What are costs? How can we define costs? Well….
Costs mean the amount of resources given up in exchange of some goods and services. These resources are expressed in terms of monetary value. Costs may also be defined as the expired cost resulting from the productive usage of an asset. Now, we know every firm or organization does costing and the objectives behind doing this act of costing can be:
-it helps in comparison between actual and estimations
-it helps improve efficiency
-it helps improve profits
-It helps in optimum utilization of resources
-it helps in determination of cost drivers or wasted efforts
-it helps in estimation of total costs/budget
-It helps determine financial position of a firm
-It helps in effective control, management and planning
-it helps in price fixation (of a product or service)
Costs can be broadly classified into Material, Labor and Expense and each of them can be further classified into direct and indirect. All the indirect costs are together called as overheads which can be again classified into factory overheads, selling & distribution overheads and office & administrative overheads.
The costs incurred directly on material or the cost on materials which is traceable is direct material costs. E.g. cotton for textile industry or steel for automobile industry.
The workers who are directly involved in production process are direct labor.
And the cost incurred apart from direct material and labor is direct expense. E.g. fee paid to architect, patent cost or cost of hiring machinery, etc.
Now, indirect material cost refers to cost of those materials which are needed for completion of the product but their regard to the product is so small that they cannot be treated as direct materials. E.g. cost of tools, lubricants, machinery, etc.
Indirect labor refers to those labor or workers who are not directly linked to production process. E.g. guards, foremen, helpers and cleaners, etc.
Indirect expense refers to all the expenditure incurred on production of a product beginning from its manufacture to it being a finished product and includes transfer costs to different markets also. E.g. light, heat, transportation cost, maintenance cost, factory manager’s salary, etc.
Selling and distribution overheads include the costs incurred on advertising and publicizing a product and include costs incurred on transporting products to the final markets. E.g. advertisement cost, salesman’s salary, commission, storage cost, etc.
Office and administrative cost includes rents and rates of offices, audit fee, legal charges, etc.
Thus, keeping into consideration all these different types of costs and expenditure, a firm or an organization carefully plans for its budgets so as to make efficient utilization of its resources and earn maximum profits.
There are several different costing tools, techniques or methods followed by firms and organizations these days. Some of them are:
Standard costing,
Uniform Costing,
Activity based costing,
Zero based costing,
Target costing, and many others.

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Contract Manufacturing

A company doing international marketing contracts with firms in foreign country to manufacture or assemble the products while retaining the responsibility of marketing the product. E.g.: Dettol, etc.

Management Contracting

The supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.

Turnkey Contracts

It is a contract under which a firm agrees to fully design, construct and equip a manufacturing or business or service facilities and turn the project over the purchase when it is ready for operations for a fixed price. At completion of the contract, the foreign client is handed the key to the project.

Assembly Operations

A manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet doesn’t want to go that for may find it desirable to establish overseas assembly facilities in selected markets. In the sense, having assembly facilities in foreign markets is very ideal when there are economies of scale in the manufacture of parts and components and when assembly operations are labor intensive and labor is cheat in the foreign country.

Third Party Location

It is sometimes used as an entry strategy when there is no commercial transaction between two nations because of political reasons or when direct transaction between two nations are difficult due to political instability or the firm in one of these nations which wants to enter the other market will have to operate from a third country base. E.g.: Rank Xerox entered USSR through its Indian venture Modi Xerox.

CounterTrade

i. Barter System

It is an old method of exchange. In old times, people used to exchange goods and services for other goods and services in system.

ii. Buyback

It means the supplier of plant equipment or technology agrees to purchase goods manufactured with that equipment or technology. E.g.: supplying hard drive to a computer manufacturing company, but instead of taking money as payment, the supplier buys the computer in return of hard drive.

Compensation deal

In this, the seller receives a part of payment in cash but agrees to spend an equal amount of money in that country within a specified period of time. E.g.: India bought a technology from US and pays amount through this foreign currency has occurred in US. Therefore, US will invest its currency in India with the same amount to balance the flow of currency in foreign.

FDI

FDI or foreign direct investment offers an exclusive opportunity to enter into international/global business ,new markets and marketing channels, elusive access to new technology and expertise, expansion of company with new or more products or services, and cheaper production facilities.

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15 Ways to expand your business to international markets- Part 1

Every entrepreneur or businessman would like to go international and cross boundaries in order to expand the business and be successful. Well…. Until now I knew only a couple of ways for that but my search showed me that there are many more like:

Licensing

It is an agreement that allows one party to use an industrial/intellectual property right to exchange for payment to the other party i.e. the agreement where licenser grants rights to intangible property to another entity (licensee) for a specific period in return for a royalty. Eg: Arms license, liquor license, etc.

Franchising

It is a business agreement under which one party i.e. the franchiser allows another party i.e. the franchisee to operate an enterprise using its trademark, logo, product and methods of operation in return for a fee. Franchiser often assists the franchisee to run the business on an ongoing basis. Eg: McDonald’s, Giani’s, etc.

Exporting

Exporting can be direct or indirect. It offers only available choice for small and new firms wanting to go international and also permits larger firms to begin international expansion. It is an easy access to overseas market and avoids the cost of establishing manufacturing operations.

Joint Ventures

When two companies invest funds into creating a third jointly owned company. The new subsidiary thus formed is called a joint venture. Typically, the ownership is 50-50 but not always. Having 50% or more does not necessarily mean that you have control over the joint venture. Joint Ventures are used to shield parent company from the risk of new venture failure. Eg: Sony Ericsson.

Strategic Alliance

When company wants quickly gain a new area of expertise or access to new technology or markets. They usually have two options i.e. by a smaller company with close assets or form a strategic alliance with another company that would benefit equally from the partnership. These agreements often have a limited scope and function such as trading access to emerging technology. Eg: Starbucks, Tata, etc.

Mergers and acquisitions

A domestic company selects a foreign company and emerges itself with the foreign company in order to enter international business. Alternatively, domestic company may purchase the foreign company and acquire its ownership access to international manufacturing and marketing network. Eg: Exxon Mobil, Lipton & Brookbond. Etc.

Wholly owned subsidiaries (WOS)

Subsidiary means individual body under parent company. They give their own rent, salary to employees, etc. but the policies and trademarks will be implemented from parent company. A WOS is an overseas operation that is totally owned and controlled by MNC.

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There are many different types of legal system relating to business that exist in India. Every entrepreneur and businessman running small or large business must know about these. They are:
Islamic Law
It is derived from the interpretation of Kuran and the teachings of Prophet Mohammad. The people following this law submit to the will of God. Among unique aspects of Islamic law is the prohibition of paying or receiving interests.
Socialist Law
This law evolves from Marxist socialist system and continues to influence regulations in former communist countries particularly those from Soviet Union.
Common Law
This law is based on tradition (refers to a country’s legal history), precedent (refers to the cases that have come before the courts in the past), customs (refers to the ways in which laws are applied in specific situations). Common law originated from England and is followed in US, Canada, Australia. Ina common law country, contracts tend to be detailed with all contingencies spelled out.
Civil/Code Law
It is based on a systematic and extensive codification of laws. It is derived from the Roman law under code law. The legal system is generally divided into three separate codes i.e. commercial, civil and criminal.
In a civil law country, contracts tend to be shorter and less specific because many of the issues of the contract are covered or included in the civil code. It is followed in Japan, Germany, France.
Theocratic Law
It relies on religious and spiritual principles to define the legal environment. This system is based on religious doctrines, percepts and beliefs. E.g.: Islamic law is based on a variety of sources:
-The Kuran i.e. the sacred text of Islam
-Decisions and sayings of Prophet Mohammad
-The writings of Islamic scholars
Customary Law
This system is anchored in the wisdom of daily experience or for those who are more intellectually inclined towards certain traditions or philosophies.
Mixed System
Mixed legal system emerges when a nation’s system engages two or more different type of legal systems.

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Many of us do not belong to business families but wish to enter into it. But how do we do that?
Here is the proper guide and steps to do so. Just follow them…
Firstly, setting up of an export firm consists of two stages which are:
1. Establishing a business firm
2. Obtaining IEC number or Import Export code number
Let us know about stage one first. It includes various steps which are as follows:
Step 1: Selection of the name of the firm. The selected name must be unique and must not be same as of any other existing firm.
Step 2: Approval of the name. There is no requirement laid down by regional licensing authority to obtain prior approval for the proposed name of the business firm. However, prior approval of the proposed name would be required in case of a joint stock company or a cooperative society.
Step 3: Selection of form of ownership. It could be sole proprietorship, partnership firm, Joint Stock Company or cooperative society.
Step 4: Deciding location of the firm.
Step 5: Developing trade name and logo.
Step 6: Creating necessary infrastructure.
Step 7: Applying for grant of PAN number. PAN of income tax is required to open the current account in the name of the proposed business firm and to apply for the allotment of IEC number.
Step 8: Opening a current account in the bank. An entrepreneur should open an account with a scheduled commercial bank with a branch of the bank where the requirement of minimum balance is minimum. It is however important to open an account with the branch that deals in foreign exchange and also accepts export import documents for negotiation and other related dealings.
Step 9: Once the bank account is opened the business firm is established.

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Life insurance, as the word suggests, refers to insurance of life; a sum of money kept aside or saved for self or dear ones in case of any mishappening. But this a general or we can say in layman terms. Basically, it is a contract for payment of a sum of money to the person assured (or to the person entitled to receive the same) on the happening of event insured against. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs. Among other things, the contracts also provide for the payment of premium periodically to the corporation by the policy holders. Life insurance eliminates risk. The major advantages of life insurance are:
• Protection: Saving through life insurance guarantees full protection against risk of death of the saver. The full assured sum is paid, whereas in other schemes only the amount saved is paid.
• Easy payments: For the salaried people the salary savings’ schemes are introduced. Further, there is an easy installment facility method of payment through monthly, quarterly, half yearly or yearly mode.
• Liquidity: Loans can be raised on the security of the policy.
• Tax relief: Tax relief in Income Tax and Wealth Tax is available for amounts paid by way of premium for life insurance subject to the tax rates in force.
Schemes of LIC
LIC offers a wide range of schemes to suit the needs of the individual investor.
• Basic Life Insurance Plans: These plans offer whole life assurance plan and endowment assurance plan.
• Term Assurance Plans: These plans offer two-year temporary assurance plan, Convertible term assurance plan, Bima sandesh and Bima kiran.
• Plans for children: Various children’s deferred assurance plans are available viz, Jeevan Balya, and Jeevan Kishore.
• Pension Plans: These plans provide for either immediate or deferred pension for life.
• Jeevan Sarita: This is a joint-life-last survivor-annuity-cum-assurance plan (for husband and wife) where the claim amount is payable partly in lumpsum and partly in the form of an annuity.

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The origin of the stock exchanges in India can be traced back to the later half of 19th century. After the American civil war, the number of brokers dealing in shares increased. The brokers organized an informal association in Mumbai named ‘The Native Stock and Share Brokers Association’ in 1875. The increased activity in trade and commerce during the First World War and Second World War resulted in an increase in the stock trading. Stock exchanges were, then, established in different centers like Chennai, Delhi, Nagpur, Kanpur, Hyderabad and Bangalore. The growth of stock exchanges suffered a setback after the end of world war due to worldwide depression. Most of the stock exchanges in the early stages had a speculative nature of working without technical strength. Securities and Contract Regulation Act, 1956 gave powers to the central government to regulate stock exchanges. The stock exchanges in Mumbai, Calcutta, Chennai, Ahmedabad, Delhi, Hyderabad and Indore were recognized by the SCR Act. The Bombay stock exchange was recognized in 1963. At present we have 23 stock exchanges and 21 of them have hardware and software compliant.
Till recent past, floor trading took place in all the stock exchanges. In the floor trading system, the trade takes place through open outcry system during the official trading hours. Trading posts are assigned for different securities where buy and sell activities of securities took place. This system needs a face to face contact among the traders and restricts the trading volume. The speeding of the new information reflected on the prices was rather slow. The deals were also not transparent and the system favored the brokers rather than the investors.
The setting up of NSE and OTCEI with the screen based trading facility resulted in more and more stock exchanges turning towards the computer based trading. Bombay stock exchange introduced the screen based trading system in 1995, which is known as BOLT (Bombay On-line Trading System). Madras stock exchange introduced Automated Network Trading System (MANTRA) on Oct 7th 1996. Apart from Bombay stock exchange, Vadodara, Delhi, Pune, Bangalore, Calcutta and Ahmedabad stock exchanges have introduced screen based trading system and others are also planning to shift to the screen based trading.

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A derivative security is a financial contract the value of which is derived from the value of an underlying asset. These assets may be stocks, currencies, interest rates, indexes, or commodities. Derivatives help manage various types of risks through hedging, arbitraging, and acquiring insurance against them. As they increase the capability of the markets to absorb risk, they enhance liquidity and reduce transaction costs in the markets for underlying assets. The deregulation of interest rates led to an interest tare risk. This risk is the adverse impact of interest rate movements on an institution’s net interest income and market value, dependent on the maturity profile of the assets and liabilities of the institutions as well as their repricing terms. This interest rate risk can be managed with the help of derivative instruments. Lack of money market derivative instruments will force banks to physically restructure their balance sheets by purchasing or shedding assets and liabilities, which might ultimately turn out to be insufficient. Derivative instruments are off-balance sheets which help banks to manage their interest rate risks without having to restructure their balance sheet and with more efficient use of capital. Hence, in July 1999, the reserve bank laid down guidelines to introduce two money market derivatives: interest rate swaps (IRS) and forward rate agreements (FRA). Both are under the counter derivatives. These contracts are negotiated between counter-parties and tailored to meet the needs of their contract. IRS and FRAs are new hedging instruments introduced to give more depth to the money market as also to enable market participants to hedge interest rate risk arising on account of lending or borrowings made at fixed/variable interest rates.

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ETHICS is derived from a Greek word ‘ethos’ which means values, beliefs which pervades a group or community. Business ethics means the norms, conditions, terms which govern any business or business activities. They are concerned with what is right or wrong, good or bad, etc.
Few examples of business ethics are:
Charging reasonable profits
Providing genuine products
Fair treatment to workers
Using fair weights for measurement of quantities of products
Paying taxes
Charge fair prices from customers
Determinants of business ethics are:
Social factor: Ethics should be such which are readily acceptable by society.
Economical factor: Economic development affects nature and spread of business ethics.
Cultural factor: It refers to and includes family background, education, religion, historical heritage, etc.
Political factor: It means that the party in power influences ethics through their ideology and philosophies.
Organizational factor: The ideology and philosophy of a firm, attitude of managers and superiors influences ethics.
Institutional factor: It means that the codes of conduct of various institutes such as ICAI, ICSI influence ethics.
Ethical issues faced by managers are:
With respect to employees can be feedback, working conditions, employment security, etc.
With respect to peers and superiors can be truth telling, loyalty, support, etc.
With respect to customers to can be truth telling, fair treatment, questionable practices, etc.
With respect to suppliers can be fair treatment, balanced relationship, truth telling, etc.
With respect to stakeholders can be truth telling, respecting legal constraints, etc.

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What is budgetary control?

Let me answer that for you…

Budgetary control is a system of management control and accounting in which all operations are forecasted and so far as possible planned ahead, and the actual results compared with the forecasted and planned ones. It involves –

Establishment of budgets

• Continuous comparison of actual with budgets for achievement of targets
• Revision of budgets in the light of changed circumstances.
• Budgetary control acts as a management tool because it:
  • Brings efficiency in working and economy
  • Establishes coordination and coordinates various divisions of business
  • Guards against undue optimism leading to over expansion
  • Acts as a safety signal
  • Adoption of uniform policy
  • Decrease in production costs
  • Adoption of standard costing principles
  • Optimum capitalization
  • Optimum mix which means most profitable mix or combination of different factors of production

Budgetary control also has certain limitations which are:

• It is seen as a opposition against the spirit of budgeting
• Changing economy may influence budgeting
• It is only a tool not a substitute for management

It asks for cooperation from employees and top management also

Budgetary control is often linked with two other terms budget and budgeting but there is difference in all these three terms. Budgets are individual objectives of a department, etc. whereas budgeting may be said to be the act of building budgets. And budgetary control embraces all and in addition includes the science of planning the budgets themselves and utilization of such budgets to affect an overall management tool for the business planning and control.

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