Chapter1: Principles of Management

1.1 Management Concepts

Management is an important element in every organization. It is the element
that coordinates currents organizational activities and plans for the future. The
management adapts the organization to its environment and shapes the
organization to make it more suitable to the organization.
Management-“as how the mind controls the human body and its function similar
management (mind) controls the various activities (human body) in the
Organisation
4 M’s in Organisation – Men, Machine, Materials, Money, and leads to nothing. For
efficient and profitable functioning it is necessary that all these factors are put to
work in a co- ordinated manner.
According to Harold Koontz, “Management is an art of getting things done
through and with the people in formally organized groups”
According to F.W. Taylor, “Management is an art of knowing what to do,
when to do and see that it is done in the best and cheapest way”.

1.1.1 Why Industrial Management

Industrial management knowledge prepare people to apply engineering
principles to the management of industrial and production operations.
Industrial engineers require certain management skills to increase
production output and solve problems. If an industrial engineer does not possess
the necessary management skills for his job, he might struggle to gain the support
of his employees, managers and suppliers.

1.1.2 Management Vs Administration

The difference between Management and Administration can be summarized
under 2 categories:
1. Functions
2. Usage / Applicability
On the Basis of Functions: -

Basis Management Administration

Meaning Management is an art of getting things It is concerned with formulation

done through others by directing their of broad objectives, plans &
efforts towards achievement of pre- policies.
determined goals.

Nature Management is an executing function. Administration is a decision-

making function.

Process Management decides who should as it Administration decides what is to

& how should he do it. be done & when it is to be done.

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Function Management is a doing function Administration is a thinking
because managers get work done function because plans &
under their supervision. policies are determined under it.

Skills Technical and Human skills Conceptual and Human skills

Level Middle & lower level function Top level function

On the Basis of Usage: -

Basis Management Administration

Applicability It is applicable to business It is applicable to non-business

concerns i.e. profit-making concerns i.e. clubs, schools,
organization. hospitals etc.

Influence The management decisions are The administration is influenced

influenced by the values, by public opinion, govt. policies,
opinions, beliefs & decisions of religious organizations, customs
the managers. etc.

Status Management constitutes the Administration represents owners

employees of the organization of the enterprise who earn return
who are paid remuneration (in on their capital invested & profits
the form of salaries & wages). in the form of dividend.

1.2 Types of Management

Generally, there are Three Levels of Management,

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

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 Fig 1.1 Types of Management
1.2.1 Top Level of Management
The Top Level Management consists of the Board of Directors (BOD) and the
Chief Executive Officer (CEO). The Chief Executive Officer is also called General
Manager (GM) or Managing Director (MD) or President. The Board of Directors are
the representatives of the Shareholders, i.e. they are selected by the Shareholders
of the company. Similarly, the Chief Executive Officer is selected by the Board of
Directors of an organization.
The main role of the top level management is summarized as follows:-
• The top level management determines the objectives, policies and plans of
the organisation.
• They mobilises (assemble and bring together) available resources.
• The top level management does mostly the work of thinking, planning and
deciding. therefore, they are also called as the Administrators and the Brain
of the organisation.
• They spend more time in planning and organising.
• They prepare long-term plans of the organisation which are generally made
for 5 to 20 years.
• The top level management has maximum authority and responsibility. They
are the top or final authority in the organisation. They are directly
responsible to the Shareholders, Government and the General Public. The
success or failure of the organisation largely depends on their efficiency and
decision making.
• They require more conceptual skills and less technical Skills.

1.2.2 Middle Level of Management

The Middle Level Management consists of the Departmental Heads (HOD),
Branch Managers, and the Junior Executives. The Departmental heads are Finance
Managers, Purchase Managers, etc. The Branch Managers are the head of a branch
or local unit. The Junior Executives are Assistant Finance Managers, Assistant
Purchase Managers, etc. The Middle level Management is selected by the Top Level
Management.

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The middle level management emphasize more on following tasks :-
• Middle level management gives recommendations (advice) to the top level
management.
• It executes (implements) the policies and plans which are made by the top
level management.
• It co-ordinate the activities of all the departments.
• They also have to communicate with the top level Management and the lower
level management.
• They spend more time in co-ordinating and communicating.
• They prepare short-term plans of their departments which are generally
made for 1 to 5 years.
• The middle Level Management has limited authority and responsibility. They
are intermediary between top and lower management. They are directly
responsible to the chief executive officer and board of directors.
• Require more managerial and technical skills and less conceptual skills.

1.2.3 Lower Level of Management

The lower level management consists of the Foremen and the Supervisors.
They are selected by the middle level management. It is also called Operative /
Supervisory level or First Line of Management.
The lower level management performs following activities :-
• Lower level management directs the workers / employees.
• They develop morale in the workers.
• It maintains a link between workers and the middle level management.
• The lower level management informs the workers about the decisions which
are taken by the management. They also inform the management about the
performance, difficulties, feelings, demands, etc., of the workers.
• They spend more time in directing and controlling.
• The lower level managers make daily, weekly and monthly plans.
• They have limited authority but important responsibility of getting the work
done from the workers. They regularly report and are directly responsible to
the middle level management.
• Along with the experience and basic management skills, they also require
more technical and communication skills.

1.3 Principles Of Management

Fayol’s14 Principles of Management - Administrative Management
The fourteen principles given by Fayol are as under:
(1) Division of Work:
This principle of Fayol tells us that as far as possible the whole work should
be divided into different parts and each individual should be assigned only one part
of the work according to his ability and taste rather than giving the whole work to
one person.
When a particular individual performs the same job repeatedly, he will become an
expert in doing that particular part of the whole job. Consequently, the benefits of
specialization will become available.
For example, a furniture manufacturer gets an order for manufacturing 100 lecture
stands. He has five workers who will do the job. There are two ways to complete
this order. First, every worker should be asked to complete 20 lecture stands.
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The second method can be distributing different parts of the lecture stand-legs, top
board, centre support, assembling and polishing-to all the five workers in a manner
that only one worker does the same job for all the 100 lecture stands. Here, Fayol’s
indication is to the second way to do this job and not the former one.
(2) Authority and Responsibility:
According to this principle, authority and responsibility should go hand in
hand. It means that when a particular individual is given a particular work and he
is made responsible for the results, this can be possible only when he is given
sufficient authority to discharge his responsibility.
It is not proper to make a person responsible for any work in the absence of
authority. In the words of Fayol, “The result of authority is responsibility. It is the
natural result of authority and essentially another aspect of authority and
whenever authority is used, responsibility are automatically born.”
For example, the CEO of a company has doubled the sales target of the sales
manager for the coming year. To achieve this target, authority for appointing
necessary sales representatives, advertising according to the need, etc. shall have
to be allowed. In case these things are not allowed the sales manager cannot be
held responsible for not
(3) Discipline:
Discipline is essential for any successful work performance. Fayol considers
discipline to mean obedience, respect for authority, and observance of established
rules.Discipline can be established by providing good supervision at all levels,
clearly explaining the rules, and implementing a system of reward and punishment.
A manager can present a good example to his subordinates by disciplining himself.
For example, if the employees break their promise of working up to their full
capacity, it will amount to the violation of obedience. Similarly a sales manager has
the authority to do business on credit.
But in case he allows this facility not to the general customers but only to his
relatives and friends, then it will amount to ignoring his respect to his authority.
(Note: Both these examples give a message of indiscipline which is an undesirable
situation.)
(4) Unity of Command:
According to the principle of unity of command, an individual employee
should receive orders from only one superior at a time and that employee should be
answerable only to that superior. If there are many superiors giving orders to the
same employee, he will not be able to decide as to which order is to be given
priority. He thus finds himself in a confused situation.
Such a situation adversely affects the efficiency of the subordinates. On the other
hand, when there are many superiors, every superior would like his orders to be
given priority. This ego problem creates a possibility of clash. Consequently, their
own efficiency is likely to be affected.
(5) Unity of Direction:
Unity of direction means that there should be one head for one plan for a
group of activities having the same objective. In other words, there should be one
plan of action for a group of activities having the same objective and there should
be one manager to control them.
For example, suppose an automobile company is manufacturing two products,
namely, scooters and cars, hence having two divisions.
As each product has its own markets and problems therefore each division must
have its own targets. Now each division must plan its target as per its

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environmental conditions to get better results. It is necessary to distinguish
between the meaning of the unity of command and the unity of direction.
Unity of command means that there should be only one manager at a time to give
command to an employee, while the unity of direction means that there should be
only one manager exercising control over all the activities having the same
objective.
(6) Subordination of Individual Interest to General Interest:
This principle can be named ‘Priority to General Interest over Individual
Interest.’ According to this principle, the general interest or the interest of the
organization is above everything. If one is asked to place individual interest and the
general interest in order of priority, definitely the general interest will be placed at
the first place.
For example, if a manager takes some decision which harms him personally but
results in a great profit to the company, he should certainly give priority to the
interest of the company and take the decision accordingly. On the contrary, if some
decision helps the manager personally but results in a great loss to the company,
then such a decision should never be taken.
(7) Remuneration to Employees:
Fayol is of the opinion that the employees should get a fair remuneration so
that the employees and the owners find equal amount of satisfaction. It is the duty
of the manager to ensure that employees are being paid remuneration according to
their work. If, however, they are not paid properly for their work, they will not do
their work with perfect dedication, honesty and capacity.
As a result, the organisation shall have to face failure. Proper remuneration
depends on some factors like the cost of living, demand of labour and their ability.
Fayol feels that in order to motivate the employees, apart from general
remuneration, they should be given some monetary and non-monetary incentives.
For example, suppose that the things are getting dearer and dearer and the company
is getting good profits. In such a situation, the remuneration of the employees
should be increased even without their asking. If this is not done, the employees
will leave the company at the first opportunity. Expenses shall have to be incurred
on new recruitment which shall bring loss to the company.
(8) Centralisation and Decentralisation:
According to this principle, the superiors should adopt effective
centralisation instead of complete centralisation and complete decentralisation. By
effective centralisation, Fayol does not mean that authority should be completely
centralised.
He feels that the superiors should keep the authority of taking important decisions
in their own hands, while the authority to take daily decisions and decisions of less
importance should be delegated to the subordinates.
The ratio of centralisation and decentralisation can differ in different situations. For
example, it is advantageous to have more centralisation in a small business unit
and more decentralisation in a big business unit.
For example, the decisions in respect of determining the objectives and policies,
expansion of business, etc. should remain in the hands of the superiors. On the
other hand, authority for the purchase of raw material, granting leave to the
employees, etc. should be delegated to the subordinates.
(9) Scalar Chain:
(i) Meaning of Scalar Chain:
It refers to a formal line of authority which moves from highest to the lowest ranks
in a straight line,
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(ii) Fayol’s Opinion:
This chain must be followed in a strict manner. It means each communication
must move from top to bottom and vice versa in a straight line. The important
condition here is that no step (post) should be overlooked during communication.
(iii) Fayol’s Ladder:
Fayol has explained this principle with the help of a ladder.
For example, in a company the employee ‘F’ wants to have contact with the
employee ‘P’. According to the principle of scalar chain ‘F’ shall have to reach ‘A’
through the medium of E,D,C,B and then having contact with L,M,N,0 shall reach
‘P’. Thus ‘F’ shall have to take the help of all the nine steps (posts) to have business
contact with ‘P’.
(iv) Utility:
Due to more clear system of authority and communication, problems can be solved
faster.
(v) Gang Plank:
It is the exception of the principle of scalar chain. This concept was developed to
establish a direct contact with the employee of equal rank in case of emergency to
avoid delay in communication.
For example, as shown in the diagram employee ‘F’ can have direct contact with
employee ‘P’. But for doing so employees ‘F’ and ‘P’ shall have to seek the prior
permission of their immediate bosses ‘E’ and ‘O’. The details of their talk also shall
have to be given to them.
(10) Order:
According to the principle of order, a right person should be placed at the
right job and a right thing should be placed at the right place. According to Fayol,
every enterprise should have two different orders-Material Order for Physical
Resources and Social Order for Human Resources.
Keeping the physical resources in order means that ‘a proper place for everything
and everything in its right place’. Similarly, keeping the human resources in order
means ‘a place for everyone and everyone in his appointed place’.
Maintaining these two orders properly will ensure that everybody knows his
workplace, what he is to do and from where he would get his required material.
Consequently, all the available resources in the organisation will be utilised
properly.
(11) Equity:
This principle tells that the managers should treat their subordinates in a
just and kind manner so that they develop a feeling of dedication and attachment
for their work. All the employees should be treated equally and impartially.
Fayol tells us in connection with this principle that there should not be any
equality of treatment between a person whose work is really good and a person who
is a shirker by nature.
Rather, the latter should be treated sternly. Doing so would be equitable. It is
because of this point of view that Taylor has presented his differential
remuneration method.
(12) Stability of Personnel:
From the point of view of management it is absolutely harmful to change the
employees frequently as it is a reflection of inefficient management. Therefore,
according to this principle there should be stability of tenure of the employees so
that the work continues efficiently.

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Fayol thinks that instability in the tenure of employees is a cause of poor
management and results. High rate of labour turnover will result in increased
expenses because of selecting them time and again, and giving them training
afresh.
It also lowers the prestige of the organisation and creates a feeling of insecurity
among the employees which keeps them busy in finding out new avenues of work.
Consequently, the sense of dedication cannot be created among them.
For example, it is true that if the workers in a company are not treated well and the
atmosphere in the company is also unhealthy, the employees will not stay for a
long time. In other words, they will leave the company at the first opportunity
available. This situation is absolutely harmful.
(13) Initiative:
Initiative means the capacity to work while expressing one’s thoughts.
According to Fayol, it is the duty of the manager to encourage the feeling of
initiative among his employees for doing some work or taking some decision but
within the limits of authority and discipline.
It will be possible only when the manager will welcome the thoughts of his/her
subordinates. By doing so the subordinates will present new and useful ideas time
and again and gradually they will become an integral part of the organisation. In
order to make this process a success a manager will have to abandon his false
sense of prestige.
For example, a salesman suggests to his sales manager to implement a new
advertisement technique. The sales manager sends him away by telling him that it
is not possible and ignores the suggestion altogether.
In such a situation the salesman, who has been admonished and belittled, will
never venture to offer any suggestion in future because his desire of taking
initiative has been suppressed.
On the contrary, if his suggestion had been listened to carefully (even though not to
be implemented) he could have taken the courage to offer some suggestion in
future. Such an action would simply have encouraged his initiative.
(14) Esprit de corps:
As per this principle, a manager should continuously make efforts to develop a
team spirit among the subordinates. To do this, he/she should use the word ‘We’
instead of” during the conversation with subordinates.
• It refers to team spirit i.e. harmony in the work groups and mutual
understanding among the members.
• Spirit De’ Corps inspires workers to work harder.
• There should be proper co-ordination of work at all levels

1.4 Scientific Management Or F.W. Taylor

1.4.1 Principles Of Scientific Management
1. Performance Standards
F.W. Taylor found out that there were no scientific performance standards.
No one knew exactly how much work a worker should do in one hour or in one day.
The work was fixed assuming rule of thumb or the amount of work done by an
average worker. Taylor introduced Time and Motion Studies to fix performance
standards. He fixed performance standards for time, cost, and quality of work,
which lead to uniformity of work. As a result, the efficiency of the workers could be
compared with each other.

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2. Differential Piece Rate System
Taylor observed that workers did as little work as possible. He felt that under
existing wage system, an efficient worker gained nothing extra. So, Taylor used the
differential piece (unit) rate system.
Under differential piece rate system, a standard output was first fixed. Then two
wage rates were fixed as follows :-
Low wage rate was fixed for those workers who did not produce the standard
output.
Higher wage rate was fixed for those workers who produced the standard output or
who produced more than the standard output.
Differential piece-rate system can be explained with following example :-
The standard output for a day is 10 units. The wage rate for producing less than 10
units is $ 5 per unit, and for producing 10 or more units is $ 8 per unit. If Mr. X
produces 7 units, and Mr. Y produces 12 units, then their wages will be as follows:
Mr. X's wage is 7 x 5 = $ 35
Mr. Y's wage is 12 x 8 = $ 96
Because of this system, the inefficient workers will try to improve their efficiency,
and the efficient workers will be motivated to maintain or improve their production
capacity.
3. Functional Foremanship
Taylor started "Functional Foremanship". Here, 8 foremen (lower level
manager or supervisor) are required to supervise the workers. This is because one
foremen cannot be an expert in all the functions.
Taylor's functional foremanship consists of two groups of supervisors :-
At the Planning Level or Office Level.
At the Doing Level or Factory Level.
(a) At the Planning Level :-
Taylor separated planning from doing. At the planning level there were four
supervisors. They are :-
• Time and Cost Clerk : This boss prepares the standard time for completing
the work and cost of doing that work.
• Route Clerk : This boss makes the exact route (way) through which each
product has to travel from a raw-material to a finished product.
• Discipline Clerk : This boss looks after the discipline and absenteeism
problems in the organisation.
Instruction Card Clerk : The boss gives instructions about how to do a particular
work.
(b) At the Doing Level :-
At the doing level there were also four supervisors. They are :-
• Gang Boss : He is responsible for setting up the machines and tools and for
direct supervision of workers.
• Speed Boss : He is responsible for maintaining a proper speed of work.
• Repair Boss : He is responsible for the repairs and maintenance of
machines.
• Inspector Boss : He is responsible for maintaining the quality of production.

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4. Mental Revolution
Taylor introduced the concept of "Mental Revolution". He said that the
management and workers should have a positive attitude towards each other. This
will result in close cooperation between them. This will increase productivity and
profits.
5. Time Study
Time study means to record the time taken for doing each part of a job. The
full job is first observed and analysed. Then it is divided into different elements
(parts). Later the time taken for doing each part of the job is recorded. This is done
by using a stop clock. Time study helps the management to know exactly how
much time it will take to do a particular job. This helps the management to fix the
amount of work to be done by each worker in one hour or in one day. That is,
management can fix a standard output of work for a certain period of time.
Taylor advised all managers to do time study. This will prevent the workers from
passing time, working slowly and doing less work. Time study helps to increase the
productivity of the organisation.
6. Fatigue and Motion Study
Frank and Lillian Gilbreth (Husband and Wife) introduced fatigue and
motion studies. Fatigue and motion studies find out and remove unnecessary and
wasteful movements while doing the job.
According to the Gilbreths, fatigue (tiredness) and motion (movements or
actions) are interlinked. Every motion that is removed will reduce fatigue. Using
cameras, they studied workers (masons) doing common jobs like bricklaying. They
found that the workers do many wasted motions while doing their work. This
resulted in fatigue. So, the Gilbreths asked the workers to stop all unnecessary
motions and to do only the motions which were necessary for doing the job. They
reduced the bricklayers' motions from 18 to 5. This also reduced the fatigue of the
bricklayers. Therefore, productivity of workers increased

1.4.2 Benefits of Scientific Management

The benefits of scientific management are:-
1. Replacement of traditional rule of thumb method by scientific techniques.
2. Proper selection and training of workers.
3. Incentive wages to the workers for higher production.
4. Elimination of wastes and rationalization of system of control.
5. Standardization of tools, equipment, materials and work methods.
6. Detailed instructions and constant guidance of the workers.
7. Establishment of harmonious relationship between the workers.
8. Better utilization of various resources.
9. Satisfaction of the needs of the customers by providing higher quality
products at lower prices.

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1.4.3 Study Of Fayol And Taylor
Table 1.1 Taylor vs Fayol

Basis Taylor Fayol

Human aspect Taylor disregards human Fayol pays due regards on

elements and there is human element. E.g. Principle of
more stress on improving initiative, Espirit De’ Corps and
men, materials and Equity recognizes a need for
methods human relations

Status Father of scientific Father of management principles

management

Efficiency & Stressed on efficiency Stressed on general

administration administration

Approach It has micro-approach It has macro-approach and

because it is restricted to discuses general principles of
factory only management which are
applicable in every field of
management.

Scope of These principles are These are applicable in all kinds

principles restricted to production of organization regarding their
activities management affairs

Achievement Scientific management Administrative management

1.5 Organization
1.5.1 Meaning of Organization:
Different authors have defined organization in different ways. The main
definitions of organization are as follows:
• According to Chester I. Barnard, "Organization is a system of co-operative
activities of two or more persons."
• According to Louis A. Allen, "Organization is the process of identifying and
grouping the work to be performed, defining and delegating responsibility
and authority, and establishing relationship for the purpose of enabling
people to work most effectively together in accomplishing objectives."
• According to Mooney and Railey, "Organization is the form of every human
association for the attainment of a common purpose."

1.5.2 Functions of an Organization

1. To define the role of the individual:
An individual employed in an enterprise must know his role, position and
relationship with other personnel in his department and with others.

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 Organization becomes necessary so that the persons involved in the
enterprise can identify themselves in the enterprise. It is through the
organization that one can know his position and role in the unit. He can
relate his position with other members of the enterprise.
2. Determination of authority:
The assignment of a certain role proposes the granting of certain authority
so that performance can be possible. Organization is necessary to define the
authority i.e., the rights and powers of men in different positions which
would help them to discharge their assigned roles.
3. Fixation of responsibility:
Each individual is assigned a certain duty organisational structure defines
what performance is expected of a member of the unit of the department of
the enterprise. Absence or faulty determination of responsibility will lead to
irresponsible functions, behavior and attitudes.
4. Specialization:
Modern production and management techniques are based on the idea of
specialization which means the performance of different parts of a job by
persons specifically suited for them.
Organization is basically required to promote specialization. Efficient and
smooth functioning is possible when different elements of a job are
performed by experts and their efforts are pooled to attain the desired and
product.
5. Coordination:
Since the pattern of managerial operations is to be based on die division' of
labour, there arises the need of coordinating the activities of various
individuals or that of different departments. They perform diverse, activities
and these have to be woven into the main fabric.
6. Proper utilization of human resources:
The most important thing for enterprises is to make the best possible use of
its human resources. There must not be wastage or misapplication of
human efforts. This is of great importance for economy as well as for the
achievement of objectives.
It can be possible only by suitable organization, which avoid all bottlenecks-
chances of work being held up and allow smooth flow of performances.
7. Efficient functioning:
Efficiency is to be the watchword of an enterprise, all the factors mentioned
above will have a great impact on the efficient functioning of the enterprise,
and Organisation avoids all duplication in jobs, overlapping and wastage. It
promotes speedy, smooth and efficient functioning of the enterprise.

1.5.3 Types Of Organisation Structure

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

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 Fig1.2 Line Organization

• There is a hierarchical arrangement of authority.

• Each department is self contained and works independently of other
departments.
• Lines of authority are vertical i.e. from top to bottom.
• There are no staff specialists.
Advantages
• Simple to establish and operate
• Promotes prompt decision making.
• Easy to control as the managers have direct control over their subordinates.
• Communication is fast and easy as there is only vertical flow of
communication.
Disadvantages
• Lack of specialization
• Managers might get overloaded with too many things to do.
• Failure of one manager to take proper decisions might affect the whole
organization.

1.5.3.2 Functional Organization

The organization is divided into a number of functional areas. This
organization has grouping of activities in accordance with the functions of an
organization such as production, marketing, finance, human resource and so on.
The specialist in charge of a functional department has the authority over all other
employees for his function.
Advantages
• Is logical and reflection of functions
• Follows principle of occupation specialization
• Simplifies training
• Better control as the manger in charge of each functional department is
usually an specialist

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 Fig1.3 Functional Organization
Disadvantages
• Overspecialisation and narrow viewpoints of key personnel can limit the
organisation growth.
• Reduced coordination between functions.
• Conflicts between different functions could be detrimental for the
organization as a whole.
• Difficult for general managers to coordinate different departments.
However, it is much suitable for large organizations where there is ample scope for
specialization. Once harmony and proper coordination among different functions is
achieved, it could lead to sure success for an organization

1.5.3.3 Line and Staff Organisation

It is a combination of line and functional structures. In this organisation a
structure, the authority flows in a vertical line and get the help of staff specialist
who are in advisory. When the line executives need advice, information about any
specific area, these staff specialists are consulted. For example Chief accountant
has command authority over accountants and clerks in the accounts departments
but he has only advisory relationship with other departments like production or
sales.
Advantages
• Line managers are provided by expert advice by these specialists.
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 • Staff managers provide specialist advice which can improve quality of
decisions in various departments.

Fig 1.4 Line and Staff Organization

Disadvantages
Line managers and staff managers might have conflicts on particular issues.
Line and staff managers might not be clear as to what the actual area of operations
is and what is expected of them. Co-ordination may be a problem.
Staff personnel are not accountable for the results and thus may not take tasks
seriously.
However, Line and staff organisation is very suitable for large organisation.
1.5.3.4 Project Organisation
The project structure consists of a number of horizontal organisational units
to complete projects of a long duration. A team of specialists from different areas is
created for each project. Usually this team is managed by the project manager. The
project staff is separate from and independent of the functional departments.

Fig 1.5 Project Organizations

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Advantages
• Special attention can be provided to meet the complex demand of the
project.
• It allows maximum use of specialist knowledge thus chances of failure are
very less.
• Project staff works as a team towards common goal which results in high
motivation level for its members.
Disadvantages
As the project staff consists of personnel from diverse fields, it might be quite
challenging for the project manager to coordinate among them.

1.5.3.5 Matrix Organisation

• Matrix organisation combines two structures – functional departmentation
and project structure.
• Functional department is a permanent feature of the matrix structure and
retains authority for overall operation of the functional units.
• Project teams are created whenever specific projects require a high degree of
technical skill and other resources for a temporary period.
• Project team form the horizontal chain and functional departments create a
vertical chain of command.
• Members of a particular team are drawn from the functional departments
and are placed under the direction of a project manager who has the overall
responsibility of a particular project.

Fig 1.6 Matrix Organization

Advantage
• Is oriented towards end results.
• Professional identification is maintained
• Pinpoints product-profit responsibility
Disadvantages
• Conflict in organization authority exists.
• Possibility of disunity of command exists
• Requires manager effective in human relations

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1.6 Elements or Functions of Management
For theoretical purposes, it may be convenient to separate the function of
management but practically these functions are overlapping in nature i.e. they are
highly inseparable. Each function blends into the other & each affects the
performance of others.
1. Planning:
• Planning involves the formulation of what is to be done, how, when
and where it is to be done, who is to do it and what results are to be
evaluated.
• Planning means looking ahead, it is mental work, it is selecting from
among many choices following the procedure given below:
i. Lay down the company objective/targets.
ii. Collect and classify the information relating to company objectives.
iii. Develop alternative course of action to do the things.
iv. Compare the alternatives in terms of objectives, feasibility and consequences
v. Select the optimum course of action yielding maximum benefit/gain
vi. Establish policies, procedure, methods, schedules, programmes, systems,
standards and budgets for the optimum course of action selected.
2. Organizing:
After determining the course and make-up of action, the next step, in order
to accomplish the task, is to distribute the necessary work among the working
groups.
It is the process of by which the structure and allocation of jobs is determined.
It means, organizing people, materials, job, time etc., and establishing framework
in which responsibilities are defined and authorities and laid down
The process of organizing involves:
• Divide the work into component activities
• Assign people to task (component activities)
• Define responsibilities
• Delegate authority
• Establish structural relationship ( i.e organization structure) to
secure coordination

Fig 1.7 Elements Of Management

17
3.Staffing
It is the function of manning the organization structure and keeping it
manned. Staffing has assumed greater importance in the recent years due to
advancement of technology, increase in size of business, complexity of human
behavior etc. The main purpose o staffing is to put right man on right job i.e.
square pegs in square holes and round pegs in round holes. According to Kootz &
O’Donell, “Managerial function of staffing involves manning the organization
structure through proper and effective selection, appraisal & development of
personnel to fill the roles designed un the structure”. Staffing involves:
• Manpower Planning (estimating man power in terms of searching, choose
the person and giving the right place).
• Recruitment, selection & placement.
• Training & development.
• Remuneration.
• Performance appraisal.
• Promotions & transfer.

4.Directing
It is that part of managerial function which actuates the organizational
methods to work efficiently for achievement of organizational purposes. It is
considered life-spark of the enterprise which sets it in motion the action of people
because planning, organizing and staffing are the mere preparations for doing the
work. Direction is that inert-personnel aspect of management which deals directly
with influencing, guiding, supervising, motivating sub-ordinate for the achievement
of organizational goals. Direction has following elements:
• Supervision
• Motivation
• Leadership
• Communication
Supervision- implies overseeing the work of subordinates by their superiors. It is the
act of watching & directing work & workers.
Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal
to work. Positive, negative, monetary, non-monetary incentives may be used for this
purpose.
Leadership- may be defined as a process by which manager guides and influences
the work of subordinates in desired direction.
Communications- is the process of passing information, experience, opinion etc from
one person to another. It is a bridge of understanding.
5.Controlling
It implies measurement of accomplishment against the standards and
correction of deviation if any to ensure achievement of organizational goals.
The purpose of controlling is to ensure that everything occurs in conformities with
the standards. An efficient system of control helps to predict deviations before they
actually occur. According to Theo Haimann, “Controlling is the process of checking
whether or not proper progress is being made towards the objectives and goals and
acting if necessary, to correct any deviation”. According to Koontz & O’Donell
“Controlling is the measurement & correction of performance activities of
subordinates in order to make sure that the enterprise objectives and plans desired
to obtain them as being accomplished”. Therefore controlling has following steps:

18
 • Establishment of standard performance.
• Measurement of actual performance.
• Comparison of actual performance with the standards and finding out
deviation if any.
• Corrective action, if necessary
• Follow up

Table 1.2 Functions Of Management

FUNCTIONS SUB FUNCTIONS

Planning Forecasting, decision making, strategy formulation, policy making,
programming, scheduling, innovation, dudgeting

Organising Grouping of functions, Departmentation, Delegation,

Decentralization, task allocation
Staffing Manpower planning, job analysis, Recruitment, Selection, Training,
Placement , Compensation, promotion, appraisal, etc

Directing Supervision , Motivation, Communication, Leadership, etc

Controlling Fixation of standard, recording, measurement, reporting corrective

action.

1.6.1 Planning
Definition :
Planning is deciding in advance what is to be done. It involves the selection
of objectives , policies, procedures, and programmes from among alternatives.
Planning is the process of thinking through and making explicit the strategy,
actions and relationships necessary to accomplish an overall objective or purpose.
Planning Premises
According to Koontz and O.Donnell “planning premises are the anticipated
environment in which plans are expected to operate”. They include assumptions or
forecasts of the future and known conditions that will affect the course of plans,
such as prevailing policies, and existing company plans that control the basic
nature of supporting plans.
Uses :
• Building blocks on which the entire planning is based.
• Useful in preparing consistent and coordinated plans.
• Facilitates the planning process by guiding, directing, simplifying and
reducing the uncertainity
Characteristics Or Features Of Planning
(i) Planning is goal-oriented: All plans arise from objectives. Objectives provide the
basic guide for planning activities. Planning has no meaning unless it contributes
some positive achievement of predetermined goals.
(ii) Planning is a primary function: Planning is the foundation of management. It is a
parent exercise in management process. It is a preface to business activities.
According to Koontz, “Planning provides the basic foundation from which all future
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management functions arise”. Terry also supported the view, that “without
planning there is nothing to organize, no one to motivate and no need to control”.
The idea of primacy of planning emphasizes the fact that planning takes
precedence over other managerial functions like organizing, directing and
controlling because none of these functions can come into being until there is a
plan.
(iii) Planning is all-pervasive: Planning is a function of all managers. It is needed and
practiced at all managerial levels. Planning is inherent in everything a manager
does. Managers have to plan before launching a new business. They have to plan
whenever things change. Even when they decide to close down a plant, they have to
plan meticulously to avoid problems from employees. The scope of planning,
however, differs at different levels and among different departments.
(iv) Planning is a mental exercise: Planning is a mental process involving imagination,
foresight and sound judgement. Planning compels managers to abandon guesswork
and wishful thinking. It makes them think in a logical and systematic manner.
Plans are based on a careful study of internal and external factors influencing
business activities.
(v) Planning is a continuous process: Planning is continuous. It is a never-ending
activity. Once plans for a specific period are prepared, they are translated into
action. At the end of that period, there is a need for a new plan to be drawn based
on new situations and conditions. Planning is thus, an ongoing process of
adjustment to change. There is always need for a new plan to be drawn on the
basis of new demands and changes in the circumstances.
(vi) Planning involves choice: Planning essentially involves choice among various
alternative courses of action. If there is one way of doing something, there is no
need for planning. The need for planning arises only when alternatives are
available. Planning presupposes the existence of alternatives. From out of these
alternatives, a manager would select the best alternative, after careful analysis and
evaluation.
(vii) Planning is forward looking: Planning means looking ahead and preparing for the
future. It means peeping into the future, analyzing it and preparing for it. Managers
plan today with a view to flourish tomorrow. Without planning, business becomes
random in nature and decisions would become meaningless, adhoc choices.
(viii) Planning is flexible: Planning is based on a forecast of future events. Since future
is uncertain, plans should be reasonably flexible. The onset of colour television sets
forced many a manufacturer in the West to abandon production of black and white
television sets long back. When market conditions change, planners have to make
necessary changes in the existing plans.
Benefits Of Planning
(i) Focuses Attention on Objectives. Since all planning is directed towards achieving
enterprise objectives, the very act of planning focuses attention on these objectives.
Laying down the objectives is the first step in planning. If the objectives are clearly
laid down, the execution of plans will also be directed towards these objectives.
(ii) Ensures Economical Operation. Planning involves a lot of mental exercise, which is
directed towards achieving efficient operation in the enterprise. It substitutes joint
directed effort for uncoordinated piecemeal activity, even flow of work for uneven
flow, and deliberate decisions for snap judgements. This helps in better utilization
of resources and thus minimizing costs.
(iii) Reduces Uncertainty. Planning helps in reducing uncertainties of future because it
involves anticipation of future events. Effective planning is the result of deliberate
thinking based on facts and figures. It involves forecasting also. Planning gives an
opportunity to a business manager to foresee various uncertainties, which may be
20
caused by changes in technology, taste and fashion of the people, etc. Sufficient
provision is made in the plans to offset these uncertainties.
(iv) Facilitates Control. Planning helps the managers in performing their function of
control. Planning and control are inseparable in the sense that unplanned action
cannot be controlled because control involves keeping activities on the
predetermined course by rectifying deviations from plans. Planning helps control by
furnishing standards of control. It lays down objectives and standards of
performance, which are essential for the performance of control function.
(v) Encourages Innovation and Creativity. Planning is basically the deciding function of
management. It helps innovative and creative thinking among the managers
because many new ideas come to the mind of a manager when he is planning. It
creates a forward-looking attitude among the managers.
(vi) Improves Motivation. A good planning system ensures participation of all
managers, which improves their motivation. It improves the motivation of workers
also because they know clearly what is expected of them. Moreover, planning serves
as a good training device for future managers.
(vii) Improves Competitive Strength. Effective planning gives a competitive edge to the
enterprise over other enterprises that do not have planning or have ineffective
planning. This is because planning may involve expansion of capacity, changes in
work methods, changes in quality, anticipation tastes and fashion of people and
technological changes, etc.
(viii) Achieves Better Coordination. Planning secures unity of direction towards the
organizational objectives. All the activities are directed towards the common goals.
There is an integrated effort throughout the organization.

1.6.2 Organizing
According to Koontz and O'Donnell, "Organization involves the grouping of
activities necessary to accomplish goals and plans, the assignment of these
activities to appropriate departments and the provision of authority, delegation and
co-ordination." Organization involves division of work among people whose efforts
must be co-ordinate to achieve specific objectives and to implement pre-determined
strategies.
Nature or Characteristics of Organizing
From the study of the various definitions given by different management experts we
get the following information about the characteristics or nature of organization
(1) Division of Work:
Division of work is the basis of an organization. In other words, there can be
no organization without division of work. Under division of work the entire work of
business is divided into many departments .The work of every department is
further sub-divided into sub works. In this way each individual has to do the saran
work repeatedly which gradually makes that person an expert.
(2) Coordination:
Under organizing different persons are assigned different works but the aim
of all these persons happens to be the some - the attainment of the objectives of the
enterprise.
Organization ensures that the work of all the persons depends on each
other’s work even though it happens to be different the work of one person starts
from where the work of another person ends. The non-completion of the work of
one person affects the work of everybody. Therefore, everybody completes his work
in time and does not hinder the work of others. It is thus, clear that it is in the

21
nature of an organization to establish coordination among different works,
departments and posts in the enterprise.
(3) Plurality of Persons:
Organization is a group of many persons who assemble to fulfill a common
purpose. A single individual cannot create an organization.
(4) Common Objectives:
There are various parts of an organization with different functions to perform
but all move in the direction of achieving a general objective.
(5) Well-defined Authority and Responsibility:
Under organization a chain is established between different posts right from
the top to the bottom. It is clearly specified as to what will be the authority and
responsibility of every post. In other words, every individual working in the
organization is given some authority for the efficient work performance and it is
also decided simultaneously as to what will be the responsibility of that individual
in case of unsatisfactory work performance
(6) Organization is a Structure of Relationship:
Relationship between persons working on different posts in the organization
is decided. In other words, it is decided as to who will be the superior and who will
be the subordinate. Leaving the top level post and the lowest level post everybody is
somebody's superior and somebody's subordinate. The person working on the top
level post has no superior and the person working on the lowest level post has no
subordinate.
(7) Organization is a Machine of Management:
Organization is considered to be a machine of management because the
efficiency of all the functions depends on an effective organization. In the absence
of organization no function can be performed in a planned manner. It is
appropriate to call organization a machine of management from another point of
view. It is that machine in which no part can afford tube ill-fitting or non-
functional. In other words, if the division of work is not done properly or posts are
not created correctly the whole system of management collapses
(8) Organization is a Universal Process:
Organization is needed both in business and non- business organizations.
Not only this, organization will be needed where two or mom than two people work
jointly Therefore, organization has the quality of universality.
(9) Organization is a Dynamic Process:
Organization is related to people and the knowledge and experience of the
people undergo a change. The impact of this change affects the various functions of
the organizations. Thus, organization is not a process that can be decided for all
times to come but it undergoes changes according to the needs. The example in
this case can be the creation or abolition of a new post according to the need.

1.6.3 Staffing
Staffing involves filling the positions needed in the organization structure by
appointing competent and qualified persons for the job.
The staffing process encompasses man power planning, recruitment, selection, and
training.

22
 Fig 1.8 Staffing
a) Manpower requirements:
Manpower planning which is also called as Human Resource Planning
consists of putting right number of people, right kind of people at the right place,
right time, doing the right things for which they are suited for the achievement of
goals of the organization. The primary function of man power planning is to analyze
and evaluate the human resources available in the organization, and to determine
how to obtain the kinds of personnel needed to staff positions ranging from
assembly line workers to chief executives.
b) Recruitment:
Recruitment is the process of finding and attempting to attract job
candidates who are capable of effectively filling job vacancies.
Job descriptions and job specifications are important in the recruiting process
because they specify the nature of the job and the qualifications required of job
candidates.
c) Selection:
Selecting a suitable candidate can be the biggest challenge for any
organization. The success of an organization largely depends on its staff. Selection
of the right candidate builds the foundation of any organization's success and helps
in reducing turnovers.
d) Training and Development:
Training and Development is a planned effort to facilitate employee learning of job
related behaviors in order to improve employee performance. Experts sometimes
distinguish between the terms “training” and “development”; “training” denotes
efforts to increase employee skills on present jobs, while “development” refers to
efforts oriented toward improvements relevant to future jobs. In practice, though,
the distinction is often blurred (mainly because upgrading skills in present jobs
usually improves performance in future jobs).
Objectives of staffing:
The general objective of Staffing is to contribute towards the accomplishment
of the goals of an enterprise. However, the Staffing in any working organization
should have the following specific objectives:
i. To attain maximum individual development;
ii. To establish desirable working relationship between employers and
employees and between groups of employees;
iii. To mould effectively the human resources;
iv. To ensure satisfaction of the workers so that they are freely ready to
work;
v. To provide fair wages, good working conditions and service benefits to the
workers;
vi. To ensure that every employee makes his maximum contribution to the
success of the enterprise.
Functions of Staffing:
1. Employment.
The responsibility for employment consists of appointing the best possible
talents suitable to the requirements of the enterprise. This function includes

23
various activities like job analysis, manpower demand analysis, recruitment,
selection and placement. Before appointing the people, manpower requirements are
estimated both in terms of number and quality. After this, different sources of
manpower supply are tapped. The applications of various applicants are screened
and the selected applicants are required to take certain tests and appear in the
final interview. The employment function is complete when the workers join the
organization and are placed on the right jobs.
2. Training and Development.
Training and development of personnel is a follow up of selection. It is a duty
of management to train each employee and also to develop him for the higher jobs
in the organization. Proper development of personnel is necessary to increase their
skills in doing their jobs and in satisfying their growth need. For this purpose, the
personnel department will devise appropriate training programmes. there are
several on the job and off the job methods available for training purposes. A good
training programme should include a mixture of both types of methods. It is
important to point out that personnel department arranges for training not only of
new employees but also of old employees to update their knowledge in the use of
latest techniques of production.
3. Compensation.
This function is concerned with the determination of adequate and equitable
remuneration of the employees in the organization for their contribution to the
organizational goals. The personnel can be compensated both in terms of monetary
as well as non-monetary rewards. Factors which must be borne in mind while
fixing the remuneration of personnel are their basic needs, requirements of jobs,
legal provisions regarding minimum wage levels afforded by competitors, etc. For
fixing the wage levels, the personnel department can make use of certain
techniques like job evaluation and performance evaluation.
4. Integration.
This function aims to achieve a reasonable reconciliation of the interests of
the personnel with those of the organization. The important problem related to
integration is communication. The personnel manager must provide an efficient
system of communication to ensure two-way traffic of personnel programmes and
policies because many a time industrial disputes arise because of poor
communication. The personnel manager should always keep himself in contact
with the trade unions to understand their grievances and remove the same so that
harmony is maintained in the organization.
5. Working Conditions.
Mere appointment and training of employees is not sufficient, they must be
provided with good working conditions so that they may like their work and
work-place and maintain their efficiency. Working conditions certainly influence
the motivation and morale of the employees. These include the measures to be
taken for health and safety of the employees.
6. Welfare Services.
The department provides for various welfare services, which relate to the
physical and social well-being of the employees. They may include provision for
cafeterias, rest-rooms, counseling, group insurance, education of children of
employees, recreational facilities, etc.
7. Personnel Records.
The HR department maintains the personal records of the employees
working in the enterprise. It keeps full records about their training, achievements,
transfer, promotion, etc. It also preserves many other records relating to the

24
behavior of personnel like absenteeism and labor turnover and the personnel
programme and policies of organization.
8. Industrial Relations.
These days, the personnel managers mainly discharge the responsibility of
industrial relations. Personnel managers help in collective bargaining, joint
consultation and settlement of disputes, if they arise. This is because personnel
manager is in possession of full information relating to personnel and he possesses
the working knowledge of various labor enactments. It is important to point out
that the responsibility of fulfilling the requirements of various labor laws like
Factories Act, Industrial Disputes Act, etc., rests with the personnel department,
the personnel manager can do a great deal in maintaining industrial peace in the
organization as he is responsible for setting various committees on discipline,
labour welfare, safety, grievance, etc. He helps in laying down the grievance
procedure to redress the grievances of the employees. He also gives authentic
information to the trade union leaders and tries to convey them the personnel
policies and programmers of the enterprise.

1.6.4 Directing
"Activating deals with the steps a manager takes to get sub-ordinates and
others to carry out plans" - Newman and Warren.
Directing concerns the total manner in which a manager influences the
actions of subordinates. It is the final action of a manager in getting others to act
after all preparations have been completed.
It is that part of managerial function which actuates the organizational
methods too efficiently for achievement of organizational purposes. It is considered
life-spark of the enterprise which sets it in motion the action of people because
planning, organizing andstaffing are the mere preparations for doing the work.
Direction is that inert-personnelaspect of management which deals directly with
influencing, guiding, supervising,motivating sub-ordinate for the achievement of
organizational goals. Direction has following elements:
• Supervision
• Motivation
• Leadership
• Communication
(i) Supervision- implies overseeing the work of subordinates by their superiors. It is
the act of watching & directing work & workers.
(ii) Motivation- means inspiring, stimulating or encouraging the sub-ordinates with
zeal to work. Positive, negative, monetary, non-monetary incentives may be used
for this purpose.
(iii) Leadership- may be defined as a process by which manager guides and
influences the work of subordinates in desired direction.
(iv) Communications- is the process of passing information, experience, opinion etc
from one person to another. It is a bridge of understanding.
Characteristics
• Elements of Management
• Continuing Function
• Pervasive Function
• Creative Function
• Linking function
25
 • Management of Human Factor
Scope of Directing
• Initiates action
• Ensures coordination
• Improves efficiency
• Facilitates change
• Assists stability and growth

1.6.5 Controlling
Control is the process through which managers assure that actual activities
conform to planned activities.
In the words of Koontz and O'Donnell - "Managerial control implies measurement of
accomplishment against the standard and the correction of deviations to assure
attainment of objectives according to plans."
Nature & Purpose of Control
• Control is an essential function of management
• Control is an ongoing process
• Control is forward – working because pas cannot be controlled
• Control involves measurement
• The essence of control is action
• Control is an integrated system
Control process
The basic control process involves mainly these steps as shown in Figure

Fig 1.9 Control Process

a) The Establishment of Standards:

Because plans are the yardsticks against which controls must be revised, it
follows logically that the first step in the control process would be to accomplish
plans. Plans can be considered as the criterion or the standards against which we
compare the actual performance in order to figure out the deviations.
Examples for the standards
• Profitability standards: In general, these standards indicate how much the
company would like to make as profit over a given time period- that is, its
return on investment.
•Market position standards: These standards indicate the share of total sales
in a particular market that the company would like to have relative to its
competitors.
•Productivity standards: How much that various segments of the
organization should produce is the focus of these standards.
• Product leadership standards: These indicate what must be done to attain
such a position.

26
 •Employee attitude standards: These standards indicate what types of
attitudes the company managers should strive to indicate in the company’s
employees.
•Social responsibility standards: Such as making contribution to the society.
•Standards reflecting the relative balance between short and long range
goals.
b) Measurement of Performance:
The measurement of performance against standards should be on a forward
looking basis so that deviations may be detected in advance by appropriate
actions. The degree of difficulty in measuring various types of organizational
performance, of course, is determined primarily by the activity being measured.
For example, it is far more difficult to measure the performance of highway
maintenance worker than to measure the performance of a student enrolled in a
college level management course.
c) Comparing Measured Performance to Stated Standards:
When managers have taken a measure of organizational performance, their next
step in controlling is to compare this measure against some standard. A standard
is the level of activity established to serve as a model for evaluating organizational
performance. The performance evaluated can be for the organization as a whole or
for some individuals working within the organization. In essence, standards are
the yardsticks that determine whether organizational performance is adequate or
inadequate.
d) Taking Corrective Actions:
After actual performance has been measured compared with established
performance standards, the next step in the controlling process is to take
corrective action, if necessary. Corrective action is managerial activity aimed at
bringing organizational performance up to the level of performance standards. In
other words, corrective action focuses on correcting organizational mistakes that
hinder organizational performance. Before taking any corrective action, however,
managers should make sure that the standards they are using were properly
established and that their measurements of organizational performance are valid
and reliable.
At first glance, it seems a fairly simple proposition that managers should take
corrective action to eliminate problems - the factors within an organization that
are barriers to organizational goal attainment. In practice, however, it is often
difficult to pinpoint the problem causing some undesirable organizational effect.
Types Of Control Systems
The control systems can be classified into three types namely feed forward,
concurrent and feedback control systems.

Fig 1.10 Control system

a) Feed forward controls: They are preventive controls that try to anticipate
problems and take corrective action before they occur. Example – a team leader
checks the quality, completeness and reliability of their tools prior to going to the
site.

27
b) Concurrent controls: They (sometimes called screening controls) occur while an
activity is taking place. Example – the team leader checks the quality or
performance of his members while performing.
c) Feedback controls: They measure activities that have already been completed.
Thus corrections can take place after performance is over. Example – feedback from
facilities engineers regarding the completed job.

1.7 Types Of Ownership

When organizing a new business, one of the most important decisions to be made
is choosing the structure of a business
1.7.1 Sole Proprietorships
The vast majority of small business starts out as sole proprietorships . . .
very dangerous. These firms are owned by one person, usually the individual who
has day-to-day responsibility for running the business. Sole proprietors own all the
assets of the business and the profits generated by it. They also assume "complete
personal" responsibility for all of its liabilities or debts. In the eyes of the law, you
are one in the same with the business.
1.7.1.1 Advantages
• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, within the law, to make all
decisions.
• Sole proprietors receive all income generated by the business to keep or
reinvest.
• Profits from the business flow-through directly to the owner's personal
tax return.
• The business is easy to dissolve, if desired.
1.7.1.2 Disadvantages
• Unlimited liability and are legally responsible for all debts against the
business.
• Their business and personal assets are 100% at risk.
• Has almost been ability to raise investment funds.
• Are limited to using funds from personal savings or consumer loans.
• Have a hard time attracting high-caliber employees, or those that are
motivated by the opportunity to own a part of the business.
• Employee benefits such as owner's medical insurance premiums are not
directly deductible from business income (partially deductible as an
adjustment to income).

1.7.2 Partnerships
In a Partnership, two or more people share ownership of a single business. Like
proprietorships, the law does not distinguish between the business and its owners.
The Partners should have a legal agreement that sets forth how decisions will be
made, profits will be shared, disputes will be resolved, how future partners will be
admitted to the partnership, how partners can be bought out, or what steps will be
taken to dissolve the partnership when needed.Yes, its hard to think about a
"break-up" when the business is just getting started, but many partnerships split
up at crisis times and unless there is a defined process, there will be even greater

28
problems. They also must decide up front how much time and capital each will
contribute, etc.
1.7.2.1 Advantages
• Partnerships are relatively easy to establish; however time should be
invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners'
personal taxes.
• Prospective employees may be attracted to the business if given the
incentive to become a partner.
1.7.2.2 Disadvantages
• Partners are jointly and individually liable for the actions of the other
partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax
returns.
• The partnerships have a limited life; it may end upon a partner
withdrawal or death.

1.7.3 Public Limited Company

Limited companies which can sell share on the stock exchange are Public Limited
companies. These companies usually write PLC after their names.

According to companies Act, 1956, every company both private and public limited
company has to be compulsorily registered. Public limited company is a voluntary
association of members which is incorporated and, therefore has a separate legal
existence and the liability of whose members is limited. Its main features are :-
• The company has a separate legal existence apart from its members who
compose it.
• Its formation, working and its winding up, in fact, all its activities are
strictly governed by laws, rules and regulations. The Indian Companies
Act, 1956 contains the provisions regarding the legal formalities for
setting up of a public limited company. Registrars of Companies (ROC)
appointed under the Companies Act covering the various States and
Union Territories are vested with the primary duty of registering
companies floated in the respective states and the Union Territories.
• A company must have a minimum of seven members but there is no limit
as regards the maximum number.
• The company collects its capital by the sale of its shares and those who
buy the shares are called the members. The amount so collected is called
the share capital.
• The shares of a company are freely transferable and that too without the
prior consent of other shareholders or without subsequent notice to the
company.
• The liability of a member of a company is limited to the face value of the
shares he owns. Once he has paid the whole of the face value, he has no
obligation to contribute anything to pay off the creditors of the company.
• The shareholders of a company do not have the right to participate in the
day-to-day management of the business of a company. This ensures
separation of ownership from management. The power of decision making
29
 in a company is vested in the Board of Directors, and all policy decisions
are taken at the Board level by the majority rule. This ensures a unity of
direction in management.
• As a company is an independent legal person, its existence is not affected
by the death, retirement or insolvency of any of its shareholders.

Minimum requirements:
• Minimum 7 Shareholders
• Minimum 3 Directors
• The directors and shareholders can be same person
• Minimum Share Capital shall be Rs. 500,000 (INR Five Lac)
• DIN (Director Identification Number) for all the Directors
• DSC (Digital Signature Certificate) for one of the Directors
1.7.3.1 Advantages
• Continuity of existence
• Larger amount of capital
• Unity of direction
• Efficient management
• Limited liability
1.7.3.2 Disadvantages
• Scope for promotional frauds
• Undemocratic control
• Scope for directors for personal profit
• Subjected to strict regulations
• There are lot of legal formalities required for forming a public limited
company. It is costly and time consuming.
• In order to protect the interest of the ordinary investor there are strict
controls and regulations to comply. These companies have to publish their
accounts.
• The original owners may lose control.
• Public Limited companies are huge in size and may face management
problems such as slow decision making and industrial relations problems.

1.7.4 Private Limited Companies

These are closely held businesses usually by family, friends and relatives.
Private companies may issue stock and have shareholders. However, their shares
do not trade on public exchanges and are not issued through an initial public
offering.
Shareholders may not be able to sell their shares without the agreement of the
other shareholders.
A private limited company is a voluntary association of not less than two and not
more than fifty members, whose liability is limited, the transfer of whose shares is
limited to its members and who is not allowed to invite the general public to
subscribe to its shares or debentures. Its main features are :-
• It has an independent legal existence. The Indian Companies Act,1956
contains the provisions regarding the legal formalities for setting up of a
private limited company. Registrars of Companies (ROC) appointed under
the Companies Act covering the various States and Union Territories are
vested with the primary duty of registering companies floated in the
respective states and the Union Territories.

30
 • It is relatively less cumbersome to organise and operate it as it has been
exempted from many regulations and restrictions to which a public
limited company is subjected to. Some of them are :-
o it need not file a prospectus with the Registrar.
o it need not obtain the Certificate for Commencement of business.
o it need not hold the statutory general meeting nor need it file the
statutory report.
o restrictions placed on the directors of the public limited company
do not apply to its directors.
• The liability of its members is limited.
• The shares allotted to it's members are also not freely transferable
between them. These companies are not allowed to invite public to
subscribe to its shares and debentures.
• It enjoys continuity of existence i.e. it continues to exist even if all its
members die or desert it.
Hence, a private company is preferred by those who wish to take the advantage
of limited liability but at the same time desire to keep control over the business
within a limited circle and maintain the privacy of their business.
Minimum requirements:
• Minimum 2 Shareholders
• Minimum 2 Directors
• The directors and shareholders can be same person
• Minimum Share Capital shall be Rs. 100,000 (INR One Lac)
• DIN (Director Identification Number) for all the Directors
• DSC (Digital Signature Certificate) for one of the Directors

1.7.4.1 Advantages
• Limited Liability: It means that if the company experience financial
distress because of normal business activity, the personal assets of
shareholders will not be at risk of being seized by creditors.
• Continuity of existence: business not affected by the status of the owner.
• Minimum number of shareholders need to start the business are only2.
• More capital can be raised as the maximum number of shareholders
allowed is 50.
• Scope of expansion is higher because easy to raise capital from financial
institutions and the advantage of limited liability.
1.7.4.2 Disadvantages
• Growth may be limited because maximum shareholders allowed are only
50.
• The shares in a private limited company cannot be sold or transferred to
anyone else without the agreement of other shareholders

31
1.7.5 Difference Between Private And Public Limited Company
1. Minimum number of members
The minimum number of person required to form a public company is seven,
whereas in a private company their number is only two.
2. Maximum number of members
There is no limit on the maximum number of member of a public company, but a
private company cannot have more than fifty members excluding past and present
employees.
3. Commencement of Business
A private company can commence its business as soon as it is incorporated. But a
public company shall not commence its business immediately unless it has been
granted the certificate of commencement of business.
4. Invitation to public
A public company by issuing a prospectus may invite public to subscribe to its
shares whereas a private company cannot extend such invitation to the public.
5. Transferability of shares
There is no restriction on the transfer of share In the case of public company
whereas a private company by its articles must restrict the right of members to
transfer the share.
6. Number of Directors
A public company must have at least three directors whereas a private company
may have two directors.
7. Statutory Meeting
A public company must hold a statutory meeting and file with the register a
statutory report. But in a private company there are no such obligations.
8. Restrictions on the appointment of Directors
A director of a public company shall file with the register a consent to act as such.
He shall sign the memorandum and enter into a contact for qualification shares. He
cannot vote or take part in the discussion on a contract in which he is interested.
Two-thirds of the directors of a public company must retire by rotation. These
restrictions do not apply to a private company.
9. Managerial Remuneration
Total managerial remuneration in the case of public company cannot exceed 11%
of net profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can
be paid. These restrictions do not apply to a private company.

32
 Chapter 2: Financial Management

2.1 Introduction
The financial management means:
To collect finance for the company at a low cost and To use this collected
finance for earning maximum profits. Thus, financial management means
to plan and control the finance of the company. It is done to achieve the objectives
of the company.
According to Richard A. Brealey, "Financial management is the process of
putting the available funds to the best advantage from the long term point of view
of business objectives."
Scope of financial management:
Financial management has a wide scope. According to Dr. S. C. Saxena, the
scope of financial management includes the following five 'A's.
• Anticipation :Financial management estimates the financial needs of the
company. That is, it finds out how much finance is required by the
company.
• Acquisition : It collects finance for the company from different sources.
• Allocation :It uses this collected finance to purchase fixed and current
assets for the company.
• Appropriation :It divides the company's profits among the shareholders,
debenture holders, etc. It keeps a part of the profits as reserves.
• Assessment :It also controls all the financial activities of the company.
Financial management is the most important functional area of
management. All other functional areas such as production management,
marketing management, personnel management, etc. depends on
Financial management. Efficient financial management is required for
survival, growth and success of the company or firm.

2.1.1 Functions Of Financial Management

• Estimation of capital requirements: A finance manager has to make
estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programmers and
policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of enterprise.
• Determination of capital composition: Once the estimation have been made,
the capital structure have to be decided. This involves short- term and
long- term debt equity analysis. This will depend upon the proportion of
equity capital a company is possessing and additional funds which have
to be raised from outside parties.
• Choice of sources of funds: For additional funds to be procured, a company
has many choices like-
o Issue of shares and debentures
o Loans to be taken from banks and financial institutions
o Public deposits to be drawn like in form of bonds.
o Choice of factor will depend on relative merits and demerits of
each source and period of financing.
• Investment of funds: The finance manager has to decide to allocate funds
into profitable ventures so that there is safety on investment and regular
returns is possible.
33
 • Disposal of surplus: The net profits decision have to be made by the finance manager.
This can be done in two ways:
o Dividend declaration - It includes identifying the rate of dividends
and other benefits like bonus.
o Retained profits - The volume has to be decided which will depend
upon expansional, innovational, diversification plans of the
company.
• Management of cash: Finance manager has to make decisions with regards
to cash management. Cash is required for many purposes like payment
of wages and salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintainance of enough stock,
purchase of raw materials, etc.
• Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances. This
can be done through many techniques like ratio analysis, financial
forecasting, cost and profit control, etc.

2.1.2 Importance Of Financial Management

• Financial Planning: Financial management helps to determine the financial
requirement of the business concern and leads to take financial planning of
the concern. Financial planning is an important part of the business
concern, which helps to promotion of an enterprise.
• Acquisition of Funds: Financial management involves the acquisition of
required finance to the business concern. Acquiring needed funds play a
major part of the financial management, which involve possible source of
finance at minimum cost
• Proper Use of Funds: Proper use and allocation of funds leads to improve the
operational efficiency of the business concern. When the finance manager
uses the funds properly, they can reduce the cost of capital and increase the
value of the firm.
• Financial Decision: Financial management helps to take sound financial
decision in the business concern. Financial decision will affect the entire
business operation of the concern. Because there is a direct relationship
with various department functions such as marketing, production
personnel, etc.
• Improve Profitability: Profitability of the concern purely depends on the
effectiveness and proper utilization of funds by the business concern.
Financial management helps to improve the profitability position of the
concern with the help of strong financial control devices such as budgetary
control, ratio analysis and cost volume profit analysis.
• Increase the Value of the Firm: Financial management is very important in the
field of increasing the wealth of the investors and the business concern.
Ultimate aim of any business concern will achieve the maximum profit and
higher profitability leads to maximize the wealth of the investors as well as
the nation.
• Promoting Savings: Savings are possible only when the business concern
earns higher profitability and maximizing wealth. Effective financial
management helps to promoting and mobilizing individual and corporate
savings. Nowadays financial management is also popularly known as
business finance or corporate finances. The business concern or corporate
sectors cannot function without the importance of the financial management

34
2.2 Source Of Finance
Business is concerned with the production and distribution of goods and
services for the satisfaction of needs of society. For carrying out various activities,
business requires money. Finance, therefore, is called the life blood of any
business. The financial needs of a business can be categorised as follows:
• Fixed capital requirements: In order to start business, funds are required to
purchase fixed assets like land and building, plant and machinery, and
furniture and fixtures. This is known as fixed capital requirements of the
enterprise. The funds required in fixed assets remain invested in the
business for a long period of time.
• Working Capital requirements: No matter how small or large a business is, it
needs funds for its day-to-day operations. This is known as working
capital of an enterprise, which is used for holding current assets such as
stock of material, bills receivables and for meeting current expenses like
salaries, wages, taxes and rent. For financing such requirements short-
term funds are needed.
Short Term And Long Term Finance
• Short-term finance is needed to cover the day to day running of the
business. It will be paid back in a short period of time, so less risky for
lenders.
• Long-term finance tends to be spent on large projects that will pay back
over a longer period of time. More risky so lenders tend to ask for some
form of insurance or security if the company is unable to repay the loan.
A mortgage is an example of secured long-term finance.
The main types of short-term finance are:
• Overdraft
• Suppliers credit
• Working capital
The main types of long-term finance that are available for to a business are:
• Mortgages
• Bank loans
• Share issue
• Debentures
• Retained profits
• Hire purchase
2.2.1 Types Of Finance
sources of finance can be classified into:
• Internal sources (raised from within the organisation)
• External (raised from an outside source)

35
 Fig 2.1 Types Of Finance
2.2.1.1 Internal Sources
There are five internal sources of finance:
1. Owner’s investment (start up or additional capital)
2. Retained profits
3. Sale of stock
4. Sale of fixed assets
5. Debt collection
1.Owner’s investment
• This is money which comes from the owner/s own savings
• It may be in the form of start up capital - used when the business is
setting up
• It may be in the form of additional capital – perhaps used for expansion
• This is a long-term source of finance
Advantages
• Doesn’t have to be repaid
• No interest is payable
Disadvantages
• There is a limit to the amount an owner can invest
2.Retained Profits
• This source of finance is only available for a business which has been
trading for more than one year
• It is when the profits made are ploughed back into the business
• This is a medium or long-term source of finance
Advantages
• Doesn’t have to be repaid
• No interest is payable
Disadvantages
• Not available to a new business
• Business may not make enough profit to plough back
•
36
3.Sale of Stock
• This money comes in from selling off unsold stock
• This is what happens in the January sales
• It is when the profits made are ploughed back into the business
• This is a short-term source of finance
Advantages
• Quick way of raising finance
• By selling off stock it reduces the costs associated with holding them
Disadvantages
• Business will have to take a reduced price for the stock
4.Sale of Fixed Assets
• This money comes in from selling off fixed assets, such as:
- a piece of machinery that is no longer needed
• Businesses do not always have surplus fixed assets which they can sell
off
• There is also a limit to the number of fixed assets a firm can sell off
• This is a medium-term source of finance
Advantages
• Good way to raise finance from an asset that is no longer needed
Disadvantages
• Some businesses are unlikely to have surplus assets to sell
• Can be a slow method of raising finance
5.Debt Collection
• A debtor is someone who owes a business money
• A business can raise finance by collecting the money owed to them
(debts) from their debtors
• Not all businesses have debtors ie those who deal only in cash
• This is a short-term source of finance
Advantages
• No additional cost in getting this finance, it is part of the businesses’
normal operations
Disadvantages
• There is a risk that debts owed can go bad and not be repaid

2.2.1.2 External Sources

• There are five internal sources of finance:
1. Bank Loan or Overdraft
2. Additional Partners
3. Share Issue
4. Leasing
5. Hire Purchase
6. Mortgage
7. Trade Credit
8. Government Grants

37
1.Bank Loan
• This is money borrowed at an agreed rate of interest over a set period of
time
• This is a medium or long-term source of finance
Advantages
• Set repayments are spread over a period of time which is good for
budgeting
Disadvantages
• Can be expensive due to interest payments
• Bank may require security on the loan
Bank Overdraft
• This is where the business is allowed to be overdrawn on its account
• This means they can still write cheques, even if they do not have enough
money in the account
• This is a short-term source of finance
Advantages
• This is a good way to cover the period between money going out of and
coming into a business
• If used in the short-term it is usually cheaper than a bank loan
Disadvantages
• Interest is repayable on the amount overdrawn
• Can be expensive if used over a longer period of time
2.Additional Partners
• This is sources of finance suitable for a partnership business
• The new partner/s can contribute extra capital
Advantages
• Doesn’t have to be repaid
• No interest is payable
Disadvantages
• Diluting control of the partnership
• Profits will be split more ways
3.Share Issue
• This is sources of finance suitable for a limited company
• Involves issuing more shares
• This is a long-term source of finance
Advantages
• Doesn’t have to be repaid
• No interest is payable

Disadvantages
• Profits will be paid out as dividends to more shareholders
• Ownership of the company could change hands
4.Leasing
• This method allows a business to obtain assets without the need to pay a
large lump sum up front
• It is arranged through a finance company
• Leasing is like renting an asset
38
 • It involves making set repayments
• This is a medium-term source of finance
Advantages
• Businesses can have the use of up to date equipment immediately
• Payments are spread over a period of time which is good for budgeting
Disadvantages
• Can be expensive
• The asset belongs to the finance company
5.Hire Purchase
• This method allows a business to obtain assets without the need to pay a
large lump sum up front
• Involves paying an initial deposit and regular payments for a set period of
time
• The main difference between hire purchase and leasing is that with hire
purchase after all repayments have been made the business owns the asset
• This is a medium-term source of finance
Advantages
• Businesses can have the use of up to date equipment immediately
• Payments are spread over a period of time which is good for budgeting
• Once all repayments are made the business will own the asset
Disadvantages
• This is an expensive method compared to buying with cash
6.Mortgage
• This is a loan secured on property
• Repaid in instalments over a period of time typically 25 years
• The business will own the property once the final payment has been made
• This is a long-term source of finance
Advantages
• Business has the use of the property
• Payments are spread over a period of time which is good for budgeting
• Once all repayments are made the business will own the asset
Disadvantages
• This is an expensive method compared to buying with cash
• If business does not keep up with repayments the property could be
repossessed
7.Trade Credit
• Trade credit is summed up by the phrase:
• “buy now pay later”
• Typical trade credit period is 30 days
• This is a short-term source of finance
Advantages
• Business can sell the goods first and pay for them later
• Good for cash flow
• No interest charged if money is paid within agreed time
39
Disadvantages
• Discount given for cash payment would be lost
• Businesses need to carefully manage their cash flow to ensure they will have
money available when the debt is due to be paid
8.Government Grants
• Government organisations such as Invest NI offer grants to businesses, both
established and new
• Usually certain conditions apply, such as where the business has to locate
Advantages
• Don’t have to be repaid
Disadvantages
• Certain conditions may apply eg location
• Not all businesses may be eligible for a grant

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

Fig 2.2 Investment

• Investment implies the production of new capital goods, plants and
equipments. John Keynes refers investment as real investment and not
financial investment.
• Investment is a conscious act of an individual or any entity that involves
deployment of money (cash) in securities or assets issued by any financial
institution with a view to obtain the target returns over a specified period of
time.
• Target returns on an investment include:
• Increase in the value of the securities or asset, and/or
• Regular income must be available from the securities or asset.

2.3.1 Types Of Investment

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

40
 Fig 2.3 Types Of Investment

1.Autonomousinvestment:
• Investment which does not change with the changes in income level, is
called as Autonomous or Government Investment.
• Autonomous Investment remains constant irrespective of income level.
Which means even if the income is low, the autonomous, Investment
remains the same. It refers to the investment made on houses, roads, public
buildings and other parts of Infrastructure. The Government normally
makes such a type of investment.
2. Induced Investment:
• Investment which changes with the changes in the income level, is called as
Induced Investment.
• Induced Investment is positively related to the income level. That is, at high
levels of income entrepreneurs are induced to invest more and vice-versa. At
a high level of income, Consumption expenditure increases this leads to an
increase in investment of capital goods, in order to produce more consumer
goods.
3. Financial Investment:
• Investment made in buying financial instruments such as new shares,
bonds, securities, etc. is considered as a Financial Investment.
• However, the money used for purchasing existing financial instruments such
as old bonds, old shares, etc., cannot be considered as financial investment.
It is a mere transfer of a financial asset from one individual to another. In
financial investment, money invested for buying of new shares and bonds as
well as debentures have a positive impact on employment level, production
and economic growth.

41
4. Real Investment:
• Investment made in new plant and equipment, construction of public
utilities like schools, roads and railways, etc., is considered as Real
Investment.
• Real investment in new machine tools, plant and equipments purchased,
factory buildings, etc. increases employment, production and economic
growth of the nation. Thus real investment has a direct impact on
employment generation, economic growth, etc.
5. Planned Investment:
• Investment made with a plan in several sectors of the economy with specific
objectives is called as Planned or Intended Investment.
• Planned Investment can also be called as Intended Investment because an
investor while making investment make a concrete plan of his investment.
6. Unplanned Investment:
• Investment done without any planning is called as an Unplanned or
Unintended Investment.
• In unplanned type of investment, investors make investment randomly
without making any concrete plans. Hence it can also be called as
Unintended Investment. Under this type of investment, the investor may not
consider the specific objectives while making an investment decision.
7. Gross Investment:
• Gross Investment means the total amount of money spent for creation of
new capital assets like Plant and Machinery, Factory Building, etc.
• It is the total expenditure made on new capital assets in a period.
8. Net Investment:
• Net Investment is Gross Investment less (minus) Capital Consumption
(Depreciation) during a period of time, usually a year.
• It must be noted that a part of the investment is meant for depreciation of
the capital asset or for replacing a worn-out capital asset. Hence it must be
deducted to arrive at net investment.

2.4 Evaluation Of Investment / Capital Budgeting

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

42
 Table 2.4 Models For Evaluating Business Investments.

1.Accounting rate of return

Average profits after tax and after depreciation are calculated & then it is
divided by the total original investment (or) average investment of the project.
𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 & 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
ARR =
original investment X 100 (or)average investment
Average investment may be calculated by the following formula,
value of investment in beginning+value of investment at end
Average investment=
2

The value of investment at the end of the project life is ‘0’ we take 1�2 of original
investment as average investment.
Accept (or) reject criterion:
• Minimum rate of return is fixed by the management.
• Any project below this rate will be straight away rejected.
• Highest rate will be accepted.
Advantages:
• It is very simple to understand & easy to calculate.
• It uses the entire earning of a project.
• This method is based upon the well known concept of profit.
Disadvantages:
• It ignores time value of money (interest factor).
• It does not take consideration real cash flows of the project.
• This method cannot be applied to a situation where investment in project
is to be made in parts.
2. Pay-back period method:
It represents the period in which the total investment in a project is reserved by
way of return (cash flow) from the project.
a. When annual cash flows are even:
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊
Payback period =
𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑐𝑐𝑐𝑐𝑐𝑐ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓
b. When annual cash flows are uneven:

43
 i. Calculate annual cash inflows – earnings after tax before
depreciation.
Find the cumulative values of the annual cash inflows.
Accept (or) reject rule:
• For accepting (or) rejecting a project under this method, first consider the
cut-off period.
• The cut-off period is the period within which the management would like
to get back the original investment.
• A project whose actual pay-back period is more than the cut-off period,
the project will be straight away rejected.
• The project having the shortest pay-back period will be preferred.
Advantages of payback period are:
• Payback period is very simple to calculate.
• It can be a measure of risk inherent in a project. Since cash flows that
occur later in a project's life are considered more uncertain, payback
period provides an indication of how certain the project cash inflows are.
• For companies facing liquidity problems, it provides a good ranking of
projects that would return money early.
Disadvantages:
• It does not take into account the cash inflows earned after the pay-back
period.
• Does not consider time value of money.
• Difficult to determine the minimum acceptable pay-back period.
• Full life of the asset is not considered under the pay-back period.
3. Net present value method:
Determine the cut-off rate (or) the rate that should be selected as minimum
required rate of return.
Normally for this purpose, the cost of capital is considered to be minimum
required rate of return. This rate is called discounting rate.
The difference between the total present value of the future cash inflows &
the cost of investment is net present value (or) excess present value.
NPV (or) EPV = total present value of the future cash inflows – cost of original
investment
𝐴𝐴1 𝐴𝐴2 𝐴𝐴3 𝐴𝐴𝑛𝑛
T1r = + + +...+
1+𝑟𝑟 (1+𝑟𝑟)2 (1+𝑟𝑟)3 (1+𝑟𝑟)𝑛𝑛

Accept (Or) Reject Rule:

• If the NPV (or) EPV is positive, the project may be considered.
• If the NPV is negative the project is straightway rejected.
Advantages:
• It will give the correct decision advice assuming a perfect capital market.
It will also give correct ranking for mutually exclusive projects.
• NPV gives an absolute value.
• NPV allows for the time value fo the cash flows.
Disadvantages:
• It is very difficult to identify the correct discount rate.
• NPV as method of investment appraisal requires the decision criteria to
be specified before the appraisal can be undertaken.

44
4. Internal rate of return (irr):
IRR is the rate at which the sum of discounted cash inflow equals the sum of
discounted cash flows.
present value of cash inflows
=1
cash outflows (o.investment)

Accept (or) reject rule:

• If the calculated IRR is less than the cost of capital, the project is
straightway rejected.
• If the IRR is greater than the cost of capital, the project may be
considered.
• The project having highest of IRR will be accepted.
Advantages :
1. Perfect Use of Time Value of Money Theory: Time value of money means
interest and it should high because we are sacrifice of money for specific time. IRR
is nothing but shows high interest rate which we expect from our investment. So,
we can say, IRR is the perfect use of time value of money theory.
2. All Cash Flows are Equally Important: It is good method of capital
budgeting in which we give equal importance to all the cash flows not earlier or
later. We just create its relation with different rate and want to know where is
present value of cash inflow is equal to present value of cash outflow.
3. Uniform Ranking: There is no base for selecting any particular rate in
internal rate of return.
4. Maximum profitability of Shareholder: If there is only project which we
have to select, if we check its IRR and it is higher than its cut off rate, then it will
give maximum profitability to shareholder
5. Not Need to Calculate Cost of Capital: In this method, we need not to
calculate cost of capital because without calculating cost of capital, we can check
the profitability capability of project.
Disadvantages :
1. To understand IRR is difficult: It is difficult to understand it because
many student cannot understand why are calculating different rate in it and it
becomes more difficult when real value of IRR will be two experimental rate
because of not equalize present value of cash inflow with present
2. Unrealistic Assumption: For calculating IRR we create one assumption.
We think that if we invest out money on this IRR, after receiving profit, we can
easily reinvest our investments profit on same IRR. We seem to be unrealistic
assumption.

2.5 Preparation Of Balance Sheets

Balance sheet is a list of the accounts having debit balance or credit balance in
the ledger. On one side it shows the accounts that have a debit balance and on the
other side the accounts that have a credit balance. The purpose of a balance sheet
is to show a true and fair financial position of a business at a particular date. Every
business prepares a balance sheet at the end of the account year. A balance sheet
may be defined as:
1. "It is a statement of assets, liabilities and owner's equity (capital) on a
particular date".
2. "It is a statement of what a business concern owns and what it owes on a
particular date". What is owns are called assets and what it owes are called
liabilities.
3. "It is a statement which discloses total assets, total liabilities and total
capital (owner's equity) of a concern on a particular date".

45
 4. "It is a statement where all the ledger account balances which remain open
after the preparation of trading and profit and loss account, find place".
Balance sheet is so called because it is prepared with the closing balance of
ledger accounts at the end of the year. It has two sides - assets side or left hand
side and liabilities side or right hand side. The accounts have a debit balance are
shown on the asset side and those have a credit balance are shown on the
liabilities side and the total of the two sides will agree.
ASSETS means all the things and properties under the ownership of the
business i.e. building, plant, furniture, machinery, stock, cash etc. Assets also
include anything against which money or service will be received i.e. creditors
accrued income, prepaid expenses etc. The assets are purchased to increase the
value of a business firm or welfare the firm's functioning's.
You will be able to think of an asset as something that can render cash flow
(run), no matter of whether it is a company's constructing equipment or a person
lease flat.
Types of assets:
A. Current assets:
• It can be converted into cash within a short time frame (ie., 1 year
or less).
• E.g., cash in hand, cash in bank, notes receivable, investment,
Debtors, accounts receivable, funds in checking accounts.
B. Fixed assets:
• Fixed assets have relatively existence & are not readily converted
into cash.
• Fixed assets are held for the purpose of earning income & they are
not sold in the cause of trading.
• E.g., land, building, equipment & machinery, furniture.
C. Other assets:
• Do not fall under either current assets or fixed assets
• E.g., patents, copyrights, franchises, goodwill, investment in bond
sinking funds.
Liabilities means our dues to others or anything against which we are to pay money
or render service, i.e. creditors, outstanding expenses, amount payable to the
owner of the business (capital) etc.
Types Of Liabilities
• Fixed Liability: the liability which is to be paid of at the time of dissolution of
firm is called fixed liability. Examples are Capital, Reserve and Surplus.
• Long-term liability: The liability which is not payable within the next
accounting period is called long-term liability. Examples are Debentures of a
company, Mortgage Loan etc.
• Current Liability: The liability which is to be paid of in the next accounting
period is current liability.. Examples: Sundry, creditors, Bills Payable and
Bank overdraft etc.
• Trade Liability: Liability which is incurred for goods and services supplied or
expenses incurred is called trade liability. Example; Bill payable and Sundry
period.
• Financial liability: Liability which is incurred for financial purposes is called
financial liability. Example: Bank overdraft, load taken for a short period.
• Contingent liability: A contingent liability is one which is not an actual liability
but which will become an actual one on the happening of some event which

46
 is uncertain. Examples: Bills discounted before maturity, Liability of a case
pending in the court.
Asset side of the balance sheet indicates the different types of assets owned by a
concern, while liabilities side discloses the various sources through which funds
have been obtained in order to acquire those assets. Balance sheet reveals the
financial position of the firm on a particular date at a point of time, so it is also
called "position statement". It is prepared on the last day of the accounting year
and discloses concern for the whole year cannot be determined through the balance
sheet because financial position is ever changing.

Pro-Forma Of A Balance Sheet Is As Follows:

Balance Sheet Of Abc Ltd As On 31st December 2005:
Table 2.5 Balance Sheet

Features of balance sheet:

Balance sheet has the following features:
1. It is the last stage of final accounts
2. It is prepared on the last day of an accounting year.
3. It is not an account under the double entry system - it is a statement only.
4. It has two sides - left hand side known as asset side and right hand side
known as liabilities side.
5. The total of both sides are always equal.
6. The balances of all asset accounts and liability accounts are shown in it. No
expense accounts and revenue accounts are shown here.
7. It discloses the financial position and solvency of the business.
8. It is prepared after the preparation of trading and profit and loss account
because the net profit or net loss of a concern is included in it through
capital account.

47
 2.6 Profit & Loss Account
The account through which annual net profit or loss of a business is
ascertained, is called profit and loss account.
Gross profit or loss of a business is ascertained through trading account and
net profit is determined by deducting all indirect expenses (business operating
expenses) from the gross profit through profit and loss account. Thus profit and
loss account starts with the result provided by trading account.
The particulars required for the preparation of profit and loss account are
available from the trial balance. Only indirect expenses and indirect revenues are
considered in it. This account starts from the result of trading account (gross profit
or gross loss).
Definition Of Profit And Loss Account
Profit and loss account is that part of final account is made for calculating
the net profit or net loss. In the debit side of this account, we show all indirect loss
and expenses and in the credit side of this account, we show all indirect incomes.
After matching debit and credit side of profit and loss account, we can find net
profit or loss of business. If organisation is company, we transfer this balance to
profit and loss appropriation account, otherwise, we transfer this balance to capital
account.
Explanation Of Profit And Loss Account
A) Debit Side of Profit and loss account
1. Gross loss transferred from trading account
2. All indirect expenses like sale expenses, office expenses and legal
expenses. If credit side is more than debit side, we show net profit in
debit side
B) Credit Side of Profit and Loss account
1. Gross profit transferred from trading account
2. Indirect Incomes like rent, commission, discount received .If debit
side is more than credit side, we show net loss in credit side.
Items Comes Under Profit And Loss Account
• Sequence of Expenses in Profit and Loss Account:
o There is no hard and fast rule as to the order in which the items of
expenses are shown in profit and loss account. Generally, the items of
expenses are shown in the following sequence:
• Office and Administration Expenses:
o These are the expenses with the management of the business e.g.
salaries of manager, accountant and office clerks, office rent, office
stationary, office electric charges, office telephone etc.
• Selling and Distribution Expenses:
o These are the expenses which are directly or indirectly connected with
the sale of goods. These expenses vary with the sales i.e. they increase
or decrease with the increase or decrease of sale of goods. Examples
are advertisements, carriage outward, salesmen's salaries and
commission, discount allowed, traveling expenses, bad debts,
packaging expenses, warehouse rent etc.
• Financial and Other Expenses:
o All other expenses excepting those mentioned above are considered
under this class.

48
Features of Profit and Loss Account:
• This account is prepared on the last day of an account year in order to
determine the net result of the business.
• It is second stage of the final accounts.
• Only indirect expenses and indirect revenues are shown in this account.
• It starts with the closing balance of the trading account i.e. gross profit or
gross loss.
• All items of revenue concerning current year - whether received in cash
or not - and all items of expenses - whether paid in cash or not - are
considered in this account. But no item relating to past or next year is
included in it.
Profit and Loss Account for the year ended .....
Table 2.6 sample profit and loss sheet
DEBIT CREDIT
$ $
Trading A/C Trading A/C
Gross loss (transferred) ----- Gross profit (transferred) -----
Office and Administration
----- Interest received -----
Expenses:
Salaries ----- Rent received -----
Rent, rates, taxes ----- Discount received -----
Postage & telegrams ----- Dividend received -----
Office electric charges ----- Bad debts recovered -----
Provision for discount on
Telephone charges ----- -----
creditors
Printing and stationary ----- Miscellaneous revenue -----
Selling and Distribution Net loss - transferred to
-----
Expenses: capital A/C
Carriage outward -----
Advertisement -----
Salesmen's salaries -----
Commission -----
Insurance -----
Traveling expenses -----
Bad debts -----
Packing expenses -----
Financial and Other
Expenses:
Depreciation -----
Repair -----
Audit fee -----
Interest paid -----
Commission paid -----
Bank charges -----

49
Legal charges -----
Net profit - transferred to
-----
capital A/C

If credit side exceeds the debit side = Net profit

If debit side exceeds the credit side = Net loss

Uses of the profit and loss account:

• The main use is to monitor and measure profit. This assumes that the
information recording is accurate. Significant problems can arise if the
information is inaccurate, either through incompetence or deliberate
fraud.
• Once the profit (loss) has been accurately calculated, this can then be
used for comparison or judging how well the business is doing compared
to itself in the past, compared to the managers’ plans and compared to
other businesses.

2.7 Working Capital

Definition: Working capital refers to a firm’s investment in short term assets-
cash, short term securities, accounts receivable & inventories.
It is the minimum amount of investment in raw materials, work in process
inventory, finished goods, stores & spares, accounts receivable & cash balance
which a firm is required to have in order to carry on a desirable level of business
activity.
Sources Of Working Capital:
1. Funds from business operations
2. Other incomes such as dividends, transfer fees, donations, etc.,
3. Sale of non-current assets such as useless & obsolete plant & machinery.
4. Long term borrowings
5. Issue of additional equity capital or preference share capital.
6. Net income,
7. Long-term loans,
8. Sale Of Capital Assets, And
9. Injection of funds by stockholders.
Uses of working capital:
1. Loss from business operations would decrease the working capital.
2. The purchase of non-current assets generally causes a decrease in current
assets, therefore it should appear as the use of funds.
3. Retirement of long-term liabilities such as payment to preference
shareholders & debenture holders involves the use of cash.
4. Dividend to shareholders.
5. Interest to Lenders.
Factors To Be Considered While Selecting Working Capital Management
The working capital needs of a firm are influenced by numerous factors. The
important ones are:

50
 Nature of business: The working capital requirement of a firm is closely related
to the nature of its business. A service firm, like an electricity undertaking or a
transport corporation, which has a short operating cycle and which sells
predominantly on cash basis, has a modest working capital requirement. On the
other hand, a manufacturing concern like a machine tools unit, which has a long
operating cycle and which sells largely on credit, has a very substantial working
capital requirement.
Seasonality of Operations: Firms which have marketed seasonally in their
operations usually have highly fluctuating working capital requirements. To
illustrate, consider a firm manufacturing ceiling fans. The sale of ceiling fans
reaches a peak during the summer months and drops sharply during the winter
period. The working capital need of such a firm is likely to increase considerably in
summer months and decrease significantly during the winter months. Electric
bulbs, tubes and CFL lamps have fairly even sales round the year, tends to have
stable working capital needs.
Production Policy: A firm marketed by pronounced seasonal fluctuations in its
sales may pursue a production policy which may reduce the sharp variations in
working capital requirements. For example, a manufacturer of ceiling fans may
maintain a steady production throughout the year rather than intensify the
production activity during the peak business season. Such a production policy may
dampen the fluctuations in working capital requirements.
Market conditions: The degree of competition prevailing in the market-place
has an important bearing on working capital needs. When competition is intense, a
larger inventory of finished goods is required to promptly serve customers who may
be inclined to wait because other manufacturers are ready to meet their needs.
Further, generous credit terms may have to be offered to attract customers in a
highly competitive market. Thus, working capital needs tend it be high because of
greater investment in finished goods inventory and accounts receivable.
If the market is strong and competition is weak, a firm can manage with
smaller inventory of finished goods, because customers can be supplied with some
delay. Further, in such a situation the firm can insist on cash payment and avoid
lock-up of funds in accounts receivable – it can even ask for advance, partial or
total.
Conditions of Supply: The inventory of raw materials, spares and stores
depends on the conditions of supply. If the supply is prompt and adequate, the firm
can manage with small inventory. However, if the supply is unpredictable and
scant, then the firm, to ensure continuity of production would have to acquire
stocks as and when they are available and carry larger inventory on an average. A
similar policy may have to be followed when the raw material is available only
seasonally and production operations are carried out round the year.
Need to hold inventories: Some businesses need to hold substantial inventories
to meet customer needs – e.g. retailers and distributors
Production lead time: A product that is made and sold within a short time (e.g.
fresh food) requires much less inventory than one where the production process
takes a long time (e.g. production of mature cheese!)
Lean production: Businesses that successfully implement lean production
techniques find that they need to hold significantly less inventory
Expected credit period by customers: In some industries it is expected that a long
credit period can be taken before trade debtors need to settle their invoices – which
means that higher working capital is required

51
 Effectiveness of the credit control function: A poorly managed credit control
department will allow customers to take too much credit and take too long to settle
their bills – which will mean higher trade debtors and higher working capital
Credit period offered by suppliers: The longer the credit offered by suppliers, the
better for cash flow and working capital.
Problems Of Working Capital Are:
• Poor control of inventories (stocks)
• Poor control of receivables (trade debtors)
• Ineffective use of payables (trade creditors)
• Poor cash flow forecasting
• Unexpected events
Types Or Classification Of Working Capital
1. Gross working capital: Total or gross working capital is that working capital which
is used for all the current assets. Total value of current assets will equal to gross
working capital. In simple words, it is total cash and cash equivalent on hand. But
remember, we do not account of current liabilities in gross working capital.
2. Net Working Capital: Net working capital is the excess of current assets over
current liabilities.
Net Working Capital = Total Current Assets – Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current
assets, then balance amount can be used for repayment of long term debts at any
time. It also measure of both a company's efficiency and its short-term financial
health.
3. Permanent Working Capital
There is always a minimum amount of working capital which is continuously
required by the enterprise to carry out its normal business operations. This is
usually called as permanent or fixed working capital. Thus, fixed working capital is
the minimum amount of working capital required to ensure effective use of fixed
assets and support the normal business operation. It is that part of capital which is
permanently blocked in current assets.
Permanent working capital is divided into two-initial working capital and regular
working capital.
(a) Initial or reserve working capital:
The working capital which is needed in the initial stage of project is
called initial working capital. It is the capital with which the project is
started.
(b) Regular Working Capital:
It is the amount needed for continuous operation of the project. It is
the amount of working capital required after the project has been
established as a going concern. It is the minimum amount of the liquid
capital to keep up the circulating capital from cash to inventories, to
receivables and back again to cash.
4.Variable or temporary Working Capital
It is the working capital which varies with volume of business. This is the
additional capital needed to meet seasonal and special needs. Variable working
capital is divided into seasonal working capital and special working capital.
(a) Seasonal Working Capital:
It is the working capital which is needed during the particular season.
It is the additional working capital required during busy seasons.
(b) Special Working Capital:

52
 It is the extra working capital to be maintained to meet unforeseen
contingencies or to finance special operations. It may be required to carry on
a special sales campaign financing slow moving stock or financing a period
of strike, lock out, etc.

2.8 Accounting
Meaning Of Accounting:
Accounting is the process of identifying, measuring, recording and
communicating the economic events (business transactions) of an organization.
Definition :
Accounting has been defined by American Institute of Certified Public
Accountants (AICPA) as under "Accounting is the art of recording, classifying, and
summarizing in a significant manner and in terms of money, the transactions and
events which are in part at least of a financial character, and interpreting the
results thereof."
The above definition can be analysed as under:
i. Accounting is the art of recording
ii. Accounting is the art of classifying
iii. Accounting is the art of summarising the business transactions and
events of financial characters in terms of money and nonfinancial and non-
monetary transactions are excluded.
iv. Interpreting the results, this may be calculation of profit or loss of the
business for a period and determining the financial position for the same
period.
Objectives Of Accounting
The following are the various objectives of accounting.
1. Maintenance of records of business.
2. Finding out the results of business activities during a period by preparing
profit and loss account.
3. Knowing the financial position of the business as on a particular date by
preparing the balance sheet.
4. Maintaining control over the assets.
5. Supplying information to the government agencies and tax authorities.
6. Deciding future plans in respect of cash by preparing cash budgets.
Advantages Of Accounting
• Accounting replaces memory work because it provides complete and
scientific record of business transactions.
• It helps in determining the profitability position and financial position of
the business.
• Accounting records are used as evidence in the court of law
• Accounting helps in the evaluation of business to both the buyer and the
seller.
• Accounting enables comparison of costs, profits, revenues, losses,
expenses etc., of the year with that of the previous years.
• Accounting statements like profit and loss account and balance sheet are
useful in getting loans from banks.
• Accounting data help and guide the management in planning and
decision making.

53
2.8.1 Types Of Accounting
Accounting has the following branches:
A. Financial Accounting: This is the branch of accounting which is related to
preparation of profit and loss account and balance sheet.
B. Cost Accounting: This is the branch of accounting which is related to
finding out the cost of a product or job or service.
C. Management Accounting: This is the branch of accounting which is related
to supply information to the management for the purpose of planning, control and
decision making.
A.Financial Accounting
Financial accounting gathers and summarizes financial data to prepare
financial reports such as balance sheet and income statement for the organization's
management, investors, lenders, suppliers, tax authorities, and other stakeholders.
The art of recording, classifying & summarizing in a significant manner and
in terms of money, transactions & events which are in part at least of a financial
character & interpreting the results there of.
Objectives / significance/ importances:
• To know the results of the business
• To ascertain the financial position of the business
• To ensure control over the assets
• To facilitate proper management to cash
• To provide requisite information
Functions of financial accounting:
(a) Book-Keeping Function : Financial accounting is the scientific process of
recording financial data of the business. Human memory is short; therefore it is not
possible to remember the numerous transactions of the business. Accounting is
supportive and supplementary to human memory. Business transactions are
recorded in journal, subsidiary books and ledger.
(b) Classification Of Information : The data of one particular type is classified
into one segment. This is done in the form of ledger accounts. The transactions of
different activities are collected in one place. Full information about specific items
is shown under separate heads in the ledger.
(c) Preparation Of Financial Statements : Business transactions are summarised
by preparing the principal statements of the business i.e., profit and loss account
and the balance sheet. These statements are the indicators of operational efficiency
and financial position of an enterprise.
(d) Segregating Financial Transactions : The economic transactions relating to a
business are measured in terms of money. Financial accounting is concerned with
transactions which are measureable in monetary terms. Any information of the
business which cannot be expressed in terms of money is not considered. It is a
basic concept of accounting called ‘money measurement concept’.
(e) Interpretation Of Financial Data: The management interprets the financial
data for decision making. The various parties concerned with the enterprise such
as shareholders, creditors, bankers and other agencies are facilitated because of
the interpretation of financial data provided in various contexts and they may draw
their own conclusions.
(f) Reporting Of Information: Financial accounting not only records data but
also communicates data by way of profit and loss account and the balance sheet to
all concerned at frequent intervals.

54
 (g) Providing Accurate And Reliable Information: Yet another important function
of accounting is to provide accurate, reliable and useful information. This function
is performed by following established accounting standards. Moreover the
accounting policies are consistently practised to maintain uniformity and accuracy.
B. Cost accounting
Cost accounting is a branch of accounting that determines the actual cost of
operations that the company indulges in. For instance all the processes as well as
products and departments and the analysis of the profitability and the social
application of the funds of the company are determined by the cost accountant.
Objectives of cost accounting :
• To aid in the development of long range plans by providing cost data that
acts as a basis for projecting data for planning.
• To ensure efficient cost control by communicating essential data costs at
regular intervals and thus minimize the cost of manufacturing.
• Determine cost of products or activities, which is useful in the
determination of selling price or quotation.
• To identify profitability of each product, process, department etc of the
business
• To provide management with information in connection with various
operational problems by comparing the actual cost with standard cost,
which reveals the discrepancies or variances.
Function of cost accounting:
(1) Ascertaining Cost: This is a basic function of coat accounting. The cost of
products, processes, jobs and services is ascertained under each element of cost
and for all the major activities of a firm.
(2) Fixation Of Selling Price: Determining the selling price of products and
services is of paramount importance. Cost accounting provides all the necessary
coat and other related data and helps in fixing selling prices.
(3) Cost Control: Controlling costs is the most important function of cost
accounting. Predetermined costs are developed through standards and budgets to
achieve this objective. Managerial action based upon variances in performance from
the standards or budgets results in cost control.
(4)Cost Reduction:Cost control aims at maintaining at a predetermined level.
Cost reduction aims at reducing cost by means of reducing wastage, effective
utilisation of labour time, reducing idle time, value analysis and fixation of
standards.
(5) Evaluation Of Performance: Cost accounting constantly evaluates
performance as a part of cost control efforts. Actual performance is compared with
predetermined performance. Any deviations are noted and analysed for causes. In
this process individual performance is automatically assessed.
C. Management Accounting:
(1) Providing Financial Information: The main emphasis of management
accounting is to provide financial information to management. The information is
provided in a manner suitable to various levels of management for reviewing
policies and decision making.
(2) Cause And Effect Analysis: Financial accounting confines itself to
presentation of p&l account and balance sheet. Management accounting analyses
the cause and effect of the facts and figures thereon. If there is loss causes for the
losses are investigated. If there is profit the variable affecting the profit are also
analysed. The amount of profit is compared with expenditure, sales, capital

55
employed, etc., to draw appropriate conclusions relating to the effect of those items
on profit.
(3) Use Of Special Techniques And Concepts: Management accounting employs
special techniques like standard costing,budgetary control, marginal costing, fund
flow, cash flow, ratio analysis, responsibility accounting. Etc. To make accounting
data more useful and helpful to the management. Each of these techniques or
concepts is a useful tool for specific purpose in analysis and interpretation of data,
establishing control over operations, etc.
(4) Decision Making: Main objective of management accounting is to provide
relevant information to management to take various important decisions. Historical
information provides a base on which the future impact is predicted, alternatives
are developed and decisions are made to select to select the most beneficial course
of action
(5) No Fixed Conventions : Financial accounting has various established
principles and rules in preparing the financial accounts. Management accounting
has no such fixed rules. The tools or techniques applied by the management
accounting are same but application of these techniques various from concern to
concern and situation to situation. Interpretation of analysed data depends on the
person using it the conclusions derived from application of a technique depend on
the intelligence and experience of the management account. The presentation of
information depends on the requirements of the concern. Every concern has its its
own was of application of the techniques to suit its needs.
(6) Achievement Of Objectives: Management accounting is helpful in realising
the enterprise objectives. Based on the historical information and with adjustments
for predicate future changes, objectives are laid down. Actual performance is
recorded. Comparison of actual with predetermined results is made. If there are
deviations of actuals from the predetermined results, corrective action is taken
predicted objectives are achieved. This becomes possible with the help of
management accounting techniques of standard costing and budgetary control.
(7) Improving Efficiency:The purpose of accounting is to provide information to
increase efficiency. The efficiency of departments, and divisions can be improved by
fixation of targets or goals for a specific period. The actual performance is
compared with that of targets. Positive deviations are reviewed the negative
deviations are probed to ascertain the causes. The ways and means tackle the
causes are analysed and targets are achieved. The process of fixing and achieving
the targets leads to gradual improvement in overall efficiency.
(8) Forecasting: Management accounting is concerned with taking decisions
for future implementation. This involves prediction and forecasting of future. It is
helpful in planning and laying down of objectives.
(9) Providing Of Information And Not Decisions: Management accounting provides
financial information and not the decisions. That is why it is said that management
accounting depends on the efficiency of the management in using information and
taking effective decisions.
Advantages Of Management Accounting :
1. It increases efficiency of business operations
2. It ensures efficient regulation of business activities
3. It ensures utilization of available resources and thereby increase the
return on capital employed.
4. It ensures effective control of performance
5. It helps in evaluating the efficiency of the company’s business policies

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2.9 Costs
Introduction:-
Generally, the term cost of production refers to the ‘money expenses’
incurred in the production of a commodity. But money expenses are not the only
expenses incurred on the production of a commodity. But there are number of
services and inputs such as entrepreneurship, land, capital etc. which are offered
by an entrepreneur without changing any price or receiving any payment for them.
While computing the total cost of production, allowance should be made for such
expenses. It is therefore essential to have clean understanding for the different
types of cost.
There are several types of costs that a firm may consider relevant under
various circumstances. Such costs include future costs, accounting costs,
opportunity costs, implicit costs, fixed costs, variable costs, semi variable costs,
private costs, social costs, common costs, etc.
For the purposes of decision-making, it is essential to know the
fundamental difference between the main cost concepts along with the conditions
of their use in decision-making.

2.9.1 Total Cost

Fixed cost (FC): the cost of all fixed inputs in a production process. Another way of
saying this: production costs that do not change with the quantity of output
produced.
Variable cost (VC): the cost of all variable inputs in a production process.
Variable cost, on the other hand, does depend on the quantity the firm
produces. Variable
cost rises when quantity rises, and it falls when quantity falls.
Total cost (TC): the total cost of producing a given amount of output.
TC = FC + VC
Note: the total cost curve has the same shape as the variable cost curve because
total costs
rise as output increases.

2.9.2 Average Cost Or Average Total Cost:

Average cost (AC), also known as average total cost (ATC), is the average cost
per unit of output. To find it, divide the total cost (TC) by the quantity the firm is
producing (Q).
Average cost (AC) or average total cost (ATC): the per-unit cost of output.
ATC = TC/QSince we already know that TC has two components, fixed cost
and variable cost, thatmeans ATC has two components as well: average fixed cost
(AFC) and average variable cost (AVC). The AFC is the fixed cost per unit of output,
and AVC is the variable cost per unit of output.
ATC = AFC + AVC
AFC = FC/Q1
AVC = VC/Q

2.9.3 Marginal Cost:

Often, we are interested in knowing what happens to a firm’s costs if output
is increased by just a small amount. This is not the same as the average cost,
57
because the next unit of output the firm produces might be more or less costly to
produce than previous units.
Marginal cost (MC): the additional cost that results from increasing output by one
unit.
Another way of saying this: the additional cost per additional unit of
output.We use the symbol D (the Greek letter delta) to designate the change in a
variable. For instance, if total cost (TC) rose from 75 to 100, we would say DTC =
100 - 75 = 25. Using this symbol, we can write the mathematical formula for
marginal cost:
MC = DTC/∆Q
Notice that we divide by the change in quantity (DQ). Often, we set DQ = 1,
because marginal cost is defined as the additional cost from one more unit of
output. But sometimes we don’t know how much the added cost from just one
more unit is, so we calculate marginal cost for a larger change in quantity.
Total cost is variable cost and fixed cost combined.
TC=VC+FC
Now divide total cost by quantity of output to get average total cost.
ATC=TC/Q
Marginal cost is a concept that's a bit harder for people grasp. The "margin"
is the end or the last. The marginal unit is the last unit. Think of marginal cost as
the cost of the last unit, or what it costs to produce one more unit. It's hard to find
exactly what the cost of the last unit is, but it's not hard to find the average cost of
a group of a few more units. To find this, simply take the change in costs from a
previous level divided by the change in quantity from the previous level.
MC = Change in TC / Change in Q

2.10 Break Even Analysis

Definition :
In simple words, the break-even point can be defined as a point where total
costs (expenses) and total sales (revenue) are equal. Break-even point can be
described as a point where there is no net profit or loss. The firm just “breaks
even.”
Any company which wants to make abnormal profit, desires to have a break-
even point. Graphically, it is the point where the total cost and the total revenue
curves meet.
The break-even point is the point at which the income from sales will cover
all costs with no profits. The business owner or manager usually considers several
factors when studying break-even analysis:
1. The capital structure of the company.
2. Fixed expenses such as rent, insurance, heat, and light.
3. Setup of the organization.
4. Variable expenses.
5. The inventory, personnel, and space required to operate properly.
6. Profit:
Sales>variable expense+ fixed expense
Break-even point:
Sales= variable expense+ fixed expense
Loss:
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 Sales<variable expense+ fixed expens
Calculation (Formula) For Bep
• Break-even point is the number of units (N) produced which make zero
profit.
• Revenue – Total costs = 0
• Total costs = Variable costs * N + Fixed costs
• Revenue = Price per unit * N

Fig 2.7 Break Even Analysis

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

• So, break-even point (N) is equal
N = Fixed costs / (Price per unit - Variable costs)

Advantages Of Break-Even Analysis

1) It is simple to conduct and understand.
2) It shows profit and loss at different levels of output.
3) It can cope with changing circumstances. e.g. the following changes in the
business environment can be shown in a break even chart.
Table 2.1 Break Even Analysis
Factor Cause Effect
Employing extra sales staff Fixed costs rise, so total costs
rise and beak-even point rises.

Price increase Revenue rises more steeply,

Internal
break-even point falls.
Automation replaces direct labour Fixed costs rise while direct
costs fall, effect on break-even
point unclear.
Recession cuts demand Break-even point unaffected,
though safety margin is
reduced.

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 Price war forces price cut Revenue line rises less steeply,
External break-even point rises.
Inflation pushes up direct costs. Direct and total cost line rise
more steeply, break-even point
rises.

Disadvantages Of Break-Even Analysis

• It assumes that all output is sold at the given price (this may well be
untrue).
• Although it can cope with changes in circumstances, these factors
change regularly reducing its usefulness as a forecasting tool.
• The model assumes that costs increase constantly and do not benefit
from economies of scale. If the firm obtains purchasing economies of
scale then its total cost line will no longer be straight.
• Break-even analysis is only as good as the data upon which it is based.
Poor quality data will lead to inaccurate conclusions being drawn.

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 Chapter 3 Production And Materials Management

3.1 Introduction
• Production management means planning, organizing, directing and
controlling of production activities.
• Production management deals with converting raw materials into finished
goods or products. It brings together the 6M's i.e. men, money, machines,
materials, methods and markets to satisfy the wants of the people.
• Production management also deals with decision-making regarding the
quality, quantity, cost, etc., of production. It applies management principles
to production.
• Production management is a part of business management. It is also called
"Production Function." Production management is slowly being replaced by
operations management.
• The main objective of production management is to produce goods and
services of the right quality, right quantity, at the right time and at minimum
cost. It also tries to improve the efficiency. An efficient organization can face
competition effectively. Production management ensures full or optimum
utilisation of available production capacity.
According to Elwood Spencer Buffa:
"Production management deals with decision-making related to production
processes so that the resulting goods or service is produced according to
specification, in the amount and by the schedule demanded and at minimum cost."
Production is defined as “the step-by-step conversion of one form of material into
another form through chemical or mechanical process to create or enhance the
utility of the product to the user.

3.2 Types Of Production

Production systems can be classified as
• Job Shop,
• Batch,
• Mass and
• Continuous Production Systems

3.2.1 Job Shop Production

Job shop production are characterized by manufacturing of one or few
quantity of products designed and produced as per the specification of customers
within prefixed time and cost. The distinguishing feature of this is low volume and
high variety of products.
A job shop comprises of general purpose machines arranged into different
departments.
Each job demands unique technological requirements, demands processing on
machines in a certain sequence.
Characteristics
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.

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3. Highly skilled operators who can take up each job as a challenge because of
uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
Advantages
Following are the advantages of job shop production:
1. Because of general purpose machines and facilities variety of products can be
produced.
2. Operators will become more skilled and competent, as each job gives them
learning
opportunities.
3. Full potential of operators can be utilised.
4. Opportunity exists for creative methods and innovative ideas.
Limitations
Following are the limitations of job shop production:
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
4. Larger space requirements.

3.2.2 Batch Production

Batch production is defined by American Production and Inventory Control
Society (APICS) “as a form of manufacturing in which the job passes through the
functional departments in lots or batches and each lot may have a different
routing.” It is characterised by the manufacture of limited number of products
produced at regular intervals and stocked awaiting sales.
Characteristics
Batch production system is used under the following circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of item in a
batch and change of set up is required for processing the next batch.
4. When manufacturing lead time and cost are lower as compared to job order
production.
Advantages
Following are the advantages of batch production:
1. Better utilisation of plant and machinery.
2. Promotes functional specialisation.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.

Limitations
Following are the limitations of batch production:
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 1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
3. Work in process inventory is higher compared to continuous production.
4. Higher set up costs due to frequent changes in set up.

3.2.3 Mass Production

Manufacture of discrete parts or assemblies using a continuous process are called
mass production.This production system is justified by very large volume of
production. The machines are arranged in a line or product layout. Product and
process standardisation exists and all outputs follow the same path.
Characteristics
Mass production is used under the following circumstances:
1. Standardisation of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and
output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back
tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Advantages
Following are the advantages of mass production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilisation due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Limitations
Following are the limitations of mass production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.

3.2.4 Continuous Production

Production facilities are arranged as per the sequence of production
operations from the first operations to the finished product. The items are made to
flow through the sequence of operations through material handling devices such as
conveyors, transfer devices, etc.
Characteristics
Continuous production is used under the following circumstances:
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
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 3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
6. Advantages
Following are the advantages of continuous production:
1. Standardisation of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilisation due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Limitations
Following are the limitations of continuous production:
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.

3.3 Process Planning

A process is defined as a group of actions instrumental to the achievement of
the output of an operation system in accordance with a specified measure of
effectiveness.
In a manufacturing setting, process planning may also address concerns
that are related to the steps identified as necessary to create a product. For
example, the plan may also address issues such as designing the packaging or
labeling for the final product, as well as the creation of user instructions that
accompany each unit that is sold.
Process planning is the systematic determination of the methods by which a
product is to be manufactured, economically and competitively.
Process planning has been defined as the subsystem responsible for the
conversion of design data to work instruction.
It is also defined as the function within a manufacturing facility which
establishes the the processes and process parameters to be used in order to
convert a piece-part from its initial form that is predetermined on detailed drawing.
Information Required To Do Process Planning
• Quantity of work to be done along with product specification
• Quality of work to be completed
• Availability of equipments, tools and personnels
• Sequence in which the operations will be performed
• Name of the equipment on which the operation will be performed
• Standard time for each operation
• When the operation will be performed?

3.3.1Process Planning Procedure

1. Preparation Of Work Drawings
• It is a document complete in itself to manufacture a component or
product. It contains dimensions, tolerances, kind of treatment etc.,
• The tooling department uses them to plan the tooling that is required for
manufacturing
• The drawings should be in standard form
• All the particulars about the should be included in the drawing
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 • Notes on drawing should be shown on in a standard panel on the
drawing pro-forma
2. Make Or Buy Decisions
The reasons for make or buy decisions are
• Idle facilities
• Product quality
• Patents
• Skills and materials
• Number of outside suppliers
• Reliability of outside sources
• Seasonal demands
• Long term considerations
3. Process Selection
• Major technological change – existence of technology, availability of more
technologies, licensing of technology, innovation o technology etc.,
• Minor technological change – deciding the combination of processes in
terms of cost and the total operation process can be difficult
• Specific component choice – type of equipment, degree of replacing the
human labour, using of CAM and industrial robots
• Process flow choice – analysis of product flow lead to re-sequencing,
combining or eliminating operation in order to reduce material handling
and storage costs
4. Machine Capacity
• Machine capacity may be defined as the time- available for work at a
machine expressed in machine hours.
• It has to be calculated for per day or week or month
5. Process And Equipment Selection Procedure
• Prepare a general statement on the manufacturing operations to be
performed
• Establish a provisional process to provide each individual feature
identified by the product designer
• Develop a list of alternative process
• Compare the alternatives with each other
• Select the best alternative
• Communicate the same to all the departments ( production, industrial,
plant and maintanence, industrial relations, finance department )to
Perform detailed processing
6. Selection Of Material, Jigs Etc
• The material should be of right quality and chemical composition as per
product specification
• The shape and size of the material should restrict the scrap
• The jigs, fixtures and other special attachments should give higher
production rate and should reduce cost of production per piece
• The selection of cutting tools and inspection gauges should reduce
production time and inspection
7. Process Analysis
• It means the study of overall process in a factory.
• It analyses each step of manufacturing process and aims at improving
the industrial operations.

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 • It aids in finding better methods of doing a job by eliminating
unproductive and unnecessary elements of the process or through
modified layout of facilities.
• The process is analysed with the help of process charts of flow diagrams.
8. Process Chart
A chart may be a diagram or a graph which gives an overall view of the
situation say a process. It records graphically or diagrammatically , in
sequence , the operation connected with a process. It helps visualizing
various possibilities of alteration or improvement.
9. Operation Planning And Tooling Requirements
It is concerned with planning the details of the method to be used to
complete each operation as its chosen work centre and with designing the
necessary tooling.
The operations are divided into work elements. It is recorded in the operation
sheet. It is prepared for each part, assembly and sub-assembly.
10. Manual / Automated Process Planning
The process planner tries to select the best set of processes and machines
either manually or by using computers.

3.4 Process Scheduling

Definition :
Kimball and Kimball define scheduling as “the determination of the time
that should be required to perform each operation and also the time necessary to
perform the entire series as routed, making allowances for all factors concerned”.
In the words of Alfred and Betty, scheduling means “fitting specific jobs into
a general time-table so that orders may be manufactured in accordance with
contracted liability, or in mass production, so that each component may arrive at
and enter into assemble in order and at the time required”.
Scheduling is the process of organizing, choosing and timing resource usage to
carry out all the activities necessary to produce the desired outputs at the desired
times, while satisfying a large number of time and relationship constraints among
the activities and the resources (Morton and Pentico, 1993).
Objectives Of Scheduling
• Ensure maximum utilization of plant at minimum cost
• Ensure the requirements of manpower is optimum and is evenly distributes,
there being no peaks and valleys.
• Keep yourself abreast of hiring, dismissals, retrenchments, holidays, leave
etc., of the work force.
• Possess up-to-date information regarding availability of materials, expected
date of delivery, materials rejection, shortages, purchase orders cancelled
etc.,
• Update with data on each machine regarding its availability of spares,
frequency of breakdowns, servicing and overhauling schedules, replacement
schedules etc.,
• Have complete information on performance standards and their revisions,
method revisions, changes in materials and machines etc.
• Obtain quick feedback from machine regarding delays and interruptions
which may held up production activity.

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3.4.1 Types Of Scheduling
Types of scheduling can be categorized as forward scheduling and backward
scheduling.
1. Forward scheduling: is commonly used in job shops where customers place their
orders on “needed as soon as possible” basis. Forward scheduling determines
start and finish times of next priority job by assigning it the earliest available
time slot and from that time, determines when the job will be finished in that
work centre. Since the job and its components start as early as possible, they
will typically be completed before they are due at the subsequent work centers
in the routing. The forward method generates in the process inventory that are
needed at subsequent work centers and higher inventory cost. Forward
scheduling is simple to use and it gets jobs done in shorter lead times,
compared to backward scheduling.
2. Backward scheduling : is often used in assembly type industries and commit in
advance to specific delivery dates. Backward scheduling determines the start
and finish times for waiting jobs by assigning them to the latest available time
slot that will enable each job to be completed just when it is due, but done
before. By assigning jobs as late as possible, backward scheduling minimizes
inventories since a job is not completed until it must go directly to the next
work centre on its routing. Forward and backward scheduling methods are
shown in the following figure.
Fig 3.1 Forward and backward scheduling

3.4.2 Scheduling Methodology

1. Charts and boards,
2. Priority decision rules, and
3. Mathematical programming methods.
1. Gantt Charts and Boards: Gantt charts and associated scheduling boards have
been extensively used scheduling devices in the past, although many of the
charts are now drawn by computer. Gantt charts are extremely easy to
understand and can quickly reveal the current or planned situation to all
concerned. They are used in several forms, namely,
• Scheduling or progress charts, which depicts the sequential schedule;
• Load charts, which show the work assigned to a group of workers or
machines; and
• Record a chart, which are used to record the actual operating times
and delays of workers and machines.

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 Table 3.2 Gantt Charts and Boards:
GANTT CHART
WEEK - 1 WEEK - 2 WEEK- 3 WEEK - 4
SECTION - A
SECTION – B
SECTION – C
Advantages
• It is simple and easy to understand
• It can be kept running
• It involves less cost
• It can be maintained by non-technical staff
• A certain percentage of total weekly capacity can be allotted for rush
orders
Disadvantages
• It provides only overall picture
• It does not give detailed information
2. Priority Decision Rules: Priority decision rules are simplified guidelines for
determining the sequence in which jobs will be done. In some firms these rules
take the place of priority planning systems such as MRP systems. Following are
some of the priority rules followed.
Table 3.3 Priority Decision Rules:
Symbol Priority rule
FCFS First come, first served
EDO Earliest due date
LS Least slack(time due less processing time)
SPT Shortest processing time
LPT Longest processing time
PCO Preferred customer order
RS Random selection

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

problem. Firms process capacity, labor skills, materials and they seek to
allocate their use so as to maximize a profit or service objective, or perhaps
meet a demand while minimizing costs.
The following are some of the models used in scheduling and production
control.
a. Linear programming model: Here all the constraints and objective functions are
formulated as a linear equation and then problem is solved for optimality.
Simplex method, transportation methods and assignment method are major
methods used here.
b. PERT/CPM network model: PERT/CPM network is the network showing the
sequence of operations for a project and the precedence relation between the
activities to be completed.

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3.5 Routing
Routing may be defined as the selection of path which each part of the
product will follow while being transformed from raw materials to finished
products. Path of the product will also give sequence of operation to be adopted
while being manufactured. In other way, routing means determination of most
advantageous path to be followed from department to department and machine to
machine till raw material gets its final shape, which involves the following steps:
• Type of work to be done on product or its parts.
• Operation required to do the work.
• Sequence of operation required.
• Where the work will be done.
• A proper classification about the personnel required and the machine for
doing the work.
For effective production control of a well-managed industry with standard
conditions, the routing plays an important role, i.e., to have the best results
obtained from available plant capacity. Thus routing provides the basis for
scheduling, dispatching and follow-up.
Techniques of routing:
While converting raw material into required goods different operations are to be
performed and the selection of a particular path of operations for each piece is
termed as ‘Routing’. This selection of a particular path, i.e. sequence of operations
must be the best and cheapest to have the lowest cost of the final product. The
various routing techniques are:
1. Route card: This card always accompanies with the job throughout all
operations. This indicates the material used during manufacturing and
their progress from one operation to another. In addition to this the details
of scrap and good work produced are also recorded
2. Work sheet: It contains
a. Specifications to be followed while manufacturing.
b. Instructions regarding routing of every part with identification
number of machines and This sheet is made for manufacturing as
well as for maintenance
3. Route sheet: It deals with specific production order. Generally made from
operation sheets. One sheet is required for each part or component of the
order. This includes the following:
a. Number and other identification of order.
b. Symbol and identification of part.
c. Number of pieces to be made.
d. Number of pieces in each lot if put through in lots.
e. Operation data which includes:
i. List of operation on the part.
ii. Department in which operations are to be performed.
iii. Machine to be used for each operation.
iv. Fixed sequence of operation, if any.
4. Move order: Though this is document needed for production control, it is
never used for routing system. Move order is prepared for each operation as
per operation sheet. On this the quantity passed forward, scrapped and to be
rectified are recorded. It is returned to planning office when the operation is
completed.
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Routing procedure:
Routing involves various procedural steps. They are as follows:
1. The finished products are analysed from the manufacturing stand point in
order to decide how many components can be made in the plant and how
many can be purchased from outside sources through vendors, sub-
contracting etc.,
2. Parts list and a bill of materials are prepared showing name of the part,
quantity, material, specifications, amount of materials required, etc.,
3. From production standards-machine capacities, machine characteristics,
and the operations to be performed at each stage of manufacturing are
established and listed in proper sequence on operation and route sheet
4. Determine the number of components to be manufactured in one batch/lot.
5. Standard scrap factors and the places where it can occur are identified.
Causes are to be explored and corrected.
6. The cost of the component is analysed.
Factors affecting routing procedure:
1. Types of manufacture: Layout of the plant depends on the type of production. In
case of product layout, routing is built into production line and the flow of
materials is virtually automatic.
2. Characteristics of individual machine: Machines do differ in age, condition, degree of
precision, capacity of range, speed, tooling and such other traits such a list
should also include the conveyors, cranes, containers and other equipment
which may be available in one section of the plant but not in another.
3. Availability of alternative routing:: Machines may breakdown (or) an operator may
be absent, in such situation routing selection must readily have an alternative
routing to substitute the standard route.
4. Human factors: Personnel vary in various characteristics. For eg., there is a
different between operators regarding experience and capability relating to
visual exactness, manual dexterity, physical limitations, intelligence and
emotional stability.

3.6 Functions And Objects Of Materials Management

Materials Management
Materials management is defined as “the function responsible for the
coordination of planning, sourcing, purchasing, moving, storing and controlling
materials in an optimum manner so as to provide a pre-decided service to the
customer at a minimum cost”.
Material management is the “management of the flow of materials into an
organisation to the point, where, those materials are converted into the firm’s end
products.
The fundamental objectives of the Materials Management function ,often
called the famous 5 Rs of Materials Management
• Of the right quality
• In the right quantity
• At the right time
• From the right source
• At the right price
Objectives of materials management:
The objectives of materials management are generally classified into two categories.
1. Primary objectives or direct objectives which contribute to the achievement
of some of the firm’s overall objectives.
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 2. Secondary objectives or indirect objectives which arise due to materials
department assisting some other department in the organisation.

Primary Objectives:
 Low Prices: Purchasing materials at the least possible price is important because
it helps in reducing the production costs and improving profits.
 High Inventory Turnover : The inventory turnover is the ratio of cost of goods sold
to cost of average inventory held in the organisation over a period of one year.
 When average inventory is low, the capital tied up in inventory is low and this will
increase the inventory turnover ratio. This in turn increases the efficiency of
utilization of the firm’s capital and improves the return-on-investment.
 Low cost acquisition and possession: Efficient receiving, handling and storing of
materials result in low acquisition and possession costs.
 Continuity of supply: If continuity of supply of materials is not maintained,
shortage of materials may cause idling of machines and labour and also
stoppage of production. This will increase in production costs, expediating and
transporting costs and so on.
 Consistent of Quality: Quality of raw materials, components, parts etc very much
determines the quality of the end product.
 Low payroll costs: The payroll costs can be kept low by minimizing the idle time of
machines and avoiding the shortage of materials.
 Cordial supplier relationship: Maintaining cordial relationship with suppliers will
be helpful in getting prompt supplies at reasonable prices at the right time. Also
the firm can have flexibility and can respond better to customer’s needs of
change in delivery schedule.
 Development of personnel: The materials managers must develop the executives
and employees in their departments by training them to acquire the necessary
knowledge and skills for the efficient functioning in their area of operations.
This will create potential leaders among subordinates and will be helpful in
smooth succession.
 Maintenance of records: Good record keeping helps to remove the onus of
suspicion form honest employees who have to work in an environment which
may be associated with corruption, favoritism etc.
Functions Or Scope Of Materials Management
1. Materials planning and control: Based on the sales forecast and
production plans, the materials planning and control is done. This
involves estimating the individual requirements of parts, preparing
materials budget, forecasting the levels of inventories, scheduling the
orders and monitoring the performance in relation to production and
sales.
2. Purchasing: This includes selection of sources of supply finalization in
terms of purchase, placement of purchase orders, follow-up,
maintenance of smooth relations with suppliers, approval of payments
to suppliers, evaluating and rating suppliers.
3. Stores management or management: This involves physical control of
materials, preservation of stores, minimization of obsolescence and
damage through timely disposal and efficient handling, maintenance
of stores records, proper location and stocking. A store is also
responsible for the physical verification of stocks and reconciling them
with book figures. A store plays a vital role in the operations of a
company.
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 4. Inventory control or management: Inventory generally refers to the
materials in stock. It is also called the idle resource of an enterprise.
Inventories represent those items, which are either stocked for sale or
they are in the process of manufacturing or they are in the form of
materials, which are yet to be utilized. The interval between receiving
the purchased parts and transforming them into final products varies
from industries to industries depending upon the cycle time of
manufacture. It is, therefore, necessary to hold inventories of various
kinds to act as a buffer between supply and demand for efficient
operation of the system. Thus, an effective control on inventory is a
must for smooth and efficient running of the production cycle with
least interruptions.

Fig 3.3 Materials Handling

Fig 3.4 Scope of Materials

3.7 Stores Management

Stores play a vital role in the operations of company. It is in direct touch
with the user departments in its day-to-day activities. The most important purpose
served by the stores is to provide uninterrupted service to the manufacturing
divisions. Further, stores are often equated directly with money, as money is locked
up in the stores.

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 Store keeping may be defined as a function of receiving, storing and issue of
materials, bought out parts and components, spare parts, tools, consumables,
supplies, stationary items etc.
Objectives Of Storekeeping
• It offers protection against fire, damage, deterioration, theft, losses.
• To facilitate a balanced and smooth flow of raw materials, components, tools
and any other items necessary to meet production
• To maintain optimum stock of materials to compensate for irregular supplies
by suppliers.
• To achieve efficient utilization of storage space.
• To reduce usage of materials handling equipments.
• To enable flexibility in production schedules.
• To facilitate quantity purchases at discount prices.
• It must allow for easy, quick and sure receipt, storage and disbursement of
material when properly authorized.
• It is an organized store and as such it must provide means for identifying
and quickly locating articles and any contents. For this purpose it has the
device of indexing, identification marks and labels.
• Minimum investment in inventories can be assured
3.7.1 Functions Of Stores
The functions of stores can be classified as follows:
• To receive raw materials, components, tools, equipment’s and other items
and account for them.
• To provide adequate and proper storage and preservation to the various
items.
• To meet the demands of the consuming departments by proper issues and
account for the consumption.
• To minimise obsolescence, surplus and scrap through proper codification,
preservation and handling.
• To highlight stock accumulation, discrepancies and abnormal consumption
and effect control measures.
• To ensure good housekeeping so that material handling, material
preservation, stocking, receipt and issue can be done adequately.
• To assist in verification and provide supporting information for effective
purchase action.
• Efficient and orderly record-keeping of all materials into storage
• Storage of material in safe and convenient locations
• Issue of purchase requisition as per instruction of production controllers to
the purchasing agent.
• Issuing (disbursement) of materials to the operators and/or foremen against
written authority.
• Conduct of physical inventory control
• Timely intimation to proper authorities regarding out-of-stock conditions of
items
• Custodian of goods against losses, damages, unauthorized use, pilfering.
Standard items often invite theft and are stolen for resale. Such thefts
should be prevented.
3.7.2 Codification:
It is one of the functions of stores management. Codification is a process of
representing each item by a number, the digit of which indicates the group, the
sub-group, the type and the dimension of the item.

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 • Many organizations in the public and private sectors, railways have their
own system of codification, varying from eight to thirteen digits.
• The first two digits represents the major groups, such as raw materials,
spare parts, sub-contracted items, hardware items, packing material, tools,
oil, stationery etc.
• The next two digits indicate the sub-groups, such as, ferrous, non-ferrous
etc.
• Dimensional characteristics of length, width, head diameter etc. constitute
further three digits and the last digit is reserved for minor variations.
• Whatever may be the basis, each code should uniquely represent one item.
• It should be simple and capable of being understood by all.
• Codification should be compact, concise, consistent and flexible enough to
accommodate new items.
• The groupings should be logical, holding similar parts near to one another.
Each digit must be significant enough to represent some characteristic of the
item.
Objectives Of Codification
The objectives of a rationalized material coding system are:
• Bringing all items together.
• To enable putting up of any future item in its proper place.
• To classify an item according to its characteristics.
• To give an unique code number to each item to avoid duplication and
ambiguity.
• To reveal excessive variety and promote standardization and variety
reduction.
• To establish a common language for the identification of an item.
• To fix essential parameters for specifying an item.
• To specify item as per national and international standards.
• To enable data processing and analysis.
Advantages Of Codification
• As a result of rationalized codification, many firms have reduced the number
of items.
• It enables systematic grouping of similar items and avoids confusion caused
by long description of items since standardization of names is achieved
through codification, it serves as the starting point of simplification and
standardization.
• It helps in avoiding duplication of items and results in the minimisation of
the number of items, leading to accurate record.
• Codification enables easy recognition of an item in stores, thereby reducing
clerical efforts to the minimum.
• If items are coded according to the sources, it is possible to bulk the items
while ordering.
• To maximise the aforesaid advantages, it is necessary to develop the codes
as concerned, namely, personnel from design, production, engineering,
inspection, maintenance and materials.
Working of the stores:
The store may have functional sections to look after principal functions and
follow set policy and procedure.
1. Receiving Section: The store in a plant has four kinds of inventories to be received:
• Raw materials
• Stores and supplies (materials consumed in operations)
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 • Tools and components (to keep the machines and plant running)
• Materials-in-process of manufacturing (semi-manufactured goods)
Procedure for receiving materials or inventories has the following steps:
• Receiving incoming materials,
• Checking and inspection of these materials
• Recording the incoming goods in ‘Goods Received Book’
• Preparing and sending goods inward not to the purchasing section
• Intimating purchasing section regarding damages, losses, defective goods,
surplus or deficit supplies etc. along with rejection forms or notes.
• Returning defective or damaged goods to the supplier as per direction of
purchase department.
• Depositing the materials to the appropriate store locations for storage When
finished products are received for the storage, the warehouse keeper will
issue an acknowledgement and intimation to the sales organisatoin that
such and such goods are ready for sale.
2. Storage Section: The stockrooms are in charge of storage, safety, care and
disbursement of materials. There are separate stockrooms for each class of
inventories. Also multiple stockrooms located at different places in the plant in
addition to general or main store.
The storekeeper has to receive the materials for actual storage, classify the
materials, provide easy identifications to facilitate quick location, keep all goods at
appropriate places, maintain up-to-date inventory records and accounts and issue
materials as per written instructions. Each article must have label and identifying
mark-stamping, embossing, colour coding writing or painting. Location of any
article can be easily found out by such devices.
3. Accounting Section: Proper and up-to-date records and accounting can facilitate
inventory control as well as financial checks. This section is called upon to keep on
a daily basis compare records of receipts and issue of materials. It is also in charge
of continuous stock – taking and inventory valuation. The chief activity of this
section is inventory control.
4. Issue Section
The storekeeper is a commodity banker. He must take necessary precautions and
actions in both cases, viz. incoming goods flow and outgoing goods flow. Items are
issued or supplied for direct use or merely on loan. Goods are issued against
material requisition slip (written authority). All particulars of issue must be duly
posted on the Bin Cards and on Stock Control Cards.

3.7.3 Stores Accounting

The accounts in a stores ledger are really detailed analyses of general
‘Purchase’ and ‘Issue’. The theoretical aspect is that the records which form the
basis of the entry in the stores ledger incidentally enable cost accounts to be
prepared.
The scheme requires that goods received from suppliers’ delivery notes be entered
in stores day book (stores received or goods inward book) and that issues of
materials may only be made in exchange for authenticated Requisitions/Issue
Notes, and that these again be either entered into a stores day book (stores issued
or goods outward book) or after interposition of the issue notes written out by the
storekeeper on supplying the materials requested.
The stores received and stores issued books form from carbon duplicates of these
books obtained by having the pages arranged in appropriate fashion. The other

75
alternative is for the requisition/issue notes or carbon copies thereof, to be sent to
office for postings direct to the stores ledger.
Quite apart from the desirability of keeping the stock records up-to-date, a
good system is necessary for certain other purposes listed below:
1. Where accurate cost account is a must
2. Where complete income and expenditure accounts are kept
3. Where management wants to know facts about good or bad buying, apparently
from the stores accounts
4. Where indications, as to the quantity and value of the stores without stock
taking, are necessary
5. Where ascertainment of the ordering level without actual inspection of the stock,
is also a pre-condition to efficient buying.
Many of the advantages mentioned above might almost be termed as necessities in
an up-to-date accounting organization. The idea, however, is mainly to show a host
of highly desirable information, at any rate, the hints for economy which such as
recording system will automatically provide and this must not be overlooked in any
case.
3.7.4 Stock Verification
It is the process of physically counting, measuring or weighing the entire
range of items in the stores and recording the results in a systematic manner. The
purposes served by stock verification are as follows:
· To reconcile the stock records and documents for their accuracy and usefulness.
· To identify areas which require more disciplined document control
· To back up the balance sheet stock figures, and
· To minimize pilferage and fraudulent practices.
Stock verification is usually carried out by the materials audit department,
reporting to either the materials manager or the internal audit. One person is
usually given the exclusive responsibility with adequate facilities and authority.
Physical verification can be carried out periodically or on continuous basis.

3.8 Inventory Control Or Management

Meaning of Inventory: Inventory generally refers to the materials in stock. It is also
called the idle resource of an enterprise. Inventories represent those items which
are either stocked for saleor they are in the process of manufacturing or they are in
the form of materials, which are yet tobe utilised.
The interval between receiving the purchased parts and transforming them
into final products varies from industries to industries depending upon the cycle
time of manufacture. It is, therefore, necessary to hold inventories of various kinds
to act as a buffer between supply and demand for efficient operation of the system.
Thus, an effective control on inventory is a must for smooth and efficient running
of the production cycle with least interruptions.
Meaning of Inventory Control: Inventory control is a planned approach of determining
what to order, when to order, how much to order and how much to stock so that
costs associated with buying and storing are optimal without interrupting
production and sales.
Reasons for keeping inventories:
1. To stabilise production: The demand for an item fluctuates because of the number
of factors, e.g., seasonality, production schedule etc. The inventories (raw materials
and components) should be made available to the production as per the demand
76
failing which results in stock out and the production stoppage takes place for want
of materials. Hence, the inventory is kept to take care of this fluctuation so that the
production is smooth.
2. To take advantage of price discounts: Usually the manufacturers offer discount for
bulk buying and to gain this price advantage the materials are bought in bulk even
though it is not required immediately. Thus, inventory is maintained to gain
economy in purchasing.
3. To meet the demand during the replenishment period: The lead time for procurement of
materials depends upon many factors like location of the source, demand supply
condition, etc. So inventory is maintained to meet the demand during the
procurement (replenishment) period.
4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the
delivery schedules at 100 per cent service level, means they cannot afford to miss
the delivery schedule which may result in loss of sales. To avoid the organizations
have to maintain inventory.
5. To keep pace with changing market conditions: The organizations have to anticipate
the changing market sentiments and they have to stock materials in anticipation of
non-availability of materials or sudden increase in prices. Sometimes the
organizations have to stock materials due to other reasons like suppliers minimum
quantity condition, seasonal availability of materials or sudden increase in prices.

3.8.1 Types Of Inventories

Table 3.4 Types Of Inventories
INPUT PROCESS OUTPUT

Raw Materials Work In Process Finished Goods

Consumables required for Semi Finished Production in Finished Goods at

processing. Eg : Fuel, various stages, lying with Distribution
Stationary, Bolts & Nuts etc. various departments like Centers through
required in manufacturing Production, WIP Stores, QC, out Supply Chain
Final Assembly, Paint Shop,
Packing, Outbound Store etc.

Maintenance Production Waste and Scrap Finished Goods in

Items/Consumables transit

Packing Materials Rejections and Defectives Finished Goods

with Stockiest and
Dealers

Local purchased Items Spare Parts

required for production Stocks & Bought
Out items

Benefits of inventory control:

• An efficient inventory control system minimizes the possibility of delay in
production. there is no danger of closure of plant, unemployment, lower
dividend and replacement of management – a dark picture resulting out of
poor inventory control.

77
 • Improvement in customer’s relationship because of the timely delivery of
goods and service.
• Smooth and uninterrupted production and, hence, no stock out.
• Efficient utilisation of working capital.
• Helps in minimising loss due to deterioration, obsolescence damage and
pilferage.
• It helps a company to secure many economies. For instance, no duplication
in ordering, better use of available materials by inter department transfers,
economies due to bulk purchases such as low freight, higher discount, lower
price, less clerical work etc.
• Eliminates the possibility of duplicate ordering.
• It is necessary for efficient accounting system, particularly for material
aspect of cost accounting.
• It discourages dishonesty, e.g. stealing material from the plant.
• Losses, damages, deterioration of materials can be minimized and enables
careful material-handling.
Standards in inventory control:
There are four important quantity standards in inventory control.
1. The Maximum Level: It indicates the upper limit of the level of stocks or inventory.
It points out the largest quantity to be normally kept in the store in the interest of
economy.
2. The Minimum Level: It indicates the lower limit of the level of stocks of inventory
which is really a maximum reserve or margin of safety. This level of safety may be
used only in an emergency. It is the level acting as a safety value. it is the
minimum level of stocks which must be always on hand. It is the minimum reserve
of the dealer.
3. The Standard Order: It is quantity of stocks to be requisitioned for purchase at any
one time. A repeat order for a commodity is always of the same quantity until
conditions change, necessitating a revision of the standard order. The purchase
requisition given the quantity for replenishment of stocks.
4. The Ordering Point: It is the quantity of stock necessary to protect against the
exhaustion of the stock during the gap between the date of order and the date of
actual receipt. When the level of stocks or the balance on hand reaches this level, it
is an indication that a new order must be placed at once. The time necessary to
secure the stock of required articles after requisitioning must be carefully
calculated and sufficient margin must be provided for contingent delays or
bottlenecks in transport.

3.8.2 Inventory Model Or Techniques

a) Economic Order Quantity (EOQ): The EOQ refers to the quantity ordered to be
purchased at the lowest cost. The economic order quantity is also known as
economic lot size.
Here the cost of procurement and cost of carrying are equal.
Eoq Formula:

Fig.3.5 Eoq Formula

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S = Annual Usage (sales) in units ,O = Order cost per order
C = The carrying cost per unit per period,Q = The order quantity
Economic order quantity (EOQ) is that size of the order which gives
maximum economy in purchasing any material and ultimately contributes towards
maintaining the materials at the optimum level and at the minimum cost.
In other words, the economic order quantity (EOQ) is the amount of
inventory to be ordered at one time for purposes of minimizing annual inventory
cost.
The quantity to order at a given time must be determined by balancing
factors: (two The cost of possessing or carrying materials and (2) the cost of
acquiring or ordering materials. Purchasing larger quantities may decrease the unit
cost of acquisition, but this saving may not be more than offset by the cost of
carrying materials in stock for a longer period of time.
Economic batch quantity: When a firm is producing its own inventory rather
than purchasing it, it is called Economic batch quantity. Here the ordering costs
are replaced by manufacturing set-up costs. Set-up costs are of fixed nature and
represent the one-time costs for machine adjustments, paper work, scheduling, etc.
In determining EBQ the following are considered.
Annual demand of a particular item of article
Total set up cost of the machine
Set up cost per piece = …………………………………………………Quantity in batch
Cost of storage.

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 Chapter 4: Sales And Marketing
4.1 Introduction:
Marketing is the process of communicating the value of a product or service
to customers, for the purpose of selling that product or service.
Definition of marketing:
• Marketing is the process of planning and executing the conception,
pricing, promotion, and distribution (4 Ps) of ideas, goods and services to
create exchanges (with customers) that satisfy individual and
organizational objectives.
• Bringing together the needs and wants of the consumer with the
products and services that match them.
A Few Relevant Terms On Marketing
Market: Normally people understand the term market as a place where goods
are bought and sold. But, in the context of Marketing, it refers to a group of
buyers for a particular product or service.
Marketer : It refers to the person who organises the various marketing
activities such as market research, product planning, pricing, distribution
etc.
Seller : It refers to a person or organisation who is directly involved in the
process of exchange of goods and services for money. This includes the
wholesaler, retailer etc.
Buyer : A buyer is one who is directly involved in the process of purchase of
goods and services. He/she is one who selects the goods, makes payment
and takes the delivery.
Consumer : One who actually uses the product or service. For example, you
bought a shirt and gifted it to your friend who uses it. Here your friend is the
consumer you are a buyer. However, a consumer can also be the buyer.
Customer : A customer usually refers to the person who takes the buying
decision.
For example, in a family, father decides on the brand of the toothpaste to be
used by his children. Here, the children are the consumers and the father is
the customer. A customer can also be the consumer. Similarly, the buyer
may be different from the customer or one can be the customer as well as
the buyer.
4.2 Concepts Of Marketing
Marketing is a social and managerial process by which individuals and
groups obtain what they need and want through creating, offering and exchanging
products of value with others.
The above definition of marketing rests on the following concepts: needs,
wants and demands; products; value, cost and satisfaction; exchange,
transactions, and relationships; markets; and marketing and marketers. Needs
wants and demands are a part of basic marketing principles
A product can be differentiated on the basis of whether it satisfies a
customers needs, wants or demands.

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 Fig 4.1 concept of marketing
4.2.1 Needs
Human needs are the basic requirements and include food clothing and
shelter. Without these humans cannot survive. An extended part of needs today
has become education and healthcare. Generally, the products which fall under the
needs category of products do not require a push. Instead the customer buys it
themselves. But in todays tough and competitive world, so many brands have come
up with the same offering satisfying the needs of the customer, that even the
“needs category product” has to be pushed in the customers mind.
• Physical needs: This types of need is related to food, clothing and shelter.
• Safety needs : Under this need, people want protection from physical harm
and economic threat.
• Social needs: Under this need, they want love, friendship and belongingness.
• Ego needs: Under this need, they want status recognition and self-esteem.
• Self development needs: They want knowledge, achievement and creativity.

4.2.2 Wants
Wants are a step ahead of needs and are largely dependent on the needs of
humans themselves. For example, you need to take a bath. But i am sure you take
baths with the best soaps. Thus Wants are not mandatory part of life. You DONT
need a good smelling soap. But you will definitely use it because it is your want. In
the above image, the baby needs milk but it WANTS candy
Example: A consumer in the United States needs food but may want a
hamburger. French fries and soft drinks. A person in Mauritius needs food but may
want a mango, rice, lentils, and beans. Wants are shaped by our society.

4.2.3 Demands
You might want a BMW or a Mercedes for a car. You might want to go for a
cruise. But can you actually buy a BMW or go on a cruise? You can provided you
have the ability to buy a BMW or go on a cruise. Thus a step ahead of wants is
demands. When an individual wants something which is premium, but he also has
the ability to buy it, then these wants are converted to demands. The basic
difference between wants and demands is desire. A customer may desire something
but he may not be able to fulfill his desire.
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Example of demands – Cruises, BMW’s, 5 star hotels etc.
The needs wants and demands are a very important component of marketing
because they help the marketer decide the products which he needs to offer in the
market. Thus the flow is like this.

4.2.4 Importance Of Marketing

Marketing is important to the business, consumer as well as the society.
This is evident from the following points.
(a)Marketing helps business to keep pace with the changing tastes, fashions,
preferences of the customers. It works out primarily because ascertaining
consumer needs and wants is a regular phenomenon and improvement in existing
products and introduction of new product keeps on taking place. Marketing thus,
contributes to providing better products and services to the consumers and
improve their standard of living.
(b)Marketing helps in making products available at all places and throughout the
year.We are able to get Kashmir shawls and Assam Tea all over India and get
seasonal fruits like apple and oranges round the year due to proper warehousing or
proper packaging. Thus, marketing creates time and place utilities.
(c) Marketing plays an important role in the development of the economy. Various
functions And sub-functions of marketing like advertising, personal selling,
packaging,transportation, etc. generate employment for a large number of people,
and accelerate growth of business.
(d)Marketing helps the business in increasing its sales volume, generating revenue
and Ensuring its success in the long run.
(e)Marketing also helps the business in meeting competition most effectively.

4.2.5 Functions Performed In Marketing

You have learnt that marketing is the performance of those business
activities that direct the flow of goods and services from producers to consumers or
users. Let us now learn
what those activities are? These are briefly discussed hereunder.
1. Marketing Research
Marketing research involves collection and analysis of facts relevant to
various aspects of marketing. It is a process of collecting and analysing information
regarding customer needs and buying habits, the nature of competition in the
market, prevailing prices,distribution network, effectiveness of advertising media,
etc. Marketing research gathers, records and analyses facts for arriving at rational
decisions and developing suitable marketing strategies.
2. Product Planning and Development
As you know marketing starts much before the actual production. The
marketers gather information regarding what are the needs of the consumers and
then decide upon what to produce. So, the task of marketing begins with planning
and designing a product for the consumers. It can also be done while modifying
and improving an already existing product. For example, now-a-days we find much
better soaps and detergent powders than we used to get earlier. Similarly, we have
many new products introduced almost on a regular basis.
3.Buying and Assembling
Buying and assembling activities as a part of marketing refer to buying and
collection of required goods for resale. This function of marketing is primarily
relevant to those business organisations that are engaged in trading activities. In
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the context of manufacturing organisations, buying and assembling involves
buying raw materials and components required for production of finished goods.
4. Packaging
Packaging involves putting the goods in attractive packets according to the
convenience of consumers. Important considerations to be kept in view in this
connection are the size of the package and the type of packaging material used.
Goods may be packaged in bottles (plastic or glass), boxes (made of tin, glass,
paper, plastic), cans or bags.
The size of the package generally varies from a few grams to a few kilograms,
5. Standardization and Grading
Standardization refers to development of standards for production of goods
with respectto shape, design, colour and other characteristics. If products are
standardised,customers are able to identify a product and its characteristics very
well. So goodscan be sold by sample or description. Standardisation helps in
promoting the sale ofthe product by increasing consumers’ confidence in the
product quality.Grading involves separating products into different classes on the
basis of certainpredetermined standards relating to size and quality. Grading is
required in case of agricultural, forest and mineral products such as cotton, sugar
cane, iron ore, coal,timber, etc
6. Branding
Branding means giving an attractive name, symbol or identity mark to the
product to make a product different from others so that it is known by that name
or symbol or mark. For example, Surf is the brand name of a detergent powder
produced by Hindustan Unilever Limited (HUL). Similarly, you must be familiar
with brands like Colgate for toothpaste, Lux for soap and so on.
7. Pricing the Product
Pricing involves decisions regarding fixation of product prices, keeping in
view the product costs, the capacity of customers to pay, and the prices of the
competitive products. It is an important decision as it influences the sales and so
also the profits.So pricing has to be done very carefully.
8. Promotion of the Product
Promotional activities include advertising, personal selling, sales promotion and
publicity.All promotional activities involve communication with the existing and
prospectivecustomers whereby they are made aware of the product, its distinctive
features, price,availability etc. The objective of promotional activities is to motivate
the customers to buy the product.
9. Distribution
Distribution refers to those activities that are undertaken for sale of
products to then customers and the physical transfer thereof. The first aspect i.e.,
sale of product involves use of middlemen such as wholesalers and retailers whose
services are used for making the products available at convenient points and
helping in their sale to the ultimate consumers. The second aspect i.e., physical
transfer involves warehousing and transportation of goods from the point of
production to the point of sale or the consumer.96 Senior Secondary
The objective of distribution activities is to ensure that consumers get the
goods and services at the place and time most convenient to them and in the
desired quantity.
10. Selling
Selling is an important function of marketing whereby the ownership of
goods andservices is transferred from the seller to the buyer for a consideration
known as price.To initiate and complete the process of selling, the seller has to
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inform the prospectivebuyer about availability of goods, the nature and uses of
products, their prices and the needs of the customers that may be effectively
satisfied by the product. In the process,he arouses customers’ interest in the
product and persuades them to buy it.
11. Storage and Warehousing
Storage refers to holding and preserving goods from the time of their
procurement or production till the time of their sale. In other words storage
involves making suitable arrangements for preserving the goods till they are bought
by the consumers and delivered to them. Warehousing is synonymous to storage
but is normally used for large-scale storage facility for goods and commodities. You
must have seen cold storage where vegetables like tomato, cabbage, potato etc. are
stored to be consumed throughout the year. In marketing it is essential to store
raw material and finished goods to be used later by the company for production or
for resale.
12. Transportation
Transportation refers to the physical movement of goods from one place to
another. In marketing, transport as an activity refers to physical movement of raw
materials as well as finished goods from the place of production to place of
consumption. Goods are transported through various means like railways,
roadways, waterways and airways. For heavy and bulky goods, the railways and
waterways are the best. For other goods, it depends upon the demand, cost
involved, urgency, nature of the goods etc. to decide about a suitable means of
transportation.

4.3 Marketing Vs Selling

The terms ‘marketing’ and ‘selling’ are related but not synonymous.
‘Marketing’ as stated earlier, emphasises on earning profits through customer
satisfaction. In marketing, the focus is on the consumer’s needs and their
satisfaction. ‘Selling’ on the other hand focuses on product and emphasises on
selling what has been produced. In fact it is a small part of the wide process of
marketing wherein emphasis is initially on promotion of goods and services and
eventually on increase in sales volume.
Marketing has long term perspective of winning over consumer loyalty to the
product by providing him maximum satisfaction. However, selling has short-term
prospective of only increasing the sales volume.
In marketing, the consumer is the on king whose needs must be satisfied. In
selling, the product is supreme and the entire focus is its sale. Marketing starts
before production and continues even after the exchange of goods and services has
taken place.
It is so because provision of after sale service is an important component of
marketing process. Selling starts after the production and ends as soon as the
exchange of goods and services has taken place.

Table 4.1 Marketing Vs Selling

S.No Marketing Selling

1. Marketing includes selling and Selling is confined to persuasion of
other activities consumers to buy firm’s goods and
like various promotional measures, services.
marketing research, after sales
service, etc.
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 2. It starts with research on consumer Focus is on earning profit through
needs, maximisation of sales.
wants, preference, likes, dislike
etc., and
continues even after the sales have
taken
place.
3. Focus is on earning profit through Focus is on earning profit through
maximisation of customers’ maximisation of sales.
satisfaction
4. Customer’s need is the central Fragmented approach to achieve
point around short- term gain
whom all marketing activities
revolve
5. It is an integrated approach to All activities revolve around the
achieve long product
term goals like creating, that has been produced.
maintaining and
retaining the customers.
6. Stresses on needs of buyer. Stresses on needs of the seller.
7. Marketing is more ‘pull’than ‘push’ Selling involves ‘push’ strategy
8. Marketing starts with the buyer Selling starts with the seller and is
and focuses constantly on buyer’s preoccupied all the time with the
needs. seller’s needs.
9. Seeks to convert “customer needs” Seeks to convert ‘products’ into “cash”
into ‘products’.
10 It is a broad composite and It narrow concept related to
worldwide concept, more so in this product,sellerand sales activity.
era of globalisation
11 The main job is to find the right The main job is to find the customer
product for your customer for your products.
12 It assumes:”let the seller beware” It assumes:”let the buyer beware”
13 Customer statisfaction is a prime Sales is a prime motive
motive

4.4 Marketing Mix

Meaning:-
Marketing mix prefers to one of the major concept in modern marketing
according Philip kotler “marketing mix is a set of controllable marketing variables
that the firm blends to produce the response it wants in the target market”.
It is the combination of four controllable variables which constitutes the
companies marketing system .the four controllable variables are
• The product
• The price structure
• The promotional activities
• The distribution system
These elements are inter related and inter dependent since decisions in one area
usually actions in other area
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Principles of marketing mix:
“Marketing mix prefers to one of the major concept in modern
marketing according Philip kotler “marketing mix is a set of controllable marketing
variables that the firm blends to produce the response it wants in the target
market”.
The principle ingredients of marketing mix are:-
Marketing mix (Price, Place, Promotion, Product)

Fig 3.7 Marketing mix

When marketing their products firms need to create a successful mix of :

1. the right product
2. sold at the right price
3. in the right place
4. using the most suitable promotion.
Product is the actual offering by the company to its targeted customers which also
includes value added stuff. Product may be tangible (goods) or intangible (services).
While formulating the marketing strategy, product decisions include:
• What to offer?
• Brand name
• Packaging
• Quality
• Appearance
• Functionality
• Accessories
• Installation
• After sale services
• Warranty
Price:
Price includes the pricing strategy of the company for its products. How
much customer should pay for a product? Pricing strategy not only related to the
profit margins but also helps in finding target customers. Pricing decision also
influence the choice of marketing channels. Price decisions include:
• Pricing Strategy (Penetration, Skim, etc)
• List Price
• payment period
• Discounts
• Financing
• Credit terms

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 Using price as a weapon for rivals is as old as mankind. but it’s risky too.
Consumers are often sensitive for price, discounts and additional offers. Another
aspect of pricing is that expensive products are considered of good quality.
Place (placement):
It not only includes the place where the product is placed, all those
activities performed by the company to ensure the availability of the product tot he
targeted customers. Availability of the product at the right place, at the right time
and in the right quantity is crucial in placement decisions.
Placement decisions include:
• Placement
• Distribution channels
• Logistics
• Inventory
• Order processing
• Market coverage
• selection of channel members
Promotion:
Promotion includes all communication and selling activities to pursuade
future prospects to buy the product. Promotion decisions include:
• Advertising
• Media Types
• Message
• Budgets
• Sales promotion
• Personal selling
• Public relations
• Direct marketing
As these costs are huge as compared to product price, So it’s good to
perform a break-even analysis before allocating the budget. It helps in determining
whether the new customers are worth of promotion cost or not.
It often takes time and requires market research to develop a successful
marketing mix. You should not depend on one mix always try new mixes. While
designing the mix, make changes to all mixes in such a way that all conveys the
same message. Don’t confuse your customers by just changing one variable and
keeping the rest same.
Limitation of marketing mix:
Marketing mix (4 P’s) was more useful in early 19′s when production concept
ws in and physical products were in larger proportion. Today, with latest marketing
concepts, marketing environment has become more intergrated. So, in order to
extend the usefulness of marketing mix, some authors introduced a fifth P and
then seven P’s (People, Packaging, Process). But the foundation of Marketing
Mix still stands on the basic 4P’s.

4.5 Product
Anything that is offered to the market for attention, acquisition, use or
consumption that satisfies a want or a need

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4.5.1 Product Life Cycle
A new product passes through set of stages known as product life cycle.
Product life cycle applies to both brand and category of products. Its time period
vary from product to product. Modern product life cycles are becoming shorter and
shorter as products in mature stages are being renewed by market
segmentation and product differentiation.
Companies always attempt to maximize the profit and revenues over the
entire life cycle of a product. In order to achieving the desired level of profit, the
introduction of the new product at the proper time is crucial. If new product is
appealing to consumer and no stiff competition is out there, company can charge
high prices and earn high profits.

4.5.1.1 Stages Of Product Life Cycle

Product life cycle comprises four stages:
• Introduction stage
• Growth stage
• Maturity stage
• Decline stage

Fig 3.8 Stages Of Product Life Cycle

1. Introduction stage
Product is introduced in the market with intention to build a clear identity
and heavy promotion is done for maximum awareness. Before actual offering of the
product to customers, product passes through product development, involves
prototype and market tests. Companies incur more costs in this phase and also
bear additional cost for distribution. On the other hand, there are a few customers
at this stage, means low sales volume. So, during introductory stage company’s
profits shows a negative figure because of huge cost but low sales volume.
At introduction stage, the company core focus is on establishing a market
and arising demand for the product. So, the impact on marketing mix is as follows:
Product
Branding, Quality level and intellectual property and protections are obtained to
stimulate consumers for the entire product category. Product is under more
consideration, as first impression is the last impression.

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Price:
High(skim) pricing is used for making high profits with intention to cover initial
cost in a short period and low pricing is used to penetrate and gain the market
share. company choice of pricing strategy depends on their goals.
Place:
Distribution at this stage is usually selective and scattered.
Promotion:
At introductory stage, promotion is done with intention to build brand
awareness.Samples/trials are provided that is fruitful in attracting early adopters
and potential customers. Promotional programs are more essential in this phase.
It is as much important as to produce the product because it positions the
product.
2. Growth Stage
In this stage, company’s sales and profits starts increasing and competition also
begin to increase. The product becomes well recognized at this stage and some of
the buyers repeat the purchase patterns. During this stage, firms focus on brand
preference and gaining market share. It is market acceptance stage. But due to
competition, company invest more in advertisement to convince customers
so profits may decline near the end of growth stage.
Affect on 4 P’s of marketing is as under:
• Product:
Along with maintaining the existing quality, new features and
improvements in product quality may be done. All this is done to compete
and maintain the market share.
• Price:
Price is maintained or may increase as company gets high demand at low
competition or it may be reduced to grasp more customers.
• Distribution:
Distribution becomes more significant with the increase demand and
acceptability of product. More channels are added for intensive
distribution in order to meet increasing demand. On the other hand
resellers start getting interested in the product, so trade discounts are
also minimal.
• Promotion:
At growth stage, promotion is increased. When acceptability of product
increases, more efforts are made for brand preference and loyalty.
3. Maturity stage
At maturity stage, brand awareness is strong so sale continues to grow but
at a declining rate as compared to past. At this stage, there are more competitors
with the same products. So, companies defend the market share and
extending product life cycle, rather than making the profits, By offering sales
promotions to encourage retailer to give more shelf space to the product than that
of competitors. At this stage usually loyal customers make purchases.
Marketing mix decisions include:
Product:
At maturity stage, companies add features and modify the product in order
to compete in market and differentiate the product from competition. At this stage,
it is best way to get dominance over competitors and increase market share.
Price:
Because of intense competition, at maturity stage, price is reduced in order to
compete. It attracts the price conscious segment and retain the customers.
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 Distribution:
New channels are added to face intense competition and incentives are
offered to retailers to get shelf preference over competitors.
Promotion:
Promotion is done in order to create product differentiation and loyalty.
Incentives are also offered to attract more customers.
4. Decline stage
Decline in sales, change in trends and unfavorable economic conditions
explains decline stage. At this stage market becomes saturated so sales declines. It
may also be due technical obsolescence or customer taste has been changed.
At decline stage company has three options:
• Maintain the product, Reduce cost and finding new uses of product.
• Harvest the product by reducing marketing cost and continue offering the
product to loyal niche until zero profit.
• Discontinue the product when there’s no profit or a successor is
available. Selling out to competitors who want to keep the product.
At declining stage, marketing mix decisions depends on company’s strategy.
For example, if company want to harvest, the product will remain same and price
will be reduced. In case of liquidation, supply will be reduced dramatically.
Limitations of product life cycle (plc):
Product life cycle is criticized that it has no empirical support and it is not
fruitful in special cases. Different products have different properties so their life
cycle also vary. It shows that product life cycle is not best tool to predict the sales.
Sometimes managerial decisions affect the life of products in this case Product Life
Cycle is not playing any role. product life cycle is very fruitful for larger firms and
corporations but it is not hundred percent accurate tool to predict the life cycle and
sales of products in all the situations.

4.6 Pricing
Price goes by a variety of names. Rent is paid for apartment, tuition fee is
paid for education and a consultation fee is paid for doctor. Price is a factor that
creates value for the product.
“price is the amount of money charged for a product or service. It may be
the sum of the values that consumers exchange for the benefits of having or using
the product or service” – PHILIP KOTLER

4.6.1 Pricing Policies

1)Competitive Pricing:
Competitive pricing means setting prices relative to competitors. For example, a
new neighborhood restaurant might use the prices of entrees at other restaurants
in the area to inform pricing decisions. Companies may choose to set prices slightly
below those offered by competitors to attract more customers. Competitive pricing
can potentially result in a price war, in which competitors repeatedly slash prices
in an attempt to undercut one another.
• Under perfect competition, the market consists of many buyers and sellers.
No single buyer or seller can influence the ongoing market price. A seller
cannot charge more than the prevailing price. Trading in a uniform
commodity is the reason for this.

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 • Under monopolistic condition, the market consists of many buyers and
sellers who trade over a range of prices. A range of prices prevails as
sellers can differentiate their offers. They will pay different prices for the
products.
• Under oligopolistic competition, the market consists of a few sellers. They
are highly sensitive to each others pricing and marketing strategies. The
products may be uniform or non-uniform. Each seller is alert to
competitor’s strategies and moves.
• In pure monopoly, the market consists of one seller. The seller may be a
government monopoly or a private non-regulated monopoly. They charge
reasonable price in order to penetrate the market.
2)Cost-Based Pricing Or Break Even Pricing:
Cost-based pricing is a strategy that uses the cost of production as a
baseline to inform pricing decisions. For instance, a company that sells office
supplies might set prices that are 10 percent higher than production costs to
ensure that it covers its expenses. Similarly, a company that sells T-shirts could
simply charge a $5 markup over the production costs of all of its products. Cost-
based pricing is a relatively straightforward strategy since it doesn't take consumer
demand or competition into account.
3)Value Pricing:
Setting prices based on the benefit or value consumers derive from products
is called value pricing. In other words, value-based pricing seeks to set prices based
on what consumers are willing to pay. A business pursuing value-based pricing
might charge prices that are significantly higher than competitors if it believes its
products are more valuable to consumers than those offered by competitors or if
wishes to establish itself as a luxury brand. Value-based pricing requires managers
to have a deep understanding of customer needs and preferences.
4)Mark-Up Pricing:
Mark-up is the difference between the costs of producing and selling a
product (fixed costs plus variable costs) and the market selling price of the product.
It is the difference between what you spend to produce the product and what the
customer spends to purchase it.
It is calculated as follows:
• Fixed Cost per unit = Total Fixed Cost / Units Produced
• Variable Cost per unit = Total Variable Costs / Units Produced
• Selling Price = Fixed Cost per unit Variable Cost per unit Desired Profit
Margin
5)Target Return Pricing:
Using this strategy, a business first determines what level of demand there is
for the product and then identifies the desired profit the business would like to
make from the product. The price is calculated by dividing the total desired profit
by the expected level of sales. Therefore, by meeting the level of expected sales, a
certain amount of profit will be received.
6)Going-Rate Pricing:
In the situation where the business is in a competitive market, the business
charges the average price of what its competitors are charging for a similar or the
same product. This may be the case where there is only a small amount of
competition and the product is a necessity. It is sometimes in a business's best
interest to not compete by undercutting their competition

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4.6.2 Methods Of Pricing
• Odd pricing: It means setting prices that end in odd numbers. Here the
consumer is impressed with the accuracy of the price set on the product.
It is adopted generally by the seller of specialty or convenience goods.
• Psychological pricing: It tries to overcome consumer’s psychological barrier
in respect of price. The price under this method fixed at a full number.
• Customary pricing: These are fixed by customs. When a company sells
goods and services and seeks to maintain them over an extended period
of time, customary prices are changed. Even when cost increases price is
not changed. Organization may reduce package size, and change
ingredients in order to absorb increases in cost.
• Pricing at a prevailing prices: The marketer fixes the price of his product at
the price prevailing in the market. So, it is also known as pricing at the
market. A price above the current price will bring down the sales. This
kind of pricing tries to avoid price competition and price wars. Where the
marketer is not able to differentiate this offering that of the competitor,
he chooses the prevailing prices.
• Prestige pricing: It is based on the assumption that consumers do not buy
goods or services at prices they consider to be too low.
• Price lining: It is quite common with retailers. This is closely related to
psychological and customary prices. It is selling products at a range of
prices with each price representing a distinct level of quality. It involves
two decisions:
• Dual pricing: It means selling the same product at two different prices.
This is also known as discriminatory pricing. Example: railway fares
differ for each class.
• Administered pricing: It is not governed by cost of the product, competitive
pressure, laws of demand and supply, etc., It is dependent solely upon
the policy decisions of the seller. It remains constantly fairly over a long
period.
• Monopoly pricing: In monopoly, the market consists of one seller. This
happens while introducing a new product. The seller is free to price at
what the market can beat. However, he does not always charge the full
price for a number of reasons.
• Skimming pricing; It is related to a new product. Initially, high price is
charged for a new product. Then price is gradually reduced as
competitors enter the market.
• Penetration pricing: A low price is charged in the initial stage or until the
product gains the acceptance of the buyers.
• Mark up pricing: Middlemen like wholesalers and retailers follow mark up
pricing. It add a certain percentage to the manufacturer’s price in order
to determine the retail price.

4.7 Channels Of Distribution

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

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the point of production and the point of consumption thereby creating time, place
and possession utilities.
A channel of distribution consists of three types of flows:-
• Downward flow of goods from producers to consumers
• Upward flow of cash payments for goods from consumers to producers
• Flow of marketing information in both downward and upward direction
i.e. Flow of information on new products, new uses of existing
products,etc from producers to consumers. And flow of information in the
form of feedback on the wants,suggestions,complaints,etc from
consumers/users to producers.
These channels of distribution are broadly divided into four types:-
• Producer-Customer:- This is the simplest and shortest channel in which no
middlemen is involved and producers directly sell their products to the
consumers. It is fast and economical channel of distribution. Under it, the
producer or entrepreneur performs all the marketing activities himself and
has full control over distribution. A producer may sell directly to consumers
through door-to-door salesmen, direct mail or through his own retail stores.
Big firms adopt this channel to cut distribution costs and to sell industrial
products of high value. Small producers and producers of perishable
commodities also sell directly to local consumers.
• Producer-Retailer-Customer:- This channel of distribution involves only one
middlemen called 'retailer'. Under it, the producer sells his product to big
retailers (or retailers who buy goods in large quantities) who in turn sell to
the ultimate consumers.This channel relieves the manufacturer from burden
of selling the goods himself and at the same time gives him control over the
process of distribution. This is often suited for distribution of consumer
durables and products of high value.
• Producer-Wholesaler-Retailer-Customer:- This is the most common and
traditional channel of distribution. Under it, two middlemen i.e. wholesalers
and retailers are involved. Here, the producer sells his product to
wholesalers, who in turn sell it to retailers. And retailers finally sell the
product to the ultimate consumers. This channel is suitable for the
producers having limited finance, narrow product line and who needed
expert services and promotional support of wholesalers. This is mostly used
for the products with widely scattered market.
• Producer-Agent-Wholesaler-Retailer-Customer:- This is the longest channel of
distribution in which three middlemen are involved. This is used when the
producer wants to be fully relieved of the problem of distribution and thus
hands over his entire output to the selling agents. The agents distribute the
product among a few wholesalers. Each wholesaler distribute the product
among a number of retailers who finally sell it to the ultimate consumers.
This channel is suitable for wider distribution of various industrial products.
An entrepreneur has to choose a suitable channel of distribution for his product
such that the channel chosen is flexible,effective and consistent with the declared
marketing policies and programmes of the firm.

4.8 Sales Promotion

Definition: “Sales promotion, in a specific sense, refers to those sales activities
that supplement both personal selling and advertising and coordinate them and
help to make them effective, such as displays, shows, and the expositions,
demonstrations and other non-recurrent selling efforts not in the ordinary routine”.

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4.8.1 Types Of Sales Promotion
It can be divided into three types
1. Consumer sales promotion
2. Dealer sales promotion
3. Sales force promotion
1. Consumers sales promotion:
Activities aimed at reaching the customer at his office or at home may be called
as consumer sales promotion. It is aimed to inform or educate the consumers and
to stimulate the consumers. Success in sales depends on consumer’s cooperation.
It increases the use of product by the consumers, attract new customers. The
following are various sales promotion schemes used at consumer level
a. Sampling: Free samples are given to consumers to increase their interest in
the product. They are also given to introduce a new product and expand the
market. It increases the sales volume when the product is new one. It is an
effective device when the product is purchased often. It is the method of
demand creation. It gives the chance to customers to compare the products
with other substitutes.
The samples may be door delivered, sent by mail, picked up in a store,
attached to another product etc. it is most effective way to introduce the
product. It is the most expensive method. It is costly to distributors also.
b. Coupons : Coupons are supplied along with a product. It is a certificate that
reduces prices. Coupons can be mailed, enclosed in packets or printed in the
advertisements. The purchase is to attract the customers and bring them to
a particular shop to increase the sales of a particular brand.
The coupons are used to introduce new products, to increase the sale
of an established product, to sell new and larger size of a product, and to
encourage the repeated sales. It is a short run stimulus.
c. Demonstration: It is the instructions to educate the consumers in the
manners of using the product. It is the promotional tool to attract the
attention of the consumers. When the products are complex and are of a
technical nature, demo is necessary. It is done in front of the customers.
d. Contests : These are conducted to attract new customers or to introduce the
new products. The consumers are asked to state in a few words why they
prefer that product. To enter into the contest, the consumers must purchase
a product and submit the evidence with the entry form for the contest. To
take part in the contest the consumers must be interested in the product.
This stimulates the sales at the retail level. Entry forms correctly filled are
submitted to panel of judges. They will select the best and prices will be
given to winners.
e. Money refund offers: If the purchaser is not satisfied with the product, a part
or all of the purchasers money will be refunded. It is stated on the package.
It will create new users and strengthen the brand royalty. Sometimes the
money will be refunded if 10 top covers or 10 empty packages are sent back
to the manufacturers.
f. Premium offers: It is a temporary price reduction which increases the instinct
of the buyers. Products are offered free or at a reduced cost as an
inducement for purchasing. It is offered to consumers for some of consumer
goods like soaps, brush etc.
There are many types of premium offers. They are
• Direct premium: A with-pack premium accompanies the product
inside or outside the package.
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 • A reusable container: It is a container which can be reused after
the product is used.
• Free in Mail Premium: Premium items are sent by the companies
by mail to consumers who are requested to send the proof of their
purchase.
• A Self-liquidating premium: it is an item sold below its normal
retail price to consumers. The cost of the additional product is
collected from the buyer at a concessional rates.
• Trading stamps: it is given for purchasing the product in a
particular shop. It is a premium given to the consumer by the
seller in the forms of stamps. These stamps are redeemable at the
stamp redemption centres.
g. Price off offer: It stimulates sales during a slump season. It gives a temporary
discount to the consumers. That is the goods are offered at a rate less than
the labeled rate. Fans are sold at a reduction rate in rainy season.
h. Consumer sweepstakes: Consumers submit their names for inclusion in a list of
prize winning contest. A ticket is given to the consumer of a specific time,
lots will be drawn. The prize winner gets the prize.
i. Buy back allowance: Allowance is given following a previous trade deal. That
is, trade deal offers a certain amount of money for new purchases based on
the purchased quantities. It prevents decline in post trade deal.
j. Free trials: It consists of inviting prospective purchasers to try the product
without cost, in the hope that they will buy the product. Thus, buyers are
encouraged by free trial to stimulate purchase interest.
k. Discount vouchers – a voucher (like a money off coupon).
l. Free gifts – a free product when buy another product.
m. Point of sales materials – e.g. posters, display stands – ways of presenting the
product in its best way or show the customer that the product is there.
n. Free-standing insert (FSI): A coupon booklet is inserted into the local
newspaper for delivery.
o. On-shelf couponing: Coupons are present at the shelf where the product is
available.
p. Checkout dispensers: On checkout the customer is given a coupon based on
products purchased.
q. On-line couponing: Coupons are available on line. Consumers print them out
and take them to the store.
2. Dealer’s Sales Promotion:
The other name for dealer promotion is trade promotion. Manufacturers use
a number of techniques to secure the co operation of wholesalers, retailers, or
the middlemen. These activities increases the enthusiasm of the dealers and
distributors. Following are the dealer’s sales promotion devices:
a) Buying allowance: It is an offer of money off or temporary reduction to dealers
for purchasing in stipulated period of time. It is an very effective to introduce
new products in the market to introduce new products. It encourages the
dealers to buy a quantity that they will not buy in ordinary time. This buying
allowance gives them immediate profit and price redemption.
b) Merchandise allowance: An advertising allowance is given to the dealers for
advertising the features of the manufacturer’s product. A display allowance
is given to them for arranging special displays for the product. After verifying
the promotional work of the dealer, the manufacturers will give a certain
amount of money for promotional activities. They hope that additional efforts
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 will be taken to increase the sales at retail level. Some manufacturers, as an
encouragement, offer additional quantities of merchandise.
c) Price deals: Apart from the regular discount, special discounts are also
allowed to the dealers for a specified quantity of purchase. This special
discount is over and above the regular discount.
d) Push money or premium: Manufacturers may offer push money. It is a
payment in cash or gifts given to dealers or to their sales force to push the
manufacturer’s product. To push this brand, the manufacturer will offer free
specialty items that carry company’s name such as pens, pencils, calendars
etc. this is a device for aggressive selling.
e) Co-operative Advertising: Dealer’s spend money in advertising manufacturer’s
product with the consent of the manufacturers. The dealer can claim an
allowance by giving the proof of the advertisement. This is an indirect
advertising for the manufacturer. It will increase the sales of the product.
f) Dealer’s Sales contest: This is an indirect way of boosting the sales. This type of
contest is conducted at the level of retailers and wholesalers. This is an form
of window display, store display, sales etc. Prize is awarded to the
outstanding achievements. This method is aimed at stimulating and
motivating distributors, dealers etc.
g) Dealer’s listed promotion: Listing dealer is an advertisement. It gives a list of
dealers or retailers who stock the product who are engaged in its promotion.
This method introduces the dealers to stock the products and the consumer
are encouraged to buy the products.
h) Dealer’s Gift: Manufacturer’s give attractive and useful articles to dealers
against their order. The articles are transistor, radio, TV set, clock etc. some
manufacturers offer free holidays family tour to dealers who place more
orders.
i) Point-of-Purchase: This play the role of silent salesman. Point-of-purchase is
also known as dealer-aids, dealer displays, dealer hopes etc. the competition
among the retailers or traders has encouraged this method. It is generally at
the level of retailers shop. For instance, floor displays, wall signs, posters etc
are examples of point-of-purchase materials. This method is example for
consumer goods as well as industrial goods.
3. Sales Force Promotion:
As dealer and consumer promotion, the sales force promotion also is a
necessary one. The activities of sales force must be induced. In the channel of
distribution the role of salesman is very important. The idea of sales force
promotion is to make the salesman’s effect more effective. The tools for sales force
promotion are,
 Bonus to sales force: The manufacturer sets a target of sales for a year. If the
sales force sell the products above the targeted sales, bonus is offered to
them. This is an encouragement incentive given to the sales people to sell
more products.
 Sales force contest: To increase the interest and efforts of sales by sales force
over a specified time, these contests are announced. The prices are given to
the salesman who secures the maximum sales in sales contest. Thus it
stimulates the salesmen to sell more products.
 Salesmen Meetings and Conferences: The idea behind these is to educate, inspire
and reward salesmen. Encouragement is given to them during the
discussion. New selling techniques are described to them and discussed in
the conference.

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How sales promotion differ from advertising:
• Whereas advertising is mostly an indirect and subtle approach towards
persuading consumers to buy a product, sales promotion is a direct and
almost open inducement to the consumer to immediately try the product
• While advertising normally has long term objectives like building brand
awareness or building consumer loyalty or repositioning a brand, sales
promotion performs an immediate task of increasing current sales.
• While advertising helps sales by adding some value to the product, sales
promotion aids selling by merely changing the price-value relationship of
the product

4.9 Advertising
Definitions:
“Advertising is a paid form of non personal presentation and promotion of ideas,
goods or services by an identified sponsor” – American Marketing Association
“Advertising is a mass communication of information intended to persuade buyers
as to maximize profits” – Littlefield.
“Advertising consists of all the activities in presenting to a group, a non-personal,
oral or visual, openly sponsored message regarding a product, service or idea” -
Stanton
“To give public notice or to announce publicly” – Webster
Objectives Of Advertising:
• Increases sales volume thereby reducing unit production costs
• Stabilizes firms units
• Increases percentage of net profit
• Secure leadership or domination
• Protects a company from competition
• Sets a standard for organizations performance
• Creates new uses of the product
• Maintain both wholesale and retail prices
• Teaches values to buyers
• Encourage the maintenance and improvement of quality
• Creates mass demand
• Has a vast educational influence

Types Of Advertising
i)Product advertising: It attempts to inform and stimulate the market about the
advertiser’s product or services. Businesses, government organization and private
non businesses use product advertising. The purpose is to promote the uses,
features, and images of products. The following are the categories comes under
this advertising.
• Direct action product advertising: It stimulates the buyer to buy the
products immediately. It expects quick response from the buyer. On
seeing the advertisement, the buyer may order the product by mail or he
may buy immediately in a retail store.
• Indirect action advertising: It seeks to stimulate demand over a long period.
They gain recognition from buyers for the manufacturer’s brand. It
increases the demand for commodities and increases sales volume. It
increases favourable attitude towards the product. So, when the buyer
goes to the market, he will buy the advertisers product.
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 • Pioneer advertising: When new kinds of goods are produced for the first
time, the manufacturer has to explain the product features. He should
make the buyer aware of the product, how it can be used and where it is
available.
• Selective advertising: Having created mass demand for a product of a
particular class, the manufacturer has to popularizes his brand among
buyers. So, it seeks to create selective demand for a particular brand.
ii)Institutional advertising: It creates a favourable company image which markets the
product or service. Service organizations such as life insurance, SBI, Indian Bank
focus on creating a good image among the public.
iii)Patronage institutional advertising: It appeals to the patronage motives of buyers. It
aims at building long term relationship with customers. It explains about the
manufacturer, his policies and his personnel
iv)Public service institutional advertising: It aims at garnering public support. For
example, conservation of natural resources, savings, security etc., are the subject
matter of public service. Generally, it undertakes by the government.

4.9.1 Advantages Of Advertising:

Advantages To Manufacturers
• Increased sales volume: Advertising increases the sales volume of the product
thereby reducing unit production costs. The manufacturer undertakes mass
production of goods and reaps the benefits of large scale production.
• Increased net profit: Ad makes price reduction possible. When prices are lower,
goods are widely demanded by customers. This leads to increased sales of the
products or services. When sales increases profit increases.
• Stability in sales volume: The market is always highly competitive. Large number
of players are selling similar goods. Modern technology makes possible
product differentiation. Every marketer is striving to retain his market share.
• Control over price: Most of the advertisements carry the product price. So, the
retailers cannot charge a price higher than that printed on the product label.
• New market: Ad creates new market for the product advertised. New crop of
customers perceive the product favourably. So, the advertiser can go in for
market expansion. He can also become the market leader.
• Creating goodwill: Ad carries a message about the product and its
manufacturer. So, it creates a favourable climate for selling the product. It
builds the product image and goodwill of the manufacturer.
• Wide information: Ad broadens the buyers knowledge. The purpose of ad is to
convey the product information. Any change in quality, or price can be
immediately brought to the attention of buyers.
Advantages To Salesman
• Favourable climate for selling: Ad creates a favouralbe climate for the job of
salesman. Even before the salesman approaches the customers, they have
background knowledge of the product. When salesman contacts customers,
they receive the product well.
• Simplifies salesman job: Ad are salesmanship in print. Ad is more effective way
of establishing contact with customers. it attempts to persuade people to
purchase foods. The aim of ad and salesmanship is therefore the same.
• Least effort: Ad easily reaches the masses. Customers gain adequate
amount of knowledge of the product. So, the salesman need not explain
every minute product details.

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 • Product awareness: Ad creates a product awareness among the buyers.
Buyers become familiar with the new and improved products available in the
market. Since, ad are attractive, they create an customers awareness
Advantages To Wholesalers And Retailers
• Increased turnover: Ad has mass appeal. It reaches target customers and
creates an awareness among them. People gather sufficient information
about the product by going through the advertisement. They are motivated
to buy the product.
• Attracts customers: A customer cannot shy away from the influence of
advertisements. These are released for all products. They have become the
order of life. Ad catches the people’s attention and induces customers.
• Increases reputation: A dealer is respected on the product’s strength range he
carries. Ad popularizes the product. Product popularizes the dealers.
• Publicity: Dealers earn p0rofit without spending advertisements. Ads are
paid for by the manufacturers. Thus, wholesalers get publicity for the
product they deal in.
Advantages To Customers
• Wise purchase: Ads has educative value. It interprets the product features in
terms of customers needs and wants. It gives the useful information about
the product to buyers. Some ads compare the product’s features advertised
with those of substitute and rival products.
• Providing link: Ads provide a link between the buyers and manufacturers.
They speak the language of potential customers. Manufacturers reach the
message to the target audience.
• Reduced prices: Ads increases the sales volume thereby reducing unit
product cost. As it enables mass production, production cost is reduced.
• Educative value: Ads inform customers about the release of improved version
of new products. They explain as to how the new product is an improved
version over the earlier ones.
• Mail order business: Ads plays a crucial role in mail order business. On
seeing the ads, people can directly buy from mail order houses. People living
in villages and remote places can buy goods through mail.
4.9.1 Types Of Advertisement Media
Table 4.5 Media Advantages Disadvantages
Media Advantages Disadvantages
Television • Offers mass coverage. • Offers low electivity.
• High level of reach combined impact • Short span of
of sight, sound & motion, prestige message life.
value. • High cost.
• Low cost per exposure. Attracts • High production
attention. costs.
• Creates Advertising
Clutter.
• Wastage coverage.
Radio • Local Coverage. • Only audio.
• Lower Cost. • Noise.
• High Frequency, • Low on attention
• Focused Segment Selection. getting.
• Low Production Costs. • Message short
lived.
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Newspapers • Mass Coverage, • Short life of
• Low Cost, Large Space, advertisement
• Short Lead time for ad placing. Clutter.
• Ad position choice possible, • Low Attention
• Good for current ads, getting.
• Reader controls exposure, • Poor Production
• Coupons can be inserted. Quality.
• Selective Exposure.

Magazines • Potential for focused segmentation. • Long lead time for ad

• Very good production quality. placing.
• Longevity of message. • Only Visual.
• High information content. • Low frequency.
• More readers per copy. • Lack of flexibility.
Outdoor • Good for specific location. • Short exposure time.
• High repetition. • Short message.
• High visibility. • Poor image.
Direct Mail • High level of selectivity. • High cost per contact
• Reader controls exposure. • Clutter often thrown
• High information content. as joint mail.
• Opportunity for repeat exposures.
Internet • User controlled. • Limited creative
• Increased attention and involvement. capabilities.

4.10 Marketing Research

Introduction: It is the method of gathering data to be used in formulating policies
and plans. Successful executives do not act on guess work. They get accurate
information about market conditions. Marketing research enables the
manufacturer to know the latest trends prevailing in the market and thus alter his
plans and strategies.
Definition:
“Marketing research is the systematic gathering, recording and analyzing of
data about marketing problems to facilitate decision-making” – Cundiff and Still
“The systematic gathering, recording and analyzing of data about problems relating
to the marketing of goods and services. Such research may be undertaken by
impartial agencies or by business firms or their agencies for the solution of their
marketing problems and the inclusive term which embrace all research activities
carried on in connection with the management of marketing work” – American
Marketing Association.
Market and marketing research:
• “Some companies use the term market research instead of marketing
research. Market research describes research into markets: their size,
geographical distribution, income and so forth. It does not cover the idea of
research into the effects of marketing efforts on market.” – Kotler.
• The term marketing research is concerned with the entire sphere of
distribution. It deals with the problems of the market in the narrow sense of
the term
• Market research is a branch of marketing research. It is only a sub function
of marketing research.It isconcerned with investigation and measurement of
market demand. It studies the future and the present customer. Size of
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 market, customers, needs and motives, degree of competition, selling
activities, details of customers as to their income, education, dealer
preference etc, are covered by market research.
Objectives Of Marketing Research
• Study the economic factors affecting the sales volume and their
opportunities
• Study the competitive position of rival products
• Study the price trends prevailing in the market
• Examine the system of distribution
• Study the relative advantages and limitations of the product offered for
sale
• Find new methods of packaging
• Analyse the market size of the existing companies
• Estimate future sales of the product
• Solve the problems in marketing of goods and services
Advantages of marketing research:
• Supply the data to be used in selling salesman quota and territorial
quotas and in planning production
• Supply the facts for fixing the budget
• Supply materials for sales talks
• Ascertain the consumer’s like and dislikes
• Find the dealer’s reactions to given policies
• Furnish data for fixing dealer’s territories and quota
• Measure the purchasing capacity of a given territory
Limitations of marketing research:
• Expensive
• Time consuming
• May not be accurate
• Very difficult to measure the effectiveness of marketing research

4.10.1 Steps In The Marketing Research Process

Step: 1- Problem Definition: The first step in research is formulating a research
problem. It is the most important stage in applied research as poorly defined
problems will not yield useful results. It is rightly said that “a problem well defined
is half solved”. Poorly defined problems cause confusion and do not allow the
researcher to develop a good research design.
In order to define a problem properly, we should determine the research nature.
Then a preliminary analysis may be carried out applying the techniques viz.,
• Situation analysis: It means the circumstances under which the research is
being conducted. It is useful take note of the factors affecting the
marketing operations in a business organization.
• Informal investigation: It refers to the discussion with a few selected
customers, dealers, top management personnel of the company, and
other parties concerned with the problem. It may be designated as the
pilot survey
Step: 2 - Research Design: After having defined the problem, the next step is to
formulate the objectives of research plan, which will specify the ways of achieving
research objectives. A research design specifies the methods and procedures for
conducting a particular study. The researcher should specify the approach he

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intends to use with respect to the proposed study. The research design can be
grouped into three categories.
• Exploratory research: It focuses on the discovery ideas and is generally
based on secondary data. It is a preliminary investigation which does
not have rigid design.
• Descriptive research: It is undertaken when the researcher wants to
know the characteristics of certain groups such as age, educative
level, income, occupation etc. In contrast,descriptive studies are well
structured.
• Casual research: It is undertaken when the researcher is interested in
knowing the cause and effect relationship between two or more
variables. Such studies are based on reasoning along well tested
lines.
Step: 3 - Data Collection: There are two types of data sources namely:
Primary data: It does not exist already in records and publication. The researcher
has to gather primary data a fresh for the specific study undertaken by him.
Original data collected specifically for a current research are known as primary
data. It can be collected from customer, retailers, distributors etc.
Methods of collecting primary data:
• Experiment method: It is employed to collect primary data. It involves
controlled experiment which stimulates the real market situation. The
manufacturer carries out a small experiment and gets valuable information.
It will be of great help in designing large scale marketing programme.
• Observation method: In this, researcher data are collected by observing the
respondents in a marketing situation. The customer may be observed while
buying a particular product. Then he may be asked why he preferred this
type of product. The actions of a customer are watched personally or
mechanically. The buyer is not aware of his being observed. So, his actions
are natural and not pre determined.
• Survey method: In this, information is gathered directly from individual
respondents either throughpersonal interview or through mail
questionnaires or telephone interviews.
Secondary data: It refers to those data which are gathered for some other purpose
and are already available in the firm’s internal records and commercial, trade or
govt., publications.
Step: 4 - Research Instrument: In survey method, questionnaire is the instrument
most frequently used. In observation method instruments like cameras, tapes, etc
are used.
Sampling plan: The research must decide the sampling unit (who is to be surveyed)
the sample size (how many units to be surveryed) the sampling procedure (how to
conduct the survey) and contact method (media).
Field work: The actual data collection operation is called fieldwork. It is the most
expensive of all the steps. The common problems during a field work are “not at
homes, refusal to cooperate, interviewer or respondent bias” etc.
Step: 5- Data Analysis: Data analysis and interpretation are possible only when data
is processed. Data processing implies data reduction namely editing, tabulating,
analyzing and interpretation.
• Editing: It is a kind of verifying the answers are consistent and logical
• Tabulation: It implies data arrangement as to classes and weightages
• Coding: It is a must when data is fed to electronic data processing units

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 • Analysis: The researcher examines the tables so designed, compares them,
use statistical techniques
• Interpretation: It is a minute and meticulous work involving the use of
mental facilities of sound judgement and clear vision to reach a cut-off point.
Step:6 - Report Presentation: When the analysis and interpretation are over, the
researcher has to prepare the report. The researcher has to prepare the report with
great care keeping the following points in mind.
The layout of the report should contain the following:
• Preliminary pages
• The main text
• The end matter
The researcher has to
• Write thesis in a concise and objective style in simple language
• Provides figures, charts and illustrations in the main report
• Mention the various constraints experienced in conducting the research

4.11 Sales Forecasting

Sales forecasting is estimating what a company's future sales are likely to be
based on sales records as well as market research. The information used in them
must be well organized and may include information on the competition and
statistics that affect the businesses' customer base. Companies try to forecast sales
in hopes of identifying patterns so that revenue and cash flow can be maximized.
Sales forecast
• Actual Sales Estimate (in dollars or units)
• by one company
• In a given territory
• For a given time
• Under a proposed marketing plan
• Under stated marketing environmental assumptions
Types Of Forecasting
There are two major types of forecasting, which can be broadly described as
macro and micro:
• Macro forecasting is concerned with forecasting markets in total. This is
about determining the existing level of Market Demand and considering what
will happen to market demand in the future.
• Micro forecasting is concerned with detailed unit sales forecasts. This is
about determining a product’s market share in a particular industry and
considering what will happen to that market share in the future

4.11.1 Sales Forecast Methods

1) Qualitative method
a)Expert’s opinion.
b) Survey of buyer’s expectation.
c) Sales Force composite.
d) Delphi technique.
e) Historical analogy.
2) Quantitative method:

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 a) Test Marketing.
b)Naïve method.
c)Trend method.
d)Moving average
e)Regression method.
f)Exponential smoothing.
Qualitative Method -it based on judgments-expert/collective.
a) Expert’s opinion method – Simplest method used in commercial organisation for
forecasting future demand of product/service. Marketing professionals/channel
members and professional bodies (market consumers) are asked to give their
opinion method works in 2 days.
1) Seasoned industries.
2) Group of industries
Discussion takes place based on key executive sub their op. and discussion is done
based on it and consensus is reached.
b) Delphi Method: - Improvement over expert opinion method forecast is based on
likely time period of occurrence of certain future Group of exp and a Delphi
coordinator. Gives their opinion include to co-ordinate. The co-or processes,
complies, refers then back to the panel member. (Process is on for at least 3
rounds) Process stops when consensus is obtained and deviant opinion given with
reason.
Coordinator carries out stats analysis of the response, deriving average
answers, variability etc. Only coordinator is aware of the members present in the
team and access to all responses. Delphi for is median forecast-Method widely
used
c) Sale force composite method – Sales people come up with forecast. Since people in
direct contact like sales people/ channel members are better informed about the
trends and demand for the product. Ind forecast is combined with over all demand
forecast. Results can be affected by the staff’s biases, lack of interest in the
process, eg. About economic changes and trends. This method is used to generate
forecast for industrial equipment manufacturing industries. Eg: - PET mach/
printing machinery.
d) Survey of buyer’s expectation- Buyer’s intention and market test sample of potential
buyer’s – information about product performance etc. Likes/ dislikes. (4 P’s)
Gathering this information for demand forecasts. Negative point:- Actual demand
varies from stated intention.Positive point:- method effective for relatively few
buyers usually for B2B buyers.
e)Historical analogy method- Used where there is not past demand data.
Eg: - New product, but markets sold other product with similar features.
Marketing person may use historical analogy between eg: - two products and derive
the demand for the new product using historical data.
Quantitative Method
a)Test Marketing- Company’s selected a limited no of cities with population which are
representative of target customer- demographic terms – age, income, lifestyle and
shopping habits etc. A product is made available at outlets and features are
highlighted either thro in store promotion/ small advertising campaign. Then the
performance is tracked through consumer research and modification-before
national launch.

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Target objective is
1) To study level of acceptance.
Second type of test market with similar characteristics is identified- one is
called ‘test market’- same as above mention without promo campaign – 2nd is
called ‘Control Market’ – where Product is sold with a promotional campaign.
The different between both markets is a measure of effectiveness of promotion
campaign. Any inconsistency with sales variation in both the market is an indicator
of the gap between customer perception and performance of the product feature.
Result- One can measure effectiveness of product helps in making customer loyal,
campaigns effectiveness and in store promotion.
b)Naive Method:
This is one of the simplest method- future sales are forecasted as the value
of sales for previous period .i.e. Next month’s sales are predicted based on the
month’s performance. Negative method ignores irregular component and assumes
that seasonality and cyclicality do not exist and trend is flat. A more complex form,
trend is projected in a/c s for influence of trend components in time series. The
sales manager is required to calculate the rate of change in sales by dividing the
most recent period by the time period immediately preceding it.

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 Chapter 5: Industrial Psychology And Personal Management

5.1 Industrial Psychology Or Organization Psychology

Industrial organizational psychology is the branch of psychology that applies
psychological theories and principles to organizations. Often referred to as I/O
psychology, this field focuses on increasing workplace productivity and related
issues such as the physical and mental well being of employees. Industrial
organizational psychologists perform a wide variety of tasks, including studying
worker attitudes and behavior, evaluating companies, and conducting leadership
training. The overall goal of this field is to study and understand human behavior
in the workplace.
Six Key Areas Of I/O Psychology
Industrial organizational psychologists work in one of six major subject areas:
• Training and development: Professional in this area often determine what type
of skills are necessary to perform specific jobs as well as develop and
evaluate employee training programs.
• Employee Selection: This area involves developing employee selection
assessments, such as screening tests to determine if job applicants are
qualified for a particular position.
• Ergonomics: The field of ergonomics involves designing procedures and
equipment designed to maximize performance and minimize injury.
• Performance Management: I/O psychologists who work in this area develop
assessments and techniques to determine if employees are doing their jobs
well.
• Work Life: This area focuses on improving employee satisfaction and
maximizing the productivity of the workforce. I/O psychologists in this area
might work to find ways to make jobs more rewarding or design programs
that improve the quality of life in the workplace.
• Organizational Development: I/O psychologists who work in this area help
improve organizations, often through increasing profits, redesigning
products, and improving the organizational structure.

5.2 Scope Of Industrial Psychology

Industrial psychology is a branch of behavioral science that directs its
research and courses of study to business. Departments of management, design,
production, pricing, marketing and distribution all benefit from knowledge of
industrial psychology
i)Work Behavior
The psychology of work behavior is one form of industrial psychology.
Attitudes of employees as related to their performance is a main theme. Variables
in employee personalities and abilities are listed and situational and background
differences are studied. The industrial psychologist also studies human mental and
physical abilities, administering tests and assessing values and establishing job-
related criteria. Human-error factors also are monitored, as are costs and causes of
accidents.
ii)Management
Many management skills fall under the umbrella of industrial psychology.
Managers must be educated concerning the area of employee supervision.
Expertise in perception and assessment is required in order to make proper

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decisions as to whether to promote or admonish. Determination of training needs
and abilities to resolve conflict are skills that managers would learn in their study
of industrial psychology. Motivational tactics are imperative to the success of
industry, thus the industrial psychologist also may devise financial or other
incentives.
iii)Environmental Design
Environmental design is another area of industrial psychology. The
psychology of the work space concerns the environment of the worker. Performance
can be affected adversely or positively depending upon the employee’s
surroundings. The industrial psychologist recommends physical arrangements,
colors, noise, lighting and ergonomics.
iv)Product Design
Product design is another avenue of industrial psychology that is important
to a successful business. A product that has been designed bearing safety,
efficiency and desirability in mind may have a higher chance of being successful in
the marketplace. The industrial psychologist can collect data and analyze buying
trends to make recommendations for a feasible, salable design.
v)Organizational Studies
The overall function of the business may be evaluated by the industrial
psychologist. Data relating to job descriptions and hierarchy may be studied and
recommendations put forth.

5.3 Personnel Management

• personnel management can be defined as obtaining, using and maintaining
a satisfied workforce.
• It is a significant part of management concerned with employees at work and
with their relationship within the organization.
• According to Flippo, “Personnel management is the planning, organizing,
compensation, integration and maintainance of people for the purpose of
contributing to organizational, individual and societal goals.”

5.3.1 Human Resource Management (Hrm)

The process of hiring and developing employees so that they become more
valuable to the organization.
According to Decenzo and Robbins:-
"Human resource management is a process consisting of four functions-
acquisition, development, motivation and maintenance of human resources."

5.3.2 Personnel Management Vs Human Resource Management

Human resource management is the new version of personnel management.
There is no any watertight difference between human resource management and
personnel management. However, there are some differences in the following
matters.
1. Personnel management is a traditional approach of managing people in
the organization. Human resource management is a modern approach of managing
people and their strengths in the organization.
2. Personnel management focuses on personnel administration, employee
welfare and labor relation. Human resource management focuses on acquisition,
development, motivation and maintenance of human resources in the organization.
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 3. Personnel management assumes people as a input for achieving desired
output. Human resource management assumes people as an important and
valuable resource for achieving desired output.
4. Under personnel management, personnel function is undertaken for
employee's satisfaction. Under human resource management, administrative
function is undertaken for goal achievement.
5. Under personnel management, job design is done on the basis of division
of labor. Under human resource management, job design function is done on the
basis of group work/team work.
6. Under personnel management, employees are provided with less training
and development opportunities. Under human resource management, employees
are provided with more training and development opportunities.
7. In personnel management, decisions are made by the top management as
per the rules and regulation of the organization. In human resource management,
decisions are made collectively after considering employee's participation,
authority, decentralization, competitive environment etc.
8. Personnel management focuses on increased production and satisfied
employees. Human resource management focuses on effectiveness, culture,
productivity and employee's participation.
9. Personnel management is concerned with personnel manager. Human
resource management is concerned with all level of managers from top to bottom.
10. Personnel management is a routine function. Human resource
management is a strategic function.

5.4 Motive
Motive is an idea or emotion which prompts an individual to take a certain
course of action. Motive is a reason for the expression of a particular ability
Motivation
"Motivation" is a Latin word, meaning "to move". Human motives are internalized
goals within individuals. Motivation may be defined as those forces that cause
people to behave in certain ways. Motivation encompasses all those pressures and
influences that trigger, channel, and sustain human behavior. Most successful
managers have learned to understand the concept of human motivation and are
able to use that understanding to achieve higher standards of subordinate work
performance.
According to Koontz and O'Donnell, "Motivation is a class of drives, needs, wishes
and similar forces".
Importance Of Motivation
A manager's primary task is to motivate others to perform the tasks of the
organization.Therefore, the manager must find the keys to get subordinates to
come to work regularly and ontime, to work hard, and to make positive
contributions towards the effective and efficient achievement of organizational
objectives.
The various benefits of motivation are:-
• Motivation is one of the important elements in the directing process. By
motivating the workers, a manager directs or guides the workers' actions in
the desired direction for accomplishing the goals of the organization.
• Workers will tend to be as efficient as possible by improving upon their skills
and knowledge so that they are able to contribute to the progress of the
organization thereby increasing productivity.

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 • For performing any tasks, two things are necessary. They are: (a) ability to
work and (b) willingness to work. Without willingness to work, ability to work
is of no use. The willingness to work can be created only by motivation.
• Organizational effectiveness becomes, to some degree, a question of
management's ability to motivate its employees, to direct at least a
reasonable effort towards the goals of the organization.
• Motivation contributes to good industrial relations in the organization. When
the workers are motivated, contented and disciplined, the frictions between
the workers and the management will be reduced.
Types Of Motivation Techniques
If a manager wants to get work done by his employees, he may either hold
out a promise of a reward (positive motivation) or he/she may install fear (negative
motivation). Both these types are widely used by managements.
a) Positive Motivation:
This type of motivation is generally based on reward. A positive motivation involves
the possibility of increased motive satisfaction. According to Flippo - "Positive
motivation is a process of attempting to influence others to do your will through the
possibility of gain or reward". Incentive motivation is the "pull" mechanism. The
receipt of awards, due recognition and praise for work-well done definitely lead to
good team spirit, co-operation and a feeling of happiness.
• Positive motivation include:-
• Praise and credit for work done
• Wages and Salaries
• Appreciation
• A sincere interest in subordinates as individuals
• Delegation of authority and responsibility
b) Negative Motivation:
This type of motivation is based on force and fear. Fear causes persons to
act in a certain way because they fear the consequences. Negative motivation
involves the possibility of decreased motive satisfaction. It is a "push" mechanism.
The imposition of punishment frequently results in frustration among those
punished, leading to the development of maladaptive behaviour. It also creates a
hostile state of mind and an unfavourable attitude to the job. However, there is no
management which has not used the negative motivation at some time or the other.

5.4.1 Motivation Theories

Some of the motivation theories are discussed below
a) McGregor’s Theory X and Theory Y:
McGregor states that people inside the organization can be managed in two
ways. The first is basically negative, which falls under the category X and the other
is basically positive, which falls under the category Y. After viewing the way in
which the manager dealt with employees, McGregor concluded that a manager’s
view of the nature of human beings is based on a certain grouping of assumptions
and that he or she tends to mold his or her behavior towards subordinates
according to these assumptions
Under the assumptions of theory X :
• Employees inherently do not like work and whenever possible, will attempt
to avoid it.
• Because employees dislike work, they have to be forced, coerced or
threatened with punishment to achieve goals.
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 • Employees avoid responsibilities and do not work fill formal directions are
issued.
• Most workers place a greater importance on security over all other factors
and display little ambition.
In contrast under the assumptions of theory Y :
• Physical and mental effort at work is as natural as rest or play.
• People do exercise self-control and self-direction and if they are committed to
those goals.
• Average human beings are willing to take responsibility and exercise
imagination,
• ingenuity and creativity in solving the problems of the organization.
• That the way the things are organized, the average human being’s
brainpower is only partly used.
• On analysis of the assumptions it can be detected that theory X assumes
that lower-order needs dominate individuals and theory Y assumes that
higher-order needs dominate individuals. An organization that is run on
Theory X lines tends to be authoritarian in nature, the word “authoritarian”
suggests such ideas as the “power to enforce obedience” and the “right to
command.” In contrast Theory Y organizations can be described as
“participative”, where the aims of the organization and of the individuals in it
are integrated; individuals can achieve their own goals best by directing their
efforts towards the success of the organization.
b) Abraham Maslow’s “Need Hierarchy Theory”:
One of the most widely mentioned theories of motivation is the hierarchy of
needs theory put forth by psychologist Abraham Maslow. Maslow saw human
needs in the form of a hierarchy, ascending from the lowest to the highest, and he
concluded that when one set of needs is satisfied, this kind of need ceases to be a
motivator.
As per his theory these needs are:
(i) Physiological needs:
These are important needs for sustaining the human life. Food, water, warmth,
shelter, sleep, medicine and education are the basic physiological needs which fall
in the primary list of need satisfaction. Maslow was of an opinion that until these
needs were satisfied to a degree to maintain life, no other motivating factors can
work.
(ii) Security or Safety needs:
These are the needs to be free of physical danger and of the fear of losing a job,
property, food or shelter. It also includes protection against any emotional harm.
(iii) Social needs:
Since people are social beings, they need to belong and be accepted by others.
People try to satisfy their need for affection, acceptance and friendship.
(iv) Esteem needs: According to Maslow, once people begin to satisfy their need to
belong, they tend to want to be held in esteem both by themselves and by others.
This kind of need produces such satisfaction as power, prestige status and self-
confidence. It includes both internal esteem factors like selfrespect, autonomy and
achievements and external esteem factors such as states, recognition and
attention.
(v) Need for self-actualization:
Maslow regards this as the highest need in his hierarchy. It is the drive to become
what one is capable of becoming; it includes growth, achieving one’s potential and
self-fulfillment. It is to maximize one’s potential and to accomplish something.
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 Fig:5.1 self-actualization:
All of the needs are structured into a hierarchy and only once a lower level of need
has been fully met, would a worker be motivated by the opportunity of having the
next need up in the hierarchy satisfied. For example a person who is dying of
hunger will be motivated to achieve a basic wage in order to buy food before
worrying about having a secure job contract or the respect of others.
A business should therefore offer different incentives to workers in order to help
them fulfill each need in turn and progress up the hierarchy. Managers should also
recognize that workers are not all motivated in the same way and do not all move
up the hierarchy at the same pace. They may therefore have to offer a slightly
different set of incentives from worker to worker.
c) Frederick Herzberg’s motivation-hygiene theory:

Fig(5.2) Frederick Herzberg’s motivation-hygiene theory:

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

5.5 Morale
• Morale is a mental condition or attitude of [individuals and groups] which
determine their willingness to co-operate.
• Morale is defined as the extent to which an individual’s needs are satisfied
and the extent to which the individual perceives satisfaction as stemming
from his total job situation.
• Morale is defined as a measure of extent (or level as either high or low) of
voluntary co-operation demonstrated by an individual or a workgroup and of
the intensity of the desire to attain common goals.
Reasons for low morale
• Too fine division of authority and responsibility.
• Improper selection of employees
• Too small a real no. of executives
• Over reliance on organizational charts.
Advantages of high morale
• Perseverance at work
• Loyalty to organization & its leadership.
• Good discipline
• Strong organizational stamina.
• A high degree of employee interest in the job.
• Reasonable employee initiative.
• Team spirit.
• Resistance to frustration.
• A keen teamwork on part of the employees.
• Organizational Commitment and a sense of belongingness in the employees
mind.
• Immediate conflict identification and resolution.
• Healthy and safe work environment.
• Effective communication in the organization.
• Increase in productivity.
• Greater motivation.
Disadvantages of low morale
• High rate of absenteeism.
• High labour turnover.
• Friction, jealously & frustration among workers.
• More complaints and employee grievances.
• Enmity towards management.
• Greater grievances and conflicts in organization.
• High rate of employee absenteeism and turnover.
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 • Dissatisfaction with the superiors and employers.
• Poor working conditions.
• Employees frustration.
• Decrease in productivity.
• Lack of motivation.
Factors Affecting Or To Be Considered For Morale
1. Job factors:
• Nature of job.
• Fatigue & boredom associated with the job.
• Employee interest in job
• Job satisfaction
• Confidence and individual members of the group.
• Nature of leadership & supervision.
• Working & environmental conditions.
• Condition of working equipment.
2. Personal factors
• Background.
• Age.
• Sex.
• Mental & emotional condition of employee.
• Intelligence.
• Skill & proficiency.
• Training.
• Experience etc.
Other factors:
• Organizational efficiency .
• Objectives of the organizational .
• Unfair selection & promotion.
• Lack of recognition.
• Rewards & incentives etc.
Difference Between Motivation And Morale
• While motivation is an internal-psychological drive of an individual which
urges him to behave in a specific manner, morale is more of a group
scenario.
• Higher motivation often leads to higher morale of employees, but high morale
does not essentially result in greatly motivated employees as to have a
positive attitude towards all factors of work situation may not essentially
force the employees to work more efficiently.
• While motivation is an individual concept, morale is a group concept. Thus,
motivation takes into consideration the individual differences among the
employees, and morale of the employees can be increased by taking those
factors into consideration which influence group scenario or total work
settings.
• Motivation acquires primary concern in every organization, while morale is a
secondary phenomenon because high motivation essentially leads to higher
productivity while high morale may not necessarily lead to higher
productivity.
• Things tied to morale are usually things that are just part of the work
environment, and things tied to motivation are tied to the performancethe
individual.

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5.6 Fatigue
Fatigue is the state of feeling very tired, weary or sleepy resulting from
insufficient sleep, prolonged mental or physical work, or extended periods of stress
or anxiety. Boring or repetitive tasks can intensify feelings of fatigue. Fatigue can
be described as either acute or chronic.
Acute fatigue results from short-term sleep loss or from short periods of heavy
physical or mental work. The effects of acute fatigue are of short duration and
usually can be reversed by sleep and relaxation.
Chronic fatigue syndrome is the constant, severe state of tiredness that is not
relieved by rest. The symptoms of chronic fatigue syndrome are similar to the flu,
last longer than six months and interfere with certain activities. The exact cause of
this syndrome is still unknown.
Fatigue may be defined as
i. Negative appetite for activity.
ii. A reduction in the ability to do work as a consequence of previous work.
causes Of Fatigue
As an individual: Many life and work factors can contribute to fatigue. Some of the
main causes are:
• inadequate sleep (most adults need seven to eight hours)
• not enough time to sleep (extended working hours, irregular working
hours, shift work, having more than one job)
• poor quality sleep (workplace stress, sleep disorders)
• extended waking and long work hours
• shift work (upsets natural sleep rhythms)
• ageing (teenagers tend to sleep later, older workers sleep less).
In workplace: The various factors affecting fatigue and the methods to eliminate
fatigue are briefed below
1. Hours of work:
2. The highest productivity per hour 7 less fatigue is achieved with small no of
working hours per day.
3. Working days of a week:
a. The highest hourly output can be achieved by a five day week with 40
working hours.
4. Nature of work:
• Complex muscular work can be done by suitable material handling
equipment.
• Minute & precise work imparts more fatigue.
• Work requiring more mental tasks adds fatigue.
• Works involving standing and abnormal posture tend to increase
fatigue more.
Working conditions:
• Improper light.
• Improper working conditions such as
• Too cold/hot atmosphere.
• Insufficient ventilation.
• Presence of bad smell, fumes, dust, smoke & flash.
• Noise.
• Heavy protective clothing.
Effect Of Fatigue
• Affects badly muscles , nerves and mind of the workers.
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 • Decreases a workers capacity to do more work.
• Loss of worker’s efficiency.
• Creates a feeling of tiredness and weakness.
• Creates disinterest in work.
• Increases monotony & boredom.
• Increases accidents.
• Increases absenteeism.
• Increases labour turnover.
• sleepiness
• irritability (more than usual)
• less conversational, or less clear in communication
• reduced attention span, more easily distracted
• slower reactions, clumsiness, poorer hand-eye coordination, reduced
manual skills
• slower thinking
• reduced short-term memory, forgetful
• inability to handle large amounts of information under time pressure,
losing ‘the big picture’
• less creative problem solving
• cutting corners to get the job finished
• poor judgment of distance, speed or time
• increased risk-taking
• uncontrolled sleep (microsleeps).
Remedies Or Strategies Or Methods Or Tips To Reduce Fatigue
Tips For Employees
Employees have a responsibility to arrive fit for work and to behave safely in the
workplace. This includes arriving at work well rested, and understanding and
managing fatigue-related risks in the workplace. To help, you can do the following:
• manage your sleep time: have a regular bed time; make sure your bedroom
is comfortable; avoid caffeine for five hours before bedtime
• manage your home life: make getting enough sleep a priority; avoid cutting
back on sleep in order to fit everything in
• manage your work life: vary or rotate work tasks so you stay alert; take a
break if you’re tired; tell your supervisor or manager you’re feeling fatigued
• eat and drink properly: eat light nutritious meals (heavy meals make you
drowsy); drink plenty of water; watch your caffeine intake
• avoid medications that make you sleepy: antihistamines, travel sickness
tablets, sleeping pills, some cold preparations and pain killers
• take power naps.
Tips For Employers
The Health and Safety in Employment Act 1992 (external link) requires employers
to take all practical steps to ensure the safety of employees while at work. As an
employer you must develop safe systems of work, and identify, assess and control
hazards. Fatigued workers can be a significant hazard.
As with other workplace hazards, you need to share the management of fatigue
with your employees, especially because it involves factors both inside and outside
of work.
Work-wise, look into:
• length of shifts: take account of the physical and mental load of the work
when determining shift length
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 • distribution of leisure time: allow for rest and recovery
• regularity of shift system: allow workers to prepare for work
• previous hours and days worked: monitor and take account of your workers’
previous hours and days. The effects of fatigue are cumulative - workers may
have sleep debt due to the length of previous shifts
• type of work being performed: pay particular attention to the level of physical
or mental effort required
• time of day work is being performed: arrange work so that high risk tasks
are scheduled at the times when workers are performing at their best,
outside body clock low points
• recovery time from sleep debt: provide workers with at least two unrestricted
nights of sleep in a row
• breaks: the frequency and length of breaks needs to match the length of shift
and the effort demanded by the work.

5.7 Accidents
An "accident" is an unplanned, undesired event which may or may not result in
injury or property damage, that interferes with the completion of an assigned task.
Types Of Industrial Accidents
Technological disasters are non-natural disastrous occurrences that include:
• Accident release: Occurring during the production, transportation or handling
of hazardous chemical substances
• Explosions: Disasters will only be classified as explosions when the explosions
is the actual disaster. If the explosion is the cause of another disaster, the
event will be classified as the resulting disaster.
• Chemical explosion : Violent destruction caused by explosion of combustible
material, nearly always of chemical origin.
• Nuclear explosion/Radiation : Accidental release of radiation occurring in civil
facilities, exceeding the internationally established safety levels.
• Mine explosion : Accidents which occur when natural gas or coal dust reacts
with the air.
• Pollution: Degradation of one or more aspects in the environment by noxious
industrial, chemical or biological wastes, from debris or man-made products
and from mismanagement of natural and environmental resources.
• Acid rain: A washout of an excessive concentration of acidic compounds in
the atmosphere, resulting from chemical pollutants such as sulphur and
nitrogen compounds. When deposited these increase the acidity of the soil
and water causing agricultural and ecological damage.
• Chemical pollution : A sudden pollution of water or air near industrial areas,
leading to internal body disorders with permanent damage of the skin.
• Atmosphere pollution: Contamination of the atmosphere by large quantities of
gases, solids and radiation produced by the burning of natural and artificial
fuels, chemicals and other industrial processes and nuclear explosions
Economic Aspects Of Accidents
An accident can be very costly to the employee as well as the employer. There are
definite costs associated with the accident (i) Direct costs (ii) Indirect costs.
i. Direct costs
• Compensation.
• Insurance.
• Wage loss for the employee.
• Medical cost.
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 ii. Indirect costs.
• Cost of damage to equipment, materials & plants.
• Cost of wages paid for time lost by workers not injured.
• Cost of wages paid to injured worker.
• Cost of replacing the injured employee.
• Cost of delay in production.
• Cost of lowered production by substitute worker.
• Cost of reduction in efficiency of the injured worker.
• Cost of safety engineers, supervisors, and staff in investigating
recording and reporting of accidents & its causes.

5.7.1 Causes Or Factors Responsible For Accidents

Causes of accidents mechanical

Technical causes

Human causes environmental

Causes of accidents in industries and in common
• Taking Shortcuts: Every day we make decisions we hope will make the job
faster and more efficient. But do time savers ever risk your own safety, or
that of other crew members? Short cuts that reduce your safety on the job
are not shortcuts, but an increased chance for injury.
• Being Over Confident: Confidence is a good thing. Overconfidence is too much
of a good thing. "It'll never happen to me" is an attitude that can lead to
improper procedures, tools, or methods in your work. Any of these can lead
to an injury.
• Starting a Task with Incomplete Instructions: To do the job safely and right the
first time you need complete information. Have you ever seen a worker sent
to do a job, having been given only a part of the job's instructions? Don't be
shy about asking for explanations about work procedures and safety
precautions. It isn't dumb to ask questions; it's dumb not to.
• Poor Housekeeping: When clients, managers or safety professionals walk
through your work site, housekeeping is an accurate indicator of everyone's
attitude about quality, production and safety. Poor housekeeping creates
hazards of all types. A well maintained area sets a standard for others to
follow. Good housekeeping involves both pride and safety.
• Ignoring Safety Procedures: Purposely failing to observe safety procedures can
endanger you and your co-workers. You are being paid to follow the
company safety policies-not to make your own rules. Being "casual" about
safety can lead to a casualty!
• Mental Distractions from Work: Having a bad day at home and worrying about
it at work is a hazardous combination. Dropping your 'mental' guard can
pull your focus away from safe work procedures. You can also be distracted
when you're busy working and a friend comes by to talk while you are trying
to work. Don't become a statistic because you took your eyes off the machine
"just for a minute."
• Failure to Pre-Plan the Work: There is a lot of talk today about Job Hazard
Analysis. JHA's are an effective way to figure out the smartest ways to work

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 safely and effectively. Being hasty in starting a task, or not thinking through
the process can put you in harm’s way. Instead, Plan Your Work and then
Work Your Plan!
Mechanical causes (or) factors
• Unsafe mechanical design or construction.
• Hazardous arrangement (piling, overloading, etc.)
• Improper machine guarding.
• Unsafe apparel.
• Improper material handling.
• Protruding nails.
• Untested boiler vessels.
Environmental factors:
• Too low temperature causing shivering.
• Too high temperature causing headache& sweating.
• Too high temperature causing uncomfort , fatigue & drowsiness.
• Defective & inadequate illumination causing eyestrain, glass, shadows,
etc.
Personal factors
• Age.
• Financial position.
• Lack of knowledge and skill.
• Incorrect machine habits.
• Day-dreaming.
• Emotional stability.
• Unnecessary exposure to risk.

5.7.2 Prevention Of Industrial Accidents

1. Put formal safety policies and procedures in place. Create a company handbook
that lists out the steps that must take place in order to prevent accidents in
the work place. Include instructions such as how to store dangerous and
toxic items and where certain product should be stowed to ensure safe
storage and retrieval.
2. Put someone in charge of safety in your company. Discuss the current safety
policies with this safety coordinator, and work on a plan to make sure that
they are adhered to. Confirm that the person is aware of all the
responsibilities associated with safety. Express your support to this person
and arrange to meet on a regular basis to discuss concerns about and
solutions to further accident prevention.
3. Communicate your expectations for a safe work environment. Let your staff know on
a regular basis that safety is a major concern in your business. You can do
this verbally and you can reiterate your expectations in memos. You can also
post safety information throughout your facility.
Words are one thing, but act accordingly, too. If someone encounters a
possible safety hazard, move quickly to correct it. Don't wait for it to correct
itself or assume that someone else is going to do it.
Ask your employees whether they have any suggestions about improving
workplace safety. One safety coordinator is certainly helpful, but a handful
of ears and eyes is almost always preferable to just one. Create an
anonymous input form that employees can fill out at their discretion.
4. Inspect your facility regularly with your safety coordinator. Make certain that your
staff is following safety policies at work. Check areas that are of concern and
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 ensure that precautions have been met. If you see an area that is cause for
concern, discuss it with the person responsible, and then arrange a meeting
with all the staff to further communicate the concern and ensure that it does
not happen again.
5. Have the right tools available so that you or your employees don't have to improvise.
Asking your employees to improvise pretty much says that you don't take
safety seriously.
For example, if you have a storage area that includes high shelving, ensure
that you have a safe ladder or step-stool available so that you or your staff
members are not forced to climb on boxes of furniture to retrieve items.
6. Schedule regular training for all scenarios that pose a risk for accidents. Training
should involve methods in picking up and carrying heavy objects and how to
use mechanical equipment and tools.
The type of training will depend on the type of business you are running.
Some businesses such as restaurants and warehouse facilities will have
more training than others.
Trainings should be scheduled for all new employees and for all
employees annually. Employees may think of it as a hassle, but they should
be reassured knowing that the company takes their health and safety
seriously.
7. Be prepared for a fire in your workplace. Fires are potentially devastating
occurrences, putting many businesses, especially restaurants, in
jeopardy.[1] Ensure that your workplace is properly protected against the
possibility of a fire to cut down on accidents:
Make sure smoke detectors are installed and have batteries.
Make sure that fire extinguishers are present and properly charged. Ask
your fire department, if necessary, to give you training on how to use a fire
extinguisher.Plan your escape routes. Know where your nearest exits are
and how employees can access them quickest.
8. Consider investing in first-aid training or, at the very least, a first aid kit. First-aid
training won't keep the accident from happening in the first place, but it
could help keep any injuries incurred during an accident from getting out of
control.
Invest in a first-aid kit for each floor of your workplace. Place it in a
strategically central location that is easily accessible.
9. Create incident reports after each workplace accident. If an accident occurs in your
workplace, write up an incident report. Investigate what happened, who was
involved, how the accident might have been prevented, and recommendation
for further procedures. At the very least, an incident report will foster
awareness and possibly act as a deterrent for future accidents.
10. Make sure your workplace entrances and exits are fully operational and easily
accessible. If your employees need to get out of the building quickly, make
sure that their exits aren't blocked by any large or unmovable objects. This
is more than just a workplace violation: this is a potential life or death
matter.
11. Clearly mark potential safety concerns with the proper signage and instructions. If an
electrician is rewiring an area of the workplace, or if a crew is doing
construction on a piece of railing, inform your employees by memo and by
placing an appropriate, visible sign near where the potential hazard could
occur. Don't assume that people are smart enough to act accordingly. Spell
it out for them very clearly.

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Other Methods of prevention:
Layout:
• Enough space to operate.
• Unobstructed passage ways between working places.
• Adequate lighting, ventilation, etc.
• Preventing insure of hot/cold air.
• Floor-nonskid, easy to cleanse, & sound proof.
• Proper windows.
• Proper no of doors & gates.
• Installing fire extinguishers.
• Easy to access safety switches.
Working conditions:
• Controlled air temperature.
• Air purity.
• Air velocity.
• Humidity of air.
• Proper ventilation.
• Sufficient illumination.
• Adequate colors of light.
• Using machines of less noise.
• Isolating noise producing machines.
• Use of silencers.
Safety material handling:
• Using fully mechanized material handling equipment.
• Insisting workers not to life beyond permissible loads.
• Using mechanical means of conveyance.
• Sharp materials, sharp edged poles, goods etc. should be covered.
• Proper piling of goods.
• Using container, vessels to transport liquids.
• Prompt repairing and maintenance of material handling equipments.
Personal protective devices:
a) Protection of heads
Using hard hats, rubberized hats, ear protectors etc.
b) Protection of face
Using face masks, shields, welding helmets.
c) Protection eyes
Using goggles.
d) Protection of lungs
Using of airline respirators, cartridge respirators, oxygen apparatus, gas
mask.
e) Protection of body parts
• Protective asbestos clothing.
• Gloves, safety shoes- foot guards,
• Aprons etc.

5.8 Man Power Planning

According to Terry L. leap and Michael D. Crino, “ HRP includes estimation
of how many qualified people are necessary to carry out the assigned activities, how
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many people will be available and what, if anything, must be done to ensure that
personnel supply equals personnel demand at the appropriate point in the future.”
HRP can now be defined as the comparison of an organization’s existing
labour resources with forecast labour demand, and hence the scheduling of
activities for acquiring, training, redeploying and possibly discarding labour. It
seeks to ensure that an adequate supply of labour is available precisely when
required.
Human Resource Planning Process:
How to have the right number of people with right skills at right times? The
process of human resource planning helps in this regard. The human resource
planning process consists of actives relating to future demand for and supply of
manpower and matching the two in the context of overall organizational plans and
objectives.
The various activities involved in the process of human resource planning are now
discussed one by one.
1. Analyzing Organizational Plans and Objectives: The process of human planning
begins with analyzing the overall plans and objectives of organization. The
reason being human resource plans stem from business plans. Analysis of
business plans into sub-sectional and functional plans such as technology,
production, finance, marketing, expansion and diversification provides for
assessing the human resource requirements for each activity in each section
and department.
2. Analyzing Objectives of Human Resource Planning: The main purpose of human
resource planning is matching employees abilities to enterprise
requirements, with an emphasis on future instead of present argument.
According to sikula, “the ultimate mission or purpose of human resource
planning is to relate future human resource to future enterprise need so as
to maximize the future return on investment in human resources”. While
developing specific specific objectives of human resource planning, certain
questions need to be addressed like:
Whether the vacancies, as and when these arise, will be filled in by
promotion, transfer or from external sources?
What will be the selection procedure?
How will provisions be made for training and development of employees?
How to restructure job positions, i.e. How to abolish the old or boring jobs
and replace these by the challenging ones?
How to downsize the organization in the light of changing business and
industrial environment?
3. Forecasting Demand for Human Resource. The demand for human resources in
an organization is subject to vary from time to time, depending upon both
external factors. External factors include competition, economic and political
climate, technological changes, government policy, etc. Among the internal
factors include growth and expansion, design and structural changes,
management philosophy, change in leadership style, employees resignation,
retirement, termination, death, etc. Therefore, while forecasting future
demand for human resources in the organization, these factors need to be
taken into consideration.
Forecasting demand for human resources is good for several reasons
because it can help:
(i) quantify the number of jobs required at a given time for producing a given
number of goods, or offering a given amount of services.

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 (ii) ascertain a staff-matrix needed at different points of time in the future,
and
iii) Ensure adequate availability of people with varying qualifications and
Skills as and when required in the organization.
Techniques Or Methods Available For Hrp
1. Management Judgement
2. Work-study Method
3. Ratio-trend Analysis
4. Delphi Technique
5. Flow Models
6. Mathematical Models.
These are described one by one:
1. Management Judgement: This technique is very simple and time-saving. Under
this technique either a “Bottom-up” or a “top-down” approach is employed
for forecasting future human resource requirement of an organisaiton. In
case of bottom-up approach, line managers prepare departmental
requirements for human resource and submit it to the top managers for
their review and consideration. In the top down approach the top managers
prepare the departmental forecasts which are reviewed with the
departmental heads or managers.
2. Work-study Method: This method can be used when it is possible to measure
standards and where job methods do no change frequently. In this method,
as used Winslow Taylor in his ‘scientific management, time and motion
study are used to ascertain time for doing a standard work. Based on this,
the number of workers required to do standard worked out.
3. Ratio-Trend Analysis. This is one of the quickest forecasting technique. Under
this method, forecasting for future human resource requirements is made on
the basis of time series data. In other words, this technique involves
studying past rations(e.g. total output/number of workers, total sales
volume/number of sales persons, direct workers, is made for indirect
workers) and , based on these forecasting is made for future rations. While
calculating future ratios, allowances can be made for expected changes in
organization, methods and jobs. The demand for human resources is
calculated on the basis of established rations between two variables.
4. Delphi Technique. Delphi technique is named after the ancient greed oracle at
the city of Delphi. This is one of the judgemental methods of forecasting
human resource needs. It is a more complex and time-consuming technique
which does not allow group members to meet face-to-face. Therefore, it does
not require the physical presence of the group members. The following steps
characterize the Delphi technique:
• The members are asked to provide their estimates of human resource
requirement through a series of carefully designed questionnaires.
• Each member anonymously and independently completes the first
questionnaire.
• Results of the first questionnaire are compiled at a central lovation,
transcribed, and copied.
• Each member receives the copy of the result.
• After viewing the results, members are again asked to review their
estimates. This initial results typically trigger new estimates or cause
changes in the original position.
• Steps 4 and 5 are repeated as often as necessary until a consensus is
reached.

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 5. Flow Models: Among the flow models the simplest one is called the Markov
model. This model involves the following:
(i) Determination of time period that will be covered under forecast.
(ii) Establishment of employee’s categories also called states. There should
not be overlapping among the various categories.
(iii) Enumeration of annual flows among various categories or states for
several time periods.
(iv) Estimation of probability of flows or movements from one category to
another based on past trends in this regard.
6. Mathematical Models: Mathematical models express relationship between
independent variables(e.g. production, sales, etc.) and dependent
variable(e.g. number of workers required).
Benefits of HRP:
• It enables organization to have right men at right time in right place.
• It checks corporate plans of organization.
• It provides scope for employee training & development etc.
• It helps to anticipate the cost of salary enhancement, better benefits, etc.
• To foresee the need of redundancy and plan to check it or to provide
alternative employment in consultation with trade union, other organization
& government.
• To foresee changes in values, aptitude of human resources & to change the
techniques of interpersonal, management etc.
• To plan for physical facilities, working conditions & fringe benefits like
canteen, schools, hospitals, conveyance, child care centers, stores etc.
• It gives an idea on the type of test & interview techniques to be used for
selection of candidates.
• It helps to take steps to increase productivity, sales, turnover etc.
Factors affecting or factors to be considered in Human resource planning
Table 5.1 Factors affecting Human resource planning
External Internal
• Government policies • Policies & strategies of company
• Level of economic development • HRP of the company
• Business environment • Formal & informal groups
• Level of technology • Job analysis
• Natural factors • Time horizons
• Internal factors • Trade union etc.
• International factors

5.9 Job Analysis(Job Description + Job Specification)

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

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 Fig 5.4 Job Analysis
Job Description: Job description includes basic job-related data that is useful to
advertise a specific job and attract a pool of talent. It includes information such as
job title, job location, reporting to and of employees, job summary, nature and
objectives of a job, tasks and duties to be performed, working conditions,
machines, tools and equipments to be used by a prospective worker and hazards
involved in it.
Purpose of Job Description
• The main purpose of job description is to collect job-related data in order to
advertise for a particular job. It helps in attracting, targeting, recruiting and
selecting the right candidate for the right job.
• It is done to determine what needs to be delivered in a particular job. It
clarifies what employees are supposed to do if selected for that particular job
opening.
• It gives recruiting staff a clear view what kind of candidate is required by a
particular department or division to perform a specific task or job.
• It also clarifies who will report to whom.

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 Fig 5.5 Job Analysis
Job Specification: Also known as employee specifications, a job specification is a
written statement of educational qualifications, specific qualities, level of
experience, physical, emotional, technical and communication skills required to
perform a job, responsibilities involved in a job and other unusual sensory
demands. It also includes general health, mental health, intelligence, aptitude,
memory, judgment, leadership skills, emotional ability, adaptability, flexibility,
values and ethics, manners and creativity, etc.
Purpose of Job Specification
• Described on the basis of job description, job specification helps candidates
analyze whether are eligible to apply for a particular job vacancy or not.
• It helps recruiting team of an organization understand what level of
qualifications, qualities and set of characteristics should be present in a
candidate to make him or her eligible for the job opening.
• Job Specification gives detailed information about any job including job
responsibilities, desired technical and physical skills, conversational ability
and much more.
• It helps in selecting the most appropriate candidate for a particular job.
Job description and job specification are two integral parts of job analysis. They
define a job fully and guide both employer and employee on how to go about the
whole process of recruitment and selection. Both data sets are extremely relevant
for creating a right fit between job and talent, evaluate performance and analyze
training needs and measuring the worth of a particular job.
Contents Of Job Analysis:
• reviewing the job responsibilities of current employees,
• doing Internet research and viewing sample job descriptions online or offline
highlighting similar jobs,

• analyzing the work duties, tasks, and responsibilities that need to be

accomplished by the employee filling the position,
• researching and sharing with other companies that have similar jobs, and
• articulation of the most important outcomes or contributions needed from
the position.

Fig 5.6 Job Analysis Methods

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Most Common Methods of Job Analysis
 Observation Method: A job analyst observes an employee and records all his
performed and non-performed task, fulfilled and un-fulfilled responsibilities
and duties, methods, ways and skills used by him or her to perform various
duties and his or her mental or emotional ability to handle challenges and
risks. However, it seems one of the easiest methods to analyze a specific job
but truth is that it is the most difficult one. This particular method includes
three techniques: direct observation, Work Methods Analysis and Critical
Incident Technique.
 Interview Method: In this method, an employee is interviewed so that he or
she comes up with their own working styles, problems faced by them, use of
particular skills and techniques while performing their job and insecurities
and fears about their careers. This method helps interviewer know what
exactly an employee thinks about his or her own job and responsibilities
involved in it. It involves analysis of job by employee himself. In order to
generate honest and true feedback or collect genuine data, questions asked
during the interview should be carefully decided.
 Questionnaire Method: Another commonly used job analysis method is getting
the questionnaires filled from employees, their superiors and managers.
However, this method also suffers from personal biasness. A great care
should be takes while framing questions for different grades of employees.
In order to get the true job-related info, management should effectively
communicate it to the staff that data collected will be used for their own
good. It is very important to ensure them that it won’t be used against them
in anyway. If it is not done properly, it will be a sheer wastage of time, money
and human resources.

5.10 Merit Rating

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

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 • Wage increase -Training
• Promotion -Transfer
• Special assignments -discharge
Advantages
Merit-rating plays very important role in the human resource administration of a
firm. Its advantages are:
1. Systematic evaluation of employees.
2. Facilitates matching of job with individual.
3. Facilitates promotion related decisions
4. Helpful in identifying weakness of the employees which may systematically
be removed.
5. Facilitates training related decisions.
6. Provides base for guidance and counseling for the employees.
7. Develops healthy competition among workers to improve performance.
8. Serves as motivational tool for employees.
Disadvantages
Merit rating has the following drawbacks;
1. The rating of empl9oyees may be subjective and this creates dissatisfaction
among them.
2. Evaluators or taters tend to give much premium to past ratings of an
employee who might have improved himself in the course of time.
3. Rates may be influenced by raters’ own attitude and self-made rating factors
which are not consistent with the merit rating process. Incentives schemes
may not be introduced advantageously if merit rating is inaccurate,
unreliable and subjective.
Factors to be considered while evaluating the worker for merit rating
Employees are rated on the basis of many factors related to personal attributes,
leadership quality, on-job performance, interpersonal quality, loyalty, attendance,
etc. Some of these factors are:
1. Quality of work
• Accuracy
• Rejections and scrap
• Thoroughness
• Economy of time
• House keeping
• Contribution in quality circle team
• Contribution in other TQM effort
2. Quantity of work
• Output
• Approach in meeting over-demand
3. Personal Qualities
• Team spirit
• Attitude for work
• Loyalty
• Leadership
• Relations with superior
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 • Relations with subordinates
• Integrity
• Judgment
4. Others
• Attendance
• Ability to follow instructions
• Safety habits
• Interest in training and learning
• Interest in corporate culture, etc.

Different Methods Or Strategies Or Tips Available For Merit Rating

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

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

5.11 Wage And Salary Administration

Wage and Salary Administration’ refers to the establishment and
implementation of sound policies and practices of employee compensation. The
basic purpose of wage and salary administration is to establish and maintain an
equitable wage and salary structure. Wages and salaries are often one of the largest
components of cost of production and such have serious implications for growth
and profitability of the company. On the other hand, they are the only source of
workers’ income. After the independence and particularly after 1948, some new
terms relating to wages began to be used. These are:
1. Statutory Minimum Wages
2. Basic Minimum Wages
3. Minimum Wages
4. Fair Wages
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 5. Living Wages
6. Need Based Wages
Steps Involved Or Flow Or Wage Determination Process
Wage determination is a complex process. However, wage determination
process consists of the following steps:
1. Job Analysis: Job analysis describes the duties, responsibilities, working
conditions and inter-relationships between the job as it is and the other jobs with
which it is associated. It attempts to record and analyse details concerning the
training, skills, required efforts, qualifications, abilities, experience, and
responsibilities expected of an employee. After determining the job specifications,
the actual process of grading, rating or evaluating the job occurs. A job is rated in
order to determine its value relative to all the other jobs in the organization which
are subject to evaluation. The next step is that of providing the job with a price.
This involves converting the relative job values into specific monetary values or
translating the job classes into rate ranges.
2. Wage Survey: In determining the wages for a specific job it is very necessary to
work as to what wages are being given for the same job in other enterprises. If, on
the basis of utility, the wages for a specific job are determined below the wages for
the same job on other enterprises, following will be its disadvantages:
1. Good persons and persons of merit will not be available.
2. If such people are at all obtained for employment, they will shift to another
enterprise after some time.it is, therefore, necessary to keep in mind the
following in wage-survey:
i) Term of survey, (weekly or monthly)
ii) The whole wage-payment-knowledge of daily working hours or monthly
payment.
iii) Definition of jobs.
iv) Appropriate questionnaire for collecting information.
v) Scientific technique of collecting the data.
3. Group Similar Jobs into Pay Grades: After the results of job analysis and salary
surveys have been received, the committee can turn to the task of assigning pay
rates to each job, but it will usually want to first group jobs into pay grades. A pay
grade is comprises the jobs of approximately equal difficulty or importance as
determined by job evaluation. Pay grading is essential for pay purposes because
instead of having to deal with hundreds of pay rates, the committee might only
have to focus on a few.
4. Price Each Pay Grade: The next step is to assign pay rates to pay grades. Assigning
pay rates to each pay grade is usually accomplished with a wage curve. The wage
curve depicts graphically the pay rates currently being paid for jobs in each pay
grade, relative to the points or ranking assigned to each job or grade by the job
evaluation. The purpose of wage curve is to show the relationship between (i) the
value of the job as determined by one of the job evaluation methods and (ii) the
current average pay rates for the grades.
5. Fine-Tune Pay Rates: Fine tuning involves correcting out of line rates and
developing rate ranges.
(i) Correcting out of Line Rates: The average current pay for a job may be too high or
too low, relative to other jobs in the firm. If a rate falls well below the line, a pay
rise for that job may be required. If the rate falls well above the wage line, pay cuts
or a pay freeze may be required.

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(ii) Developing Rate Ranges: Most employers do not pay just one rate for all jobs in a
particular pay grade. Instead, they develop rate ranges for each grade so that there
might be different levels and corresponding pay rates within each pay grade. The
rate is usually built around the wage line or curve. One alternative is to arbitrarily
decide on a maximum and minimum rate for each grade. As an alternative, some
employers allow the rate for each grade to become wider for the higher pay ranges
reflecting the greater demands and performance variability inherent in these more
complex jobs.
6. Wage Administration Rules: The development of rules of wage administration has to
be done in the next step. It is considered advisable in the interests of the concern
and the employees that the information about average salaries and ranges in the
salaries of group should be made known to the employees concerned; for secrecy in
this matter may create dissatisfaction and it may also vitiate the potential
motivating effects of disclosure. Finally, the employee is appraised and the wage is
fixed for the grade he is found fit.
Types Of Wage Incentive Plans
1. Time wage: In this type the worker is given remuneration according to time. This
type of remuneration may be per hour, per day or per month or per year. There
exists no relationship between the quantum of work and the wage. This type is in
operation in all industries in India. This plan is very simple to understand. The
worker works after due thinking and with convenience. However it encourages the
tendency of prolonging or delaying the work unnecessarily. Moreover, it is very
difficult to measure the productivity of the workers under this type of plan.
2. Piece Rate System: In this type of plan, a worker gets remuneration according to his
output irrespective of the time he takes in finishing his job. Here, the payment of
remuneration is related to work and not to time. Under this type, the workers are
encouraged to earn more and more. The more the output is, the more the
remuneration is. The workers are also at liberty for their job with interest and they
need not be supervised. However, this type of wage payment is not suitable for
commodities of artistic taste. Moreover, the quality of goods goes down.
3. Wage incentive Plan: This type of wage payment is the combination of two types the
above referred. Efforts have been made here to obtain the advantages of both these
types while avoiding their disadvantages. This includes:
a) Halsey Premium Scheme: Under this scheme if a worker gives an output more than
the fixed standard job, he is given about 33% to 50% of the remuneration for that
job as bonus. Here a standard of output is fixed and a standard of time is also fixed
for the completion of that job before hand. If the job of fixed standard is completed
with the standard time fixed for the purpose, the worker gets his fixed wages. But,
if he completes the job before the fixed standard time and, thereby, saves some
time, he gets a fixed percentage of his wages for the time so saved as bonus.
b) Rowan Premium Scheme: This plan is an improvement upon Halsey Plan. Under
this plan, premium is that proportion of the wages for the time taken which the
time saved bears to the standard time. The credit of this incentive premium method
goes to Rowan of Scotland. The worker is paid wages at normal rates for the
duration he has worked and is paid extra money in the form of premium on the
basis of the time he has saved. Under this scheme, the standard work and the
standard time both are fixed. The wages for the time saved will increase in the
same percentage that is equal to the proportion the time saved bears to standard
time. The premium for the time saved cannot be more than the total standard
wages. Thus, a worker cannot get cleverly wages more than needed.
c) Taylor’s Plan: Taylor plan is based on wages per unit. In other words, a worker is
paid wages in accordance with his output. Higher price rate is fixed for the workers
who give production over and above the standard workload fixed. The lower rate is
fixed for the workers who give production below the standard workload fixed.
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d) Merrick Plan: This plan is somewhat a modified form of Taylor’s plan. This plan
offers three grade piece rates than the two offered in the Taylor’s plan.
I. First limit is for new workers and is very low.
II. Second limit is for workers with average efficiency.
III. Third limit is for very efficient workers.
e) Gantt Plan: This is also a modified form of Taylor plan. In it, wages are fixed on
the basis of time. On the other hand, the efficient workers are given wages per unit.
Thus, the workers who give more output get their wages at enhanced rates.
f) Emerson Plan: This plan is a combination of Taylor, Merrick and Gantt plans.
However, a slight modification in these plans has been made and different rates of
bonus have been fixed under this plan. The amount of bonus increases with the
increase in efficiency. These percentages are as under:
• 1% bonus on 67.5 efficiency.
• 10% bonus on 90% efficiency.
• 20% bonus on 100% efficiency.
• 20% + 30% extra on bonus on efficiency more than 100%.
g) Profit-Sharing Scheme: Under this scheme, workers are given a certain percentage
of profits as bonus. But it suffers from one defect. Suppose, there is no profit in a
particular year. Workers will also not be given the bonus for that very year. The
workers think that they have been deceived by the employers and therefore, clash
with them on this very issue. This assumes the form of worker-management unrest
and has its bad effect on the production. This scheme is undoubtedly a new and
better scheme. But, the trade unions misuse the scheme.
h) Scalar Plan: Under this scheme, the workers are paid bonus equal to the
percentage of profits earned more than the profits earned last year by the
organisation. 15% of the bonus is deducted and this deduction is deposited in the
fund which is distributed among the workers in the year to come.

5.12 Industrial Unrest

According to the Industrial Dispute Act, 1947,sec 2(k), Industrial disputes(unrest)
means any dispute or difference between employers and employers or between
employers and workmen or between workmen and workmen, which is connected
with the employment (or) non-employment (or) terms of employment (or) with the
conditions of labour of any person.
A situation of clash or difference in opinions between
• Workers and employer
• Employers and employers
• or workers and workers
• in connection with employment terms and conditions is known as industrial
dispute.
Objectives Of Industrial Conflict Act
The basic objectives of the Act are:-
• To provide a suitable machinery for the just, equitable and peaceful
settlement of industrial disputes.
• To promote measures for securing and preserving amity and good relations
between employers and employees.
• To prevent illegal strikes and lockouts.
• To provide relief to workers against layoffs, retrenchment, wrongful dismissal
and victimisation.
• To promote collective bargaining.
• To ameliorate the conditions of workers.
• To avoid unfair labour practices.

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Factors Contributing Industrial Conflicts
The causes of industrial disputes can be broadly classified into two
categories: economic and non-economic causes. The economic causes will include
issues relating to compensation like wages, bonus, allowances, and conditions for
work, working hours, leave and holidays without pay, unjust layoffs and
retrenchments. The non economic factors will include victimization of workers, ill
treatment by staff members, sympathetic strikes, political factors, indiscipline etc.
Economic causes :
The most common causes of industrial disputes are economic causes. These
are follows:
• Demand for higher Wages: Rise in the cost of living forces the workers to
demand more wages to meet the rising cost of living index and to increase
their standards of living. This brings them into conflict with their
employers who are never willing to pay more wages to workers.
• Demand for Allowances and Bonus: Increase in cost of living was the main
cause of the demand of certain allowance allowances such as dearness
allowance, house allowance, medical allowance, night shift allowance,
conveyance allowance etc; by the workers to equate their wages with the
rise of prices. Bonus also plays an important role as a cause of industrial
dispute. Both the amount and the method of bonus payment have led to
a number of disputes.
• High Industrial Profits: In the changing world, concept of labour has
changed considerably. At the present, employers consider themselves as
a partner of the industry and demand their share in the profits.
Non- economic causes:
• Working Conditions and Working Hours: The working conditions in Indian
industries are not hygienic. There is not ample provision of water,
heating, lighting, safety etc. On the other hand, working hours are also
greater. The demand of palatable working conditions and shorter hours
of work led to labour disputes
• Modernization and Automation of Plant and Machinery: The attempt at
modernization and introduction of automatic machinery to replace labour
has been the major cause of disputes of India. Workers go on strike, off
and on, to resist such rationalization.
Personnel Causes: Sometime industrial disputes arise because of
personnel problems like dismissal, retrenchment, layoff, transfer, and
promotion etc.
• Political Causes: Various political parties control trade unions in India. In
many cases, their leadership vests in hands of persons who are more
interested in achieving their political interests rather than the interests of
the workers.
• Indiscipline: Industrial disputes also take place because of indiscipline
and violation on part the workforce.
• Non-reorganization of trade unions: The employers usually do not like the
interference by trade unions. They do not recognize them. This brings the
workers into conflict with their employers.
• Weakness of Trade Unions: Weaknesses of trade unions encourages the
employers to deny certain basic needs of the workers such as medical,
education and housing facilities etc. This led to resentment on the part of
workers who resorted to direct action.

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Types Of Industrial Conflicts Or Unrest
1. Strikes
2. Lock-outs
Strike
According to Peterson, “strike is a temporary cessation of work by a group of
employees in order to express grievances or to enforce a demand concerning
changes in work conditions.”
Section 2(q) of the Industrial Disputes Act, 1947 strike is “a cessation of
work by a body of persons employed in any industry, acting in combination or a
concerted refusal under a common understanding, of a number of persons who are
or have been so employed to continue to work or to accept employment.”

Different types of strikes

1. Primary Strike
2. Secondary Strikes
3. Others
1. Primary Strikes
• Stay away Strikes: In this strike, workmen stay away the work place. They
organize rallies, demonstrations etc.
• Stay-in Strike or Sit-down strike: In this strike, workmen come to place, they
stay at work place but they don’t work.
• Tools-down, pen-down or Mouth-shut Strike: In this Strike, the strikers lay
down their tools in case of factory workers, lay down their pens in case of
office workers and shut their mouth in case of teachers.
• Token or Protest Strike: It is a very short duration and is in the nature of
signal for the danger ahead. In this strike the workers do not work for an
hour or a day.
• Lightening or Wildcat strike: In this strike, the strikers strike the work
without any prior notice or with a shortest notice.
• Go Slow: In this strike, the workers intentionally reduce the speed of
work.
• Work to Rule/Work to Destination: In this strike, the strikers undertake the
work according to rules or job description.
• Picketing: It is an act of posting pickets and implies machinery or
patrolling of the workmen in front of the premises of the employer.
• Boycott: It aims at disrupting the normal functioning of the enterprise.
• Hunger strike: This type of strike is resorted to either by the leader of the
union or by some workers all at a time or in small batches for a limited
period or up to the period of settlement of disputes.
• Gherao: It is a physical blockade of target either by encirclement,
intended to block the regress and ingress from and to a particular office,
workshop etc.
2. Secondary Strikes
• Sympathetic strikes: Against a third party.
3. Others
• General Particular Political Bandhs

“Strikes” when justified?”

Neither all strikes can be regarded as justified, nor all strikes are unjustified. There
are some requirements which must be fulfilled to make a strike justified:
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 • It should be launched only for economic demands such as basic pay,
dearness allowance, increment, leave and other fringe benefits which are
primary objects of a trade union.
• If a strike is launched for political or other reasons and not for any trade
union objects, it would be unjustified.
• The demand of the workmen should be reasonable and legitimate so that
there is a Prima facie justification for the demands, i.e., the demand should
not be raised frivolously or for ulterior reasons.
Prevention Of Strike
According to Laski, “A strike is unjust in that it is an appeal to force in a
matter of dispute right; it is inhuman because of the misery it causes to the
workers; it is wasteful of resources of capital and labour; it is wicked, because it
stirs up hate; it is anti-social, in that it denies and disrupts the solidarity of the
community.
The following suggestions may prove fruitful to prevent strikes:
• It should adopt a well-defined, precise, clear and progressive personal
policies aiming at the maintenance of good industrial relations in the
undertaking
• It should ensure an effective administration and timely implementation of
these policies.
• It should adopt fair and reasonable recruitment, promotion and wage
policies and ensure their proper implementation.
• It should ensure an effective two-way system of communication. This will
help the management to create a favorable atmosphere of goodwill, and
faith in the organization and understand human climate threat; and
enable the workers to appreciate the management policies in their right
perspective so that no misunderstanding is created with the employees at
all levels.
Prevention Of Industrial Conflicts Or Unrest
Prevention of industrial disputes may have different methods. These
methods “cover the entire field of relations between industry and labour and
include enactment and enforcement of progressive legislation, works committees
and councils, wage boards, and trade boards profit sharing and co-partnership,
tripartite labour machinery, education, housing, welfare work, and all such
measures which can bridge the gap between the employers and employed.”
Labour Welfare Officer
Section 49(1) and (2) of the Factories Act, 1948 specifies that every
factory wherein 500 or more workers are ordinarily employed, at least one welfare
officer must be appointed, where the number of workers are in excess of 2,500, the
Assistant and/or Additional Welfare Officers are required to be appointed to assist
the welfare officer.
Functions of Labour Welfare Officer
The Committee on Labour Welfare has laid down the following duties of labour
welfare officers, based upon the Model Rules framed under the Factories Act of
1948:
(a) Supervision of: (i) safety, health and welfare programmes like housing,
recreation, sanitation services as provided under the law or otherwise; (ii)
working of Joint Committees’ (iii) grant of leave with wages; and (iv) redress of
worker’s grievances.

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(b) Counselling Workers in: (i) personnel and family problems, (ii) helping them to
adjust to their work environment, and (iii) understand their rights and
privileges.
(c) Advising Management in Matters of: (i) formulating labour and welfare policies;
(ii) apprenticeship training programmes; (iii) meeting statutory obligations of
workers; (iv) developing fringe benefits; and (v) workers’ education and use of
communication media.
(d) Establishing liaison with workers so that they may: (i) understand various
limitations under which they work; (ii) appreciate the need of harmonious
industrial relations in the plant; (iii) interpret company policies to works; and
(iv) persuade workers to come to a settlement in case of disputes.
(e) Establishing liaison with management so that the latter may: (i) appreciate
workers’ viewpoint to various matters in the plant; (ii) welfare officers should
intervene on behalf of workers in matters under consideration of the
management; (iii) help different department heads to meet their obligation
under the Act; (iv) maintain harmonious industrial relations in the plant; and
(v) suggest measures for promoting general well-being of workers.
(f) Working with Management and Workers: (i) to maintain harmonious industrial
relations in the plant; (ii) to arrange for prompt redressal of grievances and
speedy settlement of disputes; (iii) to improve productivity and productive
efficiency of the enterprise.
(g) Working with Outside Public: (i) securing proper enforcement of various Acts as
applicable to the plant by establishing contact with factory inspectors medical
officers and other inspectors; (ii) other agencies in the community with a view
to helping workers to make use of community servies.
Standing orders
Standing Orders’ means rules of conduct for workmen employed in
industrial establishments. ‘Standing orders’ means rules relating to matters set out
in the schedule to the Act. [section 2(g)]. The schedule to the Act requires that
following should be specified in Standing Orders –
(a) classification of workmen i.e. temporary, badli, casual, permanent,
skilled etc.
(b) manner of intimating to workmen working hours, shift working, transfers
etc.
(c) Holidays
(d) Attendance and late coming rules
(e) Leave rules
(f) Leave eligibility and leave conditions
(g) Closing and reopening of sections of industrial establishment
(h) termination of employment, suspension, dismissal etc. for misconduct
and acts or omissions which constitute misconduct
(i) Retirement age

5.13 Collective Bargaining

Collective bargaining may be defined as the process in which conditions of
employment are determined by agreement between representatives of the union, on
the one land, and those of the employer, on the other. It is called “collective”
because both the employer and the employees act as a group rather than
individuals.

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 CB is a mthod by which trade unions protected & improved the conditions of
their member’s working lives.
According to encyclopedia of social science collective bargaining is a process
of discussion & negotiation between two parties, one or both of whom is a group of
persons acting in consent.
CB is a procedure by which employers and a group of employers agree upon
the condition of work.
Four Types Of Collective Bargaining
According to Walton Mckersie, a collective bargaining process generally consists
of four types of activities:
I. distributive bargaining,
II. integrative bargaining,
III. attitudinal structuring and
IV. intra-organisational bargaining.
The first type of activity often involved in a collective bargaining process is
distributive bargaining. This is straight-out haggling over how to split up a pie . In
this type of activity one pays gain is the other party’s loss. When there are
economic issues in dispute(e.g.wages) this type of activity predominates in the
bargaining process.
The Second type of activity is integrative bargaining. This is negotiation of an
issue on which both parties may gain, or at least neither one loses. A co-operative
search for the best job evaluation system or a training programme are examples of
integrative bargaining.
The Third type of activity involved in collective bargaining is attitudinal
structuring. The process of collective bargaining helps in shaping such attitudes as
trust or distrust, friendliness or hostility between the parties. This is simple fact
that both parties have to deal with each other almost daily and that they do not
have just a sporadic relationship promotes restraint between the negotiators during
the bargaining process. But if there is a backlog of bitterness, it can erupt and
destroy all negotiations over a new contract.
The fourth type of activity that goes on in all collective bargaining is intra-
organizational bargaining. i.e., maneuvering to achieve consensus within the labor
and management organizations. There are always groups within a union which
believe that their interests are not being given adequate consideration by the
organization. The skilled workers may believe that the union pays too much
attention to the unskilled; women members may think that their interests are not
fairly considered by the men who run the union and so on. Similarly, on the side of
the employer there may be differences which need to be resolve.
General Advantages And Disadvantages Of Collective Bargaining
Pros
• Can lead to high-performance workplace where labor and management jointly
engage in problem solving, addressing issues on an equal standing.
• Provides legally based bilateral relationship.
• Management’s rights are clearly spelled out.
• Employers’ and employees’ rights protected by binding collective bargaining
agreement.
• Multi-year contracts may provide budgetary predictability on salary and other
compensation issues.

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Cons
• Management’s authority and freedom are much more restricted by negotiated
rules.
• Creates significant potential for polarization between employees and
managers.
• Disproportionate effect of relatively few active employees on the many in the
bargaining unit. This is particularly the case when collective bargaining
involves a system-wide structure of elections.
• Increases bureaucratization and requires longer time needed for decision
making.
• Increases participation by external entities (e.g., arbitrators, State Labor
Relations Board) in higher education’s decision making.
• Protects the status quo, thereby inhibiting innovation and change. This is
particularly the case when the change involves privatizations.

Steps in CB:
• The employees putting up their demands and grievances before the
management.
• Discussing & negotiating with the management representatives to settle the
dispute issues.
• Signing a formal or informal agreement mutually arrived at the mutual
agreement may be as regards the following.
o Union security
o Wages
o Bonus
o Other benefits
o Grievance procedure
o Hours of work
o Holiday
o Safety & health
o Promotion, transfer and discharge etc.,

5.14 MBO (Management By Objective)

MBO may be defined as a process whereby superiors and subordinates jointly
identify the common objectives, set the results that should be achieved by the
subordinates, assess the contribution of each individual in terms of the results
expected of him, and integrate individuals with the organization so as to make use
of organizational resources.
Management by objectives (MBO) can also be referred as Management by
Results or Goal Management, and is based on the assumption that involvement
leads to commitment and if an employee participates in goal setting as well as
setting standards for measurement of performance towards that goal, then the
employee will be motivated to perform better and in a manner that directly
contributes to the achievement of organizational objectives.
Characteristics of mbo:
• MBO is both a philosophy and a technique.
• MBO is goal good-oriented. Deadlines are fixed for achieving goals.
• MBO stresses participative decision making because it assumes that it leads
to because it assumes that it leads to better commitment and motivation.

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 • It lays down an evaluative mechanism through which the contribution of
each individual is measured.
• It creates a link between individual and organizational goals.
• It evaluates employee’s performance periodically.
• MBO is a continuous process.

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

Fig 5.6 MBO (Management By Objective)

3. Revision of job description : In the process of MBO resetting individual goals involves
a revision of job description of different positions in the organization which in turn
requires the revision of the entire structure of the organization. The organization
manuals and charts may also have to be modified to portray the changes that have
been introduced by the process of MBO. The job description has to define the
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objectives, authority and responsibility of different jobs. The connection of one job
with all other jobs of the organization also needs to be established clearly.
4. Matching goals : The establishment of objectives can not be fruitful unless the
resources and means required to achieve these objectives are provided. Therefore
the subordinates should be provided required tools and materials which enables
them to achieve the objectives efficiently and effectively. Resource requirements can
be measured precisely if the goals are set precisely. This makes the process of
resource allocation relatively easy. Resource allocation should be made after
consulting the subordinates.
5. Freedom implementation: The task team of manager and his subordinates should be
given freedom in deciding the way to utilize their resources and the way to achieve
their objectives. There should be very little or no interference by the seniors as long
as the team is working with in the framework of organization policies.
6. Establishing check points: The process of MBO requires regularly meetings between
the managers and their subordinates to discuss the progress achieve in the
accomplishment of the objective established for the subordinates. For this purpose
the mangers need to establish the standards of performance or check points to
evaluate the progress of their subordinates. These standards need to be specified
as for as possible quantitatively and it should also be ensured that these are
completely understood by the subordinates. This practices needs to be followed by
all managers and these should lead to an analysis of key results has the targets are
represented in terms of the results. The analysis of key results should be recorded
in writing and it generally contains information regarding :
1. The overall objectives related with the job of subordinates.
2. The key results which must be achieved by the subordinate to fulfill his
objectives.
3. The long term and short term priorities, a subordinate needs to adhere to.
4. The extent and scope of assistance expected by a subordinate from his
superior and other departmental managers and also the assistance, the
subordinates is required to extend to other departments of his organizations.
5. Nature of information and the reports receive by the subordinate to carry out
self evaluation.
6. The standards use to evaluate the performance of the subordinate.
7. Performance appraisal : An informal performance appraisal is generally conducted
in routine by the manager, a periodic review of performance of the subordinates
should also be conducted. Periodic reviews are required as the priorities and
conditions change constantly and need to be monitored constantly. These reviews
help the mangers as well as the subordinates to modify the objectives or the
methods whenever require. This significantly increases the chances of achieving the
goals and also ensures that no surprises are found at the time of final appraisal.
Periodic performance appraisal needs to be based on measurable and fair
standards so that these are completely understood by the subordinates and there
are also aware of the degree of performance required at each step.
8. Counseling : Periodic performance review helps the subordinates in improving his
future performance.
• Goal setting: The first phase in the MBO process is to define the
organizational objectives. These are determined by the top management and
usually in consultation with other managers. Once these goals are
established, they should be made known to all the members. In setting
objectives, it is necessary to identify "Key-Result Areas' (KRA).

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 • Manager-Subordinate involvement: After the organizational goals are defined,
the subordinates work with the managers to determine their individual
goals. In this way, everyone gets involved in the goal setting.
• Matching goals and resources: Management must ensure that the subordinates
are provided with necessary tools and materials to achieve these goals.
Allocation of resources should also be done in consultation with the
subordinates.
• Implementation of plan: After objectives are established and resources are
allocated, the subordinates can implement the plan. If any guidance or
clarification is required, they can contact their superiors.
• Review and appraisal of performance: This step involves periodic review of
progress between manager and the subordinates. Such reviews would
determine if the progress is satisfactory or the subordinate is facing some
problems. Performance appraisal at these reviews should be conducted,
based on fair and measurable standards.
Advantages of MBO:
The main advantages of MBO are described below:
1. Better Management of Organizational Activities: By applying MBO,
organisational resources and activities can be better managed which shows
improved results. How the performance of an organisation can improve through
MBO may be clarified on the following five assumptions
• Clarity of objectives;
• Role clarity;
• Periodic feedback of performance;
• Participation of managers in the management process;
• Realization that there is always scope for improvement of performance in
every situation.
2. Clarity in Organizational Action: MBO tends to provide the key result areas
where organizational efforts are needed. A key factor in objective setting is the
external environment in which the organization operates and any change in the
external environment should be considered very carefully at the time of objective
setting. Besides the external factors, internal factors also help in setting objectives
and there-fore they should also be considered suitably. They define what the
organisation intends to do, what it can
do, where it takes and how this gap can be bridged. All these factors lead to clarity
in organizational action.
3. Provides Maximum Personnel Satisfaction: MBO provides maximum opportunity
for personnel satisfaction. It is possible due to two closely related phenomena (i)
participation of individuals in goal setting (ii) rational performance appraisal.
People are involved in goal setting and it is a source of inspi-ration to them. They
feel that they are important for the organisation and being consulted in goal
setting.
They are sure that their performance will be measured independently without any
bias, prejudice and other personal factors. MBO provides guidelines for appraising
performance. Therefore, there is no room for any partiality.
4. Basis for Organisational Change: MBO initiates and stimulates organisational
change and it provide framework for planned change. Due to change in external
and internal factors a change is requiredin any organisation. Sometimes change is
resisted by the people in the organisation. But by MBO thechanging process
becomes easier because there is constant interaction between superiors and
subordinates, less resistant on the part of subordinates, frequently review the
situation.
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5. Increases Pressure and Frustration on the Subordinates: According to some
critics MBO actually increases pressure on the subordinates and sometimes, MBO
creates frustration among managers. This is due to the reasons that (a) many
organisations could not implement MBO properly and even the organisation is not
able to work with its old system, and (b) introduction of MBO arouses high
expectations in young managers. They are over-enthusiastic in making rapid
change in terms of growth and profitability for organisation and career development
for themselves. If rate of change is slower than the expected, then they feel
frustrated.
6. Short Term Nature of Goals: In most MBO programmes, managers set goals for
the short run usually for a year or even less. This is dangerous for the long term
development of the organisation. It is also found that strategic goals are displaced
by operational goals.
7. Quantitative Bias: In order to have verifiable and measurable goals, managers
overuse quantitative goals and attempt to force the use of numbers in areas where
they are not applicable. They may also downgrade important goals that are difficult
to state in quantitative terms or end-results.
8. Time Consuming: A great deal of time to carefully set objectives at all levels of
the organization isrequired in MBO. Initially to built confidence in subordinates in
the 'new system' superiors may have tohold many meetings. The formal, periodic
progress and final review sessions also consume time. So MBO is a time consuming
process.
9. Increases Paperwork: MBO programmes introduce a tidal wave of newsletters,
instruction booklets, training manuals, questionnaires, performance data, and
reports into the organization. To know of what is going on in the organization,
managers may demand regular reports and data in writing, thus MBO imposes
burdensome paper work.
10. Lack of Follow up: Lack of follow-up by the superior at the appropriate time is
another hurdle in the successful implementation of MBO. It is most easy to
procrastinate. The superior must get to the subordinate at the appropriate time.
The subordinate should be prepared to tell the boss exactly what has been
accomplished and how.

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