Different types of partners in a partnership business

Different types of partners in a partnership business are as follows:

1. A secret partner is active in the business but unknown to the public. A silent partner is inactive in the business but is known to the public as a partner.


2. A limited partner contributes cash or property to the business but may not take part in operations. A general partner is a fully active partner. A silent partner is inactive in a general partnership but is known to the public. A secret partner is active in the partnership but is unknown to the public. A dormant partner is neither active in the partnership nor known to the public.


3. In a general partnership, all partners share liability for debts and torts. In a limited partnership, the limited partner is not bound by the obligations of the partnership and is not liable beyond the limited investment.


4. In a limited partnership, only the limited partners have limited liability, but they cannot participate in management. In an LLC, all members have limited liability and may participate in management.


5. The limited partners enjoy limited liability and can also participate in management.

Advantages and limitations of Inter-firm comparison

The main advantages of inter-firm comparison are :–
1.  Such a comparison gives an overall view of the industry as a whole to its members– the present position of the industry, progress made during the past and the future of the industry. 

2.  It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial measures may be taken.
3.  It ensures an unbiased specialized reporting on particular problems of the concern.
4.  It develops cost consciousness among members of the industry.
5.  It helps Government in effecting price regulation.
6.  It helps to improve the quality of products manufactured and to reduce the cost of production. It is thus advantageous to the industry as well as to the society.
 

Limitations of inter-firm comparison
The following are the limitations in the implementation of a scheme of inter-firm comparison :
1.  Top management feels that secrecy will be lost.
2.  Middle management is usually not convinced with the utility of such a comparison.
3.  In the absence of a suitable Cost Accounting System, the figures supplied may not be reliable for the purpose of comparison.
4.  Suitable basis for comparison may not be available.

Conceptual Design Principles of Cost Management Systems

Conceptual Design Principles of Cost Management Systems

Cost Principles
• Identify costs of non-value-added activities to improve use of resources.
• Recognize holding costs as a non-value-added activity traceable directly to a product.
• Significant costs should be directly traceable to management reporting objectives.
• Separate cost centers should be established for each homogeneous group of activities consistent with organizational responsibility.
• Activity-based cost accumulation and reporting will improve cost traceability.
• Separate bases for allocations should be developed to reflect causal relations between activity costs and management reporting objectives.
• Costs should be consistent with the requirement to support life-cycle management.
• Technology costs should be assigned directly to products.
• Actual product cost should be measured against target cost to support elimination of waste.
• Cost-effective approaches for internal control should be developed as a company automates.

Performance Measurement Principles
• Performance measures should establish congruence with a company’s objectives.
• Performance measures should be established for significant activities.
• Performance measures should be established to improve visibility of cost drivers.
• Financial and nonfinancial activities should be included in the performance measurement system.

Investment Management Principles
• Investment management should be viewed as more than the capital budgeting process.
• Investment management decisions should be consistent with company goals.
• Multiple criteria should be used to evaluate investment decisions.
• Investments and attendant risks should be considered interrelated elements of an investment strategy.
• Activity data should be traceable to the specific investment opportunity.
• Investment management decisions should support the reduction or elimination of non value-added activities.
• Investment management decisions should support achieving target cost.
Gratitude:Callie Berliner and James A. Brimson, eds., Cost Management for Today’s Advanced Manufacturing :

Elements of Cost Management Systems

A  cost management  system  is  composed of  three primary elements: 

1. Motivational elements:

• Performance measurements
• Reward structure
• Support of organizational mission and competitive strategy

2. Information  elements:

• Support of budgeting process
• Emphasis on product life cycle
• Differentiation of value–added and non–value–added activities
• Support of cost reduction initiatives
• Focus on cost control
• Assessment of core competencies and analysis of make–or–outsource decisions

3. Reporting  elements: 

• Preparation of financial statements
• Provision of details for responsibility accounting system

The elements as a whole must be internally consistent, and the  individually selected elements must be consistent with  the strategies and missions of  the subunits. Different aspects of  these elements may be used  for different purposes. For example, numerous measures of performance can be specified, but only certain measures will be appropriate for specific purposes

6 primary goals of Cost Management Systems

Crossing all functional areas, a cost management system can be viewed as having  six  primary  goals:  

(1)  develop  reasonably  accurate  product  costs,  especially through  the use of cost drivers (activities  that have direct  cause-and-effect  relationships with costs); 

(2) assess product/service life-cycle performance; 

(3) improve understanding  of  processes  and  activities;  

(4)  control  costs;  

(5) measure  performance; and 

(6) allow  the pursuit of organizational strategies.

 

A cost management system (CMS) consists of a set of formal methods developed for planning and controlling an organization’s cost-generating activities  relative  to its short-term objectives and long-term strategies. Business entities face two major challenges: achieving profitability  in  the  short  run and maintaining a  competitive position in the long run. An effective cost management system must provide managers the information needed to meet both of these challenges.

Information requirements for organizational  success  in  the  short  run and  long  run. The  short-run  requirement  is that  revenues  exceed  costs—the  organization must make  efficient  use  of  its  resources  relative  to  the  revenues  that  are  generated.  Specific  cost  information  is needed and must be delivered in a timely fashion to an individual who is in a position to influence the cost. Short-run information requirements are often described as relating to operational management.

Meeting the long-run objective, survival, depends on acquiring the right inputs from  the  right  suppliers,  selling  the  right mix of products  to  the  right customers, and using  the most appropriate  channels of distribution. These decisions  require only  periodic  information  that  is  reasonably  accurate.  Long-run  information  requirements are often described as relating to strategic management.

The information generated from the CMS should benefit all functional areas of the entity. Thus,  the  system  should  “improve the quality, content, relevance, and timing of cost information that managers use  for short-term and  long-term decision making.”

First and foremost, a CMS should provide the means to develop accurate product or  service costs. This  requires  that  the  system be designed  to use cost driver information  to  trace costs  to products and services. The system does not have  to be the most accurate, but it should match benefits of additional accuracy with expenses of achieving additional accuracy. Traceability has been made easier by improved  information  technology,  including bar coding.

4 components of Management Control System

One of  the managerial  functions  requiring  information  is control,  the MIS  is part of  the management control system (MCS). A  control system has  the  following  four primary components:

1. A detector or sensor, which is a measuring device that identifies what is actually happening  in  the process being controlled.

2. An assessor, which is a device for determining the significance of what is happening. Usually, significance is assessed by comparing the information on what is  actually happening with  some  standard or  expectation of what  should be happening.

3. An effector, which is a device that alters behavior if the assessor indicates the need for doing so. This device is often called “feedback.”

4. A  communications network, which  transmits  information between  the detector and the assessor and between the assessor and the effector.

It  is  through  these  system  elements  that  information  about  actual  organizational occurrences is gathered, comparisons are made against plans, changes are effected when necessary,  and  communications  take place  among  appropriate parties.  For example, source documents (detectors) gather information about sales that is compared to the budgets (assessor). If sales revenues are below budget, management may issue (communications network) a variance report (effector) to encourage the sales staff to increase volume.
 

However, even given  the same  information, different managers may  interpret it differently and respond accordingly.  In  this respect, a management control system  is not merely mechanical,  it  requires  judgment. Thus, a management control system may be  referred  to as a black box: an operation whose exact nature can not be observed.

Regardless of  the specific actions  taken, a management control system should serve to guide organizations in designing and implementing strategies such that organizational goals and objectives are achieved.

What are FMSs and CIMs?

Flexible Manufacturing Systems and Computer-Integrated Manufacturing

Many manufacturers have changed their basic manufacturing philosophy in the past few decades. Causes of  change  include:  (1) automated equipment and a  cellularplant layout, (2) computer hardware and software technology, and (3) new manufacturing systems and philosophies such as JIT and activity-based management.

Traditionally, most manufacturing firms employed long production runs to make thousands of identical models of the same products; this process was encouragedby the idea of economies of scale. After each run, the machines would be stoppedand a slow and expensive setup would be made for the next massive production run to begin. Now, an entirely new generation of manufacturing known as flexible manufacturing systems (FMSs) is being developed.

An FMS involves a network of robots and material conveyance devices monitored  and  controlled by  computers  that  allows  for  rapid production  and  responsiveness  to  changes  in production needs. Two or more FMSs  connected  via  a host computer and an information networking system are generally referred to as computer-integrated manufacturing (CIM). The dimensions  of  a  traditional manufacturing  system with  an  FMS. Although  an  FMS  is typically associated with short-volume production runs, many companies  have also begun to use CIM  for high-volume  lines.

Types of Times Estimates

To take these uncertainity into account, three kinds of times estimates are generally obtained. These are:

The Optimistic Time Estimate

This is the estimate of the shortest possible time in which an activity can be completed under ideal conditions. For this estimate, no provisions for delays or setbacks are made. We shall denote this estimate by to.

The Pessimistic Time Estimate

This is the maximum possible time which an activity could take to accomplish the job. If everything went wrong and abnormal situations prevailed, this would be the time estimate. It is denoted by tp.

The Most Likely Time Estimate

This is a time estimate of an activity which lies between the optimistic and the pessimistic time estimates.

What is MRP-II (Material requirements planning)?

A material requirements planning (MRP) system is a computer based inventory information system which is used to plan and control raw material and component parts inventories.

 Pre-requisites for successful operation of MRP:

1. Strict adherence to the schedule : The successful operation of MRP system requires a strict adherence to the latest production and purchasing schedules. Workers must be educated to understand the importance of schedule adherence, and controls should be in place to ensure this adherence.
2. Accurate data base : Data accuracy is vital to the system. If a plan is based on inaccurate data it may be impossible to adhere to the schedule. For example, if the bill of materials file is not updated to reflect any changes in product composition it will be impossible to adhere to the schedule.

MRP II is the extension of MRP I

When the scope of MRP-1 is developed further which includes
1. Planning of raw material
2. planning of component & sub- assemblies
3. Compute the other resources e.g. machine or labour capacity
4. to create a full integrated plan for management

then it is known as Manufacturing resources planning ( MRP-II)

MRP II (also written MRP-2 ) adds the MRP schedule into a capacity planning system and then builds the information into a production schedule. It is also seen as a link between strategic planning and manufacturing control. The sequence of events is as follows :

A manufacturing, plan is developed based upon inputs from purchasing & production. Adjustments may be necessary to allow for production rates. Possible inventory levels in seasonal trades & the size of the workforce. The manufacturing plan leads into a detailed master production schedule which is akin to the original philosophy of MRP already outlined.

If correctly applied, MRPII provides a common data base for the different function units such as manufacturing, purchasing and finance within a firm.

What are needed to operate MRP successfully?

A material requirements planning (MRP) system is a computer based inventory information system which is used to plan and control raw material and component parts inventories. Like all computer-based information system, MRP systems can be divided into following:
i) Pre-requisite information
ii) System input
iii) System processing,
iv) System output.

 

Data requirements to operate material requirement planning system:

1. The master Production schedule: This schedule specifies the quantity of each finished unit of products to be produced, and the time at which each unit will be required.
2. The Bill of material file: The bill of material file specifies the sub-assemblies, components and materials required for each finished good.
3. The inventory file: This file maintains details of items in hand for each sub-assemblies, components and materials required for each finished goods.

4. The routing file: This file specifies the sequence of operations required to manufacture components, sub-assemblies and finished goods.
5. The master parts file: This file contains information on the production time of subassemblies and components produced internally and lead times for externally acquired items.

Difference between Financial accounting and management accounting

Financial accounts detail the performance of an organisation over a defined period and the state of affairs at the end of that period.

Management accounts are used to aid management record, plan and control the organisation's activities and to help the decision making process.

Limited liability companies must, by law, prepare financial accounts.

There is no legal requirement to prepare management accounts.

The format of published financial accounts is determined by local law, by International Accounting Standards and International Financial Reporting Standards. In principle the accounts of different organisations can therefore be easily compared.

The format of management accounts is entirely at management discretion: no strict rules govern the way they are prepared or presented. Each organization can devise its own management accounting system and format of reports.

Financial accounts concentrate on the business as a whole, aggregating revenues and costs from different operations, and are an end in themselves.

Management accounts can focus on specific areas of an organization's activities. Information may be produced to aid a decision rather than to be an end product of a decision.

Most financial accounting information is of a monetary nature.

Management accounts incorporate non-monetary measures. Management may need to know, for example, tons of copper produced, monthly machine hours, or miles traveled by salesmen.

Financial accounts present an essentially historic picture of past operations.

Management accounts are both an historical record and a future planning tool.

Quality of Information to the Management

Good information should have at least 3 Rs (Relevant, Reliable, Recent) and also complete, accurate, clear, it should inspire confidence, it should be appropriately communicated, its volume should be manageable, it should be timely and its cost should be less than the benefits it provides.

Let us look at those qualities in more detail.
(a) Relevance. Information must be relevant to the purpose for which a manager wants to use it. Report must be  ' to the point' and contain relevant information which only needed.
(b) Completeness. An information user should have all the information he needs to do his job properly. If he does not have a complete picture of the situation, he might well make bad decisions.

(c) Accuracy. Information should obviously be accurate because using incorrect information could have serious and damaging consequences. There is no need to go into unnecessary detail for pointless accuracy.
(d) Clarity. Information must be clear to the user. If the user does not understand it properly he cannot use it properly. Lack of clarity is one of the causes of a breakdown in communication. 

(e) Confidence. Information must be trusted by the managers who are expected to use it. However not all information is certain. Some information has to be certain, especially operating information, e.g, related to a production process. Strategic information, e.g relating to the environment, is uncertain. 

(f) Volume. An enormous mountain of information, even if it is all relevant, cannot be handled. Reports to management must therefore be clear and concise and in many systems, control action works basically on the 'exception' principle.

(g) Timing. Information which is not available in time may serve no purpose. Information prepared too frequently also can be a serious disadvantage. So least information are well in time than more out of time.
(h) Cost. Information should have some value, otherwise it would not be worth the cost of collecting and filing it. The benefits obtainable from the information must also exceed the costs of acquiring it, and whenever management is trying to decide whether or not to produce information for a particular purpose a cost/benefit study ought to be made.