Department Of Commerce Shah Abdul Latif University, Khairpur Sindh Pakistan

What is Inflation?

2008-12-09T10:08:00.000-08:00

Q. #: What is inflation? Also mention its relative causes, remedies and kinds.
Þ INFLATION:
Inflation is a process in which the price is rising at a rapid rate and the money is losing its value. In the words of Gardner Ackley, “Inflation may be defined as a persistent and appreciable rise in general level of average of prices.” It may here denote that rising general level of price doesn’t mean that all prices are necessarily rising. Even during inflation, the prices of some goods may remain relatively constant and a few others actually falling. Inflation also does not mean that prices of goods rise evenly or proportionately. Inflation is an upward movement in the general (average) level of prices. In Pakistan, the general price level is persistently rising since Partition of the Subcontinent. Prices remained volatile during the decade of 1990’s ranging form 5.7% to 13% mainly because of declining economic growth, expansionary policies, output set backs, higher taxes and a depreciation of Pakistani rupee. The inflation rate started declining form 1998 on ward due to improved supply position of goods, strict budgetary measures. The inflation rate was 5.7% in 1998-99. It was brought down to 3.6% in 1992-2000 and further to 3.1% in 2002-03. The inflation rate based on the CPI (Consumer Price Index) has averaged 4.6% during 2003-04. The slight rise in prices was the year 2004-05 mainly due to rise in the price of wheat and an increase in the international oil price.
Þ CAUSES OF INFLATION:
The causes of inflation are generally grouped under two main heads (a) Demand Pull Inflation (b) Cost Push Inflation.
A. Demand Pull Inflation:
Demand pull inflation occurs when aggregate demand for goods exceeds aggregate supply of goods at current prices, thus leading to an increase in the price level. The factors of which bring about increase in aggregate demand for goods or rise in the general level of prices are grouped under two separate heads; (i) Factors operating on demand side (ii) Factors operating on the supply side.
(a) Factors operating on the demand side: These are the factors which bring continuous rise in the general price level.
(1) Increase in money supply: An increase in money supply leads to an increase in money income. The increase in money income raises the aggregate demand for goods and services in the country. The supply of money increases when the govt. resorts to deficit financing or the commercial banks expand credit. When too much money chases too few goods, the result is an increase in general price level.
(2) Increase in Government expenditure: If there is increase in govt. expenditure due to adoption of development and welfare activities of the country has to flight a war, it causes as increase in govt. expenditure which leads to increase in aggregate demand for goods and services and hence the price level goes up.
(3) Increase in private expenditure: A continuous increase in consumption and investment expenditure in the private sector raises the demand for goods and services and leads to inflationary rise in prices.
(4) Increase in population: The rapid rising population exerts pressure on the demand for goods and services. If the supply of goods and services fail to match with the demand, the general price level moves upward.
(5) Black money: The money generated through smuggling, tax evasion etc. raises the demand for luxury and other goods. Hence black money is also one of the causes in raising the aggregate demand for goods and a rise in general price level.
(b) Factors causing decrease in supply of goods: If the increase in aggregate demand for goods and services is matched by an increase in the supply of goods, it will not cause inflationary situation. When the aggregate supply of goods is at a slower pace than the growth in aggregate demand, it then causes inflationary rise in prices. The following factors are identified for relatively slower growth in the supply of goods.
(i) Lagging agricultural & industrial production: The increase in population, incomes, employment and urbanization exert pressure on the demand for goods and services. However, the agricultural and industrial production grows at a slower pace, due to shortage of essential inputs like fertilizers, water, cement, iron etc. When aggregate demand for goods and services exceeds the aggregate supply of it, it causes a rise in the prices of agricultural and industrial goods.
(ii) Inadequate infrastructure facilities: If, in a country there is shortage of power, transport and communication facilities are slow and inefficient, it results in the slowing down of overall production of goods. When the supply of goods falls short of demand, the prices go up in the country.
(iii) Long gestation period: If the time lag between investment and the production of goods is long, the shortage of goods will arise. This will also contribute to inflationary pressure in the economy.
B. Cost Push Inflation:
Cost push inflation occurs when there is an increase in the cost of production of goods and is not associated with excess demand. The main causes of cost push inflation are:
(1) Increase in money wage rate: The wage push inflation occurs when strong labour unions manage to press for wage increases in excess of labour productivity. Unit cost of production is thereby raised. The rise in cost of production exerts pressure on sellers to increase prices of goods so as to get profit margin.
(2) Profit push inflation: If the producers of certain commodities have monopoly or near monopoly power in the market, they fix up higher profit margins arbitrarily without any increase in other elements of cost. When a few powerful firms increase the profit margins, the smaller firms also tend to mark up their profit margins. The higher profit margins, thus, inflate the price level.
(3) Material push inflation: If there is increase in the prices of some basic materials such as gas, steel, chemicals, oil etc which are used directly or indirectly in almost all industries, it causes an increase in the cost of production and hence in the general price level.
(4) Higher taxes: If the government levies new taxes and raises the rates of old taxes the producers generally shift the burden of taxes on to the consumers. The increases in the selling prices of the commodities push up the inflationary trend in the economy.
(5) Import prices: If prices of imported goods increase, it also results in the contribution of inflation.
Þ KINDS OF INFLATION:
Inflation is of different types. It is generally classified on the following basis.
· On the Basis of Rate of Inflation:
(i) Creeping Inflation: It is a situation in which the rise in general price level is at a very slow rate over a period of time. Under creeping inflation, the price level raises upto a rate of 2% per annum. A mild inflation is generally considered a necessary condition of economic growth.
(ii) Walking Inflation: Walking inflation is a marked increase in the rate of inflation as compared to creeping inflation. The price rise is around 5% annually.
(iii) Running Inflation: Under running inflation, the price increases is about 8% to 10% per annum.
(iv) Galloping or Hyper Inflation: Galloping inflation is a full inflation. Keynes calls it as the final stage of inflation. It is a stage of inflation which starts after the level of full employment is reached. Here price level rises very rapidly within a short period.
· On the Basis of Degree of Control:
(i) Open Inflation: It is a stage when the rise in price level gets out of control. Milton Friedman describes it as “inflationary process in which prices are permitted to rise without being suppressed by government price control or similar measures.
(ii) Suppressed Inflation: Under this type of inflation, the government makes efforts to check and control the rise in price level through price and rationing. When price level is suppressed by the above short term measures, it results in many evils such black marketing, hoarding, corruption & profiteering.
· Inflation on the Basis of Causes:
(i) Demand Pull Inflation: Inflation caused by increase in aggregate demand, not matched by aggregate supply of goods, resulting in rise of general price level is called demand pull inflation. Demand pull inflation to be simpler, occurs when the demand for goods and services in the country is more than their supply. The effective demand for goods increases due to many factors such as increase in money supply, increase in the demand for goods by the government, increase in the income of various factors of production etc. In short, the excessive increase in the money supply causes inflationary conditions. Demand pull inflation is generally characterized by shortage of goods and shortage of workers.
(ii) Cost Push Inflation: Cost push inflation occurs when the increasing cost of production pushes up the general price level. Cost pull inflation occurs when the economy is below full employment with prices rising even though there is no shortage of goods. Cost push inflation is the result of increase in wage costs unaccompanied by corresponding increase in productivity, rise in import prices of goods, depreciation in the external value of the currency, higher mark up etc, etc.
(iii) Profit Induced Inflation: Profit inflation is in fact categorized under cost push inflation. When entrepreneur, due to their monopoly position raise the profit margin on goods. It may cause profit push inflation.
(iv) Budgetary Inflation: When the government of a country occurs the deficits in the budgets through bank borrowing and creating new money (Deficit Financing), the purchasing power of commodity increases without a simultaneous increase in the production of goods. This leads to rise in the general price level.
(v) Monetary Inflation: Milton Friedman is of the firm view that inflation is always and anywhere a monetary phenomenon. According to him, inflation is caused by a too rapid increase in the money supply and by nothing else.
(vi) Multi Casual Inflation: Inflation has a number of causes. It may be caused by increase in money supply, excessive wage demands, excess aggregate demand for goods, shortage of goods etc. The chief cause of inflation in one year may not be in the next year. Since inflation is multi causal, therefore a variety of policy measures are needed to deal with it.
· On the Basis of Employment:
(i) Partial Inflation: According to J.M. Keynes, takes place when the general price level rises partly due to an increase in the cost of production of goods and partly due to rise in supply of money before the full employment stage is reached.
(ii) Full Inflation: Full inflation prevails when the economy has reached the level of full employment. Any increase in money supply beyond full employment. It is also called as real inflation.
· Anticipated versus Unanticipated Inflation:
(i) Anticipated inflation is the rate of inflation which majority of the individual believes will occur. When the rate of inflation (say 6%) turns out to be same (6%) we are then in a situation of fully anticipated inflation.
(ii) Unanticipated inflation is that which comes as a surprise to majority of individuals. It can be higher or lower than the rate of anticipated inflation.

Þ Remedies of inflation
The first panacea for a mismanagement nation is inflation of the currency. The second is war. Both bring a permanent ruin. They both are the refuge of political and economic opportunities. (Ernest Hemingway). To avoid political unrest and harmful, social and economic effects on the economy, it is the main objective of every government to take appropriate measures to control inflation. The main measures which are used to control inflation are (1) MONETARY POLICY (2) FISCAL POLICY and other measures:

1. Monetary Policy
Monetary policy is a policy that influences the economy through changes in the money supply and available credit. Monetary policy is adopted by central bank of a country. The various monetary measures which are used to control inflation are grouped under two heads (a) Quantitative controls (b) Qualitative controls. They are (1) Open market operations (2) Variation in bank rates (3) Credit rationing (4) Varying reserve requirements (5) Varying margin requirements (6) Consumer credit regulations.

2. Fiscal Policy
Fiscal policy is the deliberate change in either government spending or taxes to stimulate or slow down the economy. It is the budgetary policy of the government relating to taxes public expenditure, public borrowing and deficit financing. Fiscal policy is based upon demand management i.e, raising or lowering the level of aggregate demand by controlling various expenditures, government expenditure, consumption expenditure and investment expenditure. The main fiscal measures are:

Changes in taxation
If the Govt: of a country brings about changes in tax rates, it can help stabilization of prices in the country. For example. A decrease in taxes relates increases disposable income in relation to national income hence, consumption rises at every level of national income. With the increase in aggregate demand for goods, the employment goes up in the country. A rise in tax rates has the opposite effect. A rise in taxes causes a decrease in disposable income, creates a larger budget deficit and brings relief from inflation.

Changes in Govt. Expenditure
If inflation is at or above the level of full employment in the country, the government can bring down price level by curtailing its own unproductive expenditure.

Public borrowing
Public borrowing is another effective method of controlling inflation. Public borrowing reduces the aggregate demand for goods and hence price level.

Balanced budget Changes
A balanced budget decrease has a mild contractionary effect on national income and hence on bringing down the price level.

Control of deficit financing
For financing the budget deficit, the govt. often resorts to deficit financing . the bank borrowing and printing of new notes increases the money supply in the country and pushes up the price level. Deficit financing therefore, should be avoided to control inflation.

Others Measures:
Apart from fiscal and monetary measures, the other measures which are helpful in controlling inflation are;
(a) Price support programme.
(b) Provision subsidies.
(c) Arrangements of easy availability of goods on hire purchase to stimulate demand.
(d) Imposing direct control on prices of essential items.
(e) Rationing of essential consumer goods in case of acute emergency holding of Friday and Sunday markets.

Since 1950’s the control of inflation has become the chief objective of both developing and developed countries of the world. The government therefore take monetary, fiscal and other measures to combat inflation.

National Income Accounting(GDP,GNP,NI)

2008-11-25T05:06:00.000-08:00

National Income Accounting
Depression—Surprise!
l After being blind-sided by the Great Depression, policymakers decided that they needed measures of economic activity.
l A Keynesian economist, Simon Kuznets, was charged with establishing the methodology for this in the late 1930s.
l Kuznets later received the Nobel Prize for his efforts.

National Income Accounting
l The framework that summarizes and categorizes productive activity over a specific period of time, usually a year.
l The National Income and Product Accounts (NIPA) is the “table of accounts” for maintaining this information in the U.S.
GDP – “Output”
l Gross Domestic Product (GDP) is the market value of final goods and services produced within a country during a specific time period, usually a year.
n Valued at Market Value
n Only Final Goods and Services Count: Sales at intermediate stages of production are not counted as their value is embodied within the final-user good. Their inclusion would result in double counting.
n Excludes financial transactions and income transfers since these do not reflect production.
n Must be produced within the geographic boundaries of the country.
n Net additions to inventory are current period output so are also included.
Final Goods and Services
• The term final goods and services in GDP refers to goods and services produced for final use.
• Intermediate goods are goods produced by one firm for use in further processing by another firm.

GDP as Output Produced
l GDP includes all output sold plus all goods produced but not sold.
l Inventory is a firm’s stock of unsold goods.
– Planned inventory changes reflect management’s decision to add to or to reduce its on-hand stock.
– Unplanned inventory changes reflect the results of unexpected sales variations.
GDP as Valued-Added

• Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
• In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales.

Exclusions of Used Goods and Paper Transactions
• GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.
Exclusion of Output Produced Abroadby Domestically Owned Factors of Production
• GDP is the value of output produced by factors of production located within a country. Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP).
The Underground Economy
• The underground economy is the part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.

Two Methods of Computing An Economy’s Income
uExpenditure Approach:
– Sum the total expenditures by households (from the top portion of the circular flow).
uResource Cost or Income Approach:
– Sum the total wages and profit paid by firms for resources (from the bottom portion of the circular flow).

Expenditures
on Final Goods
= GDP =

Income Received for producing Final Goods

GDP as Expenditures
n GDP is the sum of expenditures on final user goods and services by households, investors, governments, and foreigners (net).
n There are four components of GDP:
n personal consumption expenditures (C),
n gross private domestic investment (I),
n government purchases (G) of goods and services, and,
n net exports (X) ( exports - imports )
n GDP = C + I + G + X
GDP as Income
n GDP is the sum of the income (including profits) received in producing final goods and services during the period.
n All of the payments made to producers are paid out to wage-earners, business owners, governments, etc. Thus in total the incomes must equal to the payments, which are equal in dollar value to the total expenditures.
n Payments include:
n Wages and benefits paid to workers,
n Proprietors’ income,
n rents,
n interest,
n corporate profits,
n Indirect business taxes
n Net factor income from abroad
n Capital consumption allowance.
n Wages (including benefits) are the largest category. This category includes insurance, social security and retirement contributions.
n Interest is the net expense interest paid.
n Rent is the income earned from selling the use of real estate.
n Proprietors’ income is paid directly to sole proprietors.
n Net Factor Income from Abroad The income that foreigners earn producing goods within the borders of a country minus the income Americans earn abroad.
n Capital Consumption Allowance (CCA) Depreciation is an estimate of the value of capital goods “used up” in the period’s production. It is the cost of the wear and tear on the machines and factories. CCA is depreciation, plus the value of capital lost due to accidental damage.
n Indirect business taxes Taxes collected by businesses and turned over to the governments.
Equality of Income and Expenditure
GDP is calculated either by adding up all values of final output or by adding up the values of all earnings or income

Other Measures

GDP vs. GNP
l Gross Domestic Product (GDP) is the total value of final goods and services produced during a given period within the geographic boundaries of a country regardless of by whom. The goods and services are produced domestically.
l Gross National Product (GNP) is the total value of final goods and services produced during a given period by the citizens of a country no matter where they live. The goods and services are produced by the “nationals” of the country.
GDP and NDP
Net domestic product (NDP) – the sum of consumption expenditures, government expenditures, net foreign expenditures, and investment less depreciation
n Net domestic product is GDP adjusted for depreciation:
GDP = C + I + G + (X - M)
NDP = C + I + G + (X - M) - depreciation
Net National Product
l Net National Product (NNP) is GDP that is net of depreciation—depreciation has been substracted from it.
l That is, NNP includes net investment instead of gross investment.
– Gross investment is total investment, which includes investment expenditures that simply replace worn out capital goods. Such replacement investment does not add to the total capital stock.
– Net investment excludes replacement investment. That is, it is gross investment minus CCA.
National Income
l National Income (NI) is NNP less business taxes, plus or minus some other minor factors.
l NI is a measure of the income payments that actually go to resources.
Personal Income and Personal Disposable Income
l Personal Income (PI) is national income plus current year. It is:
– Net income that is received but not earned (transfer payments like social security), and
– Net income earned but not received (like retained corporate earnings).
– PI is the income with which individuals pay personal taxes, save, and consume.
l Disposable Personal Income is PI minus personal taxes. It is “after-tax” personal income.
– DPI is the income that individuals have at their disposal for spending or saving.
Qualifications to the Income Accounting Identity
n To go from GDP to national income:
l Add net foreign factor income.
u National income is all income earned by citizens of a nation and is equal to GNP.
u To move from "domestic" to "national" we add net foreign factor income.
l Subtract depreciation from GDP.
l Subtract indirect business taxes from GDP.

Real and Nominal GDP
l The term "real" means adjusted for inflation.
l Nominal GDP is a measure of national output based on the current prices of goods and services. It is also called “money GDP”.
l Real GDP is a measure of the quantity of final goods and services produced, obtained by eliminating the influence of price changes from nominal GDP.
GDP Price Deflator
uThe GDP Price Deflator is a price index that uses a bundle of all final goods and services.
– It tells us the rise in nominal GDP that is attributable to a rise in prices.
uConverting Nominal GDP to Real GDP:
Real GDP20xx =
(Nominal GDP20xx ) ÷ (GDP deflator20xx)X100

Real GDP Growth in 7 Countries

What Increased?
GDP and Economic Well-Being
uGDP Per Person tells us the income and expenditure of the average person in the economy.
– It is a good measure of the material well-being of the economy as a whole.
– More Real GDP means we have a higher material standard of living by being able to consume more goods and services.
– It is NOT intended to be a measure of happiness or quality of life.
GDP and Economic Well-Being
uSome factors and issues not in GDP that lead to the “well-being” of the economy:
– Factors that contribute to a good life such as leisure.
– Factors that lead to a quality environment.
– The value of almost all activity that takes place outside of the markets, e.g. volunteer work and child-rearing.
Some Limitations of National Income Accounting
n Limitations of national income accounting include the following:
l Measurement problems exist.
l GDP measures economic activity, not welfare.
l Subcategories are often interdependent.
GDP Measures Market Activity, Not Welfare
n GDP does not measure happiness, nor does it measure economic welfare.
n Welfare is a complicated idea, very difficult to measure.
Measurement Errors
n GDP figures leave out the following:
l Illegal drug sales.
l Under-the-counter sales of goods to avoid income and sales taxes.
l Work performed and paid for in cash.
l Unreported sales.
l Prostitution, loan sharking, extortion, and other illegal activities
n A second type of measurement error occurs in adjusting GDP for inflation.
l If the price and the quality of a product go up together, has the price really gone up?
n Is it possible to measure the value of quality increases?

Price Indexes
l The value of a price index in any particular year indicates how prices have changed relative to a base year.
l The base year is the year against which all other years are compared.
l The index is 100 ± the percent change in prices from the base year.
l This type of index suffers from substitution bias as some buyers will change the mix of goods that they buy in response to price changes.
l Chain-type indexes of real GDP were created to correct for this bias. Such an index uses the mean of the growth rates using beginning and ending year prices.

Circular Flow Diagram

Money And BANKING

2008-11-25T05:01:00.000-08:00

Q. #: What is Commercial Bank? Also mention its relative functions?

Ø 1. COMMERCIAL BANK:

A bank is a financial institute which gives money and credit. It accepts deposits from individuals, firms and companies at a lower rate of interest and gives at higher rate of interest to those who need them. A bank thus is a profit earning institute.
According to Crowther, “A bank is a firm which collects money from those who have it spare. It lends money to those who require it.”
In the word of Mr. Parking, “A bank is a firm that takes deposits from households and firms and makes loans to other households and firms.”

Þ FUNCTIONS OF COMMERCIAL BANK:

A commercial bank performs a variety of functions. These functions are classified under two main heads, (1) Primary functions (2) Secondary functions

1) Primary Functions: The primary functions of commercial bank are as under:
(a) Accepting of deposits (b) Advancing of money/Making loans.

(a) Accepting of deposits:
The first important function of commercial bank is to accept deposits from those who can save but can’t make profitable use of their saving themselves. In order to attract the saving from different persons and institutions, the bank maintaining the three types of accounts.

(i) Current Account: A current account is one which can be operated continuously without any restrictions. The customer can draw cheques against the account. Therefore the bank usually doesn’t pay the interest on the current account deposits. The current account holder receive cheque book and regular statement containing details of money paid in and paid out.
(ii) Saving Account: The aim of this account is to encourage and mobilize savings of the people. Saving account is generally opened by persons of small income. The banks pay interest on this type of deposits. However, the banks normally place restrictions on their frequent withdrawal.
(iii) Fixed Deposit Account: Fixed deposits are kept with the banks for a specified period of time. The rate of interest on fixed also called “term deposit” are fairly high. The longer period of deposit, the high is the rate of interest.

(b) Advancing of money/Making loans:
The second major function of commercial bank is to make loan to businessman, traders, exporters, householders etc. These loans are made against documents of title of goods, marketable securities and personal securities of the borrowers etc. The loaning of money may be in any of the following forms.

(i) Cash Credit: It is very common form of borrowing by business concerns. The bank advances loan to the commercial and industrial units against the security of goods. The borrower if permitted to draw within the cash credit limit sanctioned by the bank. The interest is charged only on the amount of money withdrawn by the borrower.
(ii) Loans: The commercial bank grant short and long term loan to individual, firms, and companies mostly against securities. The amount of loan is credited to the borrowers’ account who withdraws it as per his requirement.

2) Secondary Functions: Secondary functions of commercial bank are classified as under: (a) Agency Functions (b) Utility Functions

(a) Agency Functions:
The agency function bank act as agent of there customer in various ways as:

(i) Collection of Cheques: It acts as agents to its customers in the collection and payment of cheques and bills.
(ii) Collection of dividends: The bank provides a very useful service in the collection of dividends or interest earned on shares held by its customers.
(iii) Purchase or Sale of securities: The bank, if authorized by customers, purchases or sells securities on his behalf and adds another benefit to its portfolio.

(b) Utility Functions: A bank performs a number of other general utility services to its clients which are given below:

(i) Issue of Traveler’s Cheque: The bank also issues traveler’s cheques for the convenience of the travelers and charges a nominal commission.
(ii) Export Promotion Cell: In order to boost (push) the exports of the country, the banks have established export promotion cells. These cells provide information and guidance to the exporters at no extra cost.
(iii) Advice on Financial Matters: Sometimes the banks give valuable advices on various financial matters to their customers.
(iv) Safe Custody of Valuable: The banks keep valuable ornaments, documents etc, for safe custody.

Q. #: What are the different types of Commercial Bank?

Ø 2. KINDS OF COMMERCIAL BANK:

Following are the main kinds of commercial bank, which are given below.
(i) State Bank: Every civilized country now has its own central bank or state bank. The primary functions of state bank are to arrange the flow of money and credit in order to promote efficiency and stability in the country. In Pakistan State Bank of Pakistan is the country’s central bank.

(ii) Commercial Bank: Commercial Banks are those banks which are engaged in performing the routing duties of banking business. They collect surplus money from the people. They make loans and advances in the form of O/D (overdraft) cash credit. Commercial Banks are also providing agency service and utility services. The banks in short are considered the life blood of economic society. In Pakistan, the NBP, UBL, HBL, MCB, etc. are performing the functions of commercial banks.

(iii) Foreign Exchange Bank: The Foreign Exchange Bank mainly deals with international trade. These banks take the responsibility of settlement of foreign exchange and arrange the foreign business in Pakistan. All the nationalized commercial banks have been allowed to do the business of exchange banks.

(iv) Saving Center Bank: Saving Banks are those banks which collect and keep small saving of people. The saving banks invest the funds in the safe way government security. Post offices and saving centers perform the business of saving banks of Pakistan.
(v) Agriculture Development Bank: Agriculture Banks are setup to provide the financial assistance to the agriculture. The agriculture banks provide short term credit to the farmers for the purchasing of seeds. They also make medium term advances for buying Tracters and modern technology. ADBP (Agriculture Development Bank of Pakistan) was setup in 1981, to meet financial requirement of agriculture.

(vi) Industrial Development Bank: These banks mainly provide medium and long term credit to the industries. Since the industrial bank have long-term deposit. They are in a position to permit long term investment in industries. In Pakistan Industrial Bank was setup in 1961, other institutions engaged in providing financial assistance to industries are PICIC commercial bank, NDFC bank etc…

Q. #: What are the different type of customer of Commercial Bank?

Ø 3. TYPES OF CUSTOMERS:

Every commercial bank is anxious to increase its customers. However, every one can’t be accepted as its customer. Only those persons who are competent in law to enter into a contract can be considered as customers. The customers of a bank can mainly divide into two categories (1) Ordinary Customers and (2) Special Customers. Ordinary Customers are those who are competent to inter into contract under the laws of land. And individual, a body corporate, a firm can open an account with the bank. The bank before accepting one as a customer weighs the customer’s financial position, his character, honesty, social standing and good will in the society. The special customers are those who are dealt with as special ones legally. The relationship between bank and special type of individual customers are governed by the legal rules enforced in the country.
The special types of individual customers of the commercial banks are (i) Minor (ii) Lunatic (iii) Drunkard (iv) Married Women (v) Purdah Observing Women and (vi) Illiterate persons.

(i) Minor Customer: A person who has not attained the age of 18 years is a minor. A minor cannot enter into a contract. Therefore, any contract with minor is void.
However, a bank can accept & open a minor’s account if it is directed by the Guardian Court. The Court appoints a guardian of a minor who obtains and signs the prescribed opening form of the account himself. He gives his won specimen signatures for the operating of the account. On attaining the age of majority which is 21 years, the minor is allowed to open and operate the account himself.

(ii) Lunatic Customer: A person who is incapable of understanding, is of unsound mind, cannot enter into contract with the banker as customer. If an account is already existence of a same person but his mental status is disturbed, the bank on knowing the customer going insane will immediately stop payment from his account and suspend all transactions till he receives either satisfactory evidence of his recovery or an order is received from the court.

(iii) The Drunkard Customer: If a person is in state of intoxication & is not in senses, he cannot open an account with a bank. The main condition of valid contract with a bank is between persons who are of sound mind. However, if a person is drunk, is of sound mind, he may open & operate an account with a bank.

(iv) The Married Women Customer: Man & Woman are equal in the eyes of law for the purpose of making a contract. A married woman has every right to enter into contract with a bank and open an account. A married woman is as good as a male member of the society so far as law is concerned. She can open any type of account including Foreign Currency Account in her name. If may here be noted that a married woman cannot make her husband responsible for the debt incurred by her. It is a sole responsibility of the married woman to repay the loans and advances made in her name by bank.

(v) The Purdah Observing Woman Customer: The bank has to be very cautions in opening an account of Purdah observing lady. She cannot be treated at par as with other women. Before accepting a Purdah observing woman as customer, the banker must carry out a thorough scrutiny (inspection) about the identity of woman. A very close referee of introducer, from the point of view of the parties, the customer and banker should confirm the identity of the Purdah observing lady.

(vi) The Illiterate Person Customer: An illiterate person from the banker’s point of view is the person who cannot put his signatures. He uses his thumb impressions in place of signatures for identification. The banker has, therefore, to be very cautions in honoring the cheques of illiterate person. The banker usually takes the following precautions in this regard.
Þ A Certified photograph of an illiterate person is pasted on the signature card for identification.
Þ At least two left hand thumb impressions are placed in place of specimen signatures for identification.

Q. #: What precautions are usually undertaken by bank, before cash advances?

Ø 4.PRECAUTIONS OF CASH ADVANCES:

The following are the precautions are usually undertaken by bank, these are given below.
(i) The customer to be Honest, Responsible and Trustworthy: Before advancing loans against goods or documents of title of goods, the banker must be thoroughly satisfy himself about the honesty, trustworthy and experience of the borrower in the trade or business.

(ii) Familiarity with different markets: The banker must be familiar with the up & down of the price in the commodities, against which he gives to advance loan earlier. The up-to-date knowledge of the different market enables the banker to regulate the margin for loans against produce goods.

(iii) Readily saleable commodities: The banker should advance loan against those commodities which are of seasonal nature & are readily saleable in the market.

(iv) Possession of Goods: In order to secure the loan the banker should take passions actual or constructive of the goods. He should also have a direct contract with the owner or the agent who is in possession of commodities.

(v) Storing of goods in the bank’s Godown: The banker should not allow the goods to remain in the godown of the customer unless the key of the godown and the services of the watchman transferred to the bank.

(vi) Commodities having Stable Market: The banker should prefer to advance loans against those commodities whose demand is less inelastic. The goods with stable markets are less liable to market fluctuations.

(vii) Proper Evaluation: The banker should accurately ascertain the prices of commodities pledge for loan. He can get information about the prices from commodities broker, journals and daily news papers.

(viii) Insurance of Goods Pledged: The banker must also insure the goods of the customer pledged with the bank against loss of fire, theft, etc. up to their full value.

Q. #: What is State Bank of Pakistan? Also mention its relative functions.

Ø 5. STATE BANK OF PAKISTAN:

The State Bank of Pakistan was established on 1st July 1948, it is the central bank of Pakistan. The head office of SBP is at Karachi & branches are at Lahore, Peshawar, Quetta, Faisalabad, Rawalpindi, Islamabad, Multan, Sialkoat, Sukkur, and Hyderabad. The state bank is the leader of all the other banks. It doesn’t compete for profit. It has right t issue notes (currency). It is bank of Govt. and commercial bank. It controls the operation of other banks for monetary and economic stability in the country.
The state bank is managed by a central board of directors. It includes one Governor, one more deputy Governor, and nine directors nominated by the Federal Government. There is also an executive committee which is empowered to transit business on behalf of the central board of directors. The Chief Executive of the bank is the governor, who controls and directs the affairs of the bank on behalf of the central board. The central directorate of SBP has the department over 5,000 employees the departments are:
(i) Administrative Department (ii) Accounts Department (iii) Agriculture Credit Department (iv) Audit Department (v) Banking Control Department (vi) Banking Inspection Department (vii) Engineering Department (viii) Exchange Department (ix) Legal Division Department (x) Public Relation Department (xi) Research Department (xii) Statistical Department(xii) Security Department (xiv) Training Department.

Þ FUNCTIONS OF STATE BANK OF PAKISTAN:

(a) The Bank of note issue: The State Bank has the soul right for the issuance of notes. The bank has issued currency notes of rupees 10,20,50,100,500,1000,5000, the notes are issued under fixed minimum reserve system. The bank keeps 30% in goals or foreign exchange, & 70% in form of securities; therefore notes issued by the bank are fully convertible.
(b) Banker to Government: The State Bank deal as a bank to the central and provincial government. It accepts deposits of the government. It pays cheques on behalf of the government. It pays cash for payment of salaries & wages. It provides loan to the Govt. for ninety days. It transfers fund from one account to another account & from one place to another place. The bank pays no interest on govt. accounts.
(c) Agent to the Government: The State Bank of Pakistan as an agent receives loan for government payments, interest on debts and discount on treasury bills as control the foreign exchange.
(d) Advisor to Government: The State Bank also acts as advisor to the govt. in all financial matters. Since the State Bank is directly involve in the money and foreign exchange markets. It also provides advice to commercial bank & other financial institution & to commerce & industries in general.
(e) Exchange Control: The State Bank is authorized to control foreign exchange. It has control over the foreign receipts and payments. The bank has exchange control department for control on the foreign exchange operations.
(f) Controller of Credit: The bank controls the volume of credit it is necessary for the economic development of the country. The credit is controlled by the bank rate, policy open market operation. It is the most important function of the bank.
(g) Custodian of Foreign Exchange: The State Bank of Pakistan acts as a custodian of forex. It gives gold, silver, foreign currency, foreign bills at other securities. Such reserves are necessary for making payments to the other countries. The bank controls the movement of capital.
(h) Remittance Facilities: The State Bank of Pakistan provides facilities for transfer of money from one to another place to the members’ bank. The bank doesn’t receive any commission for it.

Q. #: What is World Bank? Also discuss its relative functions and criticism.

Ø 6. WORLD BANK:

The name World Bank has too different financial real existence. It’s also called International Bank for Reconstruction & Development (IBRD) & International Development Association (IDA). The World Bank is international bank for reconstruction and development was established in 27th December 1945. The bank started operation on 25th June 1946. The IBRD has it is head office at Washington DC, USA.
The management is vested with the board of governors, consist one governor from each member country and 22 full time executive directors. The board normally meets ones a year. The governor of the bank have delegated their many powers to a board of Executive Directors, 5 directors appointed by five members like, USA, Japan, Germany, France, UK, being a largest stock holders and 17 are elected by the governor representing the other member countries. The Board of Directors performs its duties on a full time basis. The president of the bank is the Chairman of the Board.
The world bank provide assistance for many projects like, electricity power, transport, agriculture, rural and urban developments, water and sewerage development, population, health, education, housing development, about 75% of the landing is for roads plans, power station, agriculture and industries. The IRBD loans are for 20 years or less with a gress period of 5 years. The loans are made to government or entities which can sure government guaranties of repayment. The World Bank on the whole has help increasing the pare of economic development of different countries of the world.

Þ FUNCTION OF WORLD BANK:

Principal functions of World Bank are as under:

i) To assist in the reconstruction and development of member countries by facilitating the investment of capital for productive purpose.
ii) To promote and supplement private foreign investment.
iii) To give performance more useful and urgent projects.
iv) To assist in bringing about a smooth transaction for war time to peace time economy.
v) To ensuring that it is loan help in the raising the standard of living of the people in the borrowing member countries.
vi) World Bank helps now the poorer countries of the world it provides recovery of advice & information besides the making loans.

Þ CRITICISM ON WORLD BANK:

The working of World Bank is criticized on the following grounds.

i) The World Bank charges a very high rate of interest on its loan.
ii) There is discrimination in advancing loan to member Europe & Western countries of smaller both in area and population, they have received large amount of loans where Asia and Africa both is rich in natural resources are being given up stamp motherly treatment.
iii) The loan given by World Bank to the developing countries is too small to play an effective role in developing their economy.

Q. #: What is money? Also define its functions.

Ø 7. MONEY:

Money is difficult concept to define. The term money means purchasing power, something which buys things. In other words money is purchasing power that can exercise and immediate demand on goods and services. Obviously such purchasing power must be generally accept as means of payments, medium of exchange, historically in remember able things have served, as money in the modern world. However, in the most countries money the supply of consists of (i) Currency Money (ii) Deposit Money.
(i) Currency Money: It is in the form of coins & paper notes. It is legal tender money. It is the money which must by law is accepted in payments of money obligation. In very backward countries currency money is the main item of money.
(ii) Deposit Money: Demand Deposit or accounts in the bank fulfill charging all the conditions necessary to be designated as money, cheques which present demand deposit inspite are purchasing power they buy goods & services.

Þ FUNCTIONS OF MONEY:

1) Money as a medium of exchange:
In all market transactions, money is used to pay for goods and services. The sale or purchase of goods is done through money. Money, in other words, acts as a medium of exchange and helps in overcoming the difficulty of double coincidence of wants of the barter economy.
The use of money as a medium of exchange has helped in promoting efficiency in the economy. It has reduced much of the time spent in exchanging goods and services. It has also promoted efficiency by allowing people to specialize in any area in which they have comparative advantage and receive money payments for labour. The use of money as medium of exchange has permitted more specialization by lowering transaction cost and encouraging division labour.

2) Money as standard of deferred payments:
Another function of money is that it is used as a mean of settling debts maturing in the future. In modern economy, most of the business is done on credit. Goods are brought and sold on the promise to pay money on a certain date in future. Debts are stated and paid terms of units of account.
3) Influence on income and consumption:
The use of money has a direct bearing on the levels of income and consumption n the country. All production takes place for the market and the factor payments (rent, wages, interest and profit) are made in money. The higher the production, the higher are the remuneration to the factors and vice versa.
4) Money is an instrument of making loans:
People save money and deposit it in banks. The banks advance these savings to businessmen and industrialists. Money is thus the instrument by which saving are transferred into saving.
5) Money is a tool of monetary management:
Money is important tool of monetary management. If the money is effectively used, it helps in increasing output and employment. Money is also an important factor in determining the distribution of income and wealth among the members of the society.
6) Instrument of economic policy:
Money is an important instrument of economic policy of the government. In order to achieve growth, reduce unemployment and maintain regular expansion of economic activity; money is the most powerful factor.

Q. #: What is inflation? Also mention its relative causes, remedies and kinds.
Ø INFLATION:
Inflation is a process in which the price is rising at a rapid rate and the money is losing its value. In the words of Gardner Ackley, “Inflation may be defined as a persistent and appreciable rise in general level of average of prices.” It may here denote that rising general level of price doesn’t mean that all prices are necessarily rising. Even during inflation, the prices of some goods may remain relatively constant and a few others actually falling. Inflation also does not mean that prices of goods rise evenly or proportionately. Inflation is an upward movement in the general (average) level of prices. In Pakistan, the general price level is persistently rising since Partition of the Subcontinent. Prices remained volatile during the decade of 1990’s ranging form 5.7% to 13% mainly because of declining economic growth, expansionary policies, output set backs, higher taxes and a depreciation of Pakistani rupee. The inflation rate started declining form 1998 on ward due to improved supply position of goods, strict budgetary measures. The inflation rate was 5.7% in 1998-99. It was brought down to 3.6% in 1992-2000 and further to 3.1% in 2002-03. The inflation rate based on the CPI (Consumer Price Index) has averaged 4.6% during 2003-04. The slight rise in prices was the year 2004-05 mainly due to rise in the price of wheat and an increase in the international oil price.
Þ CAUSES OF INFLATION:
The causes of inflation are generally grouped under two main heads (a) Demand Pull Inflation (b) Cost Push Inflation.
A. Demand Pull Inflation:
Demand pull inflation occurs when aggregate demand for goods exceeds aggregate supply of goods at current prices, thus leading to an increase in the price level. The factors of which bring about increase in aggregate demand for goods or rise in the general level of prices are grouped under two separate heads; (i) Factors operating on demand side (ii) Factors operating on the supply side.
(a) Factors operating on the demand side: These are the factors which bring continuous rise in the general price level.
(1) Increase in money supply: An increase in money supply leads to an increase in money income. The increase in money income raises the aggregate demand for goods and services in the country. The supply of money increases when the govt. resorts to deficit financing or the commercial banks expand credit. When too much money chases too few goods, the result is an increase in general price level.
(2) Increase in Government expenditure: If there is increase in govt. expenditure due to adoption of development and welfare activities of the country has to flight a war, it causes as increase in govt. expenditure which leads to increase in aggregate demand for goods and services and hence the price level goes up.
(3) Increase in private expenditure: A continuous increase in consumption and investment expenditure in the private sector raises the demand for goods and services and leads to inflationary rise in prices.
(4) Increase in population: The rapid rising population exerts pressure on the demand for goods and services. If the supply of goods and services fail to match with the demand, the general price level moves upward.
(5) Black money: The money generated through smuggling, tax evasion etc. raises the demand for luxury and other goods. Hence black money is also one of the causes in raising the aggregate demand for goods and a rise in general price level.
(b) Factors causing decrease in supply of goods: If the increase in aggregate demand for goods and services is matched by an increase in the supply of goods, it will not cause inflationary situation. When the aggregate supply of goods is at a slower pace than the growth in aggregate demand, it then causes inflationary rise in prices. The following factors are identified for relatively slower growth in the supply of goods.
(i) Lagging agricultural & industrial production: The increase in population, incomes, employment and urbanization exert pressure on the demand for goods and services. However, the agricultural and industrial production grows at a slower pace, due to shortage of essential inputs like fertilizers, water, cement, iron etc. When aggregate demand for goods and services exceeds the aggregate supply of it, it causes a rise in the prices of agricultural and industrial goods.
(ii) Inadequate infrastructure facilities: If, in a country there is shortage of power, transport and communication facilities are slow and inefficient, it results in the slowing down of overall production of goods. When the supply of goods falls short of demand, the prices go up in the country.
(iii) Long gestation period: If the time lag between investment and the production of goods is long, the shortage of goods will arise. This will also contribute to inflationary pressure in the economy.
B. Cost Push Inflation:
Cost push inflation occurs when there is an increase in the cost of production of goods and is not associated with excess demand. The main causes of cost push inflation are:
(1) Increase in money wage rate: The wage push inflation occurs when strong labour unions manage to press for wage increases in excess of labour productivity. Unit cost of production is thereby raised. The rise in cost of production exerts pressure on sellers to increase prices of goods so as to get profit margin.
(2) Profit push inflation: If the producers of certain commodities have monopoly or near monopoly power in the market, they fix up higher profit margins arbitrarily without any increase in other elements of cost. When a few powerful firms increase the profit margins, the smaller firms also tend to mark up their profit margins. The higher profit margins, thus, inflate the price level.
(3) Material push inflation: If there is increase in the prices of some basic materials such as gas, steel, chemicals, oil etc which are used directly or indirectly in almost all industries, it causes an increase in the cost of production and hence in the general price level.
(4) Higher taxes: If the government levies new taxes and raises the rates of old taxes the producers generally shift the burden of taxes on to the consumers. The increases in the selling prices of the commodities push up the inflationary trend in the economy.
(5) Import prices: If prices of imported goods increase, it also results in the contribution of inflation.
Þ KINDS OF INFLLATION:
Inflation is of different types. It is generally classified on the following basis.
· On the Basis of Rate of Inflation:
(i) Creeping Inflation: It is a situation in which the rise in general price level is at a very slow rate over a period of time. Under creeping inflation, the price level raises upto a rate of 2% per annum. A mild inflation is generally considered a necessary condition of economic growth.
(ii) Walking Inflation: Walking inflation is a marked increase in the rate of inflation as compared to creeping inflation. The price rise is around 5% annually.
(iii) Running Inflation: Under running inflation, the price increases is about 8% to 10% per annum.
(iv) Galloping or Hyper Inflation: Galloping inflation is a full inflation. Keynes calls it as the final stage of inflation. It is a stage of inflation which starts after the level of full employment is reached. Here price level rises very rapidly within a short period.
· On the Basis of Degree of Control:
(i) Open Inflation: It is a stage when the rise in price level gets out of control. Milton Friedman describes it as “inflationary process in which prices are permitted to rise without being suppressed by government price control or similar measures.
(ii) Suppressed Inflation: Under this type of inflation, the government makes efforts to check and control the rise in price level through price and rationing. When price level is suppressed by the above short term measures, it results in many evils such black marketing, hoarding, corruption & profiteering.
· Inflation on the Basis of Causes:
(i) Demand Pull Inflation: Inflation caused by increase in aggregate demand, not matched by aggregate supply of goods, resulting in rise of general price level is called demand pull inflation. Demand pull inflation to be simpler, occurs when the demand for goods and services in the country is more than their supply. The effective demand for goods increases due to many factors such as increase in money supply, increase in the demand for goods by the government, increase in the income of various factors of production etc. In short, the excessive increase in the money supply causes inflationary conditions. Demand pull inflation is generally characterized by shortage of goods and shortage of workers.
(ii) Cost Push Inflation: Cost push inflation occurs when the increasing cost of production pushes up the general price level. Cost pull inflation occurs when the economy is below full employment with prices rising even though there is no shortage of goods. Cost push inflation is the result of increase in wage costs unaccompanied by corresponding increase in productivity, rise in import prices of goods, depreciation in the external value of the currency, higher mark up etc, etc.
(iii) Profit Induced Inflation: Profit inflation is in fact categorized under cost push inflation. When entrepreneur, due to their monopoly position raise the profit margin on goods. It may cause profit push inflation.
(iv) Budgetary Inflation: When the government of a country occurs the deficits in the budgets through bank borrowing and creating new money (Deficit Financing), the purchasing power of commodity increases without a simultaneous increase in the production of goods. This leads to rise in the general price level.
(v) Monetary Inflation: Milton Friedman is of the firm view that inflation is always and anywhere a monetary phenomenon. According to him, inflation is caused by a too rapid increase in the money supply and by nothing else.
(vi) Multi Casual Inflation: Inflation has a number of causes. It may be caused by increase in money supply, excessive wage demands, excess aggregate demand for goods, shortage of goods etc. The chief cause of inflation in one year may not be in the next year. Since inflation is multi causal, therefore a variety of policy measures are needed to deal with it.
· On the Basis of Employment:
(i) Partial Inflation: According to J.M. Keynes, takes place when the general price level rises partly due to an increase in the cost of production of goods and partly due to rise in supply of money before the full employment stage is reached.
(ii) Full Inflation: Full inflation prevails when the economy has reached the level of full employment. Any increase in money supply beyond full employment. It is also called as real inflation.
· Anticipated versus Unanticipated Inflation:
(i) Anticipated inflation is the rate of inflation which majority of the individual believes will occur. When the rate of inflation (say 6%) turns out to be same (6%) we are then in a situation of fully anticipated inflation.
(ii) Unanticipated inflation is that which comes as a surprise to majority of individuals. It can be higher or lower than the rate of anticipated inflation.

How Cost Accountant can play effective role to achieve predetermined objectives of company.

2008-11-25T04:26:00.000-08:00

COST ACCOUNTING

Cost accounting is a recent development in the accounting world. Since beginning of twentieth century and particularly during the and after World War-I the industrialists become more and more cost conscious. This was partly due to because of growing competition between manufacturers and partly because of increasing government control over pricing. During the war most of the manufacturing was done on cost plus system. During the World War- II many governments came out with legislations which had the effect of placing almost blanket control over prices. Thus, it became imperative for manufacturers:-
Improve quality of the products
Trace the cost accurately for each product
Control the costs.
Financial accounting failed to achieve those objectives, and it therefore made the accountants think and a new technique of accounting known as cost accounting.
Cost accounting has emerged mainly because of limitations of financial accounting. Cost accounting a specialized branch of accounting, which involves classifications, accumulation, assignment and control of costs.
Cost accounting has been defined as “the recording, classifying and appropriate allocation of expenditure for the determination of the cost of product or service, and for the presentation of suitably arranged data for the purpose of control and guidance of management”.
The cost accounting relates to the collection, classification, and ascertainment of cost and its accounting and control relating to the various elements of the cost. It is the formal mechanism by means of which costs of product or services are ascertained and controlled.

Costing:
Costing is the technique and process ascertaining costs. Cost accounting is different from costing in the sense that the former provides only the basis and information for ascertainment of cost. Once the information is made available, the costing can be carried out arithmetically by means of memorandum statements or by method of integral accounting. Weldon has defined it as “the classifying, recording and appropriate allocation of expenditure for the determination of product or services; the relation of these costs to sales values and the ascertainment of profitability.
Management accounting is the internal business building role of accounting and finance professionals who work inside organizations. These professionals are involved in designing and evaluating business processes, budgeting and forecasting, implementing and monitoring internal controls, and analyzing, synthesizing, and aggregating information—to help drive economic value.
The role of management accounting differs from that of public accounting, since management accountants work at the “beginning” of the value chain, supporting decision making, planning and control, while audit and tax functions involve checking the work after the fact. Management accountants are valued business partners, directly supporting an organization's strategic goals. With a renewed emphasis on good internal controls and sound financial reporting, the role of the management accountant is more important than ever.
It obviously takes more people to “do” the work than it does to “check” the work. In fact, of the five million finance function professionals in the U.S., more than 90% work inside organizations as management accountants and finance professionals. Some common job titles for management accountants in organizations of all sizes and structure include:
Staff Accountant
Cost Accountant
Senior Accountant
Corporate or Division Planner
Financial Analyst
Budget Analyst
Internal Auditor
Finance Manager
Controller
Vice President, Finance
Treasurer
Chief Financial Officer (CFO)
Chief Executive Officer (CEO)
Cost Accountant
Practitioners of accountancy related to cost are known as cost accountants.
What are the predetermined objectives of company?
First of all it is mandatory for us that we understand the predetermined objectives, what its implications are, how they are set and how a cost accountant can play its vital role in achieving those earlier set objectives.
If we analyze from a sole trader to large firms, organizations and companies before they start their business they need some resources to start their business and as soon as they acquire those resources they set certain goals objectives which are called the predetermined objectives of that business.
Predetermined objectives can be:
What would be the projected sales?
What would be the anticipated expenses?
What would be the total cost?
What would be the gross profit and net profit?
What are the ways to expand the business?

Now question arises, how these predetermined objectives can be achieved by cost accountant now to achieve these goals cost accountants prepare budget, variance analysis, and cost reports. By preparing budget we can achieve the sales price cost expenses profit of the company and by variance analysis the confirmation of the prepared budget is obtained.
The purpose of this assignment is to introduce the master budget or financial plan. This topic includes an important set of concepts and techniques that represent the major planning device for an organization, as well as the foundation for a traditional standard cost performance evaluation and control system.1 The chapter includes seven sections. The first section provides a discussion of the underlying concepts of financial planning and budgeting including the various types of budgets. This section also includes a diagram of the master budget that provides an overview of the overall budgeting process. Sections two and three include short, but important discussions of the purposes and benefits of budgeting and the limitations and problems involved in budgeting. The assumptions upon which the budget is based are briefly described in section four. Section five introduces the underlying concept of responsibility accounting and provides a brief discussion of a controversial issue associated with this concept. The techniques used to prepare a master budget are discussed and illustrated in section six. This is the longest section and includes a discussion of where the budget director obtains the budget information as well as how the information is used to complete the various schedules and sub-budgets involved.

Objectives of Cost Accounting
Main objectives of cost accounting are as follows
· Ascertainment of cost - The primary objectives of cost accounting is to ascertain cost of different products, job, and services.
· Determination of selling price- cost accounting provides detailed information about the composition of total cost for determining action of the selling price of the product or service under different conditions.
· Measure and increasing efficiency- cost accounting involves a study of various operations used in manufacturing a product or providing service. The study facilitates measuring of efficiency of organization or a whole as well as of departments besides devising means of increasing efficiency.
· Control – cost accounting aims at improving the efficiency by controlling and reducing cost. Budgetary control and standard costing are important techniques used control costs.
· Facilitating preparations of financial and other statements -it provides statements at such short intervals as the management may require. In order to operate business at high level of efficiency it is essential on the part of the management to have a frequent review of products, sales and operating result. Cost accounting produces daily weekly and monthly volumes of units produced, accumulated cost together with appropriate analysis.
· Fully developed cost accounting system provides ready information regarding stock of raw material, work-in-progress and finished goods, facilitates the preparation of financial and other statements.
· Providing basis for operating policy- the cost accounting helps in the management in formulating operative policies. The cost accounting provides useful information.
· The system is quite expensive because analysis allocation and apportionment of costs and absorption of Overhead require considerable amount of clerical work.
· The results shown by the cost accounts differ materially from that shown by the financial accounts.
· Cost of system itself does not control costs or improve efficiency. If the management is alert and efficient, it can control costs without the accounting system.
Advantages to the managements
· Supplies detailed cost information: - Cost accounting supplies detailed and regular cost information to the management to ascertain the cost of various products, process, jobs, departments, services.
· Help in price fixation: - cost plays an important role in the price fixation. Cost accounting assists the management in fixing up selling price not only during depression period
· Profitable and unprofitable activities are disclosed: - accounting makes possible for management to distinguish between profitable and non-profitable activities. Concentrating on profitable operations and eliminating non- profitable ones can maximize profit.
· Helps in estimates: - adequate costing records provide a reliable basis up on which tenders and estimates may be prepared.
· Wastages are eliminated: - as it is possible to know the cost of the article at every stage, it becomes possible to check various forms of wastages such as time, expenses etc. or in the usage of machine and equipments.
· Guides future production policies:- if the costing records are kept, comparative cost data for different periods and various volumes of production will be available. It will help the management in forming future course of action.
· Provides data for periodical profit and cost accounts:- adequate costing records supply to the management such data as may be necessary for preparation of profit and loss account and balance sheet, at such intervals as may be desired by the management.
· Aids in determining and enhancing efficiency:- disclose of wastages, idle time and other loses in various operates of manufacturing of a product are studied by the cost accountant. The efficiency can be measured and costs are controlled through formulation of various devices to increase the efficiency.
· Helps in inventory control: - cost accounting furnishes data for controls which management require in respect of stock of material, WIP, and furnished goods.
· Helps in cost reduction: - cost accounting helps in cost control, which aims at improving efficiency by controlling and reducing cost. Budgetary controls and standard costs are two important cost accounting techniques, which are used to control costs.

Managing Diversity

2008-11-23T11:27:00.000-08:00

Marathon Oil Company Actively Manages Diversity
Marathon Oil Company (MOC) is a large US integrated oil firm where diversity is an important element of its business strategy and is integrated into every facet of its human resource planning. Although an integrated company marathon’s refining and marketing activities are operated through an affiliate, Marathon Ashland Petroleum (MAP), a venture with Ashland in which Marathon has a 62% interest. MOC and its affiliate, MAP both has been successful at driving diversity synergies by linking and insuring consistency in their approaches to formulating diversity business cases and strategies, plus implementing common diversity initiatives. While aligned, each company has autonomy in implementation of diversity programs.
The presidents of each of these affiliated companies, Gray Heminger (MAP) and Clarence Cazalot (MOC), have committed resources (time, Money, and people) to insure that diversity drives business success. The head of each diversity organization partners with the respective senior leadership diversity best practices, identify natural synergies between the two companies, and troubleshoot common challenges.
During the last two years, both companies have committed to an inclusive diversity strategy and many corporatewide diversity initiatives, including (1) customized diversity business case for their respective business; (2) diversity training for over 10,000 employees; (3) mentoring program; and (4) multicultural recruiting. Each company tailored these four initiatives to address their business needs and the unique culture of their organization.
An example of the company’s approach to diversity can be seen through a closer look at its refining and tailoring business. Marathon Ashland Petroleum’s successful implementation of several diversity initiatives demonstrates how focused leadership commitment, a diversity strategy that complements business objectives, and a practical plan creates significant results in a short period of time. In fact, diversity is one of MAP’s five core values, which are diversity, ethics, environmental stewardship, safety, and premier employer, for which its senior leadership and employees are held accountable.

Minority Recruiting
Faye Gerard’s (MAP’s diversity manager) positive professional experiences as and African-American female chemical engineer, intensifies her commitment to achieve MAP’s goal to increase representation of minorities and women in technical positions. The declining number of minorities, particularly minority women, and the increased competition for technical talent makes this a daunting task. MAP’s senior executives, partnering with Faye, have created a six component recruiting strategy that focuses on (1) corporatewide, cross-functional recruiting; (2) relationship-based recruiting with first- and second-tired schools; (3) internship; (4) scholarship; (5) informal mentoring; and (6) organizational affiliations.

Diversity Awareness Training
The senior leadership felt it was important for each employee to understand diversity’s relationship to MAP’s business strategies, corporate success and expectations for their behavior. Therefore, MAP required its 6,000 employees to attend diversity training. Managers and supervisors attended an eight-hour in-class session; nonmanagement spent four hours at in-class session training, and the hourly work-force had computer-based diversity training. In less than 1.5 years, 95% of MAP’s workforce has been trained.

Mentoring
Over the last year, MAP has implemented Knowledge Enhancement Exchange Program, (KEEP) a mentoring program that targets all employees. Its objectives is to increase retention and contributions to the business, expand individual knowledge bases, and further instill MAP’s five core values by driving supportive work relationships. There are two target populations: new hires are paired with senior, more experienced employees. Informal and formal feedbacks (employee surveys) have indicated that KEEP has been extremely effective.

Phase II Diversity at MAP
MAP is now in the design and implementation of its Phase II diversity initiative. This Phase focuses on (1) increasing diversity skills and tools for managers and supervisors; (2) work-life balance; (3) accelerated join-up for new hires; and (4) on-going senior executive leadership for diversity.

Case Summary
We have embraced diversity to foster the creativity of thought and innovative solutions that result in enhanced business opportunity.
Clarence P. Cazalot Jr.President and Chief Executive Officer
At Marathon, diversity is a core value in their business strategy. they are committed to maintaining an inclusive environment in which all employees are respected and valued for the full range of talents, experiences, thoughts and opinions they bring to the workplace.
Leveraging the diversity of their workforce and their Supplier Diversity Program enables them to build relationships and business partnerships that ensure their goal for sustainable value growth.
Marathon’s minority recruiting program is also very efficient in developing diversity.
Marathon diversity councils help drive Marathon’s global diversity initiatives. These are advisory bodies comprised of a representative cross-section of the Corporation's employees.
Marathon’s diversity educations programs help raise the level of awareness of Marathon’s employees.
Marathon’s global mentoring programs help employees grow in their current jobs and develop future career opportunities.

Questions for Discussion
Which layers of diversity is Marathon Oil targeting in its recruiting and mentoring initiatives?

Personality
Functional Level/ Classification
Geographic Location
Age
WorkLocation
Seniority
Division/Dept./Unit/Group
WorkContent/Field
UnionAffiliation
Mgmt.Status
MaritalStatus
ParentalStatus
Appearance
EducationalBackground
WorkExperience
Race
Income
PersonalHabits
Religion
RecreationalHabits
Ethnicity
PhysicalAbility
SexualOrientation
There are four layers of diversity, (1) personality, dependant upon coming three dimensions or layers of diversity, (2) Internal Dimension, consist of age, race ethnicity, Physical Ability, and sexual orientation, (3) External Dimension, consists of Income, Religion, Work Experience, appearance, parental status, marital status etc, (4) Organizational dimension, the last one consist of Management status, union affiliation, work location, seniority, field, functional level or classification.
MAP is targeting the internal and external dimensions/layers of diversity. For example they are recruiting irrespective of race, age, ethnicity, Physical Ability, and sexual orientation. Means recruiting women on technical positions and giving minority preferences and making them trained. If you come at the mentoring program of the MAP they are pairing the newly hired employees with most experienced and senior employees of the organization.

Compare and contrast the extent to which Marathon is using principles from affirmative action, valuing diversity, and managing diversity. Explain your rationale.
Affirmative action is an artificial intervention aimed at giving management a chance to correct an imbalance, an injustice, a mistake, or outright discrimination. MAP has used affirmative action somewhere in minority recruiting program and giving chance to the woman to take part in technical position in an organization like MAP. MAP did not do things like include/exclude instead they gave value to diversity.
Valuing diversity emphasizes the awareness, recognition, understanding, and appreciation of human differences. As MAP has giving chances to the minority and woman by employing them as MAP and gave them value and absorb them in the organization. The diversity awareness program of MAP is step to give value to diversity.
Managing diversity entails enabling people to perform up to their maximum potential. MAP has managed diversity through programs like mentoring which entails newly hired employees with most senior employees in the organization.

Which of R Roosevelt Thomas, Jr’s eight generic diversity options is Marathon Oil using to manage diversity? Explain.

Thomas identified eight basic responses for handling any diversity issue.
Option 1: Include/Exclude
Option 2: Deny
Option 3: Assimilate
Option 4: Suppress
Option 5: Isolate
Option 6: Tolerate
Option 7: Build Relationships
Option 8: Foster Mutual Adaptation

Exclusion, denial, assimilation, suppression, isolation, and toleration are among the least preferred options. MAP is not following these options. While options like inclusion, building relationship, and mutual adaptation are preferred options for MAP to follow.

Using Table for Common Diversity Practices as a point of reference, identify the various accountability, development, and recruitment practices used by Marathon Oil.
These are the accountability, development, and recruitment practices used by MAP
Accountability practices
• Inclusion of diversity in performance evaluation goals, ratings.
• Inclusion of diversity in promotion decisions, criteria.
• Inclusion of diversity in management succession planning.
• Policies against racism, sexism.
Development practices
• Diversity training programs
• Informal networking activities
• Formal mentoring program.
• Internal training(such as personal sagety or language)
Recruitment practices
• Corporate image as liberal, progressive, or benevolent.
• Partnerships with educational institutions.
• Recruitment incentives such as cash supplements.

• Internships.

• Targeted recruitment of managers.

Table for common diversity practices

Do Corporate Leaders Have It All Wrong When It Comes to People?

2008-11-23T11:23:00.000-08:00

Gallup’s Marcus Buckingham thinks that corporate leaders have it all wrong when it comes to fostering talent within their organizations. It may sound like common sense, Buckingham says, but if you are going to succeed, you have to play to your strengths. “It is intriguing,” he says. “All of the best managers we have studied say focus on your strengths and manage your weaknesses. It seems so crushingly obvious. And yet all of the companies we’ve looked at say the opposite. It’s not like they are slightly wrong—they are totally off. They say maintain a person’s strengths and focus all of your time on fixing the weaknesses.”
For the past 15 years, the 35-year-old Buckingham has studied the connection between workplace performance and bottom-line results for many of Gallup’s clients, including Toyota, Wells Fargo, and Disney. Recently, Buckingham completed a Gallup study that helps corporate America measure a culture’s impact on company performance. For the study, Buckingham first identified 12 core traits of a healthy work atmosphere (dubbed “Q12”) such as workers feeling actively engaged in their work or whether workers have had the opportunity to learn and grow. Then, using more than 30 years of corporate data collected at Gallup, Buckingham measured how these factor contributed to a company’s success. So far, corporate America is failing the test.
On average there is an inverse correlation between length of service and a positive Q12 score, according to the study. “What it means is the longer you stay in your job with a company, the less engaged you become,” Buckingham says. “So [this study] makes it very specific. Despite all of the money that we are spending on leadership and management development, we actually depreciate our human capital.
“We all say that human capital is one of the few assets that a company has that can generally appreciate,” he says. “And yet, according to the humans within that human capital, over time they actually become less clear about their expectations, less cared about, less well-cast in their job.
” Corporate America is founded on three flawed assumptions, says Buckingham. First: Everyone who excels at a particular job does it in the same way. A good example of how this assumption is wrong, says Buckingham, is the founding fathers of America, each with their own personal style. “It would have been ludicrous to say, ‘John Adams, you need to be less belligerent and calmer like Thomas Jefferson. Thomas Jefferson, you are a terrible public speaker; you need to become like John Adams,’ ” he says. “The only thing those leaders had in common was they created the same outcome. People followed them.”
The second flawed assumption: Everything can be learned. “If you think about it, one of the reasons that current performance management systems are so popular is because of the success of process improvement initiatives like Six Sigma,” Buckingham says. “And if you play this out, Six Sigma has a very good reputation because you can take a process and endlessly rework it until all of the kinks are gone. Because a process is endlessly malleable, you can keep playing around with it. The problem is we have become so enamored with that, we’ve applied it wholesale to people. And we have forgotten that people and process are made of different things. You aren’t endlessly malleable. There are some things about you that you can change, but there are some things about you that you are never going to change.”
The third flawed assumption is that corporate America believes fixing weaknesses will lead to success. “Fixing weaknesses will prevent failure,” Buckingham says, “but that’s a different thing; it’s damage control, not development. It gets you from minus six to zero.”
Buckingham hopes that his projects will be a call to arms for CEOs to begin actively measuring what really matters. “What we are giving CEOs is a way for them to shine an accurate light within their company to say, ‘How strong is our culture? Where is it getting stronger? Where is it getting weaker? What’s the range?’ ”
Buckingham says, “If you want to build a stronger culture, you had better answer one question right: What is the best way to improve one person’s performance? If you can answer that question, it will inform everything that you do.”

Case Summary
Buckingham says, but if you are going to succeed, you have to play to your strengths. It means that you have to go to your strengths rather than fixing just weakness. Normally it is said that focus on your strengths and maintain your weaknesses but what is practiced is that companies do opposite to it by maintaining their strengths & giving their all focus on fixing weaknesses 35 year old Buckingham observed the impact of the culture on the performance of corporate America by studying the performance and bottom-line results for many of Galup’s clients, like Toyota, wells forge, Disney.
What is the Q12?
The Gallup Q12 is a survey designed to measure employee engagement. The instrument was the result of hundreds of focus groups and interviews. Researchers found that there were 12 key expectations, that when satisfied, form the foundation of strong feelings of engagement. So far 87,000 work units and 1.5 million employees have participated in the Q12 instrument. Comparisons of engagement scores reveal that those with high Q12 scores exhibit lower turnover, higher sales growth, better productivity, better customer loyalty and other manifestations of superior performance. The Gallup organization also uses the Q12 as a semi-annual employee engagement Index – a random sampling of employee across the country.
The engagement index slots people into one of three categories.
• Engaged employees work with passion and feel a profound connection to their company. They drive innovation and move the organization forward.
• Not-Engaged employees are essentially “checked out.” They are sleepwalking through their workday. They are putting in time, but not enough energy or passion into their work.
• Actively Disengaged employees aren’t just unhappy at work; they’re busy acting out their unhappiness. Every day, these workers undermine what their engaged co-workers accomplish.
The Q12 Index
1. Do I know what is expected of me at work?
2. Do I have the materials and equipment that I need in order to do my work right?

What do I get?

3. At work, do I have the opportunity to do what I do best every day?
4. In the past 7 days, have I received recognition or praise for doing good work?
5. Does my supervisor, or someone at work, seem to care about me as a person?
6. Is there someone at work who encourages my development?

What do I give?

7. At work, do my opinions seem to count?
8. Does the mission or purpose of my company make me feel that my job is important?
9. Are my coworkers committed to doing quality work?
10. Do I have a best friend at work?

Do I belong here?

11. In the past six months, has someone at work talked to me about my progress?
12. This past year, have I had opportunities at work to learn and grow?

How do we all grow?

Study reveals that there is inverse relationship between length of service and Q12 score, means longer you stay less you are engaged. According to Buckingham he does not want to invest more on leadership and management, and says that length of service makes a human careless about a job. The corporate America is based on three Assumptions these are:
Everyone who excels at a particular job does it in a same way.
Everything can be learned by taking help of six sigma’s which improve their management performance.
The corporate America believes that fixing weaknesses will prevent failure.
Buckingham disagrees to the assumptions which are followed by corporate America.
Buckingham hopes that his research will be guideline for managers if they follow his research they can shine.

Questions for Discussion
1. Which of the seven people-centered practices discussed at the beginning of this chapter play a role in this case? Explain.
2. For managers who want to do a better job of managing people, what learning points and action items emerge from Buckingham’s findings and beliefs?
3. On which points do you most strongly agree with Buckingham? Why?
4. Any points of disagreement? Explain.

Question #1: Which of the seven people-centered practices discussed at the beginning of this chapter play a role in this case? Explain.

The following seven people-centered practices are defined for the successful companies lets have a look at these with reference to Buckingham’s research:
1. Job security (to eliminate fear of layoffs).
Job security means that if any organization reduces the fear of layoff or fire from job for its employees this reduction of fear of being fired from job is job security. This can be done through giving considerable salary, bonuses, gifts, etc. As Q12 tells us that what do I get, what do I give, do I belong here, and how do we all grow. These are the four questions (comprising 12 questions described earlier) which Mr. Buckingham asked from the employees of the organizations which he studied. The answers to these questions plays vital role for managers to best give job security to employees. If you give job security to any employee he will be highly engaged in the organization.

2. Careful hiring (emphasizing a good fit with the company culture).
It is the second People-centered practice. Careful hiring means recruiting those people, who best fulfill the needs of the company and its environment. Mr. Buckingham’s research tells us that organization needs those people who are strengthened and well trained, they should not be weak. They should not be weak if they are weak organization have to focus on their weaknesses which is too costly in many dimensions.

3. Power to the people (via decentralization and self-managed teams).
The group and team power is recognized in the modern world and management styles. If you look at the last fourth question of the Mr. Buckingham, how do we all grow tells us about the team spirit which is well gained through giving power to the people.

4. Generous pay for performance.
This factor comes under job security and tells us that how much a person is engaged in and organization varies with salary he/she gets.

5. Lots of training.
Training is necessary factor. Training means equipping employees with latest tricks and tools, which are vary necessary for proper job performance, If your organization will not provide you tools and equipment you will be less engaged in the job.

6. Less emphasis on status (to build a “we” feeling).
Stratification is an idea which means that some groups in the society have different status. The power is defined with status. So if you want to engage your employees you have to build the “we” felling which reduces the felling about status.

7. Trust building (through the sharing of critical information).
If you are well at trust building you have the power to manage the people. Do I belong here? In the Q12 tells about the trust building.
Importantly, these factors are a package deal, meaning they need to be installed in a coordinated and systematic manner—not in bits and pieces.

Question #2: For managers who want to do a better job of managing people, what learning points and action items emerge from Buckingham’s findings and beliefs?

Strengths refer to the competitive advantages and other distinctive competencies that a company can exert in the marketplace.
Weaknesses are constraints that hinder movements in certain directions.
Mr. Buckingham tells us that “Focus on your strengths rather than fixing your weaknesses.” Fixing weaknesses will make you 0 from -6 but focusing on and developing your strengths will made 6 from 0. The study of Mr. Buckingham at Gallup tells us that there is Inverse relationship between the length of the service and Q12 Score. It means that experienced and old employees of any organization are less engaged in the matters of the organization.

Question #3: On which points do you most strongly agree with Buckingham? Why?

The strengths are one of the world’s most powerful tools that one can feel proud of. Mr. Buckingham says, but if you are going to succeed, you have to play to your strengths. This is the main point on which I strongly agree with Buckingham because weaknesses can prevent the failure and playing to strengths makes you success.

Question #4: Any points of disagreement? Explain.

Length of the service having inverse relationship with performance as Q12 score of the Buckingham’s research tells us. I do not agree with the Buckingham on this point of case. Length of the service gives us the most experienced people which are the appreciated asset of the organization the negative Q12 score tells us that the employee is less engaged but does not tell that he/she is totally not engaged. This Q12 score can be made positive by applying the seven people-centered practices, defined earlier in the case study.
Strengths and weaknesses are two simultaneous processes if you leave weaknesses you can not overcome the strengths. It means you have to eradicate the weaknesses with playing to your strengths.

What is OB?

2008-11-23T11:12:00.000-08:00

Organization
The word organization is derived from Latin word organism which means to create the structure.
A group of two or more than two persons who work together to achieve the organizational goals
CHESTER BERNARD’S classical definition says that “Organization is a system of consciously coordinated structured activates or forces of two or more than two persons”
Organizations are social invention helping us to achieve things collectively that we could not achieve alone.

Behavior
Behavior is the aggregate of responses, reactions, movements made by any people in any situation.
Behavior is the observable demonstration of some capability, skill, ability or characteristics.

Organization Behavior
According to KRIETNER “Interdisciplinary field dedicated to better understanding and managing people at work”
Organizational behavior is the systematic study and careful application of knowledge about how people—as individuals and as groups—act within organizations.
Organizational behavior is the field of study that investigates the impact individuals, groups and structure purpose of applying such knowledge towards improving on organizations effectiveness. (Stephen P. Robins)
Organizational Behavior (OB) is the study and application of knowledge about how people, individuals, and groups act in organizations. It does this by taking a system approach. That is, it interprets people-organization relationships in terms of the whole person, whole group, whole organization, and whole social system. Its purpose is to build better relationships by achieving human objectives, organizational objectives, and social objectives.
The organization's base rests on management's philosophy, values, vision and goals. This in turn drives the organizational culture which is composed of the formal organization, informal organization, and the social environment. The culture determines the type of leadership, communication, and group dynamics within the organization. The workers perceive this as the quality of work life which directs their degree of motivation. The final outcomes are performance, individual satisfaction, and personal growth and development. All these elements combine to build the model or framework that the organization operates from.

Organizational goals:
1. To earn the profit.
2. Managing work force diversity.
3. Improving quality and productivity.
4. Improving customer services.
5. Human resource development.
6. Organizational change.

Methods to achieve organizational goals
1. Commitment.
2. Communication.
3. Leadership.
4. Motivation.
5. Believe on people/Trust.
6. Organizational Change.

1. Commitment:
Make employees committed. Through modern type of leadership not authoritarian. If leaders(managers) are behaving good to employed and employees are committed to work sincerely, it would speed up the whole environment and there would be a positive impact on output which leads to earn more profit which is the basic goal, when managers are giving job satisfaction to their foreign employees than the work force diversity will also be managed properly. It also improves not only the output but also the quality or output. If the managers are committed to customer giving respect, it also creates a customer service relation.

2. Communication
Managers should be fond of two way communication; it means that employees should be given the respect. Communication should not be done imposingly. This creates creativity and positiveness in organization, which ultimately helps in achieving the organizational goals like with this it increases the profit, work force diversity would be managed properly, in turn increases quality and productivity and as a whole creates change in an organization.

3. Leadership
Leadership is one of the most important and back bone in any organizations success. Leadership is of two types (1) Modern or democratic: which involves two ways communication. In this sort of leadership every one has right to speak. (2) Autocratic or authoritarian type of leadership creates disparity and non-availability and chaos of goals. Where Modern leadership is an effective tool of achieving goals.

4. Motivation
Performance of the people of the organization depends upon the motivation. Motivation came from the Latin word “mover” which means to influence the inner felling. Motivation plays vital role in achieving the organizational goals which involve the employees. If the human in the organization is motivated he/she performs well, which increases the productivity, quality, output. Motivation also helps in managing the workforce diversity. There can be two types of motivation (1) Enforcement (2) Reinforcement. Enforcement is related with the giving of reward to the employees. Whereas the reinforcement related with the punishment for motivating employees.

5. Believe
People in any organization are focal point in any organization. People are real essence in any organizational success. Management should treat people as major, adult which have thinking capability and they should be given the due respect and dignity. With this organization becomes a unit and achieve the organizational goals easily.

Management
Simply speaking, management is what managers do. However, this simple statement doesn’t tell us much. We define management as the process of coordinating and integrating work activities so that they are completed efficiently and effectively with and through other people.

Management Style:
Management is the combination of different activities which are given below:
1. PLANNING
2. ORGANIZING
3. LEADING
4. CONTROLLING
Planning: determining organizational goals and the means for achieving them. It also includes the future strategy about how the goals which were set can be achieved.

Organizing: deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom.
Leading: inspiring and motivating workers to work hard to achieve organizational goals.
Controlling: monitoring progress towards goal achievement and taking corrective action when needed.

CHART 1

Organizational Behavior

Organization Behavior

Profit Not for Profit
Productivity Absenteeism Turnover

CHART 2

HUMAN FACTORS

Commitment Communication Motivation Leadership Trust

CHART 3

Management Functions

Planning Organizing Leading Controlling

Visionary Leaders and Thinkers Recommend Adopting New Paradigm

2008-11-23T11:02:00.001-08:00

Visionary Leaders and Thinkers Recomment Adopting
A New Managerial Paradigm
Now companies like AT&tT, Procter & Gamble, and Dupont are offering employees personal-growth experiences of their own, hoping to spur creativity, encourage learning, and promote “ownership” of the company’s results. A handful of visionary leader-General Electric Chairman Jack Welch chief among them –are going beyond training seminars to a fundamental reordering of managerial priorities. Meanwhile, a small network of consultants, thinkers, and academics are working to transform business. Propelled by a belief that the world is undergoing major change, they call for a new paradigm-a whole new framework for seeing and understanding business-that will carry humankind beyond the industrial age.
The result is a curious convergence; executives seeking ways to reverse America’s fall from dominance sharing common ground with freethinkers drawn to business as the most powerful institution in a global society.
The new paradigm might be described as New Age without the glazed eyes the word “Paradigm” comes from the Greek for pattern, and the new paradigm is just that: a new pattern of behavior that stems from a new way of looking at the world. The old world view-Newtonian, mechanistic, and analytical- is present in everything from the Constitution with its clockwork system of checks and balances, to the rectilinear street plans of Washington, D.C and San Francisco, to the assembly lines devised by Henry Ford. The new paradigm ideas from quantum physics, cybernetics, chaos theory, cognitive science, and Eastern and western spiritual traditions to from a world view in which everything is interconnected, in which reality is not absolute but a by-product of human consciousness. Nobody is promising universal enlightenment next week, however. “What we’re talking about here is not a search for nirvana,” says Michael Ray, 51, holder of the BancOne chair in creativity at the Stanford business school. “It’s an attempt to deal with a very difficult time.”
So far, what has emerged is a host of management theories and practices benefiting an age of global enterprise, instantaneous communication, and ecological limits. Some are familiar: hierarchical organizations being replaced by more flexible networks; workers being “empowered” to make decisions on their own: organizations developing a capacity for group learning instead of waiting for wisdom from above; national horizons giving way to global thinking. Others may still seem a little far-out; creativity and intuition joining numerical analysis as aids to decision-making; love and caring being recognized as motivators in the workplace; even the primacy of profit motivate being questioned by those who argue that the real goal of enterprise is the mental and spiritual enrichment of those who take part in it.
Individually, each of these developments is just one manifestation of progressive management thought. Together, they suggest the possibility of a fundamental shift. Applied to business, the old paradigm held that numbers are all-important, that professional managers can handle any enterprise that control can and should be held at the top. The new paradigm puts people-customers and employees-at the center of the universe and replaces the rigid hierarchies of the industrial age with a network structure that emphasizes interconnectedness.
Why would companies want to embrace a new paradigm? “Because the old paradigm isn’t working,” says Ray. He argues that the decline of American business form its postwar apogee is like scientific anamoly-a situation the old theories fail to explain. Just as a new paradigm emerges in science when old theories stop working, the new paradigm in business begins to take form when the old-by-the-number school of management started to founder during the seventies. The surprise success of in Search of Excellence, with its explicit attack on the old model, signaled the beginning of a new perspective.
Several factors since have encouraged the trend. Perhaps the most visible is the faltering performance that has fed the vogue for Japanese management techniques and the quest for “excellence” But the driving force is the need for speed: The spread of computers and telecommunications and the rise of global markets have rendered bureaucracies hopelessly unwieldy. At the same time, a series of wrenching changes-deregulation, corporate takeovers the demise of the soviet bloc-has made the extraordinary seem commonplace. The sudden backlash against the money mania of the Eighties- combined, some say, with the gradual rise to power of the sixties generation- has put idealism back on the agenda. The result is a vague but growing sense that business has to be conducted differently…
In a recent speech before San Francisco’s Commonwealth Club, Levi Strauss Chairman Robert Haas, 48, sketched his idea of the corporation of the future: a global enterprise relying on employees who “are able to tap their fullest potential” and managers who act not as authority figures but as “coaches, facilitators, and role models,” Levi Strauss is striving to transform itself along those lines because it needs creative thinking and rapid response to satisfy a fashion-conscious public. “This company isn’t turning into a group of Moonies for some Platonic management good.” observes chief counsel Tom Baush, 47. “It’s a way of promoting our own success.”
Presumably Levi Strauss won’t be turning into a bunch of Moonies at all. The point of the new paradigm is not to get people to tom out in front of some guru but to encourage them to think for themselves. Ideally, this yields an organization that functions like a rugby team. “Rugby is a flow sport,” says Noel Tichy of the University of Michigan business school. “It looks chaotic, but it requires tremendous communication, continuous adjustment to an uncertain environment, and problem solving without using a hierarchy.” American business has been conducted more like football, with every play a call from sidelines.
One man who’s ready to play rugby is Jack Welch of GE. Having streamlined with a flurry of sales, acquisitions, and plant closings, Welch has now turned to the culture, “productivity is the key,” says GE’s head of management development, James Baughman, a former Harvard business school professor charged with effecting much of the change. “You can only get so much more productivity out of reorganization and automation. Where you really get productivity leaps is in the minds and hearts of people.”
But GE’s moves bear the twin hallmarks of new-paradigm thinking the systems view-seeing everything as interconnected- and the focus on people. Welch’s goal is fast turnaround and to get it he intends to create what he calls the “boundary less organization”-no hierarchical boundaries vertically, no functional boundaries horizontally….
So what’s the alternative? Business as a spiritual pursuit? Don’t laugh. Jack Welch recently remarked that he wants people at GE to feel rewarded “in both the pocketbook and the soul.” Thus is the lesson of the new paradigm: if people are your greatest resource and creativity the key to success, then business results cannot be divorced from personal fulfillment.

Case Summary
Visionary leaders and Thinkers calls for new paradigm, they say that the world is going through a major change. To tackle this change they speak about the new managerial paradigm instead of just arranging seminars and trainings as quoted by the GE’s chairman Jack Welch.
The word “paradigm” is Greek word which means “Pattern”, and the new paradigm means new pattern. New paradigm is the new eye to look at the world. People have got great value through new paradigm. New paradigm promotes team work and group learning behavior. The new organizations are eliminating the hierarchical patterns of the organization with the most powerful and new flexible networks of people who don’t wait for instructions from top level people. The modern managers don’t believe in centralization of work they organize team and groups. Love and wisdom are the two words recognized as motivators at the work place. Through love and wisdom the modern organizations are keen to achieve their goal of making their people enrich mentally and spiritually.
The scene of the business has changed tremendously like the demise of the soviet, deregulation, and corporate takeover, rise of markets, sophisticated technology, and new communication channels. All these variables defined earlier have made the old paradigm unable to work, which leads to the emergence of new paradigm. Levi Strauss is also taking place in modern business through new patterns of business by putting the people first. Levi Strauss managers are trying to become coaches not just the authority figures in the business. Creating the boundary less organization is first and foremost strategy of the modern managers.

For Discussion

How would you describe the new managerial paradigm?

Managers are the leaders of the organization. Leaders are given authorities at organization. The managers are working at various levels in the organization they have authority and power to move on but new managerial paradigm give value to the people and the modern managers do exactly same. Modern manager do not make themselves authority figure instead they create friendly atmosphere at the organization. As take example of the Levi Strauss, they create managers as “coaches, facilitators, and role models.” not the authority figures.
The new managerial paradigm can best be described that a manager can get work done through his/her subordinates in a way that the citizenship behavior is created.