Question

Q2. Write a brief essay on “costing approach” adopted by various organizations. Use proper examples to substantiate your answer.

Q3. Critically analyze the following type of firms with respect to their operating cycle and capital investment cycle:

a) Manufacturer

b) Wholesaler

c) Retailer

d) Hybrid

e) Service – capital intensive

f) Service – labor intensive

Q4. Analyze the advantages and disadvantages of credit. Highlight the cost and financial consequences of debt.

Answer 1

Q.2 Cost approach is the valuation method adopted that determines the price of product for which buyer will pay. Method refers to system of cost ascertaining of products and services which is differ from industry to industry and product to product of industry. For example costing method adopted by manufacturing industry is different from service industry, method followed by consulting firm is differ from contractor.

However approach that various organizations are adopted are,

1. Zero based costing approach - It is based on detailed analysis of various options of cost structure. Detailed analysis gives better understanding of cost structure and optimal level of benefit receivable. Zero based costing approach adopted to sustainable and significant cost reduction. Zero based costing involves systematically analysis of various activities undertaken by companies and understanding of cost centers.
2. Activity based costing approach - It is an costing method adopted by company that identifies various activities of organization and assignment of cost of each activity to goods and services of organization. It assign the cost based on actual consumption of resources by each activity. Benefit of this approach is that dentify and eliminate those product and services that are unprofitable. Identify and analyse of production processes that are ineffective.
3. Portfolio management - Portfolio management helps in ensuring that priorities ate line with budget. Goals of portfolio management is that the demand management, Value management, program management. Portfolio management offers effective management work. It involves identifying, controlling, managing activities that helps to achieve organization strategic objective.

Q.3 Operating cycle & Capital investment cycle in respect of following firms

1. Manufacturer-

Operating cycle means length of time taken by firm to convert non cash current asset (raw material, finished goods ) in to cash.

Capital investment cycle involve purchase of capital assets, equipments that support to carry day to day activities.

2. Wholesaler

Operating cycle in case of reseller not involve time production. It is time of cash outlay on purchase of goods to the time of collection of cash from customer.

Capital investment involve acquisition of building, plant which is requirement of business.

3.Retailer

Operating cycle in case of retailer is that the working capital investment by retailer in acquisition of inventory to to receives income from sell of inventory.

Capital investment cycle is the money invested by retailer in to business that is used to acquire assets.

4. Hybrid

Hybrid companies means whose responsibility is limited to members guarantee and capital contribution by members.

Operating cycle time is the time taken to receipt of inventory and sell of inventory and collection of cash. Operating cycle determines efficiency of business.

Capital investment cycle in case hybrid firm is that investment made by members in to business to gain long term profitability.

5. Service labor intensive

Operating cycle investment is that working capital investment in labor work force.

Capital investment is the investment in assets to run labor industry.