“Develop success from failures. Discouragement and failure are two of the surest stepping stones to success.”
Print Production Planning and Management
Unit - 1
Business Process Management:
Business process management (BPM) has been referred to as a
"holistic management" approach to aligning an organization's business processes with the
wants and needs of clients. BPM uses a systematic approach in an attempt to continuously
improve business effectiveness and efficiency while striving for innovation, flexibility, and
integration with technology. It can therefore be described as a "process
optimization process.
Printing Industries: Printing means to produce reproductions of written material or images in multiple copies. There are four traditional types of printing: relief printing (with which this article is mainly concerned), intaglio, lithography, and screen process printing. Relief printing encompasses type, stereotype, electrotype, and letterpress. Flexographic printing is a form of rotary letterpress printing using flexible rubber plates and rapid-drying inks.
Printing and Print – Packaging industry in India is growing; people are taking keen interest in this key industry now. There are more than 36 printing institutes some of these giving even post-graduate education. Every year more than 3500 new printing engineering graduates joins the industry, while still much more get on the spot training in the print shops. Printing especially Packaging printing is now one of the industry. It is said that since 1989 the growth of the Printing coupled with Packaging Printing industry is over 14%.
The growth of this sector attributes to the two main reasons, First is the spread of education- according to the 2001 census report literacy growth in India touched nearly 66 per cent. This amazing growth in literacy together with rising educational levels and rapidly progressing trade and industry in India make the current situation a happy note. Literacy rate is growing; increase in the literacy rate has direct positive effect on the rise of the circulation of the regional papers. The people are first educated in their mother tongue as per their state in which they live e.g. students in Maharashtra are compulsory taught Marathi language and hence they are educated in their state language and the first thing a literate person does is read papers and gain knowledge and hence higher the literacy rate in a state the sales of the dominating regional paper in the state rises. There's little doubt about India's market potential in print media. According to a national survey, 248 million literate adults still don't read any publication. But readership of newspapers and magazines is up by 15% since 1998 to 180 million. It's a reflection of a younger, more educated population, especially in small-town India, feel experts. India has 49,000 publications, but annual revenues total just $1.1 billion. While they can be vibrant and gutsy, most are starved for technology, marketing, and capital to expand. So a handful of publications dominate. With the growth in literacy, the Indian print media industry is expected to grow at CAGR of 5.7% for the period 2009-13 to reach Rs. 213.6 billion from Rs. 161.8 billion in 2008.
Unit - 3
Work flow and organizational structure in a printing press
The print production process is intricate, involving numerous stages spanning from design to finishing. Effectively managing workflows and procedures is challenging, but it is crucial to ensure that the final output conforms to quality standards and meets delivery deadlines. This article will delve into the various stages of print production workflow, examine the tools that can facilitate workflow and process management, and discuss the best practices for print production management.
Print Production Workflow
Print production is a complex process that requires careful planning and execution to ensure high-quality results. The print production workflow comprises several stages, each with unique challenges and requirements.
Here’s a more in-depth look at each step of the print production workflow:
Step #1 Design
The design stage is where the initial concept of the print product is developed. This stage involves creating the artwork, selecting fonts, and deciding on the layout and colours. A designer may use specialized software, such as Adobe Illustrator or InDesign, to create the design. This stage is critical since the design sets the tone and aesthetics of the final product.
Step #2 Pre-press
Pre-press is the stage where the design is prepared for printing. This stage includes processes such as colour management, imposition, and proofing. Colour management ensures the final product’s colours are accurate and consistent across different printing technologies and substrates. Imposition involves arranging multiple pages on a single sheet to maximize printing efficiency. Proofing is verifying that the final product will match the desired outcome before printing.
Step #3 Printing
The printing stage involves the actual production of the final product. The printing process can vary depending on the technology, such as digital, offset, or screen printing. Each technology has its unique advantages and limitations, and the choice of technology will depend on factors such as print run size, substrate type, and desired print quality.
Step #4 Finishing
In this stage, the final touches are added to the printed material to prepare for distribution. The finishing stage can include processes such as cutting, binding, and folding.
Understanding the Workflow for Effective Management
A comprehensive understanding of the print workflow is fundamental to successful print production management. The print production workflow consists of several stages, requiring different skill sets, resources, and equipment. Ensuring each step is completed correctly before moving on to the next one is essential to produce a high-quality output.
A clear understanding of the workflow enables print production managers to anticipate potential issues and allocate resources effectively. Effective communication between different teams involved in the production process is also critical to ensure everyone knows the workflow and their responsibilities. By working collaboratively towards a shared goal, print production managers can efficiently optimize their workflows and produce high-quality printed materials.
Workflow Software
Print production workflows can be complex and time-consuming, with numerous stages requiring careful planning and execution to ensure high-quality results. However, businesses can optimize their print production workflows by leveraging various software solutions, such as Print Factory RIP and Workflow Automation, offered by Access.
PrintFactory is a workflow software specifically designed for wide-format printers, providing a set of tools that work harder and smarter than the standard RIP shipped with wide-format printers today. With a world-class colour engine, PrintFactory guarantees better printing for customers and bigger profits for companies.
PrintFactory workflow software offers more than just a RIP engine. It provides consistent, perfect color with device-link profiling, ensuring better neutrals and greys, as well as cleaner and sharper spots. Additionally, the software features the ultimate tiling tool, which allows for multiple substrates and bespoke templates.
The premium in-app editor allows users to edit like a design pro, and it works with all formats and supports Mac and PC, with multiple installs available. The software also offers intelligent last-minute nesting, enabling users to stack multiple files and add last-minute jobs, with total manual control over true-shape nesting.
PrintFactory’s Cloud platform simplifies print workflows by providing cloud-based productivity tools that include features like just-in-time dynamic nesting, local automation, complete XML/JDF support, variable data, remote file pickup, cloud workflow, and job management.
Some other key benefits of PrintFactory include:
PrintFactory’s WorkFlow Desktop App lets you connect your artwork delivery, MIS or ERP systems directly to our Cloud Nester by placing a simple XML file into a hot folder on your local area network
PrintFactory’s automated nesting queues prioritize printing according to the specified print deadline in the XML job ticket, guaranteeing that you will never miss a delivery deadline again.
You can choose any pending nest in the PrintFactory Queue and adjust the sheet size to accommodate any size, including off-cuts. The system will then analyze the files in the queue, dynamically re-nest them for the best fit, and initiate the printing process.
Best Practices for Print Production Management
Print production management involves complex processes and workflows requiring careful attention to detail and coordination among different teams. To ensure that these processes run smoothly and efficiently, businesses must follow best practices to optimize their workflows and minimize errors.
Here are some examples of best practices that businesses can implement for effective print production management:
1. Open communication
Communication is essential in any collaborative effort, and print production management is no exception. By fostering open lines of communication between teams, businesses can ensure that everyone is on the same page and that any issues or changes are promptly addressed. For example, a project manager can use project management software to keep everyone informed of project progress, deadlines, and changes to the project scope.
2. Standard operating procedures (SOPs)
SOPs provide clear guidelines for consistency and quality in print production. SOPs can include everything from file preparation to final product packaging. With SOPs, businesses can reduce the risk of errors and inconsistencies, saving time and money. For example, an SOP can outline specific colour profiles for different types of print products, ensuring consistency across other jobs.
3. Quality control measures
Quality control measures are critical to ensure the final product meets the desired standards. For example, colour management and proofing can ensure that printful products meet the desired colour accuracy and consistency. Quality control measures can also include checks for image resolution, font sizes, and other factors affecting the final product’s quality.
Conclusion
In today’s fast-paced business world, it’s more important than ever to optimize every step of the print production workflow. Understanding the intricacies of the workflow, from prepress to post-press, can be the key to ensuring high-quality output and efficient operations. In addition, workflow software can play a critical role in managing the complex tasks involved in print production. Moreover, implementing best practices in print production management can go a long way toward optimizing workflow and reducing errors. These include proper file preparation, efficient communication and collaboration among team members, and thorough quality control checks.
Key Takeaways:
Network Model: Project management can be defined as a structural way of planning, scheduling, executing, monitoring and controlling various phases of a project. To achieve the end goal of a project on time, PERT and CPM are two project management techniques that every management should implement. These techniques help in displaying the progress and series of actions and events of a project.
Program (Project) Evaluation and Review Technique (PERT) is an activity to understand the planning, arranging, scheduling, coordinating and governing of a project. This program helps to understand the technique of a study taken to complete a project, identify the least and minimum time taken to complete the whole project. PERT was developed in the 1950s, with the aim of the cost and time of a project.
Critical Path Method or CPM is a well-known project modelling technique in project management. It is a resource utilising algorithm that was developed in the 1950s by James Kelly and Morgan Walker.
CPM is mainly used in projects to determine critical as well as non-critical tasks that will help in preventing conflicts and reduce bottlenecks.
In essence, CPM is about choosing the path in a project that will help in calculating the least amount of time that is required to complete a task with the least amount of wastage.
Abbreviation
PERT – Project Evaluation and Review Technique
CPM – Critical Path Method
What does It Mean?
PERT – PERT is a popular project management technique that is applicable when the time required to finish a project is not certain
CPM – CPM is a statistical algorithm which has a certain start and end time for a project
Model Type
PERT – PERT is a probabilistic model
CPM – CPM is a deterministic model
Focus
PERT – The main focus of PERT is to minimise the time required for completion of the project
CPM – The main focus of CPM is on a trade-off between cost and time, with a major emphasis on cost-cutting.
Orientation type
PERT – PERT is an event-oriented technique
CPM – CPM is an activity-oriented technique
The Critical Path Method or CPM has been used in many industries starting from defence, construction, software, aerospace, etc.
PERT Example
Advantages of CPM
Disadvantages of CPM
CPM Example
How to Make a PERT Chart?
To prepare a PERT Chart, the following steps need to be followed.
CPM in Project Management
The Critical Path Method in project management is a step-by-step technique used in the planning process that explains the critical and non-critical activities of a project. CPM goals are to check time-bound issues and process that causes blockage in the project. The CPM is preferably applicable to projects that involve various activities that are associated with a complex method. Once CPM is applied, it will help you keep your projects on track.
The term of each action is listed above each joint in the diagram. For an individual path, insert the duration of each node to ascertain the total duration. The critical path is the one that has the longest duration.
Human Resource Management (HRM) is the function within an organization that focuses on recruitment of, management of, and providing direction for the people who work in the organization. Human Resource Management can also be performed by line managers.
Human Resource Management is the organizational function that deals with issues related to people such as compensation, hiring, performance management, organization development, safety, wellness, benefits, employee motivation, communication, administration, and training.
Training and Development
Training and Development is a subsystem of an organization. It ensures that randomness is reduced and learning or behavioral change takes place in structured format.
Traditional Approach – Most of the organizations before never used to believe in training. They were holding the traditional view that managers are born and not made.
There were also some views that training is a very costly affair and not worth. Organizations used to believe more in executive pinching. But now the scenario seems to be changing.
The modern approach of training and development is that Indian Organizations have realized the importance of corporate training. Training is now considered as more of retention tool than a cost. The training system in Indian Industry has been changed to create a smarter workforce and yield the best results.
Training and Development Objectives
The principal objective of training and development division is to make sure the availability of a skilled and willing workforce to an organization. In addition to that, there are four other objectives: Individual, Organizational, Functional, and Societal.
Individual Objectives – help employees in achieving their personal goals, which in turn, enhances the individual contribution to an organization.
Organizational Objectives – assist the organization with its primary objective by bringing individual effectiveness.
Functional Objectives – maintain the department’s contribution at a level suitable to the organization’s needs.
Societal Objectives – ensure that an organization is ethically and socially responsible to the needs and challenges of the society.
Importance of Training and Development
Outsourcing
In India, the HR processes are being outsourced from more than a decade now. A company may draw required personnel from outsourcing firms. The outsourcing firms help the organisation by the initial screening of the candidates according to the needs of the organisation and creating a suitable pool of talent for the final selection by the organisation.
Outsourcing firms develop their human resource pool by employing people for them and make available personnel to various companies as per their needs. In turn, the outsourcing firms or the intermediaries charge the organisations for their services.
Advantages of outsourcing are:
1. Company need not plan for human resources much in advance.
2. Value creation, operational flexibility and competitive advantage
3. Turning the management's focus to strategic level processes of HRM
4. Company is free from salary negotiations, weeding the unsuitable resumes/candidates.
5. Company can save a lot of its resources and time.
Unit - 4
Marketing Management
All small and big businesses strive for one thing i.e., success in achieving its goals, Numerous factors all together help the business to achieve what they strive for- various factor endowments like hard-working employees, free flow of information, planning, resource utilization, strategies, execution of plan, control mechanism etc. But modern businesses have one thing in common, they prioritize customers and heavily invest in marketing, they understand the fact that customer is king and accordingly they predict the needs and wants of customers way in advance by analysing the market, serve to those needs and wants and ultimately satisfying (delighting) their customers in a manner that it leaves a positive impact on the target market.
Marketing has different meaning to different people, further in the chapter we will discuss various definitions of marketing given by eminent authors and institutions, So, marketing can be considered a lifestyle, marketing is getting the right product (goods, services, people, places, experience, event etc.) to the right people (target market, customers) at the right places at the right time at the right price with the right communication and promotion to deliver more than the perceived value to the customer which will make them delighted. Businesses now a days know it well that if they take good care of their customers, every other goal will fall in place including profitability, customer base and an edge over competitors.
In any business, there are several functional departments, marketing is one such departmental function which directly deals with customers. Delivering the right value or sometimes more than perceived value keeps the customers delighted enough to become another medium of promotion for the business as well as it retains the customer for a longer period of time.
It is normally perceived that only large businesses having huge profits, practice marketing or invest in it, but if we pay attention to the environment or markets, we are in, we will notice that some sort of marketing is being used by all businesses around us, for example a small vendor on the road side, if you analyze you will find that the vendor has its own pricing strategy, an unique product mix, the place where this vendor sells is by choice on the basis of footfall to that place. So, you consider any business small or big, local or global, marketing has a role to play in the success story of that business.
Marketing has its own history as well, if you search the term marketing in the dictionaries of before 1910, you would not find this term in it, but for the first time this term was propounded in 1910 and was also instilled in dictionaries as well with a clear meaning, but that meaning has evolved a lot from the era of industrial revolution to the era of digital revolution. Marketing firstly was brought in use by consumer packaged-goods, consumer durable and industrial equipment companies and all sort of industries saw the magic of marketing unfold and then the world saw the evolution of marketing, we will discuss more about history and evolution of marketing as we move further in this chapter.
Marketing is not confined to core product business only, organization’s working for welfare of society and providing services have started marketing in modern world like hospitals, educational institutions, NGOs, police departments etc. Even service providers like advocates and chartered accountants also market their services.
You already have an in-depth understanding of marketing; you see it happening around you on a daily basis:
You see and experience marketing through various mails and messages pouring in your mailbox and inbox.
While surfing the internet various pop-ups make you curious about attaining more information of the marketer.
Knowingly or unknowingly, you are hammered through television, radio, newspaper and social media etc. in the form of advertisement again and again.
On a regular basis your eye balls capture hundreds of brands, even while travelling you see bombardment of advertisement through different modes like transit advertising, hoardings, pamphlets etc.
But marketing is more than what your eyes see on a regular basis, behind what your eyes see or your mind experience as marketing is a huge number of people working tirelessly to withdraw your attention and extract money out of your pocket by promising to deliver you some value. Most of us are confused and assume marketing and advertising as one and the same thing, but it is not, we will have much better understanding about what marketing actually is further in this chapter.
What is Marketing: What marketing is all about? It will make you realize after you conduct proper research over this topic that it’s more than what you thought it to be. In simple language, if we define marketing as per our understanding it is analyzing the perceived value, expectations or preferences of customers for their money about a product (it includes everything like services, person, idea or experience etc.), and approaching those customers to deliver the expected value to delight them, it is nothing but exchange of value for the satisfaction of human needs and wants.
It is not to be assumed as mere selling like old times, but it is more than selling and delivering value to the customer for satisfaction (delightedness) in modern times like now. In introduction as we discussed that marketing and advertising is confused to be the same thing, but it is not, advertising is just one out of many ways of marketing, it is not the innocent people’s mistake to assume marketing or advertising or selling the same thing, as we see a lot of advertisements on a daily basis on television, newspapers, magazines, transport mediums trying to persuade us to buy a new thing every now and then, our minds has been approached by these marketers through advertising so many times in a day that we clearly assume marketing and advertising to be the same thing. If any marketer focuses well on customer’s needs and develop a product which gives the customer more than the expected value, also makes that product reach to every customer in demand as well as promotes it well, product will sell off without putting much efforts, in today’s world if you have the right combination of quality and quantity of a particular product it will sell with minimum efforts.
SALESMANSHIP AND ADVERTISING
Marketing helps in developing economic resources, since a business firm generates revenue and earns. Profit by carrying out marketing function, it will engage in exploiting more and more economic resources of the country to earn more profits. Therefore, marketing should be given the greatest important if the national resources are to be exploited fully. Marketing determines the needs of the customers and sets out of the pattern of production of goods and services necessary to satisfy the needs of the customers. Marketing also helps to explore the export market.
Definition of marketing:
1. Narrow definition: marketing may be an economic process by which goods and services are exchanged and the values determined in terms of monthly prices. The American marketing association has defined marketing as “the performance of business activities that direct the flow of goods and services through producer to consumers or users. That means marketing includes all those activities carried on to transfer the goods from the manufacturers or producers to the consumers. In involves the exchanges of goods and services for money.
But in the present day, business marketing begins long before the goods are produced. The demands of the customers must be forecast before the product development and production take place. Marketing decisions must also be made regarding the market, pricing and promotion of the product, marketing does not end with the final sale. It is main aim of customer satisfaction.
2. broad definition: marketing is the business process by which products are matched with the markets and though which transfer of ownership are effected if a business organization produces the products after assessing the requirements of prospective customers, it is more likely to be successful to achieve its objectives. The consumer-oriented marketing has given rise to a new phillosphy in business known as ‘marketing concept’. The marketing concept emphasis the determination of the requirement of potential customers and supplying products to satisfying their requirements.
“marketing is a total system of interacting business activities designed to plan, price, promote and distribute wants satisfying products and services to present and potential customers.
Marketing concepts: Modern authors view marketing more than a physical process of distribution goods and services. They feel that marketing represents a distinct phillosphy of business or a course of business thinking that has emerged over the recent years. The businessman following this philosphy recognise and accept ‘customer oriented’ way of doing the business. It needs of customers.
Under marketing concept the emphasis is a selling satisfaction and not merely on selling a product.
Marketing concept is based on three fundamental beliefs. First all company planning policies and operations should be oriented towards the customers.
Secondly, profitable sales volume should be the goal of a firm.
Third all marketing activities in a firm should be organizationally integrated and co-ordinated.
Distinction between marketing and selling: The marketing concept is a course of business thinking while marketing is a process or a course of business action. Naturally, marketing is influenced by the course of business thinking (i.e. customer-oriented). Marketing concept focuses on customers for earning profits through customers ‘satisfaction and follows integrated marketing but formely marketing focused on products to earn profit through sales volume and followed sales promotion techniques for this purpose.
Marketing is a total system of interacting business activities designed to plan, promote and distribute want satisfying goods and services to present and potential customers.
Selling is a sub-activity of marketing and is basically administrative in nature conditioned to physical transfer of ownership and possession of goods and services from the seller to the buyer. Selling concentration merely on increasing the volume of sales whereas marketing is concerned with satisfaction of wants, needs and preferences of the customer.
Focus means objectives
Selling concept products selling & promotion profits through sale volume
Marketing concept customer needs integrated marketing profit through customer satisfaction.
Marketing management: Marketing management is an important operative function of management. It performs all management functions in the field of marketing. It is responsible for planning, organising, directing and controlling the marketing activities.
Marketing management is the analysis planning implementation and control of programmes designed to create, build, maintained mutually beneficial exchanges and relationships with target market for the purpose of achieving organization objectives.
Function of marketing: In most of the business enterprises, marketing department is set up under supervision of the marketing manager. The major purpose of this department is to generate revenue for the business by selling want satisfaction goods and services to the customers. In order to achieve this purpose. The marketing manager perform the following functions.
1. Marketing research.
2. Product planning and development.
3. Buying and assembling.
4. Selling.
5. Standardisation, garding and branding.
6. Packaging.
7. Storage.
8. Transportation.
9. Sale-man ship.
10. Advertising.
11. Pricing.
12. Insurance.
Marketing functions:
1. Function of research
(a) Marketing research.
(b) Product planning & development.
2. Function of exchange
(a) Buying and assembling
(b) Selling
3. Functions of physical treatment
(a) Standardization grading & branding.
(b) Packaging.
(c) Storage.
(d) Transportation.
4. Function which facilitate exchange
(a) Salesman ship.
(b) Advertising.
(c) Pricing.
(d) Insurance.
Distribution channels:
The process of moving products from the producer to the final consumer is known as distribution in marketing. Distribution takes place through channels, which are agents that enable and promote consumer purchasing and whose quantity and nature are decided by the producers. In order to assemble items, staff, advertising messages, and downstream selling partners that, when combined, enhance competitive advantage, producers must first choose and then manage a channel or array of channels. Producers may alter their distribution methods in reaction to modifications in the market, technological advancements, or other circumstances, but unwise or poorly executed channel changes usually lead to the loss of reseller support, disappointing sales, and decreased earnings.
How to go to market, or how to create a distribution system, is a crucial strategic marketing choice for many businesses, with each strategy offering a different set of advantages and disadvantages. A multistage distribution process in which a manufacturer sells to a reseller (a wholesaler, who may subsequently sell to retailers), who then sells to consumers, is frequently the only viable choice. In the business-to-business market, the producer frequently sells to the final user through wholesale distribution or, in some cases, through a distributor to a dealer or supply house who then provides the final user with the product. Simple economic models of company behavior sometimes neglect the existence of this multistage process, but economists and marketers are increasingly examining the degree to which producer/reseller connections and incentives impact how goods and services reach customers and at what price.
A producer must weigh three key factors before deciding on a distribution strategy: control, effectiveness, and efficiency. Where efficiency is the capacity to provide products and services to customers and merchants at the lowest possible cost and effectiveness is the maximum market coverage and control is the ability to fix the timing and focus of distribution efforts.
One of a marketing manager's biggest challenges is designing and implementing distribution channels. All facets of the company's operations, from segmentation and targeting high priority clients to defining revenue streams and profitability, could be significantly impacted by how the company chooses to enter the market. Channel decisions may require more time to implement than other marketing-mix considerations.
A group of interconnected businesses that work together to make a good or service accessible for end-user consumption is referred to as a channel of distribution. Important is the interdependent component. To meet the needs of the end-user customer, channel members must understand that they cannot act alone and must collaborate. If one member views another as a dependent, an opportunistic and harmful self-interest is likely to emerge, and power and conflict may govern the relationship. Conflict tends to be contained if participants perceive themselves as interdependent, even though it is inevitable in all channel connections.
Designing Distribution channel
The successful introduction of new products is essential for many Organizations to keep their market dominance. Sadly, empirical facts show that between one-third and fifty percent of all new goods fall short of a company's financial and marketing objectives. These failures have been attributed to a number of reasons, including an inadequate focus on the commercialization process, a lack of management backing, and subpar marketing planning and execution. In this part, we systematically evaluate, plan, and execute the distribution channel design.
The main query is to the channel structure; specifically, which intermediary, or intermediary group, is most suitable to promote the new product? A related but equally crucial issue is how the intermediary network should be run once it is operational.
Designing a distribution channel refers to the choices made when creating new marketing channels or altering those that already exist (Rolnicki, 2018).
The distribution channel design decision can be broken down into six steps namely:
1. Identifying the need for channel design decision
2. Setting and organizing distribution objectives
3. Specifying the distribution responsibilities
4. Developing alternate channel structures
5. Evaluating important variables
6. Choosing the best channel structure
The first and one of the most important tasks for any organisation is to recognize the need for a channel design. For the following reasons, an organisation would opt for a new channel design:
i. When a new line of products is created, usually when the existing channels are insufficient for the new line
ii. When a new target market for the existing product is chosen. This frequently occurs when a company that typically serves B2B clients decides to enter the consumer sector.
iii. When there is a shift in the components of the marketing mix when a company lowers the price on a particular item, the channel chosen will be depending on the price points, and they might look for discounters.
iv. When dealing with significant environmental changes, especially those in the economic, technological, or legal domains.
v. Lastly, when the company expands its geographic marketing areas.
The channel manager's next responsibility is to figure out how to construct the channel structure, either from scratch or by changing the existing one, after the need for a design has been identified. The channel manager needs to carefully assess the company's distribution goals. The channel manager must do three responsibilities for the distribution objectives to be successful and well-coordinated.
i. Learn about the firm's other pertinent goals and strategies as well as the ones in the other parts of the marketing mix. In most circumstances, the same individual or group that sets the distribution objectives will also set them for the other components of the marketing mix.
ii. Define the goals and make them clear. A good objective is one that is plain, clear, and plays a bigger part in attaining the company's overarching goals. The following are some illustrations of effective distribution goals. With its "Apple experience," campaign Apple Computers set a distribution goal to reach more customers. As a result, Apple revived and re-established its connections with major retail chains, which it had neglected in recent years.
Similar to this, Coca-Cola wants to increase its market share in schools and colleges.
As a result, it has contacted numerous educational institutions in order to have them offer only Coca-Cola products on their campuses.
iii. Verify that the distribution goals are in line with the company's marketing, overall goals, and other strategies. This entails confirming that the distribution goals do not clash with those of the other marketing mix components or even with the business's overall goals. Examining the interrelationships and hierarchy of the firm's goals is crucial for cross-checking. Figure 1.1 gives a clear picture of the same.
Distribution Goals (Adapted from (Dent, 2011))
Specify the distribution responsibilities
Once the goals have been established, certain tasks must be carried out in order to achieve the distribution goals. Therefore, in order to achieve the goals, the management must describe the kind of tasks that must be completed. To fulfill the defined distribution objectives, the duties must be clearly stated.
For instance, a producer of a consumer good, such as high-end cricket bats targeted at serious amateur cricket players, would have to specify distribution tasks such as gathering information on target markets shopping patterns, promoting product availability to the target, maintaining inventory and timely availability, compiling information about the product features, providing hands-on experience using the product, processing and filling customers’ orders, transporting the product, and setting up credit. When we talk about seeing clients, these duties are in fact distribution tasks, even though they may appear to be production oriented rather than distribution tasks.
Develop alternate channel structures
The channel manager should research other methods of assigning these jobs after having specified them. To effectively contact the consumer, the channel manager typically selects multiple channels. Britannia offered its biscuits for sale at pharmacies, department stores, convenience stores, and wholesale food distributors. Whatever the channel layout, there should be options for allocating resources based on
(a) The number of levels in the channel,
(b) The intensity at different levels, and (c) the kinds of intermediaries.
There is a range of levels available, from two to five. The channel manager may choose between meeting clients directly and employing two middlemen as appropriate approaches.
The quantity of intermediates at each level is referred to as intensity.
Generally speaking, there are three types of intensities:
i) Intensive
ii) Selective
iii) Exclusive.
Using the maximum number of outlets at each level of the channel is what is meant by intensive saturation. Selective refers to the utilization of only a subset of the available intermediaries at a certain level. Exclusive describes an extremely selective distribution pattern.
A company like Rolex may use a high level of selectivity, whereas a company like Parle Products may use an intense distribution channel strategy. The third component, or categories of intermediates, must be handled carefully. Businesses shouldn't disregard the new kinds of intermediaries that have developed recently.
3. Evaluate important variables affecting channel structure
Each channel structure needs to be assessed based on a variety of factors after the various designs have been described. There are five fundamental categories, including
i. Market variables: Marketing management is founded on the marketing concept idea, which emphasises the requirements and wants of customers; managers must follow the market's indications. Market geography, market size, market density, and market behavior are the subcategories that have the biggest impact on the market structure.
ii. Product variables: Product variables include things like volume and weight, perishability, unit value, level of standardization, technical vs. non-technical, and newness. These are some of the most crucial product factors. Products that are large and heavy have high handling and shipping expenses compared to their value. Manufacturers of these goods must remember to ship in bulk to the fewest locations possible.
iii. Company Variables: Size, financial capability, managerial competence, goals, and tactics are significant factors that influence effective channel design. The ability to exert significant power in the channel increases with the size of the firm. The company has some freedom in choosing the channel structures because of its size. When it comes to financial capabilities, the same is true. The amount of capital a company has accessible will reduce its reliance on intermediaries.
For an example companies like General Electric and AEC business engages in industrial marketing prefers to have its own sales force, storage, and order processing capabilities. Larger companies with strong financial foundations are better able to endure the high expense of these facilities. When a company lacks good managerial abilities, a thorough channel structure ranging from wholesalers to brokers is required to carry out the distribution activity. As the company gets expertise, the number of intermediaries can be changed or decreased.
The use of intermediaries may be constrained by the goals and plans an organization has. These tactics may place a focus on aggressive promotion and even change the duties involved in distribution. This is one of the main factors considered while appraising something.
iv. Intermediary Variables: The crucial intermediary variables are services provided, price, and availability. One of the important factors is availability because it affects the channel shape.
If we look at the example of Dell Computers, it created a direct mail order channel in the absence of a proper channel structure, which also offered a solid technical backup.
Another factor a channel manager takes into account is the price. The manager may think about decreasing the use of intermediaries if the cost of utilising a particular intermediary is too high relative to the services it provides. Another crucial element is the services provided by the intermediaries; a reputable intermediary will provide effective services at a reasonable price.
v. Environmental Variables: The various facets of channel development and management may be impacted by uncontrollable or large-scale environmental phenomena. In this context, "environment" refers to the setting in which a company, its consumers, and its distribution channels operate. Environmental variables like socio-cultural, technological, and legal have a big impact on the channel structure. The other factors can be changed or improved upon by the organisation, but the environmental forces are those that the organisation must contend with.
4. Choose the best channel structure
The management should select the best channel structure available in order to achieve the necessary degree of effectiveness at the lowest cost. Although there isn't a single right way to choose an ideal channel structure, it all comes down to the firm's orientation. The channel structure would be appropriate if the company's objective were profit maximization. However, the majority of channel decisions are still made using administrative discretion and the information at hand.
The channel structure should always be kept short as this will always be superior. Food items and flowers are regarded as being extremely perishable. Highly perishable products should have a channel structure that allows for quick distribution from producers to consumers. One crucial factor to keep in mind is that the longer the channels, the lower the unit value of the product, the less room there is for distribution costs.
Figure 1.2 explains the relationship between the channel length and degree of standardization. The degree of personalization is greater if the product flows directly from the maker or producer to the user, but as the product becomes more standardized, it passes through more channels. While many consumer markets are primarily standardized, B2B machinery has a high degree of customization as it moves from the maker to the industrial user.
Because of their technical know-how and support, industrial items are typically distributed through direct channels, but many technical consumer products do use shorter channel structures. A shorter channel is suggested to raise awareness when the product is new and in the introduction stage in order to take advantage of the aggressive promotion.
Financial Management: The goal of financial management is to maximize the value of the company and, by extension, the wealth of the company's owners or shareholders. This is done by planning, raising, and using the necessary financial resources in the best way possible.
Financial management is all about planning, getting the money you need, and using it in the best way possible. Recently, managing a company's finances has become a separate and important part of managing the company as a whole. The effectiveness and quality of the financial decisions that are made by a company largely determine whether or not that company will be successful in business. In this context, the role of financial manager takes on a very important significance. A company's financial manager is accountable for all of the company's financial activities, including the planning, raising, distribution, and control of funds in the most efficient manner possible. As a result, financial management pertains to the administration of the finances of a company.
MEANING OF FINANCIAL MANAGEMENT: Financial management is the job of a company's managers to plan and control how the company's money is used. In other words, it is focused on acquiring, financing, and managing assets to achieve the overall goal of the business, which is primarily to maximise shareholder value.
It aims to obtain capital at the lowest possible cost and use it to maximise return while maintaining the optimal degree of risk.
According to Phillippatus, "Financial Management is concerned with the managerial decisions that result in the acquisition and financing of short term and long-term credits for the firm."
In terms of Joshep and massie, “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations”.
There are two basic aspects of financial management viz., procurement of funds and an effective use of these funds to achieve business objectives.
Procurement of funds-
Since money can be obtained from various sources, getting it is always a complicated problem for businesses. Several of the funding options for a business enterprise include: equity (owners' capital); bonds; bank borrowing; angel financing; and so on.
Different sources of funds have different characteristics in terms of risk, cost, and control.
The cost of funds should be kept to a bare minimum, which necessitates a careful balancing of risk and control factors. Another important factor to consider when selecting a source of new business finance is striking a balance between equity and debt to ensure the funding structure suits the business.
Let's talk about equity and debt in terms of cost, control, and risk. The funds raised through the issuance of equity shares are the least risky for the firm because there is no need to repay equity capital unless the firm is liquidated.
However, in terms of cost, equity capital is typically the most expensive source of funds. This is because shareholders' dividend expectations are typically higher than the prevalent interest rate, and dividends are an appropriation of profit that is not allowable as an expense under the Income Tax Act.
Furthermore, the issuance of new public shares or a further public offering may dilute the control of existing shareholders.
The funds raised through the issuance of debt or the raising of loans are the riskiest for the firm because there is a requirement to repay principal and interest amounts in the form of instalment payments, whether the firm is profitable or not. As a company, you have to pay it. It's a kind of legal obligation.
But on the other side, if a company issues debt, then it can claim a deduction for interest, which is provided by the Income Tax Act. That is why we say that debt is cheaper than equity because it provides a tax advantage. It will benefit us by lowering the amount of tax. Aside from that, if a company raises funds by issuing debt, there is no dilution of the company's ownership. It will simply create an obligation that the company must meet in terms of timely repayment of interest and the principal amount of money.
Utilization of Fund-
As the financial manager of your company, you need to use money in the best way possible. You must identify instances where funds are sitting idle or where proper use of funds is not being made. All funds are obtained at a certain cost and with a certain amount of risk. There is no point in running the business if these funds are not used in such a way that they generate an income greater than the cost of acquiring them. As a result, it is critical to use the funds wisely and profitably.
There are two ways to study the scope of financial management:
1. The Traditional Approach, and
2. The Modern Approach.
SCOPE OF FINANCIAL MANAGEMENT
Traditional Approach
The scope of financial management was restricted by this approach to the process of raising and administering the funds that were necessary for businesses to meet their financial obligations. This strategy put more and more emphasis on companies getting the money they needed to meet their different financial needs. This emphasis has led to the following results:
● The emergence of an increasing number of financial institutions to satisfy the demand for business financing.
● The creation of a variety of different financial instruments, such as shares, debentures, bonds, and so on, could have been used to raise funds.
As a result, the traditional approach centred on the task of determining how the required funds could be raised from the combination of sources that were available in the most effective manner. The function of finance was concerned with the acquisition of finances in order to finance the activities of expanding or diversifying the business. The function of finance was not an essential part of the daily managerial activities.
The Modern Approach-
Due to changes in technology, industrialization, rapid economic growth, more competition, the creation of management information systems, and the rise of professional management, the definition of financial management has changed to include decisions about both raising money and using it wisely. So, the modern approach includes not only the process of getting money but also the process of putting that money to good use among an organization's assets. This method sees financial management as an integrated part of overall management and gives a conceptual and analytical framework for making financial decisions.
OBJECTIVE/GOAL OF FINANCIAL MANAGEMENT: Each and every business is created with certain goals or objectives to be achieved during its lifetime. An operationally useful criterion is required for financial management. This criterion would serve as a yardstick for various financial decisions, including capital budgeting, capital structure, dividend policy, and working capital management. The goal is to establish a structure within which the most effective choices regarding one's financial situation can be made. The vision, mission, and overall goals and objectives of the corporation should serve as the basis for determining what the objective of financial management should be. The objective would provide a framework within which optimal financial decisions can be taken.
Profit Maximization Objective
Profit maximisation was emphasised as an important goal of financial management during the traditional phase. Profit is the primary goal of any business. It can be said that the majority of businesses exist primarily to make money. Profit is the yardstick for measuring the efficiency of business operations. Profit maximisation as a financial management objective means that all financial decisions in a company are guided by the amount of profits that the financial decision generates or saves. Unprofitable projects and alternative investment options would be rejected. If there are insufficient funds to finance all profitable investment projects, the ones with the highest profits will be chosen.
Advantages of Profit Maximization
● The primary goal of most businesses is to earn profits.
● Profit can be used to assess the success of business operations.
● Profit maximization ensures efficient use of scarce financial resources by allocating these resources to uses that generate the highest profits.
Limitations of Profit maximization
● Profit a vague and confusing concept- The term profit is not specifically defined. It can refer to overall profit, incremental profit, profit before taxes, or profit after taxes.
● Ignorance of risk- The goal of maximising profits must be approached with a comprehension of the risks that are involved. There is a direct relationship between the levels of risk and profits. There are a lot of high-profit opportunities that involve higher risks. The greater the risk, the greater the potential for gain. If increasing profits is the main objective, consideration of the risk aspect is totally ignored. This suggests that financial managers are willing to go along with highly risky propositions if they will result in large profits. In actuality, risk is a very significant factor that must be weighed against the desired level of profit, but these two factors must be kept in proper proportion.
● It ignores time value of money- There is no consideration given to the order in which benefits will be received (cash inflows). It does not make any difference between cash inflows occurring at different points in time.
● Based on Accounting Profit- Management can easily affect accounting profits by changing the accounting policies that are used to figure out accounting profits.
● Against corporate responsibility-The concept of corporate responsibility is in direct conflict with the purpose of maximising profits. If the main purpose of a company is to maximise its objectives, then the company may engage in a variety of immoral and illegal acts that would not normally be wanted. The purpose of a business organization is not merely to maximise profits; rather, it is to produce value for the company's owners as well as for its other stakeholders. It is considered impractical, inappropriate, and immoral in today's modern business world to maximise profits at all costs.
Shareholder Wealth Maximization objective-
The maximisation of shareholder wealth is regarded as the goal of modern-day financial management. It overcomes the limitations of the Profit Maximization objective and provides a realistic objective by being based on the concept of cash flows and taking into consideration the timing of benefits.
The current market value of the company's shares, as well as reserves, surplus, and accumulated profits, are all part of the wealth of the company's shareholders. However, the market value of a share is the most important component here.
The market value of the shares, also known as the market capitalization, is equal to the market price multiplied by the total number of outstanding shares.
Market Capitalization= Market price of share * total number of outstanding shares
As a result, the company's financial manager should make all financial decisions in order to
maximise the market value of the company's shares. Now, considering that the total number of shares will not change over the course of some specified amount of time, the objective of the finance manager should be to achieve the highest possible market price for each share, with the goal of increasing the wealth of the shareholders. A finance manager has the potential to achieve a higher share price more quickly by selecting projects with high risk and high return. On the other hand, this strategy might fail, which would lead to a significant drop in share prices. If shareholders are unhappy with the way management is operating the company or the progress it is making, they can voice their displeasure by selling company shares, which will result in a decrease in the price of those shares.
This is also referred to as "maximizing value or ensuring that your net present worth is as high as possible. This objective is to maximise, for the benefit of shareholders, the net present value of a course of action. This is based on the assumption that the financial manager will work towards increasing the value of shareholders' total investments as much as possible. In this context, the goal of the finance managers would be to increase the value of each and every investment project that the company chooses to pursue and implement. In order to accomplish this, the net present value of a project is calculated using the project's anticipated cash inflows and outflows, in addition to the firm's cost of capital (discount rate). You can calculate the net present value (NPV) of a project by deducting the present value of all cash outflows associated with the project from the present value of all cash inflows experienced by the project over the course of its lifetime.
Net present value= Present value of cash inflows-Present value of cash outflow
The objective of maximising the wealth of shareholders takes into account cash flows, the timing of benefits, and risks associated with expected benefits. Because it is based on the idea of cash flows and takes into account both the timing of benefits and the risks associated with them, it is capable of overcoming the constraints that are imposed by the objective of profit maximisation and offers a more realistic objective.
Advantages of shareholders’ wealth maximization
(i) The goal of wealth maximisation is to increase the value of shareholders' investments as well as their overall wealth. Therefore, is regarded as a more valuable goal than maximising profits.
(ii) Unlike profit, the concept of cash flows is clear and unambiguous, and it serves as the foundation for this method. In this context, cash inflow is regarded as an advantage, while cash outflow is considered a cost associated with a specific decision.
(iii)The process of maximising wealth takes into account the order in which benefits (cash inflows) and expenses take place (cash outflows). As a result, it takes into account the value that money has over time.
(iv)The process of maximising wealth takes into account the risk that is associated with the occurrence of cash flows.
(v)The goal of wealth maximisation is to direct a company's financial resources towards those activities that will yield the greatest financial return for the company's shareholders.(vi) The goal of maximising the wealth of shareholders contributes to the maintenance of the economic well-being of the society as a whole by promoting the effective utilisation of the limited financial resources available to the society.
Criticism of shareholders’ wealth maximization objective
Even the intention of maximising wealth for shareholders is being called into question as more people are becoming concerned about the social responsibility of corporations.
Maximizing wealth is criticised on the grounds that its only goal is to maximise the wealth of shareholders, and it does not consider the welfare of other important stakeholders in the company, such as management, creditors, employees, suppliers, distributors, customers, and so on. This is one of the main criticisms levelled against wealth maximisation. The criteria for wealth maximisation is to maximise the price at which a company's shares are sold on the market. However, in the real world, the price of a company's shares is influenced by a large number of factors over which the company has no control. In order to manipulate the market price of the share, the management might also engage in unethical business practises. As a result, there is a growing demand for the objective of maximising the wealth of stakeholders, as opposed to the objective of maximising the wealth of shareholders.
Cost Accounting: Cost concept, cost sheet, Cost reduction.
Companies utilise cost reduction analysis as a method to lower their expenses and boost earnings. Depending on the goods or services they provide, many businesses adopt various strategies. Every choice made during the product development process has an impact on the price.
Companies frequently launch new products without concentrating on how much value there will be. However, the importance of pricing changes drastically when market rivalry rises and prices of goods and services become a significant point of differentiation.
The action is regulated by cost management to maintain the cost components within the predetermined bounds. Contrarily, cost reduction refers to a real, long-term decrease in the unit price. Understanding the distinction between cost reduction and cost control will be helpful.
CONTROL OF COSTS
The goal of cost control is to rationalise overall value through the use of competitive analysis.
The goal of this technique is to keep the real price in line with the specified policy. The operational costs must not exceed the budgeted amount, thus this must be ensured.
Cost control encompasses a number of tasks, beginning with the creation of the budget for the operation, evaluation of the performance, computation of the differences between the actual costs and the budgeted value, and identification of the causes of those differences. The final task is carrying out the appropriate corrections to address the discrepancies.
Importance of Cost Control and Cost Reduction
• Better utilization of resources
• To prepare for meeting a future competitive position
• Reasonable prices for the customers
• Firm standing in domestic and export markets
• Improved methods of production and use of latest manufacturing techniques which have the effect of rising productivity and minimizing cost
• Improves rate of return on investment
• Improves the image of the company for long-term benefits
WHAT DISTINGUISHES COST REDUCTION FROM COST CONTROL?
The distinction between the two can be summed up as follows: cost management ensures that costs are within defined criteria; cost reduction focuses on trying to continuously improve costs while ignoring any standards.
The key advantages of cost reduction initiatives are that they can improve an organization's cash flow and profitability. The essential components and variables for programme design and implementation are presented. The results of a cost-cutting programme can also be guaranteed to align with the organization's beliefs and aims. The fact that a corporation must implement a cost reduction programme is widely understood, especially given the abundance of options available to managers who are cost-conscious. Last but not least, a comprehensive tax reduction programme can lessen the heavy financial obligations that can stabilise a business's growth and can free up valuable capital that can result in the long-term advantage of the organisation.
S.No.
Cost Control
Cost Reduction
1
analysis of actual results with establishedThis process undertakes the competitive norms
This process finds out the substitute by finding new ways or methods
2
Under this method, variances are appraised and reported and necessary course of action will be taken to revise norms, standards
Under this process, necessary steps are taken for further modification in the method
3
It starts from established cost standards and attempts to keep the costs of operation of a process in line with those of materials
It challenges the standards forthwith and attempts to reduce cost on a continuous basis
4
It is a preventive function
It is a corrective function
5
The main stress is on the present and past behaviour of costs
The emphasis is partly on the present costs and largely on future costs
While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements, which include information about its revenues, expenses, assets, and liabilities. Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost-control programs, which can improve net margins for the company in the future.
One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to the information needs of the management. Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department.
Depreciation:
The assets which are expected to give benefit over a long period of time are not charged to expense at the time of their acquisition, rather they are capitalised in the balance sheet as Fixed Assets or Property Plant and Equipment and are charged to profit and loss account through the medium of depreciation or amortisation.
As per Ind AS 16, Property, Plant and Equipment are tangible assets that:
(a) Are held for:
(b) Are expected to be used for at least 12 months.
Part of the acquisition cost of the fixed assets allocated as an expense in each of the accounting period in which the asset is utilized. The allocation of amount of fixed assets in such a systematic manner to respective accounting periods is called depreciation.
MEANING OF DEPRECIATION
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is the reduction in the value of fixed tangible assets due to wear and tear, up gradation of technology and afflux of time.
Depreciation commences from the day asset is available for use even if it is not put to use.
OBJECTIVES FOR PROVIDING DEPRECIATION
Depreciation is charged on property plant and equipment to serve the following objectives:
1. To calculate true cost of production of goods or services rendered which involve usage of fixed assets in their production.
2. To correctly measure the income as per the matching concept.
3. To depict true financial position by valuing the assets after deducting depreciation.
4. To provide internal funds for replacement of fixed assets by charging depreciation from profit and loss.
FACTORS INFLUENCING DEPRECIATION
Calculation of depreciation is based on the following three factors:
1. Historical Cost or other amount substituted for the historical cost of the asset when revalued. Historical cost is the actual amount which is paid by the entity to acquire or construct the asset.
2. Estimated Useful Life
3. Estimated Residual Value
These factors are explained as follows –
1. Historical Cost:
Purchase price
XX
Add : Other Non-refundable taxes & duties
Add: Any directly attributable cost of bringing the asset to its working condition for its intended use
Less: Trade discount & rebates
(XX)
Cost of Asset
2. 'Useful Life' is either -
i) The period over which a depreciable asset is expected to be used by the enterprise, or
ii) The number of production or similar units expected to be obtained from the use of the asset by the enterprise.
3. Residual/Scrap Value is the amount likely to be obtained by the disposal of the fixed asset at the end of its useful life.
DEPRECIABLE AMOUNT
'Depreciable Amount' of a depreciable asset is determined as under:
Particulars
Historical cost, or other amount substituted for it in the financial Less: Estimated Residual Value
XX (XX)
Depreciable Amount
METHODS OF DEPRECIATION
The following methods are available for computing and allocating the depreciable amount of an asset over its useful life -
FIXED INSTALMENT/ORIGINAL COST OR STRAIGHT LINE METHOD (SLM)
• Under this method, an equal or constant amount of depreciation is written off from depreciable asset every year.
• Suitable for assets which generates equal utility during every year of its useful life.
• At the end of the useful life of the asset, the cost of the asset will be NIL or equal to its
Residual Value / Scrap Value.
Straight Line Depreciation = Cost of Asset Less Residual Value
Useful Life
SLM Depreciation Rate = SLM Depreciation x 100
Example: X Ltd purchased a machine costing Rs. 10 Lakhs, having a useful life of 5 years. Its estimated residual value is Rs. 1 Lakh.
Straight Line Depreciation = 10,00,000-1,00,000
= Rs. 1,80,000 p.a
SLM Depreciation Rate = 1,80,000 x 100 = 18% p.a
10,00,000
REDUCING/DIMINISHING BALANCE/WRITTEN DOWN VALUE (WDV) METHOD
• Depreciation amount for each year is computed by applying a fixed % on the opening balance of the asset (i.e. diminishing balance of the asset.)
• Reducing balance refers to the Written down value of the asset, i.e. value of the asset as reduced by the depreciation up to the previous year.
• The value of the asset will never be extinguished, as it happens in SLM Method.
• Depreciation rate is computed in a manner such that at the end of the useful life of the asset, the cost of asset will be equal to its residual value / scrap value.
WDV Depreciation Rate = 1 –n√Residual Value
Where n = useful life.
Example: X Ltd purchased a machine costing Rs. 10 Lakhs with scrap value of Rs. 2,50,000 and useful life of 10 years, and has ascertained its WDV rate as 10% p.a. Depreciation rate will be calculated as follows:
WDV Depreciation Rate = 1 – [2,50,000/10,00,000]1/10 = 12.95% p.a (approx.)
SUM OF DIGITS OF YEARS METHOD
It is a variation of the WDV Method. Under this method, depreciation amount for each year is computed by applying the following formula –
Depreciation= Depreciable amount x no. of years of balance useful life (incl. current year)
Total of digits of the useful life of the asset (in years)
Example: X Ltd purchased a machine costing Rs 78 lakhs, having a useful life of 5 years, and estimated Scrap Value of Rs. 3 Lakhs. Depreciation amounts for the five years will be –
Sum of digits of the year = 1+2+3+4+5 = 15
Depreciable amount = Rs. 78,00,000 – Rs. 3,00,000 = Rs. 75,00,000.
Year 1
Year 2
Year 3
Year 4
Year 5
Depreciation amount for the year
75,00,000 x 1/15 =5,00,000
75,00,000 x 2/15 = 10,00,000
75,00,000 x 3/15 = 15,00,000
75,00,000 x 4/15 = 20,00,000
75,00,000 x 5/15 = 25,00,000
Note: Depreciation is calculated on the depreciable amount, i.e. Cost-Residual Value.
MACHINE HOUR METHOD
In this method, depreciation is computed based on the number of machine hours (rather than years).
Where it is practicable to keep a record of the actual running hours of each machine, depreciation may be calculated on the basis of hours that the concerned machinery worked for. Under machine hour rate method of calculating depreciation, the life of a machine is not estimated in years but in hours. Thus depreciation is calculated after estimating the total number of hours that machine would work during its whole life.
Depreciation= depreciable amount x No. of machine hours during the year
Total machine hours during the entire useful life
Example: X Ltd purchased a machine costing Rs 22,00,000, having a Scrap Value of Rs 1,30,000.
The machine has a useful life of 20,700 machine hours distributed as under –
In this case, depreciation amounts will be computed as under –
Depreciable amount = Rs. 22,00,000 - Rs. 1,30,000 = Rs. 20,70,000
Depreciation per hour = Rs. 20,70,000/20,700 = Rs. 100 per hour
Year
Machine Hours
Depreciation amount
2500
2500 x100 = 2,50,000
2000
2000 x100 = 2,00,000
6
7
1800
1800 x100 = 1,80,000
8
9
10
Total
20700
PRODUCTION UNITS METHOD
In this method, Depreciation is computed based on the production / output quantity.
Depreciation = Depreciable Amount x Production Quantity for the current year
Total Estimated Production Quantity from the Machine
Example: X Ltd purchased a machine costing Rs 25,00,000, having a scrap value of Rs 5,00,000. The machine is expected to produce 10,00,000 units of output in the following manner –
Years 1 & 2: 1,15,000 units each,
Years 3 to 7: 1,00,000 units each, and
Years 8 to 10: 90,000 units each.
Depreciation will be calculated as follows:
Depreciable amount = Rs. 25,00,000 - Rs. 5,00,000 = Rs. 20,00,000
Depreciation per unit = Rs. 20,00,000/10,00,000 = Rs. 2 per unit
Units of output
Depreciation amount (in Rs.)
1,15,000
1,15,000 x 2 = 3,30,000
1,00,000
1,00,000 x 2 = 2,00,000
90,000
90,000 x 2 = 1,80,0000
DEPLETION METHOD
Depletion means reduction or exhaustion.
This method is used in the case of mines, quarries, oil well, etc. containing only a certain estimated quantity of resources / products.
Depreciation = Depreciable amount x Quantity of mineral / oil extracted during current year
Total estimated quantity from the mine / quarry / well
Example: X Ltd took a quarry on lease by paying Rs. 75,00,000. As per technical estimate, the total quantity of mineral deposit is 1,00,000 tonnes. The extraction pattern is given below –
Depreciable Amount = Rs. 75,00,000
Depreciation per tonne = Rs. 75,00,000/1,00,000 = Rs. 75 per tonne
mineral deposit in tonnes
6,000
6,000 x 75 = 4,50,000
15,000
15,000 x 75 = 11,25,000
17,000
17,000 x 75 = 12,75,000