Human Resource Management SET-2

Q.1 Explain Wage Administration policy. What are the ways by which wages and salaries are managed in
India?

Answer: Wage and salary administration revolves around designing and managing policies
and methods of disbursing employee compensation. Traditionally it includes such areas as job
evaluation, maintenance of wage structures, wage surveys, incentives administration, wage changes
and adjustments, supplementary payouts, profit sharing, control of compensation costs, and other
related pay items.

Salaried often implies a status distinction, because those who are on salary are generally white-
collar, administrative, professional, and executive employees, whereas wage-earners are designated
as hourly, non-supervisory, or blue-collar. Wage-earners in some organizations do receive full wage
if they are absent for such reasons as sickness, whereas salaried employees, especially at the lower
levels, often receive overtime pay when they work over the standard work week.

Compensation/ salary systems are designed to ensure that employees are rewarded appropriately
depending on what they do and the skills and knowledge (intellect) required for doing a specific job.
It must therefore provide for the following key factors in order to be effective:

The following factors may be helpful to raise the effectiveness of employees

• Signal to the employee the major objectives of the organizations – therefore it must link to the
overall goals and objectives of the company. For example if doing a quality job is critical for the
company its compensation system has to ensure that this is adequately rewarded. On the other
hand if a company values productivity and units produced, the compensation system would be
designed such that productivity is rewarded.

• Attract and retain the talent an organization needs – the need to benchmark salaries to the
prevalent market standard for that job /skill so that the company is able to attract the right talent. If a
enterprise pays a salary lower that what the market does for that job/responsibilities, the probability
that suitable candidates would take the job offer and join the company. Even if they do join
subsequently when they find that the market pays more for that job they would quickly find a more
remunerative job and leave the company

• Motivate employees to perform effectively – as discussed at the outset, money is a key motivator
and it often might be the only motivator for most employees, therefore ensuring that compensation is
appropriately disbursed need to be taken care of while designing the compensation system. Jobs in
the brick and motor, production setups would focus on higher incentive policies that would motivate
the employee to produce more while the base-salary would be low.

• Create the type of culture the company seeks to engender – compensation systems play a critical
role as sponsors for the organizations culture. A performance driven culture would build
compensation policies that clearly and significantly reward performance. A company that rewards
loyalty would reward employees who stay longer in the company with significantly better incentive
programs.

Hence we see how compensation systems are reflective of the organizations over all philosophy of
what its goals and objectives are and how this can be linked to salary payout.

Managing Wages

The main purpose of wage and salary administration is to establish and maintain equitable wage and
salary programs. The secondary objective is to design and implement an equitable labour-cost
structure. Therefore payout cannot be out-of-sync with the organizations ability to pay it needs to be
able to satisfy the employees as well as employers, profits maximised and conflicts minimised.

Wage and salary administration is concerned with the financial aspects of needs, motivation and
rewards. Managers, therefore, analyse and interpret the needs of their employees so that reward
can be suitably designed to satisfy these needs. We will now review a few of the important theories
that support the design of wage systems.

The word 'salary' is defined in the Oxford Dictionary as „fixed periodical payment to a person doing
other than manual or mechanical work‟. The payment towards manual or mechanical work is
referred to as wages. The word pay refers to the payment for services done which would include
salary as well as wages.

Wages are commonly understood as price of labour. In ordinary parlance, any remuneration paid for
services is etymological wage. Benham defines wage as a sum of money paid under contract by an
employer to a worker for services rendered.

Labour was always looked upon as a commodity governed by the law of supply and demand.
Certain theories were propounded for determination of wages but these could not stand the test of
time. A few theories are discussed below:

Subsistence theory: This theory, also known as 'Iron Law of Wages', was propounded by David
Ricardo (1772 -1823). According to this theory, wages tend to settle at a level just sufficient to
maintain the workers and his family at minimum subsistence levels. The theory applies only to
backward countries where labourers are extremely poor and are unable to get their share from the
employers.

Standard of living theory: This theory is a modified form of subsistence theory. According to this
theory, wages are determined not by subsistence level but also by the standard of living to which a
class of labourers become habituated.

Residual claimant theory: Francis A. Walker (1840-1897) propounded this theory. According to him,
there were four factors of production/ business activity viz., land, labour, capital and
entrepreneurship. Wages represent the amount of value created in the production which remains
after payment has been made for all these factors of production. In other words, labour is the
residual claimant.

The wage fund theory: According to this theory, after rent and raw materials are paid for, a definite
amount remains for labour. The total wage fund and the number of workers determine the average
worker's share in the form of wages.

Demand and supply theory: According to this theory, wages depend upon the demand and supply of
labour.

Marginal productivity theory: This is an improved form of demand and supply theory. Wages are
determined by the value of the net product of the marginal unit of labour employed.

Purchasing power theory: According to this theory the prosperity, productivity and progress of
industry depend on there being sufficient demand to ensure the sale of its products and pocketing of
reasonable profits. A large pact of the products of industry is consumed by workers and their families
and if wages are high, demand will be good. However, if wages and the purchasing power of the
workers are low, some of the goods will remain unsold; output will go down, which will result in
unemployment.

The bargaining theory of wages: John Davidson propounded this theory. According to him, wages
are determined by the relative bargaining power of workers or trade unions and of employers. When
a trade union is involved, basic wages, fringe benefits, job differentials and individual differences tend
to be determined by the relative strength of the organization and the trade union.

The Tribunals and Wage Boards have generally followed the-principles laid down in the Fair Wages
Committee's Report on fixing wages. The Committee, in its report, has focused on wage differentials
and has identified the following factors for consideration for fixation of wages:

1. The degree of skill.

2. The strain of work.
3. The experience involved.
4. The training involved.
5. The responsibility undertaken.
6. The mental and physical requirements.
7. The disagreeableness of the task.
8. The hazard attendant on the work, and
9. The fatigue involved.
Q.2 Texas is a medium size, plastic manufacturing company. In this Company, workers have developed grievances
against management. For past 2 years, in spite of making Profit, Company is not paying bonus to the workers. It is
expected that, if the grievances are not dealt, it might lead to severe consequences. Imagine this situation and explain
the grievance handling procedure, list each steps of the procedure. Suggest few measures to avoid grievances.

Ans. Grievances Meanings

The definition of a grievance often varies from company to company and from author to author. The broadest
interpretation of the term would include any discontent or dissatisfaction that affects organizational performance. As
such, it can be stated or unvoiced, written or oral, legitimate or ridiculous. The only major restriction in this
definition is that the discontent must affect worker performance.

The word grievance is used commonly to indicate various forms and stages of an employee’s dissatisfaction. It
means either dissatisfaction or a complaint or a grievance.
While dissatisfaction could be defined as anything that disturbs an employee, a complaint is spoken or written
dissatisfaction brought to the attention of the supervisor or his immediate head. In the language of the labour
management relations, a grievance is a complaint formally presented by the employee or employees to the
management.

Dale Yoder defines it as "a written complaint filed by an employee and claiming unfair treatment". Prof. Jucious
defines grievance as “any discontent or dissatisfaction, whether expressed or not and whether valid or not, arising
out of anything connected with the company that an employee thinks, believes or even feels unfair, unjust or
inequitable.”
Prof. Pigors and Meyers define grievance as dissatisfaction. According to them, dissatisfaction of an employee is
anything that disturbs the employee, whether expressed or not. The International Labour Organization (ILO)
classifies a grievance as a complaint of one or more workers with respect to wages and allowances, conditions of
work, interpretations of service stipulations, covering such areas as overtime, leave, transfer, promotion, seniority,
job assignment and termination of service. The National Commission of Labour states that complaints affecting one
or more individual workers in respect of their wage payments, overtime, leave, transfer, promotion, seniority, work
assignment, and discharges would constitute grievances.

The Grievance Handling Procedure

Principles suggested by the Indian Institute of Personnel Management for addressing the grievance are as follows:
a) A grievance should be dealt within the limits of the first line supervisor.
b) The appellate authority should be made clear to the employee so that if he cannot get satisfaction from his
immediate supervisor, he should know the next step.
c) The grievance should be dealt with speedily.
d) In establishing a grievance procedure, if the grievance is against an instruction given by a superior in the interest
of order and discipline, the instructions must be carried out first and then only employee can register his protest.

Grievance Handling Procedure

Initial step
The greatest opportunity for the settlement of a complaint or grievance lies in the initial step of the procedure. If
there is no formal procedure and the firm announces an open door policy, then it is possible that the supervisor may
get bypassed by the worker who would take his grievance directly to the higher levels of management. But such
bypassing not merely undermines the supervisor’s authority, which loses face, but also creates an atmosphere of win
or lose in which both the worker and supervisor will try to prove the other wrong.
Intermediate step
As the figure indicates, the next step on the management side of the procedure is to submit the dispute to middle
management.
Involving the supervisor’s middle and senior line managers in the grievance process helps in two ways. Initially, the
social barriers between the various categories are, to some extent, broken by personal contact and mutual
understanding. Secondly, the problem solving approach integrates the various levels in the organization into a team
to jointly overcome the problem which concerns not only the worker but the manager as well. However, it is
important to ensure that the line management assumes prime responsibility for the settlement of a grievance. In
many organizations, the Personnel Department is injected into the procedure as a decision making power. On the
union side, intermediate levels are represented by higher personnel in the union hierarchy. In most of the
organizations, the business agent, a fulltime negotiations specialist of the union, takes over the intermediate and
sometimes the final step. The presence of a business agent may explain why management is often out man oeuvre by
the union. Business agents are specialists in union management negotiations, and it is also their fulltime job. The
line manager often considers grievance processing a minor, incidental, and distasteful duty. This lack of
specialization and interest on the part of line management has led to the situation in which the staff personnel
department is given authority to make decisions about grievances.
Final Company union step
Usually, the final step to be undertaken by the company and union is a discussion of the grievance between
representatives of top management and top union officials. For management, it may be the President in important
grievances, a Vice-president, or a high level
Industrial Relations Executive but, for the union, it may be the President of the local union, the Union Executive
Committee, or a representative of the International Union. It is difficult to secure an integration of interests at this
high level.

Few measures to avoid grievances:-

Grievances arise due to various factors. It is important from the point of view of the manager to know the root cause
of the employee's dissatisfaction.
A grievance is always a symbol of some malfunctioning or maladjustment and an able and skilful manager can
always find out the real or submerged reasons for a grievance.
Several studies have been conducted in various establishments and it has been generally found that causes of
employee grievances could be grouped under different major headings.
Some of the causes that need to be considered are avoiding grievances:-

1. Promotions; 2. Amenities; 3. Continuity of Services;

4. Compensation; 5. Disciplinary action; 6. Fines;
7. Increments; 8. Wages; 9. Acting Promotion;
10. Recovery of dues; 11. Safety appliance; 12. Superannuation;
13. Supersession; 14. Transfer; 15. Victimization; And
16. Conditions of work.
Q.3.Define competency. How competency is linked to Human resource system?

Answer: There is much temptation to use what has worked before, even when it may exceed its effective scope. The
potential of an employee for a promotion based on performance in the current job; i.e., members of a hierarchical
organization eventually are promoted to their highest level of competence, after which further promotion raises them
to incompetence. That level is the employee's "level of incompetence" where the employee has no chance of further
promotion, thus reaching his or her career's ceiling in an organization. The employee's incompetence is not
necessarily exposed as a result of the higher-ranking position being more difficult — simply, that job is different
from the job in which the employee previously excelled, and thus requires different work skills, which the employee
may not possess. For example, a factory worker's excellence in his job can earn him promotion to manager, at which
point the skills that earned him his promotion no longer apply to his job. Where exceptions to this exist, the scenario
switches to the "Septic Tank Principle" which is broadly similar but is usually described as "excrement rising to the
top". One way that organizations attempt to avoid this effect is to refrain from promoting a worker until he or she
shows the skills and work habits needed to succeed at the next higher job. Thus, a worker is not promoted to
managing others if he or she does not already display management abilities. The first corollary is that employees
who are dedicated to their current jobs should not be promoted for their efforts (like Dilbert Principle), for which
they might, instead, receive a pay increase. The second corollary is that employees might be promoted only after
being sufficiently trained to the new position. This places the burden of discovering individuals with poor
managerial capabilities before (as opposed to after) they are promoted. Class, or caste (social stratification) system is
more efficient at avoiding incompetence. Lower-level competent workers will not be promoted above their level of
competence as the higher jobs are reserved for members of a higher class. "The prospect of starting near the top of
the pyramid will attract to the hierarchy a group of brilliant [higher class] employees who would never have come
there at all if they had been forced to start at the bottom". Thus the hierarchies "are more efficient than those of a
classless or equalitarian society". In a similar vein, some real-life organizations recognize that technical people may
be very valuable for their skills, but poor managers, and so provide parallel career paths allowing a good technical
person to acquire pay and status reserved for management in most organizations.

Q.4 Think of a situation in which an employee is to be dismissed from the organization, what will be the
fair steps of dismissal followed by the organization?

Answer:- Ans: Dismissal and Discharge of an Employee

According to Article 311 of the Indian Constitution, which says that “no person shall be dismissed or
removed from service until he has been given a reasonable opportunity to show cause as to why the
proposed action should not be taken against him?"
The Model Standing Orders, too, lay down that, "before an employee is dismissed, he should be
given an opportunity to explain the circumstances against him."
The following steps are followed for dismissal of an employee:
a) Charge Sheet is Framed and Issued:
The first step in the procedure is to frame a written charge sheet which is based upon a written
complaint against the employee in question, and which contains details of the offence with which he
is charged and the allegation of misconduct made against him, and indicating the time limit within
which a reply to the charge sheet should be submitted to the authorities.
The employee is called upon to show because why a disciplinary action should not be taken against
him.
The contents and implications of the charge sheet may be explained to him in his own language and
in the presence of some reputable witness, before a copy of it is handed over to him. If he refuses to
accept it, it should be sent to his residential address "registered post with acknowledgement due". If
the employee refuses to take delivery of the registered letter, or when it has been returned undelivered, it
should be published in a local paper to ensure its wide publicity.
b) Receipt of Explanation:
The employee may submit his explanation within the prescribed period of time, or he may ask for an extension of
time for its submission. In the latter case, the request should be considered in good faith in accordance with the rules
of natural justice.
c) Issue of Notice of Enquiry:
If the explanation is received from the employee is found to be unsatisfactory, a notice of enquiry, mentioning the
time, date and place, has to be given to him in which the name of the person or officer who would conduct the
enquiry would also be mentioned. The employee is required to be present at the appointed time and place, together
with his witness, if he has any.
d) The Holding of Enquiry:
On the appointed day and at the appointed place and time, the enquiry is held by the Enquiry Officer in the presence
of the employee. The contents of the charge sheet and an explanation of the procedure to be followed at the enquiry
are communicated to the worker. If he pleads his innocence, the enquiry proceeds; but if he pleads guilty,
unconditionally and in writing, the enquiry is dropped.
e) The Findings:
Once the enquiry is over, the Enquiry Officer has to give his findings, which should invariably contain the procedure
which was followed, the party’s statements, the documents produced and examined, the charges made and the
explanations given and the evidence produced. The officer should then record his own findings on each of the
charges and the grounds on which he has come to a particular conclusion. He should specifically mention which
charges have been proved and which have not been proved. He then submits his findings to the authorities
empowered to take a disciplinary action against the employee. He, however, is not required to make any
recommendations.
a) On receiving the report, the executive authorized to take a decision thereon passes an order of punishment.
b) Communication of the order:
A copy of the orders is then handed over to the employee.
Discharge of an Employee
The following conditions must necessarily be satisfied before an employee is discharged from service by way of
punishment for misconduct.
a) The misconduct of the employee is of such a nature as to indicate that his discharge or dismissal would be an
appropriate punishment and that this kind of punishment has been provided in the Standing Orders.
b) An enquiry must be held by the employer into the misconduct which an employee has been charged with. This
enquiry should be held only after a charge sheet has been preferred against him, and he has been given due notice of
the time, place and date of enquiry.
c) The officer should be held in such a manner as to ensure that it would be fair and proper and in conformity with
the principles of natural justice. The worker must be given an adequate opportunity to defend himself and to present
witness in support of his contention or case.
d) The officer holding the enquiry should not be one who may be disqualified on the ground of bias, personal
interest, or on the ground of his having been on eye witness to the misconduct with which the employee is charged.
e) At the conclusion of the enquiry, the findings, based on recorded evidence, should be recorded by the enquiry
officer.
f) The findings must necessarily be based on recorded evidence and should not be perverse.
g) The order of dismissal or discharge against the employee must be passed in good faith.
h) The order must be duly communicated to the employee against who it has been passed.
Q.5 Suggest few measures to improve employee morale.

Answer:- Ans: Measurement of Employee Morale

Signs of low morale are generally not noticed till it is obviously, low or when something goes amiss. By the time the
management recognizes the fact that morale has deteriorated, it is faced with one crisis or another. Perceptive
managers are, therefore, constantly on the lookout for clues to any deterioration in the morale of the employees.
Dale Yoder and others pointed out the following as signals of low morale:
1. Employee unrest.
2. High rate of absenteeism.
3. Tardiness.
4. High employee turnover.
5. Grievances.
6. Need for discipline
7. Fatigue and monotony.

Improving Morale

There are a number of measures which can be used to control the warning signals of low morale.
The following are the positive measures to be taken to bring job satisfaction to the employees and reconcile
individual interests with the interests of the organization.
1. Creation of whole jobs.
2. Job enrichment.
3. Building responsibility into a job.
4. Modifying the work environment.
5. Flexing working hours.
6. Job sharing.
7. Rotation of jobs.
8. Profit sharing.
Morale can also be improved by adapting several other measures such as employee contest, special recognition and
awards to long service employees, film shows to employees during their lunch hour, free coffee during rest pauses,
and training the supervisors in how to handle people.
1. Under this method, complete jobs are assigned to the workers. The complexity of a job should be increased so that
it may appeal to their higher needs.
2. Job enrichment tries to deal with dissatisfaction by increasing job depth. Under this, individual employees may be
given responsibility for setting their own work pace, for concerning their own errors, and/or for deciding on the best
way to perform a particular task.
3. Employees should be encouraged to take risk decision.
4. This can be achieved by:
i) Developing work groups;
ii) Developing the social contacts of the employees;
iii) The use of music;
iv) Regular rest breaks.
5. Flex time permits employees to arrange their work hours to suit their personal needs and lifestyles.
This is particularly suited to situations with fluctuating workloads. Flex time employees are responsible for
coordinating their functions with other employees and thereby have more responsibility and autonomy.
6. Two workers divide a fulltime job between themselves splitting not only the hours of work but also the salary.
7. This reduces employee's boredom which arises out of the monotonous nature of his work.
8. Morale can be improved by effective profit sharing schemes. In addition to its economic aspects, profit sharing
has also psychological aspects relating to friendly move by the management in providing the workers an opportunity
to participate in the profits.
Ques.6 Explain Victor Vroom’s Expectancy theory of motivation.

Ans: Motivation

The personnel function is really all about motivation. It is agreed that unless individuals are motivated to make
sufficient potential to perform effectively, they may not achieve the level of performance that is desired from them.
Managerial people are always facing the problems of motivating their subordinates to release their potential most
effectively and thereby permit the desired goals of the organization and the needs of employees to be achieved.
Knowledge of the motivational process provides the basis for understanding why people do what they do.
Motivation is positively correlated with concepts of (1) level of aspiration, (2) degree of commitment, and (3)
inclination towards action.
It is rightly said, "You can buy a man's time, you can buy a man's physical presence at a given place, but you cannot
buy his enthusiasm, initiative and loyalty." Motivation aims at transforming the ‘ability to do’ into ‘the will to do’.
Motivated employees are in a state of tension. To relieve this tension, they engage in activity. The greater the
tension, the greater shall be the activity to bring about relief.

Victor Vroom’s Expectancy theory of motivation

The expectancy theory of motivation is suggested by Victor Vroom. Unlike Maslow and Herzberg, Vroom does not
concentrate on needs, but rather focuses on outcomes.

Whereas Maslow and Herzberg look at the relationship between internal needs and the resulting effort expended to
fulfill them, Vroom separates effort (which arises from motivation), performance, and outcomes.

Vroom, hypothesizes that in order for a person to be motivated that effort, performance and motivation must be
linked. He proposes three variables to account for this, which he calls Valence, Expectancy and Instrumentality.

Expectancy is the belief that increased effort will lead to increased performance i.e. if I work harder then this will be
better. This is affected by such things as:

1. Having the right resources available (e.g. raw materials, time)

2. Having the right skills to do the job
3. Having the necessary support to get the job done (e.g. supervisor support, or correct information on the job)

Instrumentality is the belief that if you perform well that a valued outcome will be received i.e. if I do a good job,
there is something in it for me. This is affected by such things as:

1. Clear understanding of the relationship between performance and outcomes – e.g. the rules of the reward
‘game’
2. Trust in the people who will take the decisions on who gets what outcome
3. Transparency of the process that decides who gets what outcome
Valence is the importance that the individual places upon the expected outcome. For example, if I am mainly
motivated by money, I might not value offers of additional time off.

Having examined these links, the idea is that the individual then changes their level of effort according to the value
they place on the outcomes they receive from the process and on their perception of the strength of the links between
effort and outcome.

So, if I perceive that any one of these is true:

1. My increased effort will not increase my performance

2. My increased performance will not increase my rewards
3. I don’t value the rewards on offer

...then Vroom’s expectancy theory suggests that this individual will not be motivated. This means that even if an
organization achieves two out of three, that employees would still not be motivated, all three are required for
positive motivation.

Here there is also a useful link to the Equity theory of motivation: namely that people will also compare outcomes
for themselves with others. Equity theory suggests that people will alter the level of effort they put in to make it fair
compared to others according to their perceptions. So if we got the same raise this year, but I think you put in a lot
less effort, this theory suggests that I would scale back the effort I put in.

Crucially, Expectancy theory works on perceptions – so even if an employer thinks they have provided everything
appropriate for motivation, and even if this works with most people in that organisation it doesn’t mean that
someone won’t perceive that it doesn’t work for them.

At first glance this theory would seem most applicable to a traditional-attitude work situation where how motivated
the employee is depends on whether they want the reward on offer for doing a good job and whether they believe
more effort will lead to that reward.

However, it could equally apply to any situation where someone does something because they expect a certain
outcome. For example, I recycle paper because I think it's important to conserve resources and take a stand on
environmental issues (valence); I think that the more effort I put into recycling the more paper I will recycle
(expectancy); and I think that the more paper I recycle then less resources will be used (instrumentality)

Thus, this theory of motivation is not about self-interest in rewards but about the associations people make towards
expected outcomes and the contribution they feel they can make towards those outcomes.

Other theories, in my opinion, do not allow for the same degree of individuality between people. This model takes
into account individual perceptions and thus personal histories, allowing a richness of response not obvious in
Maslow or McClelland, who assume that people are essentially all the same.

Expectancy theory could also be overlaid over another theory (e.g. Maslow). Maslow could be used to describe
which outcomes people are motivated by and Vroom to describe whether they will act based upon their experience
and expectations.
 SET-1

Q.1 Trace the phases of evolution of human resource management.

Answer:
The historical background to the management techniques of human resources are in vogue since ancient times. It’s
only in the past 100 odd years that the techniques and study of human behaviour at work has become formal and
structured with certain basic practices established as core and a host of other practices left to each organization to
design and implement as per their individual business driven practices. As per Fisher, Schonfeldt and Shaw, in their
book titled Human Resources Management, they have characterised the history of HRM as having evolved through
four broad phases, the Craft system, the scientific system, the human relations approach and the prevalent
organizational science-human resources approach.
The Craft system refers to early trends noticed in Egypt and Babylon, where skills based training was provided to
people to ensure a steady flow of craftsmen required to build huge monuments. By the 13th century, subsequently
the trend was noticed in Europe and later craft guilds evolved to ensure not only the skill acquisition but regulate the
conditions of employment, level of skill and improved production techniques. Most relevant in the domestic industry
where generations of skilled workers trained and became experts in a particular skill.
The Scientific Management approach was a key part of the industrial revolution typical of the nineteenth and early
twentieth century. It was instilled in the principles of mass production and organization of work – simple work skills
and supervisory/managerial skills. This rapidly emerged as the assembly line approach to managing workflow,
which later Fredrick Taylor (1856-1915) pioneered based on the philosophy that employees wanted to be used
efficiently and money being the primary motivator. Over a period of time this was proved wrong as employee
dissent grew and union issues surfaced. It was during this phase that employee welfare as a key HR practice
emerged which redressed employee issues like recreational facilities, medical program and employee grievance
systems.
The Human Relations approach was an outcome of the famous studies undertaken by US social scientist Elton Mayo
and Fritz Roethlisberger at the Western Electric’s Hawthorne plant in Chicago.
The Hawthorne Studies: As described in virtually every book written about management, the human relations or
behavioral school of management began in 1927 with a group of studies conducted at the Hawthorne plant of
Western Electric, an AT&T subsidiary. Curiously, these studies were prompted by an experiment carried out by the
company’s engineers between 1924 and 1932. Following the scientific management tradition, these engineers were
applying research methods to answer job-related problems.
Two groups were studied to determine the effects of different levels of illumination on worker performance. One
group received increased illumination, while the other did not. A preliminary finding was that, when illumination
was increased, the level of performance also increased. Surprisingly to the engineers, productivity also increased
when the level of illumination was decreased almost to moonlight levels. One interpretation made of these results
was that the employees involved in the experiment enjoyed being the centre of attention; they reacted positively
because management cared about them. The reason for the increase in the production was not the physical but the
psychological impact of the employee’s attitude towards the job and towards the company. Such a phenomenon
taking place in any research setting is now called the Hawthorne effect.
As a result of these preliminary investigations, a team of researchers headed by Elton Mayo and F.J. Roethlisberger
from Harvard conducted a lengthy series of experiments extending over a six year period. The conclusions they
reached served as the bedrock of later developments in the human relations approach to management. Among their
key findings were the following:
• Economic incentives are less potent than generally believed in
influencing employees to achieve high levels of output.
• Leadership practices and work-group pressures profoundly influence employee satisfaction and performance.
• Any factor influencing employee behaviour is embedded in a social
system. For instance, to understand the impact of pay on performance, you also have to understand the climate that
exists in the work group and the leadership style of the superior.
Leadership Style and Practices: As a consequence of the Hawthorne Studies, worker attitudes, morale, and group
influences became a concern of researchers. A notable development of the nature occurred shortly after World War
II at the University of Michigan. A group of social scientists formed an organization, later to be called the Institute
for Social Research, to study those principles of leadership that were associated with highest productivity.

Finally the Organizational Sciences approach to human resources management has brought the focus to the scientific
process within organizations that can impact employee experience, and less on just the individual. Today’s
organizations focus on building their processes and policies and compete to emerge as ‘preferred employers’ (best
employer). It is not uncommon for competing organizations to woo the employees through advertising more and
better employee-friendly initiatives like work-from-home jobs, careers for married couples, global work assignments
and internal job postings and world class workplace infrastructures from in-campus cricket grounds to gymnasiums
for employee wellbeing. This is the HR that we now see around us.

Q.2 Explain the various techniques and methods used in selecting employees.

Answer: There is no shortcut to fair and accurate evaluation of a candidate. As mentioned earlier, the hiring
procedures are therefore, generally long and multiple. Organizations are constantly evaluating the selections tools
they use to hire and keep innovating to ensure they hire quality candidates.
The following are popular methods commonly used:
1 Initial or preliminary interview
2 Application blank or blanks.
3 Check of references.
4 Skill / Psychological tests.
5 Employment interview
6 Approval by the manager.
7 Medical examination.
8 Induction or orientation.
1. Preliminary Interview: The more non-selective the recruitment programme, the more likely it is that a preliminary
interview will be required. This initial interview is usually quite short and has as its object the elimination of the
obviously unqualified. In many instances it is a over-telephone / short face-to-face interview conducted at a desk.
The facts and impressions collected are of the type generally obtained in an initial interview. Many firms do not
bother to initiate any paperwork at this early stage. If the applicant appears to have some chance of qualifying for
existing job openings, he or she is given the application blank to complete.

2 Application Blank: An application blank is a traditional, widely accepted template for getting information from a
prospective applicant. This enables the recruiter to qualify the candidate to the next level in the selection process and
is used extensively subsequently during the selection process. The blank aids in the interview by indicating areas of
interest and discussion. It is a good means of quickly collecting verifiable basic historical data from the candidate. It
also is a excellent document to share with the manager and with the interviewers and is a useful device for storing
information for, later reference. These templates generally carry information on biographical data, educational
attainment, work experience, salary, personal items, and other items such as names and addresses of previous
employers, references etc.

3 Check of References: The use of references is common in most selection procedures. It involves minimum of
effort and time/money. The objective is to obtain evaluation of prior employers and professional colleagues, who
have known the candidate in a professional capacity. Checks on references are made by mail or telephone, and
occasionally in person, and by using a reference form.

4 Skill & Psychological Tests: The next step in the procedures outlined above is that of testing. The use of tests is
common and most popular in the lower levels in an organization. It serves as a excellent qualifying criteria and in
jobs that are dependent on a skill or a specific competency it is very useful. The objectivity of the test results make it
especially popular and a fair assessment of the individual.
Most organizations do not use psychological tests. However, there is a direct relationship between the size and firm
and the use of such tests in hiring. Most of the larger companies that can afford to have a more detailed and accurate
selection procedure do utilize some form of employment testing. It is the smaller company that frequently does not
bother with tests, but places greater reliance upon the interview.

5 Interviewing: Interviewing is probably the most widely used single method of selection. A substantial amount of
subjectivity, and therefore, unreliability, is to be expected from interviewing when used as a tool of evaluation.
The interview consists of interaction between interviewer and applicant. If handled properly, it can be a powerful
technique in achieving accurate information and getting access to material otherwise unavailable. Organizations
aware of the challenges of using interviews have come up with a variety of ways to overcome the subjectivity. The
use of multiple rounds of interview (even upto 8-10 rounds) and use of panel interviews are some common work-
around.
Four kinds of interviews for selection have been identified. These are:
1. Preliminary interview: These interviews are preliminary screening of applicants to decide whether a more detailed
interview will be worthwhile. The applicant is given job details during the interview to afford him freedom to decide
whether the job will suit him. This method saves the company’s time and money.

2. Stress interview: Stress interviews are deliberate attempts to create pressure to observe how an applicant performs
under stress. Methods used to induce stress range from frequent interruptions and criticism of an applicant’s opinion,
to keeping silent for an extended period of time. The most important advantage of the stress interview is that helps to
demonstrate important personality characteristics which would be difficult to observe in tension-free situations.
However, stress-inducing must be done carefully by trained and skilled interviewers.

3. Depth interview: Depth interviews cover the complete life history of the applicant and include such areas as the
candidate’s work experience, academic qualifications, health interest, and hobbies. It is an excellent method for
executive selection, performed by qualified human resources.

4. Patterned interview: Patterned interviews are a combination of direct and indirect questioning of the applicant.
The interviewer has certain clues and guidelines to areas which should be probed deeply and the interview also
encourages the candidate to express the relevant information freely.
After the patterned interview is complete, the interviewer should evaluate the candidate on the basis of practical
experience. According to R.N. McCurry and others, certain factors lead to accurate predictions of the candidate’s
suitability for a particular position. The factors are: (1) basic character traits, (2) motivation, and (3) emotional
maturity. One advantage of a patterned interview is that systematic and chronological information is obtained, and
hence this yields to statistical analysis.
6. Approval by the Manager: Following the outlined procedure, we should now be of the opinion that a candidate
who has successfully completed all steps so far should be hired. In executing the recruitment unit screening
functions, the emphasis tends to be more on formal qualifications and general suitability. When the manager takes
over, the emphasis tends to switch toward more specifically job oriented worker characteristics such as training and
relevant past experience.
7. Medical Examination: The medical examination is an employment step found in most businesses. It can vary from
a very comprehensive examination and matching of an applicant’s physical capabilities to job requirements to a
simple check of general physical appearance and well-being. In the selection procedure the physical examination has
at least three basic objectives. First, it serves to ascertain the applicant’s physical capabilities.
The second objective of the examination is to protect the company against unwarranted claims under workers’
compensation laws, or against lawsuits for damages. And the final objective is to prevent communicable diseases
from entering the organization.

8 Induction: Induction is concerned with introducing or orienting a new employee to the organization. Organizations
could have induction programs of duration of
1-3 days and even up to 1/3/6 months. Common objectives of an Induction program can be listed as covering:
1. Overview of the organization, its history, its hero’s and important stories in the life of the firm so far like mergers,
acquisitions, JV’s, expansion in new countries etc…
2. Organization Vision / Mission and Objectives statement, its structure, hierarchy of the top and the senior
management, structure of the teams/divisions, focus on the division the employee/s is/are joining
3. Overview of the HR policies and processes and introduction to the Facilities team, IT team and other relevant
teams per the location of joining.
4. Handover to the manager and induction at a team level on specificities related to the job and its responsibilities.
Organizations also build processes by which the new employee provides feedback on the on boarding experience
and use this information to improve the Induction process. In as much as various firms report that over half of their
voluntary resignations occur within the first 6 months, proper orientation can do much to reduce this problem and its
accompanying costs

Q.3 A company is being set up by a group of 3 professionals. The business objective is to sell mobile phones of a
Chinese company which has come up with an inexpensive range of handset ranging from Rs.1200 to Rs.7000. They
need to submit a human resource plan to their investors. Explain the process of Human Resource Planning system
for this company, which covers all important steps needed for HRP.

Ans- Human resource or manpower planning is ‘the process by which a management determines how
anorganization should move from its current manpower position to its desired manpower position. Through
planning, a management strives to have the right number and the right kind of people at the right places, at the right
time, to do things which result in both the organization and the individual receiving the maximum long-range
benefit". The organization’s business plan to invest in a particular product/market or a service will drive the HRP
activity towards hiring to meet the business need. In the event an organization is divesting or shutting down a
particular business unit or a manufacturing division the HRP activities would focus on the redeployment of the
workforce that will be rendered unemployed as a result of the business decision. An organization wanting to retain
its current market share and revenue projection at status quo would be supported by HRP activities that are limited
to only filling positions falling vacant due to natural organizational attrition. Hence the HRP focus in a organizations
is closely linked to the business plan and acts as a bridge between what an organization wishes to achieve and how
it will go about achieving it w.r.t. the human resources requirements. The scope of HRP is futuristic in nature and
usually runs parallel to the annual business planning exercise. It commences prior to the start of the company’s new
financial year. For example if
the business year for a company runs April to March. The business planning and the HR planning
activities for the New Year beginning in April is usually completed and in place by the 1st week of

April. Once the HR plan is in place it is broken up

into a quarterly or even a monthly plan which then
is the input for the recruitment team to go and
hire accordingly.

Steps in Human Resource Planning:

The Human Resource Planning process consists of a set of activities,viz.

a)Forecasting manpower requirements, either by using mathematical tools to project trends in the
economic environment and development in industry, or in by using simple judgemental stimates based on the
specific future business plans of the company;
b) Creating an inventory of present manpower resources and assessing the extent to which these resources are
ployed/ptimally;.
c)Identifying manpower problems by projecting present resources into the future to determine
their adequacy, both quantitatively and
d)Planning the necessary programmes of requirement selection, training, development, utilization, transfer,
promotion, motivation and compensation to ensure that future manpower requirements areproperly met.Thus, it will
be noted that ‘manpower planning consists in projecting future manpower requirements and developing manpower
plans for the
implementation of the projections’.

Q.4 Explain Thayer and McGhee ‘Assessment of training requirement’ model.

Answer- Assessment of Training Requirement: Given the investment that organizations make in training it is
critical for organizations to ensure that the money is rightly spent. Training needs consider both the organization’s
demands and that of the individual’s. Diversification of product lines, new technology, and hence a new kind of job,
or a shift in organizational culture or ways of conducting business are common organizational needs that cover most
employees in the company. On the other hand demands that pertain to individual’s growth and development,
including induction training for new hire’s, or training necessitated by job rotation due to an organization’s internal
mobility policies are examples of individual need based training.
The model we shall examine here is the Thayer and McGhee model. It is based on the following three factors:
1. Organization analysis
2. Task analysis
3. Individual analysis

1 Organization Analysis: Total Organization Analysis is a systematic effort to understand exactly where training
effort needs to be emphasized in an organization. It involves a detailed analysis of the organization structure,
objectives, human resources and future business plans, and an understanding of its culture.
The first step in organization analysis is establishing a clear understanding of both short-run and long-run business
and people goals. Long-term objectives are the broad directions in which the organizations would move over a long
duration. These long-term objectives are then broken down into specific strategies and short-term goals for each of
the units/departments. In an organization, the cumulative effect of all these would ultimately lead to the long-term
goal. Short-term goals are constantly in need of adaptation to the changing environment, both external and internal.
For an organization analysis, there are three essential requirements: (1) an adequate number of employees available
to ensure fulfilment of the business operation; (2) that employee performance is up to the required standard; and (3)
that the working environment in their units/departments is conducive to fulfilment of tasks.
In order to ensure the first two requirements a human resource inventory needs to be made. Data regarding positions,
qualifications, vacancies, replacements and training time required for replacements have to be worked out. Job
standards must also be worked out.
Various efficiency and productivity indexes, or ratios such a productivity ratios, cost per unit etc, can be worked out
to determine not only efficiency but also adequacy, in terms of under-manning or over-manning, of the workforce.
An important dimension of organizational need-based analysis, is the diagnosis of the state of the organization
"climate" or “culture”. While rules, procedures, systems and methods all contribute to the making of the
environment, much of it is also determined by the attitude that the "people" have in the organization-for instance, the
attitude that top management has towards its subordinate staff and the attitudes that members have towards work,
Managers and company procedures. These attitudes are learnt, they result from the person’s experience both within
and outside the organization, and training inputs could be used to effect changes of attitude and consequently of the
organizational climate.
In analyzing the organization climate, both direct and indirect methods could be used. Direct methods are
observation, use of questionnaires, and interviews. Reliance or indirect methods would not give a clear
understanding of the attitudes and predispositions of employees. In fact, factors such as low absenteeism and low
turnover are not by themselves indicators of positive or negative attitudes, and high or low morale. It would be better
to make a careful analysis and study each indicator in a particular situation in conjunction with more direct methods
like attitude surveys. Analysis and interpretation of the data may give clear clues not only to attitudinal training
needs but possibly also to kill training needs.

2. Task Analysis: This activity entails a detailed examination of each job, its components, its various operations
and the conditions under which it has to be performed. The focus here is on the "task" itself and the training required
to perform it, rather than on the individual. Analysis of the job and its various components will indicate the skills
and training required to perform the job at the required standard.

Standard of Performance: Every job has an expected standard of performance (SOP). Unless such standards are
attained, not only will inter-related jobs suffer, but organizational viability will be affected, and so will the
expectations that have been set for that particular job itself. If the standards set for the performance of a job are
known, then it is possible to know whether the job is being performed at the desired level of output or not.
Knowledge of the "task" will help in understanding what skills, knowledge and attitudes an employee should have.
Methods: If an employee is asked to perform a job, the exact components of the job and the standard of
performance must be known. Task analysis entails not merely a simple listing of the various job components, but
also of the various sub-tasks. Conventional methods of job analysis are usually suitable for task analysis. They are:
1. Literature review regarding the job.
2. Job performance.
3. Job observation,
4. Data Collection regarding job interviews.
For blue-collar employees, more precise industrial-engineering techniques, like time and motion studies, could be
used, and for white-collar employees, work sampling observation, interviews, and job performance data analysis
could be employed. The focus in task analysis approach to identifying training needs is with the clear objective of
enhancing the performance standard of a given task. This information is then utilised to establish the training
programme for the employee. It helps identify the skill required, either in terms of education or training, to perform
the job, knowledge, and finally attitudinal pre-dispositions such as the attitudes, towards safety, or interpersonal
competence that will ensure that the job is performed optimally.

3 Individual Analysis: Individual analysis is the third component in identifying training needs. The focus of
individual analysis is on the individual employee, his abilities, and the inputs required for job performance, or
individual growth and development in terms of career planning.
The common source for this needs analysis usually forms parts of the performance assessment process. Clues to
training needs can also come from an analysis of an individual’s or a group’s typical behaviour. The primary sources
of such information are:
(1) Observation at place or work, examination of job schedules, quantum of spoilage, wastage, and clues about
interpersonal relations of the employees; (2) interviews with superiors and employees; (3) comparative studies of
good vs. poor employees, to identify differences, skills and training gaps; (4) personnel records; (5) production
reports; and (6) review of literature regarding the job and machines used. Job-knowledge tests, work sampling and
diagnostic psychological tests also provide information about employees.

Q.5 Write short notes on:

 Succession Planning
 Career Planning(6.3 and 6.5)

Answer:

 Succession Planning

From Global Organization development Summit (GODS) held last month, it was worth noting that one of the
challenges facing the organizations today is succession planning. (Succession planning can be broadly defined as
identifying future potential leaders to fill key positions)

It is imperative that in all organizations discounting the size of the organization or the area of operation, it is
important to have people with the right skills to fill key and top leadership jobs. Traditionally most of the companies
did fill the key positions from within the organization through mostly secretive approach, which was successful,
thanks to the stable markets and and belief among the employees in long-term career. However globalization and
liberalization has fuelled the growth of economies generating numerous job opportunities, but the existing workforce
is unable to meet the demands of the market, which has stimulated the human resource professionals to think of
succession planning.

Some statistics in favor of the statement are given below:

1. In 2005, one in seven of the world's largest companies made a change in leadership compared with only one in 11
a decade earlier.
2. In the year 2000, a Retention Practices Survey conducted by the Society for Human Resource Management
reported that the highest rate of resignations occurred within professional ranks.
3. By 2005, one in five executives will be eligible for retirement and according to Development Dimensions
International, a significant number of companies will see forty to fifty per cent of their executives leave in the next
five years.
4. Xerox forced out Richard Thoman just 13 months after making him CEO. Apple Computer went through three
CEOs in quick succession before Steve Jobs returned to set the company straight. Coca-Cola, Philip Morris, and
Toys R Us have had to fill their CEO slots twice in less than three years. Mattel's Jill Barad held the top job for just
two years before investors made their lack...

 Career Planning(6.3 and 6.5)

Table of Contents

Introduction 1
Changes in the workforce 2
The potential impacts of the above changes cast on my desired career are: 3
The labour workforce is becoming unsound 3
My desired field of work 4
My desired level and type of responsibility 5
Short term 5
Long term 5
The competencies I want to use or develop and how these relate to my desired field of work. 6
Customer service skill 6
Ability to save for future planning and development 7
How my values align with my desired field of work 7
How I view success in the workplace 8
Motivated 8
Engaging with the customer 8
Strive to reach higher 8
Career Strategic Plan 9
Statement of Career Strategies 9
The SWOT Analysis 10
Conclusion 11
Reference 12

Introduction

For the purpose of this assessment, to construct a career strategic plan hence it is necessary to explicate my desired
work career. Everyone at some stage in their life will ask the question “What do I want to be when I grow up?” Well
personally for me, nothing too fancy, like doctors or lawyers, it’s just simply to be a successful business woman.  
Through many working experiences I have developed a strong passion for the retailing business hence I anticipate in
the near future to become my own boss and own many retailing businesses throughout Australia and ultimately
become a wholesaler to distribute stock for my retailing businesses and many other businesses.

Therefore this report will map out my career path and choices hence creating my own personal career strategic plan.
In doing so I will discuss of the changes in the workforce and how it impacts on my career. Furthermore I will
embrace my desired field of work, the type of roles, responsibilities and competencies that needs to be developed to
aid my field of work. In addition I will explain how my values align with my desired field of work and how I view
success in the work place. More importantly I will include a table of my career...
Q.6 Discuss Individual evaluation methods used for performance appraisal.

Answer:

PERFORMANCE APPRAISAL:

People differ in their abilities and their aptitudes. There is always some difference between the quality and quantity
of the same work on the same job being done by two different people. Performance appraisals of Employees are
necessary to understand each employee’s abilities, competencies and relative merit and worth for the organization.
Performance appraisal rates the employees in terms of their performance.

Performance appraisals are widely used in the society. The history of performance appraisal can be dated back to the
20th century and then to the second world war when the merit rating was used for the first time. An employer
evaluating their employees is a very old concept. Performance appraisals are an indispensable part of performance
measurement.

Performance appraisal is necessary to measure the performance of the employees and the organization to check the
progress towards the desired goals and aims.

The latest mantra being followed by organizations across the world being – "get paid according to what you
contribute" – the focus of the organizations is turning to performance management and specifically to individual
performance. Performance appraisal helps to rate the performance of the employees and evaluate their contribution
towards the organizational goals. If the process of performance appraisals is formal and properly structured, it helps
the employees to clearly understand their roles and responsibilities and give direction to the individual’s
performance. It helps to align the individual performances with the organizational goals and also review their
performance.

Performance appraisal takes into account the past performance of the employees and focuses on the improvement of
the future performance of the employees. Here at naukrihub, we attempt to provide an insight into the concept of
performance appraisal, the methods and approaches of performance appraisal, sample performance appraisal forms
and the appraisal softwares available etc. An attempt has been made to study the current global trends in
performance appraisal.

Once a Year Overview every company give the appraisal and HR need to give Self Appraisal form to employees
,HR need to conduct meeting to review Performance

Performance Appraisal Methods :

1. Critical incident method

The critical incidents for performance appraisal is a method in which the manager writes down positive and negative
performance behavior of employees throughout the performance period

2. Weighted checklist

This method describe a performance appraisal method where rater familiar with the jobs being evaluated prepared a
large list of descriptive statements about effective and ineffective behavior on jobs

3. Paired comparison analysis

Paired comparison analysis is a good way of weighing up the relative importance of options. A range of plausible
options is listed. Each option is compared against each of the other options. The results are tallied and the option
with the highest score is the preferred option.

4. Graphic rating scales

The Rating Scale is a form on which the manager simply checks off the employee’s level of performance. This is the
oldest and most widely method used for performance appraisal.

5. Essay Evaluation

This method asked managers / supervisors to describe strengths and weaknesses of an employee’s behavior. Essay
evaluation is a non-quantitative technique. This method usually use with the graphic rating scale method.

6. Behaviorally anchored rating scales

This method used to describe a performance rating that focused on specific behaviors or sets as indicators of
effective or ineffective performance. It is a combination of the rating scale and critical incident techniques of
employee performance evaluation.

7. Performance ranking method

Ranking is a performance appraisal method that is used to evaluate employee performance from best to worst.

Manager will compare an employee to another employee, rather than comparing each one to a standard
measurement.

8. Management By Objectives (MBO)

MBO is a process in which managers / employees set objectives for the employee, periodically evaluate the
performance, and reward according to the result.

MBO focuses attention on what must be accomplished (goals) rather than how it is to be accomplished (methods)

9. 360 degree performance appraisal

360 Degree Feedback is a system or process in which employees receive confidential, anonymous feedback from the
people who work around them.

10.Forced ranking (forced distribution)

Forced ranking is a method of performance appraisal to rank employee but in order of forced distribution.

For example, the distribution requested with 10 or 20 percent in the top category, 70 or 80 percent in the middle, and
10 percent in the bottom.

11. Behavioral Observation Scales

Behavioral Observation Scales is frequency rating of critical incidents that worker has performed.

Most of the companies or organisations follow 360 degree performance appraisal.

Hope this will be helpful to you.

MB0041 – Financial and Management Accounting - 4 Credits

SET-1

Q.1 Explain the Various accounting Concepts and Principles?

Answer: Concepts: Concepts take the form of assumptions or conditions, which guide the accountants while
preparing accounting statements.Types of Accounting Concepts
As said earlier, concepts are the basic assumptions or conditions upon which the science of accounting is based.
There are five basic concepts of accounting, namely – business entity concept, which is also termed as separate
entity concept, going concern concept, money measurement concept, periodicity concept and accrual concept. Each
concept is discussed below.

Business Separate Entity Concept: The essence of this concept is that business is a separate entity and it is different
from the owner or the proprietor. It is an economic unit which owns its assets and has its own obligations. This
enables the business to segregate the transactions of the company from the private transactions of the proprietor(s).

Going concern concept: The fundamental assumption is that the business entity will continue fairly for a long time
to come. There is no reason why an enterprise should be promoted for a short period only to liquidate the business in
the foreseeable future. This assumption is called “going concern concept”.
This concept forms the basis for the distinction between expenditure that will yield benefit over a long period of
time (Fixed Assets) and expenditure whose benefit will be exhausted in the short term (Current Asset). Similarly
liabilities are classified as short term liabilities and long term liabilities.

Money Measurement Concept: All transactions of a business are recorded in terms of money. An event or a
transaction that cannot be expressed in money terms, cannot be accounted in the books of accounts.

Periodicity Concept: The time interval for which accounts are prepared is an important factor even though we
assume long life for a business. The accounting period could be half year or even a quarter. The financial statements
should be prepared at the end of each accounting period so that income statement shows profit or loss for that
accounting period. So also a balance sheet is prepared to depict the financial position of the business.
Accrual Concept: Profit earned or loss suffered for an accounting period is the result of both cash and credit
transactions. It is possible that certain incomes are earned but not received and similarly certain expenses incurred
but not yet paid during an accounting period. But it is relevant to consider them while computing the financial
results just because they are related to the specific accounting period.
Accounting Principles: Accounting Principles are the rules basing on which accounting takes place and these rules
are universally accepted.
Principle of Income Recognition: According to this concept, revenue is considered as being earned on the date on
which it is realized, i.e., the date on which goods and services are transferred to customers for cash or for promise. It
should further be noted that it is the amount which the customers are expected to pay which shall be recorded. In
effect, only revenue which is actually realized should be taken to profit and loss account. Unrealized revenue should
not be taken into consideration for determining the profit.
Principle of Expense: Expenses are different from payments. A payment becomes expenditure or an expense only
when such payment is revenue in nature and made for consideration.
Principle of Matching Cost and Revenue: Revenue earned during a period is compared with the expenditure incurred
to earn that income, whether the expenditure is paid during that period or not. This is matching cost and revenue
principle, which is important to find out the profit earned for that period. Here costs are reported as expenses in the
accounting period in which the revenue associated with those costs is reported.
Principle of Historical Costs: This is called ‘cost’ principle. All assets are recorded at the cost of acquisition and this
cost is the basis for all subsequent accounting for the assets. The expenses and the goods purchased are shown at the
value at which they are incurred. The value of the assets is constantly reduced by charging depreciation against their
cost to present their book value in the balance sheet.
Principle of Full Disclosure: The business enterprise should disclose relevant information to all the parties
concerned with the organization. It means that any information of substance or of interest to the average investors
will have to be disclosed in the financial statements.
Double Aspect Principle: This concept is the most fundamental one for accounting. A business entity is an
independent unit and it receives benefits from some and gives benefits to some other. Benefit received and benefit
given should always match and balance.
Modifying Principle: The modifying principle states that the cost of applying a principle should not be more than the
benefit derived from. If the cost is more than the benefit, then that principle should be modified. This is called cost-
benefit principle. There should be flexibility in adopting a principle and the advantage out of the principle should
over weigh the cost of implementing the principle.
Principle of Materiality: While important details of financial status must be informed to all relevant parties,
insignificant facts which do not influence any decisions of the investors or any interested group, need not be
communicated. Such less significant facts are not regarded as material facts. What is material and what is not
material depends upon the nature of information and the party to whom the information is provided. While income
has to be shown for income tax purposes, the amount can be rounded off to the nearest ten and fraction does not
matter. The statement of account sent to a debtor contains all the details regarding invoices raised, amount
outstanding during a particular period. The information on debtors furnished to Registrar of Companies need not be
in detail.
Principle of Consistency: Consistency is required to help comparison of financial data from one period to another.
Once a method of accounting is adopted, it should not be changed. For instance if stock is valued under FIFO
method in first year it should be valued under the same method in the subsequent years also. Likewise if the firm
chooses to depreciate assets under diminishing balance method, it should continue to do so year after year, unless
the management takes a policy decision to change the depreciation method. Any change in the accounting methods
should be informed to the concerned authorities with justification.
Principle of Conservatism or Prudence: Accountants follow the rule “anticipate no profits but provide for all
anticipated losses “. Whenever risk is anticipated sufficient provision should be made. The value of investments is
normally taken at cost, even if the market value is higher than the cost. If the market value expected is lower than
the cost, then provision should be made by charging profit and creating investment fluctuation fund. This is the
principle of conservatism and it does not mean that the income or the value of assets should be intentionally under
stated

Q.2 Pass journal entries for the following transactions

1. Madan commenced business with cash Rs. 70000
2. Purchased goods on credit 14000
3. Withdrew for private use 3000
4. Goods purchased for cash 12000
5. Paid wages 5000

Answer:
1. Capital a/c Dr. to Cash a/c.
2. Goods a/c Dr. to Creditors a/c.
3. Drawings a/c Dr. to Cash a/c
4. Goods a/c Dr. to Cash a/c
5. Wages a/c Dr. to Cash a/c.

Q.3 Explain the various types of errors disclosed by Trial Balance?

Answer: Errors affecting Trial Balance or Errors Disclosed by Trial Balance:

If the Trial Balance does not tally, it will indicate that certain errors have been committed
which have affected the agreement of the Trial Balance. The accountant will then proceed
to find out the errors and ultimately the errors will be located. Such errors are called
‘Errors Disclosed by Trial Balance or Errors which affect the agreement of Trial Balance.
Until such errors are rectified, the Trial Balance will not agree. Some of these types of errors are as follows.

Wrong Casting: If the total of the Cash Book or some other Subsidiary Book is wrong the Trial Balance will not
tally. For example, the total of the Purchase book has been added Rs. 2000 in excess. When this total will be posted
to the debit side of the purchase account, it will also show an excess debit of Rs. 2000 and hence, the Trial Balance
will not tally.

Posting to the Wrong Side: If instead of posting an amount on the debit side of an account, it is posted on the credit
side, or vice versa, the Trial balance will not tally. For example, goods for Rs. 2000 from Gopal. If instead of
posting the amount on the credit side of Gopal’s account it is posted to his debit, the debit side of the Trial Balance
will exceed the credit by Rs. 4,000.

Posting of Wrong Amount: The Trial Balance will not tally if the posting in an account is made with an incorrect
amount. For example, goods for Rs. 600 have been purchased from Mahendra. If, it has been correctly entered in the
Purchase Book or purchase account, but while posting to Mehendra’s account, in credit side (correct side) the
amount posted is Rs. 60 instead of Rs. 600, the Trial Balance will not tally.

Omission of Posting of One Side of an Entry: For example if Rs. 500 have been received from Ram and correctly
entered in the Cash Book or Cash Account but if it is mmitted to be posted on the credit side of Ram’s Account, the
Trial Balance will not tally.

Double posting in a Single Account: For example if Rs. 500 have been received from Shyam Lal and correctly
entered in the Cash Account, but if it is posted twice on the credit side of Shyam Lal’s account, the Trial Balance
will not tally.

Errors of Totaling and Balancing of Accounts in the Ledger: Errors may occur in the totaling of debit or credit
sides of accounts in the Ledger or in the balancing of accounts in the Ledger. Because the balances of accounts are
transferred to the Trial Balance, Then the Trial balance will not tally.

Q.5 Differentiate Financial accounting and Management accounting?

Answer: Distinction between Financial Accounting and Management Accounting

Financial accounting is the preparation and communication of financial information to outsiders such as creditors,
bankers, government, customers and so on. Another objective of financial accounting is to give complete picture of
the enterprise to shareholders. Management accounting on the other hand aims at preparing and reporting the
financial data to the management on regular basis. Management is entrusted with the responsibility of taking
appropriate decisions, planning, performance evaluation, control, management of costs, cost determination etc., For
both financial accounting and management accounting the financial data is the same and the reports prepared in
financial accounting are also used in anagement accounting But the following are major differences between
Financial accounting and Management accounting.

Financial accounting
· The primary users of financial accounting information are shareholders, creditors, government Authorities,
employees etc.
· Accounting information is always expressed in terms of money
· Financial data is presented for a definite period, say one year or a quarter.
· Financial accounting focuses on historical data
· Financial accounting is a discipline by itself and has its own principles, policies and conventions

Management accounting

· Top, middle and lower level managers use the information for planning and decision making.
· Management accounting may adopt any measurement unit like labour hours, machine hours or product units
for the purpose of analysis.
· Reports are prepared on continuous basis, monthly or weekly or even daily.
· Management accounting is oriented towards future .
· Management accounting makes use of other disciplines like economics, management, information system,
operation research etc,

Q.4 From the following balances extracted from Trial balance, prepare Trading Account.
The closing stock at the end of the period is Rs. 56000

Particulars Amount in Rs.

Stock on 1-1-2004 70700
Returns inwards 3000
Returns outwards 3000
Purchases 102000
Debtors 56000
Creditors 45000
Carriage inwards 5000
Carriage outwards 4000
Import duty on materials received 6000
from abroad
Clearing charges 7000
Rent of business shop 12000
Royalty paid to extract materials 10000
Answer:
DR TRADING ACCOUNT FOR THE YEAR ENDING -------Cr
PRTICULARS Rs PRTICULARS Rs
STOCK ON 1-1-2004 70700
To Purchases 102000 By Sales 250000
(-) Returns (-) Returns
Outwards 3000 99000 inwords 3000 247000
To Carriage Inwards 5000 By Closing STOCK 56000
To Import Duty 6000
To Clearing Charges 7000
To Royalty 10000
To Fire Insurance 2000
To Wages 8000
To Gas Electricity Water 4000
To Gross Profit 91300
Total 303000 Total 303000

Q.6 Following is the Balance Sheet of M/s Srinivas Ltd. You are required to prepare a Fund Flow Statement.

Answer:
Schedule of Changes in Working Capital
Balance as on
2006 2007 Increase Decrease
Current Assets
Cash 10,000 13,000 3000
Debtors 25,000 27,000 2000
Stock 37,000 39,000 2000
Total current assets
Say A 72,000 79,000
Current Liabilities
Trade Creditors 29,000 31,000 2000
Short term lons 15,000 16,500 1500
Accrued expenses 8,000 7,500 500
Total current 52,000 55,000
liabilites,
Say B
Working Capital 20,000 24,000
(A-B)
Nat increases in 4,000 - 4000
Working Capital
Total 24,000 24,000 7500 7500
 SET-2
Q.1 Explain the tools of Management accounting?
Answer: Tools of Management Accounting
Management Accounting uses the following tools or techniques to fulfill its responsibilities and duties towards
management.
• Financial Statement Analysis
• Funds Flow Analysis
• Cash Flow Analysis
• Costing Techniques that includes marginal costing, differential costing, standard costing, and responsibility costing

• Budgetary control
• Management Reporting.

Financial Statements are indicators of two significant factors that include profitability and financial soundness.
Analysis and interpretation of financial statements enables full diagnosis of the profitability and financial soundness
of the firm. Analysis means methodical classification of the data given in the financial statements. Methodical
classification enables comparison of the various inter-connected figures with each other. Interpretation explains the
meaning and significance of the data.
Funds Flow Analysis is an important tool for management accountant. It reveals the changes in working capital
position, the sources from which the working capital was obtained and the purpose for which it was used. It also
reveals the changes that have taken place behind the Balance Sheet.

Cash Flow Statement identifies the sources and application of cash. It is prepared on the basis of actual or estimated
data. It depicts the changes in the cash position from one period to another. A projected cash flow or a cash budget
will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to
pay bank loans and to pay dividends to the shareholders.

Standard Costing is the preparation and use of standard costs, their comparison with actual costs and the analysis of
variance. It discloses the cost of deviations from standards. It aims at assessing the cost of a product, process or
operation under standard operating conditions.

Budgetary Control has become an essential tool of management for controlling costs and to maximize profit. It helps
to compare the current performance with pre-planned performance thereby correcting the deviations if any.

Management Reporting System is an organized method of providing each manager with all the data and only those
data which he needs for his decisions, when he needs them and in a form which aids his understanding and
stimulates his action.
Q.2 Find the contribution and profit earned if the selling price per unit is Rs.25, variable cost per unit Rs.20 and
fixed cost Rs.3,05,000 for the output of 80,000 units.

Q.3 Explain the essential features of budgetary control?

Answer:
Essential Features Of Budgetary Control
An effective budgeting system should have essential features to get best results. In this direction, the following may
be considered as essential features of an effective budgeting.

Business Policies defined: The top management of an organization strives to have an action plan for every activity
and for each department. Every budget should reflect the business policies formulated from time to time. The
policies should be precise and the same must be clearly defined. No ambiguity should enter the document. Clear
knowledge should be provided to all the personnel concerned who are going to execute the policies. Periodic
suggestions should be called for.

Forecasting: Business forecasts are the foundation of budgets. Time and again Discussions should be arranged to
derive the most profitable combinations of forecasts Better results can be anticipated based on the sound forecasts.
As far as possible, quantitative techniques should be made use of while forecasting.

Formation of Budget Committee: A budget committee is a group of representatives of various important

departments in an organization. The functions of committee should be specified clearly. The committee plays a vital
role in the preparation and execution of Budget estimated. It brings coordination among other departments. It aids in
the Finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair.

Accounting System: To make the budget a successful document, there should be proper Flow of accurate and
timely information. The accounting adopted by the organization should be proper and must be fine-tuned from time
to time.

Organizational efficiency: To make the budget preparation and its subsequent Implementation a success, an
efficient, adequate and best organization is necessary a Budgeting system should always be supported by a sound
organizational structure. There must be a clear cut demarcation of lines of authority and responsibility. There must
also be a delegation of authority from top to bottom line. .

Management Philosophy: Every management should set a healthy philosophy while opting for the budget.
Management must wholehear4tedly support the activities which Developing a budget. Encouragement should flow
from top management. All the Members must be involved to make it a workable preposition and a dream-driven
Document.

Reporting system: Proper feedback system should be established. Provision should be made for corrective
measures whenever comparative measures are proposed. Availability of statistical information: Since budgets are
always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data should
be made available to each department.

Motivation: Since budget acts as a mirror, the entire organization should become smart in its approach. Every
employees both executive and non-executives should be made part of the overall exercise. Employees should be
persuaded than pressurized to appreciate the Benefits of the budgets so that the fruits can be shared by all the
members of the organization.

Q.4 A large retail stores makes 25% of its sales for cash and the balance on 30 days net. Due to faulty collection
practice, there have been losses from bad debts to the e extent of 1 % of credit sales on average in the past. The
experience of the store tells that normally 60 % of credit sales are collected in the month following the sale, 25% in
the second following month and 14 % in the third following month. Sales in the preceding three months have been
January 2007 Rs.80, 000, February Rs.1, 00,000 and March Rs.1, 40,000. Sales for the next three months are
estimated as April Rs.1, 50, 000, May Rs.1, 10,000 and June Rs.1, 00,000. Prepare a schedule of projected cash
collection.

Answer:
 Statement of expected Cash Receipts

Collection form April May June

Cash sales 37,500 27,500 25,000
Collection form Debtors - January 8,400 - -
February 18,750 10,500 -
March 63,000 36,350 14,700
April - 67,500 28,125
May - - 49,500

127,65 141,85
TOTAL
0 0 117,325

Assume that the credit policy is enforced strictly, what would be the cash receipts.

Cash sales :
Debtors 37,500 27,500 25,500
March 105000 - -
April - 112500 -
May - - 82,500

140,00
Total
142,500
0 107,500

Forecasts of cash payments: The items of expenditures differ from business to

Business. The normal items which come under the lists are :
1. Cash purchases
2. Payment to creditors or suppliers
3. Payments to Bills payable
4. Payment to employees in the nature of wages, salaries
5. Manufacturing, selling and distribution and administration expenses
6. Repayments of bank load and special obligations such as bonus, donations, advances
7. Interest and dividend payments
8. Capital expenditures for acquiring assets of enduring benefit
9. Payment of tax liability
10. Other expenses of periodic nature

Q.5 A factory works on standard costing system. The standard estimates of material for the manufacture of 1000
units of a commodity are 400 kg at Rs. 2.50 per kg. When 2000 units of a commodity are manufactured, it is found
that 820 kgs of material is consumed at Rs. 2.60 per kg. Calculate the material variance?

Answer:

First calculate the standard quantity and standard cost.

Standard quantity: For manufacture of 1000 units, the standard estimates = 400 kgs.
Therefore, for actual manufactured quantity, the standard is 2000 x 400 / 1000 or 800
kgs.
Standard cost = Standard quantity x Standard rate
=> 800 x Rs.25
=> Rs.2, 000
Actual Cost = 820 x Rs. 2.60
=> Rs. 2,132
Material cost variance = Standard cost – Actual cost
= > 2000 – 21312
=> 132 ADV.
Material price variance = (SR – AR ) AQ
=> 2.5-0 – 2.60 x 820
=> Rs.82 ADV
Material usage variance = 800 – 820 x 2.50

=> Rs.50 ADV

Q.6 The Anchor Company Ltd produces most of its electrical parts in its own plant. The company is at present
considering the feasibility of buying a part from an outside supplier for Rs. 4.5 per part. If this were done, monthly
costs would increase by Rs. 1,000

The part under consideration is manufactured in Department 1 along with numerous other parts. On account of
discontinuing the production of this part, Department 1 would have somewhat reduced operations. The average
monthly usage production of this part is 20,000 units. The costs of producing this part on per unit basis are as
follow.

Material Rs. 1.80

Labor (half-hour) 2.40

Fixed overheads 0.80

Total costs 5.00

MB0042 – Managerial Economics - 4 Credits

SET-2

1. Define Pricing Policy. Explain the various objective of pricing policy?

Answer: Pricing policy refers to the policy of setting the price of the product or products and services
by the management after taking into account of various internal and external factors, forces and its
own business objectives.

Pricing Policy basically depends on price theory that is the corner stone of economic theory. Pricing
is considered as one of the basic and central problems of economic theory in a modern economy.
Fixing prices are the most important aspect of managerial decision making because market price
charged by the company affects the present and future production plans, pattern of distribution,
nature of marketing etc. Above all, the sales revenue and profit ratio of the producer directly depend
upon the prices. Hence, a firm has to charge the most appropriate price to the customers. Charging
an ideal price, which is neither too high nor too low, would depend on a number of factors and
forces. There are no standard formulas or equations in economics to fix the best possible price for a
product. The dynamic nature of the economy forces a firm to raise and reduce the prices
continuously. Hence, prices fluctuate over a period of time.
Generally speaking, in economic theory, we take into account of only two parties, i.e., buyers and
sellers while fixing the prices. However, in practice many parties are associated with pricing of a
product. They are rival competitors, potential rivals, middlemen, wholesalers, retailers, commission
agents and above all the Govt. Hence, we should give due consideration to the influence exerted by
these parties in the process of price determination.
Objectives of the Price Policy:-
While formulating the pricing policy, a firm has to consider various economic, social, political and
other factors. The following objectives are to be considered while fixing the prices of the product.
1. Profit maximization in the short term:-The primary objective of the firm is to maximize its
profits. Pricing policy as an instrument to achieve this objective should be formulated in such a way
as to maximize the sales revenue and profit. Maximum profit refers to the highest possible profit. In
the short run, a firm not only should be able to recover its total costs, but also should get excess
revenue over costs. It may follow skimming price policy, i.e., charging a very high price when the
product is launched to cater to the needs of only a few sections of people. Alternatively, it may adopt
penetration pricing policy i.e., charging a relatively lower price in the latter stages in the long run so
as to attract more customers and capture the market.
2. Profit optimization in the long run:-The traditional profit maximization hypothesis may not prove
beneficial in the long run. Optimum profit refers to the most ideal or desirable level of profit. Hence,
earning the most reasonable or optimum profit has become a part and parcel of a sound pricing
policy of a firm in recent years.
3. Price Stabilization:-Price stabilization over a period of time is another objective. A stable price
policy only can win the confidence of customers and may add to the good will of the concern. It
builds up the reputation and image of the firm.
4. Facing competitive situation:-The companies try to match the prices of their products with those
of their rivals to expand the volume of their business. Most of the firms are not merely interested in
meeting competition but are keen to prevent it.
5. Maintenance of market share:-Market share refers to the share of a firm’s sales of a particular
product in the total sales of all firms in the market. The economic strength and success of a firm is
measured in terms of its market share. Hence, the pricing policy has to assist a firm to maintain its
market share.

6. Capturing the Market:-Another objective in recent years is to capture the market, dominate the
market, command and control the market in the long run. In order to achieve this goal, sometimes
the firm fixes a lower price for its product and at other times even it may sell at a loss in the short
term. It may prove beneficial in the long run. Such a pricing is generally followed in price sensitive
markets.
7. Entry into new markets:-Apart from growth, market share expansion, diversification in its
activities a firm makes a special attempt to enter into new markets. The price set by a firm has to be
so attractive that the buyers in other markets have to switch on to the products of the candidate firm.
8. Deeper penetration of the market:-The pricing policy has to be designed in such a manner that
a firm can make inroads into the market with minimum difficulties. Deeper penetration is the first step
in the direction of capturing and dominating the market in the latter stages.
9. Achieving a target return:-A predetermined target return on capital investment and sales
turnover is another long run pricing objective of a firm. The targets are set according to the position
of individual firm. Hence, prices of the products are so calculated as to earn the target return on cost
of production, sales and capital investment. Different target returns may be fixed for different products
or brands or markets but such returns should be related to a single overall rate of return target.
10. Target profit on the entire product line irrespective of profit level of individual products:-
The price set by a firm should increase the sale of all the products rather than yield a profit on one
product only. A rational pricing policy should always keep in view the entire product line and
maximum total sales revenue from the sale of all products. A product line may be defined as a group
of products which have similar physical features and perform generally similar functions. In a product
line, a few products are regarded as less profit earning products and others are considered as more
profit earning. Hence, a proper balance in pricing is required.
11. Long run welfare of the firm:-A firm has multiple objectives. They are laid down on the basis of
past experience and future expectations. Simultaneous achievement of all objectives are necessary
for the overall growth of a firm. Objective of the pricing policy has to be designed in such a way as to
fulfill the long run interests of the firm keeping internal conditions and external environment in mind.
12. Ability to pay:-Pricing decisions are sometimes taken on the basis of the ability to pay of the
customers, i.e., higher price can be charged to those who can afford to pay. Such a policy is
generally followed by those people who supply different types of services to their customers.
13. Ethical Pricing:-Basically, pricing policy should be based on certain ethical principles. Business
without ethics is a sin. While setting the prices, some moral standards are to be followed. Although
profit is one of the most important objectives, a firm cannot earn it in a moral vacuum. Instead of
squeezing customer, a firm has to charge moderate prices for its products. The pricing policy has to
secure reasonable amount of profits to a firm to preserve the interests of the community and
promote its welfare.

Besides these goals, there are various other objectives such as promotion of new items, steady
working of plants, maintenance of comfortable liquidity position, making quick money, maintaining
regular income to the company, continued survival, rapid growth of the firm etc which firms may set
while taking pricing decisions.

2. Explain the important features of long run AC curve. ?

Answer: Long run AC curves:- Long run is defined as a period of time where Adjustments
to changed conditions are complete. It is actually a period during which the quantities of
all factors, variable as well as fixed factors can be adjusted. Hence, there are no fixed
costs in the long run. Hence, the distinction between fixed and variables costs in the
total cost of production
Will disappear in the long run. In the long run only the average total cost is important and
considered in taking long term output decisions

Important features of long run AC curve:-

1. Tangent curve Different SAC curves represent different operational capacities of different
plants in the short run. LAC curve is locus of all these points of tangency. The SAC curve can
never cut a LAC curve though they are tangential to each other. This implies that for any given
level of output, no SAC curve can ever be below the LAC curve. Hence, SAC cannot be lower
than the LAC in the lIng run. Thus, LAC
Curve is tangential to various SAC curve.

2. Envelope curve It is known as Envelope curve because it envelopes a group of SAC curves
appropriate to different levels of output.

3. Flatter Unshaped or dish-shaped curve. The LAC curve is also U shaped or dish shaped cost
curve. But It is less pronounced and much flatter in nature. LAC .gradually falls and rises due to
economies and diseconomies of scale.

4. Planning curve. The LAC cure is described as the Planning Curve of the firm because it
represents the least cost of producing each possible level of output. This helps in producing
optimum level of output at the minimum LAC. This is possible when the entrepreneur is
selecting the optimum scale plant. Optimum scale plant is that size where the minimum point of
SAC is tangent to the minimum point of LAC.

5. Minimum point of LAC curve should be always lower than the minimum point of SAC curve.
This is because LAC can never be higher than SAC or SAC can never be lower than LAC. The
LAC curve will touch the optimum plant SAC curve at its minimum point. A rational entrepreneur
would select the optimum scale plant. Optimum scale plant is that size at which SAC is tangent
to LAC, such that both the
Curves have the minimum point of tangency. In the diagram, OM2 is regarded as the optimum
scale of output, as it has the least per unit cost. At OM2 output LAC = SAC. LAC curve will be
tangent to SAC curves lying to the left of the optimum scale or right side of the optimum scale.
But at these points of tangency, neither LAC is minimum nor will SAC be minimum. SAC curves
are either rising or falling indicating a higher cost.

Q.3. Explain the changes in market equilibrium and effects of shifts in supply and demand?

Answer: Changes in Market Equilibrium The changes in equilibrium price will occur when there
will be shift either in demand curve or in supply curve or both. Effects of shit in demand Demand
changes when there is a change in the determinants of demand like the income, tastes, prices
of substitutes and complements, size of the population etc. If demand raises due to a change in
any one of these conditions the demand curve shifts upward to the right. If, on the other hand,
demand falls, the demand curve shifts downward to the left. Such rise and fall in demand are
referred to as increase and decrease in demand. A change in the market equilibrium caused by
the shifts in demand can be explained with the help of a diagram Y D1 D D2 Price D1 P2 D S
D2 X 0 Q2 Q Q1 Demand & Supply E2 P1 P E1 E S
Quantity demanded and supplied is shown on OX axis, Price is shown on OY axis. SS is the
supply curve which remains unchanged. DD is the demand curve. Demand and supply curves
intersect each other at point E. Thus OP is the equilibrium price and OQ is the equilibrium
quantity demanded and supplied. Now, suppose the demand increases. The demand curve
shifts forward to D1D1. The new demand curve intersects the supply curve at point E1, where
the quantity demanded increases to OQ1 and price to OP1. In the same way, if the demand
curve shifts backwards and assumes the position D2D2, the new equilibrium will be at E2 and
the quantity demanded will be OQ2, price will be OP2. Thus the market equilibrium price and
quantity demanded will change when there is an increase or decrease in demand. Effects of
Shifts in Supply To study of the effects of changes in supply on market equilibrium we assume
the demand to remain constant. An increase in supply is represented by a shift of the supply
curve to the right and a decrease in supply is represented by a shift to the left. The general rule
is, if supply increases, price falls and if supply decreases price rises. We can show the effects of
shifts in supply with the help of a diagram D Y S S1 P2 P P1 S1 0 Q2 Q Q1 Demand & Supply X
E2 S2 S E1 D E S2.

4.Describe the trend projection method of demand forecasting with illustration. ?

Answer: Meaning of Demand Forecasting Demand forecasting seeks to investigate and measure
the forces that determine sales for existing and new products. Generally companies plan their business
production or sales in anticipation of future demand. Hence forecasting future demand becomes mportant.
In fact it is the very soul of good business because every business decision is based on some assumptions
about the future whether right or wrong, implicit or explicit. The art of successful business lies in
avoiding or minimizing the risks involved as far as possible and faces the uncertainties in a most befitting
manner Trend Projection Method Demand Forecasting An old firm operating in the market for a long
period will have the accumulated previous data on either production or sales pertaining to different years.
If we arrange them in chronological order, we get what is called as ‘time series’. It is an ordered sequence
of events over a period of time pertaining to certain variables. It shows a series of values of a dependent
variable say, sales as it changes from one point of time to another. In short, a time series is a set of
observations taken at specified time, generally at equal intervals. It depicts the historical pattern under
normal conditions. This method is not based on any particular theory as to what causes the variables to
change but merely assumes that whatever forces contributed to change in the recent past will continue to
have the same effect. On the basis of time series, it is possible to project the future sales of a company.

An important question in this connection is how to ascertain the trend in time series? A statistician,
in order to find out the pattern of change in time series may make use of the following methods.

1. The Least Squares method.

2. The Free hand method.

3. The moving average method.

4. The method of semi – averages. The method of Least Squares is more scientific, popular and thus more
commonly used when compared to the other methods. It uses the straight line equation Y= a + bx to fit
the trend to the data.
Illustration: Under this method, the past data of the company are taken into account to assess the nature of
present demand. On the basis of this information, future demand is projected. For e.g., a businessman will
collect the data pertaining to his sales over the last 5 years. The statistics regarding the past sales of the
company is given Year Sales below.

The table indicates that the sales fluctuate over a period of 5 years. However, there is an up- trend in the
business. The same can be represented in a diagram.

Diagrammatic Representation:

a) Deriving sales Curve

YEAR SALES (RS)

1990 30
1991 40
1992 35
1993 50
1994 45

We can find out the trend values for each of the 5 years and also for the subsequent
Years making use of a statistical equation, the method of Least Squares. In a time
Series, x denotes time and y denotes variable. With the passage of time, we need to
Find out the value of the variable. To calculate the trend values i.e., Yc, the
regression equation used is Yc = a+ bx.
As the values of ‘a’ and ‘b’ are unknown, we can solve the following two normal
Equations simultaneously.

(i) ∑Y = Na + b∑x

(ii) ∑XY = a∑x + b∑x 2

Where,

∑Y = Total of the original value of sales (y)

N = Number of years,

∑X = total of the deviations of the years taken from a central period. åXY = total of

The products of the deviations of years and corresponding sales (y)

∑X 2 = total of the squared deviations of X values. When the total values of X. i.e.

∑X = 0

Year = n Sales in Lakhs Deviation Square of Productd sales Computed

Rs Y Form assumed Deviation x2 and time trend values
Year x Deviation xy YC
1990 30 -2 +4 -60 32

1991 40 -1 +1 -40 36
 1992 35 0 0 0 40

1993 50 +1 +1 +50 44

1994 45 +2 +4 +90 48

N=5 ∑y= 200 ∑x= 0 ∑x2= 10 ∑xy=40

Regression equation = Yc = a + bx

To find the value of a = ∑Y/N = 200/5 = 40

To find out the value of b = ∑XY/ ∑X 2 = 40/10 = 4

For 1990 Y = 40+ (4x-2) Y = 40-8 = 32

For 1991 Y = 40+ (4x-1) Y = 40-4 = 36

For 1992 Y = 40+ (40x0) Y = 40+0 = 40

For 1993 Y = 40+ (4X1) Y = 40+4 = 44

For 1994 Y = 40+ (4X2) Y = 40+8 = 48

For the next two years, the estimated sales would be:

For 1995 Y = 40+ (4X3) Y = 40+12 = 52

For 1996 Y = 40+ (4X4) Y = 40+16 = 56

Q.5. Discuss any one method of measuring price elasticity of demand?

Answer: Price Elasticity of Demand Price elasticity of demand is one of the important concepts of
elasticity which is used to describe the effect of change in price on quantity demanded. In the words of
Prof. .Stonier and Hague, price elasticity of demand is a technical term used by economists to explain the
degree of responsiveness of the demand for a product to a change in its price. Price elasticity of demand is
a ratio of two pure numbers, the numerator is the percentage change in quantity demanded and the
denominator is the percentage change in price of the commodity. It is measured by using the following
formula.
Ep Percentage change in quantity demanded/Percentage change in price

Demand rises by 80% i.e. + 80/Price falls by 20% i.e. -20 = -4

Demand falls by 80% i.e. -80/Price rises by 20% i.e. + 20 = -4

Measurement of price elasticity of demand There are different methods to measure the price elasticity of
demand and among them the following two methods are most important ones.

1. Total expenditure method.

2. Point method.
3. Arc method.
Total Expenditure Method Under this method, the price elasticity is measured by comparing the total
expenditure of the consumers (or total revenue i.e., total sales values from the point of view of the seller)
before and after variations in price. We measure price elasticity by examining the change in total
expenditure as a result of change in the price and quantity demanded for a commodity.

Total expenditure = Price per unit x total quantity purchased

Price in (Rs) Qty. Total Natue of PED

Demanded Expenditur
e
I CASE 5.00 2000 10000 >1

4.00 3000 12000

2.00 7000 14000

II CASE 5.00 2000 10000 =1

4.00 2500 10000

2.00 5000 10000

III CASE 5.00 2000 10000 <1

4.00 2200 8000

2.00 4200 8400

Note: 1. when new outlay is greater than the original outlay, then ED > 1.
2. When new outlay is equal to the original outlay then ED = 1.
3. When new outlay is less than the original outlay then ED < 1.
Graphical Representation

From the diagram it is clear that

1. From A to B price elasticity is greater than one.

2. From B to C price elasticity is equal than one.
3. From C to D price elasticity is lesser than one.
Note:
§ It is to be noted that when total expenditure increases with the fall in price and
Decreases with a rise in price, then the PED is greater that one.
§ When the total expenditure remains the same either due to a rise or fall in price,
The PED is equal to one.
§ When total expenditure, decrease with a fall in price and increase with a rise in
Price, PED is said to be less than one.

Q.6. Give a brief description of

(a) Stock and ratio variables

(b) Equilibrium and Disequilibrium.

Ansewr:-

(A) Stock and ratio variables

(i) Stock variable

 A stock variable is a quantity measured at a specific point of time. It may be referred to as a certain
amount or quantity at a specific point of time. For example, we can say that total money supply in India
as on 2722008 is Rs 80,000 crores. Stock variable has time reference. In this case, both time and quantity
is specified in clear terms and there is no ambiguity.

(ii) Ratio variables:-Economic variables are measured in terms of ratio variables. A ratio variable
Expresses quantitative relationship between two different variables at a certain time. For example,
verage propensity to save expresses the ratio of total savings to total income. Similarly, average
propensity to consume expresses the relationship between total consumption to total income. Hence, Total
savings Total Consumption APS = APC = Total income Total Income These two examples come under
flow ratio. Liquidity ratio shows relationship between liquid assets and total assets where as Leverage
ratio shows value of debts and total assets. Hence, Liquid Assets Liquidity Ratio
=------------------------------------Total Assets These two examples come under stock ratio.

A. Dependent variable A variable is dependent if its value varies as a result of variations in the value of
some other independent variables. In short value of one variable depends on the value of another variable
or variables.
B. Independent variable In this case, the value of one variable will influence the value of another variable.
If a change in one variable cause changes in another variable, it is called as independent variable. An
independent variable cause changes in another variable.
(b) Equilibrium and Disequilibrium.
These are the two terms which are frequently used in economic discussions. It is a position where in two
opposing forces tend to balance with each other so that there will be no further changes. Hence, it is
described as a position of rest in general. But in economics, it has a different meaning. A state of rest
implies that the various quantities used in the economic system remain constant and with the help of these
constant quantities, the economy continues to churn over. There is movement or activity. But his
movement is regular, smooth, certain and constant. The equilibrium position is free from violent
fluctuations, frequent variations and sudden changes. At the point of equilibrium, an economic unit is
maximizing its benefits or gains. Hence, it is described as the coziest position of an economic unit.
Always there will be a tendency to move towards this equilibrium position. Disequilibrium on the
other hand is a position where in the forces operating in the system is not in balance. There is imbalance
in different forces which are working in the system. Hence, there are disturbances and disorders in the
system. Generally speaking in microeconomics we make reference to partial equilibrium analysis and in
macro economics general equilibrium analysis. We can explain these two concepts with the help of two
simple examples. When demand for a particular commodity is equal to its supply in the market,
equilibrium price is established at the micro level. Any imbalance between either demand or supply
would create disequilibrium. At macro level, an economy is said to be in equilibrium when aggregate
demand for goods and services is equal to aggregate supply and total investment is equal to total savings.
If aggregate demand is either greater than aggregate supply or aggregate supply is greater than aggregate
demand, it would disturb the equilibrium in the economic system.