Cost Accounting: fundamental principles and functions

 Q. Define cost accounting. Explain the fundamental principles and functions of cost accounting.

VK

Ans. Meaning of Cost Accounting: Cost Accounting refers to the process of accounting for costs incurred in manufacturing, trading or services rendering types of businesses. Hence, cost accounting is the most systematic and scientific branch of accounting that deals with identification, analysis, recording, summarizing and communication of current and prespective cost. 

Cost Accounting is a branch of accounting which deals with accumulation (collection), classification, recording, analysis, interpretation, reporting and control of current and prospective costs. It explains the cost of production of a product or a service according to its components per unit as well as total. Cost accounting is a specialised branch of accounting which involves classification, accumulation, analysis, assignment and control of cost. The rules and principles of cost accounting have developed over a period of time by experience. The cost accounting need arouse because of the limitation of financial accounting.

Cost Accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products and services and for the presentation of suitably arranged data for the purpose of control and guidance of management. It includes the calculation of cost of every product, job, section, department, process, service. It is the method of accounting for cost. 

Fundamental Principles of Cost Accounting: The following are the main principles of cost accounting:

1. A Cost should be related to its cause: A cost should be related as closely as possible to its cause for recovering the cost of product, job, process or cost centre. The effect of cost of an item on the various products, departments or processes should be established before it is charged to that product or cost centre. The cost are collected and analysed according to their nature and are to be allocated or apportioned on the basis of cause relationship. For example, rent of the factory building should be charged from all the production departments on the basis of the area occupied by each production department. 

2. A Cost should be Charged only after its Incurrence: While calculating the cost of individual units those costs which have been incurred (actually or nationally) should be taken into account. As for example selling overheads should be charged only to those units which have been sold and all those units which are still in stock should not be charged with selling overheads. Similarly normal loss should be only absorbed by those units in which it has taken place and not in those units which are yet to be produced.

3. Abnormal Cost should be Excluded from Costing: A loss due to accident, fire, theft, riots, negligence is the abnormal loss. Abnormal losses should not be charged to the production cost as these are not related to production. The inclusion of abnormal loss in the cost of production would distort cost figures ans mislead the management as to the working results of the undertaking. For this reason only normal cost incidental to production is charged to product, job or cost centre and not the abnormal losses or abnormal cost. This is the reason abnormal losses are transferred to costing profit and loss account. 

4. Past Costs are not charged to Future Periods: A past cost means a cost from which no more benefit is to accrue. A cost item which was incurred in the year 2015 is not to be charged from the cost of production from the product of the year 2016. It will unnecessary distort the cost of production and it may lead to wrong decision by the management regarding the product, cost centre or efficiency of the department. But if there is an item of expenditure in the past, the benefit of which will accure in the future, then it should be charged in future period as a deffered revenue expenditure as for example expenditure on advertisement. The items of past cost if remain uncharged from the product of that period then it should be transferred to costing profit and loss account with a note stating reason. 

5. The concept of Conservatism has no place in Cost Accounting: Cost accounts should be prepared with facts without any biasness or with a secret purpose. The closing stock is valued at cost price or market price, whichever is less in financial accounts while in cost accounts stock is valued at cost only. There is no creation of secret reserve in cost accounts as in the case of financial accounts. If principle of conservation is asopted in cost accounting then the cost of production will not be comparable and purposeful. 

6. Principle of Double Entry should not be Applied in Cost Accounting: The cost ledgers and other cost control accounts are kept on double entry principles. Costing, however requires a greater use of cost sheets and cost statements for the purpose of cost ascertainment, cost control and reporting to management.

Functions/Objectives of Cost Accounting: The main objectives of cost accounting may be:

1. To Ascertain Cost: With the help of cost accounting cost per unit of a product, job or process is calculated. For calculating cost of the product or service various methods like unit costing, contract costing, job costing etc. are applied. The technique of ascertaining the cost is known as costing. 

2. Cost Control: Cost Control is reducing the cost of production by controlling the wastage of material, labour and other expenses. Cost control helps to improve the efficiency of organisation as a whole. For cost control bugetary control, standard costing and responsibility accounting are the main tools applied by the management.

3. Determination of Selling Price: Cost accounting has the main object to help in fixation of selling price of the product or service not only in normal condition but also under various stressing market conditions. To fix the selling price various factors like cost of production, market situation, business cycle, govt. policies, competition, change in fashion, income level of the people do play their role. Cost accounts helps to provide necessary information to take decisions under conditions like depression, export, or exploring the new market etc. Minimum selling price can be decided with the availability of proper cost data.

4. Ascertainment of Profitability: Profitability means capacity to earn profits of a department, section, product, job or a process or service. This capacity can be judged with the help of cost data provided by cost accounting. The expected profits are compared with the actual profits to know the reasons of difference, if any. This helps to analyse the efficiency of each segment of the organisation as well as the whole of the organisation. Before introduction of a new product, design, method, machine or operating Market profitability analysis helps to set targets and performance measurement. Thus, the object of cost accounting is to measure the profitability of the activities carried out or planned. Profit making capacity should be established.

5. Provides a base for setting business policies: Cost accounting helps to provide accurate cost information. These cost data help the management in taking short-term and long-term business policies to be followed. Cost accounts help in various decision making processes which may be very crucial to the organisation like: 

(a) To introduce new product or new method of production or to explore a new market.

(b) How to use idle capacity if there remains any?

(c) Deciding the sales mix to maximise the profits or to maximise the use of available factors of production.

(d) Make or buy decision regarding a product 

(e) Exporting goods in a foreign market even at below the cost of production or not.

(f) Closing down the plant or to contribute production even in losses.

(g) Replacement of old machinery with the new model or not. 

6. Inter-firm Comparison: Cost accounting helps in making comparisons of cost or of profits of one firm with other firm operating in the same industry. For the inter-firm comparison there should be the application of uniform costing system within that industry. 

7. Control on Wastage: Cost accounting can explain the source of wastage in the statement of cost (i.e. material, labour and other expenses) and thus can save the national factors of production.

8. Minimum Capital in Stocks: Cost accounting through various techniques like various levels of stock, analysis of slow moving material, continuous stock taking can decide the objective to minimise the investment of capital in stocks of raw material, work-in-progress or finished goods.

9. Effective Information System: The objective of cost accounting is to prepare regular reports regarding material, labour and other expenses and to communicate those reports at the effective level of management to make them effective. 

10. Internal Audit System: The objective of cost accounting is to develop internal audit system which may help in effective working of different departments of the organisation.

SBP

Ans. MEANING OF COST ACCOUNTING: Cost Accounting is a specialised branch of general accounting in which detailed and systematic information related to cost of goods and services are maintained in such a way as to obtain detailed information about total and per unit cost and guidance for the analysis and control of cost.

Add definition here.

Conclusively, cost accounting may be defined as the body of concepts, methods, techniques and procedures used to compute, analyse or estimate the costs, profitability and performance of individual products, services or departments and other segments of an enterprise.

FUNDAMENTAL PRINCIPLES OF COSTING

The fundamental principles of costing are as follows:

1. Cost is related to its cause. A cost is related as closely as possible to its cause. Rent of the factory, for instance cannot be charged to office expenses, repairing charges of a machine cannot be charged to some other machine, and in the same way, a foreman's salary cannot be charged to one single unit, if many more units are produced in a department supervised by that foreman. The reason in all the above cases is that the cost is related to its cause.

2. Cost is charged after it is incurred. If a cost is not incurred either actually or notionally, it cannot be charged to a cost centre. For instance, a cost unit is not charged with selling costs while it is still under manufacture in the factory, as selling costs would occur only when the cost unit is finished in the factory and is sold. Similarly, normal loss or wastage is to be borne by the units of which it is a loss or wastage. Such a loss is not imposed on those units which are yet to pass the point of loss.

3. Abnormal costs are excluded from costing. A cost to meet the loss caused by'fire, riot, theft or accident is an abnormal cost. This cost is not charged to production as it is not related to production part. The presence of abnormal cost in costing would only distort cost figures and mislead the management for the purposes of cost control and decision-making. Similarly such financial expenses as have little or no relationship with costing, are also considered abnormal and are not charged to costing.

4. Past costs are not charged to future periods. A past cost is one from which no more benefit is to accrue. If, however, a past cost is such the benefit of which is to accrue in a future period also, as for instance, advertisement expense being treated as deferred revenue expenditure, then it is not a past cost and it can be charged during the period of benefit.

5. The concept of conservatism has no place in costing. The closing stock in financial accounting is valued at cost price or the market price, whichever is less, but in costing, the closing inventory and stocks are valued at cost only. There is a value attached to the concept of conservatism in financial accounting but it is not so in costing. Cost statements are required to be prepared so as to state facts with no known bias. If, however, a contingency is to be taken into consideration in cost accounting, it should be so stated and shown distinctly.

6. Accounting for cost is based on Double-entry Principle. The Cost ledgers and other cost control accounts are kept on the double-entry principle-the same principle which is adopted so exhaustively in financial accounting. Costing, however, requires a greater use of cost-sheets and cost statements for the purpose of cost ascertainment, cost control and guidance to management.

FUNCTIONS OR OBJECTS OF COST ACCOUNTING

The main functions or objects of cost accounting are as follows :

1. Cost ascertainment. The primary objective of cost accounting is to determine the cost of production of every unit, job, operation, process, department or service. The technique of ascertaining cost is known as 'Costing. In order to determine cost, all the expenses are accumulated, classified and analysed. It not only determines the cost at completion stage but also determines cost at various stages of production.

2. Cost control. Cost control is one of the important functions of cost accounting. To measure the efficiency of the organisation or of the cost centres, the various operations involved in the manufacture of products are to be carefully studied. Budgets and standards for the consumption of materials, use of labour, and for expending the overhead are to be set and compared with the actual performances. The variances arising out of the comparison so made tell the tale whether the cost is within control or not.

3. Cost reduction: Cost reduction refers to real or genuine savings through permanent reduction in cost of a product or service without impairing the quality and affecting its purpose for which it was intended to be used. In the competitive market situations, it is utmost important for the organisations to look for activities and search for new technology through research and development activities that can reduce the cost of a product. Cost reduction can be attainable in almost all the areas of business activities. The area covered for cost reduction are like product design, plant layout, production methods, material substitution, reduction in wastages, innovation marketing strategies, purchasing and material control etc.

4. Ascertainment of profitability: It is the object of cost accounting to ascertain the profit making capacity of that activity planned or being carried out and to compare the actual profits made with their profitabilities. Difference is analysed and efforts are made to earn the maximum profit as per capacity.

 

5. Determination of selling price: The supply price or the tender price of a product depends upon its total cost plus a margin of profit which the businessman wants to make depending upon the inter-play of factors of demand and supply. Cost accounting provides detailed information about the composition of total cost for the determination of the selling price. It also provides information to decide the extent to which the prices can be reduced to meet the challenge arising out of competition, by differentiating the costs into variable and fixed cost. Similarly, in the event of depression or recession, the cost accountant can guide as to which expenses can be curtailed, to reduce the cost of production and thus to decide the minimum selling price.

6. Providing a basis for business policy and decision-making. The objective of cost. account- ing is to help the management in the formulation of business policy and in decision-making. The gross-profit analysis, the cost-volume-profit relationship, the break-even point of sales, and the differential costing method, etc., help the management in profit-planning and in deciding crucial matters like (a) introduction or discontinuance of a product; (b) utilization of idle plant capacity; (c) selection of most profitable sales-mix; (d) dumping of goods in a foreign market at a cheaper price; (e) make or buy; (f) purchase of new plant or continuance with the old plant at the cost of heavy repairs, etc.

7. Compliance to statutory requirements: The Central Government, under Section 209(1) (d) of the Companies Act, has made it compulsory for 47 industries to maintain cost accounts. Thus, compliance to statutory requirements is also one of the objectives of cost accounting.

Define cost accounting. Explain the fundamental principles and functions of cost accounting.

Advantages and Disadvantages of Foreign Direct Investment

 Q. Describe in detail the advantages and disadvantages of Foreign Direct Investment.

Ans. In simple words, it is the investment other than the domestic investment. It is made by foreigners. In Foreign Direct Investment, the control of the company is in foreign hands. For example, if a company in USA directly invests money in an Indian company and keeps the control in its own hands in form of majority stake, this is said to be Foreign Direct Investment. Foreign Direct Investment means injection of the funds into an enterprise by a company having its origin and operation in a different country. Therefore, as a result of Foreign Direct Investment, the investors invests funds in the company directly and as a result of this ownership, the owner is granted management rights. Also the investor gets voting rights. Generally, Foreign Direct Investment refers to the Investment of foreign assets into domestic goods and services.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT: Following are the major advantages of Foreign Direct Investment in the host country:

1. Inflow of funds: Foreign Direct Investment causes inflow of the funds into the host country. These funds are generally in form of foreign exchange. Therefore FDI helps in bringing foreign exchange to the host country. Due to this reason vious countries are opening up their economies and relaxing FDI norms.

2. High technology: Foreign Direct Investment helps in bringing latest technology to the host country. The companies that establish their operations in different countries are usually very big in size and therefore are very high tech.

3. New markets and marketing channels: Foreign Direct Investment brings in dual benefits of exploring new markets to the parent company and also gives new markets and the marketing channels to the host country company

4. Employment generation: As a result of Foreign Direct Investment, a lot of employment is generated in the host country. The companies usually employ a lot of skilled as well as unskilled labours,

5 Capital formation: As the company bringing in Foreign Direct Investment invests its money in the assets, goods and services of the host.country, a lot of capital is generated and therefore the process of capital formation is accelerated.

6. Increased tax revenues: The government of the host country is also benefitted because the company establishing its business operations in the host country pays taxes on the income earned in such country to the government of that country. Therefore these companies are a source of government revenues.

7. High quality products: Generally as a result of Foreign Direct Investment there is an increase in the competition in the host country. As a result of this increased competition, the high quality products are ensured.

8. Cheap prices: Due to the use of latest technology and the economies of scale, the goods are offered at cheap prices to the customers. Therefore, the customers are benefitted.

DISADVANTAGES OF FOREIGN DIRECT INVESTMENT: Following are the major disadvantages of Foreign Direct Investment:

1. Foreign Control: As a result of Foreign Direct Investment, the control and the management are vested in the foreign hands. As a result of this the domestic company becomes a puppet in the hands of the foreign country. 

2. Harmful to domestic industry: The foreign countries bring in the latest technology in the host country. Also due to large scale operations, the big companies enjoy economies of scale and hence sell goods at cheap prices. The domestic industry cannot fight the tough competition that these big companies give to them.

3. Outside management and control: As a result of Foreign Direct Investment, the management and the control are vested in foreign hands. Therefore, all the decisions are taken by the foreigners. There is a dilution of control of the host country. 

4. Repatriation of profits: The company that establishes its business in the hist country repatriate a part of its profit to the host country. As a result, there is an outflow of funds from the host country. 

5. Dilution of Control: Foreign Direct Investment results in dilution of control. As a result of FDI, the control of the companies goes from host country to the foreigners.

Describe in detail the advantages and disadvantages of Foreign Direct Investment.

Scope of Modern Marketing Research

 Q. Discuss in detail the scope of modern marketing research.

Ans. Marketing research is more comprehensive, it covers all marketing functions relating to product, price, promotion and distribution. Marketing policies, programmes and strategies are guided by it. There is hardly any area in marketing where research is not possible or needed. The area of marketing research can be classified as: 

I. Problem Identification Research: It helps to identify problems that are exist or are likely to arise in the future. This type of research provides information about the marketing environment and helps to diagnose a problem. Problem identification research covers the following areas:

(i) Market Share Research

(ii) Market Potential Research

(iii) Market Features Research

(iv) Market Image Research

(v) Sales Analysis Research

(vi) Business Trend Research

II. Problem Solving Research: Once a problem is identified, problem solving research is undertaken to arrive at some solution. The findings of problem solving research are used in making decisions that will solve specific marketing problems. Problem solving research covers the following areas:

(i) Product Research

(ii) Pricing Research

(iii) Promotion Research

(iv) Segmentation Research

(v) Distribution Research

Marketing Research can be applied in almost every aspect of marketing. A wide range of marketing activities are covered by the marketing research. The scope of marketing research is very wider but it may be summarised in following manner: 

1. CONSUMER RESEARCH: Consumer Research is concerned with the studies of consumer behaviour. It probes into different factors such as economic, sociological and psychological that influence the consumers in their decision to buy the product. Generally, consumer research is in the form of attitude studies which offer clues in distinguishing the appeals of competitive brands to certain type of customers.

Consumer research can also provide consumer suggestions when they feel certain deficiency or when they would like to have some improvement in the product or service.

Consumer research may be undertaken not only at macro level but also at different segment level. Consumer research generally covers the following areas:

(i) To know the demographic features of both present and potential consumers.

(ii) To identify the needs and expectation level of consumers regarding product or service.

(iii) To know the buying motives and buying habits of the consumers.

(iv) To determine the level of consumer satisfaction.

2. MARKET RESEARCH: Market research is the study of markets with regard to certain products of a company. The market research involves analysis of market potential for existing products and estimating demand for new products, sales forecasting, characteristics of product markets, analysis of sales potentials and studies of market trends. 

Market Research develops market and sales potentials and sales quotas by determining how much of a commodity in a given market is expected to be sold. It helps in determining the sales territories of salesmen, distributors and dealers.

Market Research involves investigation of various elements of consumer demand, such as total demand, relative demand and replacement demand. Market research provides answer to the question, 'who may buy and who is buying the product. 

Market Research collect the information on following aspects:

(i) Forecasting of sales and demand

(i) Nature and extent of competitive forces

() Geographical location of markets.

(iv) Strength's and weaknesses of the firm and the competitors

(v) Assessment of government policies on the marketing efforts of the firm.

3. PRODUCT RESEARCH: Product Research refers to the efforts made to have knowledge about new and existing product, to meet the specific requirements of consumers regarding quality, design, shape, size, style, durability, purity, packaging, branding, etc. It aims at finding out new product or combination of products. On the basis of product and packaging research, a business firm can develop suitable market segment strategies. It may also emphasized that the product research is concerned with every stage of product life cycle viz. introduction, growth, maturity and decline. 

The major area of product research are: 

(i) Evaluating the product performance of the firm in terms of turnover, profits, market segments and competition.

(ii) Market testing for new products of the firm.

(iii) Research on consumer acceptance of firm’s products and services as compared to similar products of competitors.

(iv) Research on development of new products.

(v) Evaluation of new competitive products.

(vi) Appraisal of product diversification and simplification plans.

(vii) Determining product modifications on the basis of their quality, design, varieties, colours and appearance, etc.

(viii) Research on causes and extent of consumer dissatisfaction with firm’s products when sales are rapidly declining.

4. SALES RESEARCH: Sales Research covers the problems relating to the sales of products of the firm. It examine various sales outlets or sales territories to find out sales potentials to improve the existing level. Such a research can be product wise in addition to the overall performance. Sales research helps in determining the effectiveness of the sales force and identifying specific factors that may improve its performance. Sales research can be used:

(i) For measuring sales performance in terms of volume and profits.

(ii) For determining and revising sales territories and sales quotas.

(iii) For assessing firm’s position in the market in relation to its main competitors.

(iv) For analysing and appraising the sales methods and sales force performance.

(v) For finding out ways and efforts by which sales opportunities can be exploited successfully.

5. PRICING RESEARCH: Pricing Research examine all the questions relating to the consumer’s ability to pay for the products and services. It examine the policies relating to prices, discounts and allowances.

The areas of pricing research are:

(i) Testing of alternative price strategies.

(ii) Studying the price policies and strategies of the competitors.

(iii) Determining the suitable price policy for a product.

(iv) Determining price expectation of the consumers in different market areas or segments.

(v) Measuring the consumers reactions and responses to firm’s product prices.

6. PROMOTION RESEARCH: Promotion Researches are conducted to know past trends, present performance and future plans in connection with the promotional policies of the company and its competitors. The research on promotional policies includes advertising research, analysing advertising and selling practices, selection of advertising media, designing advertising copy and testing advertising message, determining sales territories, evaluating present and proposed sales methods, evaluating promotional tools viz., premiums, price-offs, contests, trade shows, exhibitions, etc. 

Promotion research is getting more importance because huge amount is spent by al fe companies on advertising, publicity, personal selling and sales promotion activities. Following are the important areas of promotional research:

(i) Measuring effectiveness of alternative advertising copies designed.

(ii) Media research ie., studying alternative media television, radio, newspapers and magazines, etc.

(iii) Evaluating and selecting the media mix.

(iv) Determining the advertising messages and appeals in the light of research findings.

(v) Identifying the consumer motives, attitudes and emotions to find out the ways and means of motivating the people to increase the sales.

7. DISTRIBUTION RESEARCH: Distribution Research has two major areas namely, channel research and physical distribution research. Channel research is concerned with the problems of middlemen and their solution. Physical distribution research is concerned with the problems of and solutions to storing. transporting and handling of products. Distribution research is concerned with designing of distribution channels, handling and packaging of merchandise, location of warehouses, transportation, inventory control, material handling, etc.

The areas of distribution research are:

(i) Studying the existing and potential channels with evaluation of channel performance.

(ii) Determining optimum inventory levels and storage facilities.

(iii) Making cost analysis of various elements of distribution mix like, warehousing, transporting, inventory control and material handling, etc.

(iv) Determining dealers needs and behavioural factors.

8. POLICY RESEARCH: Policy Research is concerned with the study of the policies in all the areas of an organisation and their post-operative effects on marketing. Marketing as a specialised activity is going to be a grand success if other specialised activities contribute to it. The areas of policy research are:

(i) Studying the existing policies and strategies in production, finance, personnel, etc.

(ii) Determining the best policies to better the results with reduced efforts and investments.

(iii) Studying the marketing policies adopted by the competitors.

(iv) Evaluating the impact of change in firm’s policies on marketing efforts.

9. CORPORATE RESEARCH: Corporate Research is gaining importance because of increasing consumer awareness. Corporate research is conducted on anti-pollution devices, consumerism, attitude of consumers towards package designs and promotional strategies, etc. A company might be interested to see whether the consumers are unintentionally harmed by the company by adding to the pollution of environment, adding to the social costs, excessive expenditure on packaging and promotion, not allowing consumers to know about the product quality and manufacturing, etc. Corporate research covers the following areas:

(i) Studying the awareness among consumers regarding product quality and manufacturing methods.

(ii) Evaluating attitudes of consumers to package designs and promotional strategies, company’s addition to social costs, etc.

(iii) Studying the impact of business on the environment and cost of using anti-pollution devices.

10. MOTIVATION RESEARCH: Motivation Research is qualitative research, that answers, why do people buy or do not buy a particular product. It also studies impact of motives, attitudes and ability to pay on consumer purchase decisions. The areas of motivation research are:

(i) Knowing the consumer reactions in terms of consumer expectations and aspirations.

(ii) Finding out the ways and means which motivate the consumers to buy company’s products or services.

(iii) Identifying the consumer motives, attitudes, emotions and other hidden reasons which influence the buying decisions.

(iv) Knowing the consumer likes and dislikes about the product or service.

From the above description it is clear that the scope of marketing research is very wide. It spans over the marketing activities in the areas of consumer, product, market, sales, pricing, promotion, distribution, business policies, advertising, motivation, etc. In addition to the above broad areas, there are many other areas of marketing research which are also equally important. However, The actual scope of marketing research is determined by the specific needs of the firm.

 Scope of Modern marketing Research 

What do you mean by international advertising ? How international advertising is different from domestic advertising ?

 Q. What do you mean by international advertising ? How international advertising is different from domestic advertising ?

Ans. MEANING OF INTERNATIONAL ADVERTISING: The advertising activities undertaken in different nations constitute international advertising. It aims to inform, persuade and remind target audience of multiple nations about the advertiser’s products and services offered. 

International advertising is a communication process of dissemination of advertising message to the target audience in more than one nation. Sometimes, these advertisements differ from country to country depending upon the domestic environment of different nations. The domestic environment of various nations differs in terms of culture, language, literacy rate, level of economic development, government regulations, consumption pattern, fashion, taste, value system, religion etc. Due to these differences, global companies design different ad-copies for different nations. In short, international advertising is a communication process for disseminating ad-message in different nations which may differ in terms of communication, style, culture, consumption pattern, literacy level, language, value system, level of economic development etc. 

INTERNATIONAL ADVERTISING Vs. LOCAL ADVERTISING: International advertising refers to communication of marketing message to target customers in more than one country. Local advertising here refers to advertising within a country. International advertising is different from local advertising in following ways: 

(1) Coverage: It refers to market area. In local advertising, the coverage area is maximum up to one nation or it can be a few states within a nation, or a few regions with in a nation. But the coverage of international advertising is very wide. International advertising campaign may be undertaken for many nations. Some MNCs like Coca Cola advertise their products in more than 150 nations, so the coverage of international advertising is wider than that of local advertising.

(2) Cultural Diversity: As local advertising is confined to a nation or a part of it, so the problem of cultural diversity is not very serious because within a nation the culture may be same or cultural diversity may not be very significant. But in case of international advertising, the problem of cultural diversity is very serious as advertising campaign is undertaken in many nations which may have altogether different culture. There may be different interpretation and perception of colours, symbols, ad-appeals, body gestures, etc. in case of international advertising due to cultural diversity.

(3) Language Problem: In case of local advertising, the problem of language diversity is not very serious as every nation has its national language/mother tongue. But in case of international advertising, different ad-copies have to be prepared as the language spoken in different nations may be entirely different. For example, although India and China are neighbouring countries, yet their spoken languages are entirely different.

(4) Government Regulations: The problem of inconsistency in government regulations related to advertising arises in case of international advertising. Different nations have different code of conduct for T.V. advertising, print media advertising, etc. Similarly, there are different types of regulations for tobacco-advertisements, alcohol-advertisements, etc But this problem is not very serious in case of local advertising.

(5) Media of Advertising: In local advertising, media with local circulation is selected. It can be cable TV, local newspaper, local radio channels, local T.V. channels. The media with global circulation is not selected for local advertising. But in case of global advertising, media with national or international circulation is selected. Online media is very popular in international advertising because it has global circulation. But at the same time, local media may also be used along with global media for intensive market coverage of global advertising.

(6) Selection of Ad-Message Source: In international advertising, such persons are selected as ad-message source for communicating the message as have global popularity. But in case of local advertising, local persons are selected as ad-message source persons.

(7) Selection of Advertising Agency: In case of international advertising, marketing message is to be communicated in many nations, so such ad-agencies are selected for undertaking advertising campaigns as have global network. In case of local advertising, local ad-agencies are selected for executing ad-campaigns.

(8) Advertising Budget: In case of international advertising, commercial message is communicated to target audience in more than one country. Some MNCs undertake ad-campaigns in many nations which may be even more than 150 nations. So ad-budget in case of international advertising may run in million or billion dollars. But in case of local advertising, the ad-message is communicated within one nation only, so ad-budget involves lesser funds.

(9) Mutual Dependence: The international advertiser may undertake local advertising campaigns along with global ad campaigns so as to meet local market requirements of each nation. But local advertiser never undertakes global ad-campaigns. 

What do you mean by international advertising ? How international advertising is different from domestic advertising ?

What is Secondary Market? Explain major defects of Secondary Market.

 Q. What is Secondary Market? Explain the major problems or defects of Secondary Market.

Ans. MEANING OF SECONDARY MARKET: The market where the outstanding securities are traded is known as secondary market. This market is popularly known as stock market or stock exchange. In this market, the investors can sell and buy shares or debentures of companies. Stock markets deal in equity shares primarily, but the debt instruments like bonds and debentures are also traded in stock market. The growth of primary market depends on the secondary market. It also promotes capital formation. 

Definition: The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as “an established association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.” 

MAJOR PROBLEMS OR DEFECTS OF SECONDARY MARKET: The Indian Secondary Market is suffering from certain defects. These are:

1. Weak Management of Stock Exchanges: The management of stock exchanges is weak and deficient in India. The Indian stock exchanges are governed by the member brokers for their own benefit. The Executive Director has also failed to perform his regulatory functions freely as he is also responsible to the governing body. 

2. Lack of Integration: There are 23 stock exchanges in India which are scattered throughout the country. But these exchanges lack in integration. Due to lack of integration among the stock exchanges, the prices of securities vary considerably between different markets at the same time.

3. Arbitrary Classification of Specified and Non-specified Shares: The Indian stock exchanges have been following an arbitrary practice of classifying listed shares into specified and unspecified groups. This type of arbitrary categorisation favours artificial encouragement to a few large companies and promotes speculation in it. 

4. Ignoring Investors’ Interest: The Indian stock exchanges are ignoring the genuine interests of investors. Complaints made by investors remain uncared and unattended.

5. Domination of Financial Institution: Indian capital market is dominated by financial institutions and big operators. UTI, LIC, GIC, ICICI and 3-4 big operators are the main players in the Indian stock markets. Transactions done by these institutions set the trend in the market. If these institutions buy the stocks, the market gets bullish and on the reverse side, the market becomes bearish because of selling by them. Individual investor has no say in the stock market. 

6. Poor Liquidity: The Indian stock exchanges suffer from poor liquidity. A small number of stocks are traded everyday and most of the times, thin volumes can be seen at the stock exchanges. 

7. Less Floating Stocks: Scarcity of floating stocks in the Indian stock exchanges is another reason for their weaknesses. The shares and debentures offered for sale are a small portion of total stock. Financial institutions do not offer the scrips they have purchased for sale. It creates shortage of floating stocks.

What is Secondary Market? Explain the major defects of Secondary Market.

What do you understand by Auditing ? Briefly explain the advantages and limitations of Auditing.

Q. What do you understand by Auditing ? Briefly explain the advantages and limitations of Auditing. 

Ans. MEANING OF AUDITING: The English word ‘Auditing’ is derived from the Latin word ‘Audire’, which literally mean ‘to hear’. Auditing implies the examination of books of accounts and related documents of an organisation in order to correctly estimate their accuracy, completeness and regularity. Such an examination is carried out by a competent and unbiased person with the help of evidences, documents, information and explanations given to him. For example, if a person goes to a doctor to have himself examined, the doctor, only after a thorough examination of his body, gives his report as to whether he is healthy or not, and if not, what is the ailment he is suffering from. In the same manner, a businessman gets his books of accounts examined by a doctor of books of accounts (i.e the auditor) who, after a thorough examination of the books, gives his report as to whether or not they give a true and fair view of the statement of affairs of the business, and if not then what are the errors, deficiencies and faults in them. 

According to Montgomery, “Auditing is a systematic examination of the books and records of a business or other organisation in order to ascertain or verify and to report upon, the facts regarding its financial operation and the result thereof.” 

Thus, Auditing is a special and critical examination of the books of accounts of a business organisation, conducted by a competent and unbiased person with the help of vouchers, documents, information and explanations provided by the organisation, on the basis of which he can report on the books of accounts for a specific period as to:

(a) Whether the accounts are complete and drawn up according to conventions or not,

(b) Whether the Balance Sheet gives a true and fair view of the financial position of the organisation, and

(c) Whether the Profit and Loss Account depicts the true profits or losses of the organisation or not.

ADVANTAGES OF AUDITING: The various advantages of audit are as follows: 

(I) General Advantages: The general advantages of audit are as follows: 

(1) Knowledge of the Actual Position of the Business: Through an audit the actual position of the business comes to light. The owners of the business are assumed that the results being shown by the Profit and Loss Account and Balance Sheet are correct. 

(2) Detection of Frauds and Errors: During the examination of accounts in the course of the audit, the frauds and errors contained therein, also come to light. This also reduces the chances of frauds and errors being committed in the future. 

(3) Moral Pressure on Employees: When the employees are aware of the fact that their work is going to be examined by an independent person, there is an indirect fear among them, and they do their work with much greater regularly, competency and caution. They do not have to do anything wrong or be negligent. As a result of this the possibilities of frauds and errors being are also reduced. 

(4) Alertness among Employees and Management: Audit makes the employees and the management more alert as it results in healthy criticism of their work. The employees become more disciplined and adopt better policies and procedures. Work gets completed as per schedule. The control exercised through the audit also helps in reducing corruption and judging the honesty and capability of employees.

(5) Proper Valuation of Business: If any business is to be sold or in case a firm is to be converted into a company, then audited accounts are helpful in proper valuation of the business and the valuation of goodwill. In fact, audited accounts are considered more dependable than unaudited ones. 

(6) Increase in Goodwill: Public puts greater faith in accounts of organisations who get their accounts audited, which enhances the goodwill of the business. The increase in goodwill makes it very easy for the organisation to obtain loans from banks and other financial institutions.

(7) Helpful in Receiving Compensation: In case of accidents such as fire, theft, etc., audited accounts are more helpful in receiving compensation from insurance companies.

(8) Helpful in Assessment of Tax: Assessment of tax is much easier on the basis of audited accounts otherwise officers usually define tax liability arbitrarily. Hence, audited accounts are helpful in preventing arbitrary assessment of tax.

(9) Helpful in Getting Declared as Insolvent: When the state of the business becomes so bad, that its liabilities exceed its assets, then the businessmen often wants to be declared as insolvent so that he may be relieved of his liabilities. In such cases, the description provided by audited accounts serves as a better evidence in courts.

(10) Helpful in Formulating Dividend and Bonus Plan: The audit of accounts certifies the truthfulness of the Profit and Loss Account, and as a result, it becomes easier to declare and distribute dividends as well as proper disbursement of bonus is facilitated. This is because the shareholders and the workers consider the audited accounts as correct and have faith in them.

(11) Availability of Valuable Suggestions: The auditor from fime to time keeps on giving

suggestions to his client regarding book-keeping and accountancy, so.as to prevent frauds and errors. Apart from this, the suggestions of the auditor are also useful in other business matters.

(II) Advantages to Various Organisations:

(A) To Sole Proprietorship Concerns: Apart from the above benefits, audit has the following advantages in case of a sole proprietorship concern:

(1) Proof in Court: If in any business dispute any fact is to be established through the books of accounts, then audited accounts can be produced as evidence in courts.

(2) Helpful in Conversion of Business into Partnership: In case a sole proprietor wants to convert his business into a partnership firm, i.e. wants to take in another person as a partner in his business, or himself wants to become a partner in another firm, then audited accounts prove very helpful.

(3) Comparative Study Possible: In case the accounts for a number of years need to be compared, on the basis of the audit reports of the said years the accounts of one year can be compared with those of another. This makes a comparative study of profits and losses or income and expenditure possible.

(4) Helpful in Assessment of Wealth Tax: If the sole proprietor has a lot of assets, and upon his death taxes are to be paid upon his wealth, audited accounts prove very helpful.

(5) Helpful in Assessment of Income Tax and Sales Tax: While determining the liability for income tax and sales tax the concerned officers lay much greater reliance upon audited accounts.

(B) To Partnership Firms: Audit has the following advantages in case of a Partnership firm:

(1) Mutual Confidence among Parties: Normally, all the partners do not participate in the day-to-day running of the business of the firm. If the accounts of the partnership firm have been audited, it helps in building mutual confidence among the partners. In case the firm also has sleeping partners, the audit of the accounts of the firm becomes even more necessary since the sleeping partners do not have complete information about the business of the firm. Hence, audited accounts reduce the chances of disputes at the time of division of profits among the partners, and the work of the firm can proceed without any hindrance.

(2) Helpful in Valuation of Business and Goodwill: In case of admitting a new partner into the business of the firm, or at the time of retirement or death of a partner, the valuation of the business, and the valuation of its assets and liabilities and the goodwill of the firm, is greatly facilitated if the accounts have been audited.

(3) Peaceful Settlement of Accounts: At the time of dissolution of the firm, the assets and liabilities of the firm can be divided among the partners in a peaceful manner on the basis of audited accounts. 

(C) To a Joint Stock Company: The advantages of audit to a joint stock company, apart from the general advantages mentioned above, are as follows:

(1) Confidence among Shareholders in Management: A company has a system of representative management. The management of the company is in the hands of a few selected shareholders (the directors). The remaining shareholders do not participate in the management of the company. Hence, the managers of the company with the help of getting the accounts audited assure the shareholders that they have been working properly and that they have not misused their position in the company in any manner.

(2) Easy Availability of Investment: A company accumulates capital by issuing shares and debentures to the public. The public has faith on audited accounts and it is on the basis of the same that it invests capital in the company.

(3) Helpful in Declaration of Dividends: Since audit certifies the profits of the company, hence at the time of declaration and distribution of dividends no suspicious are aroused. The auditor certifies in his report that the dividend has been declared and distributed at an appropriate rate.

(4) Facilitates Amalgamation, Absorption and Reconstruction of Companies: Whenever, companies are amalgamated, absorbed or reconstructed, then deciding the purchase consideration is greatly facilitated by audited accounts. In such situations, audited accounts are considered to be more reliable.

(D) To other Parties: Audit has the following advantages for other parties:

(1) When any property is placed in a trust for the benefit of a particular person then the trustee, in order to present in front of others that he has done the work of the trust honestly, gets the accounts of the trust audited.

(2) Audited accounts of a business are helpful for an insurance company when the amount of loss is to be estimated in case of a fire. The insurance companies on the basis of the audited accounts of the organisation can find out whether the claim filed by the organisation is correct or not. This becomes very difficult in case the accounts have not been audited.

(3) Banks and other money lending institutions can take decisions as to whether or not to lend money to a particular organisation on the basis of audited accounts.

(4) If any external person wants to purchase an organisation, then audited accounts a very helpful in deciding the purchase consideration. In case the accounts have bee audited and certified they serve as a basis for the purchasers to decide upon t purchase consideration.

(5) Audited accounts are very helpful for government employees. While levying sales tax, income tax, wealth tax and expenditure tax. 

(6) The court, in any case, can also rely upon audited accounts as evidence. One can present one’s case better in front of courts by providing audited accounts as evidence.

LIMITATIONS OF AUDITING: Despite the exercise of utmost diligence, caution and competence on the part of the auditor some frauds and errors in the books of accounts may escape getting detected. Hence, before reaching any conclusions on the basis of the auditor’s report, the following limitations of audit must be kept in mind:

(1) Auditing is not a Conclusive Proof of the Honesty of Employees: If the organisation has a system of internal check and the auditor is satisfied with the working of the same, then he may certify the accuracy of the accounts by resorting to test checking. In a system of internal check also, two or more people can team up and commit fraud, and such frauds may not come to light during the audit. Hence, getting the accounts audited doesn’t certify that the employees of the organisation have worked honestly throughout the period under review. 

(2) Auditing doesn’t Guarantee cent-per-cent Accuracy: Normally, large organisations have a very large number of transactions during the financial year. Hence, it is not possible for the auditor to examine each and every transaction in detail, nor it is viable in terms of wastage of time, effort and money. In such cases the auditor resorts to test checking and hence it is only natural that some frauds and errors may remain undetected.

(3) Minor things are not paid attention: The auditor, during the course of his examination,  gives full attention only to matters related to Profit and Loss Account and Balance Sheet. He does not pay much attention to small transactions or transactions entered into by the lower staff of the organisation. Hence, it is possible that a few irregularities may remain undetected at the lower levels, despite the audit. 

(4) Certain Frauds may Remain Undetected: Despite the exercise of due diligence, competency and efficiency on the part of the auditor, intentional and pre-planned frauds committed by the top managers or other responsible employees of the organisation may escape getting detected.

(5) Auditor does not understand the Nature of all Business Transactions: Even though the auditor examines the accounts of organisation in a variety of fields, it is not necessary for him to understand the nature of each and every transaction. Hence, it is not possible for the auditor to certify as to whether a particular transaction makes business sense or not. During the course of audit, transactions are examined from the legal point of view and not from the point of view of appropriateness.

(6) Auditor merely expresses his Opinion: The auditor merely expresses his opinion on the accounts of the organisation. By expressing his opinion that the Profit and Loss Account and Balance Sheet are correct does not mean that there can be no irregularity in the books of accounts. Even though he gives his opinion after due examination, he is also human, and human beings make mistakes.

(7) Auditor does not Enjoy Practical Freedom: Even though an auditor is considered to be an independent person, since his rights, duties and responsibilities have been specified by the Companies Act, 2013, in practice the managers of the company appoint their own persons as auditors of the company. The auditor is influenced by the management of the company, and hence is not able to conduct a completely independent examination of the books of accounts and give his report on the same. 

What do you understand by Auditing? Briefly explain the advantages and disadvantages of Auditing.