MEANING OF ACCOUNTING?

 

» MEANING OF ACCOUNTING
» NEED AND IMPORTANCE OF ACCOUNTING
» BOOK KEEPING
» BRANCHES OF ACCOUNTING
» BASIC ACCOUNTING CONCEPTS
» DOUBLE ENTRY SYSTEM
» PREPARATION OF FINAL ACCOUNTS

MEANING OF ACCOUNTING

Accounting refers to the actual process of preparing and presenting the accounts. In other words, it is the art of putting the academic knowledge of accountancy into practice. American Accounting Association defines accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.”

NEED AND IMPORTANCE OF ACCOUNTING

When a person starts a business, whether large or small, his main aim is to earn profit. He receives money from certain sources like sale of goods, interest on bank deposits, etc. He has to spend money on certain items like purchase of goods, salary, rent, etc. These activities take place during the normal course of his business. He would naturally be anxious at the year end, to know the progress of his business. Business transactions are numerous, that is it not possible to recall his memory as to how the money had been earned and spent. At the same time, if he had noted down his incomes and expenditures, he can readily get thee required information. Hence, the details of business transactions have to be recorded in a clear and systematic manner to get answers easily and accurately for the following questions at any time he likes.

1. What has happened to his investment?

2. What is the result of the business transactions?

3. What are the earning and expenses?

4. How much amount is receivable from the customers and to whom the goods have been sold on credit?

5. How much amount is payable to the suppliers on account of credit purchases?

6. What are the nature and value of the assets possessed by the business concern?

7. What are the nature and value of liabilities of the business concern?

These and several other questions are answered with the help of accounting. The need for recording business transactions in a clear and systematic manner is the basis which gives rise to book-keeping.

BOOK KEEPING

Book–keeping is that branch of knowledge which tells us how to keep a record of business transactions. It is often routine and clerical in nature. It is important to note that only those transactions related to business which can be expressed in terms of money are recorded. The activities of book-keeping include recording in the journal, posting to ledger and balancing the accounts.

DEFINITION OF BOOK KEEPING

R.N. Carter says, “book-keeping is the science and art of correctly recording in the books of account all those business transactions that result in transfer of money or money’s worth.”

MEANING OF BOOK KEEPING

Book-Keeping: Is a part of accounting and is concerned with record keeping or maintenance of books of accounts. It is often routine and clerical. Book-keeping is an act of keeping permanent records of the financial transactions of a business in a systematic and orderly manner. The financial transactions of the business are identified, recorded and classified in different books. In modern entities, records of financial transactions are maintained under a double entry system. The double entry system has been recognized as a systematic and complete system for recording financial transactions. Double entry system recognizes that every financial transactions has two aspects. It then records two aspects of a transaction simultaneously in two separate accounts with equal amounts. It provides the aspects of a transaction with their names of debit and credit. Thereafter, with the help of ledger accounts, profit and loss account and the balance sheet are prepared to ascertain the profit and loss and the financial position of the business. Thus, the double-entry system is the most systematic and complete system of book-keeping. Therefore double entry system is the technique or method of book-keeping which recognizes the fact that every financial transaction has two aspects and records two aspects of each transaction simultaneously in two separate account giving their names 'debit' and 'credit' respectively.

OBJECTIVES OF BOOK KEEPING

1. To have permanent record of all the business transactions.

2. To keep records of incomes and expenses in such a way that the net profit or net loss may be calculated.

3. To keep records of assets and liabilities in such a way that the financial position of the business may be ascertained.

4. To keep control on expenses with a view to minimize the same in order to minimize the profit.

5. To know the names of the customer and the amount due from them.

6. To know the names of the suppliers and the amount due to them.

7. To have important information for legal and tax purpose.

BRANCHES OF ACCOUNTING

Increased scale of business operations has made the management function more complex. This has given rise to specialized branches in accounting. The main branches of accounting are Financial Accounting, Cost accounting, and Management accounting.

FINANCIAL ACCOUNTING

It is connected with recording of business transactions in the books of accounts in such a way that operating result of a particular period and financial position on a particular date can be known. The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.

COST ACCOUNTING

Cost accounting relates to collection, classification, and ascertainment of the cost of production or job undertaken by the firm. Cost accounting is used to compute the unit cost of a manufacturer's products in order to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieved with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems. Cost accounting assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more. According to the Chartered Institute of Management Accountants, London, cost accounting is the process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned.

MANAGEMENT ACCOUNTING

It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control, and decision making by the management. It is an accounting for the management i.e., accounting which provides necessary information to the management for discharging its functions. According to the Anglo-American Council on productivity, “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking.” It covers all arrangements and combinations or adjustments of the orthodox information to provide the Chief Executive with the information from which he can control the business e.g. Information about funds, costs, profits etc. Management accounting is not only confined to the area of cost accounting but also covers other areas such as capital expenditure decisions, capital structure decisions, and dividend decisions as well.

“Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting” – The Institute of Chartered Accountants of England and Wales.

“Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking” – The Anglo American Council on Productivity Report.

“Management Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business performances” – The American Accounting Association.

Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents’ performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.

In short, Financial Accounting is the process of summarizing financial data taken from an organization’s accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.

Financial accountancy is governed by both local and international accounting standards.

BASIC ACCOUNTING CONCEPTS

Financial accountants produce financial statements based on Generally Accounting Principles of a respective country.

Financial accounting serves following purposes

• Producing general purpose financial statements.

• Provision of information used by management of a business entity for decision making, planning and performance evaluation.

• For meeting regulatory requirements.

Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

In contract to financial accountancy information, management accounting information is

• Usually confidential and used by management, instead of publicly reported.

• Forward-looking, instead of historical.

• Pragmatically computed using extensive management information systems and internal controls, instead of complying with accounting standards.

This is because of the different emphasis: Management accounting information is used within an organization, typically for decision-making.

DOUBLE ENTRY SYSTEM

Double Entry System: There are numerous transaction in a business concern. Each transaction, when closely analyzed, reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect.” This is termed as the ”debit aspect.” The other aspect will be “giving aspect” or “outgoing aspect “or“ income/gain aspect.” This is termed as the “credit aspect”. These two aspects namely “debit aspect” and “credit aspect” forms the basis of double entry system.

Definiton of Double Entry System: According to J.R. Batliboi, “every business transaction has a two-fold effect and that it affects two accounts in opposite directions and if a complete record were to be made of such transactions, it would be necessary to debit one account and credit another account. It is this recording of the two fold effect of every transaction that has given rise to the term double entry system.”

FEATURES OF DOUBLE ENTRY SYSTEM:

• Every business transaction affects two accounts.

• Each transaction has two aspects i.e., debit and credit.

• It is based upon accounting assumption concept and principles.

• Helps on preparing trial balance which is a test of arithmetical accuracy in accounting.

• Preparation of final accounts with the help of trial balance.

ADVANTAGES OF DOUBLE ENTRY SYSTEM:

1. Scientific system.
2. Complete record of transaction.
3. A check on the accuracy of accounts.
4. Ascertainment of profit or loss.
5. Knowledge of the financial position.
6. Full details for control.
7. Comparative study.
8. Helps in decision-making.
9. Detection of frauds.

PREPARATION OF FINAL ACCOUNTS

The final account of business concern generally includes two parts. The first part is trading and profit and loss account. This is prepared to find out the net result of the business. The second part is the balance sheet which is prepared to know the financial position of the business. However, manufacturing concern, will prepare a manufacturing account prior to the preparation of trading account, to find out the cost of production.

TRADING ACCOUNT

Trading account is a part of final accounts prepared by a business firm which shows gross profitability of business activities during a particular period. In other words, trading account shows total sales, total purchases and all direct expenses relating to purchase and sales. Trading means buying and selling. The trading account shows the result of buying and selling of goods. Trading account is prepared by manufacturing companies and trading companies only because the sales and purchases of goods are done in these types of business firms only. It can be prepared by a business firm on any particular date. It can be prepared on monthly basis or quarterly basis or half yearly basis or yearly basis according to its requirement. For example all the companies registered with stock exchanges furnish monthly details relating to sale, and profits. Therefore these companies have to prepare the Trading account on monthly basis. The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year.

ITEMS APPEARING IN THE DEBIT SIDE

1. Opening stock, 2. Purchases, 3. Direct expenses-wages, 4. Carriage inwards, 5. Octroi duty, 6. Custom duty, 7. Dock dues, 8. Clearing charges, 9. Import duty, 10. other expenses, etc.

ITEMS APPEARING IN THE CREDIT SIDE

1. Sales, 2. Closing stock.

You can prepare a Balance Sheet by following the format below:

PROFIT AND LOSS ACCOUNT

After calculating the gross profit or gross loss, the next step is to prepare the profit and loss account. A profit and loss account provides information on a company’s financial position during a specific time period, usually annually or quarterly. It generally gives an outline of revenue, the costs of running the business and the profits or losses generated. Along with the balance sheet, which provides a snapshot of a company’s finances on a certain date, the profit and loss account gives investors the information they need to make informed decisions on their investments. Companies typically issue P&L reports monthly. It is customary for the reports to include year-to-date figures, as well as corresponding year-earlier figures to allow for comparisons and analysis. A profit and loss account shows how much money the business has made (over the period that the accounts cover) and how much money it cost the business to do so. The profit and loss accounts cover an accounting period; usually one year. The profit and loss account is opened with gross profit transferred from the trading account (or with gross loss which will be debited to profit and loss account). After this all expenses and losses (which have not been dealt in the trading account) are transferred to the debit side of the profit and loss account. If there are any incomes or gains, these will be credited to the profit and loss account. The excess of the gain over the losses is called the net profit and that of the loss over the gain is called the net loss. The account is closed by transferring the net profit or loss to capital account of the trader.

ITEMS APPEARING IN THE DEBIT SIDE

1. Office and administrative expenses. 2. Repairs and maintenance expenses. 3. Financial expenses. 4. Selling and distribution expenses.

ITEMS APPEARING IN THE CREDIT SIDE

1. Interest received on investment. 2. Interest received on fixed deposits.3 Discount earned. 4. Commission earned. 5. Rent received.

You can prepare a Balance Sheet by following the format below:

BALANCE SHEET

Balance sheet is defined as, “a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date. A balance sheet is one of a business' main financial statements, along with the income statement and cash flow statement. It summarises the financial position of your business at a point in time, by providing a snapshot of how much you own and how much you owe.

A financial report stating the total assets, liabilities, and owners' equity of an organization at a given date, usually the last day of the accounting period. The credit side of the balance sheet states assets, while the debit side states liabilities and equity, and the two sides must be equal, or balance.

Assets include cash in hand and cash anticipated (receivables), inventories of supplies and materials, properties, facilities, equipment, and whatever else the company uses to conduct business. Assets also need to reflect depreciation in the value of equipment such as machinery that has a limited expected useful life.

Liabilities include pending payments to suppliers and creditors, outstanding current and long-term debts, taxes, interest payments, and other unpaid expenses that the company has incurred.

Subtracting the value of aggregate liabilities from the value of aggregate assets reveals the value of owners' equity. Ideally, it should be positive. Owners' equity consists of capital invested by owners over the years and profits (net income) or internally generated capital, which is referred to as "retained earnings"; these are funds to be used in future operations.

You can prepare a Balance Sheet by following the format below:

Describe Financial Management?

 

 

 

 

 

 

» Profit Maximization as a Decision Criterion

» Wealth Maximization Decision Criterion
» Functions Of The Financial Manager
» Debentures
» Balance Sheet
» Ratio Analysis
» Fund Flow Statement

 

Profit Maximization as a Decision Criterion

Profit maximization is considered as the goal of financial management. In this approach, actions that Increase profits should be undertaken and the actions that decrease the profits are avoided. Thus, the Investment, financing and dividend also be noted that the term objective provides a normative framework decisions should be oriented to the maximization of profits. The term 'profit' is used in two senses. In one sense it is used as an owneroriented.

In this concept it refers to the amount and share of national Income that is paid to the owners of business. The second way is an operational concept i.e. profitability. This concept signifies economic efficiency. It means profitability refers to a situation where output exceeds Input. It means, the value created by the use of resources is greater that the Input resources. Thus in all the decisions, one test is used I.e. select asset, projects and decisions that are profitable and reject those which are not profitable.

The profit maximization criterion is criticized on several grounds. Firstly, the reasons for the opposition that are based on misapprehensions about the workability and fairness of the private enterprise itself. Secondly, profit maximization suffers from the difficulty of applying this criterion in the actual real world situations. The term 'objective' refers to an explicit operational guide for the internal investment and financing of a firm and not the overall business operations. We shall now discuss the limitations of profit maximization objective of financial management.

1) Ambiguity:
The term 'profit maximization' as a criterion for financial decision is vague and ambiguous concept. It lacks precise connotation. The term 'profit' is amenable to different interpretations by different people. For example, profit may be long-term or short-term. It may be total profit or rate of profit. It may be net profit before tax or net profit after tax. It may be return on total capital employed or total assets or shareholders equity and so on.

2) Timing of Benefits:
Another technical objection to the profit maximization criterion is that It Ignores the differences in the time pattern of the benefits received from Investment proposals or courses of action. When the profitability is worked out the bigger the better principle is adopted as the decision is based on the total benefits received over the working life of the asset, Irrespective of when they were received. The following table can be considered to explain this limitation.

3) Quality of Benefits:
Another Important technical limitation of profit maximization criterion is that it ignores the quality aspects of benefits which are associated with the financial course of action. The term 'quality' means the degree of certainty associated with which benefits can be expected. Therefore, the more certain the expected return, the higher the quality of benefits. As against this, the more uncertain or fluctuating the expected benefits, the lower the quality of benefits.

The profit maximization criterion is not appropriate and suitable as an operational objective. It is unsuitable and inappropriate as an operational objective of Investment financing and dividend decisions of a firm. It is vague and ambiguous. It ignores important dimensions of financial analysis viz. risk and time value of money.

An appropiate operational decision criterion for financial management should possess the following quality.
a) It should be precise and exact. b) It should be based on bigger the better principle.
c) It should consider both quantity and quality dimensions of benefits.
d) It should recognize time value of money.

Wealth Maximization Decision Criterion

Wealth maximization decision criterion is also known as Value Maximization or Net Present-Worth maximization. In the current academic literature value maximization is widely accepted as an appropriate operational decision criterion for financial management decision. It removes the technical limitations of the profit maximization criterion. It posses the three requirements of a suitable operational objective of financial courses of action. These three features are exactness, quality of benefits and the time value of money.

i) Exactness : The value of an asset should be determined In terms of returns it can produce. Thus, the worth of a course of action should be valued In terms of the returns less the cost of undertaking the particular course of action. Important element in computing the value of a financial course of action is the exactness in computing the benefits associated with the course of action. The wealth maximization criterion is based on cash flows generated and not on accounting profit. The computation of cash inflows and cash outflows is precise. As against this the computation of accounting is not exact.

ii) Quality and Quantity and Benefit and Time Value of Money: The second feature of wealth maximization criterion is that. It considers both the quality and quantity dimensions of benefits. Moreover, it also incorporates the time value of money. As stated earlier the quality of benefits refers to certainty with which benefits are received In future.

The more certain the expected cash in flows the better the quality of benefits and higher the value. On the contrary the less certain the flows the lower the quality and hence, value of benefits. It should also be noted that money has time value. It should also be noted that benefits received in earlier years should be valued highly than benefits received later.

The operational implication of the uncertainty and timing dimensions of the benefits associated with a financial decision is that adjustments need to be made in the cash flow pattern. It should be made to incorporate risk and to make an allowance for differences in the timing of benefits. Net present value maximization is superior to the profit maximization as an operational objective.

It involves a comparison of value of cost. The action that has a discounted value reflecting both time and risk that exceeds cost is said to create value. Such actions are to be undertaken. Contrary to this actions with less value than cost, reduce wealth should be rejected. It is for these reasons that the Net Present Value Maximization is superior to the profit maximization as an operational objective.

Functions of The Financial Manager

The important function of the financial manager in a modern business consists of the following:

1. Provision of capital: To establish and execute programmes for the provision of capital required by the business.
2. Investor relations: to establish and maintain an adequate market for the company securities and to maintain adequate liaison with investment bankers, financial analysis and share holders.
3. Short term financing: To maintain adequate sources for company’s current borrowing from commercial banks and other lending institutions.
4. Banking and Custody: To maintain banking arrangement, to receive, has custody of accounts.
5. Credit and collections: to direct the granting of credit and the collection of accounts due to the company including the supervision of required arrangements for financing sales such as time payment and leasing plans.
6. Investments: to achieve the company’s funds as required and to establish and co-ordinate policies for investment in pension and other similar trusts.
7. Insurance: to provide insurance coverage as required.
8. Planning for control: To establish, co-ordinate and administer an adequate plan for the control of operations.
9. Reporting and interpreting: To compare information with operating plans and standards and to report and interpret the results of operations to all levels of management and to the owners of the business.
10. Evaluating and consulting: To consult with all the segments of management responsible for policy or action concerning any phase of the operation of the business as it relates to the attainment of objectives and the effectiveness of policies, organization structure and procedures.
11. Tax administration: to establish and administer tax policies and procedures.
12. Government reporting: To supervise or co-ordinate the preparation of reports to government agencies.
13. Protection of assets: To ensure protection of assets for the business through internal control, internal auditing and proper insurance coverage.

Debentures

The issue of debentures by public limited companies is regulated by Companies Act 1956. Debenture is a document, which either creates a debt or acknowledges it. Debentures are issued through a prospectus. A debenture is issued by a company and is usually in the form of a certificate, which is an acknowledgement of indebtedness. They are issued under the company's seal. Debentures are one of a series issued to a number of lenders.

The date of repayment is invariably specified in the debenture. Generally debentures are issued against a charge on the assets of the company. Debentures may, however, be issued without any such charge. Debenture holders have no right to vote in the meetings of the company.

Kinds of Debentures

1. Bearer Debentures: They are registered and are payable to its bearer .They are negotiable instruments and are transferable by delivery.

2. Registered Debentures: They are payable to the registered holder whose name appears both on debenture and in the register of debenture holders maintained by the company. Registered debentures can be transferred but have to be registered again. Registered debentures are not negotiable instruments. PI registered debenture contains a commitment to pay the principal sum and interest. It also has a description of the charge and a statement that it is issued subject to the conditions endorsed therein.

3. Secured Debentures: Debentures which create a charge on the assets of the company, which may be fixed or floating, are known as secured debentures.

4. Unsecured or Naked Debentures: Debentures, which are issued without any charge on assets, are unsecured or naked debentures, The holders are like unsecured creditors and may sue the company for recovery of debt.

5. Redeemable Debentures: Normally debentures are issued on the condition that they shall be redeemed after a certain period. They can, however, be reissued after redemption under Section 121 of Companies Act 1956.

6. erpetual Debentures: When debentures are irredeemable they are called Perpetual.

7. Convertible Debentures: If an option is given to convert debentures into equity shares at stated rate of exchange after a specified period they are called convertible debentures. In our country the convertible debentures are very popular. On conversion, the holders cease to be lenders and become owners. Debentures are usually issued in a series with a pari passu (at the same rate) clause which entitles them to be discharged rate ably though issued at different times. New series of debentures cannot rank pari passu with old series unless the old series provides so.

8. New debt instruments issued by public limited companies are participating debentures, convertible debentures with options, third party convertible debentures, and convertible debentures redeemable at premium, debt equity swaps and zero coupon convertible notes.

9. Participating Debentures: They are unsecured corporate debt securities, which participate in the profits of the company. They might find investors if issued by existing dividend paying companies.

10. Convertible Debentures with Options: They are a derivative of convertible debentures with an embedded option, providing flexibility to the issuer as well as the investor to exit from the terms of the issue. The coupon rate is specified at the time of issue.

11. Third Party convertible Debentures: They are debt with a warrant allowing the investor to subscribe to the equity of a third firm at a preferential vis-à-vis the market price. Interest rate on third party convertible debentures is lower than pure debt on account of the conversion option.

12. Convertible Debentures Redeemable at a premium: Convertible debentures are issued at face value with an option entitling investors to later sell the bond to the issuer at a premium. They are basically similar to convertible debentures but embody less risk.

Balance Sheet

The balance sheet is a significant financial statement of the firm. In fact, it is called the fundamental accounting report. Other terms to describe this financial statement are the statement of financial position or the position statement. As the name suggests, the balance sheet provides information about the financial standing / position of a firm at a particular point of time, say as on March 31. It can be visualized as a snap shot of the financial status of a company. The position of the firm on the preceding or the following day is bound to be different. The financial position of a firm as disclosed by the balance sheet refers to its resources and obligations, and the interest of its owners in the business. In operational terms, the balance sheet contains information regarding the assets, liabilities and shareholder’s equity. The balance sheet can be present in either of the two forms: Report form or Account form.

Contents of the balance sheets:
1) Assets
2) Liabilities

Assets:

Assets may be described as valuable resources owned by a business which have been acquired at a measurable money cost. As an economics resource, they satisfy three requirements. In the first place, the resource must be valuable. A resource is valuable if it is in cash or convertible into cash or it can provide future benefits to the operations of the firm. Secondly, the resources must be owned in the legal sense of the term.

Finally, the resource must be acquired at a measurable money cost. In case where an asset is not acquired with cash or promise to pay cash, the criterion is, what the asset would have cost, had cash been paid for it.

The assets in the balance sheet are listed either in the order of liquiditypromptness with which they are expected to be converted into cash- or in reverse order, that is, fixity or listing of the least liquid asset first, followed by others. All assets are grouped into categories, that is, assets with similar characteristics are put into one category. The assets included in one category are different from those in other categories. The standard classification of assets divides them into:

1) Fixed assets/ long term assets
2) Current assets
3) Investments
4) Other assets

Liabilities:

The second major content of the balance sheet is liabilities of the firm. Liabilities may be defined as the claims of outsiders against the firm. Alternatively, they represent the amount that the firm owes to outsiders that is, other than owners. The assets have to be financed by different sources. One source of funds is borrowing- long term as well as short term. The firms can borrow on a long term basis from financial institutions/ banks or through bonds/ mortgages/ debentures.

The short term borrowing may be in the form of purchase of goods and services on credit. These outside sources from which a firm can borrow are termed as liabilities. Since they finance the assets, they are, in a sense, claims against the assets. The amount shown against the liability items is on the basis of the amount owed, not the amount payable.

Depending upon the periodicity of the funds, liabilities can be classified into
1) Long-term liabilities
2) Current liabilities

Ratio Analysis

Ratio analysis is the method or process by which the relationship of items or groups of items in the financial statements are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measures or guides concerning the financial health and profitability of the business enterprise. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of the analyst but the group of ratios he would prefer depends on the purpose and the objectives of the analysis.

Accounting ratios are effective tools of analysis. They are indicators of managerial and overall operational efficiency. Ratios, when properly used are capable of providing useful information. Ratio analysis is defined as the systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined the term ratio refers to the numerical or quantitative relationship between items/ variables. This relationship can be expressed as:
1) Fraction
2) Percentages
3) Proportion of numbers

These alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratio does not add any information in the figures of profit or sales. What the ratios do is that they reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them.

ADVANTAGES OF RATIO ANALYSIS

· Ratios simplify and summarize numerous accounting data in a systematic manner so that the simplified data can be used effectively for analytical studies.

· Ratios avoid distortions that may result the study of absolute data or figures.

· Ratios analyze the financial health, operating efficiency and future prospects by inter-relating the various financial data found in the financial statement.

· Ratios are invaluable guides to management. They assist the management to discharge their functions of planning, forecasting, etc. efficiently.

· Ratios study the past and relate the findings to the present. Thus useful inferences are drawn which are used to project the future.

· Ratios are increasingly used in trend analysis.

· Ratios being measures of efficiency can be used to control efficiency and profitability of a business entity.

· Ratio analysis makes inter-firm comparisons possible. i.e. evaluation of interdepartmental performances.

· Ratios are yard stick increasingly used by bankers and financial institutions in evaluating the credit standing of their borrowers and customers.

LIMITATIONS OF RATIO ANALYSIS:

An investor should caution that ratio analysis has its own limitations. Ratios should be used with extreme care and judgment as they suffer from certain serious drawbacks. Some of them are listed below:

1. Rations can sometimes be misleading if an analyst does not know the reliability and soundness of the figures from which they are computed and the financial position of the business at other times of the year. A business enterprise for example may have an acceptable current ratio of 3:1 but a larger part of accounts receivables comprising a great portion of the current assets may be uncollectible and of no value. When these are deducted the ratio might be 2:1

2. It is difficult to decide on the proper basis for comparison. Ratios of companies have meaning only when they are compared with some standards. Normally, it is suggested that ratios should be compared with industry averages. In India, for example, no systematic and comprehensive industry ratios are complied.

3. The comparison is rendered difficult because of differences in situations of 2 companies are never the same. Similarly the factors influencing the performance of a company in one year may change in another year. Thus, the comparison of the ratios of two companies becomes difficult and meaningless when they are operation in different situations.

4. Changes in the price level make the interpretations of the ratios Invalid. The interpretation and comparison of ratios are also rendered invalid by the changing value of money. The accounting figures presented in the financial statements are expressed in monetary unit which is assumed to remain constant. In fact, prices change over years and as a result. Assets acquired at different dates will be expressed at different values in the balance sheet. This makes comparison meaningless.

5. The differences in the definitions of items, accounting, policies in the balance sheet and the income statement make the interpretation of ratios difficult. In practice difference exists as to the meanings and accounting policies with reference to stock valuation, depreciation, operation profit, current assets etc. Should intangible assets be excluded to calculate the rate of return on investment? If intangible assets have to be included, how will they be valued? Similarly, profit means different things to different people.

6. Ratios are not reliable in some cases as they many be influenced by window / dressing in the balance sheet.

7. The ratios calculated at a point of time are less informative and defective as they suffer from short-term changes. The trend analysis is static to an extent. The balance sheet prepared at different points of time is static in nature. They do not reveal the changes which have taken place between dates of two balance sheets. The statements of changes in financial position reveal this information, bur these statements are not available to outside analysts.

8. The ratios are generally calculated from past financial statements and thus are no indicator of future. The basis to calculate ratios are historical financial statements. The financial analyst is more interested in what happens in future.

While the ratios indicate what happened in the past Art outside analyst has to rely on the past ratios which may not necessarily reflect the firm’s financial position and performance in future.

Fund Flow Statement

Fund flow statement also referred to as statement of “source and application of funds” provides insight into the movement of funds and helps to understand the changes in the structure of assets, liabilities and equity capital. The information required for the preparation of funds flow statement is drawn from the basic financial statements such as the Balance Sheet and Profit and loss account. “Funds Flow Statement” can be prepared on total resource basis, working capital basis and cash basis. The most commonly accepted form of fund flow is the one prepared on working capital basis.

CASH FLOW VS FUND FLOW

CASH FLOW - A Cash Flow Statement is a statement which shows inflows and outflows of cash and cash equivalents of an enterprise during a particular period. It provides information about cash flows, associated with the period’s operations and also about the entity’s investing and financing activities during the period.

FUND FLOW – Fund Flow Statement also referred to as the statement of “Source and Application of Funds” provides insight into the movement of funds and helps to understand the changes in the structure of assets, liabilities and equity capital.,

A fund flow statement is different from cash flow statement in the following ways –

i). Funds flow statement is based on the concept of working capital while cash flow statement is based on cash which is only one of the element of working capital. Thus cash flow statement provides the details of funds movements.

ii). Funds flow statement tallies the funds generated from various sources with various uses to which they are put. Cash flow statement records inflows or outflows of cash, the difference of total inflows and outflows is the net increase or decrease in cash and cash equivalents.

iii). Funds Flow statement does not contain any opening and closing balance whereas in cash flow statement opening as well as closing balances of cash and cash equivalents are given.

iv). Funds Flow statement is more relevant in estimating the firm’s ability to meet its long-term liabilities, however, cash flow statement is more relevant in estimating the firms short-term phenomena affecting the liquidity of the business.

v). The Cash Flow statement considers only the actual movement of cash whereas the funds flow statement considers the movement of funds on accrual basis.

vi). In cash flow statement cash from the operations are calculated after adjusting the increases and decreases in current assets and liabilities. In funds flow statement such changes in current items are adjusted in the changes of working capital.

vii). Cash flow statement is generally used as a tool of financial analysis which is utilized by the management for short- term financial analysis and cash planning purposes, whereas funds flow statement is useful in planning intermediate and long-term financing.

Advantages of Fund Flow Statements:

Advantages of fund flow are as follows:

 Management of various companies are able to review their cash budget with the aid of fund flow statements.

 Helps in the evaluation of alternative finance and investments plan.

 Investors are able to measure as to how the company has utilized the funds supplied by them and its financial strengths with the aid of funds statements.

 It serves as an effective tool to the management of economic analysis.

 It explains the relationship between the changes in the working capital and net profits.

 Help in the planning process of a company.

 It is an effective tool in the allocation of resources.

 Helps provide explicit answers to the questions regarding liquid and solvency position of the company, distribution of dividend and whether the working capital is effectively used or not.

 Helps the management of companies to forecast in advance the requirements of additional capital and plan its capital issue accordingly.

 Helps in determining how the profits of a company have been invested: whether invested in fixed assets or in inventories or ploughed back.

CONCEPT OF DEPRECIATION?

 

 

 

 

 

 

» CONCEPT OF DEPRECIATION
» FIXED ASSETS
» MEANING AND DEFINITION OF DPRECIATION
» METHODS OF CALCULATING DEPRCIATION

 

 

CONCEPT OF DEPRECIATION

Depreciation is the process of spreading the cost of fixed asset over the different accounting periods which drive the benefit from their use. The cost of fixed assets apportioned to a given period from part of the overall cost to be matched with the revenues generated in that. So, depreciation is of great significance in the concept of income measurement. It measures the service potential of the fixed assets period.

FIXED ASSETS

They include all assets whose benefit is derived by businessman for a long period of time, usually more than one year period, Examples : Machinery, Furniture, Buildings, Leases, etc. land is affixed asset but not subject to depreciation because it has infinite lifetime. Assets are any property owned by a person or business. Tangible assets include money, land, buildings, investments, inventory, cars, trucks, boats, or other valuables. Intangibles such as goodwill are also considered to be assets. Capital Assets, also known as Fixed Assets, are those assets such as land, buildings, and equipment acquired to carry on the business of a company with a life exceeding one year. Fixed assets are assets that help companies reap economic benefits over a period of time. Assets such as land, building, plant and machinery are all fixed assets. The general consensus is that fixed assets cannot be liquidated easily. This is quite apparent when compared to current assets such as cash and bank account and inventories, which can be liquated or converted into cash relatively easily. It may be noted that intangible assets can also be part of this head as they benefit companies over a long period of time. Few more examples of the same would be trademarks, designs and patents.

MEANING AND DEFINITION OF DPRECIATION

Depreciation is a permanent decline in the value of an asset. The gradual decrease, both in the value and usefulness, of an asset due to its nature and usage is termed as depreciation. Depreciation is the measure of wearing out of a fixed asset. All fixed assets are expected to be less efficient as time goes on. Depreciation is calculated as the estimate of this measure of wearing out and is charged to the Profit & Loss account either on a monthly or annual basis. The cost of the asset less the total depreciation will give you the Net Book Value of the asset.

It is common experience that whenever an asset is used it reduces in value. The net result of depreciation is that sooner or letter, the asset becomes useless. So, it can be stated that depreciation is that portion of the cost of an asset which is reduced from revenues for the services of the asset in the operation of a business.

According to Spicer and Pegler “Depreciation is thee measure of the exhaustion of the effective life of an asset from any cause during a given period.”

According to the Institute Of Chartered Accountants Of India, “Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use effluxion of time or obsolescence through technology and market changes.”

According to International Accounting Standards Committee, “Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life. Depreciation for the accounting period is charged to income either directly or indirectly.”

The following important terms from these definitions are important:

• Depreciable Assets: The assets whose lifetime can be estimated and useful during two or more accounting periods in production or service activities of an organization can be called depreciable assets.

• Useful life: Useful life is the time during which the asset is helpful in the normal business activities of a firm. It can be less than the total life time of the asset. It can be exactly predetermined or it should be estimated on reasonable basis.

• Depreciable Amount: It is the cost of acquisition and installation of an asset after reducing any realizable value at the end of useful life.

• Realizable value at the end of useful life.

• Effluxion of time: It is the passage of time irrespective of actual use of an asset as in the case of leased assets.

• Obsolescence: It refers to an asset becoming out of date due to improved models or methods.

METHODS OF CALCULATING DEPRCIATION

1. Straight Line Method or Fixed Installment Method.

2. Written Down Value Method or Diminishing Balance Method.

3. Annuity Method.

4. Depreciation Fund Method.

5. Insurance Policy Method.

6. Revaluation Method.

Straightline Method or Fixed Instalment Method or Original Cost Method

Under this method, the same amount of depreciation is charged every year throughout the life of thee asset. The amount and rate of depreciation is calculated as under.

1. Amount of depreciation = Total cost - Scrap value / Estimated life

2. Rate of depreciation = Amount of depreciation / Original cost x 100

MERITS:

1. Simplicity: It is every simple and easy to understand.

2. Easy to calculate; It is easy to calculate the amount and rate of depreciation.

3. Assets can be completely written off: Under this method, the book value of the asset become zero or equal to its scarp value at the expiry of its useful life.

DEMERITS: The amount of depreciation is same in all the years, although the usefulness of the machine to the business is more in the initial years, although the usefulness of the machine to the business is more in the initial years than in the later years.

Written Down Value Method or Dimnishing Balance Method or Reducing Balance Method

Under this method, depreciation is charged at a fixed percentage each year on the reducing balance (i.e. cost less depreciation) goes on decreasing every year.

Merits:

1. Uniform effect on the profit and loss account of different years. The total charge (i.e.. depreciation plus repairs and renewals) remains almost uniform year after year, since in earlier year the amount of depreciation is more and the amount of repairs and renewals is more.

2. Recognized by the income tax authorities: This method is recognized by the income tax authorities.

3. Logical Method: It is a logical method as the depreciation is calculated on the diminished balance every year.

DEMERITS: It is very difficult to determine the rate by which the value of assets could be written down to Zero.

Annuity Method

The annuity method considers that the business besides loosing the original cost of the asset in terms of depreciation and also loses interest. On the amount used for buying the asset. This is based on the assumption that the amount invested in the asset would have earned in case the same amount would have been invested in some other form of investment. The annual amount of depreciation is determined with the help of annuity table.

Depreciation Fund Method or Sinking Fund Method

Under this method, funds are mad available for the replacement of asset at the end of its useful life.th depreciation remains the same year after year and is changed to profit and loss account every year through the creation of depreciation fund. The aggregate amount of interest and annual provision is invested every year. When the asset is completely written off or is to be replaced, the securities are sold and the amount so realized by selling securities is used to replace the old asset.

Insurance Policy Method

According to this method, an insurance policy is taken for the amount of the asset to be replaced. The amount of the policy is such that it is sufficient to replace the asset when it is worn out. A sum equal to the amount of depreciation is paid as premium every year. The amount goes on accumulating at a certain rate of interest and is received on maturity. The amount so received is used for the purchase of new asset, replacing the old one.

Revaluation Method

Under this method, the asset like loose tools are revalued at the end of the accounting period and the same is compared with the value of the asset at the beginning of the year. The difference is considered as depreciation.

Straightline Method or Fixed Instalment Method or Original Cost Method

Under this method, the same amount of depreciation is charged every year throughout the life of the asset .The amount and rate of depreciation is calculated as under.

1. Amount of depreciation = Total cost - Scrap Value / Estimated life

2. Rate of depreciation = Amount of depreciation / Original Cost x 100

Merits:

1. Simplicity; It is very simple and easy to understand.

2. Easy to calculate; It is easy to calculate the amount and rate of depreciation.

3. Assets can be completely written off; Under this method, the book value of the asset become Zero or equal to its scrap value at the expiry of its useful life.

DEMERITS:

The amount of depreciation is same in all the years, although the usefulness of the machine to the business is more in the initial years than in the later years.

Written Down Value Method or Dimnishing Balance Method or Reducing Balance Method

Under this method, depreciation is charged at a fixed percentage each year on the reducing balance (i.e., cost less depreciation) of asset. The amount of depreciation goes on decreasing every year.

MERITS:

1. Uniform effect on the profit and loss account of different years. The total charge( i.e.… depreciation plus repairs and renewals) remains almost uniform year after year, since in earlier year the amount of depreciation is more and the amount of repairs and renewals is less, Whereas in later years the amount of depreciation is less and the amount of repairs and renewals is more.

2. Recognized by the income tax authorities; this method is recognized by the income tax authorities.

3. Logical Method: It is a logical method as the depreciation is calculated on the diminished balance every year.

DEMERITS:

It is very difficult to determine the rate by which the value of asset could be written down to zero.

DEFINATION OF BUDGETARY CONTROL?

 

 

 

 

 

» DEFINATION OF BUDGETARY CONTROL
» PREPARATION OF A CASH BUDGET
» FLEXIBLE BUDGETS
» MASTER BUDGET

 

 

DEFINATION OF BUDGETARY CONTROL

Budgetary Control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with the budgetary standards.

This comparison reveals the necessary actions to be taken so that organizational objectives are accomplished. Budgeting focuses on specific and time bound targets and thus help in the attainment of organizational objectives.

Budgeting is a source of motivation to the employees who know the standard against which their performance will be evaluated and thus, enables them to perform better. Budgeting helps in optimum utilization of resources by allocating them according to the requirements of different departments.

Budgeting is also used for achieving coordination among different departments of an organization and highlights the interdependence between them. For instance, sales budget cannot be prepared without knowing production programmes and schedules. It facilitates management by exception by stressing on those operations which drive from budgeted standards in a significant way.

PREPARATION OF A CASH BUDGET

CASH BUDGET

An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has to fulfill regular operations and/or whether too much cash is being left in unproductive capacities.

“A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems”.

For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.

For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things.

If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.

OUTLINE OF A CASH BUDGET

Cash Budget is prepared in the following manner:

Opening Cash Balance		--		------------
Add Cash Sales		--		------------
Cash Received yet to be
Received from debtors		--		------------
Less: Expenses made by Cash		--		------------
Payments to made to Creditors		--		------------
Administrative and Selling
Expenses		--		------------
Surplus or Deficit				------------
				------------

FLEXIBLE BUDGETS

Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets. For example, a restaurant may serve 100, 150 or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served? Similar scenarios exit with merchandising and manufacturing companies. To effectively evaluate the restaurant’s performance in controlling costs, management must us a budget prepared for the actual level of activity. This does not mean management ignores difference in sales level, or customers eating in a restaurant, because those differences and the management actions that caused them need to be evaluated, too.

The flexible budget shows an even higher unfavorable variance than the static budget. This does not always happen but is why flexible budgets are important for giving management an indication of what question need to be asked. The important thing to remember in preparing a flexible budget is that if an amount, cost or revenue, was variable when the original budget was prepared, that amount is still variable and will need to be recalculated when preparing a flexible budget. If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range. Budget reports can be a useful tool for evaluating a manager’s effectiveness only if they contain the appropriate information. When preparing budget reports, it is important to include in in the report items the manager can control. If a manager is only responsible for a department’s costs, to include all the manufacturing costs or net income for the company would not result in a fair evaluation of the manager’s performance .If, however the manager is the Chief Executive Officer, the entire income statement should be used in evaluating performance.

MASTER BUDGET

The master budget is a summary of company’s plans that sets specific targets for sales, production, distribution and functioning activities. It generally culminates in a cash budget, a budgeted income statement and a budgeted balance sheet. In short a master budget represents a comprehensive expression of management’s plans for future and how these plans are to be accomplished.

It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate affects other budget estimates because the figure of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets.

DEFINE BREAK-EVEN ANALYSIS

 » BREAK-EVEN ANALYSIS DEFINITION
» MARGIN OF SAFETY
» IN CAPITAL BUDGETING
» PROFIT, COST AND QUANTITY ANALYSIS

 

 

BREAK-EVEN ANALYSIS DEFINITION

The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC).A break-even point is typically calculated in order for business to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. Break-Even Analysis can also be used to analyze the potential profitability of an expenditure in a sales-based business.

Break-even point (for output) = fixed cost/ contribution per unit

Contribution (p.u) = Selling price (p.u) – Variable cost (p.u)

Break-even point (for sales) = fixed cost/ contribution (pu) *sp (pu)

MARGIN OF SAFETY

In break-even analysis, margin of safety is how much output or sales level can fall before a business reaches its break-even point (BEP).

Margin of safety = ( (Budgeted sales- break-even sales)/ Budgeted sales) x100%

In Unit Sales

If the product can be sold in a larger quantity that occurs at the break-even point, then the firm will make a profit : below this point, a loss. Break-even quantity is calculated by:

Total fixed costs / (Selling price- average variable costs). Explanation-in the denominator, “price minus average variable cost” is the variable profit per unit, or contribution margin of each unit that is sold. This relationship is derived from the profit equation : Profit = Revenues –Costs where Revenues = (selling price * quantity of product ) and Costs= (average variable costs*quantity)+ total fixed costs. Therefore, Profit = (selling price*quantity)-(average variable costs* quantity +total fixed costs).Solving for Quantity of product at the breakeven point when profit equals zero, the quantity of product at breakeven is Total fixed costs/ (selling price-average variable costs).

Firms may still decide not to sell low- profit products, for example those not fitting well into their sales mix. Firms may also sell products that lose money-as a loss leader, to offer a complete line of products, etc. But if a product does not break does not break even, or a potential product looks like it clearly will not sell better than the break-even point, then the firm will not sell, or will stop selling, that product.

EXAMPLE

• Assume we are selling a product for $2 each.

• Assume that the variable cost associated with producing and selling the product is 60 cents.

• Assume that the fixed cost related to the product (the basic costs that are incurred in operating the business even if no product is produced) is $1000.

• In this example, the firm would have to sell (1000/2.00-0.60)=715)715 units to break even in that case the margin of safety value of NIL and the value of BEP is not profitable or not gaining loss.

Break Even =FC /(SP “VC)
Where FC is Fixed Cost, SP is selling Price and VC is Variable cost

IN CAPITAL BUDGETING

Break-even analysis is a special application of sensitivity analysis. It aims at finding the value of individual variables at which the project’s NPV is zero. In common with sensitivity analysis, variables selected for the break-even analysis can be tested only one at a time.

The break–even analysis results can be used to decide abandon of the project if forecasts show that blow break even values are likely to occur.

In using Break-even analysis, it is important to remember the problem associated with Sensitivity analysis as well as some extension specific to the method:

• Variables are often interdependent, which makes examining them each individually unrealistic.

• Often the assumption upon which the analysis is based are mad by using past experience/ data which may not hold in the future.

• Variables have been adjusted one by one; however it is unlikely that in the life of the project only on variable will change until reaching the break-even point. Management decisions made by observing the behavior of only one variable are most likely to be invalid.

• Break-even analysis is a pessimistic approach by essence. The figures shall be used only as a line of defense in the project analysis.

LIMITATIONS

• Break-even analysis is only a supply side (i.e. . cost only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.

• It assumes that fixed costs (FC) are constant.

• It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity).

• It assumes that the quantity of goods produced is equal to the quantity of good sold ( i. e,. there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).

• In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e. the sales mix is constant).

Branch of Cost-Volume –Profit (CVP) Analysis that determines the break-even point, which is the level of sales where total, costs equal total revenue. Thus, zero profit results. Break even sales is computed as follows:-

Break-even sales in units = Fixed costs / Unit contributions margin.

Break-even sales in dollars = Fixed costs /Contribution margin ratio.

For example, assume:

Fixed costs = $ 15,000.

Unit contribution margin (selling price- unit variable cost )= $15, and

Contribution margin ratio (unit CM/ selling price ) = .6

Then, break-even sales in units = $ 15,000/$15 = 1000 units and break-even sales in dollars = $ 15,000/.6 =$ 25,000.

A break-even chart is one in which sales revenue, variable costs, and fixed costs are plotted on the vertical axis while volume is plotted on the horizontal axis .The Break-Even Point is the Point at which the total sales revenue line intersects the total cost line.

See the example chart below.

PROFIT, COST AND QUANTITY ANALYSIS

Cost-Volume-profit (CVP) analysis is a mathematical representation of the economics of producing a product. The relationship between a product’s revenue and cost functions expressed within the CVP model are used to evaluate the financial implications of a wide range of strategic and operational decisions. For example, CVP analysis is employed to assess the financial implications of product mix, pricing, and product and process improvement decisions. Perhaps equally important, CVP analysis facilities measuring the sensitivity of a product’s profitability to variations in one or more of its underlying parameters. Finally, CVP analysis may be used to determine the trade-offs in profitability and risk from alternative product design and production possibilities. In effect, CVP is a quantitative model for developing much of the financial information relevant for evaluating resource allocation decisions.

PRODUCT MIX DECISIONS AND CVP ANALYSIS

CVP analysis is generally implemented with financial data taken from the firm’s accounting system. Financial data is readily available, as well as congruent, with the accounting profit objective inherent in the use of CVP analysis. The financial data needed for CVP may be taken from either a traditional cost accounting or an activity-based costing (ABC) system. Traditional cost accounting system allocate overhead to products based on one or more volume-based measures of activity. However, products consume overhead resources based on batch-, facility-,and complexity-, as well as volume- or unit-level, activities, Consequently, traditional cost accounting systems can systematically misallocate overhead to products.

CVP analysis is used to measure the economic characteristics of manufacturing a proposed product. Based on accounting data, the CVP model is used to determine the sales quantity needed to break even, as well as the sales quantity required to earn a desired profit or profit margin. Managers then compare a product’s expected sales with the sales quantities required to break even and/or earn a target profit margin to determine whether the product should be produced.

APPLICATION OF MARGINAL COSTING

Marginal costing is an important technique of managerial decision-making. It is a tool for cost control and profit planning. The advantages of Marginal costing technique are:

1. Simplicity: the statement under marginal costing can be easily followed as it breaks up the cost as variable and fixed.

2. Stock valuation: Stock valuation can be easily done and understood as it includes only variable cost.

3. Meaningful reporting: marginal costing serves as a good basis for reporting to management. The profits can be analyzed from the point of view of sales rather than production.

4. Effect of fixed costs: the fixed costs are treated as period costs and are charged to P&L A/C directly. Thus they have practically no effect on decision- making.

5. Profit planning: the cost- volume relationship is perfectly analyzed to reveal the efficiency of products, processes and departments. ‘Break-even point’ and margin of safety’ are the two important concepts helpful in profit planning. Most advantageous volume and cost to maximize profits within the existing limitations can be planned.

LIMITATIONS OF MARGINAL COSTING

1. Classification of Cost: Break up of cost into variable and fixed portions is a difficult problem. Moreover clear-cut division of semi variable or semi fixed cost is complicated and cannot be accurate.

2. Not suitable for external reporting: Since fixed cost is not included in total cost, full cost is not available to outsider to judge the efficiency.

3. Lack of Long-term perspective: Marginal Costing is more suitable for decision making in the shot-term. It assumes that costs are classified into fixed and variable. In the long term all the costs are variable. Therefore it ignores time element and is not suitable for long-term decisions.

4. Under Valuation of Stock: Under marginal costing, only variable costs are considered and the outputs as well as stocks are undervalued and profit is distorted. When there is loss of stock the insurance cover will not meet the total cost of Marginal Costing in Business.

1. KEY FACTOR OR LIMITING FACTOR

Any factor concerned with production or sales, which imposes ‘limits’ on the production or sales can be called ‘limiting factor’ or key factor. It can be limited sales, limited production, and limited raw materials in us or limited finance.

2. MAKE OR BUY DECISION

Using a large number of parts or components assembles many durable products. Some of them may be made by the firm, which is assembling the product. It may buy some products from outside. When an assembling firm receives an offer from outside for a component it is already making, the ‘make or buy decision’ must be taken. Marginal Costing helps in taking the make or buy decision.

3. FIXATION OF SELLING PRICE

Marginal costing technique is widely used in the area of determining selling price. Prices will have to be fixed in different situations, under specific constraints, etc. total cost must be recovered and profit also to be mad by fixing appropriate selling price.

4. EXPORT DECISION

When idle capacity still exists, exporting is usually the most profitable strategy. So companies that have already recovered their fixed costs from local sales can export just above their variable cost and still make good profits. This is generally termed as dumping.

Definition of Learning ? Describe Its Process

 

 

 

» Meaning and Definition of Learning
» Nature/Characteristics of Learning
» Principal of Learning
» Principle Elements of Learning
» Learning Process
» Key Attributes of Learning Process in Training
» Methods of Learning in a Training Programme
» Theories of Learning
» Training Needs
» Training Policy

 

Meaning and Definition of Learning

Learning is an important psychological process determining human behavior. It is a continuous process and it occurs all the time. Learning may be defined as the sum total of behavioral changes resulting from experience at training. The newly acquired knowledge and experience serve as feedback to the individual and provide the basis for future behavior in similar situations.

According to E.R.Hilgard,”Any relatively permanent change in behavior that occurs as a result of prior experience is known as learning.”

According to Sanford,” learning as a relatively enduring change in behavior bought about as a consequence of experience.”

According to McGhee, “learning has taken place if an individual behavior reacts, responds as a result of experience in a manner different from thee way, he formerly behaved.”

“Learning is the process by which new behaviors are acquired. It is generally agreed that learning involves changes in behavior, practicing new behaviors and establishing permanency in the change.”

According to the Dictionary of psychology, “Learning means the process of acquiring the ability to respond adequately to a situation which may or may not have been previously encountered the favorable modification of response tendencies consequent upon previous experience, particularly the building of a new series of complex coordinated motor response: the fixation of items in memory so that they can be recalled or organized; the process of acquiring insight into a situation.”

Nature/Characteristics of Learning

Characteristics of Learning

1) Purposeful.
2) Result of experience.
3) Multi-faceted.
4) Active Process.

1) Learning is purposeful: Each student sees a learning situation from a different viewpoint. Each student is a unique individual whose past experiences affect readiness to learn and understanding of the requirements involved. For example, an instructor may give two aviation maintenance students the assignment of learning certain inspection procedures. One student may learn quickly and be able to competently present the assigned material. The combination of an aviation background and future goals may enable that student to realize the need and value of learning the procedures. A second student’s goal may result in only minimum preparation. The response differ because each student acts in accordance with what he or she sees in the situation.

2) Learning is a Result of Experience: Since learning is an individual process, the instructor cannot do it for the student. The student can learn only from personnel experiences; therefore, learning and knowledge cannot exit apart from a person. A person’s knowledge is a result of experience and no two people have had identical experiences. Even when observing the same event, two people react differently, they learn different things from it according to the manner in which the situation affects their individual needs. Previous experience conditions a person to respond to some things and to ignore others.

3) Learning is Multi-faceted: If instructors see their objective as being only to train their students’ memory and muscles, they are underestimating the potential of the teaching situation. Students may learn much more than expected, if they fully exercise their minds and feelings. The fact that these items were not included in the instructor’s plan does not prevent them from influencing the learning situations.

Learning is multi-faceted in still another way. While learning the subject at hand, students may be learning other things as well. They may be developing attitudes about aviation –good or bad – depending on what they experience. Under a skillful instructor, they may learn self-reliance. The list is seemingly endless. This type of learning is sometimes referred to as incidental, but it may have a great impact on the total development of the student.

4) Learning is an active process: Students do not soak-up knowledge like a sponge absorbs water. The instructor cannot assume that students remember something just because they were in the classroom, shop or airplane when the instructor presented the material. Neither can the instructor assume that the students can apply what they know because they can quote the correct answer verbatim. For students to learn, they need to react and respond perhaps outwardly, perhaps only inwardly, emotionally or intellectually. But if learning is a process of changing behavior, clearly that process must be an active one.

5) Other characteristics:
Learning involves a change in behavior. This may be good or bad from an organizational point of view. People may learn favorable behaviors as well as unfavorable behavior.

The behavioral change must be relatively permanent. Temporary changes may be reflexive and fall to represent any learning.

Learning is reflected in behavior. A change in human’s thought, process, attitudes not accompanied by behavior is not learning.

The practice or experience must be reinforced in order for learning to occur, It reinforcement does not accompany the practice or experience, the behavior will disappear.

Principal of Learning

Over the years, educational psychologists have identified several principals which seem generally applicable to the learning process. They provide additional insight into what makes people learn most effectively.

1. Readiness: Individuals learn best when they are ready to learn and they do not learn well, if they see no reason for learning. Getting students ready to learn is usually the instructor’s responsibility. If students have a strong purpose, a clear objective and a definite reason for learning something, they make more progress than if they lack motivation. When students are ready to learn, they meet the instructor at least halfway and this simplifies the instructor’s job.

2. Exercise: The principle of exercise states that those things most often repeated, are best remembered. It is the basis of drill and practice. The human memory is fallible. The mind can rarely retain, evaluate and apply new concepts or practices after a single exposure. Students do not learn to weld during one shop period or to perform crosswise landings during one instructional flight. They learn by applying what they have been told and shown. Every time practice occurs, learning continues. The instructor must provide opportunities for students to practice and at the same time; make sure this process is directed towards a goal.

3. Effect: The principle of effect is based on the emotional reaction of the student. It states that learning is strengthened when accompanied by a pleasant or satisfying feeling and that learning is weakened when associated with an unpleasant feeling. Experiences that produce feelings of defeat, frustration, anger, confusion or futility are unpleasant for the student. If, e.g., an instructor attempts to teach landing during the first flight, the student is likely to feel inferior and be frustrated.

4. Primacy: Primacy, the state of being first often creates a strong, almost unshakable impression. For the instructor, this means that what is taught must be right the first time. For the student, it means that learning must be right. Unteaching is more difficult than teaching.

5. Intensity: A vivid, dramatic or exciting learning experience teaches more than a routine or boring experience. A student is likely to gain greater understanding of slow flight and stalls by performing them rather than merely reading about them. The principle of intensity implies that a student will learn more from the real thing than from a substitute.

6. Recency: The principle of recency states that things most recently learned are best remembered. Conversely, the further a student is removed time-wise from a new fact or understanding, the more difficult it is to remember. It is easy, e.g., for a student to recall a torque value used a few minutes earlier, but it is usually impossible to remember an unfamiliar one used a week earlier.

7. Employee Motivation: Motivation to learn is the basic requisite to make training and development programme effective.

8. Recognition of individual Differences: Regardless of individual differences and whether a trainee is learning a new skill or acquiring knowledge of a given topic, the trainee should b given the opportunity to practice what is being taught.

9. Practice Opportunities: Practice is also essential after the individual has been successfully trained.

10. Reinforcement: It may be understood as anything that both increases the strength of response and tends to induce repetitions of thee behavior that preceded the enforcement. Distinction may be made between positive reinforcement and negative reinforcement.

Positive reinforcement strengthens and increases behavior by the presentation of desirable consequences.

In negative reinforcement, the individual exhibits the desired behavior to avoid something unpleasant.

11. Knowledge of results (feedback): Knowledge of results is a necessary condition for learning.

12. Goal: goal setting can also accelerate learning, particularly when it is accompanied by knowledge of results.

13. Schedules of Learning:

i) Duration of practice sessions.
ii) Duration of rest sessions and.
iii) Positioning of rest pauses.
All the three must be carefully planned and executed.

14. Meaningfulness of Material: A definite relationship has been established between learning and meaningfulness of the subject learnt. The more meaningful the material, the better the learning process.

15. Transfer of Learning: What is learnt in training must be transferred to the job.

Principle Elements of Learning

1) Drive: Learning frequently occurs in the presence of drive- any strong stimulus that impels action. Without drive, learning does not take place thus it is the basis of motivation. A motive differs from drive mainly in that it is purposeful, or directed towards the specific goal, where as drive refers to an increased probability of activity without specifying the nature of the activity. Drives are basically of two types primary or psychological drives and secondary or psychological drives. These two categories of drives often interact. Individuals operate under many drives at the same time.

2) Cue Stimuli: Cue stimuli are any objects existing in the environment as perceived by the individual. It is common to speak of cue stimuli simply as stimuli or to use the term cue and stimuli interchangeable. The idea here is to discover the conditions under which as stimulus will increase the probability of eliciting a specific response. There may be two types of stimuli so far as their results in terms of response are concerned: generalization and discrimination:

i) Generalization: Generalization occurs when a response is elicited by a similar new stimulus. If two stimuli are exactly alike, they will have the same probability of evoking specified response. The principle of generalization has important implications for human learning. It makes possible stability in main actions across the time .For example, stereotyping or halo effect in perception occurs because of generalization.

ii) Discrimination: Discrimination is opposite of generalization. This is a process where an organism learns to emit a response to a stimulus but avoids making the same response to a similar but somewhat different stimulus. For example, a rat no may learn to respond to the white color but not to the black.

3) Responses: The stimulus results in responses. Responses may be in the physical form or may be in terms of attitudes. Familiarity, perception, or other complex phenomena. Usually however, learning psychologists attempt measurement of learning in behavioral terms that is, responses must be operationally defined and preferable physically observable.

4) Reinforcement: Reinforcement is a fundamental condition of learning without reinforcement, no measurable modification of behavior takes place. The term reinforcement is very closely related to the psychological process of motivation. Reinforcement may be defined as environmental events affecting the probability of occurrence of responses with which they are associated. The role of reinforcement in learning is very important. Of several responses made to the same situation, those which are accompanied or closely followed by satisfaction (reinforcement) will be more likely to recur ; those which are accompanied or closely followed by discomfort (Negative reinforcement or punishment) will be less likely to occurs.

5) Retention: The stability of learned behavior over time is defined as retention and the converse in forgetting. Some of the learning is retained over a period of time, while other may be forgotten. Extinction is a specific form of forgetting.

6) Extinction: Extinction may be defined as a loss of memory. Extinction of a well learned response is usually difficult to achieve because once something is learned, it is never truly unlearned. Thus extinction merely mans that the response in question has been repressed or it may be replaced by learning of incompatible response.

7) Spontaneous Recovery: The return of response strength after extinction, without intervening reinforcement, is called spontaneous recovery. Spontaneous recovery is not unusual among people when they are confused under stress or in other unusual states. The original response strength of an extinguished behavior can also be recovered when a previously extinguished response is rewarded in an isolated instance.

Learning Process

The various elements involved in the process of learning are :

1) The training/teaching organization.
2) And the technology of training/teaching.
3) The trainer/teacher and.
4) The learner.

All these four elements are important. Each of these can be treated as a system or a sub-system.

i) The training /teaching organization, including the training/teaching group, can be called the endosystem. This system has its own dynamics. The main function of this system is to maximize the motivation for learning by creating the culture and climate conducive to such motivation.

ii) The system of the teaching/training technology is concerned with the mechanics of teaching/training. Methodology and aids help in various aspects of learning. However, the main function of this system is to help assimilation and stabilization of learning through practices and application.

iii) The trainer/teacher is certainly an important person in this whole cycle, and is the main representative of the influence system. Although other elements also produce influence, the main impact is made by the teacher/trainer through his behavior, values, and competence. The way the trainer/teacher influences the learner may determine the effectiveness of learning to a great extent.

iv) The last, but certainly the most important element in the process of learning is the learner. The learner makes use of the other systems. His main function is the development and effective use of processes. Process is the dynamic system of various procedures used in assimilating, internalizing, using, and creating learning. This system may therefore be called the process system.

Another important feature of the inter-relationship among the four elements is that while three elements-the endosystem, the process, and the influence of trainer/teacher-make mutual contributions, the mechanics of learning only receive contributions from the endosystm and the trainer/ teacher while being in a mutual relationship with the process system. This means that the technology of training is not crucial in determining the effectiveness of learning. Because of the glamor of technology, it may draw more attention: but it plays a limited, through important role in making learning effective.

ENDOSYSTEM

The general atmosphere of the training institute communicates much more and with greater impact than what is taught in the classroom. One of the main advantages of programmed learning is that a learner does not feel threatened in committing mistakes. If learning cannot provide challenge, it ceases to motivate. One way to produce a challenge is to encourage new learning. Failure to achieve a goal, however challenging it may be, does not motivate.

MECHANICS OF LEARNING

If the learner knows what he could not learn, and why, learning will be more effective. It is important that feedback is given as close to the learning event as possible. The application of learning implies the development of insight in the learner and an ability to respond to a situation effectively. The learner should develop both, the motivation as well as the skills and capability for self-learning. Learning can be more effective if the learner discovers knowledge rather than getting it from the teacher/trainer. The learner should be helped to develop his own system of self-learning. Learners learn not only from the teacher/trainer but also from one another.

INFLUENCE: THE TRAINER

The teacher/trainer influences the learning situation a great deal. The trainer’s values, general style of interaction, competence, and individual needs matter a great deal. His contribution to the learning process is most vital.

The trainer’s main contribution is through his values. It may be useful for teacher/trainers to examine what values they are incorporating. Since the main role of the trainer/teacher is to influence the learners and their learning process, the question they should ask themselves is what their model of an ideal human being is. Cognitive learning takes place best through enquiry, through the learner’s own motivations.

The trainer’s style is very important in the learning process .One dimension of the trainer’s style is the type of influence he uses. Teacher/trainers can be classified as having a direct influence style or an indirect influence style.

The interaction process between the trainer/teacher and the learner is very important. One simple and useful system of classification for the interaction process is that based on the influence of the trainer. The trainer influences learners in various ways. Direct influence restricts the freedom of the learner, is prescriptive, and develops coping behavior. Indirect influence increases the learner’s freedom, is liberating, and develops expressive behavior.

LEARNING THROUGH TRAINING

Training is essentially a learning process, and studies show there are several things you can do to improve learning.

Make Learning Meaningful: It is usually easier for trainees to understand and remember material that is meaningful, Therefore:

1) At the start of training, provide a bird’s- eye view of the material to be presented. Knowing the overall picture facilitates learning.

2) Use a variety of familiar examples.

3) Organize the information so you can present it logically, and in meaningful units.

4) Use terms and concepts that are already familiar to trainees.

5) Use as many visual aids as possible.

Make skills Transfer Easy: Make it easy to transfer new skills and behaviors from the training site to the job site.

1) Maximize the similarity between the training situation and the work situation.

2) Provide adequate practice.

3) Label or identify each feature of the machine and/or step in the process.

4) Direct the trainees’ attention to important aspects of the job. For example, if you’re training customer service representatives how to handle incoming calls, first explain the different types of calls they will encounter and how to recognize such calls.

5) Provide “heads- up.” Preparatory information. For example, trainees learning to become first-line supervisors often face stressful conditions, high workload, and difficult subordinates back on the job. Studies suggest you can reduce the negative impact of such events by letting trainees know they might happen.

Motivate the Learner: Here are some ways to motivate the trainee:

1) People learn best by doing. Try to provide as much realistic practice as possible.

2) Trainees learn best when the trainers immediately reinforce correct responses, perhaps with a quick “well done”.

3) Trainees learn best at their own pace. If possible, let them pace themselves.

4) Create a perceived training need in the trainees’ minds. In one study, pilots who had experienced pretraining accident- related events subsequently learned more from an accident-reduction training program than did those experiencing fewer such events. You could illustrate the need for the training by showing videos of simulated accidents. Similarly, “before the training, managers need to sit down and talk with the trainee about why they are enrolled in the class, what they are expected to learn and how they can use it on the job.”

5) The schedule is important too: The learning curve goes down late in the day. So that “full day training is not as effective as half the day or three-fourths of the day.”

Key Attributes of Learning Process in Training

Learning is an Evolutionary process: In a training programme, learning is an evolutionary process. It is instigated by a training activity and nurtured through participation and sharing. It flourishes in an environment of mutual support and encouragement among the participants, with the trainer providing the necessary guidance and direction.

Learning is a product of collaboration: A key imperative for a successful training programme is the establishment of an active and functional bond between the participants and the trainers, based on mutual support and respect. This relationship underpins all learning activities and interaction during a programme. There is considerable investment, in time and effort, from both sides. It is, therefore, necessary that the training team and the participants should have unity of purpose, as both have high stakes in the success of the programme.

Learning process is Unique to an individual: Learning is a highly individual and unique process. The participation of an individual participant in the learning process is determined by the level of intrinsic motivation and nurtured by an environment that encourages him to explore and discover the meaning of training in his work and other aspects of life. Each participant responds in his own distinct way to the same stimulus and environment in accordance with the meaning, the training has for him and the interest the training activities generate. There are other factors also that influence his response— his training needs, his personal experiences, the working environment in his organization and overall perception of the programme.

Learning also takes place at the subconscious Level: In a training programme, while most of the learning takes place at the conscious level, in many cases, a significant part occurs at the subconscious level as well. A participant may not be fully aware of all the learning that his mind gathers and internalizes. a major reason for this phenomenon is that a participant is so intensely engaged in the training activities that he does not have an opportunity to sit back and reflect on the learning. Thus, it is quit conceivable that learning at the subconscious level, is not perceived or acknowledged by the participant during the programme or even soon after a training activity is completed.

Learning has Intellectual and Emotional Elements: Learning is not merely a cognitive process. It has emotional content as well.” The extent to which emotions are involved in the learning process depends on the level of commitment and motivation of the participant. If the whole persona of the participant is involved in the process, there is no superficially and the learning is through and profound. It should be noted that if learning remains at the cognitive level, it may not be translated into behavioral changes. The emotional element plays a key part in the process.

Learning does not progress at a Uniform pace: There are two aspects of this distinctive feature of the learning process. A participant does not learn at an even pace throughout the programme. There are highs and lows in individual learning, depending on personal and environmental factors at a given point of time. It is likely that while in one situation, a participant finds it difficult to comprehend and internalize learning, in another training activity; he does it with relative ease. Also, as each participant learns in accordance with his training needs and interests, there is an element of selectivity of learning. He is likely to learn the most from training activities that he perceives as relevant, useful and stimulating.

Methods of Learning In a Training Programme

Five key methods of learning can be identified. These are:

1) Direct inputs by the Trainers: In a training programme, a key function of the trainer is to provide suitable and quality inputs in the areas covered by the programme. A trainer is also a subject-matter specialist in areas or topics for which he is especially responsible. A trainer is expected to be mentally and professionally prepared to organize training activities, appropriate to the topics or modules of the programme, and make useful contribution.

Inputs by the trainers can take any of the following forms:

i) Lectures or presentations.

ii) Interventions during discussion or other group activities to present varied dimensions of the issues under discussion or a different point of view.

iii) Opening remarks when introducing a new topic, module or a different point of view.

iv) Interventions during the conduct of training activity or method (e.g., after role-play or a field trip).

v) Response to questions of the participants, clarification or elaboration on points raised by the group.

vi) Summary of comments or concluding remarks.

vii) Informal, out-of-session discussions or conversations.

viii) A trainer also acts as a role model for the participants. They learn a lot not only from his training style but also from the manner in which he conducts himself in and out of sessions.

The training team also provides inputs through documents and printed materials, distributed either in advance of the session or after its conclusion. These could be summaries of the inputs, learning outcomes from a session or a module, or specific learning packages.

The inputs by the trainers would generally focus on:

i) Elaborating various theories, concepts on the topics or related issues.

ii) Presenting ideas and viewpoints on different issues that come up for discussion during the programme.

iii) Highlighting issues and analyzing problems to promote discussion in the group.

iv) Bringing out learning outcomes from training activities.

v) Providing information on any aspect of the theme of the programme.

vi) Giving guidelines for effective functioning of the training group or proper organization of training activities.

2) Learning through sharing within training group: In my training programme, especially in in-service programmes, the training group is a powerful source of learning. The wide variety of experience and knowledge that the participants bring with them provide a sound basis for the promotion of the learning process. Group-based training activities are most productive when the objective is to:

i) Develop mental skill:

ii) Facilitate an exchange of views and ideas on specific topics and issues:

iii) Help in critical appraisal of theories and concepts:

iv) Bring out different dimensions of a topic; or

v) Analyze different approaches adopted by the participants in carrying out work-related tasks. Proper guidelines and monitoring is required for all group-related training activities and events. The extent to which this key learning resource is productive and useful depends on the manner in which a trainer handles the activity and facilitates the discussion. Therefore, the role of the trainer is crucial.

The following factors promote sharing in a training group:

i) Clarity on the objectives and scope of sharing. This enables the participants to be specific and focus only on relevant experiences.

ii) Willingness on the part of the participants to share their experience and views without fear of adverse reactions, rejection or any perceived threat to ‘reputation’, i.e., the environment is conducive for free and open sharing.

iii) Their ability to recall and bring forward experiences that are relevant to a particular topic or activity.

iv) The ability to translate their experiences into concepts, principals and approaches which can be aptly put across to others in the group and understood by them.

v) Communication skills of the participants.

3) Learning through practice and exercise: Another key method of learning is through individual or group practical assignments, by doing things. These are not simulated exercise but involve actual work, a physical activity. Participants are given specific tasks or projects to be completed within an allotted time. The training team may organize special projects or activities for individual participants or smaller groups, at the training venue itself, send them to other agencies for placements or for specific projects or even to the field.

4) Formal and Informal Methods of observation: The process involves observing how a person performs an activity or carries out a task, assessing the nature of investment and effort, monitoring the progress of the activity, and evaluating outcomes. It helps in picking out key learning points. In training for trainers, the participants can learn a lot by observing the trainers while they make a presentation or conduct an activity.

5) Out-of-Session Exchange with participants and Trainers: An import aspect of participation in training programmes is the opportunity it provides for formal, out of session interaction and contacts with other members of the group and the training team . This is particularly so in residential programmes. These interactions are an important source of learning not only in training areas but in personal development as well.

Theories of Learning

Various theories have been developed to explain different aspects of learning. These theories, however, can be grouped into several major categories for the focus of our present discussion. As figure 8 depicts. The first major division is among the connectionist, cognitive and socialistic schools of thought. While cognitive interpretations place emphasis on the discovery of patterns and insight, connectionists argue that what humans learn are connections or associations between stimuli and responses and according to social learning theory people learn through different means like observation of others, direct experiences and indirect experiences.

1) Connectionist/ Learning connections: Some learning theorists maintain that learning involves the development of connections between a stimulus and some response to it. That is, the association of a response and a stimulus is the connection that is learned.

A portion of this group minimizes the importance of reinforcement is employed in conjunction with two fundamentally different methods of learning connections: classical and operant conditioning.

a) Classical conditioning: A type of conditioning in which an individual responds to some stimulus that would not ordinarily produce such a response. Ivan Pavlov. a Russian physiologist conducted experiments to teach dogs to salivate in response to the ringing of a bell. A simple surgical procedure allowed Pavlov to measure accurately the amount of saliva secreted by a dog. When Pavlov presented the dog with a piece of meat, they exhibited a noticeable increase in salvation.

When Pavlov withheld the presentation of meat and merely rang a bell, the dog did not salivate. Then Pavlov proceeded to link the meat and ringing of the bell. After repeatedly hearing the bell before getting the food, the dog began to salivate as soon as the bell rang. After a while, the dog would salivate merely at the sound of the bell, even if no food was offered. In effect, the dog had learned to respond- i.e., to salivate- to the bell.

The meat was an unconditioned stimulus; the reaction that took place whenever the unconditioned stimulus occurred was called the unconditioned response. The bell was an artificial stimulus, or what we call the conditioned stimulus. The last key concept is the conditioned response. This describes the behavior of the dog; it salivated in reaction to the bell alone.

Classical conditioning has some important implications for understanding human behavior. Since higher-order conditioning for learning by human beings is important, its implication must be recognized. For example, higher-order conditioning can explain how learning can be transferred to stimuli other than those used in the original conditioning. Another implication of higher-order conditioning is that reinforcement can be acquired. A conditioned stimulus conditioning is that reinforcement can be acquired. A conditioned stimulus becomes reinforcing under higher –order conditioning.

REQUIREMENTS FOR UTILIZING CLASSICAL CONDITIONING

If advertisers are to use classical conditioning concepts to influence consumers, several conditions must occur. McSweeney and Bierley cite four conditions:

There should be no other stimuli that could Over-shadow the Marlboro cowboy was always portrayed on a white horse. It is possible the white horse might have over-shadowed the cowboy as a stimulus, thus weakening the association between the cowboy and the product. This is known as the over-shadowing effect.

Unconditioned stimuli should have no previous Associations to other brands or product categories; Assume a beer company decides to use a cowboy in its advertising to convey a macho image to its target group. The campaign would be ineffective because of the association already established by the Marlboro cowboy. This is referred to as the blocking effect.

Unconditioned Stimulus should not be Overly Familiar and should be presented Alone: Consumers could become over-saturated with certain stimuli that frequently appear in the mass media (Known as a pre-exposure effect). Such stimuli are unlikely to be effective as the unconditioned stimulus. For example, the tuxedo has been shown so often as a symbol of luxury that it has probably lost its effectiveness.

Classical conditioning is more effective when the conditioned stimulus is new; consumers have established associations for well-known products. It would be difficult for the company to link its products with a new unconditioned stimulus.

b) Operant Conditioning: A type of conditioning in which desired voluntary behavior leads to a reward or prevents a punishment.

People learn to behave to get something they want or to avoid something they don’t want. Operant behavior means voluntary or learned behavior in contrast to reflexive or unlearned behavior. The tendency to repeat such behavior is influenced by the reinforcement or lack of reinforcement brought about by the consequences of the behavior. Reinforcement, therefore, strengthens a behavior and increases the likelihood that it will be repeated.

The Harvard psychologist B.F. Skinner did research for operant conditioning, skinner argued that creating pleasing consequences to follow specific forms of behavior would increase the frequency of that behavior. People will most likely engage in desired behaviors, if they are positively reinforced for doing so. Rewards are most effective if they immediately follow the desired response. In addition, behavior that is not rewarded, or is punished, is less likely to be repeated.

Differences between Classical and Operant Conditioning

Classical Conditioning		Operant Conditioning
Responses are elicited from a person (reactive).		Responses are emitted by a person (proactive).
Responses are fixed to stimulus (no choice).		Responses are variable in types and degrees (choice).
CS is stimulus such as sound, an object, a person.		CS is a situation such as office, a social setting, a specific set of circumstances.
Conditioning is implemented before response.		Conditioning is implemented after response.
First we produce a stimulus and then we expect the desired behavior.		First we get a behavior pattern and then either by reward or by avoidance of punishment we reinforce that behavior.

2) Cognitive Learning ( S.S. Learning): Instead of viewing learning as the development of connections between stimuli and responses, cognitive theorists stress the importance of perception, problem solving, and insight. This viewpoint contents that much learning occurs not as a result of trial and error or practice but through discovering meaningful patterns which enables us to solve problems. Cognitive learning involves learning ideas, concepts, attitudes, and facts that contribute to our ability to reason, solve problems, and learn relationships without direct experience or reinforcement. Cognitive learning can range from very simple information acquisition to complex, creative problem solving.

Types of cognitive Learning

i) Latent Learning: Latent learning (sometimes called incidental learning) is learning without reinforcement and is not immediately demonstrated when it occurs. For example, if a student wants a coffee break, wonders where to go, and suddenly remembers a new coffee shop near campus, the student is demonstrating latent learning. E.C. Tolman, a well-known investigator of cognitive learning, suggested that organisms from cognitive maps of their environments, maps that can be used when needed.

ii) Insight: An insight is a new way to organize stimuli or a new approach to solve a problem. A student struggling with a mathematical problem who suddenly sees how to solve it without having been taught additional methods has had an insight. Wolfgang Kohler, a famous Gestalt psychologist, demonstrated that chimpanzees can solve problems using insight. Chimps placed in a cage, with bananas beyond their reach, learned that they could pile up boxes or attach one stick to another to reach and obtain the food. The chimps had not been reinforced for these specific behaviors but learned how to get the food through insight. Once insight has occurred, no further instruction or training is required.

3) Social Learning theory: People can learn through observation and direct experience.

Much of what we have learned comes from watching models –presents, teachers, peers, motion picture and television performers, bosses, and so forth.

Social learning theory is an extension of operant conditioning, i.e., it assumes that behavior is a function of consequences it also acknowledges the existence of observational learning and the importance of perception in learning.

i) Attention processes: people learn from a model only when they recognize and pay attention to its critical features. We tend to be most influenced by models that are attractive, repeatedly available, important to us, or similar to us in our estimation.

ii) Retention Processes: A model’s influence will depend on how well the individual remembers the model’s action after the model is no longer readily available.

iii) Motor reproduction processes: After a person has seen a new behavior by observing the model, the watching must be converted to doing. This process then demonstrates that the individual can perform the modeled activities.

iv) Reinforcement processes: Individuals will be motivated to exhibit the modeled behavior if positive incentive or rewards are provided. Behaviors that are positively reinforced will be given more attention, learned better, and performed more often.

Training Needs

Employees are the human resources who need training and development. Training makes them perfect where they lack in certain areas like knowledge, ability, skill, potential, etc. These weaknesses of employees need to be identified and efforts should be made to develop them through proper training and development programmes. The success of the training function depends greatly on the correct identification of needs. The spotting of shortcomings among the employees, organizational constraints will provide a base for determining the training needs in an organization. The organization needs and the kind of work to be performed and the knowledge and skills required to do the work are studied through human resource planning and job analysis. The human resource needs in the form of knowledge, skill, potentials can be met through training and development programme. After making the necessary evaluation the training needs are determined. Training needs can be expressed in terms of components such as information, knowledge, skills and competencies, attitudes and values a sound basis for determining the nature of inputs required, by voicing two major concerns:

1) How does each type of training need emerge?

2) How is each type of training need catered to?

WHY TRAINING NEEDS ARISE?

The gap between actual and expected performance, behavior and attitude leads to emergence of training needs. But the main purpose of training is to attain that level of performance, behavior and attitude in employees, which leads to fulfillment of the objectives of any organization.

Thus, training needs arise when there is a condition of requirement to move to particular level of performance, behavior and attitude.

NEED FOR TRAINING

1) To match the Employee Specification with the job Requirements and Organizational Needs : Training is needed to fill the gap between employee’s present specifications and the job requirements and organizational needs by developing and molding the employee’s skill, knowledge, attitude, behavior, etc.

2) Organizational Viability and the Transformation process: For the effective and smooth functioning of the organization it is necessary for the organization to train the employees to impart specific skills and knowledge. In addition, training provides continuity to the organization can be improved by developing the efficiency of transformation process, which is turn, depends on enhancement of the existing level of skills and knowledge of the employees.

3) Technological Advances: The organization should train the employees to enrich them in the areas of changing technical skills (i.e., automation, mechanization and computerization) and knowledge from time to time.

4) Organizational Complexity: Complex organizational situation, which emerge due to the increased mechanization and automation and other related factors calls for training in the skills of co-ordination, integration and adaptability to the requirements of growth, diversification and expansion. Thus, training solves the problem of organizational complexity.

5) Human relations: Training is human relations is necessary to deal with human problems (including alienation, inter-personal and intergroup conflicts, etc.) and to maintain human relations.

6) Change in the job Assignment: Training is necessary when the existing employ is promoted to the higher level in the organization and when there is some new job or occupation due to transfer. Training is also necessary to equip the old employees with the advanced disciplines, techniques or technology.

WHOM TO TRAIN? Training is imparted to employees for whom the training needs have been recognized. Training needs can arise for employees at all levels.

LEVELS OF TRAINING NEEDS

The assessment of management training and development needs can be undertaken at different levels of generation.

Individual Levels → Group Levels → Organizational Levels → Sectoral Level → Country Level → Regional Level → Regional Level → Global Level.

1) Individual Level: This is the starting point and basic building block of any needs assessment. Every employee has unique needs owing to the particular combination of his job profile, educational and cultural background, experience and personality. Emphasis on individual needs assessment makes it possible to have development programmes that are tailored to individual needs and aim at results that are visible and understandable to each individual concerned and for which he can feel responsible.

2) Group and team Level: To identify and meet needs, we also have to group employees for the following reasons:

i) While some of their needs are individual and unique, other needs are common.

ii) As mentioned above, employees do not work as isolated individuals, but in groups and teams; this brings out needs that could not be identified in dealing with each individual separately .Also, needs that concern relations and interaction with other employees often have to be treated through collective training and development. Therefore, at the second level, we would deal with groups and teams of employees within an organization. The nature of the management system and process will determine the criterion for establishing these groups and tams.

3) Organizational Level: This level is particularly important for relating management development and training needs to organizational systems, problems, diagnoses, objectives and performance improvement programmes. In practice, most needs assessment exercise take place at organization levels as their components. To meet the need , many organizations design and implement their own management development and training programmes. Typical organizational level management development needs are those related to organizational (corporate) culture. Organizations that have developed a set of shared values, constituting their specific culture, tend to use management development programmes for strengthening this value system, in particular in training newly recruited and junior managers and staff members.

4) Sectoral Level: The definition of sectoral needs may be quite meaningful if a sectoral development policy or plan is being considered, or if a sectoral body (for example, an employers’ or trade association, or a ministry) intends to alert organizations in the sector to their management problems or to imbalances in the managerial manpower supply and demand, and provide a service for dealing with these problems (for example, a spectral training institution or special and hoc programmes).

5) Country (National) Level: In similar vein, we are often interested in common nationwide characteristics and needs of the management population, in planning or suggesting country level programmes or in stablishing national management institutes, centres, faculties or foundations. Typically, country level needs are examined by national surveys and studies. Often, these surveys would also use a sectoral breakdown, differentiate between regions (for example, urban and rural, less or more developed, geographically remote) and consider needs as classified under major occupations or functions (for example, financial managers, marketing managers) that are found in most enterprises.

6) Regional Level: Regional aspects and considerations are of interest if regional programmes, projects or institutions can provide useful guidance and support to governments and provide useful guidance and support to governments and private organizations in individual countries of the region. For example, the European Foundation for Management Development has undertaken several projects looking into the future needs of European managers, and one of the main objectives of a Asian productivity Organization has been to meet training and development needs in conjunction with efforts to improve productivity in Asian countries.

7) Global Level: This is the highest level of generation in respect of training and development needs. A global, worldwide view tends to be taken selectively by associations or institutions involved in exchange of experience, information services or new programme development of the widest international interest. The globalization of world markets, the widest international interest. The globalization of world markets, the current trends in financing business and trade or the progress in information and communication technologies are regarded as factors that will influence management in all regions and countries ; hence the existence of needs, and an opportunity to thinks of policies, progammes and services that are global in application.

SOURCES OF DATA FOR IDENTIFYING TRAINING NEEDS

There are three sources for identifying training needs, although, they are independent sources for gathering the necessary data. It is usually beneficial if they are considered complementary to one another to arrive at a consolidated data of training needs.

The three sources are as follows:

1) Job profile: It is a comprehensive description of all the functions and the responsibilities that a person has to carry out in the course of his job. Job analysis can be undertaken in order to have a realistic and systematic appraisal of training needs. In order to do this, first it is necessary to break up the functions and responsibilities into categories and classify these task/activities on the basis of their relative importance to the nature of the job. Finally, a priority listing of these tasks should be computed. This will help in developing a catalogue of knowledge, skills and attitudes required for effective performance of the job.

The second method is to prepare a comparative study of the performance of those who perform well and those who have not performed up to the mark, to pinpoint on the training needs of those who need to improve their skills.

2) Experience of the training agency: It is very common for organizations nowadays to hire professional training agencies to look into training affairs. The training agencies have both depth and breadth of experience. They have to observe the performance in the unique environment of the organization to put forward their proposals. However, it cannot be the sole basis, as training needs of majority of organizations are very specific. The experiences of the training agencies can only serve to facilitate the process.

3) Pre-training Survey of the participants’ Needs: This could be the best way to assess the training needs of employees. In this exercise, it would be beneficial if the superiors are also included, as they have a better overview and a wider perspective on the training needs of their associates, especially in the context of their performance. This is generally done in a systematic manner with the help of a structured questionnaire in order to reflect the genuine desire to involve the participants and the organization in the planning process.

Determination of Training Needs

The determination of training needs and organization of training programmes would vary from organization to organization. On one hand there may be a progressive company with highly organized central personnel and training departments, and a plan for integrated manpower development. At the other extreme there may be a company where the personnel and training responsibilities are not very clear.

In the first type of company, the determination of training needs is something which is constantly being carried out. On the other hand, in the second type of company, training is less likely to be planned for the company as a whole.

Even if the approach of each company differs, there are number of common basic steps:

1) Take an Inventory: Take an inventory of existing manpower both qualitatively and quantitatively.

2) Make forecasts of future Requirements: make forecasts of future requirements by considering normal wastage through resignations, retirements, transfers, etc.

3) Look for Source of talent: Look for sources of talent both within and outside the organization.

4) Prepare Strategy for Development: Prepare strategy for development for existing as well as future manpower.

The training officer has to base his strategy on a number of other factors. These factors are as follows:

Consider Terms of Reference: Consider terms of reference by getting recommendations from the management for the company as a whole or first by concentrating on the specific department.

Consider the Situation within the Organization: Consider the situation within the organization by ascertaining which training programmes have already been conducted and not conducted in the organization.

Consider the Information already Available: Consider the information already available regarding new employees and existing employees.

Consider the problems which arise within the Organization: Consider the problems which arise within the organization like huge labor turnover, unnecessary wastages, excessive maintenance costs and frequent customer complaints.

Consider other possible Approaches: Consider other possible approaches like business and production reports, questionnaires, tests, surveys, group conferences, etc.

IDENTIFICATION OF TRAINING NEEDS/ TRAINING NEED ASSESSMENT

Training efforts must aim at meeting the requirements of the organization (long-term) and the individual employees (short-term).This involves finding answers to questions such as: Whether training is needed? If yes, where is it needed? Etc. Once training gaps within the organization is identified, it becomes easy to design an appropriate training programme. Training needs can be identified through the following types of analysis, as shown in table below.

1) Organizational Analysis : It involves a study of the entire organization in terms of its objectives, its resources, the utilization of these resources , in order to achieve stated objectives and its interaction pattern with environment. The important elements that are closely examined in this connection are:

i) Analysis of objectives : This is a study of short-term and long-term objectives and the strategies followed at various levels to meet these objectives.

ii) Resource Utilization Analysis : How the various organizational resources (human, Physical and financial) are put to use is the main focus of this study. The contributions of various departments are also examined by establishing efficiency indices for each unit. This is done to find out comparative labor costs, whether a unit is under-manned or over- manned.

iii) Environmental Scanning : Here the economic, political, socio-cultural and technological environment of the organization is examined.

iv) Organizational Climate Analysis : The climate of an organization speaks about the attitudes of members towards work, company policies, supervisors, etc. Absenteeism, turnover ratios generally reflect the prevailing employee attitudes, These can be used to find out whether training efforts have improved the overall climate within the company or not.

2) Task or Role Analysis : This is a detailed examination of a job, its components, its various operations and conditions under which it has to be performed. The focus here is on the roles played by an individual and the training needed to perform such roles. The whole exercise is meant to find out how the various tasks have to be performed and what kind of skills, knowledge attitudes are needed to meet the job needs. Questionnaires, interviews, reports, tests, observation and other methods are generally used to collect job related information from time- to –time. After collecting the information, an appropriate training programme may be designed, paying attention to:

i) Performance standards required of employees,
ii) The tasks they have to discharge,
iii) The methods they will employ on the job, and
iv) How they have learned such methods, etc.

3) Person Analysis : Here the focus is on the individual in a given job. There are three issues to be resolved through manpower analysis:

i) We try to find out whether performance is satisfactory and training is required.

ii) Whether the employee is capable of being trained and the specific areas in which training is needed.

iii) We need to state whether poor performers (who can improve with requisite training inputs) on the job need to be replaced by those who can do the job. Other options to training such as modifications in the job or processes should also be looked into personal observation, performance reviews, supervisory reports , diagnostic tests help in collecting the required information and select particular training options that try to improve the performance of individual workers.

IMPORTANCE OF TRAINING NEED ASSESSMENT

Identification of training needs/Training need assessment is important from both the organizational point of view as well as from an individual’s point of view.

From an organization’s point of view, it is important because an organization has objectives that it wants to achieve for the benefit of all stakeholders or members, including owners, employees, customers, suppliers and neighbors, These objectives can be achieved only through harnessing the abilities of its people, releasing potential and maximizing opportunities for development.

From an individual’s point of view, people have aspirations, they want to develop and in order to learn and use new abilities and people need appropriate opportunities, resources and conditions. Therefore, to meet people’s aspirations, the organization must provide effective and attractive learning resources and conditions.

With the help of training need identification, organization can focus on the following areas:

To pinpoint if training will make a difference in productivity and the bottom line.

To decide what specific training ach employee needs and what will improve his or her job performance.

To differentiate between the need for training and organizational issues and bring about a match between individual aspirations and organizational goals.

APPROACHES TO TRAINING NEEDS ASSESSMENT

The two approaches are:

1) Proactive TNA: The proactive TNA focuses on future human resource requirements. The HR function needs to be involved in the development of a strategic plan (SWOT analysis). From the resulting unit objectives, HR must develop unit strategies and tactics to be sure the organization has employees with the required KSAs in each of the critical jobs based on future KSA requirements. Two approaches can be taken to develop needed KSAs:

a) Prepare employees for promotions/ transfers to different jobs.

b) Prepare employees for changes in their current jobs.

An effective, proactive procedure used for promotions and transfers is succession planning, Succession planning is the identification and development of employees who are perceived to be of high potential. The first step in development of a succession plan is to identify key positions in the organization. These positions, if left vacant for any length of time, would negatively affect organizational functioning. In practice, these positions often are high-level management positions such as vice president of finance, plant manager and so forth, but they could be at any level (e.g., mold -maker if the position is key to the operation and difficult to fill). Once the positions are identified, employees with the potential to fill these key positions are identified, employees with the potential to fill these key positions are identified, and employees with the potential to fill these key positions are identified. Information is then provided on employees’ readiness to fill the position if it becomes vacant. This information becomes the TNA.

When preparing employees for changes in their current jobs, it is important that the TNA identify the changes that are expected based on strategic objectives. Once expected changes are determined, new KSAs required for that job can be identified. These future KSAs can be compared with the incumbent’s current KSAs, and any resulting discrepancies can then be addressed through training. Consider Heinz. When they determined that they would be moving to a high-tech ketchup machine, it was necessary to determine what KSAs would be necessary to operate it. Training in these KSAs then occurred before the new equipment was in place.

2) Reactive TNA: The reactive TNA begins with an existing discrepancy in job performance. A middle manager may notice that production is dropping a supervisor may see that a particular employee’s performance declined, or human resources may note an increase in grievances from a particular employee’s performance declined, or human resources may note an increase in grievances from a particular department. Once a discrepancy is identified, or human resources may note an increase in grievances from a particular department. Once a discrepancy is identified, one need to determine whether it is worth fixing. Although, this decision may be based on financial implications, it does not have to b. for example, the company notes that one department has lower rating of supervisory consideration (as rated by subordinates) than the organization expected. The cost of this lower rating would be difficult to assess. It may take a long time (If ever) to notice any significant impact on the company’s bottom line. If the company makes a strong commitment to developing a good employee-management relationship, it may decide to try to alleviate the problem.

In the reactive TNA, the organizational analysis, operational analysis, and person analysis is still conducted, but the distinction among them is even more blurred for the following reasons:

i) The focus is primarily on the one department.

ii) Those who demonstrate the discrepancy (and their peers and subordinates) are the key persons to be interviewed about all three components.

iii) The discrepancy focuses the issue on a particular part of the job (e.g., interactions with subordinates).

METHODS USED IN TRAINING NEEDS ASSESSMENT

Identifying Specific Problems: Such problem are productivity, high costs, poor material control, poor quality, excessive scrap and waste, excessive labor-management troubles, excessive grievances, excessive violation of rules of conduct, poor discipline, high employee turnover and transfers, excessive absenteeism, accidents, excessive fatigue, fumbling, discouragement, struggling with the job; standards of work performance not being met, bottlenecks in productions, deadlines not being met, and delayed production. Problems like these suggest that training may be necessary. For this the task and workers should be closely observed and the difficulties found out.

Anticipating Impending and future problems: Baring on the expansion of business, the introduction of new products, new services, new designs, new plant, and new technology and of organizational changes concerned with manpower inventory for present and future needs.

Management Requests: The supervisors and managers may make specific request for setting training programmes. Though this method is simple and a correct evaluation of the employees performance deficiencies can be made, but often such recommendations may be built on built on faulty assumptions: and requests may not coincide with each other or organizational goals.

Interviewing and observing the personnel on the job: Interviewing personnel and direct questioning and observation of the employee by his supervisors may also reveal training needs.

Performance Appraisal: an analysis of the past performance records of the perspective trainee and comparing his actual performance with the target performance may provide clues to specific interpersonal skills that may need development.

Questionnaires: Questionnaires may be used for eliciting options of the employees on topics like communication, satisfaction, job characteristics, their attitude towards working conditions, pay, promotion policies etc.These will reveal much information about where an employee’s skills and knowledge are deficient.

Checklist: The use of checklist is a useful supplement to interviews and observations. Through it, more reliable information can be obtained and the data got are quantifiable. This facilitates evaluating the training programmes’ effectiveness.

Morale and Attitude surveys: An occasional personnel audit may be conducted to forecast future promotions, skill requirements, and merit rating, to initiate informal discussions and an examination of records and statistics regarding personnel, production, cost, rejects and wastages. All these generally reveal the potential problems to be tackled through training programmes.

Interpersonal skills: In addition, test of the interpersonal skills through handling of posed cases and incidents, may also reveal training needs.

Disadvantages of Training Needs Assessment

The list of disadvantages is considerably smaller than the benefits of advantages. The only one of any significance is the need for a skilled person to be employed and consequently the use of the person’s time. This is one of the common criticisms of TNA’s. Failure to conduct any form of TNA, in the same way as failure to validate and evaluate the training programme, leaves the organization open to criticisms of over-use and waste of money spent on unnecessary training, to every attempt must be made to identify and analyze the needs accurately.

Training Needs Assessment Process

The following are the steps in TNA process:

Step one: Identify problem Needs

1) Determine organizational context.
2) Gap analysis is performed.
3) Objectives are set.

Step two: Determine Design of Needs Analysis

1) Method selection criteria is established.
2) Advantages and disadvantages of the methods are assessed.

Step three: Collect Data

1) Interviews are conducted.
2) Questionnaires and surveys are administered.
3) Documents are reviewed.
4) People at work are observed to find out how the work is being done.

Step four: Analyze data

1) Qualitative analysis and,
2) Quantitative analysis is conducted.
3) Solution/ recommendations are determined.

Step Five: Provide Feedback

1) Report is prepared.
2) Presentation is made to the management.
3) What training is needed is decided.

Step Six: Develop Action Plan

Once this formal needs assessment process is completed, the information is used as the basis for training design, development and evaluation. However, one must continue to assess the attitudes, knowledge and skill level of participants prior to each session. Different audiences may have different needs. This can be done both through a basis questionnaire sent just prior to a specific training event and also during the first five minutes of each session.

1) Changing the job itself: This is the process undertaken as the last resort. This option can be considered when training, practice, providing job aids are not possible.

2) Training Needs: these are generally the needs that arise due to the lack of KSA’s (knowledge, skills and abilities) that are necessary for the job to be performed effectively and their lack causes performance deficiency.

Training Policy

The word ‘policy’ has its roots to the Greek word polis meaning ‘city’ a term that in classical times conveyed notions of system or law and order. A policy is an expression of intention, which gives general guidance for the conduct of corporate affairs.

Organizations develop training policies for four main reasons.

1) To define the relationship between the organization’s objections objectives and its commitment to the training functions.

2) To provide operational guidelines and responsibilities of the management for planning and implementation of training so as to ensure that the training resources are directed in achieving critical success factors and priorities of the organization.

3) To provide information to the employees.

4) To enhance public relations and corporate image of the organization. The training policy at the corporate level may contain general statements and aim at influencing the outside world. Corporate policy at the departmental level-states the line manager’s action-plan by specifying the nature of the training, duration of training, the venue of training, for whom it is meant and who will be responsible for its implementation. It is at this level the training policy plays a vital role in linking the training objectives with the organization’s objectives.

Factors Influencing training Policy

The training policy of an organization is influenced by many factors. The training policy is more often determined by the prevailing situation than as principle in generation and hence is dynamic and susceptible to change.

The following factors influence the training policy:

1. The vision and mission of the organization.

2. The aims and strategic objectives of organization.

3. Size, traditions and prevailing culture in the organization.

4. Products or services of the organization.

5. Economic and social objectives of the organization.

6. The level of technology upgradation.

7. Obligation to provide professional updating and continuous training.

8. Top management’s views about training.

9. The labor market and the availability of skilled and qualified staff.

10. Organization’s past and present training policies and practices.

11. The resources that are available and allocable surplus to training.

12. Expectation of employees and records of training needs of the organization.

13. Government legislation in areas of industrial safety/statutory requirements.

14. Government funds available for sponsoring training programmes.

Contents of Training policy

The training policy of an organization is likely to cover most of the following points either explicitly or implicitly.

The underlying philosophy/belief of the organization about the value of the training.

The process available for identifying the organizational training needs.

What type of training is provided by organization- only job related, career related or general programmes?

Who will be the target audience amongst employees?

What extents of financial resources are allocated for training?

Balance struck between on-the-job and off-the-job training and between internal and external resources and the basis on which such decisions will be made like cost, cost effectiveness, urgency, etc.

Who will be responsible to decide whether a training proposal is covered and to what extent and to whom the employees can appeal against decisions that affect their training?

Evolving/Drafting Training policy

1) Introduction : Write few lines on the importance of training. Like Training and Development requires the same rigor and attention as any other management task. Well managed, training and development can deliver people with the right skills at the right time to enable the organization to deliver strategic results.

2) Purpose and Scope : Write objective of the training which will be impacted to the employs.

3) Applicability : To whom it applies?

4) References and Definition : References of other policies or documents which might be mentioned in the policy. Definition of the technical words used.

5) Training Needs Analysis : Jot down the methods that will be used for doing Training Need Analysis.

6) Training Need Analysis : Mention from where all the training material or content will be derived. In case of internal content development, mention who will be approving the content made. Mention about Training curriculum, i.e., what all trainings will be imparted whether soft skills, sales or technical or all.

7) Mode of Delivery : Mention what will be the mode of delivery, i.e., online, classroom or on the job.

8) Costing : what cost will be incurred during training programme.

9) Documentation : What all kinds of reports and documents will be maintained and for how long they’ll be kept.

10) Training Feedback and Evaluation : Training feedback and evaluation might include any specific benchmark for trainers, any assessment that might be conducted after the training to the judge the participant’s knowledge.

11) Training Environment : What kind of seating arrangements will be there in the training room, white boards or projector required.

12) Tracking, Training, and Certification : How training imparted will be tracked (any specific software will be used or not) or hard copies to be maintained, how employees’ performance will be tracked and will employees be given a certification after the training or not.

13) Training Department support system :Mention the responsibilities and coordination required by the different departments, trainees and management.

14) Checklist for training : Mention all the material that will be required, i.e., manual, white board, makers, projector, computers, water bottles, etc.

15) Lastly : List of the templates or forms that will be used in training, Like nomination form, attendance form, training feedback form, etc.

Advantages of Training Policy

The training policy aims to clarify the purpose of training and to communicate the top management’s intentions.

The training policy defines the organization’s responsibility for the development of the individual employee.

It helps the management responsible for implementing the training, clarifying their role and function.

Progressive training policy enhances the employee-employer relationship.

The training policy stats in general terms the training opportunities to enhance their knowledge and skill and appropriately to prepare them to take up new responsibilities.

Preparing a training policy requires considerable skill and attention to details. The policy statements are to be positive and should not contain any ambiguities.