As you know business planning is essential in a business,what is the purpose of business planning?Business planning is used to assist individuals and groups within organisations to be effective in working towards the achievement of the organisation's activities.Planning allows managers to identify the objectives for which they are responsible and how far they are being successful in achieving those objectives.It is an activity which must take place against background of the organisation's environment and which must take account of the organisation's internal strengths and weaknesses.Planning involves decisions about what to do in the future;how to do it;when to do it; and who should do it.These activities are relevant at all levels of organisation activity.Basically we have 3 levels of planning:Strategic,tactical and operational.
At a strategic level this is about deciding what business the organisation should be in and what its overall objectives should be.Strategic planning represents a systematic attempt to influence the medium and long-term future of the business or enterprise by defining the overall company objectives and appraising the major factors within the company and the environment which might affect the achievement of objectives.The overall objective of planning at this level is to point the direction in which an organisation is to move over a fairly lengthy period.Strategic plans should be sufficiently clear to be evaluated in terms of whether they have been achieved or not,but they are not specific that they tie the organisation down to achieving objectives and meeting what could be impossible long-term targets in condition of uncertainty.It is also important in the public sectors areas such as education.It is practiced widely informally and formally.Strategic planning and decision processes should end with objectives and a roundmap of ways to achieve them.
At tactical level this is about deciding how it should go about achieving its overall objectives:what products or services it should offer and how they will be marketed,how it will organise work and so on.This is a lower level of planning and is often termed intermediate range planning.The overall objective of tactical planning is to ensure that resources are obtained and used efficiently and effectively to accomplish the organisation's objectives.It includes decisions around organisation structure,financial budgets,staff requirements and product sales mix.Decisions are usually based on financial analysis and performance reports and summaries of different operations.
The detailed control over each individual operation is exercised at operational level.At operational level this is about deciding what needs to be done from day to day and task to task.This represents the lowest level of planning and involves line managers and first line supervisors in the setting of specific tasks.Operational planning takes place within the context of broader management plans.The focus of operational plan is upon individual activities and tasks,for example scheduling individual orders through a production planning process.
Okay you all must also understand that business planning should take into account the availability of resources.Resource planning would include estimates of requirements with regard to human resource(HR),equipment or machinery,finance,materials and components.But the main concern in CAT T5 is the HR planning as this was one of the most important resources to any business as well.
HR planning can be defined as a strategy for acquisition,utilisation,improvement and retention of an organisation's human resources.The human resource plan is prepared on the basis of the analysis of labour requirement and the implications for productivity and costs.A key goal of HR planning is to get the right number of people with the right skills,experience and competences in the right jobs at the right time at the right cost.
The four main stage of HR planning are auditing,forecasting,planning and controlling,each will be explained below:
Auditing stage involves the analysis of the strategic environment(trends in population growth,education,pensions and employment rights) in the light of the organisation's strategic objectives.The strategy chosen will have implications on the number of employees and the mix of skills required.
Forecasting stage analyses the demand for,and supply of,labour in terms of number,type and quality of people the organisation should employ to meet planned requirements and cover expected turnover.
Planning stage involves policies to recruit,train and develop the labour force identified in the forecast.
Controlling stage involves measuring the effective use of the human resources and their contribution towards the achievement of the organisation's objectives in the forecast.Organisation may use performance appraisal in this stage.
Beside that,the elements of HR planning would include the following:
Recruitment,selection and promotion plan-numbers and types of people and what they are required,culminating in the recruitment programme.
Education and training plan-numbers of trainees required and/or existing staff needing training,culminating in the training programme.
Development plan-programmes for transferring and retaining employees.
Rewards and benefits plan-the system of pay and benefits used to reward employees.
Succession plan-assessing the quality and quantity of employees required at each level within the organisation and ensuring that the necessary measures are taken so that these positions are filled on continuous basis.
Retention plan-actions to reduce avoidable labour wastage.
Redundancy plan-where and when redundancies are to occur;policies for selection and declaration of redundancies;redevelopment,retraining or relocation of redundant employees,policy on redundancy payments,etc.
Productivity plan-Setting of productivity target for employees,those who achieved the targets could be given bonus.
Apart from that,planning requires coordination as well.Coordination is one of the major function of management.Departmental plans and budgets must be coordinated,so that they are all working together to achieve the business plan.At production level,coordination will ensure that department knows what and when they need to achieve,work can be flowed without holdups or clashes and without idle time or overwork for staff and machinery,the resources required for the task are available where and when required and there is no duplication of effort.
As the planning is essential in business,coordination must also be good so that all departments are able to work together to achieve a common business plan,I had provided information which T5 students are not expected to know everything,this has included information for extra reading.For those who are aiming to become an entrepreneur,these information may be important and you need to understand how to differentiate between 3 levels of planning,each has their relative importance. :)
Friday, August 20, 2010
Wednesday, August 18, 2010
CAT T7,ACCA F5-Activity based costing
I know not everyone know about this costing technique as it was relatively unknown and not commonly used,most people prefer absorption costing(AC),marginal costing(MC) and standard costing.Therefore not many people really know how to use activity based costing(ABC).I am here to provide guideline in how to use ABC to calculate the cost of products.
The traditional approach to fixed overhead absorption has the merit of being simple to calculate and apply. However, simplicity does not justify the production and use of information that might be wrong or misleading.For example,in absorption costing,when we use labour hour as the base to have an overhead absorption rate(OAR),it is not accurate if we have different types of overhead which didn't use any labour hour,thereby causing the final cost per unit of product charged is misleading.In the modern manufacturing environment now,overheads are much greater in proportion of total costs and direct costs are lower because human is replaced by technology.Therefore traditional costing technique cannot provide an accurate cost information.
ABC is a costing model that identifies activities in an organisation and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs(overheads) into direct costs.Simple speaking,ABC analyses the cost according to the cost driver.Cost driver is factor which causes a cost of an activity(cost pool),it might be better to think of it as the ‘cost causer’.For example,the cost driver of the material handling costs would be number of components handled.Ok let's get started,the steps of ABC is as follow:
1.Identify a cost
2.Identify cost driver
3.Calculate cost driver rate(cost incurred each time the activity occurs.)
4.Trace the cost into the units produced
A simple example would enhance understanding:Cost of goods inwards department totalled $10000.During 2010 there were 1000 deliveries.200 of these deliveries related to product X.2000 units of product X were produced.Calculate the unit cost of product X.
1.We know that the total cost of good inwards is $10000.
2.We then identify the cost driver,in this case the cost driver is the number of deliveries and we have total of 1000 deliveries in this year.
3.Then you find out the cost driver rate(this is just like OAR but we calculate according to each activity),cost driver rate=total cost/cost driver=$10000/1000=$10.
4.Then use this $10 to charge against the total deliveries for product X,in this example there are 200 deliveries for product X,therefore $10 X 200=$2000,this cost is the total cost of 2000 units product X,we want to find unit cost,therefore
unit cost=cost/units=$2000/2000units=$1.
Therefore in this example,if there is other product,for example 500 deliveries for 500 units of product Y,then take the cost driver rate of $10 multiply with 500 deliveries=$5000,$5000 is the total cost for 500 deliveries,so unit cost=$5000/500units=$10.
I hope this simple example helps to understand how to calculate costs using ABC,there may be more activity such as material handling costs,set-up costs and so on given in exam or in reality,you need to identify cost driver for each activity and get a cost driver rate for each activities,then find out the costs by multiplying the activities consumed by each products and finally adding all costs up to get the final total costs for each products.
In addition to estimating more accurately the true cost of production,ABC will also give a better indication of where cost savings can be made.Working on the principle that large cost savings are likely to be found in large cost elements,management's attention will start to focus on how this cost could be reduced.But ABC has limitations as well,it undoubtedly requires an organisation to spend time and effort investigating more fully what causes it to incur costs,and then to use that detailed information for costing purposes.It can be very complex,recently there are only about 4% of companies in this world which actually implemented ABC.But understanding the drivers of costs must be an essential part of good performance management.
In summary,ABC can be used to identify inefficient products, departments and activities,allocate more resources on profitable products, departments and activities,control the costs at an individual level and on a departmental level,find unnecessary costs and helps in fixing price of product or service scientifically.It is very hard to implement in practice although it provides accurate information,practice often if you are interested to try to implement ABC in your business or workplace,make sure you understand everything about ABC.You should also understand that ABC values inventory using full production cost(variable production cost+fixed production overheads),therefore it is similar to AC in this way.
The most important thing to remember in the calculation of cost using ABC is the 4 steps,if you follow the steps,it will definitely help you a lot and you can do most questions.Practice for a number of times until you are used to the steps.
The traditional approach to fixed overhead absorption has the merit of being simple to calculate and apply. However, simplicity does not justify the production and use of information that might be wrong or misleading.For example,in absorption costing,when we use labour hour as the base to have an overhead absorption rate(OAR),it is not accurate if we have different types of overhead which didn't use any labour hour,thereby causing the final cost per unit of product charged is misleading.In the modern manufacturing environment now,overheads are much greater in proportion of total costs and direct costs are lower because human is replaced by technology.Therefore traditional costing technique cannot provide an accurate cost information.
ABC is a costing model that identifies activities in an organisation and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs(overheads) into direct costs.Simple speaking,ABC analyses the cost according to the cost driver.Cost driver is factor which causes a cost of an activity(cost pool),it might be better to think of it as the ‘cost causer’.For example,the cost driver of the material handling costs would be number of components handled.Ok let's get started,the steps of ABC is as follow:
1.Identify a cost
2.Identify cost driver
3.Calculate cost driver rate(cost incurred each time the activity occurs.)
4.Trace the cost into the units produced
A simple example would enhance understanding:Cost of goods inwards department totalled $10000.During 2010 there were 1000 deliveries.200 of these deliveries related to product X.2000 units of product X were produced.Calculate the unit cost of product X.
1.We know that the total cost of good inwards is $10000.
2.We then identify the cost driver,in this case the cost driver is the number of deliveries and we have total of 1000 deliveries in this year.
3.Then you find out the cost driver rate(this is just like OAR but we calculate according to each activity),cost driver rate=total cost/cost driver=$10000/1000=$10.
4.Then use this $10 to charge against the total deliveries for product X,in this example there are 200 deliveries for product X,therefore $10 X 200=$2000,this cost is the total cost of 2000 units product X,we want to find unit cost,therefore
unit cost=cost/units=$2000/2000units=$1.
Therefore in this example,if there is other product,for example 500 deliveries for 500 units of product Y,then take the cost driver rate of $10 multiply with 500 deliveries=$5000,$5000 is the total cost for 500 deliveries,so unit cost=$5000/500units=$10.
I hope this simple example helps to understand how to calculate costs using ABC,there may be more activity such as material handling costs,set-up costs and so on given in exam or in reality,you need to identify cost driver for each activity and get a cost driver rate for each activities,then find out the costs by multiplying the activities consumed by each products and finally adding all costs up to get the final total costs for each products.
In addition to estimating more accurately the true cost of production,ABC will also give a better indication of where cost savings can be made.Working on the principle that large cost savings are likely to be found in large cost elements,management's attention will start to focus on how this cost could be reduced.But ABC has limitations as well,it undoubtedly requires an organisation to spend time and effort investigating more fully what causes it to incur costs,and then to use that detailed information for costing purposes.It can be very complex,recently there are only about 4% of companies in this world which actually implemented ABC.But understanding the drivers of costs must be an essential part of good performance management.
In summary,ABC can be used to identify inefficient products, departments and activities,allocate more resources on profitable products, departments and activities,control the costs at an individual level and on a departmental level,find unnecessary costs and helps in fixing price of product or service scientifically.It is very hard to implement in practice although it provides accurate information,practice often if you are interested to try to implement ABC in your business or workplace,make sure you understand everything about ABC.You should also understand that ABC values inventory using full production cost(variable production cost+fixed production overheads),therefore it is similar to AC in this way.
The most important thing to remember in the calculation of cost using ABC is the 4 steps,if you follow the steps,it will definitely help you a lot and you can do most questions.Practice for a number of times until you are used to the steps.
Monday, August 9, 2010
CAT T2-Variances calculation
In CAT T2,students are required to be able to calculate variances and identify whether variances is favourable or adverse.Variance is basically the differences between actual result and budgeted result.Well before starting on the calculation,we need to understand a few terms first:
Fixed budget=original budget(budgeted/standard cost per unit X budgeted unit)
Flexed budget=adjusted budget to reflect what budgeted revenues and costs would have been if set at the actual level of activity,in simplier word,using budgeted/standard cost per unit X actual unit.
Actual result=actual cost per unit X actual unit
Favourable variances=good variances
adverse variances=bad variances
Total variances=actual compare with fixed budget
Price/Efficiency variances=flexed budget compare with actual
Activity variances=fixed budget compare with flexed budget
Then let's get started,you may not understand much when seeing the above terms,let me provide a simple example to make everything clear:
eg. A company budgets its material purchases cost per unit=$1,budgeted units purchases=10 units,but in actual the material purchases cost per unit=$2 and actual units purchased=20 units.
Therefore:
Fixed budget=$1/unit X 10 units=$10
Flexed budget=$1/unit X 20 units=$20
Actual=$2/unit X 20 units=$40
Total material purchases variances=$40-$10=$30(adverse) why adverse?Using common sense,our actual expenses is more than budgeted,that's why no good,as simple as that.
Price variances use flexed budget compare with actual because you see,their differences are just the cost per unit right,so to see whether the actual or budgeted price is more expensive,both of these are to be compared:
Total Price variances=$40-$20=$20(adverse) why adverse?Again use common sense,our flexed budget adjusted the fixed budget figure by using budgeted cost per unit X actual units and we used this to compare with our actual which is calculated using actual cost per unit X actual units,their differences will be cause by the differences of price,so if our actual is more than flexed budget,it means actual price is more,conclusion is no good.
Activity variances use fixed budget compare with flexed budget because their differences are just the units purchased,their cost per unit is the same,therefore to see whether the actual units purchases are more than budget or less,flexed is used rather than actual because actual result was calculated using actual cost per unit:
Total Activity variances=$20-$10=$10(adverse) why adverse again?Well common sense is quite important to help you to understand variances,when flexed budget compare with fixed budget,we are meaning that we want to find out the differences between their units purchased,because flexed budget is calculated using actual units purchased but fixed budget used budgeted units purchased,therefore if flexed budget figure is more than fixed budget figure,that means we purchased more than we budgeted,that's not good for us.
Therefore if you really understand,you can find that total variances is actually made up of activity variances and price variances,in this example:Total material purchases variances=price variances+activity variances=$20+$10=$30(same as the total material purchases variances previously calculated).
In conclusion,this paper involves a little bit of variances analysis where we analyse the variances into price and activity variances,if you can truely understand this,it will definitely help you to settle this topic and also contribute to CAT T7-Planning,control and performance management.The most important thing is to understand how it works,carefully read through this example and it will enhance your understanding.This topic is one of the most difficult topics in CAT T2,I hope this article makes you think this topic is actually easy enough. :)
Fixed budget=original budget(budgeted/standard cost per unit X budgeted unit)
Flexed budget=adjusted budget to reflect what budgeted revenues and costs would have been if set at the actual level of activity,in simplier word,using budgeted/standard cost per unit X actual unit.
Actual result=actual cost per unit X actual unit
Favourable variances=good variances
adverse variances=bad variances
Total variances=actual compare with fixed budget
Price/Efficiency variances=flexed budget compare with actual
Activity variances=fixed budget compare with flexed budget
Then let's get started,you may not understand much when seeing the above terms,let me provide a simple example to make everything clear:
eg. A company budgets its material purchases cost per unit=$1,budgeted units purchases=10 units,but in actual the material purchases cost per unit=$2 and actual units purchased=20 units.
Therefore:
Fixed budget=$1/unit X 10 units=$10
Flexed budget=$1/unit X 20 units=$20
Actual=$2/unit X 20 units=$40
Total material purchases variances=$40-$10=$30(adverse) why adverse?Using common sense,our actual expenses is more than budgeted,that's why no good,as simple as that.
Price variances use flexed budget compare with actual because you see,their differences are just the cost per unit right,so to see whether the actual or budgeted price is more expensive,both of these are to be compared:
Total Price variances=$40-$20=$20(adverse) why adverse?Again use common sense,our flexed budget adjusted the fixed budget figure by using budgeted cost per unit X actual units and we used this to compare with our actual which is calculated using actual cost per unit X actual units,their differences will be cause by the differences of price,so if our actual is more than flexed budget,it means actual price is more,conclusion is no good.
Activity variances use fixed budget compare with flexed budget because their differences are just the units purchased,their cost per unit is the same,therefore to see whether the actual units purchases are more than budget or less,flexed is used rather than actual because actual result was calculated using actual cost per unit:
Total Activity variances=$20-$10=$10(adverse) why adverse again?Well common sense is quite important to help you to understand variances,when flexed budget compare with fixed budget,we are meaning that we want to find out the differences between their units purchased,because flexed budget is calculated using actual units purchased but fixed budget used budgeted units purchased,therefore if flexed budget figure is more than fixed budget figure,that means we purchased more than we budgeted,that's not good for us.
Therefore if you really understand,you can find that total variances is actually made up of activity variances and price variances,in this example:Total material purchases variances=price variances+activity variances=$20+$10=$30(same as the total material purchases variances previously calculated).
In conclusion,this paper involves a little bit of variances analysis where we analyse the variances into price and activity variances,if you can truely understand this,it will definitely help you to settle this topic and also contribute to CAT T7-Planning,control and performance management.The most important thing is to understand how it works,carefully read through this example and it will enhance your understanding.This topic is one of the most difficult topics in CAT T2,I hope this article makes you think this topic is actually easy enough. :)
Wednesday, August 4, 2010
T5-The business environment
Not only for CAT T5 students,but to anyone who started to study business related subjects,this is an important topic to start off your long journey.People who just started to enter business world would probably do not know what is happening around the world,so let's get started with basics.
In business,most of the time you may not choose to work on your own,so-called sole trading,because you have an individual limits and you need to take care of everything in the business on your own.Therefore,the existence of organisations became more common.Organisation is defined as a social arrangement which pursues collective goals,which control its own performance and which has a boundary separating it from environment.It is basically mean people who have the same goals gather to share their expertise so that they can earn more profits.
So why do we need organisation?I had already mentioned above that individuals have limitations,they cannot do everything on their own especially if your business is growing.With organisation,members can specialise their skills and perform in the area that they are more capable of so that tasks can be done faster and better.I had also mentioned that when people are gathered,they can share their expertise and complex work can be done by synergy of people.There is much more benefits when operating under an organisation.
Organisation is an open system too.Let's see what is open system.Open system is a system which continuously interacts with its environment.It takes influences from its environment and also influences its environment.It also obtains inputs and generates outputs.
Why do we need to know that organisation is an open system?This is because that organisation is regularly exchanging feedbacks with its environment.That's why environment is an important issues for managing an organisation.Healthy organisations will regularly try to understand their environments through use of environmental scanning,market research and evaluations and often try to influence their external environment.
Environment can be divided into two types:micro environment and macro environment.Well the difference is just about the control,micro environment is the one that we can control easily for example customers and suppliers but macro environment is the one that is almost out of our control such as rise of interest rate,inflation and so on.We have to be careful in deciding what type of business is more suitable in different place.Well there is a well known model called PEST which analyse the external environment factors using political/legal,economic,social and technological.Let's me provide guidance on how to use this model.
Legal factor will affect all organisations,that's for sure.We can analyse the laws such as company law,employment law,health and safety act,data protection act,tax law and so on of an area.For example,if a certain country requires a strict health and safety procedures in an organisation,it will affect us and we must do so.
Political risk is an important factor to consider when looking for a new market.Political risk in a decision is the risk that political factors will invalidate our strategy and perhaps severely damage our organisation,for example,wars and political chaos.Remember investors will only come to invest if the politic is stable,we shall keep an eye on the government policy too.
Business planning must also take into account the forecast state of the economy.In this case,Gross Domestic Product(GDP) of a country can help a lot,we can start our business in the country where the GDP is higher because it measures the overall economic output of a country.Keep an eye on the local economic trends too such as the wages rate.Other factors such as inflation,interest rates,tax levels,government spending and business cycle of a country should be taken into account as well.
For the social factor,we analyse the demographic change.Demography is the study of human population and population trends.So for example,if our business is selling expensive items,we may open our business in the area where the wealth(buying power of people) is good,then we have business to do.Beside wealth,we can also see factors such as growth,age,geography,ethnicity,social structure and so on.
Technological factor is also important if our business requires high technologies to operate.Technology can help in gaining productivity,reduce costs and introduce new types of product.For example,if our business is selling computer,technological factor becomes very important to us as we want to improve our products from year-to-year so that we can compete with our competitors.
So you can see that PEST model actually helped us a lot in analysing the external environment.Okay now let's talk about stakeholders,who are stakeholders?Stakeholders are groups or individuals who have interests on the organisation.We can categorise stakeholders into three types:Internal(employees,managers),external(government,shareholder) and connected(bank,suppliers).In the basic,you just need to know who are stakeholders,for further studies,we need to analyse the stakeholders probably by stakeholder mapping,triple tasks method and so on because stakeholder analysis is a key part of stakeholder management.
Okay now you should have some basics knowledge about business,you should understand organisation,environment and stakeholders by now.Therefore,have you realise that we actually have a lot things to study in business,even these basics knowledge contain a lot of information.This article is an introduction to business studies,you need to understand this article and if you can explain the terms in your own words,that's the best!!I wish everyone good luck in business studies and enjoy it :)
In business,most of the time you may not choose to work on your own,so-called sole trading,because you have an individual limits and you need to take care of everything in the business on your own.Therefore,the existence of organisations became more common.Organisation is defined as a social arrangement which pursues collective goals,which control its own performance and which has a boundary separating it from environment.It is basically mean people who have the same goals gather to share their expertise so that they can earn more profits.
So why do we need organisation?I had already mentioned above that individuals have limitations,they cannot do everything on their own especially if your business is growing.With organisation,members can specialise their skills and perform in the area that they are more capable of so that tasks can be done faster and better.I had also mentioned that when people are gathered,they can share their expertise and complex work can be done by synergy of people.There is much more benefits when operating under an organisation.
Organisation is an open system too.Let's see what is open system.Open system is a system which continuously interacts with its environment.It takes influences from its environment and also influences its environment.It also obtains inputs and generates outputs.
Why do we need to know that organisation is an open system?This is because that organisation is regularly exchanging feedbacks with its environment.That's why environment is an important issues for managing an organisation.Healthy organisations will regularly try to understand their environments through use of environmental scanning,market research and evaluations and often try to influence their external environment.
Environment can be divided into two types:micro environment and macro environment.Well the difference is just about the control,micro environment is the one that we can control easily for example customers and suppliers but macro environment is the one that is almost out of our control such as rise of interest rate,inflation and so on.We have to be careful in deciding what type of business is more suitable in different place.Well there is a well known model called PEST which analyse the external environment factors using political/legal,economic,social and technological.Let's me provide guidance on how to use this model.
Legal factor will affect all organisations,that's for sure.We can analyse the laws such as company law,employment law,health and safety act,data protection act,tax law and so on of an area.For example,if a certain country requires a strict health and safety procedures in an organisation,it will affect us and we must do so.
Political risk is an important factor to consider when looking for a new market.Political risk in a decision is the risk that political factors will invalidate our strategy and perhaps severely damage our organisation,for example,wars and political chaos.Remember investors will only come to invest if the politic is stable,we shall keep an eye on the government policy too.
Business planning must also take into account the forecast state of the economy.In this case,Gross Domestic Product(GDP) of a country can help a lot,we can start our business in the country where the GDP is higher because it measures the overall economic output of a country.Keep an eye on the local economic trends too such as the wages rate.Other factors such as inflation,interest rates,tax levels,government spending and business cycle of a country should be taken into account as well.
For the social factor,we analyse the demographic change.Demography is the study of human population and population trends.So for example,if our business is selling expensive items,we may open our business in the area where the wealth(buying power of people) is good,then we have business to do.Beside wealth,we can also see factors such as growth,age,geography,ethnicity,social structure and so on.
Technological factor is also important if our business requires high technologies to operate.Technology can help in gaining productivity,reduce costs and introduce new types of product.For example,if our business is selling computer,technological factor becomes very important to us as we want to improve our products from year-to-year so that we can compete with our competitors.
So you can see that PEST model actually helped us a lot in analysing the external environment.Okay now let's talk about stakeholders,who are stakeholders?Stakeholders are groups or individuals who have interests on the organisation.We can categorise stakeholders into three types:Internal(employees,managers),external(government,shareholder) and connected(bank,suppliers).In the basic,you just need to know who are stakeholders,for further studies,we need to analyse the stakeholders probably by stakeholder mapping,triple tasks method and so on because stakeholder analysis is a key part of stakeholder management.
Okay now you should have some basics knowledge about business,you should understand organisation,environment and stakeholders by now.Therefore,have you realise that we actually have a lot things to study in business,even these basics knowledge contain a lot of information.This article is an introduction to business studies,you need to understand this article and if you can explain the terms in your own words,that's the best!!I wish everyone good luck in business studies and enjoy it :)
Tuesday, August 3, 2010
T7-Collection of Information
Everyone knows that collecting useful information is a benefit for companies to plan,control and decision-making,but let's discuss about where can we get information that is useful.At first,let's talk about internal sources of information.One of the examples are accounting system of the organisations,we collect data from source documents such as invoices,time-sheets and journal entries.Reports of direct and indirect costs compared to budgets may be produced at regular intervals to help managers plan and control costs.Ad hoc reports such as aged receivables report,wastage report may be produced to help managers make specific decision.Appart from accounting system,we can get useful information from payroll system too which provide information concerning detailed labour costs.
Well in practice we really can't get much information from internal sources to help in planning,since then let's get some information from external sources!An organisation is difficult to succeed if they ignore external environment(can be analyse using PESTEL) which will influence their activities.Process known as environmental scanning or environmental monitor is becoming a more important part of the role of mangement accountant.Main sources of external information includes government sources(which may not always be true),business contacts(customers and suppliers),trade associations and trade journals,financial and business press and other media.Most of the information collected externally are known as secondary data which for us,is not as accurate as primary data which we generated ourselves.
Although collecting information is useful,but what if an overload of information are available?It may costs us a lot of time to analyse whether the information available are accurate and relevant or not.For example,an auditor will not have time to check all the invoices of a company.So we must consider different types of sampling techniques depending on what information we need.Before going into detail,first understand two words:
Population-group of people or objects of interest to the data collector.
Sample-small proportion of that population.
The purpose of sampling is to gain as much information as possible about the population by observing only a sample.There are a lot of sampling techniques,I will explain some of them.
Random sampling-Sample is taken in the way that every item of the population has an equal chance of being selected.Normal way of achieving this is by numbering each item in the population.For example,if a sample size(the number of sample) of 20 items is needed,first number each items of the population,then randomly pick 20 numbers maybe by drawing from box and then these 20 items are the samples.This is used when the population is known and with random sampling,we can avoid bias.
Systematic sampling-This is a bit similar to random sampling,just that only the first item is selected randomly. For example,if the population has 100 items and sample size of 10 is required,first item will be determined randomly eg.if choose 5th,then second item will the 15th,third will be 25th...up to 95th item.Then these 10 choosen items are samples.But there is danger of bias if the population has a repetitive pattern.For example,if a street has five types of house arranged in the order,A B C D E A B C D E.....an interviewer visiting every 5th home would only visit one type of house.
Stratified sampling-Random sample is taken from well defined group(eg.men and women,adults and children).This is done in such a way that the number in each sample is the proportional to the size of the group in the population.For example,in selecting a sample of people in order to discover their leisure habits,age could be an important factor,so if 50% of the population are over 40 years old and 50% are under 40 years old,when a sample size of 200 people is needed,50 should be people who are over 40 years old and 50 are under 50 years old.This method is often used by auditors to choose a sample to confirm receivables balances,in this case a greater proportion of larger balances will be selected.
Multi-stage sampling-Population is splitted into groups and random samples are taken from these groups,then the random samples are investigated.This method often applied if the population is large,for example all TV viewers in UK,the process involved would be first:country is divided into areas and random sample of areas is taken,second:each area chosen is then subdivided into towns and a random sample of these is taken,third:each town choosen is further divided into roads and random sample of roads is taken,forth:from each road choosen a random sample of houses is taken and people in the houses are interviewed.
Cluster sampling-Similar to multi-stage sampling,is just that in the final,every items in the final random samples are investigated.This is also like a more detail version of multi-stage sampling.This is a non-random sampling method because finally all items in the random samples are investigated.
Quota sampling-This is a non-probability sampling method because randomness is forfeited in the interests of cheapness and administrative simplicity.Investigators are told to interview all the people they meet up to a certain quota.This is thus very biased because for example,males investigors may be more interested to take females as their samples for interview.
Ideally the sample would be chosen at random and would be large enough because the larger the sample the more reliable will be the results and also avoiding bias.In order to use different sampling methods effectively,it is often necessary to have some knowledge of the population.Systematic sampling should not be used if the population follows a repetitive pattern.Quota sampling must be used with caution.The data collector may introduce bias because they choose how to fill the quota.
In conclusion,there are a lot of information available to us,but to determine which information is more useful for us,we can use sampling techniques to reduce time and costs.These sampling methods are important in practice especially for auditors.
Well in practice we really can't get much information from internal sources to help in planning,since then let's get some information from external sources!An organisation is difficult to succeed if they ignore external environment(can be analyse using PESTEL) which will influence their activities.Process known as environmental scanning or environmental monitor is becoming a more important part of the role of mangement accountant.Main sources of external information includes government sources(which may not always be true),business contacts(customers and suppliers),trade associations and trade journals,financial and business press and other media.Most of the information collected externally are known as secondary data which for us,is not as accurate as primary data which we generated ourselves.
Although collecting information is useful,but what if an overload of information are available?It may costs us a lot of time to analyse whether the information available are accurate and relevant or not.For example,an auditor will not have time to check all the invoices of a company.So we must consider different types of sampling techniques depending on what information we need.Before going into detail,first understand two words:
Population-group of people or objects of interest to the data collector.
Sample-small proportion of that population.
The purpose of sampling is to gain as much information as possible about the population by observing only a sample.There are a lot of sampling techniques,I will explain some of them.
Random sampling-Sample is taken in the way that every item of the population has an equal chance of being selected.Normal way of achieving this is by numbering each item in the population.For example,if a sample size(the number of sample) of 20 items is needed,first number each items of the population,then randomly pick 20 numbers maybe by drawing from box and then these 20 items are the samples.This is used when the population is known and with random sampling,we can avoid bias.
Systematic sampling-This is a bit similar to random sampling,just that only the first item is selected randomly. For example,if the population has 100 items and sample size of 10 is required,first item will be determined randomly eg.if choose 5th,then second item will the 15th,third will be 25th...up to 95th item.Then these 10 choosen items are samples.But there is danger of bias if the population has a repetitive pattern.For example,if a street has five types of house arranged in the order,A B C D E A B C D E.....an interviewer visiting every 5th home would only visit one type of house.
Stratified sampling-Random sample is taken from well defined group(eg.men and women,adults and children).This is done in such a way that the number in each sample is the proportional to the size of the group in the population.For example,in selecting a sample of people in order to discover their leisure habits,age could be an important factor,so if 50% of the population are over 40 years old and 50% are under 40 years old,when a sample size of 200 people is needed,50 should be people who are over 40 years old and 50 are under 50 years old.This method is often used by auditors to choose a sample to confirm receivables balances,in this case a greater proportion of larger balances will be selected.
Multi-stage sampling-Population is splitted into groups and random samples are taken from these groups,then the random samples are investigated.This method often applied if the population is large,for example all TV viewers in UK,the process involved would be first:country is divided into areas and random sample of areas is taken,second:each area chosen is then subdivided into towns and a random sample of these is taken,third:each town choosen is further divided into roads and random sample of roads is taken,forth:from each road choosen a random sample of houses is taken and people in the houses are interviewed.
Cluster sampling-Similar to multi-stage sampling,is just that in the final,every items in the final random samples are investigated.This is also like a more detail version of multi-stage sampling.This is a non-random sampling method because finally all items in the random samples are investigated.
Quota sampling-This is a non-probability sampling method because randomness is forfeited in the interests of cheapness and administrative simplicity.Investigators are told to interview all the people they meet up to a certain quota.This is thus very biased because for example,males investigors may be more interested to take females as their samples for interview.
Ideally the sample would be chosen at random and would be large enough because the larger the sample the more reliable will be the results and also avoiding bias.In order to use different sampling methods effectively,it is often necessary to have some knowledge of the population.Systematic sampling should not be used if the population follows a repetitive pattern.Quota sampling must be used with caution.The data collector may introduce bias because they choose how to fill the quota.
In conclusion,there are a lot of information available to us,but to determine which information is more useful for us,we can use sampling techniques to reduce time and costs.These sampling methods are important in practice especially for auditors.
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