Formal requirements documentfor Bill of Exchange

1. The Bank letter has to be extended in the corresponding amount, which can be purchased at any tobacconist letterheads.


2. The title has to carry the name inserted therein bill of exchange, expressed in the language used in the rest of the document.

3. The title must be dated and indicate the place where the bill is drawn. In the event that no place is expressly designated warrant shall apply such stating beside the name of the drawer.

4. Must necessarily contain the name of who has to pay the bill, person against whom the payment order, which will appear as "freed" is directed. In the case of individual person the designation shall be by name and in the case concerned a legal person, by its corporate name.

5. Also has to include the signature of the pound, that is, issues the document, which appear as "drawer".

6. The name of the person to whom payment must be made or to whose order will have to make, which may be the same drawer or a third party, and will appear as "taker". The appointment will be made, as in the case of the drawer, by his full name or its name if it is a legal person.

7. necessarily must include the unconditional order to pay a certain sum of money, not subject to any conditions. The currency in which the value of the letter may be domestic or foreign is expressed.

8. the time of "maturity" shall be indicated, ie the day when the letter should be paid. If you have not done this mention specifically, it is understood that the bill is payable at sight.

9. It is necessary that it is indicated the place where payment is to be made, ie, the place where the holder must present the bill to pay. In the event that this data remains unspecified means as payment instead of stating next to the name of the drawee, which in turn is deemed as a place of the same address.

In the event that missing any of these requirements document will not be considered bills of exchange and thus lose its enforceability which is basically the possibility that, before a default, can demand their collection quickly through the courts ( currency judgment). In this case the document will only have validity arising out of their circumstances as documentary evidence of the existence of an obligation.

A different question is that of the so-called blank letter, which carried the signature of the drawer or the acceptor, omits some of the formal requirement or all. In this case the letter is valid if completed properly before maturity

Way of raising the level of satisficing that occurs in the organizational decision-making process

36. The bounded rationality model reflects individual’s or team’s tendencies to do all of the following except ______.

a.	select an alternative that will provide the maximum possible gain
b.	undertake a limited search for alternative solutions
c.	cope with inadequate information and control of external and internal environmental forces influencing the outcomes of decisions
d.	select less than the best goal or alternative solution

ANS:  A                   

   37.   In the_____, an individual or team stops searching for alternatives as soon as an acceptable goal or solution is discovered.

a.	bounded rationality model
b.	balancing interests principles
c.	equitable outcome principles
d.	situational-effect model

ANS:  A                  

   38.   Which of the following has (have) been suggested as a way of raising the level of satisficing that occurs in the organizational decision-making process?

a.	personal determination
b.	setting higher individual or organizational standards
c.	using sophisticated decision-making and problem-solving techniques
d.	all of these have been suggested for this purpose

ANS:  D                   

   39.   ____ is the process of continuing or increasing the allocation of resources to a course of action even though a substantial amount of feedback indicates that the choice made is wrong.

a.	Satisficing
b.	Risk propensity
c.	Escalating commitment
d.	Emotional block

ANS:    C

Essential features of Life Cycle Costing:

Costs are incurred along the product’s life cycle starting from product’s design, development, manufacture, marketing, servicing and final disposal. The objective is to accumulate all the costs over a product life cycle to determine whether the profits earned during the manufacturing phase will cover the costs incurred during the pre and post manufacturing stages of product life cycle.

Product Life Cycle costing involves:

• Tracing of costs and revenue of product over several calendar period- throughout their entire life cycle.
• Emphasis is on Cost and revenue accumulation over the entire life cycle of the product.
• Life cycle costing traces research and design.
• It focuses on development costs, incurred to individual products over their entire life cycles.
• Total magnitude of research and development costs are reported and compared with product revenues generated in later periods.

Why Product life cycle costing is important?

Life cycle costing estimates, tracks and accumulates the costs over a product’s entire life cycle from its inception to abandonment or from the initial R & D stage till the final customer servicing and support of the product. It aims at tracing of costs and revenues on product by product basis over several calendar periods throughout their life cycle.

Product life cycle costing is important for the following reasons:
(i) When non-production costs like costs associated with R & D, design, marketing, distribution and customer service are significant, it is essential to identify them for target pricing, value engineering and cost management. For example, a poorly designed software package may involve higher costs on marketing, distribution and after sales service.

(ii) There may be instances where the pre-manufacturing costs like R & D and design are expected to constitute a sizeable portion of life cycle costs. When a high percentage of total life cycle costs are likely to be so incurred before the commencement of production, the firm needs an accurate prediction of costs and
revenues during the manufacturing stage to decide whether the costly R & D and design activities should be undertaken.
(iii) Many costs are locked in at R & D and design stages. Locked in or Committed costs are those costs that have not been incurred at the initial stages of R & D and design but that will be incurred in the future on the basis of the decisions that have already been taken. For example, the adoption of a certain design will determine the product’s material and labour inputs to be incurred during the manufacturing stage. A complicated design may lead to greater expenditure on material and labour costs every time the product is produced. Life cycle budgeting highlights costs throughout the product life cycle and facilitates value engineering at the design stage before costs are locked in.

Total life-cycle costing approach accumulates product costs over the value chain. It is a process of managing all costs along the value chain starting from product’s design, development, manufacturing, marketing, service and finally disposal.

Stages of product life cycle

Typically the life cycle of a manufactured product will consist of the following stages :
(i) Market research : Before any investment in made the investor must believe that what the company proposes to make can be sold at a price which will permit a profit to be made. This usually means that market research will establish what product the customer wants, how much he is prepared to pay for it and how many he will buy.

(ii) Specification : When market research has established what is to be made, it will be necessary to turn the general statement of requirements into a detailed specification which will tell the designer and manufacturing engineer precisely what is required. The design specification will give such details as required life, maximum permissible maintenance costs, maximum permissible manufacturing cost, the number required, the delivery date, the required performance of the product.

(iii) Design : With a precise specification, the designers can produce the drawings and process schedules which define the geometry of the product and some of the manufacturing processes.

(iv) Prototype manufacture : From the drawings it will be possible to manufacture a small number of the product. These prototypes will be used to develop the product and eventually to demonstrate that it meets the requirements of the specification.

(v) Development : When a product has been made for the first time, it is necessary to prove that it meets the requirements of the specification. In fact, when a product is first made it rarely meets the requirements of the specification and changes have to be made until it does. This period of testing and changing is ‘development’. Development can be very expensive and often generates a large negative cash flow before any products have been sold and hence, before any positive cash flows have been generated.

(vi) Tooling : When a product is shown to meet the requirements of the specification and if calculations suggest that it will be profitable, the decision will be made to make it to sell. This is not a decision that will be taken lightly because, in many cases, the decision to make a product for sale is commitment to tool up for production. Tooling up for production can mean building a production line costing several lakhs of rupees, building expensive jigs, buying special purpose machine tools or, in some other say, making a very large initial investment.

(vii) Manufacture : The manufacture of a product involves the purchase of the raw materials, the purchase of bought out components, the use of labour to make and assemble the product, and the use of supervisory labour. 

(viii) Selling : When the product is fit to sell and available, it may be necessary to spend money on a campaign to sell the product.

(ix) Distribution : In the process of selling the product, it must be distributed to the sales outlets and to the customers.

(x) Product support : When the product has been bought, the customer will expect it to be supported. The manufacturer or supplier will have to make sure that spares and expert servicing are available for the life of the product. The manufacturer or the supplier may even have to offer free servicing and parts replacement during the early life of the product.

(xi) Decommissioning or Replacement : When a manufacturing product comes to an end, the plant used to build the product must be re-used, sold, scrapped, or decommissioned in a way that is acceptable to society.

Example of life cycle costing and target costing solution

A company is planning a new product. Market research information suggests that the product should sell 10,000 units at $21.00/unit. The company seeks to make a mark-up of 40% product cost. It is estimated that the lifetime costs of the product will be as follows:

1 Design and development costs $50,000

2 Manufacturing costs $10/unit

3 End of life costs $20,000

The company estimates that if it were to spend an additional £15,000 on design, manufacturing costs/ unit could be reduced.

Required

(a) What is the target cost of the product?

(b) What is the original lifecycle cost per unit and is the product worth making on that basis?

(c) If the additional amount were spent on design, what is the maximum manufacturing cost per unit that could be tolerated if the company is to earn its required mark-up?

Solution

The target cost of the product can be calculated as follows:

(a) Cost + Mark-up = Selling price

$15           $6                 $21

100%        40%            140%

(b) The original life cycle cost per unit = ($50,000 +(10,000 x $10) + $20,000)/10,000 = $17

This cost/unit is above the target cost per unit, so the product is not worth making.

(c) Maximum total cost per unit = $15. Some of this will be caused by the design and end of life costs:

=($50,000 + $15,000 + $20,000)/10,000

= $8.50

Therefore, the maximum manufacturing cost per unit would have to fall from $10 to ($15 - $8.50)

= $6.50.

How to Maximise the return over the product life cycle

Design costs out of products
Majority of a product's life cycle costs are determined by decisions made early in the life cycle of a product, at the design or development stage. Careful design of the product and manufacturing and other processes will keep cost to a minimum over the life cycle.

Minimise the time to market
This is the time from the conception of the product to its launch. More products come onto the market nowadays and development times have been reduced over the years. Competitors watch each other very carefully to determine what types of product their rivals are developing. If an organisation is launching a new product it is vital to get it to the market place as soon as possible. This will give the product as long a period as possible without a rival in the market place and should mean increased market share in the long run. Furthermore, the life span may not proportionally lengthen if the product's launch is delayed and so sales may be permanently lost. It is not unusual for the product's overall profitability to fall by 25% if the launch is delayed by six months. This means that it is usually worthwhile incurring extra costs to keep the launch on schedule or to speed up the launch.

Minimise breakeven time (BET)
A short BET is very important in keeping an organisation liquid. The sooner the product is launched the quicker the research and development costs will be repaid, providing the organisation with funds to develop further products.

Maximise the length of the life span
Product life cycles are not predetermined; they are set by the actions of management and competitors. Once developed, some products lend themselves to a number of different uses; this is especially true of materials, such as plastic, PVC, nylon and other synthetic materials. The life cycle of the material is then a series of individual product curves nesting on top of each other as shown below.

By entering different national or regional markets one after another an organisation may be able to maximise revenue. This allows resources to be better applied, and sales in each market to be maximised. On the other hand, in today's fast moving world, an organisation could lose out to a competitor if it failed to establish an early presence in a particular market.

Minimise product proliferation
If products are updated or superseded too quickly, the life cycle is cut short and the product may just cover its R&D costs before its successor is launched. 

Manage the product's cashflows
Hewlett-Packard developed a return map to manage the lifecycle of their products.You can see their approach.

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Example of Life cycle costing problem

Energypac specialises in the manufacture of solar panels. It is planning to introduce a new slimline solar panel specially designed for small houses. Development of the new panel is to begin shortly and Solaris is in the process of determining the price of the panel. It expects the new product to have the following costs.

The Marketing Director believes that customers will be prepared to pay $500 for a solar panel but the
Financial Director believes this will not cover all of the costs throughout the life cycle.

Required: Calculate the cost per unit looking at the whole life cycle and comment on the suggested price.

Answer:

                                                                                               $'000

R&D (1,900 + 100)                                                                  2,000
Marketing (100 + 75 + 50 + 10)                                                 235
Production (1,000 + 6,750 + 8,000 + 2,250)                         18,000
Customer service (100 + 600 + 800 + 200)                             1,700
Disposal                                                                                     300
Total lifecycle costs                                                                22,235
Total production ('000 units)                                                         42
Cost per unit                                                                       $529.40

The total lifecycle costs are $529.40 per solar panel which is higher than the price proposed by the marketing director. Solaris will either have to charge a higher price or look at ways to reduce costs.

It may be difficult to increase the price if customers are price sensitive and are not prepared to pay more. Costs could be reduced by analysing each part of the costs throughout the life cycle and actively seeking cost savings. For example, using different materials, using cheaper staff or acquiring more efficient technology.

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Benefits of life cycle costing

There are a number of benefits associated with life cycle costing.

(a) The life cycle concept results in earlier actions to generate revenue or to lower costs than otherwise might be considered.
(b) Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage.
(c) Life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding.
(d) The life cycle concept helps managers to understand acquisition costs vs. operating and support costs. It encourages businesses to find a correct balance between investment costs and operating expenses.

With life cycle costing, non-production costs are traced to individual products over complete life cycles.
(a) The total of these costs for each individual product can therefore be reported and compared with revenues generated in the future.
(b) The visibility of such costs is increased.
(c) Individual product profitability can be better understood by attributing all costs to products.
(d) As a consequence, more accurate feedback information is available on the organisation's success or failure in developing new products. In today's competitive environment, where the ability to produce new or updated versions of products is paramount to the survival of an organisation, this information is vital.

In order to compete effectively in today's competitive market, organisations need to redesign continually their products with the result that product life cycles have become much shorter. The planning, design and development stages of a product's cycle are therefore critical to an organisation's cost management process. Cost reduction at this stage of a product's life cycle, rather than during the production process, is one of the most important ways of reducing product cost.

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What are life cycle costs?

A product's life cycle costs are incurred from its design stage through development to market launch, production and sales, and finally to its eventual withdrawal from the market. The component elements of a product's cost over its life cycle could therefore include the following.

Research & development costs

•  Design
• Testing
• Production process and equipment

The cost of purchasing any technical data required

Training costs (including initial operator training and skills updating)

Production costs

Distribution costs. Transportation and handling costs

Marketing costs

• Customer service
• Field maintenance
• Brand promotion

Inventory costs (holding spare parts, warehousing and so on)
Retirement and disposal costs. Costs occurring at the end of a product's life

Traditional cost accumulation systems are based on the financial accounting year and tend to dissect a product's life cycle into a series of 12-month periods. This means that traditional management accounting systems do not accumulate costs over a product's entire life cycle and do not therefore assess a product's profitability over its entire life. Instead they do it on a periodic basis. Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle.

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Features of Product Life Cycle

Life cycle costs can apply to services, customers and projects as well as to physical products.
Traditional cost accumulation systems are based on the financial accounting year and tend to dissect a product's life cycle into a series of 12-month periods. This means that traditional management accounting systems do not accumulate costs over a product's entire life cycle and do not therefore assess a product's profitability over its entire life. Instead they do it on a periodic basis.

Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle. Hence the total profitability of any given product can be determined.

The major characteristics of product life-cycle concept are as follows :

(i) The products have finite lives and pass through the cycle of development, introduction, growth, maturity, decline and deletion at varying speeds.

(ii) Product cost, revenue and profit patterns tend to follow predictable courses through the product life cycle.

(iii) Profit per unit varies as products move through their life cycles.

(iv) Each phase of the product life-cycle poses different threats and opportunities that give rise to different strategic actions.

(v) Products require different functional emphasis in each phase-such as an R&D emphasis in the development phase and a cost control emphasis in the decline phase.

(vi) Finding new uses or new users or getting the present users to increase their consumption may extend the life of the product.

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What is Life Cycle Costing?

Keyword: Life cycle costing is the accumulation of costs over a product's entire life.
The practice of obtaining over their life time, the best use of physical asset at the lowest cost of entity. The definition is brought you by CIMA. Life Cycle Costing is a market based approach to cost for a product.

Life cycle costing is different to traditional cost accounting system which report cost object profitability on a calendar basis i.e. monthly, quarterly and annually. In contrast life cycle costing involves tracing cost and revenues on a product by product bases over several calendar periods.

Phases in the Life Cycle of a Product

Every product goes through a life cycle. A product life cycle can be divided into five phases.

• Development 

• Introduction 

• Growth 

• Maturity

• Decline

(a) Development. The product has a research and development stage where costs are incurred but no revenue is generated.

(b) Introduction. The product is introduced to the market. Potential customers will be unaware of the product or service, and the organisation may have to spend further on advertising to bring the product or service to the attention of the market.

(c) Growth. The product gains a bigger market as demand builds up. Sales revenues increase and the product begins to make a profit.

(d) Maturity. Eventually, the growth in demand for the product will slow down and it will enter a period of relative maturity. It will continue to be profitable. The product may be modified or improved, as a means of sustaining its demand.

(e) Decline. At some stage, the market will have bought enough of the product and it will therefore
reach 'saturation point'. Demand will start to fall. Eventually it will become a loss-maker and this is
the time when the organisation should decide to stop selling the product or service.

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