Management Process and

Organisational Behavior
Assignment-1

1. Elaborate the functions of Management?

Ans. Management is the process of getting activities completed efficiently and

effectively with and through other people. Thus Management is creative problem solving
or problem moving process. This creative problem solving is accomplished through
various functions of management: planning, organizing, staffing, leading and controlling.
The intended result is the use of an organization's resources in a way that accomplishes its
mission and objectives.
The function of Management is modern context are as follow:
i. Planning
Planning is concerned with the future impact of today's decisions. It is the fundamental
function of management from which the other four stem. The need for planning is often
apparent after the fact. However, planning is easy to postpone in the short-run.
Postponement of planning especially plagues labor oriented, hands on managers. Planning
is important at all levels of management. However, its characteristics vary by level of
management. The Planning involves vision-mission-objectives-goals. The tasks of the
strategic planning process is shown below

The organizing, staffing, leading and controlling functions stem from the planning
function. The manager is ready to organize and staffs only after goals and plans to reach
the goals are in place. Likewise, the leading function, influencing the behavior of people
in the organization, depends on the goals to be achieved. Finally, in the controlling
function, the determination of whether or not goals are being accomplished and standards
met is based on the planning function. The planning function provides the goals and
standards that drive the controlling function.

ii. Organizing
When it comes to business leadership, one of the most important aspects is the organizing
function of management. Organizing is allocating and configuring resources to
accomplish the preferred goals and objectives establishing during the planning processes.
Hence we can say that Organizing is establishing the internal organizational structure of
the business. The focus is on division, coordination, and control of tasks and the flow of
information within the organization. Managers distribute responsibility and authority to
job holders in this function of management. Figure below shows the steps required to
undergo in this function of management.

Each organization has an organizational structure. By action and/or inaction, managers

structure businesses. Ideally, in developing an organizational structure and distributing
authority, managers' decisions reflect the mission, objectives, goals and tactics that grew
out of the planning function. Specifically, they decide:

Division of labor
Delegation of authority
Departmentation
Span of control
Coordination

iii. Staffing
Staffing is filling and keeping filled with qualified people all positions in the business.
Recruiting, hiring, training, evaluating and compensating are the specific activities
included in the function. In the family business, staffing includes all paid and unpaid
positions held by family members including the owner/operators.
Management teams on successful farms excel at many human resource management
skills. Staffing (including recruiting, selecting, hiring and training of employees) is
among the skills that become more important as the complexity and overall level of
performance of a farm business increases. With increasing size and improving
performance comes people complexity: more things accomplished through employees,
more delegation to key employees and more reliance on employees to maintain a routine
that assures superiority. Any cynical attitudes managers have about employees need to be
replaced with positive attitudes.
Staffing success depends heavily on the planning and organizing functions of
management. In planning, both farm goals and employees' goals are considered. A
business functions best when business and employee goals are compatible. Job analysis
leads to job specifications and job descriptions. In developing job specifications, the
necessary knowledge, skills and abilities for each position are determined. Job
descriptions identify specific tasks for each position. Full success in staffing rarely comes
without analyzing the jobs on the farm, determining what is needed for success in each
job and writing a description of the job.
Staffing is best done with attention to recruiting, selecting and training employees to help
them satisfy their goals and the goals of the business. The following assumptions provide
the context for our discussion of staffing:
The mission for the farm has been given careful attention by top management and
distributed to the management team and all employees, i.e., the reasons the farm is in
business are known.
A management team is in place and able to divide up responsibilities. Top
management is willing and able as needed to delegate responsibilities and authority.
Key positions, e.g., a herdsperson, head milkier, full-time crops and machinery
person, or a full-time office person are being filled. The process for filling key positions
can be modified for part-time and temporary positions.
The person hired will be trained to carry out the responsibilities of the position, i.e., it
is not necessary to hire a person who already knows how to do the job.
No selection process can guarantee selection success. Even if the "right" person was
hired based on all the information available to the employer at the time the decision was
made, six months, a year or three years later, it may seem that the "wrong" person was
hired.

iv. Directing
Directing is influencing people's behavior through motivation, communication, group
dynamics, leadership and discipline. The purpose of directing is to channel the behavior
of all personnel to accomplish the organization's mission and objectives while
simultaneously helping them accomplish their own career objectives.
The directing function gives the manager an active rather than a passive role in employee
performance, conduct and accomplishments. Managers accomplish their objectives
through people. In blaming others for her or his human resource problems, a manager is
denying the management responsibilities inherent in the directing function.
The directing function gives managers a second responsibility: helping people in the
organization accomplish their individual career goals. Organizations do not succeed while
their people are failing. Helping people in the organization with career planning and
professional development is an integral part of the directing function.
In Management Excel, the directing function in Managing for Success has included:
motivation, communication, performance appraisal, and discipline and conflict
management. Several Management Excel teams have offered situational leadership as an
advanced course for Managing for Success graduates. Management Excel team leader in-
services have included group dynamics and team building.

v. Controlling
Controlling is a four-step process of establishing performance standards based on the
firm's objectives, measuring and reporting actual performance, comparing the two, and
taking corrective or preventive action as necessary.
Performance standards come from the planning function. No matter how difficult,
standards should be established for every important task. Although the temptation may be
great, lowering standards to what has been attained is not a solution to performance
problems. On the other hand, a manager does need to lower standards when they are
found to be unattainable due to resource limitations and factors external to the business.
Corrective action is necessary when performance is below standards. If performance is
anticipated to be below standards, preventive action must be taken to ensure that the
problem does not recur. If performance is greater than or equal to standards, it is useful to
reinforce behaviors that led to the acceptable performance. Effective control systems have
the following characteristics:
Control at all levels in the business
Acceptability to those who will enforce decisions
Flexibility
Accuracy
Timeliness
Cost effectiveness
Understandability
Balance between objectivity and subjectivity
Coordinated with planning, organizing and leading.

vi. Innovation
Innovation means creating new ideas which may either result in the development of new
products or finding user for the old ones. The implementation of new, ideas, practices,
processes or structure that significantly alters the work of management in a way that
further encompasses the organization’s goals is the main focus in this function of the
management. Figure below shows the stages of management innovation.

Following are the key points to underline in this function of management:

 We need to think about the innovation in management process as much as we do
about innovation in technologies and products.
Management innovation can be a deep source of competitive advantage.
Management innovation needs active experimentation to take shape.
vii. Representation
In this function of management a manager represents his/her Organization before various
outside groups which have some stake in the organization. These stakeholders can be
government officials, labour unions, financial institutions, suppliers, customers, etc. They
wield influence over the Organization. Manager need to spend some part of his/her
interacting with these stakeholders and must win their support by effectively managing
the social impact of his Organization.

2. Compare Classical Conditioning theory versus Operant Conditioning theory?

Ans. Classical Conditioning Theory:

Classical conditioning is one of the simplest forms of learning, yet it has a

powerful effect on our attitudes, likes and dislikes, and emotional
responses. We have all learned to respond in specific ways to a variety of
words and symbols. Our lives are profoundly influenced by associations
we learn through classical conditioning. Ivan Pavlov’s research on the
conditioned reflex in dogs revealed much of what we know about the
principles of classical conditioning.

Classical conditioning of Pavlov: Ivan Pavlov (1949 – 1936) organized and

directed research in physiology at the institute of experimental medicine
in St. Petersburg, Russia from 1891 until his death in 1936. His book
“Conditioned Reflexes” is one of the classic works in psychology.

Classical conditioning is modifying behavior so that a conditions stimulus

is paired with an unconditioned stimulus and elicits an unconditioned
behavior. Ivan Pavlov, a Russian psychologist developed classical
conditioning theory based on his experiments to teach a dog to salivate in
response to the ringing of a bell. When Pavlov presented meat to the dog,
he noticed a great deal of salivation. But, when merely bell was rung, no
salivation was noticed in the dog. What Pavlov did next was to link the
meat and the ringing of the bell. He did this several times. Afterwards, he
merely rang the bell without presenting the meat. Now, the dog began to
salivate as soon as the bell rang. After a while, the dog would salivate
merely at the sound of the bell, even if no meat were presented. In effect,
the dog had learned to respond, i.e., to salivate at the sound of bell, since
it was conditioned to link the sound of the bell with the offering of meat.

Classical conditioning introduces a simple cause-and-effect relationship

between one stimulus and response. It also makes the response reflective
or involuntary after the stimulus-response relationship has been
established. This leaves no ground for making choices, which factor
differentiates human beings from dogs. Under certain situations, classical
conditioning does explain human behaviour. For examples, if a student is
always reprimanded by his principles office, he may become nervous
whenever asked to come to the principal’s office because of this
association.

Operant Conditioning theory:

Operant Conditioning theory argues that Behaviour is a function of its

consequences. People learn to behave to get something they want or
avoid something they don’t want. Operant behaviors mean voluntary or
learned behaviour in contrast to reflexive or unlearned behaviour. The
tendency to repeat such behaviour is influenced by the reinforcement or
lack of reinforcement brought about by the consequences of the
behaviour. Reinforcement therefore strengthens behaviour and increases
the likelihood that it will be repeated.

What Pavlov did for classical conditioning, the Harvard psychologist B. F.

Skinner did for operant conditioning.

Operant conditioning induces a voluntary change in behavior and learning

occurs as a “Consequence” of such change. It is also known as
reinforcement theory and it suggests that behaviour is a function of its
consequences. It is b based upon the premise that behaviour of job
performance is not a function of inner thought, feeling, emotions or
perceptions but is keyed to the nature of the outcome of such behaviour.
The consequences of a given behaviour would determine whether the
same behaviour is likely to occur in future or not. Based upon this direct
relationship between the consequences and behaviour the management
can study and identify this relationship and try to modify and control
behaviour. Thus, the behaviour can be controlled by manipulating its
consequences. This relationship is built around two principles;

• The behaviour that results in positive rewards tends to be repeated

and behaviour with negative consequences tends not to be
repeated.
• Based upon such consequences, the behaviour can be predicted and
controlled.
3. Define Attitude. Explain the Cognitive Dissonance theory.

Ans. An attitude is a hypothetical construct that represents an individual's degree of like

or dislike for an item. Attitudes are generally positive or negative views of a person, place,
thing, or event-- this is often referred to as the attitude object. People can also be conflicted or
ambivalent toward an object, meaning that they simultaneously possess both positive and
negative attitudes toward the item in question.

Attitudes are judgments. They develop on the ABC model (affect, behavior, and cognition).
The affective response is an emotional response that expresses an individual's degree of
preference for an entity. The behavioral intention is a verbal indication or typical behavioral
tendency of an individual. The cognitive response is a cognitive evaluation of the entity that
constitutes an individual's beliefs about the object. Most attitudes are the result of either
direct experience or observational learning from the environment.

Cognitive dissonance is an uncomfortable feeling caused by holding two contradictory ideas

simultaneously. The "ideas" or "cognitions" in question may include attitudes and beliefs, and
also the awareness of one's behavior. The theory of cognitive dissonance proposes that people
have a motivational drive to reduce dissonance by changing their attitudes, beliefs, and
behaviors, or by justifying or rationalizing their attitudes, beliefs, and behaviors.Cognitive
dissonance theory is one of the most influential and extensively studied theories in social
psychology.

Dissonance normally occurs when a person perceives a logical inconsistency among his or
her cognitions. This happens when one idea implies the opposite of another. For example, a
belief in animal rights could be interpreted as inconsistent with eating meat or wearing fur.
Noticing the contradiction would lead to dissonance, which could be experienced as anxiety,
guilt, shame, anger, embarrassment, stress, and other negative emotional states. When
people's ideas are consistent with each other, they are in a state of harmony or consonance. If
cognitions are unrelated, they are categorized as irrelevant to each other and do not lead to
dissonance.

A powerful cause of dissonance is when an idea conflicts with a fundamental element of the
self-concept, such as "I am a good person" or "I made the right decision." This can lead to
rationalization when a person is presented with evidence of a bad choice. It can also lead to
confirmation bias, the denial of disconfirming evidence, and other ego defense mechanisms.

EXAMPLE:- Smokers tend to experience cognitive dissonance because it is widely accepted

that cigarettes cause lung cancer, yet virtually everyone wants to live a long and healthy life.
In terms of the theory, the desire to live a long life is dissonant with the activity of doing
something that will most likely shorten one's life. The tension produced by these
contradictory ideas can be reduced by quitting smoking, denying the evidence of lung cancer,
or justifying one's smoking. For example, a smoker could rationalize his or her behavior by
concluding that everyone dies and so cigarettes do not actually change anything. Or a person
could believe that smoking keeps one from gaining weight, which would also be unhealthy.

This case of dissonance could also be interpreted in terms of a threat to the self-concept. The
thought, "I am increasing my risk of lung cancer" is dissonant with the self-related belief, "I
am a smart, reasonable human being." Because it is often easier to make excuses than it is to
change behavior, dissonance theory leads to the conclusion that humans are rationalizing and
not always rational beings.

4. Define Personality. Elucidate Trait theory.

Ans. Different psychologists defined the term personality in different ways.
We can define personality as a relatively stable set of characteristics that
influence an individual’s behavior. In other words, personality can be
defined as the sum total of ways in which an individual react and interact
with others.

Trait Theory:

Over the time, researches have developed a number of personality

theories and no theory is complete itself. We can conventionally group
these theories in to five heads:- Intrapsychic theory, Type theories , trait
theories, self theory.

According to trait theory, all individuals have some traits, which help to
develop their personality. We can summarize these traits in to five heads.

Openness to experience:

These types of people are imaginative, creative and conventional. They

are open to experiment new ideas, and adventurous things.

Conscientiousness:

These type of traits a have a tendency to show self discipline, aim for
achievement, and planned behavior rather than spontaneous behavior.
Conscientiousness concerns the way in which we control regulate and
impulse our controls. There are several advantages for this type of
behavior as they positively regarded by others as intelligent and reliable.

Extraversion:

Extraversion includes Energy, urgency and tendency to seek stimulation

and the company of others. Extraverts enjoy being with people, they are
full of energy, and often experience positive emotions. They tend to be
enthusiastic and action oriented individuals.

Introverts tend to be quiet, low-key and less dependent on social world.

Their lack of social involvement should not be interpreted as shyness or
depression.

Agreeableness:

This includes a tendency to be compassionate and cooperative rather

than suspicious and antagonistic towards others. This type of individuals
prefers to getting along with others, they are friendly, generous, helpful
and willing to compromise their interest with others. These types of
people generally have an optimistic view of human nature.
Draw back of agreeableness nature is that, it is not useful in a situation
that requires tough or absolute objective decisions.

Neuroticism:

This is a tendency to experience unpleasant emotions easily such as

anger, anxiety etc. We can call this as depression or emotional instability.
These types of individuals are emotionally reactive. They get easily upset
with the emotional events that would not affect most people and their
reactions tend to be more intense than others. These negative reactions
tend to be persisting for long period of time; as a result they would be in a
bad mood often.

This negative emotional reaction diminishes their ability to think clearly,

make decisions and cope with stress situations.

CASE STUDY
1. Explain the motivational problem in this case by relating it to Herzberg's theory.

Herzberg developed a theory of motivation on the premise that human

nature has two separate elements - The motivators and maintenance
factors. According to this theory of motivation the items that determine
job content are considered motivation factors e.g. Achievement,
recognition, responsibility, advancement and the work itself. The elements
that influence the job context are the hygiene or maintenance factors e.g.
company policy, salary, interpersonal relations, working conditions etc.
They must be adequate and if they are absent or inadequate, they will
create dissatisfaction.

Hygiene Factors:

Hygiene factors represent the need to avoid pain in the environment.

They are not an intrinsic part of a job, but they are related to the condition
under which job is performed. They are associated with negative feelings.
They must be viewed as preventive measures that remove sources of
dissatisfaction from environment.

Motivators:

Motivators are associated with positive feelings of employee about the

job. They make people satisfied with their job. Motivators are necessary to
keep job satisfaction and job performance high. On the other hand, if they
are not present they do not prove highly satisfying. Motivational Factors
or satisfiers are directly related to job content itself, the individual
performance of it, its responsibilities and the growth and recognition
obtained from it. Motivators are intrinsic to the job.

2. Analyze the problem in depth and find out a solution to the

problem.

Ans: There is a need of a sound system of motivation to make the

workers put forth their best efforts. A sound system of motivation should
have the following essential features.

1. It should satisfy the needs and objective of both organization and

employees.

2. Motivational system should change with the changes in the situation.

3. Jobs should be designed in such a way as to provide challenges and

variety.

4. Managers should recruit the active co-operation of subordinates in

improving the organization's output. Subordinates should be made
to realize that they are stakeholders in the organization.

5. The motivation system should satisfy the different needs of employees.

It should be directly related to the efforts of the employee.

6. The motivational system should be simple so that they simply

understood the system.

3. If you were the HR Manager how would you motivate the

employees so they work better?

Ans: Several factors influence human behavior. There are numerous

drives and needs which can act as good motivators moving people to work
and getting things done through them as per the plan. People respond to
physiological needs, social needs and egoistic needs. Human needs and
desire are the doorways through which the manager channelizes his
motivation efforts. There are three types of motivational programmers to
improve a person’s behavior towards his job. These are

• Pay incentive plans

• Job enrichment and
• Management by objective

There are four important factors governing employee response to the

measures of motivation.
1. The intensity or urge of the Drive.

2. Past Experience - can he rely upon the promise given by the

boss.
 3. Amount of Reward - The quantity and quality of the reward
can influence the amount of extra effort put forth by
employee.

Time Relationship of Response to Reward - Long range promises are less

effective than immediate fulfillment.

Management Process and

Organisational Behavior
Assignment-2
1. Define Perception. Interpret the various barriers to Perception.

Ans. perceiving and interpreting what others do is burdensome. As a

result, individuals develop techniques for making the task more
manageable. These techniques are not foolproof. Several factors lead us
to form inaccurate impressions of others. These barriers to perception are
inaccurate impressions of others. These barriers to perception are:

Selective Perception: we receive a vast amount of information. Therefore,

it is impossible for us to assimilate everything we see – only certain
stimuli can be taken note of. That is why; the boss may reprimand some
employees for doing something that – when done by another employee –
goes unnoticed. Since we can have observed everything going on about
us, we engage in selective perception.

Selective perception is also out tendency to choose information that

supports our viewpoints; individuals often ignore information that makes
them feel uncomfortable.

Selective perception allow us to “Speed –read” others, but not without the
risk of drawing an inaccurate picture. Because we see what we want to
see, we can draw unwarranted conclusions from an ambiguous situation.
Our perception tends to be influenced more by an individual’s attitudes,
interests, and background than by the stimulus itself.

1. Stereotype:
A stereotype is a generalization about a group of people. When we judge
someone on the basis of our perception of the group to which he or she
belongs, we are using the shortcut called stereotyping. Stereotypes
reduce information about other people to a workable level, and they are
efficient for compiling and using information. It is a means of simplifying a
complex world and it permits us to maintain consistency. It is less difficult
to deal with an unmanageable number of stimuli if we use stereotypes.
Stereotypes can be accurate, and when they are accurate, they can be
useful perceptual guidelines. However, most of the time, stereotypes are
inaccurate.

2. Halo Effect:

The halo error in perception is very similar to stereotyping. In stereotyping

the person is perceived according to a single category whereas under the
halo effect the person is perceived on the basis of one trait.

3. First-impression error:

Individuals place a good deal of importance on first impressions. First

impressions are lasting impressions. We tend to remember what we
perceive firs about a person, and sometimes we are quite reluctant to
change out initial impressions. First-impression error means the tendency
to form lasting opinions about an individual based on initial perceptions.
Primacy effects can be particularly dangerous in interviews, given that we
form first impressions quickly and that these impressions may be the
basis for long-term employment relationships.

4. Projection:

It is easy to judge others if we assume they are similar to us. This

tendency to attribute one’s characteristics to other people is called
projection. Projection can distort perceptions made about others. People
who engage in projection tend to perceive others according to what they
are like, rather than according to what the person being observed is really
like. When managers engage in projection, they compromise their ability
to respond to individual differences. They tend to see people as more
homogeneous than they really are.

5. Self-Fulfilling prophecies:

Self-fulfilling prophecies are situations in which our expectations about

people affect our interaction with them in such a way that our
expectations are fulfilled. Self-fulfilling prophecy is also known as the
Pygmalion effect, named after a sculptor in Greek mythology who carved
a statue of a girl that came to life when he prayed for this boon and it was
granted.
The Pygmalion effect has been observed in work organizations as well. A
manager’s expectations of an individual affect both the manager’s
behaviour toward the individual and the individual’s response. For
example, suppose a manager has an initial impression of an employee as
having the potential to move up within the organization. Chances are that
the manager will spend a great deal of time coaching and counseling the
employee, providing challenging assignments and grooming the individual
for success.

2. Define Motivation. Describe Hertzberg’s Two-factor theory of Motivation.

Ans. Hertzberg’s theory explains the motivational factors and the hygiene
factors which affect directly and indirectly to workers performance.
According to this theory the motivational factors were identified as
responsibility, achievement, and the work itself. When these factors are
present, they lead to superior performance and provide job satisfaction
the workers.

In this case the workers are affected by the both factors. The motivational
measure or the appreciation methods followed by the company was not
satisfactory to the workers, as even the inexperienced workers stared to
enjoy all the benefits which should have been facilitated to the
trained/experienced workers. Experienced workers feel that their
experience and knowledge were not accepted or appreciated by the
management and their performance was always evaluated with the new
untrained workers. This created a negative mind set and their productivity
affected adversely thus the firm is facing the critical situation. The
management should implement good reward or appreciation plans based
on better performance to motivate the workers and this will result in
better productivity as well.

Hygiene Factors:

Hygiene factors represent the need to avoid pain in the environment.

They are not an intrinsic part of a job, but they are related to the condition
under which job is performed. They are associated with negative feelings.
They must be viewed as preventive measures that remove sources of
dissatisfaction from environment.

Motivators:

Motivators are associated with positive feelings of employee about the

job. They make people satisfied with their job. Motivators are necessary to
keep job satisfaction and job performance high. On the other hand, if they
are not present they do not prove highly satisfying. Motivational Factors
or satisfiers are directly related to job content itself, the individual
performance of it, its responsibilities and the growth and recognition
obtained from it. Motivators are intrinsic to the job.

3. Elaborate on different types of Groups.

Ans. Groups can be either formal or informal.

1. Formal Groups:

A designated work group defined by the organization’s structure. A formal

group is set up by the organization to carry out work in support of the
organization’s goals. In formal groups, the behaviours that one should
engage in are stipulated by – and directed toward – organizational goals.
Examples include a book-keeping department, an executive committee,
and a product development team. Formal groups may be command
groups or task groups.

• Command Group: A command group consists of a manager and

the employees who report to him or her. Thus, it is defined in terms
of the organization’s hierarchy. Membership in the group arises from
each employee’s position on the organizational chart.
• Task Group: A task group is made up of employees who work
together to complete a particular task or project. A task group’s
boundaries are not limited to its immediate hierarchical superior. It
can cross command relationships. An employee’s membership in
the group arises from the responsibilities delegated to the employee
– that is, the employee’s responsibility to carry out particular
activities. Task group may be temporary with an established life
span, or they may be open ended.

• Committee: A group of people officially delegated to perform a

function, such as investigation, considering, reporting, or acting on a
matter. Committee, one or more persons appointed or elected to
consider report on, or take action on a particular matter. It
investigates analyses and debates the problem and makes
recommendation. Committee usually has their own Committee
member comprising of advisory authority, secretary and others.
Recommendation is sent to the authority that is responsible for
implementing them.

2. Informal Groups:

An organization’s informal groups are the groups that evolve to meet

social of affiliation needs by bringing people together based on shared
interests or friendship. Thus, informal groups are alliances that are neither
formally structured nor organizationally determined. These groups are
natural formations in the work environment that appear in response to the
need for social contact. Many factors explain why people are attracted to
one another every day, they are likely to form friendships. That likelihood
is even greater when people also share similar attitudes, personalities, or
economic status.

• Friendship Groups: Groups often developed because the

individual members have one or more common characteristics. We
call these formations “Friendship groups”. Social alliances, which
frequently extend outside the work situation, can be based on
similar age, same political view, attended the same college, etc.

• Interest Groups: people who may or may not be aligned into

common command or task groups may affiliate to attain a specific
objective with which each is concerned. This is an interest group.

• Reference Groups: Sometimes, people use a group as a basis for

comparison in making decisions or forming opinions. When a group
is used in this way. It is a reference group. Employees have
reference group inside or outside the organization where they work.
For most people, the family is the most important reference groups.
Other important reference groups typically include co-workers,
friends, and members of the person’s religious organization. The
employee need not admire a group for it to serve as a reference
group. Some reference groups serve as a negative reference; the
employee tries to be unlike members of these groups.

3. Stages of Group Development: In interpreting behaviour of a

particular group, it is important to recognize not only a broad pattern of
development but also the unique characteristics of the particular group
and the circumstances that contribute to (or detract from) its
development. The way in which a particular group develops, depends in
part on such variables as the frequency with which group members
interact and personal characteristics of group members. However, it is
generally believed that groups pass through a standard sequence of five
stages.

4. Enumerate the sources of Power in Organizations

Ans. The concept of human societies and human organizations entails the
concept of power in a wide range of interpretations. Power is seen as the
ability to influence, an ability to affect, an ability to mobilize, a capacity to
exert influence, the ability to employ sanctions and so on. There is a
range of definitions that the meaning of power, influence control,
domination, and authority are not sharply cut off from one another.
(Pheby, 2004)

Power in organisations is classically represented by Weber (1947) and is

directly concerned with hierarchy or structure and legitimacy. At times of
change however, illegitimate power is recognised as of considerable
significance. ‘Insiders are not always obedient’ Minzberg (1983).
One of the major theories of power, exchange theory, has as its central
assertion in the exchange theory as it appears in economics and has been
the notion of the market that is called catallaxy. A catallaxy is a market
order without planned ends, characterized by the ‘spontaneous order’
which emerges when individuals pursue their own ends within a
framework set by law and tradition. (Hayek, 1982) In a broader
organisational context, emphasis on the interpersonal relationships
between manager and subordinates or leader and followers can offer an
insight into the complicity of power and organisation. The figure shows the
sources of power in an organisation and the effects of the Exchange
Theory.
Reward Power is an individual’s ability to influence others’ behaviour by
rewarding their desirable behaviour. Coercive Power is an individual’s
ability to influence others’ behaviour by means of punishment for
undesirable behaviour. Legitimate Power most frequently refers to the
manager’s ability to influence subordinates’ behaviour because of the
manager’s position in the organisation hierarchy. Expert Power is an
individual’s ability to influence others’ behaviour because of skills, talents
or specialised knowledge possessed by the individual. Referent Power is
an individual’s ability to influence others’ behaviour as a result of being
liked or admired.
The hierarchical relationship between manager and subordinate is not the
only dimension of power in an organisation. Power can exist from
situations created from the design of the organisation, the type of
departmental structure, the opportunity to influence, access to powerful
individuals and critical resources. In general, structural and situational
sources of power are created by the division of labour and
departmentalisation, which naturally result in unequal access to
information, resources, decision-making, and other individuals and
groups. Knowledge as power means that individuals, groups or
departments that possess knowledge crucial to attaining or meeting the
organisational goals have power. Resources as power suggest that groups
or departments or individuals who can provide critical or difficult to obtain
resources acquire power in the organisation. Decision making as power
means that individuals or groups acquire power to the extend that they
can affect some part of the decision making process. Networks as power
imply that various affiliations and coalitions, both inside and outside the
organisation, represent sources of power.
It may be argued that users of technology gain power themselves due to a
lack of technological training amongst more senior members of the
organisation but it is in the information, not the technology that power
lies. The use of technological know-how to misrepresent or manipulate
data will inevitably be exposed and the use of standard software packages
and ‘open systems’ reduces the chance to possess unique knowledge.

CASE STUDY

Mr. Ravinder Rao is a B.E. in Computer Science from the Regional

Engineering College, Surathkal and is working as a Project Manager in
Mangala Tech., a leading software company in India. Mr. Rao was an all-
rounder, who did exceedingly well in his studies as well as other
extracurricular activities. Though he secured admission for MBA at
Manipal Institute of Management, due to financial constraints he
discontinued his studies and joined Mangala Tech. He proved to be good
in his job and within a short period of 5 years rose to the position of
Project Manager.

Gradually Mr. Rao began to feel dissatisfied with the work environment in
general and his own work in particular. He wanted to get an MBA degree
and as his desire remained unfulfilled, he was feeling quite restless. His
friends appreciated his feelings and suggested that he should meet his
boss Mr. S. S. Pai and discuss the matter with him. Mr. Rao then
approached Mr. Pai and asked him to sanction study leave for two years.
Mr. Pai was not helpful and discouraged Mr. Rao by saying that for a
talented person like Mr. Rao, a MBA degree would make no difference and
moreover, the company had no such policies of granting study leave. After
about a month Mr. Ravindra Rao put in his resignation.

Read and analyze the above case, on the basis of your individual analysis
answer the following questions:

1. Critically analyze the attitude and action of Mr. Ravinder Rao.

Ans: Basically Mr Ravinder Rao was an all-rounder, who did exceedingly

well in his studies as well as other extracurricular activities. With in a short
period of 5 years by his good job and hard work he rose to the position of
Project Manager.

But when we are to discuss about his attitude , first and the foremost
thing what we see his unsteady mind. Because, even though he was
studying well, he discontinued his studies showing his financial crisis. But
after joining in an organization, he decided to resign his job and again go
for studies.

A man rather a human being should first set goals in his life and then
should work hard to achieve his goal. When a goal is fixed then only we
can plan our life accordingly and take necessary actions to proceed step
by step to achieve these goals. But Mr.Rao seems have got no specific
goals.

When he was studying, he wanted to go for job to rid over his financial
crises. But when he was an employment, gradually he lost his interest
even though it is mainly because of dissatisfied working environment.

If he is proceeding towards some goal, then he will not resign his job in
order to continue his studies. He can as well selected or carried out
studies by continuing his employment itself by doing as a part time course
.

Therefore, after analyzing the attitude and action, Mr. Rao seems to be an
unsteady minded human being.

2. If you were Mr. S. S. Pai what advice would you give Mr.Rao
and why ?

Ans: If I was Mr. S S. Pai , I would have advised him to proceed his studies
and go for MBA degree . Because, he is very good in his studies also apart
from doing good job. So an Organization should also give due care on the
career development of his employees.

I would have never at least discouraged Mr. Rao by saying that for a
talented person like Mr. Rao, a MBA degree would make no difference.

Rather, I would have explained him the company policy of not granting
any study leave but could have helped by way of giving some education
advance which can be deducted from his monthly installments over the
period of certain years. This is mainly to reduce his financial burden as it
is one of the constraints for him to discontinue his studies.

I would have also suggested him not to go for resignation as he will totally
be handicapped if he desires to go for full time degree course. I would
have suggested him to take MBA degree course as a part time course, so
that he works to earn money and studies to acquire more knowledge and
obtain qualification.

Statistics for Management

Assignment-1
 1. Explain the limitations of statistics in your own words.

Ans. Limitations of Statistics:

1. Statistics does not deal with qualitative data. It deals only with quantitative data: Statistical
methods can be applied only to numerically expressed data. Qualitative characteristics can be
studied only if an alternative method of numerical measurement is introduced.

2. Statistics does not deal with individual fact: Statistical methods can be applied only to
aggregate of facts. Single fact cannot be statistically studied.

3. Statistical inferences (conclusions) are not exact: Statistical inferences are true only on an
average. They are probabilistic statements.

4. Statistics can be misused: Increasing misuse of Statistics has led to increasing distrust in
statistics.

5. Common men cannot handle statistics properly: Only statisticians can handle statistics
properly. An illogical analysis of statistical data leads to statistical fallacies.

Statistics is a mathematical science pertaining to the collection, analysis, interpretation or

explanation, and presentation of data. It is applicable to a wide variety of academic
disciplines, from the physical and social sciences to the humanities. Statistics are also used
for making informed decisions.
Statistical methods can be used to summarize or describe a collection of data; this is called
descriptive statistics. In addition, patterns in the data may be modeled in a way that accounts
for randomness and uncertainty in the observations, and then used to draw inferences about
the process or population being studied; this is called inferential statistics. Both descriptive
and inferential statistics comprise applied statistics. There is also a discipline called
mathematical statistics, which is concerned with the theoretical basis of the subject.

2. Briefly explain relative frequency of occurrence in your own words.

Ans. Relative Frequency of Occurrence:-

In statistics the frequency of an event i is the number ni of times the event occurred in the
experiment or the study. These frequencies are often graphically represented in histograms.

We speak of absolute frequencies, when the counts ni themselves are given and of (relative)
frequencies, when those are normalized by the total number of events:

f_i = \frac{n_i}{N} = \frac{n_i}{\sum_i n_i}

Taking the fi for all i and tabulating or plotting them leads to a frequency distribution.

The Relative Frequency Density of occurrence of an event is the relative frequency of i

divided by the size of the bin used to classify i.
For example: If the lower extreme of the class you are measuring the density of is 15 and the
upper extreme of the class you are measuring is 30, given a relative frequency of 0.0625, you
would calculate the frequency density for this class to be:

Rel.freq / (Upper Extreme of Class - Lower Extreme of Class) = Density

0.0625 / (30 - 15) = 0.0625 / 15 = 0.0041666.. That is: 0.00417 to 5 S.F.

In biology, relative frequency is the occurrence of a single gene in a specific species that
makes up a gene pool.

The Limiting Relative Frequency of an event over a long series of trials is the conceptual
foundation of the frequency interpretation of probability. In this framework, it is assumed that
as the length of the series increases without bound, the fraction of the experiments in which
we observe the event will stabilize. This interpretation is often contrasted with Bayesian
probability.

Frequency is the measurement of the number of occurrences of a repeated event per unit of
time. It is also defined as the rate of change of phase of a sinusoidal waveform.

Relative Frequency of Occurrence:-

Question like : “What is the probability that I will live to be 85 ? or “ what are the chances
that I will below one of my stereo speakers if I turn my 200 –watt amplifier up to wide
open?” or “what is the probability that the location of a new paper plant on the river near our
town will cause a substantial fish kill?. We quickly see that we may not be able to state in
advance, without experimentation, what these probabilities are. Other approaches may be
more useful.

In the 1800s, British statisticians, interested in a theoretical foundation for calculating risk of
losses in life insurance and commercial insurance, began defining probabilities from
statistical data collected on births and deaths. Today, this approach is called The relative
frequency of Occurrence. It defines probability as either:

1. The observed relative frequency of an event in a very large number of trials, or

2. The proportion of times that an event occurs in the long run when conditions are stable.

This method used the relative frequencies of past occurrences as probabilities. We determine
how often something has happened in the past and use that figure to predict the probability
that it will happen again in the future.

For example. Suppose an insurance company knows from past actuarial data that of all males
40 years old, about 60 out or every 100,000 will die within a 1 – year period. Using this
method, the company estimates the probability of death of that age group as:

___60____ or 0.0006

1000
A second characteristic of probabilities established by the relative frequency of occurrence
method can be shown by tossing one of our fair coins 300 times. Here we can see that
although the proportion of heads was far from 0.5 in the first 100 tosses, it seemed to stabilize
and approach 0.5 as the number of tosses increased.

In statistical language, we would say that the relative frequency becomes stable as the
number of tosses becomes large (if we are tossing the coin under uniform conditions). Thus,
when we use the relative frequency approach to establish probabilities, our probability figure
will gain accuracy as we increase the number of observations. Of course, this improved
accuracy is not free; although more tosses of our coin will produce a more accurate
probability of head occurring, we must bear the time and the cost of additional observations.

One difficulty with the relative frequency approach is that people often use it without
evaluating a sufficient number of outcomes. If you heard someone say, “My aunt and uncle
got the flu this year, and they are both over 65, so everyone in that age bracket will probably
get the flu, “you would know that your friend did not base his assumptions on enough
evidence. His observations were insufficient data for establishing a relative frequency of
occurrence probability.

3. Write short notes on Bernoulli distribution. Also write the use of

Bernoulli process.

Ans. In probability theory and statistics, the Bernoulli distribution,

named after Swiss scientist Jakob Bernoulli, is a discrete probability
distribution, which takes value 1 with success probability p and value 0
with failure probability q = 1 − p. So if X is a random variable with this
distribution, we have:
Definition:
A Bernoulli process is a discrete-time stochastic process consisting of a
finite or infinite sequence of independent random variables X1, X2, X3,...,
such that

• For each i, the value of Xi is either 0 or 1;

• For all values of i, the probability that Xi = 1 is the same number p.

In other words, a Bernoulli process is a sequence of independent

identically distributed Bernoulli trials. The two possible values of each Xi
are often called "success" and "failure", so that, when expressed as a
number, 0 or 1, the value is said to be the number of successes on the ith
"trial". The individual success/failure variables Xi are also called Bernoulli
trials.
Independence of Bernoulli trials implies memory lessness property: past
trials do not provide any information regarding future outcomes. From any
given time, future trials are also a Bernoulli process independent of the
past (fresh-start property).
Random variables associated with the Bernoulli process include:
 • The number of successes in the first n trials; this has a binomial
distribution;
• The number of trials needed to get r successes; this has a negative
binomial distribution.
• The number of trials needed to get one success; this has a
geometric distribution, which is a special case of the negative
binomial distribution.

The problem of determining the process, given only a limited sample of

Bernoulli trials, is known as the problem of checking if a coin is fair.
Bernoulli distribution:
One widely used probability distribution of a discrete random variable is
the binomial distribution. It describes a variety of processes of interest to
managers. The binomial distribution describes discrete, not continuous,
data, resulting from an experiment known as a Bernoulli process, after the
seventeenth-century Swiss mathematician Jacob Bernoulli. The tossing of
a fair coin a fixed number of times is a Bernoulli process, and the
outcomes of such tosses can be represented by the binomial probability
distribution. The success or failure of interviewees on an aptitude test
may also be described by a Bernoulli process. On the other hand, the
frequency distribution of the lives of fluorescent lights in a factory would
be measured on a continuous scale of hours and would not quality as a
binomial distribution.
Use of the Bernoulli process:
We can use the outcomes of a fixed number of tosses of a fair
coin as an example of a Bernoulli process. We can describe this
process as follows:
1. Each trial (each toss, in this case) has only two possible outcomes:
heads or tails, yes or no, success or failure.
2. The probability of the outcome of any trial (toss) remains fixed over
time with a fair coin, the probability of heads remains 0.5 for each toss
regardless of the number of times the coin is tossed.
3. The trials are statistically independent; that is, the outcome of one toss
does not affect the outcome of any other toss.

4. Discuss briefly the Continuous Probability Distribution.

Ans. The Normal Distribution/ Continuous Probability, also called the

Gaussian distribution, is an important family of continuous probability
distributions, applicable in many fields. Each member of the family may
be defined by two parameters, location and scale: the mean ("average",
μ) and variance ("variability", σ2), respectively. The Standard Normal
Distribution is the normal distribution with a mean of zero and a
variance of one (the green curves in the plots to the right). Carl Friedrich
Gauss became associated with this set of distributions when he analyzed
astronomical data using them [1], and defined the equation of its
probability density function. It is often called the bell curve because the
graph of its probability density resembles a bell.

The importance of the normal distribution as a model of quantitative

phenomena in the natural and behavioral sciences is due to the central
limit theorem. Many psychological measurements and physical
phenomena (like noise) can be approximated well by the normal
distribution. While the mechanisms underlying these phenomena are
often unknown, the use of the normal model can be theoretically justified
by assuming that many small, independent effects are additively
contributing to each observation.

The normal distribution also arises in many areas of statistics. For

example, the sampling distribution of the sample mean is approximately
normal, even if the distribution of the population from which the sample is
taken is not normal. In addition, the normal distribution maximizes
information entropy among all distributions with known mean and
variance, which makes it the natural choice of underlying distribution for
data summarized in terms of sample mean and variance. The normal
distribution is the most widely used family of distributions in statistics and
many statistical tests are based on the assumption of normality. In
probability theory, normal distributions arise as the limiting distributions
of several continuous and discrete families of distributions.

So far in this subsection, we have been concerned with discrete

probability distributions (Binomial and Poisson). In this section, we shall
turn to cases in which the variable can take on any value within a given
range and in which the probability distribution is continuous.
A very important continuous probability distribution is the normal
distribution. Several mathematicians were instrumental in its
development, including the eighteenth-century mathematician-
astronomer Karl Gauss. In honour of his work, the normal probability
distribution is often called the Gaussian distribution.
There are two basic reasons why the normal distribution occupies such a
prominent place in statistics. First, it has some properties that make it
applicable to a great many situations in which it is necessary to make
inferences by taking samples. In subsequent units, we will find that the
normal distribution is a useful sampling distribution. Second, the normal
distribution comes close to fitting the actual observed frequency
distributions of many phenomena, including human characteristics
(weights, heights, and IQs), outputs from physical processes (dimensions
and yields), and other measures of interest to managers in both the public
and private sectors.

5. Write short notes on Simple Random Sampling.

Ans. In statistics, a Simple Random Sample is a group of subjects (a

sample) chosen from a larger group (a population). Each subject from the
population is chosen randomly and entirely by chance, such that each
subject has the same probability of being chosen at any stage during the
sampling process. This process and technique is known as Simple
Random Sampling, and should not be confused with Random Sampling.

In small populations such sampling is typically done "without

replacement", i.e., one deliberately avoids choosing any member of the
population more than once. An unbiased random selection of subjects is
important so that in the long run, the sample represents the population.
However, this does not guarantee that a particular sample is a perfect
representation of the population. Simple random sampling merely allows
one to draw externally valid conclusions about the entire population based
on the sample. Although simple random sampling can be conducted with
replacement instead, this is less common and would normally be
described more fully as simple random sampling with replacement.

Conceptually, simple random sampling is the simplest of the probability

sampling techniques. It requires a complete sampling frame, which may
not be available or feasible to construct for large populations. Even if a
complete frame is available, more efficient approaches may be possible if
other useful information is available about the units in the population.

Advantages are that it is free of classification error, and it requires

minimum advance knowledge of the population. It best suits situations
where not much information is available about the population and data
collection can be efficiently conducted on randomly distributed items. If
these conditions are not true, stratified sampling or cluster sampling may
be a better choice.

Simple Random Sampling:

Simple Random Sampling selects samples by methods that allow each
possible sample to have an equal probability of being picked and each
item in the entire population to have an equal chance of being included in
the sample.
Suppose we have a population of four students in a seminar and we want
samples of two students at a time for interviewing purposes. The table
below illustrates all of the possible combinations of samples of two
students in a population size of four, the probability of each sample being
picked, and the probability that each student will be in a sample.

6. State Central Limit Theorem. Explain in your own words.

Ans. A Central Limit Theorem is any of a set of weak-convergence results in

probability theory. They all express the fact that any sum of many independent
and identically-distributed random variables will tend to be distributed according
to a particular "attractor distribution". The most important and famous result is
called The Central Limit Theorem which states that if the sum of the variables has
a finite variance, then it will be approximately normally distributed (i.e., following
a Gaussian distribution).

Since many real processes yield distributions with finite variance, this explains the
ubiquity of the normal probability distribution.

Several generalizations for finite variance exist which do not require identical
distribution but incorporate some condition which guarantees that none of the
variables exert a much larger influence than the others. Two such conditions are
the Lindeberg condition and the Lyapunov condition. Other generalizations even
allow some "weak" dependence of the random variables. Also, a generalization
due to Gnedenko and Kolmogorov states that the sum of a number of independent
random variables with power-law tail distributions decreasing as 1/|x|α+1 with 0 <
α < href="http://en.wikipedia.org/wiki/L%C3%A9vy_skew_alpha-
stable_distribution" title="Lévy skew alpha-stable distribution">Lévy distribution
as the number of variables grows. This article will only be concerned with the
central limit theorem as it applies to distributions with finite variance.
History:

“The central limit theorem has an interesting history. The first version of this
theorem was postulated by the French-born English mathematician Abraham de
Moivre, who, in a remarkable article published in 1733, used the normal
distribution to approximate the distribution of the number of heads resulting from
many tosses of a fair coin. This finding was far ahead of its time, and was nearly
forgotten until the famous French mathematician Pierre-Simon Laplace rescued it
from obscurity in his monumental work Théorie Analytique des Probabilités,
which was published in 1812. Laplace expanded De Moivre's finding by
approximating the binomial distribution with the normal distribution. But as with
De Moivre, Laplace's finding received little attention in his own time. It was not
until the nineteenth century was at an end that the importance of the central limit
theorem was discerned, when, in 1901, Russian mathematician Aleksandr
Lyapunov defined it in general terms and proved precisely how it worked
mathematically. Nowadays, the central limit theorem is considered to be the
unofficial sovereign of probability theory. ”

See Bernstein (1945) for a historical discussion focusing on the work of Pafnuty
Chebyshev and his students Andrey Markov and Aleksandr Lyapunov that led to
the first proofs of the C.L.T. in a general setting.
Proof of the central limit theorem:

For a theorem of such fundamental importance to statistics and applied

probability, the central limit theorem has a remarkably simple proof using
characteristic functions. It is similar to the proof of a (weak) law of large numbers.
For any random variable, Y, with zero mean and unit variance (var(Y) = 1), the
characteristic function of Y is, by Taylor's theorem,

\varphi_Y(t) = 1 - {t^2 \over 2} + o(t^2), \quad t \rightarrow 0

Where o (t2 ) is "little o notation" for some function of t that goes to zero more
rapidly than t2. Letting Yi be (Xi − μ)/σ, the standardised value of Xi, it is easy to
see that the standardised mean of the observations X1, X2, ..., Xn is just
Z_n = \frac{n\overline{X}_n-n\mu}{\sigma\sqrt{n}} = \sum_{i=1}^n {Y_i
\over \sqrt{n}}.

By simple properties of characteristic functions, the characteristic function of Zn

is

\left[\varphi_Y\left({t \over \sqrt{n}}\right)\right]^n = \left[ 1 - {t^2 \over 2n} +

o\left({t^2 \over n}\right) \right]^n \, \rightarrow \, e^{-t^2/2}, \quad n \rightarrow
\infty.

But, this limit is just the characteristic function of a standard normal distribution,
N(0,1), and the central limit theorem follows from the Lévy continuity theorem,
which confirms that the convergence of characteristic functions implies
convergence in distribution.

Statistics for Management

Assignment-2

1. What is the criteria of a good estimator, explain the points in your own
word.

Ans. There are two number of estimates about a population:

1. A point estimate and

2. An interval estimate:
Estimator:

In statistics, an estimator is a function of the observable sample data that is used to

estimate an unknown population parameter; an estimate is the result from the
actual application of the function to a particular set of data. Many different
estimators are possible for any given parameter. Some criterion is used to choose
between the estimators, although it is often the case that a criterion cannot be used
to clearly pick one estimator over another. To estimate a parameter of interest
(e.g., a population mean, a binomial proportion, a difference between two
population means, or a ratio of two population standard deviation), the usual
procedure is as follows:

1. Select a random sample from the population of interest.

2. Calculate the point estimate of the parameter.
3. Calculate a measure of its variability, often a confidence interval.
4. Associate with this estimate a measure of variability.

There are two types of estimators: Point Estimators and Interval Estimators.

1. A point Estimate: is a single number that is used to estimate an unknown

population parameter. A point estimate is often insufficient, because it is either
right or wrong. If you are told only that her point estimate of enrollment is wrong,
you do not know how wrong it is, and you cannot be certain of the estimate’s
reliability. If you learn that is off by only 10 students, you would accept 350
students as a good estimate of future enrollment.

Point estimation:

In statistics, point estimation involves the use of sample data to calculate a single
value (known as a statistic) which is to serve as a "best guess" for an unknown
(fixed or random) population parameter.

More formally, it is the application of a point estimator to the data.

Point estimation should be contrasted with Bayesian methods of estimation, where

the goal is usually to compute (perhaps to an approximation) the posterior
distributions of parameters and other quantities of interest. The contrast here is
between estimating a single point (point estimation), versus estimating a weighted
set of points (a probability density function).

2. An interval estimator: is a range of values used to estimate a population

parameter. It indicates the error in two ways: by the parameter lying within that
range.

Interval estimation:

In statistics, interval estimation is the use of sample data to calculate an interval of

possible (or probable) values of an unknown population parameter. The most
prevalent forms of interval estimation are confidence intervals (a frequentist
method) and credible intervals (a Bayesian method).

* Behrens-Fisher problem
* fiducial inference

Other common interval estimation are

* Tolerance interval
* Prediction interval - used mainly in Regression Analysis

Criteria of a good estimator:

1. Unbiasedness: This is a desirable property for a good estimator to have. The

term unbiasedness refers to the fact that a sample mean is an unbiased estimator of
a population mean because the mean of the sampling distribution of sample means
taken from the same population is equal to the population mean itself. We can say
that a statistic is an unbiased estimator if, on average, it tends to assume values
that ate the same extent as it tends to assume values that are below the population
parameter being estimated.

2. Efficiency: Another desirable property of a good estimator is that it be efficient.

Efficiency refers to the size of the standard error of the statistic. If we compare
two statistics from a sample of the same size and try to decide which one is the
more efficient estimator, we would pick the statistic that has the smaller standard
error, or standard deviation of the sampling distribution. Suppose we choose a
sample of a given size and must decide whether to use the sample mean or the
sample median to estimate the population mean. If we calculate the standard error
of the sample mean and find it to be 1.05 and then calculate the standard error of
the sample median and find it to be 1.6, we would say that the sample mean is a
more efficient estimator of the population mean be cause its standard error is
smaller. It makes sense that an estimator with a smaller standard error (with less
variation) will have more chance of producing an estimate nearer to the population
parameter under consideration.

3. Consistency: A statistic is a consistent estimator of a population parameter if as

the sample size increases, it becomes almost certain that the value of the statistic
comes very close to the value of the population parameter. If an estimator is
consistent, it becomes more reliable with large samples. Thus, if you are
wondering whether to increase the sample size to get more information about a
population parameter, find out first whether your statistic is a consistent estimator.
If it is not, you will waste time and money by taking larger samples.
Consistency:

A Consistent Estimator is an estimator that converges in probability to the

quantity being estimated as the sample size grows without bound.

An estimator tn (where n is the sample size) is a consistent estimator for parameter

θ if and only if, for all ε > 0, no matter how small, we have

\lim_{n\to\infty}\Pr\left\{ \left| t_n-\theta\right|<\epsilon \right\}=1.

It is called strongly consistent, if it converges almost surely to the true value.

4. Sufficiency: An estimator is sufficient if it makes so much use of the

information in the sample that no other estimator could extract from the sample
additional information about the population parameter being estimated.
Efficiency:

Main article: Efficiency (statistics)

The quality of an estimator is generally judged by its mean squared error.

However, occasionally one chooses the unbiased estimator with the lowest
variance. Efficient estimators are those that have the lowest possible variance
among all unbiased estimators. In some cases, a biased estimator may have a
uniformly smaller mean squared error than does any unbiased estimator, so one
should not make too much of this concept. For that and other reasons, it is
sometimes preferable not to limit oneself to unbiased estimators; see estimator
bias. Concerning such "best unbiased estimators", see also Cramér-Rao bound,
Gauss-Markov theorem, Lehmann-Scheffé theorem, Rao-Blackwell theorem.

2. Write short notes on Interval estimates.

Ans. Interval estimation:

The purpose of gathering samples is to learn more about a population. We can
compute this information from the sample data as either point estimates, An
Interval estimate describes a range of values within which a population parameter
is likely to lie.

Interval estimation:

In statistics, interval estimation is the use of sample data to calculate an interval of

possible (or probable) values of an unknown population parameter. The most
prevalent forms of interval estimation are confidence intervals (a frequentist
method) and credible intervals (a Bayesian method).

* Behrens-Fisher problem
* fiducial inference

Other common interval estimation are

* Tolerance interval
* Prediction interval - used mainly in Regression Analysis.

3. Explain Type I and Type II errors in testing of Hypothesis.

Ans. Types of hypothesis:

A proposition may take the form of asserting a causal relationship (such as "A
causes B"). A proposition often (but not necessarily) involves an assertion of
causation. For example, if a particular independent variable changes, then a
certain dependent variable also changes. This formulation, also known as an "If
and Then" statement, applies whether or not a proposition asserts a direct cause-
and-effect relationship.

A hypothesis about possible correlation does not stipulate the cause and effect per
se, only stating that "A is related to B". Investigators may have more difficulty in
verifying causal relationships than other correlations, because quite commonly
intervening variables also become involved, possibly giving rise to the appearance
of a possibly direct cause-and-effect relationship, but which (upon further
investigation) turn out to have some other, more direct causal factor not
mentioned in the proposition. Also, a mere observation of a change in one
variable, when correlated with a change in another variable, can actually mistake
the effect for the cause, and vice-versa (i.e., potentially get the hypothesized cause
and effect backwards).
Empirical hypotheses that experimenters have repeatedly verified may become
sufficiently dependable that, at some point in time, they become considered as
"proven". Some people may succumb to the temptation to term such hypotheses
"laws", but they would do so mistakenly, since by definition a hypothesis explains
and a law describes (for example, a law can state: "Matter can neither be created
or destroyed, only changed in form"). More accurately, one could refer to
repeatedly verified hypotheses simply as "adequately verified", or as
"dependable".
Statistics features a rather more general concept of a hypothesis: this involves
making assertions about the probability distributions or likelihoods of events.
Statisticians use two kinds of hypothesis: first, the null hypothesis or H0;
secondly, the alternative hypothesis or H1. To give the simplest non-trivial
example, one might formulate two hypotheses about tossing a coin:
• H0: coin-tossing operates "fairly" (equally likely to fall "Heads" or "Tails")
• H1: coin-tossing operates in a biased manner to give a 90% probability of falling
"Heads"
No finite sequence of results could utterly falsify either hypothesis. However,
various statistical approaches (such as Bayesian statistics and classical statistics
(i.e. t-tests)) can quantify the strong intuition that H1 appears much less likely
than H0 if, in 1,000 tosses, 495 came out "Heads" — and much more likely if 895
came out "Heads". In more complex sciences, researchers generally evaluate
experiments statistically rather than as simple verifications or falsifications.
A hypothesis (from Greek ὑπόθεσις) consists either of a suggested explanation for
a phenomenon or of a reasoned proposal suggesting a possible correlation
between multiple phenomena. The term derives from the Greek, hypotithenai
meaning "to put under" or "to suppose." The scientific method requires that one
can test a scientific hypothesis. Scientists generally base such hypotheses on
previous observations or on extensions of scientific theories.

Type I and Type II errors:

Rejecting a null hypothesis when it is true is called a Type I error, and its
probability ( Which, as we have seen, is also the significance level of the test) is
symbolized α (alpha). Alternatively, accepting a null hypothesis when it is false is
called a Type II error, and its probability is symbolized β (beta). There is a trade-
off between these two errors: the probability of making one type of error can be
reduced only if we are willing to increase the probability of making the other type
or error. With an acceptance region this small, we will rarely accept a null
hypothesis when it is not true, but as a cost of being this sure, we will often reject
a null hypothesis when it is true.
Put another way, in order to get a low β, we will have to put up with a high α. To
deal with this trade-off in personal and professional situations, decision makers
decide the appropriate level of significance by examining the costs or penalties
attached to both types of errors.

When Type I error is preferred:

Suppose that making a Type I error (rejecting a null hypothesis when it is true)
involves the time and trouble of reworking a batch of chemicals that should have
 been accepted. At the same time, making a Type II error (accepting a null
hypothesis when it is false) means talking a chance that an entire group of users of
this chemical compound will be poisoned. Obviously, the management of this
company will prefer a Type I error to a Type II error and, as a result, will set very
high levels of significance in its testing to get low β s.

When Type II error is preferred:

Suppose, on the other hand, that making a Type I error involves disassembling an
entire engine at the factory, but making a Type II error involves relatively
inexpensive warranty repairs by the dealers. Then the manufacturer is more likely
to prefer a Type II error and will set lower significance levels in its testing.

4. Write down the properties of Chi-square distribution.

Ans. Properties of χ2 distribution:

1. Mean of χ2 distribution = Degrees of freedom = V

2. SD of χ2 distribution = √2V

3. Median of χ2 distribution divides the area of the curve into two equal
parts, each part being 0.5

4. Mode of χ2 distribution is equal to degrees of freedom less 2 i.e., V-2

5. χ2 values are always positively skewed.

6. χ2 values increase with the increase in the DF, there is a new χ2

distribution with every increase in the no. of degrees of freedom.

7. The lowest value of χ2 is zero and the highest is infinity i.e. 0 < χ2 <

8. When two chi-squares γ 2\1 and χ2/2 are independent following χ2

distribution with n1 and n2 degrees of freedom, their sum χ2/2 +χ2/2
will follow χ2 distribution with n1 + n2 degrees of freedom.

9. When V>30, √2χ2 - √2V -1 approximately follows the standard normal

distribution.

5. Briefly explain the concepts of Correlation in your own words.

Ans. Types of Correlation are given below:

a. Positive of Negative

b. Simple, Partial and Multiple

c. Linear and Non-Linear

a. Positive Correlation: Both the variables (X and Y) will vary in the same
direction. If variable X increases, variable Y also will increase; if variable X
decreases, variable Y also will decrease.

Negative Correlation: The given variables will vary in opposite direction. If on

variable increases, other variable will decrease.

b. Simple, Partial and Multiple Correlations: In simple correlation, relationship

between two variables are studies. In partial and multiple correlations three or
more variables are studies. Three or more variables are simultaneously studied in
multiple correlation. In partial correlation more than two variables are studied, but
the effect on one variable is kept constant and relationship between other two
variables is studied.

c. Linear and Non-Linear Correlation: It depends upon the constance of the ration
of change between the variables. In linear correlation the percentage change in
one variable will be equal to the percentage change in another variable. It is not so
in non-linear correlation.

Method of Studying Correlation::

The various methods of studying correlation are given below.

a. Scatter Diagram Method.

b. Graphic Method

c. Karl Pearson’s Coefficient of Correlation

d. Concurrent Deviation Method

e. Method of Least Squares

In probability theory and statistics, correlation, also called correlation coefficient,

indicates the strength and direction of a linear relationship between two random
variables. In general statistical usage, correlation or co-relation refers to the
departure of two variables from independence. In this broad sense there are
several coefficients, measuring the degree of correlation, adapted to the nature of
data.

A number of different coefficients are used for different situations. The best
known is the Pearson product-moment correlation coefficient, which is obtained
by dividing the covariance of the two variables by the product of their standard
deviations.

6. What do you mean by regression analysis; explain in your own words.

Ans. Regression analysis:

In “Statistical Methods” has defined Regression as, “The measure of the average
relationship between two or more variables in terms of the original units of the
data”.

Morris Hamburg has defined Regression Analysis as, “The method by which
estimates are made of the values of a variable from knowledge of the values of
one or more other variables and to the measurement of the errors involved in this
estimation process”.

Correlation analysis attempts to study the relationship between the two variables x
and y. Regression analysis attempts to predict the average x for a given y. in
Regression it is attempted to quantify the dependence of one variable on the other.
Example; There are two variables x and y. y depends on x. the dependence is
expressed in the form of the following equation:

Y=a+bx

Regression analysis used to estimate the values of the dependent variables from
the values of the independent variables.

Regression analysis uses to get a measure of the error involved while using the
regression line as a basis for estimation.

Regression coefficient is used to calculate correlation coefficient. The square of

correlation coefficient measures the degree of association of correlation that
prevails between the given two variables.

Correlation coefficient measures the degree of co variability between the given

variables x and y. the regression analysis uses to study the ‘nature of relationship’
between the given variables; the value of one variable is predicted based on
another.

Correlation analysis does not study cause and effect relationship of the given
variables. It is not stated that one variable is the cause and other the effect. In
regression analysis one variable is taken as dependent and another independent.
 Here there is possibility to study the cause and effect relationship.

In statistics, regression analysis examines the relation of a dependent variable

(response variable) to specified independent variables (explanatory variables). The
mathematical model of their relationship is the regression equation. The
dependent variable is modeled as a random variable because of uncertainty as to
its value, given only the value of each independent variable. A regression equation
contains estimates of one or more hypothesized regression parameters
("constants"). These estimates are constructed using data for the variables, such as
from a sample. The estimates measure the relationship between the dependent
variable and each of the independent variables. They also allow estimating the
value of the dependent variable for a given value of each respective independent
variable.

Uses of regression include curve fitting, prediction (including forecasting of time-

series data), modeling of causal relationships, and testing scientific hypotheses
about relationships between variables.

Financial and Management Accounting

Assignment-1
1. Elaborate on Basic Accounting Concepts.

Ans. Basic Accounting Concepts:-

1. The Entity Concepts:

A business is an artificial entity distinct from its proprietor(s). A business

entity is an economies unit which owns its assets and has its own
obligations. The owner(s) may have personal bank accounts, real estate,
and other assets, but these will not be considered as assets of the
business. A business entity may be in the form of a sole proprietorship
concern, partnership, or a corporate entity. In case of a sole proprietary
form of business, the sole proprietor is considered fully responsible for the
welfare of the entity and, in the eyes of law, the sole proprietor and the
business are not considered to have a separate existence. For accounting
purposes, however, they are separate entities. A partnership form of
business has more than one owner who have “agreed to share profits of a
business carried on by all or an of them acting for all”. A corporate entity
is a separate legal entity, entirely divorced from its owners (called equity
shareholders). A sole proprietorship business normally comes to an end
with the expiry of the owner, a partnership firm may cease to operate or,
at least, there will be reconstruction of the agreement of the expiry of an
owner (called partner) but a corporate entity is not disturbed at all on the
expiry of any equity shareholder.

2. Money Measurement Concepts:

Each transaction and event must be expressible in monetary terms. If an

event cannot be expressed in monetary terms. It cannot be considered for
accounting purpose. Foe example, if you successfully pass a Distance
Learning Programme of a university, it will give you a great deal of
Satisfaction. But the satisfaction cannot be expressed in monetary terms.
Hence such an event is not fit for accounting. On the other hand, if you
are robbed of Rs. 1,000 in a train journey, the loss suffered can definitely
be expressed in monetary terms. This concepts implies that the legal
currency of a country should be used for such measurement.

3. The Cost Concepts:

Assets such as land, buildings, plant and machinery etc. and obligations,
such as loans, public deposits, should be recorded at historical cost (i.e.,
cost as on acquisition). For example, the land purchased by a business
entity two years back at a cost of Rs. 10 lakh should be shown, as per the
cost concept, at the same amount even today when the current price of
the land may have increased five-fold. Thus, the greatest limitation of this
concepts is tat it distorts the true worth of an asset by sticking to its
original cost.

4. The Going Concern Concepts:

One common argument put forward by the proponents of cost concept is

that the assets are shown at its original cost (net of depression) because
these are meant for use for a long period of time and not for immediate
resale. Therefore, the cost concept rests on the assumption that an entity
would continue its operation for a long time. An entity is said to be a going
concern if it has neither the intention nor the necessity of the liquidation
or considered as one of the fundamental accounting assumptions. The
valuation principle of assets and liabilities depend on this concept. If an
entity is not a going concern, its assets and liabilities are to be valued in
an altogether different manner.

5. The Accrual Concepts:

It suggests that incomes and expenses should be recognized as and when

they are earned and incurred, irrespective of whether the money is
received or pain in connection thereof. This concept is used by all
businesses that disclose their financial statements to various interested
parties. In fact, the Companies Act, 1956 provides that accrual concept
has to be maintained for practically all purposes. The alternative to the
accrual basis of accounting is called ash basis of accounting. The law in
India provides that in cases where accrual concept cannot be followed
under and circumstances, cash basis may be followed.

6. The Matching Concepts:

The inherent concept involved in accrual accounting is called matching

concept. Revenue earned in an accounting year is offset(matched) with all
the expenses incurred during the same period to generate that revenue,
thus providing a measure of the overall profitability of the economic
activity. Thus, matching concept is very vital to measure the financial
results of a business. The timing of incurring expensed and earning
revenues does not always match. For example, in case of a seasonal
business, majority of sales may take place only in four months of a year
whereas fixed expenses like salaries, rent etc. are incurred throughout the
year. Matching concept suggests that the expenses incurred to generate
revenue are to be matched against that revenue to find out the
profitability.

2. Explain various type of Journals.

Ans. Types of Journals:

In actual practice, Journalisation does not mean recording of transactions

in only one format of journal. The transactions are categorized as per their
nature and, for each type of transaction, a separate journal is available
where the same has to be recorded. These journals can be of the
following:

a Purchases Day Book : It records credit purchase of merchandise.

.
b Sales Day Book : It records credit sale of goods.
.
c Return Outward: It records goods returned to the
. Book supplier(s).
d Return Inward Book : It records goods returned by the customer
.
e Bills Receivable: It records bills accepted by customers
. Book
f. Bills payable Book : It records bills raised by suppliers.
g Cash Book : It records cash (and bank) receipts and
. payments.
h Journal Proper : It records all residual transactions.
.

a. Purchase Day Book:

It records credit purchase of raw materials (in case of a manufacturing
concern), or of goods traded (in case of trading concern). In the illustration
given above, only the transaction of January 3 can be recorded in this
book as below.

Sales Day Book:

Date Particulars Voucher No. Ledger FolioAmount

Rs.
Jan 3 M/s………. 85,000

Purchased goods

From this purchase day book, the amount of Rs. 85,000 will be posted
subsequently in the secondary book. i.e. ledger. This will be discussed in
the next unit.

b. Return Outward Book:

It is also known as purchases return book. It records goods returned to the

suppliers. Goods may be returned to the suppliers either because of
excess supplies or because of defective supplies.

Examples: Goods returned to the supplier MN Ltd. Consisting of 10

packets of Vanaspati Oil costing Rs. 43 per packet because of defective
container design.

Return Outward Book:

Date Particulars Voucher No. Ledger FolioAmount

Rs.
Jan 15 M/s MN Ltd. 430

10 Packets of
Vanaspati

Oil @ Rs. 43 per

packet

d. Return Inward Book:

Also known as the sales return book. It records goods returned by

customers. Normally customers are given a time during which they can
return the goods for any valid reason.

Example: A customer M/s AB & Co., returned 5 pieces of T.V. sets sent in
excess of order. The selling price of each T.V. Set was Rs. 11,000.

Return Outward Book:

Date Particulars Voucher No. Ledger FolioAmount
Rs.
Jan 15 M/s AB & Co. Ltd. 55,000

5 Pcs. Of TV Sets @
Rs. 11,000 each
returned

The above entry in the return inward book will be posted in the ledger by
debiting the return inwards Account and crediting the Customer’s
Account.

This will be discussed in the next chapter.

e & f. Bills Receivable and Bills Payable Book:

A bill of exchange is documentary evidence in writing, containing an

unconditional order signed by the marker, directing a certain person to
pay a certain sum of money only to, or to the order of, a certain person, or
to the bearer of the instrument. A bill of exchange accepted by a
customer is called bills Receivable and a bill of exchange drawn by a
supplier on the business entity is called Bills payable. These books record
bills accepted by customers and drawn by suppliers date-wise. These
books help a business unit ti easily find out which bill has become
matured on a particular date and, therefore, it becomes easier to keep
track of the bills.

The format of these books are as below:

Bill Receivable Book:

Date V. No. Party Date ofDue Place ofAmount L.F.

of from Bill Date paymen Rs.
recei whom t
pt received

Bill Payable Book:

Date of Drawn Date ofDue Place ofAmount L.F.

accepta Bill Date Payment Rs.
nce

g . Cash Book:

It records daily cash (including bank) receipts and payments. Its unique
feature is that it serves the purpose of both a book of prime entry and a
book of secondary entry. In other words, the cash book is a journal as well
as ledger. The simplest form of the cash book is a single column cash
book which records only cash (no bank) receipts and payments. The
double column cash book has two amount columns on either side – one
for cash and the other for bank account (which is quite common) , a
separate column should be devoted to each bank account. The highest
form of cash book is a triple column cash book – one column for cash, the
second column for bank and the third column for discount. A typical triple
column cash looks like below:

Dr. Cr.

D Particu V. L.F Cas Ban Disco Dat Particu V. L. Cas Ban Discou
at lars No. . h k unt e lars No. F. h k nts
e

The cash book is divided vertically into two equal sides – the left hand side
(called the debit side) shows cash and bank receipts and discounts
allowed, and the right hand side (called the credit side) shows cash and
bank disbursements and discounts received. The ledger folio Indicates the
folio number of the secondary book where a particular item is
subsequently posted to complete the dual effect.

The importance of cash book is paramount. The final balance at the end of
an accounting period in the cash column indicates the cash balance in
hand and the same should actually tally with the physical cash balance. If
physical cash balance does not tally exactly with the balance of the cash
book, an inquiry must be made into the discrepancy. There may be a
possibility of defalcation of cash. In case of a statutory audit of banks, the
first step of audit is cash verification. The auditors are supposed to visit
the branch on the first day of the accounting year, before the bank opens
its operations for the day. Cash is physically counted – either fully or
through test checks – and the auditors should satisfy themselves about
the authenticity of the cash balance shown in the cash book.

3. Write a note on types of Errors and their Rectification.

Ans. Rectification of Accounting Errors:

Every businessman is interested in finding out the true profit and correct
financial position of his business at the close of the trading period. The
effort of the accountant is to prepare the final accounts in such a fashion
which exhibits true picture of the business. Accounts are considered to be
authentic proof of true financial position of a concern. But in spite of best
efforts there are certain transactions which are omitted to be recorded or
entered wrongly in the books. Such errors affect the final accounts. An
accountant should, therefore, try to locate such errors and rectify them
before the preparation of final accounts.
Accountants prepare trial balance to check the correctness of accounts. If
total of debit balances does not agree with the total of credit balances, it
is a clear-cut indication that certain errors have been committed while
recording the transactions in the books of original entry or subsidiary
books. It is our utmost duty to locate these errors and rectify them, only
then we should proceed for preparing final accounts. We also know that all
types of errors are not revealed by trial balance as some of the errors do
not effect the total of trial balance. So these cannot be located with the
help of trial balance. An accountant should invest his energy to locate
both types of errors and rectify them before preparing trading, profit and
loss account and balance sheet. Because if these are prepared before
rectification these will not give us the correct result and profit and loss
disclosed by them, shall not be the actual profit or loss.

All errors of accounting procedure can be classified as follows:

1. Errors of Principle

When a transaction is recorded against the fundamental principles of

accounting, it is an error of principle. For example, if revenue expenditure
is treated as capital expenditure or vice versa.

2. Clerical Errors

These errors can again be sub-divided as follows:

(i) Errors of omission

When a transaction is either wholly or partially not recorded in the books,

it is an error of omission. It may be with regard to omission to enter a
transaction in the books of original entry or with regard to omission to
post a transaction from the books of original entry to the account
concerned in the ledger.

(ii) Errors of commission

When an entry is incorrectly recorded either wholly or partially-incorrect

posting, calculation, casting or balancing. Some of the errors of
commission effect the trial balance whereas others do not. Errors effecting
the trial balance can be revealed by preparing a trial balance.

(iii) Compensating errors

Sometimes an error is counter-balanced by another error in such a way

that it is not disclosed by the trial balance. Such errors are called
compensating errors.

From the point of view of rectification of the errors, these can be divided
into two groups :
(i) Errors affecting one account only, and

(ii) Errors affecting two or more accounts.

Errors affecting one account

Errors which affect can be:

(a) Casting errors;

(b) error of posting;

(c) carry forward;

(cl) balancing; and

(e) omission from trial balance.

Such errors should, first of all, be located and rectified. These are rectified
either with the help of journal entry or by giving an explanatory note in
the account concerned.

Rectification

Stages of correction of accounting errors

All types of errors in accounts can be rectified at two stages:

(i) before the preparation of the final accounts; and

(ii) after the preparation of final accounts.

Errors rectified within the accounting period

The proper method of correction of an error is to pass journal entry in

such a way that it corrects the mistake that has been committed and also
gives effect to the entry that should have been passed. But while errors
are being rectified before the preparation of final accounts, in certain
cases the correction can't be done with the help of journal entry because
the errors have been such. Normally, the procedure of rectification, if
being done, before the preparation of final accounts is as follows:

(a) Correction of errors affecting one side of one account Such errors do
not let the trial balance agree as they effect only one side of one account
so these can't be corrected with the help of journal entry, if correction is
required before the preparation of final accounts. So required amount is
put on debit or credit side of the concerned account, as the case maybe.
For example:
(i) Sales book under cast by Rs. 500 in the month of January. The error is
only in sales account, in order to correct the sales account, we should
record on the credit side of sales account 'By under casting of. sales book
for the month of January Rs. 500".I'Explanation:As sales book was under
cast by Rs. 500, it means all accounts other than sales account are
correct, only credit balance of sales account is less by Rs. 500. So Rs. 500
have been credited in sales account.

(ii) Discount allowed to Marshall Rs. 50, not posted to discount account. It
means that the amount of Rs. 50 which should have been debited in
discount account has not been debited, so the debit side of discount
account has been reduced by the same amount. We should debit Rs. 50 in
discount account now, which was omitted previously and the discount
account shall be corrected.

(iil) Goods sold to X wrongly debited in sales account.

This error is effecting only sales account as the amount which should have
been posted on the credit side has been wrongly placed on debit side of
the same account.

For rectifying it, we should put double the amount of transaction on the
credit side of sales account by writing "By sales to X wrongly debited
previously."

(iv) Amount of Rs. 500 paid to Y, not debited to his personal account. This
error of effecting the personal account of Y only and its debit side is less
by Rs. 500 because of omission to post the amount paid. We shall now
write on its debit side. "To cash (omitted to be posted) Rs. 500.

Correction of errors affecting two sides of two or more accounts

As these errors affect two or more accounts, rectification of such errors, if

being done before the preparation of final accounts can often be done
with the help of a journal entry. While correcting these errors the amount
is debited in one account/accounts whereas similar amount is credited to
some other account/ accounts.

Correction of errors in next accounting period

As stated earlier, that it is advisable to locate and rectify the errors before
preparing the final accounts for the year. But in certain cases when after
considerable search, the accountant fails to locate the errors and he is in
a hurry to prepare the final accounts, of the business for filing the return
for sales tax or income tax purposes, he transfers the amount of
difference of trial balance to a newly opened 'Suspense Account'. In the
next accounting period, as and when the errors are located these are
corrected with reference to suspense account. When all the errors are
discovered and rectified the suspense account shall be closed
automatically. We should not forget here that only those errors which
effect the totals of trial balance can be corrected with the help of
suspense account. Those errors which do not effect the trial balance can't
be corrected with the help of suspense account. For example, if it is found
that debit total of trial balance was less by Rs. 500 for the reason that
Wilson's account was not debited with Rs. 500, the following rectifying
entry is required to be passed.

Effect of Errors of Final Accounts:

1. Errors effecting profit and loss account

It is important to note the effect that an en-or shall have on net profit of
the firm. One point to remember here is that only those accounts which
are transferred to trading and profit and loss account at the time of
preparation of final accounts effect the net profit. It means that only
mistakes in nominal accounts and goods account will effect the net profit.
Error in the these accounts will either increase or decrease the net profit.

How the errors or their rectification effect the profit-following rules are
helpful in understanding it :

(I) If because of an error a nominal account has been given some debit the
profit will decrease or losses will increase, and when it is rectified the
profits will increase and the losses will decrease. For example, machinery
is overhauled for Rs. 10,000 but the amount debited to machinery repairs
account -this error will reduce the profit. In rectifying entry the amount
shall be transferred to machinery account from machinery repairs
account, and it will increase the profits.

(il) If because of an error the amount is omitted from recording on the

debit side of a nominal account-it results in increase of profits or decrease
in losses. The rectification of this error shall have reverse effect, which
means the profit will be reduced and losses will be increased. For
example, rent paid to landlord but the amount has been debited to
personal account of landlord-it will increase the profit as the expense on
rent is reduced. When the error is rectified, we will post the necessary
amount in rent account which will increase the expenditure on rent and so
profits will be reduced.

(iil) Profit will increase or losses will decrease if a nominal account is

wrongly credited. With the rectification of this error, the profits will
decrease and losses will increase. For example, investments were sold
and the amount was credited to sales account. This error will increase
profits (or reduce losses) when the same error is rectified the amount
shall be transferred from sales account to investments account due to
which sales will be reduced which will result in decrease in profits (or
increase in losses).
(iv) Profit will decrease or losses will increase if an account is omitted from
posting in the credit side of a nominal or goods account. When the same
will be rectified it will increase the profit or reduce the losses.

For example, commission received is omitted to be posted to the credit of

commission account. This error will decrease profits ( or increase losses)
as an income is not credited to profit and loss account. When the error will
be rectified, it will have reverse effect on profit and loss as an additional
income will be credited to profit and loss account so the profit will
increase ( or the losses will decrease).

If due to any error the profit or losses are effected, it will have its effect on
capital account also because profits are credited and losses are debited in
the capital account and so the capital shall also increase or decrease. As
capital is shown on the liabilities side of balance sheet so any error in
nominal account will effect balance sheet as well. So we can say that an
error in nominal account or goods account effects profit and loss account
as well as balance sheet.

2. Errors effecting balance sheet only

If an error is committed in a real or personal account, it will effect assets,

liabilities, debtors or creditors of the firm and as a result it will have its
impact on balance sheet alone. because these items are shown in balance
sheet only and balance sheet is prepared after the profit and loss account
has been prepared. So if there is any error in cash account, bank account,
asset or liability account it will effect only balance sheet.

4. Enumerate various sub-fields of accounting.

Ans. Various Sub-Fields of Accounting are:

 Book-Keeping

 Financial Accounting

 Management Accounting and Cost Accounting

 Social Responsibility Accounting

Book Keeping:

It covers procedural aspects of accounting work and embraces recording

and classifying functions. Keeping subsidiary and principle books of
accounts to record transactions and events as and when they occur,
classifying into suitable account-headings form the subject matter of book
keeping.
Financial Accounting:

Finalization of accounts, preparation of financial statements,

communication of accounting information to the users and interpretation
thereof are subject matter of financial accounting.

However, border line between book keeping and financial accounting is

very thin. One can even ignore it and use the term financial accounting to
mean the whole process. In fact, the term financial accounting is
becoming more popular nowadays.

Management Accounting:

It emerged as an accounting sub-field only in the 20th century.

Management accounting shifted focus of accounting from recording and
analyzing financial transactions to generating information for
management decisions. R. N. Anthony gives a simple definition: “
Management Accounting is concerned with accounting information that is
useful to management. It contributed significantly to the expansion of
trade and commerce, more generally spreading of capitalism”. Charles T.
Horngren nicely distinguished between financial accounting and
management accounting. Financial accounting emphasizes the
preparation of reports of an organization for external users whereas
management accounting emphasizes the preparation of reports for its
internal users.

Cost Accounting:

Cost accounting is a special wing of management Accounting I.C.M.A.

London gives the following definition: “Cost Accounting is the application
of accounting and cost principles, method and techniques in the
ascertainment of costs and the analysis of savings and/or excesses as
compared with previous experience”. Charles T. Horngren explained that
cost accounting is generally indistinguishable from management
accounting of managerial accounting.

5.

i. Marginal Costing Vs CVP Analysis

Ans. Marginal Costing

Marginal cost means the same thing as variable cost. The term is not a
new one. The accountants concept of marginal cost differs from
economists concept of marginal cost Economists define marginal cost as
the additional cost of production one additional unit. This shall include an
element of fixed cost also. Moreover, the economists marginal cost per
unit cannot be uniform with the additional production since the law of
diminishing or increasing returns is applicable; whereas the accountants
marginal cost shall be constant per unit of output with the additional
production.

The Institute of Cost and Works Accountants of India defined marginal cost
as, :The amount at any given volume of output by which aggregate costs
are changed, if the volume of output is increased of decreased by one
unit”. Here a unit may be a single article, a batch of articles, an order, a
stage of production capacity, a process or department. To ascertain the
marginal cost, we need the following element of cost.

 Direct Materials

 Direct Labour

 Other Direct Expensed, and

 Total Variable overheads.

That is Marginal Cost = Prime Cost + Total Variable overheads

Or

Marginal Cost = Total Cost – Fixed Cost

Marginal Cost = Increase in total cost

Increase in total units

Fixed costs remain fixed within a frange of production. They are not
directly linked to product units. Rather, they are spent on elapse of time.
Some portion of the fixed costs may be discretionary, which the
management spends on availability of adequate profit. Other portion of
fixed costs in non-discretionary which the management cannot avoid in
the short run.

So in the short run decisions only incremental to fixed costs are

considered. Decisions are based on marginal cost and contribution. Cost,
volume and profit (C.V.P.) relationship provides important information to
aid decision – making.

Also, managerial decisions are affected by product’s life cycle. This means
the various stages through which a product passes, from conception and
development through introduction into the market through maturation
and finally, withdrawal from market.

Marginal Costing is defined by the ICWA as, the ascertainment by

differentiating between fixed costs, and variable costs, of marginal costs
and of the effect on profit of change in volume of type of output”.
According to Dr. Joseph, “Marginal Costing is a technique of determining
the amount of change in the aggregate costs due to an increase of one
unit over the existing level of production. As such, it arises from the
production of additional increments of output.

Batty defines Marginal Costing as a “Technique of Cost accounting which

pays special attention to the behavior of costs with changes in the volume
of output”.

Example:

RS.

Variable cost 8,000 @ Rs. 5 40,000/-

Fixed cost 10,000/-

-----------

50,000/-

ii. Standard Costing Vs Variance Analysis

Ans.

Standards are set for various activities with reference to resource, time
and values on the basis of normally available working facilities and
capability of an average employee and machine. Similarly, sales standard
is set on the basis of appropriate market survey.

Budgets may be set after deciding upon the standards. In actual

circumstances, after budgets are set on the basis of past experience and
given resources ignoring the standard requirements.

Standards are nothing but a control device. Deviation from the standards
is called variance. Analysis of variances is an effective means of control.

6. Differentiate between Management Accounting and Financial

Accounting.

Ans. Financial accountancy (or financial accounting) is the field of

accountancy concerned with the preparation of financial statements for
decision makers, such as stockholders, suppliers, banks, government
agencies, owners, and other stakeholders. The fundamental need for
financial accounting is to reduce principal-agent problem by measuring
and monitoring agents' performance and reporting the results to
interested users.

Financial accountancy is used to prepare accounting information for

people outside the organization or not involved in the day to day running
of the company. Managerial accounting provides accounting information
to help managers make decisions to manage the business.
Financial accountancy is governed by both local and international
accounting standards.

Management accounting is concerned with the provisions and use of

accounting information to managers within organizations, to provide them
with the basis in making informed business decisions that would allow
them to be better equipped in their management and control functions.
Unlike financial accountancy information (which, for public companies, is
public information), management accounting information is used within an
organization (typically for decision-making) and is usually confidential and
its access available only to a select few.

According to the Chartered Institute of Management Accountants (CIMA),

Management Accounting is "the process of identification, measurement,
accumulation, analysis, preparation, interpretation and communication of
information used by management to plan, evaluate and control within an
entity and to assure appropriate use of and accountability for its
resources. Management accounting also comprises the preparation of
financial reports for non management groups such as shareholders,
creditors, regulatory agencies and tax authorities" (CIMA Official
Terminology).

The distinctions between financial accounting and management

accounting may be summarized as follows:

1. In most of the big business houses, financial accounting is the

responsibility within the management accounting. It is the duty of
financial accounting to process the mass of unwieldy data and make
free the management accountant from the details. The
management accounting, in its turn, sorts out the significant figures
and channels them for the use in management process.
Management accounting offers figures as facts having managerial
significance.

2. Financial accounting is more confined to the preparation of accounts

from the point of view of outside parties (Eg. Debenture-holders,
creditors and shareholders) while management accounting used the
information for internal use of management.

3. Financial accounting tries to present statements according to standards

laid down by the outside parties while management accounting tries
 to measure up to the standards laid down by the management
which may be much higher than that laid by the outsiders.

4. Financial accounting is made compulsory by law but management

accounting is adopted to increase the efficiency without and legal
force.

5. Financial accounting lays emphasis on the past while management

accounting stresses the future.

6. Financial accounting deals with the whole of the business while

management accounting takes up only those divisions of the
business which are vital and significant in business activities.

Financial and Management Accounting

Assignment-2

1. Write a note on three Important Profitability Ratios.

Ans. Profitability ratios reflect the overall performance of the business.

Profit must be compared with other information to evaluate the firm’s
profitability. There are 2 types of profitability ratios –
Profit margin ratios, which indicate the relationship between profit and
sales. The important profit margin ratios are: -
 Gross profit margin ratio
 Net profit margin ratio
Rate of return ratios, which examine the relationship between profit and
investment. The important rate of return ratios are: -
 Return on total assets
 Earning power
 Return on equity
Gross profit margin ratio:
This ratio computes the margin earned by the firm after incurring
manufacturing costs. It measures the efficiency of the production process
and pricing policy of the firm. It is calculated as –
Gross Profit x 100 %
Net sales
Where
Gross profit is the difference between Net Sales and Cost of Goods Sold
The cost of goods sold takes into account costs of labour, material and
manufacturing overheads.
Net profit margin ratio :
The net profit margin ratio gives the earnings available for shareholders
as a percentage of net sales. It is calculated as –
Net profit x 100 %
Net sales
It measures the overall efficiency of the firm in relation to production,
administration, selling, financing, pricing and tax management.
The gross and net profit margin ratios taken together provide an
understanding of the firm’s cost and profit structure. It also helps identify
the sources of the firm’s efficiency or inefficiency.

Return on total assets :

This ratio measures the degree to which capital is efficiently employed by
the firm. It is calculated as –
Net Income (profit)
Average Total Assets
Earning power:
Earning power is a measure of operating profitability. It is calculated as –
Earnings Before Interest And Tax
Average Total Assets
It measures the business performance, which is not affected by interest
charges and tax payments and thus focuses on operating performance.
Return on equity:
The return on equity measures the earnings from shareholders’
investment and is calculated as –
Equity Earning
Average Net Worth
Equity earnings refers to profit after tax less preference dividends.
Average net worth refers to (paid-up capital+ reserves and surplus).
Also known as the return on net worth, this measure is an important
indicator of profitability. It indicates the productivity of the owners’ capital
employed. The return on equity is influenced by the firm’s earning power,
debt-equity ratio, average cost of debt to the firm and the tax rate.

2. Elaborate on Objective of Fund Flow Statement.

Ans. Fund Flow Statement is a widely used tool in the hands of financial
executives for analyzing the financial performance of a concern. Funds
keep on moving in a business which itself is based on a going concern
concept. In a narrow sense, it means cash only and a funds flow
statements prepared on this basis is called as Cash Flow Statement. Such
a statement enumerates net effects of the various business transactions
on cash and takes into account receipts and disbursements of cash. In a
broader sense, the term “Fund” refers to money values in what ever form
it may exist. Here “Funds” means all financial resources in the form of
men, Materials, Money, Machinery etc. But in a popular sense, the term
“Funds”, means working capital, i.e. the excess of current assets over
current liabilities. When the funds move inwards or outwards, they cause
a flow or rotation of funds. The word “Fund” here means net working
capital.

Objective of Fund Flow Statement:

The main purposes of Fund Flow Statement are:

1. To help to understand the changes in assets and assets sources

which are not readily evident in the income statement of
financial statement.

2. To inform as to how the loans to the business have been used.

3. to point out the financial strengths and weakness of the business.

Format of Fund Flow Statement

Sources Applications
Fund from - Fund lost in operations
operation
Non-trading Non-operating expenses
incomes
Issues of shares Redemption of redeemable
preference share
Issue of debentures Redemption of debentures
Borrowing of loans Repayment of loans
Acceptance of Repayment of deposits
deposits
Sale of investments Purchase of long term instruments

3. Explain the various steps involved in preparing a Cash Flow

Statement.

Ans. Cash plays a very important role in the entire economic life of a
business. Cash Flow Statement is a statement like Fund Flow Statement. A
Cash Flow Statement concentrates to transactions that have a direct
impact on cash. It deals with the inflow and outflow of cash between two
Balance Sheet. That is, it explains the changes in cash position between
the two period. Cash Flow mean inflow and outflow of cash during
accounting period. From the beginning of the year up to the end of the
year cash is received from various sources and spent on various heads.
Incoming and outgoing of cash is termed as cash flow. The term cash here
stands for cash and bank balances.
When the management is interested to know about the movement of cash
and the availability of cash, the cash flow analysis provides this
information. Cash Flow Statement is a Statement of recording
systematically all inflows and outflows of cash of the accounting period.
Thus it shows the sources (inflow) of cash receipts and the purpose for
which payments (outflow) are made. It is like a receipts and payments
account in a summary form.

Steps in Preparing Cash Flow Statement:

1. Opening of Accounts for Non-current Items (To find out the hidden
information).
2. Preparation of adjusted P & L Account ( to find out cash from
operation or profit, and cash lot in operation or loss).
3. Comparison of current items (to find out inflow or outflow of cash).
4. Preparation of Cash Flow Statement.

To prepare Account for all non-current items is easier for preparing items
is easier for preparing Cash Flow Statement.

Cash from operation can be prepared by this formula also:

Decrease in CurrentIncrease in Current Assets

Assets
Net Profit + Increase in Current - Decrease in
Liabilities Current Liabilities

Cash Flow Statement can be prepared in statement form or

account form.

A Specimen Cash Flow Statement

Account form of cash flow statement is normally followed by all.

Cash Flow Statement:

Inflow of Cash Outflow of Cash

Opening Cash Balance xxx Redemption of Pref. Shares xxx
Cash from Operation xxx Redemption of Debentures xxx
Sales of Assets xxx Repayment of Loans xxx
Issue of Debentures xxx Payment of Dividends xxx
Raising of Loans xxx Pay of Tax xxx
Collection from Debentures xxx Cash Lost in Operations xxx
Refund of tax Xxx Xxx

Cash from operation can be calculated in two ways.

1. Cash Sales Method:

Cash Sales – (Cash Purchases + Cash Operations Expenses)

2. Net Profit Method:

It can be prepared in statement form or by Adjusted Profit and Loss

Account.

4. Elucidate various bases of Cost Classification.

Ans. Costs are classified in different ways to answer different questions

asked by the management. Management wants different kinds of
information for different purposes. Hence, costs must be classified and
arranged to serve the purpose of the management.

Classification is the process of grouping costs according to their common

characteristics. There are various ways of classifying costs. Each
classification is for a particular purpose. The important bases of cost
classification are the following.

1. Nature of Elements

2. Traceability

3. Functions or Operations

4. Variability or Behaviour

5. Controllability

6. Normality

7. Managerial Purposes

1. Nature of Elements:

In a manufacturing concern, the total cost of a product is made of three

elements viz., material cost, labour cost and expenses material cost is
defined as the cost of commodities supplied to in undertaking. Labour cost
means the cost of remuneration of the employees of an undertaking. The
expenses are the cost of services provided to an undertaking and the
notional cost of the use of owned assets.

2. Traceability:

On the basis of traceability or indentifiability, costs are classified as direct

costs and indirect costs. Costs which are clearly, conceniently and
economically identifiable to a costing centre or cost unit are called direct
costs. Eg. material and labour costs are clearly traceable to particular
product because they are common to several products Eg. rent of the
factory cannot be traced to a single product, since it is incurred for all
products manufactured in the factory.

3. Functions or Operations:

Costs are classified by functions as manufacturing (production) cost,

administration cost, selling and distribution cost. Manufacturing costs are
incurred to manufacture the products, including direct material, direct
labour and indirect production costs.

4. Variability or Behaviour

Costs can be classified in terms of changes in activity or volume as fixed,

variable and semi-fixed (or semi variable) costs.

Fixed Costs:

Fixed cost is a cost which does not change in total amount for a given
period of time in spite of changes in quantity of output or volume of
activity. It is to be incurred irrespective of changes in output or turnover
or level of activity.

Fixed cost depends on passage of time. Hence it is also known as period

cost, capacity cost or stand by cost. Examples of fixed cost are rent, rates,
insurances, salary etc.

5. Describe the advantages of Break-Even Chart.

Ans. The important advantages are as follows:

1. Total cost, Variable cost and fixed cost can be determined.

2. B.E. output or sales value can be determined.

3. It shows cost and profits on different volumes of production. Planning

and forecasting are made more effective.

4. Cost volume and profit relationship can be studied, and they are very
useful to the managerial decision-making.

5. the best product mix can be selected.

6. It is useful for forecasting plans and profits.

7. It facilitates inter-firm comparison of profitability.

 8. Total profit can be calculated.

9. It provides information in a more easily understandable form than

the profit and loss account.

10. It is helpful for cost control

6. Discuss the Limitations of Budgetary Control

Ans. Modern business world is full of competition, uncertainty and

exposed to different types of risks. This complexity of managerial
problems has led to the development of various managerial tools,
techniques and procedures useful for the management in managing the
business successfully. Budgeting is the most common, useful and widely
used standard device of planning and control. The budgetary control has
now become an essential tool of the management for controlling costs
and maximizing profit. Costs can be reduced, wastage can be prevented
and proper relationship between costs and incomes can be established
only when the various factors of production are combined in profitable
way. The resources of a business can be effectively utilized by efficient
conduct of its operation. This requires careful working out of proper plans
in advance, co-ordination and control of activities on the part of
management.

Limitation of Budgetary Control:

Budgetary control is a sound technique of control. But it is not a perfect

tool. Despite the appreciation, it has its own limitations which are as
follows:

1. Budgets deal with future. Forecasting is necessary for budgeting.

Forecasts and estimates are rarely cent per cent accurate. The success
largely depends upon the degree of accuracy of the estimates.

2. Budgeting is time-consuming process. During the preparation period,

the business conditions may change and estimates may go wrogn by
that time.

3. The Successful operation and execution of budgets depends upon the

efficiency of the executive personnel.

4. Budgetary control is essentially a tool of decision-making and it helps

the management in taking sound decisions. But it cannot replace the
management.

5. Budgeting necessitates the employment of specialized staff and this

involves expenditure which small concerns may not afford.
6. A budget programme should be dynamic, capable of being adapted to
changing conditions. But when budgets are prepared with pre-
determined targets, there is a feeling rigid.

7. the success of the budgetary control largely depends upon willing co-
operation or team work of all concerned. If there is no co-operation, the
whole system collapses.

Organization:

The following are the essentials for a sound system of budgetary control:

1. Chart:

There must be an organizational chart to show the authority and

responsibility of each executive of the firm. This will enable him to know
his relationship with other executives. The budget director derives power
from the chief executive, helps in co-ordination and drawing up of all
budgets and suggests changes, if necessary. The sales manager,
production manager, purchasing manager, personnel manager and
accountant will prepare their budgets.

2. Budget Centre:

For the purpose of effective budgetary control, budget centres are

defined. A budget centre may be a department of a section of the
undertaking. Separate budgets are prepared for each department and the
departmental head is responsible for carrying out budgets. Departmental
heads should have effective control over the execution of the budget, to
prevent unfavorable variation.

3. Budget:

In small firms, the chief accountant prepares the budgets and co-ordinates
various activities. In big concerns, a Committee is appointed for this task.
The Committee consists of various section heads, the chief executive and
the budget controller. The budgets are prepared by section heads and
submitted to the Committee for approval; changes are made, if necessary,
and approved.

4. Budget Manual:

It is a document which sets out the responsibilities of persons engaged in

the routine work. Budget manual lays down the objectives of the
organization, responsibilities of all executives and the procedure to be
followed for budgetary control. Duties, authorities, powers of each official
of the different departments are clearly defined, so as to avoid conflicts
amount the personnel. It also specifies different forms and records to be
used for the purpose of budgetary control.
5. Key-Factor:

Key factor is also known as “Limiting factor” of “Governing Factor” which

means this is the factor, the extent of whose influence must first be
assessed, in order to ensure that the functional budgets are reasonably
capable of fulfillment. The key factor may be , shortage of raw materials,
non-availability of labour, limited sales, government restrictions etc. the
key-factor is a limitation of production or sales. First locate the key-factor,
before preparing the budget, as it influences all other budgets. For
example, shortage of power supply leads to under-utilization of plant
capacity. Therefore, the concern will have to first prepare a budget for
plant utilization and later the other budgets say sales will be prepared.

Master Budget: A Master Budget is the summary budget. For the entire
enterprise and embodies the summarized figures for various activities.
This is also known as summary budget or finalized profit plan. This budget
includes the budgeted position of the profit and loss as well as balance
sheet. Master budget is prepared by the Committee and becomes a target
for the company.

Managerial Economics
Assignment-1

1. Explain different types of Elasticity of Demand.

Ans. Different types of Elasticity of Demand:-

After knowing what is demand and what is law of demand, we can now
come to elasticity of demand. Law of demand will tell you the direction
i.e. it tells you which way the demand goes when the price changes.
But the elasticity of demand tells you how much the demand will
change with the change in price to demand to the change in any
factor.
Different types of Elasticity of Demand:
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Advertisement Elasticity of Demand
1. Price Elasticity of Demand:
We will discuss how sensitive the change in demand is to the change in
price. The measurement of this sensitivity in terms of percentage is
called price Elasticity of Demand. According to Marshall, Price
Elasticity of Demand is the degree of responsiveness of demand to the
change in price of that commodity.
Types of Price Elasticity of Demands:
a) Perfectly Elastic
b) Perfectly Inelastic
c) Relatively Elastic
d) Relatively Inelastic
e) Unit Elasticity
Factors influencing Price Elasticity of Demand:
a) Nature of Commodity
b) Availability of Substitutes
c) Number of Uses
d) Durability of commodity
e) Consumer’s income
Practical significance of Price Elasticity of Demand:
a) Importance to the business
b) Important to Government
2. Income elasticity of demand:

In economics, the income elasticity of demand measures the responsiveness

of the quantity demanded of a good to the change in the income of the people
demanding the good. It is calculated as the ratio of the percent change in
quantity demanded to the percent change in income. For example, if, in
response to a 10% increase in income, the quantity of a good demanded
increased by 20%, the income elasticity of demand would be 20%/10% = 2.

3. Cross elasticity of demand:

In economics, the cross elasticity of demand and cross price
elasticity of demand measures the responsiveness of the quantity
demand of a good to a change in the price of another good.
It is measured as the percentage change in quantity demanded for the
first good that occurs in response to a percentage change in price of the
second good. For example, if, in response to a 10% increase in the price of
fuel, the quantity of new cars that are fuel inefficient demanded
decreased by 20%, the cross elasticity of demand would be -20%/10% =
-2.

The formula used to calculate the coefficient cross elasticity

4. Advertisement Elasticity of Demand:

The degree of responsiveness of quantity demanded to the change in the
advertisement expense of expenditure.
Ea= Change in quantity demanded x original advertisement expenses
Chang in advertisement expenses original quantity demanded

Important factors influencing Advertisement:

1. Promotional elasticity of demand will be affected, depending on whether

it is a new product or the product with a growing market.

2. The amount a competitor reacts to the firm’s advertisement.

3. The time interval between the advertisement expensed or expenditure and

the unresponsiveness of the sales.

4. The influence of non-advertisement determinants of demands such as trends,

price, income etc.

Uses of Advertisement Elasticity of Demands:

1. It helps the manager to decide the advertisement expense. If the

advertisement is more than one, which means incremental revenue
exceeds incremental expenses, then increased expenditure on
advertisement can be justified.

2. The fire should observe the saturation point, where advertisement pays
nothing or does not help in increasing sales revenue.

2. Write a note on Market Equilibrium.

Ans. The word “Equilibrium” is derived from a Latin word, which means
equal balance. Equilibrium is the position from which there is no tendency
to move. We say ‘Tendency’ to emphasize the fact that it is not
necessarily a state of sudden inertia, but may instead represent the
cancellation of power forces.

Equilibrium Price is the price at which the quantity demanded of a good

or service is equal to the quantity supplied

In economics, Economic Equilibrium is simply a state of the world where

economic forces are balanced and in the absence of external influences
the (equilibrium) values of economic variables will not change. Market
equilibrium, for example, refers to a condition where a market price is
established through competition such that the amount of goods or
services sought by buyers is equal to the amount of goods or services
produced by sellers. This price is often called the equilibrium price or
market clearing price and will tend not to change unless demand or
supply change.

3. Elaborate on the Law of Economies of scale.

Ans. Economies of scale exist when larger output is associated with low
per unit cost. It has been classified into internal Economies and External
Economies. (Here Economies are advantages, which a firm or industry will
enjoy when they increase the scale of production)

A. Internal Economies –Economies are internal to a firm, when it

expands in its size. It is open only for the firm, independent to the action
of other firms.

B. External Economies –They are external to the firms, which are

available when output of whole industry expands. It is shared by number
of firms or industry, when the scale of production increases in any
industry.

A. Internal Economies of Scale:

Under internal Economies of scale, there are two categories:

• Real

• Pecuniary

Real Internal Economies of Scale: Real Internal Economies of Scale which

arises from the expansion of the firm are:

1. Technical Economies:

In order to produce a commodity in large scale, the firms will install up-to-
date machinery. A large firm can utilize the waste material as a by-
product by installing a plant for this purpose. Eg. Molasses left over while
manufacturing sugar, can be used to produce spirit. They can have the
advantage of linked processes. Eg. Sugar producing firms can have their
own farms, with their own transport bringing the sugarcane to the factory
and their own distribution system to send it to the market. Thus, they
enjoy the economies of linked processes.

2. Marketing Economies:
A firm enjoys the advantage of buying and selling, as the requirement is in
bulk because they are able to get favorable terms, in form of better
quality input, transport concessions etc. these economies are due to large
scale of production, as they have strong bargaining power.

3. Managerial Economies: A large firm can afford specialist to be

managers and supervisors for all the departments like, sales manager for
sales department, production manager dealing with the production
department and so on. This brings more efficiency and leads to functional
efficiency.

4 Risk Managerial Economies: Large firms are in a better position to

spread risk. They can diversify their products and counter balance the loss
in one product by gains from the other product. They can even diversify
their market by selling their product in many markets and counter the loss
in market by gains in the other market.

5 Economies of Welfare: Many firms provide welfare facilities to their

workers. They provide better working conditions in and out of factory by
providing canteen, crèche for the infants of women workers, recreational
club, health and medical facilities to the families of the workers..

B External Economies of scale:

In External Economies of scale, again we have two categories:

• Real

• Pecuniary

Real External Economies of Scale: It represents how a firm is benefited in

an industry through technological interdependence of firms. The external
economies are:

1. Technical Economies:

When any industry expands, firms in that industry start with different
types of processes and the whole industry is benefited. Eg. In textile
industry, some firms start specializing in manufacturing thread, some in
printing, some in dying, others in shirting, etc.

2. Economies of Information:

An Industry is in a better position to set up research laboratories as they

are able to gather large resources. The work of the research may be some
now invention and the information about it will be given to all the firms
through the journals. The industry can have their own information centre,
which gives information regarding the export potentials, modern
technology and information. This can be useful for the firms by publishing
in the journals. This in turn helps the efficiency and productivity of the
whole industry.

1. Economies of By-Product:

Many industries turn out large waste materials, which can be used as
input in process of manufacturing, like iron-scarps in steel industry,
molasses in the sugar industry, etc. New firms can enter the industry and
use these waste materials to produce by-products. They can purchase the
raw material at reasonable rates. It gives them the advantage of waste
management, the expenses of disposing off waste and they can earn
certain amount by selling their waster material.

4. Write a note on Profit Maximization Model.

Ans. In Economics, Profit Maximization is the process by which a firm determines the
price and output level that returns the greatest profit. There are several approaches to this
problem. The total revenue -- total cost method relies on the fact that profit equals
revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact
that total profit in a perfectly competitive market reaches its maximum point where
marginal revenue equals marginal cost.

Basic Definitions:

Any costs incurred by a firm may be classed into two groups: fixed cost and variable cost.
Fixed costs are incurred by the business at any level of output, including zero output.
These may include equipment maintenance, rent, wages, and general upkeep. Variable
costs change with the level of output, increasing as more product is generated. Materials
consumed during production often have the largest impact on this category. Fixed cost
and variable cost, combined, equal total cost.

Revenue is the total amount of money that flows into the firm. This can be from any
source, including product sales, government subsidies, venture capital and personal funds.

Marginal cost and revenue, depending on whether the calculus approach is taken or not,
are defined as either the change in cost or revenue as each additional unit is produced, or
the derivative of cost or revenue with respect to quantity output. It may also be defined as
the addition to total cost as output increase by a single unit. For instance, taking the first
definition, if it costs a firm 400 USD to produce 5 units and 480 USD to produce 6, the
marginal cost of the sixth unit is approximately 80 dollars, although this is more
accurately stated as the marginal cost of the 5.5th unit due to linear interpolation.
Calculus is capable of providing more accurate answers if regression equations can be
provided.
To obtain the profit maximizing output quantity, we start by recognizing that profit is
equal to total revenue minus total cost. Given a table of costs and revenues at each
quantity, we can either compute equations or plot the data directly on a graph. Finding the
profit-maximizing output is as simple as finding the output at which profit reaches its
maximum. That is represented by output Q in the diagram.
There are two graphical ways of determining that Q is optimal. Firstly, we see that the
profit curve is at its maximum at this point (A). Secondly, we see that at the point (B) that
the tangent on the total cost curve (TC) is parallel to the total revenue curve (TR), the
surplus of revenue net of costs (B,C) is the greatest. Because total revenue minus total
costs is equal to profit, the line segment C,B is equal in length to the line segment A,Q.
Computing the price at which to sell the product requires knowledge of the firm's demand
curve. The price at which quantity demanded equals profit-maximizing output is the
optimum price to sell the product.

5. Enumerate the different Pricing Policies.

Ans. Pricing Policies:

The discussion of pricing is very important in any business. Price once fixed is never
permanent. It needs to be reviewed and revised according to the market conditions.

Different Pricing Policies by firm:

Every firm has its own pricing practice, depending on the nature of its product, demand ,
utility of its product, taxes etc. Now under this topic, we will discuss some main pricing
practices –

1. Cost-Plus pricing:-
After taking into account the cost per unit and profit margin, cost-plus is fixed. In this
method, the firm will consider average fixed cost and estimate the average variable cost
after that a certain mark up has to be taken in terms of profit percentage. This is called
profit margin; this is with regard to Total cost. Here, the fixed costs are land, capital
invested in machinery and other fixed costs and variable cost include rent, wages, bills of
material etc. the most difficult is deciding on the profit margin. New firm entering in the
industry will imitate the existing firm and get information of profit margin from the
competitor. But one with new product has to use his judgment according to market
conditions and potential demand. The commodities requiring huge investment will fix
high profit margins Eg. Television, Air-Conditioners, Cars etc (Sometime have 25% of
total cost), whereas commodities with simpler techniques and small investment stick to
low profit margins.

This pricing practice has its limitations:

• It ignores demand side of market and has no consideration for fluctuation in demand and
needs to change the price.
• It fails to show the force of competition in market.

2. Going – rate pricing:-

This is opposite to the cost-plus pricing; it suggests fixing price according to the existing
price of similar product in market. This firm adjusts its own price according to the general
price structure. This is safest way; here price leadership fits better. But one should not
confuse it with perfect competition because in Perfect Competition, the firms are price
takers and they have no choice of determining price; where as, in going rate pricing, the
firm can charge higher than its competitors in prosperity and lower than them in
depression; which means they can change the price according to the market situations.
This kind of practice is followed not only by small firms but also by big firms. It is time
 saving and convenient.

3. Imitative Pricing:-
It is similar to going rate pricing. The firm imitates the price of leading firm. In
oligopolistic situation, the firm which joins later imitates the leader. There is a price
leader. And price followers who the price fixed by price leader. This is also a simple and
convenient way of pricing.

4.Marginal Cost Pricing:-

It is a common practice, it is based on a pure economic concept of equilibrium of the
firm, where marginal cost is equal to marginal revenue. This pricing practice is based on
the belief that if Marginal revenue. This pricing practice is based on the belief that if
Marginal Revenue covers Marginal cost, the normal profit will always be there. This also
has its own limitations. The accounts and calculation of Marginal cost and Marginal
revenue should be done accurately. If the data in not available, the firm avoids such type
of practice.

6. Write a short note on Market Structures.

Ans. Market structure refers to economically significant features of market, which affect
the behavior, and working of firms in the industry. It tells us how a market is built up and
what its basic features are. According to Pappas and Hirschey, “Market structure refers to
the number and size distribution of buyers and sellers in the marketfor a good or service”.

Traditionally, the most important features of market structure are:

• The number of firms (including the scale and extent of foreign competition)
• The market share of the largest firms (measured by the concentration ratio – see
below)
• The nature of costs (including the potential for firms to exploit economies of scale
and also the presence of sunk costs which affects market contestability in the long
term)
• The degree to which the industry is vertically integrated - vertical integration
explains the process by which different stages in production and distribution of a
product are under the ownership and control of a single enterprise. A good example of
vertical integration is the oil industry, where the major oil companies own the rights
to extract from oilfields, they run a fleet of tankers, operate refineries and have control
of sales at their own filling stations.
• The extent of product differentiation (which affects cross-price elasticity of
demand)
• The structure of buyers in the industry (including the possibility of monopsony
power)
• The turnover of customers (sometimes known as “market churn”) – i.e. how many
customers are prepared to switch their supplier over a given time period when market
conditions change. The rate of customer churn is affected by the degree of consumer
or brand loyalty and the influence of persuasive advertising and marketing
The major forms of Market Structure with its characteristics are as follows:

1. Monopoly: One Seller and many buyers. No close substitutes of products. Firms and Industry
are same. Price and Quantity are changeable. Entry of new firm is restricted. Ownership of
strategic raw materials, exclusive knowledge of production techniques with one firm, patent rights,
economies of scale, government policies, high entry cost are the main causes of monopoly. A
Monopolistic firm/Industry attains maximum profit when it meets two conditions: a) MR=MC,
where MR is Marginal Revenue and MC is Marginal Cost. b) Slope of Marginal Revenue should be
less than the slope of marginal cost curve. A monopolist can charge different Prices for the same
goods known as Price Discrimination which is classified in 3 degrees: I. Charging the maximum
Price possible for each unit of output. II. Pricing based on quantities of output purchased by
individual consumer. III. Separating consumers or markets in terms of their price elasticity of
demand.

2. Monopsony: Complementary form of Monopoly. One Buyer and Large number of competitive
Sellers. Other Conditions same as Monopoly.

3. Bilateral Monopoly: One Buyer – One Seller. Single Buyer and single seller individually fixes
the prices. A monopoly seller faces a monopsony buyer.

4. Monopolistic Competition: Concept introduced by Prof. Chamberlin in his famous book “The
Theory of Monopolistic Competition.” Many Sellers selling differentiated products in the market.
Products are close substitutes but not perfect substitutes for the product of competitive firm. Each
firm satisfies a small share of market demand. Entry of new firm is possible. Products can be
differentiated in the form of Product Quantity, Services, Location/Accessibility, Advertising and
Packaging. Product Differentiation may be in the form of Features, Quantity or Quantity. The firm
maximizes Profit when Marginal Revenue equals Marginal Cost.

5. Oligopoly: Few dominating Sellers and sellers are interdependent. Rival’s reaction when
selecting prices, output goals, advertising budgets and other business policy is taken into
consideration.

Products may be :

a) Homogenous (Pure Oligopoly)

b) Heterogeneous (Differentiated Oligopoly). Entry of new seller is difficult or impossible. Change

in the prices of output by single firm affects the profit of all the firms. If members of the group
compete with one another its called “Non Collusive Oligopoly”

If the members come to an understanding among themselves and form a general body to promote
their common interest it is called “Collusive Oligopoly” Cartels refer to direct agreements among
competing oligopolists with the aim of reducing uncertainty. The aim of the Cartel is the
maximization of joint profits. The Theory of Games is an ideal method for analyzing choices and
options when the participants in the market are independent

6. Oligopsony: Complementary form of Oligopoly. Few Buyers and Large number of Sellers. Other
Conditions same as Oligopoly.

7. Duopoly: Two Sellers and Large number of Buyers. Products are Homogenous. Other
Conditions same as Oligopoly.

8. Perfect Competition: Large number of Buyers and Sellers. No participants can influence
Price’s. Free flow of information without any barriers to entry. Technical Characteristics, Services
Associated with its Sales and Delivery of Products are Homogenous. Entry and Exit of Firms is free
from the Industry. An Individual firm is a Price Taker.
 Managerial Economics
Assignment-2

1. Interpret the concept of Consumer Surplus.

Ans. The concept of consumer surplus is based on demand theory by

Marshall.
According to Marshall, consumer surplus is a part of the benefit, which a
person derives from his environment of conjuncture. The price, which a
person pays for a product is always less than what he is willing to pay for
it. The differences between the amount the consumer is willing to pay and
what he actually pays leads to satisfaction which is consumer surplus. Let
us illustrate this with as example. If a consumer is willing to pay Rs. 5/- for
one orange and the actual price is Rs. 3/- , then the consumer surplus is
Rs. 2/-.

In this diagram, the DD1 is the curve for a commodity. If OP1 is the
price then the quantity demanded is OQ1. the consumer surplus is
P1R1D, (Q1R1D- OP1R1Q1 = P1R1D).

The individual consumer surplus is the difference between the maximum total price a
consumer would be willing to pay (or reservation price) for the amount he buys and the actual
total price. For example, suppose you are in Wal-Mart and you see a DVD on the rack. No
price is indicated on the package, so you bring it over to the register to check the price. As
you walk to the register, you think to yourself that $20 is the highest price you would be
willing to pay. At the register, you find out that the price is actually $12, so you buy the
DVD. Your consumer surplus in this example is $8: the difference between the $20 you were
willing to pay and the $12 you actually paid. If someone is willing to pay more than the
actual price, their benefit in a transaction is how much they saved when they didn't pay that
price. For example, a person is willing to pay a tremendous amount for water since he needs
it to survive, however since there are competing suppliers of water he is able to purchase it
for less than he is willing to pay. The difference between the two prices is the consumer
surplus.

The maximum price a consumer would be willing to pay for a given amount is the sum of the
maximum price he would be willing to pay for the first unit, the maximum additional price he
would be willing to pay for the second unit, etc. Typically these prices are decreasing; in that
case they are given by the individual demand curve. If these prices are first increasing and
then decreasing there may be a non-zero amount with zero consumer surplus. The consumer
would not buy an amount larger than zero and smaller than this amount because the consumer
surplus would be negative. The maximum additional price a consumer would be willing to
pay for each additional unit may also alternatingly be high and low, e.g. if he wants an even
number of units, such as in the case of tickets he uses in pairs on dates. The lower values do
not show up in the demand curve because they correspond to amounts the consumer does not
buy, regardless of the price. For a given price the consumer buys the amount for which the
consumer surplus is highest.

One bargaining tactic is to pretend a lower consumer surplus.

The aggregate consumers' surplus is the sum of the consumer's surplus for each individual
consumer. This can be represented on the figure of the aggregate demand curve.

2. Explain the basic concepts of Macro Economics.

Ans. Basic Concepts of Macro Economics:

Let us introduce ourselves with the basics concepts of Macro Economics,

which are important in business management:

1. Stock and Flows:

Stock is always measured at a given point of time and flow is measured

over a given period of time. Macro Stock Variables are inventory, capital
stock, wealth, debits etc. Macro flow variables are National income and
output, consumption, investment etc. Both stock and flow are expressed
in money units. Stock may be expressed as just rupee but flows are
expressed as rupees per month, rupees per year or in any time unit. The
distinction between the stock and flow can be cleared with an example.
Total money supply is stock but change in money supply is flow.

2. Capital and Investment:

Capital is always measured at a point of time, which investment is the

change in the capital stock over a period of time. Many times investment
and capital formation are used synonymously.

3. Ex-Post and Ex-ante:

These are Latin phrases, which means before hand and afterwards. Ex-
ante means anything planned and intended. For Eg., Ex-ante saving is an
amount that the people intend to save out of their income. Ex-post is
realized saving, investment etc. For Eg. Ex-Post saving is the amount that
the people actually save in that period.
4. Equilibrium:

Equilibrium is defined in economics as the position of rest or a state of

balance or a state where there is no change required in a period of time.
Equilibrium is absence of disequilibrium. Economics deals with variables,
whose value changes over a period of time.

3. Write a note on Consumption Function.

Ans. There are two group of factor that affect consumption function:

1. Subjective of internal factor:

These are related to psychological characteristics of human wants. These

factors change more in long run rather than short run. These factors are:

a. Precaution motive:

every individual has a strong feeling to prepare for unseen emergencies

like sickness, accident, unemployment etc. so they build up reserves for
such emergencies

b. Foresight motive:

Every man has future needs. They need to save for old age, educational
needs of children, marriage of daughters etc.

c. Motive for independence:

Most of us have a strong desire to be independent financially. So we tend

to save by sacrificing present consumption.

2. Objective or External factors:

a. Distribution of income:

This is an important factor of propensity to consume. The more inequality

in income distribution, the lower will be the propensity to consume. Equal
distribution of income increases the propensity to consume. Poor people
have higher MPC, as their basic or primary needs are not satisfied. So,
increase in income tends to increase MPC, whereas rich people have lower
MPC.

b. Fiscal Policies:
Fiscal policy is related to tax structure and government expenditure.
When the taxes are decreased the disposable income with people will
increase and so will the consumption and vice versa.

Consumption means: Consumption means using goods for services

for satisfying current wants. We spend major portion of our income on
consumption. Consumption expenditure means house hold spending.
Which satisfies our immediate wants. Under this section, we will study the
relationship between consumption and income. The pattern of
consumption expenditure for all families is more or less the same. We can
see that families have tendencies to increase consumption with increase
in income. This relationship between consumption and income is called
consumption function. Consumption is a function of income.

C = f(Y)

C – consumption

F – function

Y - income

Consumption function is expressed as a linear function of income.

4. Elaborate on Monetary Policy.

Ans. Monetary policy is the process by which the government, central

bank, or monetary authority manages the supply of money, or trading in
foreign exchange markets.[1] Monetary theory provides insight into how to
craft optimal monetary policy.
Monetary policy is generally referred to as either being an expansionary
policy, or a contractionary policy, where an expansionary policy increases
the total supply of money in the economy, and a contractionary policy
decreases the total money supply. Expansionary policy is traditionally
used to combat unemployment in a recession by lowering interest rates,
while contractionary policy has the goal of raising interest rates to combat
inflation (or cool an otherwise overheated economy). Monetary policy
should be contrasted with fiscal policy, which refers to government
borrowing, spending and taxation.
Types of monetary policy
In practice all types of monetary policy involve modifying the amount of
base currency (M0) in circulation. This process of changing the liquidity of
base currency through the open sales and purchases of (government-
issued) debt and credit instruments is called open market operations.
Constant market transactions by the monetary authority modify the
supply of currency and this impacts other market variables such as short
term interest rates and the exchange rate.
The distinction between the various types of monetary policy lies primarily
with the set of instruments and target variables that are used by the
monetary authority to achieve their goals.
Monetary Target Market
Long Term Objective:
Policy: Variable:
Inflation Interest rate on
A given rate of change in the CPI
Targeting overnight debt
Price Level Interest rate on
A specific CPI number
Targeting overnight debt
Monetary The growth in money
A given rate of change in the CPI
Aggregates supply
Fixed Exchange The spot price of the
The spot price of the currency
Rate currency
Low inflation as measured by
Gold Standard The spot price of gold
the gold price
Usually unemployment + CPI
Mixed Policy Usually interest rates
change
The different types of policy are also called monetary regimes, in
parallel to exchange rate regimes. A fixed exchange rate is also an
exchange rate regime; The Gold standard results in a relatively fixed
regime towards the currency of other countries on the gold standard and
a floating regime towards those that are not. Targeting inflation, the price
level or other monetary aggregates implies floating exchange rate unless
the management of the relevant foreign currencies is tracking the exact
same variables (such as a harmonised consumer price index).
Inflation targeting:
Under this policy approach the target is to keep inflation, under a
particular definition such as Consumer Price Index, within a desired range.
The inflation target is achieved through periodic adjustments to the
Central Bank interest rate target. The interest rate used is generally the
interbank rate at which banks lend to each other overnight for cash flow
purposes. Depending on the country this particular interest rate might be
called the cash rate or something similar.
The interest rate target is maintained for a specific duration using open
market operations. Typically the duration that the interest rate target is
kept constant will vary between months and years. This interest rate
target is usually reviewed on a monthly or quarterly basis by a policy
committee.
Changes to the interest rate target are done in response to various
market indicators in an attempt to forecast economic trends and in so
doing keep the market on track towards achieving the defined inflation
target.
This monetary policy approach was pioneered in New Zealand. It is
currently used in the Eurozone, Australia, Canada, New Zealand, Norway,
Poland, Sweden, South Africa, Turkey, and the United Kingdom.
Price level targeting:
Price level targeting is similar to inflation targeting except that CPI growth
in one year is offset in subsequent years such that over time the price
level on aggregate does not move.
Something akin to price level targeting was tried in the 1930s by Sweden,
and seems to have contributed to the relatively good performance of the
Swedish economy during the Great Depression. As of 2004, no country
operates monetary policy based on a price level target.
Monetary aggregates:
In the 1980s several countries used an approach based on a constant
growth in the money supply. This approach was refined to include
different classes of money and credit (M0, M1 etc). In the USA this
approach to monetary policy was discontinued with the selection of Alan
Greenspan as Fed Chairman.
This approach is also sometimes called monetarism.
Whilst most monetary policy focuses on a price signal of one form or
another this approach is focused on monetary quantities.

This policy is based on maintaining a fixed exchange rate with a foreign

currency. There are varying degrees of fixed exchange rates, which can
be ranked in relation to how rigid the fixed exchange rate is with the
anchor nation.

Under a system of fiat fixed rates, the local government or monetary

authority declares a fixed exchange rate but does not actively buy or sell
currency to maintain the rate. Instead, the rate is enforced by non-
convertibility measures (e.g. capital controls, import/export licenses, etc.).
In this case there is a black market exchange rate where the currency
trades at its market/unofficial rate.
Under a system of fixed-convertibility, currency is bought and sold by the
central bank or monetary authority on a daily basis to achieve the target
exchange rate. This target rate may be a fixed level or a fixed band within
which the exchange rate may fluctuate until the monetary authority
intervenes to buy or sell as necessary to maintain the exchange rate
within the band. (In this case, the fixed exchange rate with a fixed level
can be seen as a special case of the fixed exchange rate with bands
where the bands are set to zero.)
Under a system of fixed exchange rates maintained by a currency board
every unit of local currency must be backed by a unit of foreign currency
(correcting for the exchange rate). This ensures that the local monetary
base does not inflate without being backed by hard currency and
eliminates any worries about a run on the local currency by those wishing
to convert the local currency to the hard (anchor) currency.
Under dollarisation, foreign currency (usually the US dollar, hence the
term "dollarisation") is used freely as the medium of exchange either
exclusively or in parallel with local currency. This outcome can come
about because the local population has lost all faith in the local currency,
or it may also be a policy of the government (usually to reign in inflation
and import credible monetary policy).
These policies often abdicate monetary policy to the foreign monetary
authority or government as monetary policy in the pegging nation must
align withe monetary policy in the anchor nation to maintain the exchange
rate. The degree to which local monetary policy becomes dependent on
the anchor nation depends on factors such as capital mobility, openness,
credit channels and other economic factors.
Managed Float:
Officially, the Indian Rupee (INR) exchange rate is supposed to be 'market
determined'. In reality, the Reserve Bank of India (RBI) trades actively on
the INR/USD with the purpose of controlling the volatility of the Rupee - US
Dollar exchange rate - within a narrow bandwidth. ( i.e pegs it to the US
Dollar )
Other rates - like the INR/Pound or the INR/JPY - have volatilities which
reflect the volatilities of the US/Pound and the US/JPY respectively.
The pegged exchange rate is accompanied by an elaborate system of
capital controls.
- On the current account, there are no currency conversion restrictions
hindering buying or selling foreign exchange (though trade barriers do
exist).
- On the capital account, "foreign institutional investors" have
convertibility to bring money in and out of the country and buy securities
(subject to an elaborate maze of quantitative restrictions).
- Local firms are able to take capital out of the country in order to expand
globally.
- Local households have quantitative restrictions( which are being relaxed
in recent times) in their ability to do global diversification . ( example
while local firms can buy real estate - individuals may not). However they
are able to purchase items ( mainly consumer items - say a laptop) and
services reasonably freely ( there are quantitative restrictions ). Most of
these transactions happen through credit cards through the internet.
Owing to an enormous expansion of the current account and the capital
account, India is increasingly moving into de facto convertibility. However
- it still cannot be considered a fully convertible currency.
The INR is not a highly traded currency - beyond India. It is traded by way
of Forwards through inter bank transactions. ( again the US Dollar
exchange rate determines the INR / other Crosses exchange rate )
As any currency traded in the international market - the INR does trade at
a market determined premium / discount for the forward months.
Gold standard:
The gold standard is a system in which the price of the national currency
as measured in units of gold bars and is kept constant by the daily buying
and selling of base currency to other countries and nationnals. (i.e. open
market operations, cf. above). The selling of gold is very important for
economic growth and stability.
The gold standard might be regarded as a special case of the "Fixed
Exchange Rate" policy. And the gold price might be regarded as a special
type of "Commodity Price Index".
Today this type of monetary policy is not used anywhere in the world,
although a form of gold standard was used widely across the world prior
to 1971. For details see the Bretton Woods system. Its major advantages
were simplicity and transparency.
Mixed policy:
In practice a mixed policy approach is most like "inflation targeting".
However some consideration is also given to other goals such as
economic growth, unemployment and asset bubbles.
This type of policy was used by the Federal Reserve in 1998.

5. Define Business Cycle. Elucidate characteristics and phases of Business Cycle.

Ans. Business cycle:

Business cycle is also called Trade Cycle. The business is never steady.
There are always ups and downs in economic activity. This cyclical
movement both upwards and downwards iswcommonly called Trade
Cycle. This is a wave like movement in regular manner in business cycle.
In business, there are flourishing activities, which take economy to
prosperity and growth whereas there are periods when there is recession,
which leads to decline in the employment, income and output. When the
economy goes into downswing then there is a stage of recovery to reach a
new boom.
Definition and Characteristics of Business Cycle:
Keynes : Trade Cycle is composed of periods of good trade characterized
by rising price and low unemployment percentage altering with periods of
bad trade characterized by falling price and high unemployment
percentage. To put in simple words:-
Business cycle is a fluctuation of the economy characterized by periods of
prosperity followed by periods of depression.
Definition and Characteristics of Business Cycle:

• The fluctuation are wave like movement and are recurrent in nature.

• Business cycle is characterized by waves of expansion and

contraction. But these are not only two phased of business
cycle. There are four phases of business cycle.

o Expansion

o Recession

o Contraction and

o Revival or Recovery

• The movement from peak to trough and again trough to peak is not
symmetrical. According to Keyness, prosperity phases of business
cycle comes to end fast but dip is gradual and slow.

• Business Cycle is self generating. Every phase has germs of the next
phase, that is, expansion has the germs of the recession in it.
The Business cycle or Economic cycle refers to the fluctuations of
economic activity about its long term growth trend. The cycle involves
shifts over time between periods of relatively rapid growth of output
(recovery and prosperity), and periods of relative stagnation or decline
(contraction or recession). These fluctuations are often measured using
the real gross domestic product. Despite being named cycles, these
fluctuations in economic growth and decline do not follow a purely
mechanical or predictable periodic pattern.

6. Write a note on Externalities.

Ans. Externalities:

Externalities (Spillover effects)- are common virtually every area of

economic activity. Externalities occur when firm of people impose costs or
benefits outside the market place. External cost are said to be the
negative externals cost and benefits together are called Externalities.
External cost are said to be the negative externalities and external
benefits are said to be positive externalities. External cost is
uncompensated cost an individual or the firm imposes on the other, the
best example for external cost or negative externalities is the
environment cos of the pollution. The external benefits are the benefits
the individual of firm gives to others without receiving and compensation
in returns, the best example for positive externality or external benefits is
the national defense provided to protect the freedom of everyone., even if
one wants or not irrespective of whether one is paying for it or not and
commodity available from public distribution system. The government
should be more concerned about the negative externalities. They are
defined as third party effects arising from production and / or
consumption of goods and services for which no appropriate
compensation is paid. The study of externalities by economists has been
more in the recent years after the link between the economy and
environment became strong.

Externalities create divergence between private and social cost. Eg. costs
of pollution is not included in the cost of production of the factory, which
is creating the pollution; but it is included in the social cost as the
community has to bear the cost in some way or the other. Thus the social
cost in this case is greater than the private cost.

Social cost= private cost +private cost

A chemical factory throwing out a lots of chemical waste in the nearby

river killing the fish and making the water unhealthy for use, refineries
pullulating the air and paint industry creating bed odour, creating
respiratory track infections and other diseases to all the people living in
the area around the factories. These negative externalities will increase
the social cost as the cost on the clean up and health will increase.
External cost due to traffic jams, an individual deciding to go for a drive in
the peak hours and increasing the travel time of the other drivers are all
negative externalities.

Human Resource Management

Assignment-1

1. Write a note on the Human Resources and their importance.

Ans. Human resource management (HRM) is the strategic and coherent approach to the
management of an organization's most valued assets - the people working there who
individually and collectively contribute to the achievement of the objectives of the
business.[1] The terms "human resource management" and "human resources" (HR) have
largely replaced the term "personnel management" as a description of the processes
involved in managing people in organizations.[1] Human Resource management is
evolving rapidly. Human resource management is both an academic theory and a business
practice that addresses the theoretical and practical techniques of managing a workforce.

Human Resources and their importance:

From the national standpoint, the human resources can be defined as the total knowledge,
skills, creative abilities, talents and aptitudes obtained in the population whereas from the
viewpoint of the individual enterprise, they represent the total of the inherent abilities,
acquired knowledge and skills as exemplified in the talents and aptitudes of its
employees. The human resources have also been designated as human factors. According
to jucius, “The human factor” refers to a whole consisting of inter-related, interdependent
and inter-acting physiological, psychological, sociological and ethical components. As
regards physiological components. It requires several inputs like food, rest and
environmental conditions to satisfy the physiological needs. It also requires protection
against harmful and destructive conditions and attempts to avoid loss of income as a
measure to have physiological security. Psychologically, it is characterized by emotions
and impulses. It likes and dislikes certain thing and some things make one happy while
making others unhappy. It is inspired as well as depressed by certain situations. It has
numerous psychological need such as autonomy, achievement, power, acquisitiveness etc.
through interaction with other. Again as an ethical creature, it has concepts of right and
wrong. It tends to do what it thinks right obviously the human factor is dynamic in nature
as it revealed in motivation and defense mechanism. It is an on-going process involving
the above four sub-process.

The human resources are assuming increasing significance in modern organization.

Obviously, majority of the problems in organizational setting are human and social rather
than physical, technical or economic. The failure to recognize this fact causes immense
 loss to the nation, enterprise and the individual. It is a truism that productivity is
associated markedly with the nature of human resources and their total environment
consisting of inter-related, inter-dependent and interacting economic and non-economic
(i.e., political, religious, cultural, sociological and psychological factors. Thus the
significance of human resources can be examined from at least two standpoint-economic
and non-economic.

Human Resource Management Systems (HRMS, EHRMS), Human Resource Information

Systems (HRIS), HR Technology or also called HR modules, shape an intersection in
between human resource management (HRM) and information technology. It merges
HRM as a discipline and in particular its basic HR activities and processes with the
information technology field, whereas the planning and programming of data processing
systems evolved into standardized routines and packages of enterprise resource planning
(ERP) software. On the whole, these ERP systems have their origin on software that
integrates information from different applications into one universal database. The
linkage of its financial and human resource modules through one database is the most
important distinction to the individually and proprietary developed predecessors, which
makes this software application both rigid and flexible.
Modern concept of human resources

Though human resources have been part of business and organizations since the first days
of agriculture, the modern concept of human resources began in reaction to the efficiency
focus of Taylorism in the early 1900s. By 1920, psychologists and employment experts in
the United States started the human relations movement, which viewed workers in terms
of their psychology and fit with companies, rather than as interchangeable parts. This
movement grew throughout the middle of the 20th century, placing emphasis on how
leadership, cohesion, and loyalty played important roles in organizational success.
Although this view was increasingly challenged by more quantitatively rigorous and less
"soft" management techniques in the 1960s and beyond, human resources had gained a
permanent role within an organization.

2. Distinguish amongst Personnel Management and Human Resources

Management.

Ans. Though the two terms ”Personnel Management “ and “Human

Resources Management” are interchangeably used by most of the
authors, there are some differences between them. Management of
Human Resources is a new field of study embodying behavioral science
knowledge relating to the working of line and staff officials and union
leaders to motivate organizational goals. On the other hand, personnel
Management is that phase of management which deals with the effective
control and use of manpower. Yodar, Henemen and other agreed that the
HRM is a broad concept which covers many personnel aspects and include
social, professional and individual enterprise aspects, whereas Personnel
Management focuses only on personnel aspects such as leadership,
justice determination, task specialization, staffing, performance appraisal,
etc. HRM is more growth oriented whereas Personnel Management is
slightly narrow, Human Resources planning is very vital in HRM. This is
because it leads to the maximum utilization of human resources, reduces
excessive labour turnover and high absenteeism; improves productivity
and aids in achieving the objectives of an organization. In addition to the
above function, HRM emphasizes on training, an important area of
personnel, which covers the following aspects:

1. Increasing productivity;

2. Improving quality;

3. Improving organizational climate;

4. Ensuring personnel growth etc.

3. Interpret Human Resource Planning.

Ans. Human Resource Planning

Human Resource Planning defines project roles, responsibilities, and reporting
relationships. One key result of Human Resource Planning is the Staffing management
plan which depicts how and when team members are added to the team, and how the team
members are released from the project, the training needs of the team, and several other
key components.
The inputs to Human Resource Planning are:
1. Enterprise Environmental Factors – The Enterprise Environmental Factors that
comprise of individuals of an organization interact and relate with one another are an
input into Human Resource Planning. Items to considers about enterprise environmental
factors involving organizational culture and structure are:
o Organizational – Which organizations or departments are going to be engaged in the
project? Are there existing working arrangements between them? What are the formal and
informal relationships between the departments?

o Technical – What are the areas of expertise needed to successfully complete this
project? Do these skills need to be transitioned to the supporting organization?

o Interpersonal – What types of formal and informal reporting relationships exist among
the team members? What are team members current job descriptions? What are their
supervisor-subordinate relationships? What levels of trust and respect currently exist?

o Logistical – Are people in different locations or time zones? What are other type of
distances between team members?

o Political – What are the individual goals and agendas of the stakeholders? Where is the
informal power base and how can that influence the project? What informal alliances
exist?

In addition to these factors, there are also constraints. Examples of inflexibility in Human
Resource Planning are:

o Organizational Structure – An organization with a weak matrix structure is commonly a

constraint.
o Collective Bargaining Agreements – Contractual agreements with service organizations
can require interesting nuances to certain roles and reporting arrangements.

o Economic Conditions – Hiring freezes, little to no training funds, and a lack of traveling
budget can place restrictions of staffing options.

2. Organizational Process Assets - As an organization's project management methods

evolve, experience gained from past projects are available as organizational process
assets. Templates and checklists reduce the planning time required and the likelihood of
overlooking key responsibilities.

3. Project Management Plan - The Project Management Plan contains activity resource
requirements and project management activity descriptions which assist in identifying the
types and quantities of resources required for each schedule activity in a work package.

With the proper inputs, the results are going to have a good foundation. Project teams use
different tools and techniques to guide the Human Resource Planning process. These
three tools and techniques are:
• Organization Charts and Position Descriptions - Organization charts and position
descriptions are used to communicate and clarify team member roles and responsibilities
and to ensure that each work package is assigned. Organization charts can have three
formats: Hierarchical-type Organization chart, Matrix-Based Responsibility Chart, and
the Text-oriented format.
• Networking – Informal interactions among co-workers in the organization is a
constructive way to comprehend the political and interpersonal factors which will affect
organizational relations.
• Organizational Theory – Organizational theory portrays how people, teams, and
organizational units behave.

The three outputs from Human Resource Planning are found below:
• Roles and Responsibilities - Clarification of roles and responsibilities gives project team
members an understanding of their own rules and the roles of others in the project. Clarity
is always a key component of project success.
• Project Organization Charts - A project organization chart is a diagram of the reporting
relationships of project team members. Project organization charts should be tailored for
their audience, they can give a generalize overview or highly granular.
• Staffing Management Plan - The Staffing Management Plan is an important output of
the Human Resource Planning process which establishes the timing and methods for
meeting project human resource requirements. The components of the staffing
management plan are:
1. Staff Acquisition – Staff Acquisition details how the project will be staffed, where the
team will work, and the level of expertise needed with the staff.
2. Timetable – The timetable illustrates the necessary time frames for project team to be
available. One tool commonly used is a resource histogram.
3. Release Criteria – Release criteria lists the method and timing of releasing team
member.
4. Training Needs – Training needs is a plan on how to train the project resources.
5. Recognition and rewards – Recognition and rewards are the criteria for rewarding and
promoting desired team behaviors
6. Compliance – Compliance details the strategies for complying with regulations,
contracts, and other established human resource policies.
7. Safety – Safety procedures are listed to protect the team members.

4. Discuss Individual Evaluation Methods.

Ans. There are five ways to evaluate and employee individually. In these systems,
employees are evaluated one at a time without directly comparing them with other
employees.

Graphical rating scale:

The most widely used performance evaluation technique is a graphic rating scale. In this
technique, the evaluator is presented with a graph and asked to rate employees on each of
the characteristics listed. The number of characteristics rated varies from a few to several
dozen. A factor analysis of the results indicates that only two traits were being rated;
quality of performance and ability to do the present job.
The rating can be is a series of boxes, or they can be on a continuous scale (0-9) or so. In
the latter case, the evaluator places a check above descriptive words ranging from none to
maximum. Typically, these ratings are then assigned points. For example, outstanding
may be assigned a score of 4 and unsatisfactory a score of 0. Total scores are then
computed. In some plans, greater weights may be assigned to more important traits.
Evaluators are after asked to explain each rating with a sentence of two.

Forced Choice:
The forced-choice method of evaluation was developed because other methods used at the
time led to a preponderance of higher ratings, which made promotion decisions difficult.
In forced choice, the evaluator must choose from a set of descriptive statements about the
employee. The two-,three-, or four-statement items are grouped in a way that the
evaluator cannot easily judge which statements apply to the most effective employee.

Essay evaluation:
In the essay technique of evaluation, the evaluator is asked to describe the strong and
weak aspects of the employee’s behavior. In some enterprises, the essay technique is the
only one used; in others, the essay summarizes the scale, elaborates on some of the
ratings, or discusses added dimensions not on the scale. In both of these approaches the
essay can be open ended, but in most cases there are guidelines on the topics to be
covered, the purpose of the essay, and so on. The essay method can be used be evaluators
who are superiors, peers, or subordinates of the employee to be evaluated.

Management by objectives:
Another individual evaluation method in use today is Management by Objectives (MBO).
In this system, the supervisor and employee to be evaluated jointly set objectives in
advance for the employee to try to achieve during a specified period. The method
encourages, if not requires, them to phrase these objectives primarily in achievement of
the objectives. The approach combines the superior and self-evaluation systems.

Critical incident technique:

In this technique, personnel specialists and operating managers prepare lists of statements
of very effective and very ineffective behavior for an employee. These are the critical
incidents. These are the critical incidents. The personnel specialists combine these
statements into categories, which vary with the job. Once the categories are developed
and statements of effective and ineffective behaviour are provided, the evaluator “records
examples of critical (outstandingly good or bad) behaviors in each of the categories, and
the log is used to evaluate the employee at the end of the period. It is also very useful for
the evaluation interview, since the evaluator can be specific in making positive and
negative comment, and it avoids “recently” bias. The critical incident technique is more
likely to be used by superiors than in peer or subordinate evaluations.

Behaviourally anchored rating scale:

Anther technique which essentially is based on the critical incident approach is the
Behaviourally anchored rating scale (BARS). This technique is also called the
behavioural expectation scale (BES). This is new, relatively infrequently used technique.
Supervisors give descriptions of actually good and bad performance, and personnel
specialists group these into categories (five to ten is typical). As with weighted checklist,
the items are evaluated by supervisors (often other than those who submitted the items).
A procedure similar to that for weighted checklists is used to verify the evaluations
(outstandingly good, for example) with the smallest standard deviation, hopefully around
1.5 on a 7-point scale. These items are then used to construct the BARS.

Case Study:
Vinod has been working in I.G. Ferns and Curtains for almost 15 years. He has been a
sincere worker. He leaves his house at 7 a.m. and works till 5.30 p.m. every day. If there
is heavy orders, he even works till late in the evenings and if necessary even on Sundays.
Though other workers leave their work incomplete at 5.00 p.m. the closing time resume
their work only the next day, Vinod does not do so. He invariable completes his work
before leaving even it is passed the closing time. The Manager thus depends on Vinod to
complete the work left incomplete by other tailors. If there is an additional order, the
manager invariably gives it to Vinod.
Vinod married Diana about two years back. After his marriage, he has been indulging in
alcoholism. Vinod's marital life was in trouble not very successful. He started developing
feeling of hatred towards his wife. He was dissatisfied in his sexual relations and started
visiting prostitutes. Here he came under the influence of youngsters. Seeing the
deteriorating morale and social life of Vinod, his brother approached IG Ferns and certain
and asked them not to overburden him with work. She alleged that because of his working
for long hours, he does not pay any attention to his family life. His wife has almost
rejected him and if these states of affairs continue she has threatened to break the nuptial
bondage.
The firm’s policy at present is to redress the grievances of the employees and to deal with
only those grievances relating to the terms and conditions of employment and work.
Questions:

1. Does the issue raised by Vinod's mother come under the purview of Human Resource
Management?

2. If you were the Manager, how would you redress this grievance?
 3. Do you suggest a change in the present HR policy? If so, mention the policy.

Ans: 1. Yes, the issues raised by vinod’s mother totally come under the purview of human
resource management as his extra work pressure took a toll on his social life. He was not
able to fulfill his household responsibilities. He was always overburdened with his work.
Consequently his social life deteriorated to an extent, that he practised immoral activities.
In my perception, had he been working for normal hours, he would have sufficient time to
do justice with his social responsibilities towards his mother and wife.

Ans: 2. Had I been the manager, I would have appreciated Vinod’s hard work and his
responsibilities towards his job. However I would have distributed his extra work with his
Colleagues equally. It is not possible I would have recruited extra staff to fulfill the
overburdened work. So that he was ample amount of time to spend with his family and do
justice with his household responsibilities. Infect I would have given him some moral
support by giving him promotions and extra work allowances.

Ans: 3. Yes, the present HR policy should be change. In my opinion, the firm should not
only amend the grievances of the employee relating to the terms and conditions of the
employment but also the firm should entertain some social and moral responsibilities
towards the employee. According to me the company should have some internal rotation
policy to revitalize the employees. Apart from normal job schedule, they should be some
extra work allowances as well. According to the talent and caliber of the employee, he
should be given promotion and other recreational facilities.

Human Resource Management

Assignment-2

1. Define Morale. Write importance of Morale.

Ans. Morale has been variously defined by different authors. Professor

Ralph C. Davis says, “Good organizational morale is a condition in which
individuals and groups voluntarily make a reasonable subordination of
their personal objectives of their organization”. According to Dale Yoder
and Paul D. Standohar, “ Morale means evident commitment, that is and
Paul D. Standohar, “Morale means evident commitment, that is,
demonstrated spirit, enthusiasm, and confidence in the organization’s
policies, programmes , and accomplishments. Morale is revealed by what
individuals and groups say and accomplishments. Morale is revealed by
what individuals and groups say and do to show an interest in,
understanding of, and personal identification with work-team survival and
success”. Edwin B. Filippo has described morale as “ A mental condition or
attitude of individuals and groups which determines their willingness to
co-operate. Good morale is evidenced by employee enthusiasm, voluntary
conformance with regulations and orders, and a willingness to co-operate
with others in the accomplishment of an organization’s objectives. Poor
morale is evinced by surliness, insubordination, a feeling of
discouragement and dislike of the job, company and associates.”

According to Haimann, “It is a state of mind and emotions affecting the

attitude and willingness to work, which in turn, affect individual and
organizational objectives.” Joseph D. Mooney describes morale as “the
sum total of several psychological qualities which include courage,
fortitude, resolution, and above all, confidence.

Importance of Morale:

1. The employee’s background-which includes his levels of indigence and

education and his type of personality-largely determines the way in
which he seeks to fulfill his needs for belonging, esteem, and self
realization. High morale hinges on the satisfaction of these needs.

2. An employee’s personal environment encompasses his relations with his

family, friends, and neighbors. The employee brings his thoughts of
his home and social life with him when he goes to work and they
influence his thinking and attitudes while on the job.

Management practices influencing morale include policies on

procedures with respect to wages, promotion methods employee
services and benefits, working conditions, handling grievances,
disciplinary actions.

2. Elaborate on Principles for Maintenance of Discipline.

Ans. The Maintenance of discipline have been outlined by Yoder. Henman,

Turnball and Harold Stone. These are:-

1. As far as possible, all the rules should be framed in co-operation and

collaboration with the representatives of employees. If the latter
have a share in formulating them, will be much more likely to
observe them.

2. All this rules should be appraised at frequent and regular intervals to

ensure that they are, and continue to be, appropriate sensible and
useful.
3. rules should vary with changes in the working conditions of employees.
Those framed for office employees, for example, may very well be
different from those that are formulated for workers in an industrial
concern.

4. Rules should be uniformly enforced if they are to be effective. They

must be applied without exception and without bending them or
ignoring them in favour of any one worker.

5. A disciplinary policy should have as its objective the prevention of any

infringement rather than the simple administration of penalties,
however just: It should be preventive rather than punitive.

6. Recidivism must be expected. Some offenders would almost certainly

violate rules more often than others. These cases should be
carefully considered so that their causes may be discovered.

7. Define and precise provisions for appeal and review of all disciplinary
actions should be expressly mentioned in the employees handbook
for collective agreements.

3. Enumerate the Grievance Handling Procedure.

Ans. 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 them
only employee can register his protest.

There should be no recourse to official machinery of conciliation unless

the procedure has been carried out without reaching any solutions.

Grievance Machinery:

A Grievance machinery is usually thought of in connection with a

company that deals with a labour union. Though the union must be given
some credit for stimulating the installation of such procedures, all
companies, whether unionized or not, should have established and known
methods of processing grievances.

To establish a new grievance machinery, workers in each department and

each shift shall select, from among themselves and for a period of not less
than one year at a time, departmental representatives, and forward the
list of persons so selected to the management. Where the unions in the
undertaking are in a position to submit an agreed list of names, recourse
to election may not be necessary when a works committee is functioning
satisfactorily, for the Works Committee’s member of a particular
constituency shall act as the departmental representative.

Grievance Handling :

The details of the grievance procedure vary from industry to industry

and from trade union to trade union because of the variations in the
size of organization, trade union strength, the management philosophy,
the company traditions, industrial practices and in the cost factor. An
important aspect of the grievance machinery is the reassurance given
to an individual employee by the mere fact that there is a mechanism
available to him which will consider his grievance in a dispassionate
and detailed manner, and that his point of view will be heard and given
due consideration. An employee’s conception of his problem(s) may be
quite biased. Venting his grievance and being heard gives him a feeling
of being cared for. He gets it “off his chest”.

4. Interpret the various aspects of Charismatic Leadership.

Ans. Charismatic Leadership is defined by Max Weber as "resting on

devotion to the exceptional sanctity, heroism or exemplary character of
an individual person, and of the normative patterns or order revealed or
ordained by him". He defines Charisma as "a certain quality of an
individual personality, by virtue of which he is set apart from ordinary men
and treated as endowed with supernatural, superhuman, or at least
specifically exceptional powers or qualities. These are such as are not
accessible to the ordinary person, but are regarded as of divine origin or
as exemplary, and on the basis of them the individual concerned is
treated as a leader (...). How the quality in question would be ultimately
judged from an ethical, aesthetic, or other such point of view is naturally
indifferent for the purpose of definition".
Charismatic leadership is leadership based on the leader's ability to
communicate and behave in ways that reach followers on a basic,
emotional way, to inspire and motivate. We often speak of some sports
and political leaders as charismatic (or not) -- an example being John F.
Kennedy.
It's difficult to identify the characteristics that make a leader
"charismatic", but they certainly include the ability to communicate on a
very powerful emotional level, and probably include some personality
traits.
Developing "charisma" is difficult, if not impossible for many people, but
luckily charismatic leadership is not essential to be an effective leader.
Many other characteristics are involved in leading effectively, and there is
significant evidence to indicate that it simply is not necessary to have this
elusive charisma to lead others well.
The sociologist Max Weber defined charismatic authority as "resting on
devotion to the exceptional sanctity, heroism or exemplary
character of an individual person, and of the normative patterns or
order revealed or ordained by him." Charismatic authority is one of
three forms of authority laid out in Weber's tripartite
classification of authority, the other two being traditional
authority and rational-legal authority. The concept has acquired
wide usage among sociologists.
Routinizing charisma:
Charismatic authority almost always evolves in the context of boundaries
set by traditional or rational (legal) authority, but by its nature tends to
challenge this authority and is thus often seen as revolutionary. [2]
However, the constant challenge that charismatic authority presents to a
particular society will eventually subside as it is incorporated into that
society. The way in which this happens is called routinization.
Routinization is the process by which ‘charismatic authority is succeeded
by a bureaucracy controlled by a rationally established authority or by a
combination of traditional and bureaucratic authority’ (Turner, Beeghley,
and Powers, 1995 cited in Kendal et al. 2000). For example, Muhammad,
who had charismatic authority as "The Prophet" among his followers, was
succeeded by the traditional authority and structure of Islam, a clear
example of routinization.
Some leaders may employ various tools to create and extend their
charismatic authority; for example utilizing the science of public relations.
As in the example of Islam, a religion which evolves its own priesthood
and establishes a set of laws and rules is likely to lose its charismatic
character and move towards another type of authority upon the removal
of that leader.
In politics, charismatic rule is often found in various authoritarian states,
autocracies, dictatorships and theocracies. In order to help to maintain
their charismatic authority, such regimes will often establish a vast
personality cult, which can be seen as an attempt to gain legitimacy by an
appeal to other forms of authority. When the leader of such a state dies or
leaves office and a new charismatic leader does not appear, such a
regime is likely to fall shortly thereafter unless it has become fully
routinized.

CASE STUDY:
1. As Ivan's Manager, what should your strategy be in handling the performance
evaluation interview with Ivan .

Ans. The strategy behind the performance evaluation interview with Ivan
and Ivan's Manager follows 360-degree appraisal.

 360 degree appraisal:

It is a method of appraisal in which people receive performance feedback

from those on all sides of them in the organization - their boss, their
colleagues and peers and their own subordinates. Thus, the feedback
comes from all around them, 360 degrees. This form of performance
evaluation can be very beneficial to managers because it typically gives
them a much wider range of performance-related feedback than a
traditional evaluation.

 360 degree feedback:

360-degree feedback is a method and a tool that provides each employee

the opportunity to receive performance feedback from his supervisor and
four to eight peers, reporting staff members, co-workers and customers.
It allows each individual to understand how his effectiveness as an
employee, co-worker, of staff member is viewed by others. The feedback
provides insight about the skills and behavior desired in the organization
to accomplish the mission, vision, and goals and live the values.

2. What remedial measures do you suggest to tackle the

situation?

Ans: Ivan's behavioral attributes are not up to the mark. He creates

animosity wherever he goes. But he is an excellent worker and his
performance in terms of achievement is significant. Therefore Ivan should
be given a change in the nature of job he performs with limited mobility
amongst sales and promotion department.

3. As an appraiser do you suggest with holding Ivan's increment?

Give reasons.

Ans: No, Ivan should be given an increment since his performance in

terms of achievement is significant. The change in his environment would
aid him the use of better behavioral attributes.