period costs or noninventoriable costs or non manufacturing overheads are all such costs that are...

8/3/2019 Period Costs or Noninventoriable Costs or Non Manufacturing Overheads Are All Such Costs That Are Not Incurred in

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Period costs or noninventoriable costs or nonmanufacturing overheads are all such

costs that are not incurred in connection to the production. Rather they are connected and

measured in context of time. These costs do not play any role in producing the asset or

bringing the asset to its present location and condition. These are basically such costs that

are non-manufacturing in nature and thus do not form part of inventory cost.

Examples of these costs include administrative costs, selling and marketing costs, finance

costs or borrowing costs (excluding such costs that can be included in the inventory),

product research costs, product development costs that failed to fulfill capitalization

criteria, abnormal losses etc.

Product costs or Inventoriable costs are all such costs that form part of the

inventory.These are basically such costs that relates directly to the products and are

incurred to produce such products and also include the costs that are incurred to bring

these products into saleable condition (or simply present location and condition).

Examples are direct material costs, direct labour costs manufacturing overheads, carriage

inwards and all such costs that contributes and are necessary to bring the inventory totheir present location and condition for example handling costs, amortized development

costs, borrowing costs in specific cases, storage costs where production process requires

goods to be stored i.e. storage is part of the production process for example pickles.

Cost relating to a time period rather than to the output of products and services

These are called period costs because they are reported in the period in which they are

incurred and cannot be carried forward to the next period as opposed to the product costswhich are absorbedin the products and are reported in the period in which they are sold.

Another important fact to consider is that how costs are to be classified and treated also

depends on the type of accounting being used i.e. financial accounting or cost and

management accounting and costing techniques used.


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For example under absorption costing all the manufacturing costs whether variable or

fixed, direct or indirect are treated as product costs. Whereas under marginal costing

technique, only variable manufacturing costs are treated as product costs and fixed

production overheads are treated as period costs.

Going bit deeper in costing techniques and cost accounting techniques, we see under

Throughput accounting all production costs except direct material costs are treated as

period costs like direct labour etc is also treated as period cost. Whereas under Life Cycle

costing all the costs incurred right from the beginning i.e. research and development until

the product is disposed or consumed are considered as part of the inventory i.e. product

cost

Classifying costs as direct or indirect cost is one way of cost classification whereas

classifying costs on the basis of their behaviour as fixed or variable costs is just another

way of classification of costs. Both classifications are separate and must not be confused

together.

The cost that can be traced back to a product or a cost center is considered as direct costin

relation to a product or cost center respectively. Simply put if we can identify a cost to a

specific cost object then it is a direct cost.

Indirect costs are such costs that are either not traceable or it is just not economically

beneficial to trace such costs back to cost object.

From the above definitions we understood that even fixed costs provided they aretraceable to a specific cost object under consideration are basically direct costs.

For example, if direct labour is being paid on monthly basis as opposed to piecemeal basis

or daily wages basis then it is a direct cost but will be fixed in nature. To clarify it more,

fixed costs are such costs that do not change with the change in activity level. When labour


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is paid on monthly basis then irrespective of activity level they will be paid the same

amount every month. Another example can be fixed amount of royaltythat company pays

on annual basis for a particular formula used to produce a specific product. It is a direct

expense or in other words direct cost as it is traceable back to specific product but it is

fixed.

Whereas indirect cost, as said earlier, are such costs that cannot be traced back to a specific

cost object. Examples can be of maintenance and inspection costs which will be increased

with the increased activity level as more and more units are produced more time and

resources for inspection will be needed and as wear and tear of the production facility will

increase so does the maintenance cost. Another example can be of electricity costs which

are usually indirect in nature but increases with the increase in production activity.

A cost that is traced back to specific cost object i.e. a product or a cost center etc. is adirect cost and traceable costs can be fixed costs in nature. For example, labour is

paid on monthly basis, fixed amount of royalty paid every year.

Indirect costs can be variable costs in nature. For example maintenance costs,inspection costs, electricity costs.

Prime cost is a sum of all the direct costs i.e. prime is the aggregate of all suchcosts that can be traced back to products (cost units) or cost centers.

Thus prime cost means sum of direct material costs, direct labour costs and directexpenses.

Direct material costs include cost incurred on material bought with an intention tobe sold after conversion or such material that will be used in manufacturing or

provision of services AND the costs on such materials can be traced back to theproduct or service or cost centers.

Direct labour costs mean such costs that is incurred on such employees who weredirectly involved in the conversion process or provision of services.

All such expenses which cannot categorized as direct material or direct labour butstill such expenses can be traced back to particular cost unit or cost center are


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termed as direct expenses. Usually these are the expenses incurred for such items,

services, activities or anything which were used in production of a particular

product or provision of services e.g. construction plan of one house, royalties etc

Most of the time overheads are not caused by a single product or a cost center andare jointly incurred on one or more product or by one or more departments.

Therefore, we cannot charge such overheads specifically to each department or

simply they cannot be allocated.

Even though we cannot charge some kinds overheads specifically, it does not meanthat they will not be form part of production cost. In order to overcome such

difficulty, we divide the overheads on some justifiable basis. And as overheads are

distributed on the basis of some arbitrary basis, we call such distribution or division

as apportionment.

The difference between allocation and apportionment is evident from the abovediscussion i.e. to allocate overhead we do not need any secondary way of division as

we already know how much has been incurred in relation to a product or cost

center. But overheads for which we do not exactly know how much has been

incurred in different products or cost centers, we just apportion them using

understandable basis.

There is no such thing as direct apportionment. People use such terms loosely tomean other meanings. For example, direct apportionment might be used for

allocation. And indirect allocation might be used for apportionment. It is

recommended that such terms should not be used as these can cause confusions.

What Does Internal Rate Of Return - IRR Mean?

The discount rate often used in capital budgeting that makes the net present value of all

cash flows from a particular project equal to zero. Generally speaking, the higher a project's

internal rate of return, the more desirable it is to undertake the project. As such, IRR can be

used to rank several prospective projects a firm is considering. Assuming all other factors

are equal among the various projects, the project with the highest IRR would probably be

considered the best and undertaken first.


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Net Present Value

The idea behind the NPV technique is that it DISCOUNTS the cash flows generated by an

asset back to the present day: thus the NPV technique is concerned with the time value of

money

The payback period is measures the length of time it takes a project to repay its initial

capital cost. For example, if I buy a machine for 10,000 and it earns me a cash flow of

10,000 for the whole of the first year of its life, I can see immediately that the cash flows

have repaid the initial capital cost and therefore that the payback period is exactly one

year.

What Does Profitability Index Mean?

An index that attempts to identify the relationship between the costs and benefits of a

proposed project through the use of a ratio calculated as:

Profitability Index is logically the lowest acceptable measure on the index. Any value

lower than 1.0 would indicate that the project's PV is less than the initial investment. As

values on the profitability index increase, so does the financial attractiveness of theproposed project.

Accounting rate of return (ARR, also known as average rate of return) is used to estimate

the rate of return for an investment project. The higher the ARR, the more attractive the

project is. If the ARR is higher than the minimum standard average rate of return, then we

will accept the project. However, this technique does not take into account of the time value

of money.

Calculation and Formula:

ARR = Average profit / Average investment

Chapter 2

Marginal Costing and Absorption Costing


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Learning Objectives

To understand the meanings of marginal cost and marginal costing To distinguish between marginal costing and absorption costing To ascertain income under both marginal costing and absorption

costing

Introduction

The costs that vary with a decision should only be included in decision analysis. For many

decisions that involve relatively small variations from existing practice and/or are for

relatively limited periods of time, fixed costs are not relevant to the decision. This is

because either fixed costs tend to be impossible to alter in the short term or managers are

reluctant to alter them in the short term.

Marginal costing - definition

Marginal costing distinguishes between fixed costs and variable costs as convention ally

classified.

The marginal cost of a productisits variable cost. This is normally taken to be; direct

labor, direct material, direct expenses and the variable part of overheads.

Marginal costing is formally defined as:

the accounting system in which variable costs are charged to cost units and the fixed costs

of the period are written-off in full against the aggregate contribution. Its special value is in

decision making. (Terminology.)

The term contribution mentioned in the formal definition is the term given to the

difference between Sales and Marginal cost. Thus

MARGINAL COST = VARIABLE COST DIRECT LABOUR

+


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DIRECT MATERIAL

+

DIRECT EXPENSE

+

VARIABLE OVERHEADS

CONTRIBUTION SALES - MARGINAL COST

The term marginal cost sometimes refers to the marginal cost per unit and sometimes to

the total marginal costs of a department or batch or operation. The meaning is usually clear

from the context.

Note

Alternative names for marginal costing are the contribution approach and direct costing In

this lesson, we will study marginal costing as a technique quite distinct from absorption

costing.

Theory of Marginal Costing

The theory of marginal costing as set out in A report on Marginal Costing published by

CIMA, London is as follows:

In relation to a given volume of output, additional output can normally be obtained at less

than proportionate cost because within limits, the aggregate of certain items of cost will

tend to remain fixed and only the aggregate of the remainder will tend to rise

proportionately with an increase in output. Conversely, a decrease in the volume of output

will normally be accompanied by less than proportionate fall in the aggregate cost.

The theory of marginal costing may, therefore, by understood in the following two steps:

1. If the volume of output increases, the cost per unit in normalcircumstances reduces. Conversely, if an output reduces, the cost

per unit increases. If a factory produces 1000 units at a total cost


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of $3,000 and if by increasing the output by one unit the cost goes

up to $3,002, the marginal cost of additional output will be $.2.

2. If an increase in output is more than one, the total increase in costdivided by the total increase in output will give the average

marginal cost per unit. If, for example, the output is increased to

1020 units from 1000 units and the total cost to produce these

units is $1,045, the average marginal cost per unit is $2.25. It can

be described as follows:

Additional cost =

Additional units

$ 45 = $2.25

20

The ascertainment of marginal cost is based on the classification and segregation of cost

into fixed and variable cost. In order to understand the marginal costing technique, it is

essential to understand the meaning of marginal cost.

Marginal costmeans the cost of the marginal or last unit produced. It is also defined as the

cost of one more or one less unit produced besides existing level of production. In this

connection, a unit may mean a single commodity, a dozen, a gross or any other measure of

goods.

For example, if a manufacturing firm produces X unit at a cost of $ 300 and X+1 units at a

cost of $ 320, the cost of an additional unit will be $ 20 which is marginal cost. Similarly if

the production of X-1 units comes down to $ 280, the cost of marginal unit will be $ 20

(300280).

The marginal cost varies directly with the volume of production and marginal cost per unit

remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all

variable overheads. It does not contain any element of fixed cost which is kept separate

under marginal cost technique.

Marginal costing may be defined as the technique of presenting cost data wherein variable

costs and fixed costs are shown separately for managerial decision-making. It should be


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clearly understood that marginal costing is not a method of costing like process costing or

job costing. Rather it is simply a method or technique of the analysis of cost information for

the guidance of management which tries to find out an effect on profit due to changes in the

volume of output.

There are different phrases being used for this technique of costing. In UK, marginal costing

is a popular phrase whereas in US, it is known as direct costing and is used in place of

marginal costing. Variable costing is another name of marginal costing.

Marginal costing technique has given birth to a very useful concept of contribution where

contribution is given by: Sales revenue less variable cost (marginal cost)

Contribution may be defined as the profit before the recovery of fixed costs. Thus,

contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost

plus profit (C = F + P).

In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed

cost (C = F). this is known as breakeven point.

The concept of contribution is very useful in marginal costing. It has a fixed relation with

sales. The proportion of contribution to sales is known as P/V ratio which remains the

same under given conditions of production and sales.

The principles of marginal costing

The principles of marginal costing are as follows.

a. For any given period of time, fixed costs will be the same, for anyvolume of sales and production (provided that the level of activity

is within the relevant range). Therefore, by selling an extra item

of product or service the following will happen.

Revenue will increase by the sales value of the item sold. Costs will increase by the variable cost per unit.


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Profit will increase by the amount of contribution earnedfrom the extra item.

b. Similarly, if the volume of sales falls by one item, the profit will fallby the amount of contribution earned from the item.

c. Profit measurement should therefore be based on an analysis oftotal contribution. Since fixed costs relate to a period of time, and

do not change with increases or decreases in sales volume, it is

misleading to charge units of sale with a share of fixed costs.

d. When a unit of product is made, the extra costs incurred in itsmanufacture are the variable production costs. Fixed costs are

unaffected, and no extra fixed costs are incurred when output is

increased.

Features of Marginal Costing

The main features of marginal costing are as follows:

1. Cost ClassificationThe marginal costing technique makes a sharp distinction between

variable costs and fixed costs. It is the variable cost on the basis of

which production and sales policies are designed by a firm

following the marginal costing technique.

2. Stock/Inventory ValuationUnder marginal costing, inventory/stock for profit measurement

is valued at marginal cost. It is in sharp contrast to the total unit

cost under absorption costing method.

3. Marginal ContributionMarginal costing technique makes use of marginal contribution for

marking various decisions. Marginal contribution is the difference

between sales and marginal cost. It forms the basis for judging the

profitability of different products or departments.

Advantages and Disadvantages of Marginal Costing Technique


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Advantages

1. Marginal costing is simple to understand.2. By not charging fixed overhead to cost of production, the effect of

varying charges per unit is avoided.

3. It prevents the illogical carry forward in stock valuation of someproportion of current years fixed overhead.

4. The effects of alternative sales or production policies can be morereadily available and assessed, and decisions taken would yield the

maximum return to business.

5. It eliminates large balances left in overhead control accountswhich indicate the difficulty of ascertaining an accurate overhead

recovery rate.

6. Practical cost control is greatly facilitated. By avoiding arbitraryallocation of fixed overhead, efforts can be concentrated on

maintaining a uniform and consistent marginal cost. It is useful to

various levels of management.

7. It helps in short-term profit planning by breakeven andprofitability analysis, both in terms of quantity and graphs.Comparative profitability and performance between two or more

products and divisions can easily be assessed and brought to the

notice of management for decision making.

Disadvantages

1. The separation of costs into fixed and variable is difficult andsometimes gives misleading results.

2. Normal costing systems also apply overhead under normaloperating volume and this shows that no advantage is gained by

marginal costing.

3. Under marginal costing, stocks and work in progress areunderstated. The exclusion of fixed costs from inventories affect


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profit, and true and fair view of financial affairs of an organization

may not be clearly transparent.

4. Volume variance in standard costing also discloses the effect offluctuating output on fixed overhead. Marginal cost data becomes

unrealistic in case of highly fluctuating levels of production, e.g., in

case of seasonal factories.

5. Application of fixed overhead depends on estimates and not on theactuals and as such there may be under or over absorption of the

same.

6. Control affected by means of budgetary control is also accepted bymany. In order to know the net profit, we should not be satisfied

with contribution and hence, fixed overhead is also a valuable

item. A system which ignores fixed costs is less effective since a

major portion of fixed cost is not taken care of under marginal

costing.

7. In practice, sales price, fixed cost and variable cost per unit mayvary. Thus, the assumptions underlying the theory of marginal

costing sometimes becomes unrealistic. For long term profit

planning, absorption costing is the only answer.

Presentation of Cost Data under Marginal Costing and Absorption Costing

Marginal costing is not a method of costing but a technique of presentation of sales and cost

data with a view to guide management in decision-making.

The traditional technique popularly known as total cost or absorption costing technique

does not make any difference between variable and fixed cost in the calculation of profits.

But marginal cost statement very clearly indicates this difference in arriving at the net

operational results of a firm.

Following presentation of two Performa shows the difference between the presentation of

information according to absorption and marginal costing techniques:

MARGINAL COSTING PRO-FORMA


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Sales Revenue xxxxx

Less Marginal Cost of Sales

Opening Stock (Valued @ marginal cost) xxxx

Add Production Cost (Valued @ marginal cost) xxxx

Total Production Cost xxxx

Less Closing Stock (Valued @ marginal cost) (xxx)

Marginal Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxxx

Marginal Cost of Sales (xxxx)

Contribution xxxxx

Less Fixed Cost (xxxx)

Marginal Costing Profit xxxxx

ABSORPTION COSTING PRO-FORMA

Sales Revenue xxxxx

Less Absorption Cost of Sales

Opening Stock (Valued @ absorption cost) xxxx

Add Production Cost (Valued @ absorption cost) xxxx

Total Production Cost xxxx

Less Closing Stock (Valued @ absorption cost) (xxx)

Absorption Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxxx

Absorption Cost of Sales (xxxx)

Un-Adjusted Profit xxxxx

Fixed Production O/H absorbed xxxx


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Fixed Production O/H incurred (xxxx)

(Under)/Over Absorption xxxxx

Adjusted Profit xxxxx

Reconciliation Statement for Marginal Costing and Absorption Costing Profit

$

Marginal Costing Profit xx

ADD

(Closing stock opening Stock) x OAR

xx

= Absorption Costing Profit xx

Where OAR( overhead absorption rate) =Budgeted fixed production overhead

Budgeted levels of activities

Marginal Costing versus Absorption Costing

After knowing the two techniques of marginal costing and absorption costing, we have seen

that the net profits are not the same because of the following reasons:

1. Over and Under Absorbed Overheads

In absorption costing, fixed overheads can never be absorbed exactly because of difficulty

in forecasting costs and volume of output. If these balances of under or over

absorbed/recovery are not written off to costing profit and loss account, the actual amount

incurred is not shown in it. In marginal costing, however, the actual fixed overhead

incurred is wholly charged against contribution and hence, there will be some difference in

net profits.

2. Difference in Stock Valuation

In marginal costing, work in progress and finished stocks are valued at marginal cost, but in

absorption costing, they are valued at total production cost. Hence, profit will differ as

different amounts of fixed overheads are considered in two accounts.


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The profit difference due to difference in stock valuation is summarized as follows:

a. When there is no opening and closing stocks, there will be nodifference in profit.

b. When opening and closing stocks are same, there will be nodifference in profit, provided the fixed cost element in opening and

closing stocks are of the same amount.

c. When closing stock is more than opening stock, the profit underabsorption costing will be higher as comparatively a greater

portion of fixed cost is included in closing stock and carried over

to next period.

d. When closing stock is less than opening stock, the profit underabsorption costing will be less as comparatively a higher amount

of fixed cost contained in opening stock is debited during the

current period.

The features which distinguish marginal costing from absorption costing are as

follows.

a. In absorption costing, items of stock are costed to include a fairshare of fixed production overhead, whereas in marginal costing,

stocks are valued at variable production cost only. The value of

closing stock will be higher in absorption costing than in marginal

costing.

b. As a consequence of carrying forward an element of fixedproduction overheads in closing stock values, the cost of sales

used to determine profit in absorption costing will:

i. include some fixed production overhead costs incurred in aprevious period but carried forward into opening stock

values of the current period;


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ii. exclude some fixed production overhead costs incurred inthe current period by including them in closing stock

values.

In contrast marginal costing charges the actual fixed costs of a

period in full into the profit and loss account of the period.

(Marginal costing is therefore sometimes known as period

costing.)

c. In absorption costing, actual fully absorbed unit costs arereduced by producing in greater quantities, whereas in marginal

costing, unit variable costs are unaffected by the volume of

production (that is, provided that variable costs per unit remain

unaltered at the changed level of production activity). Profit per

unit in any period can be affected by the actual volume of

production in absorption costing; this is not the case in marginal

costing.

d. In marginal costing, the identification of variable costs and ofcontribution enables management to use cost information more

easily for decision-making purposes (such as in budget decision

making). It is easy to decide by how much contribution (and

therefore profit) will be affected by changes in sales volume.

(Profit would be unaffected by changes in production volume).

In absorption costing, however, the effect on profit in a period of

changes in both:

i. production volume; andii. sales volume;

is not easily seen, because behaviour is not analysed and

incremental costs are not used in the calculation of actual

profit.


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Limitations of Absorption Costing

The following are the criticisms against absorption costing:

1. You might have observed that in absorption costing, a portion offixed cost is carried over to the subsequent accounting period as

part of closing stock. This is an unsound practice because costs

pertaining to a period should not be allowed to be vitiated by the

inclusion of costs pertaining to the previous period and vice versa.

2. Further, absorption costing is dependent on the levels of outputwhich may vary from period to period, and consequently cost per

unit changes due to the existence of fixed overhead. Unless fixed

overhead rate is based on normal capacity, such changed costs are

not helpful for the purposes of comparison and control.

The cost to produce an extra unit is variable production cost. It is realistic to the value of

closing stock items as this is a directly attributable cost. The size of total contribution

varies directly with sales volume at a constant rate per unit. For the decision-making

purpose of management, better information about expected profit is obtained from the use

of variable costs and contribution approach in the accounting system.

Summary

Marginal cost is the cost management technique for the analysis of cost and revenue

information and for the guidance of management. The presentation of information through

marginal costing statement is easily understood by all mangers, even those who do not

have preliminary knowledge and implications of the subjects of cost and management

accounting.

Absorption costing and marginal costing are two different techniques of cost accounting.

Absorption costing is widely used for cost control purpose whereas marginal costing is

used for managerial decision-making and control


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T5 MANAGING PEOPLE & SYSTEMS

Matrix Organization is a combination of two or more organization structures. For example,

Functional Organization and Project Organization.

The employee has to work under two authorities (bosses). Theauthorityof the Functional

Manager flows downwards while the authority of the Project Manager flows across (side

wards). So, the authority flows downwards and across. Therefore, it is called "Matrix

Organization

Features of Matrix Organisation

The pecularities or characteristics or features of a matrix organisation are:-

1. Hybrid Structure : Matrix organisation is a hybrid structure. This is so, because it is acombination of two or moreorganisation structures. It combines functional organisation

with a project organisation. Therefore, it has the merits and demerits of both these

organisation structures.

2. Functional Manager : The Functional Manager has authority over the technical(functional) aspects of the project.

Advantages of Matrix Organisation

The benefits or merits or advantages of a matrix organisation are:-

1. Sound Decisions : In a Matrix Organisation, all decisions are taken by experts.Therefore, the decision are very good.

2. Development of Skills : It helps the employees to widen their skills. Marketing peoplecan learn about finance, Finance people can learn about marketing, etc.

3. Top Management can concentrate on Strategic Planning : The Top Managers canspend more time on strategic planning. They can delegate all the routine, repetitive and

less important work to the project managers.
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4. Responds to Changes in Environment : Matrix Organisation responds to the negativechanges in the environment. This is because it takes quick decisions.

5. Specialisation : In a matrix organisation, there is a specialization. The functionalmanagers concentrate on the technical matters while the Project Manager concentrates

on the administrative matters of the project.

6. Optimum Utilisation of Resources : In the matrix organisation, many projects are runat the same time. Therefore, it makes optimum use of the human and physical resources.

There is no wastage of resources in a matrix organisation.

7. Motivation : In a matrix organisation, the employees work as a team. So, they aremotivated to perform better.

8. Higher Efficiency : The Matrix organisation results in a higher efficiency. It gives highreturns at lower costs.

Limitations of Matrix Organisation

The demerits or disadvantages or limitations of a matrix organisation are:-

1. Increase in Work Load : In a matrix organisation, work load is very high. The managersand employees not only have to do their regular work, but also have to manage other

additional works like attending numerous meetings, etc.

2. High Operational Cost: In a matrix organisation, the operational cost is very high. Thisis because it involves a lot of paperwork, reports, meetings, etc.

3. Absence of Unity of Command : In a matrix organisation, there is no unity of command.This is because, each subordinate has two bosses, viz., Functional Manager and Project

Manager.

4.

Difficulty of Balance : In a matrix organisation, it is not easy to balance theadministrative and technical matters. It is also difficult to balance the authority and

responsibilities of the project manager and functional manager.

5. Power Struggle : In a matrix organisation, there may be a power struggle between theproject manager and the functional manager. Each one looks after his own interest,

which causes conflicts.


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6. Morale : In a matrix organisation, the morale of the employees is very low. This isbecause they work on different projects at different times.

7. Complexity : Matrix organisation is very complex and the most difficult type oforganisation.

8. Shifting of Responsibility : If the project fails, the project manager may shift theresponsibility on the functional manager. That is, he will blame the functional manager

for the failure.

Functional system refers to a system of organisation in which functional departments are

created at all levels to deal with the problems of the business. The management is divided

into number of functions like purchasing, selling, production, financing, personnel and

research and development. The credit for the growth of functional organization can be

traced back to Taylor who is regarded as the father of scientific management. In this form

of organization authority does not flow from top to bottom as it is found in line

organisation.

In this the entire organisation is divided into different sections and each section is in the

charge of a specialist who has a complete control over his function. He is regarded as

functional manager. According to Taylor production function is separated from office

function. The clerical aspects of functions are handled by four persons like time and cost

clerk, instruction card clerk, route clerk and shop disciplinarian.

In framing the structure of functional organisation, the following points are to be kept in

mind.

(a) The inter-related functions are allotted to each department.

(b) An activity is allotted to each functional department.

(c) An activity allotted to each department can-not be allotted to another department.

(d) Functional authority is confined to functional advice.

(e) It provides expert service at each functional department.


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Definition

A divisional organizational structure usually consists of several parallel teams focusing on a

single product or service line. Examples of a product line are the various car brands under

General Motors or Microsoft's software platforms. One example of a service line is Bank of

America's retail, commercial, investing and asset management arms. Unlike departments,

divisions are more autonomous, each with its own top executive--often a vice president--

and typically manage their own hiring, budgeting and advertising. Though small businesses

rarely use a divisional structure, it can work for such firms as advertising agencies which

have dedicated staff and budgets that focus on major clients or industries.

Advantages

Divisions work well because they allow a team to focus upon a single product or service,

with a leadership structure that supports its major strategic objectives. Having its own

president or vice president makes it more likely the division will receive the resources it

needs from the company. Also, a division's focus allows it to build a common culture and

esprit de corps that contributes both to higher morale and a better knowledge of the

division's portfolio. This is far preferable to having its product or service dispersed among

multiple departments through the organization.

Disadvantages

A divisional structure also has weaknesses. A company comprised of competing divisions

may allow office politics instead of sound strategic thinking to affect its view on such

matters as allocation of company resources. Thus, one division will sometimes act to


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undermine another. Also, divisions can bring compartmentalization that can lead to

incompatibilities. For example, Microsoft's business-software division developed the Social

Connector in Microsoft Office Outlook 2010. They were unable to integrate Microsoft

SharePoint and Windows Live until months after Social Connector could interface with

MySpace and LinkedIn. Some experts suggested that Microsoft's divisional structure

contributed to a situation where its own products were incompatible across internal

business units.

Improve

Divisional structure:

Divide the organization according to the type of work, region, product and so on. Large

organization may break down into Rail, water, road and building division.

Divisional structure divides the employees based on the product/customer

segment/geographical location. For example, each division is responsible for certain

product and has its own resources such as finance, marketing, equipments,

maintenance..etc.

Advantages

this structures allows for flexibility and quick response to environmental changes. It also

enhances innovation and differentioan strategies.

Disadvantages:

This structure results in duplication of resources because, for example we need to have

equipment , for each division. Obviously, it does not support the exchange of knowledge

between people working in the same profession because part of them are working in one

division and the others are working in other divisions

Contingency theories of leadership focus on particular variables related to the environment

that might determine which particular style of leadership is best suited for the situation.

According to this theory, no leadership style is best in all situations. Success depends upon


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a number of variables, including the leadership style, qualities of the followers and aspects

of the situation.

Trait Theories:

Similar in some ways to "Great Man" theories, trait theories assume that people inherit

certain qualities and traits that make them better suited to leadership. Trait theories often

identify particular personality or behavioral characteristics shared by leaders. If particular

traits are key features of leadership, then how do we explain people who possess those

qualities but are not leaders? This question is one of the difficulties in using trait theories to

explain leadership

Laissez-faire leadership, also known as delegative leadership, is a type ofleadership stylein

which leaders are hands-off and allow group members to make the decisions. Researchers

have found that this is generally the leadership style that leads to the lowest productivity

among group members.

Laissez-faire leadership is characterized by:

Very little guidance from leaders Complete freedom for followers to make decisions Leaders provide the tools and resources needed Group members are expected to solve problems on their own.Classical scientific school

The classical scientific branch arose because of the need to increase productivity and

efficiency. The emphasis was on trying to find the best way to get the most work done by

examining how the work process was actually accomplished and by scrutinizing the skills

of the workforce.

The classical scientific school owes its roots to several major contributors, including

Frederick Taylor, Henry Gantt, and Frank and Lillian Gilbreth.

Frederick Taylor is often called the father of scientific management. Taylor believed that

organizations should study tasks and develop precise procedures. As an example, in 1898,

Taylor calculated how much iron from rail cars Bethlehem Steel plant workers could be

unloading if they were using the correct movements, tools, and steps. The result was an

amazing 47.5 tons per day instead of the mere 12.5 tons each worker had been averaging.
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In addition, by redesigning the shovels the workers used, Taylor was able to increase the

length of work time and therefore decrease the number of people shoveling from 500 to

140. Lastly, he developed an incentive system that paid workers more money for meeting

the new standard. Productivity at Bethlehem Steel shot up overnight. As a result, many

theorists followed Taylor's philosophy when developing their own principles of

management.

Henry Gantt, an associate of Taylor's, developed the Gantt chart, a bar graph that measures

planned and completed work along each stage of production. Based on time instead of

quantity, volume, or weight, this visual display chart has been a widely used planning and

control tool since its development in 1910.

Frank and Lillian Gilbreth, a husband-and-wife team, studied job motions. In Frank's early

career as an apprentice bricklayer, he was interested in standardization and method study.

He watched bricklayers and saw that some workers were slow and inefficient, while others

were very productive. He discovered that each bricklayer used a different set of motions to

lay bricks. From his observations, Frank isolated the basic movements necessary to do the

job and eliminated unnecessary motions. Workers using these movements raised their

output from 1,000 to 2,700 bricks per day. This was the first motion study designed to

isolate the best possible method of performing a given job. Later, Frank and his wife Lillian

studied job motions using a motion-picture camera and a split-second clock. When her

husband died at the age of 56, Lillian continued their work.

Thanks to these contributors and others, the basic ideas regarding scientific management

developed. They include the following:

Developing new standard methods for doing each job

Selecting, training, and developing workers instead of allowing them to choose their own

tasks and train themselves

Developing a spirit of cooperation between workers and management to ensure that work

is carried out in accordance with devised procedures

Dividing work between workers and management in almost equal shares, with each group

taking over the work for which it is best fitted

Classical administrative school

Whereas scientific management focused on the productivity of individuals, the classical

administrative approach concentrates on the total organization. The emphasis is on the

development of managerial principles rather than work methods.


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Contributors to this school of thought include Max Weber, Henri Fayol, Mary Parker Follett,

and Chester I. Barnard. These theorists studied the flow of information within an

organization and emphasized the importance of understanding how an organization

operated.

In the late 1800s, Max Weber disliked that many European organizations were managed ona personal family-like basis and that employees were loyal to individual supervisors

rather than to the organization. He believed that organizations should be managed

impersonally and that a formal organizational structure, where specific rules were

followed, was important. In other words, he didn't think that authority should be based on

a person's personality. He thought authority should be something that was part of a

person's job and passed from individual to individual as one person left and another took

over. This nonpersonal, objective form of organization was called a bureaucracy.

Weber believed that all bureaucracies have the following characteristics:

A well-defined hierarchy. All positions within a bureaucracy are structured in a way that

permits the higher positions to supervise and control the lower positions. This clear chain

of command facilitates control and order throughout the organization.

Division of labor and specialization. All responsibilities in an organization are specialized

so that each employee has the necessary expertise to do a particular task.

Rules and regulations. Standard operating procedures govern all organizational activities

to provide certainty and facilitate coordination.

Impersonal relationships between managers and employees. Managers should maintain an

impersonal relationship with employees so that favoritism and personal prejudice do not

influence decisions.

Competence. Competence, not who you know, should be the basis for all decisions made

in hiring, job assignments, and promotions in order to foster ability and merit as the

primary characteristics of a bureaucratic organization.

Records. A bureaucracy needs to maintain complete files regarding all its activities.

Henri Fayol, a French mining engineer, developed 14 principles of management based onhis management experiences. These principles provide modern-day managers with general

guidelines on how a supervisor should organize her department and manage her staff.

Although later research has created controversy over many of the following principles, they

are still widely used in management theories.

Division of work: Division of work and specialization produces more and better work with

the same effort.


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Authority and responsibility: Authority is the right to give orders and the power to exact

obedience. A manager has official authority because of her position, as well as personal

authority based on individual personality, intelligence, and experience. Authority creates

responsibility.

Discipline: Obedience and respect within an organization are absolutely essential. Gooddiscipline requires managers to apply sanctions whenever violations become apparent.

Unity of command: An employee should receive orders from only one superior.

Unity of direction: Organizational activities must have one central authority and one plan of

action.

Subordination of individual interest to general interest: The interests of one employee or

group of employees are subordinate to the interests and goals of the organization.

Remuneration of personnel: Salaries the price of services rendered by employees should be fair and provide satisfaction both to the employee and employer.

Centralization: The objective of centralization is the best utilization of personnel. The

degree of centralization varies according to the dynamics of each organization.

Scalar chain: A chain of authority exists from the highest organizational authority to the

lowest ranks.

Order: Organizational order for materials and personnel is essential. The right materials

and the right employees are necessary for each organizational function and activity.

Equity: In organizations, equity is a combination of kindliness and justice. Both equity and

equality of treatment should be considered when dealing with employees.

Stability of tenure of personnel: To attain the maximum productivity of personnel, a stable

work force is needed.

Initiative: Thinking out a plan and ensuring its success is an extremely strong motivator.

Zeal, energy, and initiative are desired at all levels of the organizational ladder.

Esprit de corps: Teamwork is fundamentally important to an organization. Work teams and

extensive face-to-face verbal communication encourages teamwork.

Mary Parker Follett stressed the importance of an organization establishing common goals

for its employees. However, she also began to think somewhat differently than the other

theorists of her day, discarding command-style hierarchical organizations where

employees were treated like robots. She began to talk about such things as ethics, power,

and leadership. She encouraged managers to allow employees to participate in decision


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making. She stressed the importance of people rather than techniques a concept very

much before her time. As a result, she was a pioneer and often not taken seriously by

management scholars of her time. But times change, and innovative ideas from the past

suddenly take on new meanings. Much of what managers do today is based on the

fundamentals that Follett established more than 80 years ago.

Chester Barnard, who was president of New Jersey Bell Telephone Company, introduced

the idea of the informal organization cliques (exclusive groups of people) that naturally

form within a company. He felt that these informal organizations provided necessary and

vital communication functions for the overall organization and that they could help the

organization accomplish its goals.

Barnard felt that it was particularly important for managers to develop a sense of common

purpose where a willingness to cooperate is strongly encouraged. He is credited with

developing the acceptance theory of management, which emphasizes the willingness of

employees to accept that managers have legitimate authority to act. Barnard felt that four

factors affected the willingness of employees to accept authority:

The employees must understand the communication.

The employees accept the communication as being consistent with the organization's

purposes.

The employees feel that their actions will be consistent with the needs and desires of the

other employees

Process Costing

Cal Poly Pomona lists five steps for process costing: summarize the flow of physical units of

output, calculate output in terms of equivalent units, determine equivalent-unit costs,

summarize total costs and assign total costs to units completed and to ending work in

process.

period costs or noninventoriable costs or non manufacturing overheads are all such costs that are...

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