CU-MCOM-SEM-IV-Strategic Cost Management-Second Draft

c. Profit d. Loss 5.………………strengthen the firm's image in the long run.. e. Cost reduction f. Cost Increment g. Cost Control h. Profit Answers 1-b, 2-a, 3-c, 4-a, 5-a 3.8 REFERENCES References book  Charles T. Harngreen, Srikant M. Datar, George Foster, Cost Accounting,  A Management Emphasis, Pearson Education, 2008, p. 3. Managerial Accounting,  Cost Management Ibid Management Accounting,  A Strategic Approach Strategic Cost Management Cost Management,  A Strategic Emphasis Cost Management,  What is Strategy Cost Management, A Strategic Emphasis Ibid., et al., Ibid., Cost Management Ibid., et al, Ibid., et al., Ibid. Activity Accounting Textbook references  Ravi. M. Kishore, Cost Management, Taxman, Allied Services (p) Ltd.,  S. Mukherjee & A.P. Roychowdhury, Advanced Cost and Management Accountancy, New Central Book Agency, Calcutta.  Keith Ward, Strategic Management Accounting, Butterworth Heirmann Pub.  John K. Shank, Cases in Cost Management: A Strategic Emphasis, South-Western Publishing, Thomson Learning. Website  https://www.accountingnotes.net/cost-accounting 51 CU IDOL SELF LEARNING MATERIAL (SLM)

 https://www.yourarticlelibrary.com/accounting 52 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 4: COST REDUCTION POLICIES STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Cost reduction Methods 4.3 Cost reduction Techniques 4.4 Summary 4.5 Keyword 4.6 Learning Activity 4.7 Unit End Questions 4.8 References 4.0LEARNING OBJECTIVES After studying this unit, you will be able to:  State the various methods of Cost reduction.  Discuss the various Techniques used in Cost reduction. 4.1INTRODUCTION In this Unit, we will understand that cost reduction is the process of removing extra or unnecessary costs from the manufacturing and operations processes using various methods and techniques. For cost reduction, a variety of methods and approaches are employed, including the just-in-time system, activity-based management, target costing, comprehensive quality management, and so on. 4.2 COST REDUCTION METHODS The cost-reduction methods are highlighted in the following sections: 53 CU IDOL SELF LEARNING MATERIAL (SLM)

Administration Production Product Design Plan, Programme and Methods Personnel Cost Marketing Management reduction Utility Services Organisation Factory Layout and Equipment Fig 4.1 Cost-reduction methods 54 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Product Design: The initial phase in the production of a product is product design. The influence of any cost reduction measures taken at this stage will be seen throughout the product's manufacturing process, including production and sales. The most important field in which cost reduction can be undertaken is design. Cost reduction opportunities should be explored both when introducing new designs and when looking for ways to improve existing designs. It's better to invest a little more time and money up front than to lose money and waste time later on when production is up and running. Designing a new product efficiently and improving the design of an existing product saves money in the following ways: a. The cost of the materials:Cheaper replacements , higher yields, less quantities, and a wider range of materials lower storage costs and inventory investment. b. Labor Expenses:Minimum tolerance, reduced operation time, and so on. c. In terms of variety, standardisation and simplification boost productivity while lowering costs. d. Lowering the cost of after-sales servicing. 2. Organisation: All efforts should be made to continually lower costs through the adoption of innovative organisational and production processes. It's impossible to quantify the cost savings that come from bettering the organisation. Nonetheless, if the following factors are taken into account, economies will undoubtedly be realised: a. Each function and duty is defined. b. Task assignment and delegation shall be done correctly, with no overlapping. c. A good communication route between different levels of management. d. Employees are encouraged to make cost-reduction suggestions. e. Doubts and stumbling blocks are eliminated. 3. Factory Layout and Equipment: 55 CU IDOL SELF LEARNING MATERIAL (SLM)

A cost reductionprogrammer should examine the industrial layout and the use of current equipment to see whether there is any room for cost reduction through the removal of manpower and material waste, as well as maximising the use of existent facilities. The need for plant replacement, the introduction of new processes, and facility expansion should all be examined, and various cost-cutting options should be investigated. Any hidden bottlenecks or challenges that prevent plants and other facilities from being used to their full potential should be investigated. 4. Production Plan, Programme and Methods: Production control ensures proper work planning by implementing an efficient procedure and programme for material ordering, proper machine loading, and proper utilisation of material, manpower, and resources, ensuring that time and money are not wasted due to waste of components, men, materials, and other resources. 5. Administration: Because cost cutting is a top management issue, there is plenty of room for cost cutting in this area. If the effectiveness of the people working in the office can be improved, the office should be reorganised. To save money on stationery and labour, it's best to avoid using superfluous forms. Efforts should be made to decrease telephone, lighting, and travel expenses, but not at the expense of productivity. 6. Marketing: Market research, advertising, packing, warehouse, distribution, and after-sales support are just a few of the tasks that might be included in a cost reduction programme. Making an ABC study of customers can help you improve your sales effectiveness. Customers are divided into three groups: A, B, and C. The following are the important factors that need to be examined in order to reduce costs in this area: a) Is the distribution route efficient and cost-effective? b) Whether or not there is an effective sales marketing system. c) Is the market research sufficient? 7. Personnel Management: 56 CU IDOL SELF LEARNING MATERIAL (SLM)

a. The use of appropriate work study methodologies and the implementation of solid incentive schemes to reduce the labour content of production. b. Labor cost reduction through improved labour relations, welfare measures, and improved working conditions. 8. Material Control: a. Purchase of materials that is both effective and cost-effective. b. EOQ observance. c. Low inventory means less stock investment. d. Thorough inspection of received goods. e. Material storage and issues are within your command. f. A thorough examination of the yield of materials. 9. Financial Management: With the increasing difficulties of obtaining financing, management should reduce unnecessary investment. To do so, it must assess the amount of working capital and fixed capital required, as well as the financial benefits of reducing them. Capital waste is just as bad as having insufficient capital. Overcapitalization and undercapitalization are both red flags; what is required is appropriate capitalization. Capital should be acquired at a low cost and used efficiently to maximise returns. Fixed assets and inventories that aren't being used profitably should be sold, and the proceeds should be re-invested in more successful channels. 10. Utility Services: Power, water, steam, repair and maintenance, transportation, and clerical services are just a few examples of these services. Consider the following factors: a. Whether or not the utilities are provided at a reasonable rate, and whether or not there is room for increased usage. b. Whether or not an appropriate preventative and curative maintenance system is in place. c. Whether or not distribution wastage and other losses were maintained to a minimum. 57 CU IDOL SELF LEARNING MATERIAL (SLM)

d. Whether or not modern equipment is being used, and whether or not the routines are automated. e. Whether or not the workflow and loading factor have been adequately addressed. 4.3 COST REDUCTION TECHNIQUES The key advantages of cost reduction strategies are that they can help an organization's profitability and cash flow. It outlines the important features and factors to consider while developing and implementing a programme. A cost reduction programme can help ensure that the outcomes are consistent with the organization's goals and values. It is widely known that implementing a cost reduction strategy is one of the most difficult obligations or tasks that a firm must do, especially when there are so many options available to cost-conscious executives. Just-In-Time (JIT) Target Costing Activity Based System Management(ABM) Business Process-re- Life Cycle Costing Kaizen Costing engineering Management Audits Bench Marketing Value chain Total Quality 58 Management(TQM): Fig 4.2 Cost Reduction Techniques CU IDOL SELF LEARNING MATERIAL (SLM)

1. Just-In-Time (JIT) System: JIT's major goal is to manufacture the required things, in the required quality and quantity, at the exact time they are needed. JIT purchase is necessary for items that have significant carrying costs due to large inventory levels. Because little amounts are ordered frequently, the purchasing mechanism reduces inventory investment. 2. Target Costing: Target costing is the process of designing a product and the procedures that go into making it so that it may be made at a cost that allows the company to profit when the product is sold at a projected market-driven price. 3. Activity Based Management(ABM): The use of activity-based costing to improve operations and decrease non-value-added costs is known as activity-based management. ABM's major purpose is to find and remove non- value-added activities and expenditures. 4. Life Cycle Costing: Life cycle costing calculates and aggregates costs throughout the course of a product's complete life cycle to see if the profits made during the manufacturing phase will cover the expenditures incurred during the pre- and post-production stages. 5. Kaizen Costing: The process of cost reduction throughout the production phase of an established product is known as kaizen costing. The Japanese described 'Kaizen' means \"continuous and steady development through little actions,\" as opposed to \"big or radical change by innovation or large-scale investment technology.\" 6. Business Process-re-engineering: Re-engineering is a thorough process redesign that focuses on discovering innovative new approaches to achieve a goal. Business process re-engineering aims to improve an organization's main business processes by focusing on simplification, cost reduction, improved quality, and increased customer satisfaction. 7. Total Quality Management(TQM): 59 CU IDOL SELF LEARNING MATERIAL (SLM)

All business functions are included in a continuous quality improvement process when using the TQM approach. 8. Value chain: Value chain analysis is a technique for increasing customer satisfaction while also reducing costs. The value chain is a connected set of value-creating activities that spans the supply chain for basic raw materials, component suppliers, and the end-use product or service provided to the consumer. 9. Bench Marketing: Bench marketing is the process of comparing existing procedures and performance levels with those of other companies or sub-units within the same business in order to determine the most effective means of executing a task. 10. Management Audits: Both corporate and non-profit organisations can benefit from management audits, often known as performance audits. Management audits are designed to assist management in doing a better job by finding waste and inefficiency and recommending a course of action for improvement. 4.4 SUMMARY  A cost reduction programme can help ensure that the outcomes are consistent with the organization's goals and values.  Cost reduction opportunities should be explored both when introducing new designs and when looking for ways to improve existing designs.  Market research, advertising, packing, warehouse, distribution, and after-sales support are just a few of the tasks that might be included in a cost reduction programme.  Fixed assets and inventories that aren't being used profitably should be sold, and the proceeds should be re-invested in more successful channels. 4.5 KEYWORD  Personnel: A company's \"personnel\" would be all the people employed; an army unit's personnel would be the people in that unit. 60 CU IDOL SELF LEARNING MATERIAL (SLM)

 Administration: The activity or process of running a business, organisation, or other entity.  Layout: Something that has been laid out according to a plan, design, or arrangement.  Reduction: the simplification of a topic or hassle to a specific shape in presentation or analysis.  Aggregate: an entire shaped via way of means of combining numerous separate elements 4.6 LEARNING ACTIVITY 1. What is Performance Audit? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Value Chain? ___________________________________________________________________________ ___________________________________________________________________________ 4.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain how designing an existing product saves money. 2. Write a note on Marketing. 3. What is Financial Management? 4. List down the factors considered in Utility services. 5. What is Target Costing? Long Questions 1. Discus the various methods used for Cost Reduction. 2. Explain the different techniques of Cost Reduction. 3. What are Target Costing, Life Cycle Costing, and Kaizen Costing? 4. Explain any 5 methods of cost reduction process. 5. Discuss any 7 techniques of Cost Reduction Process... B. Multiple Choice Questions 61 CU IDOL SELF LEARNING MATERIAL (SLM)

1. ………………….is a technique for increasing customer satisfaction while also is reducing costs. a. Value chain analysis b. Bench Marketing c. TQM d. Kaizen Costing 2. Corporate and non-profit organisations is usually benefited from ………………audits. a. Cost b. Strategic c. Financial d. Management 3. ABM is …………………………. a. Activity Based Management b. Activity Behaviour Management c. Action Based Management d. Activity Based Maintenance 4. Businesses use …………. basic cost-reduction strategies. a. Two b. Three c. Four d. Five 5. Management Audit is also known as ……………… a. Strategic audit b. Internal audit c. Performance audit d. Statutory audit Answers 62 CU IDOL SELF LEARNING MATERIAL (SLM)

1-a, 2-d, 3-a, 4-d, 5-c 4.8 REFERENCES References book  Charles T. Harngreen, Srikant M. Datar, George Foster, Cost Accounting,  A Management Emphasis, Pearson Education, 2008, p. 3. Managerial Accounting,  Cost Management Ibid Management Accounting,  A Strategic Approach Strategic Cost Management Cost Management,  A Strategic Emphasis Cost Management,  What is Strategy Cost Management, A Strategic Emphasis Ibid., et al., Ibid., Cost Management Ibid., et al, Ibid., et al., Ibid. Activity Accounting Textbook references  Ravi. M. Kishore, Cost Management, Taxman, Allied Services (p) Ltd.,  S. Mukherjee & A.P. Roychowdhury, Advanced Cost and Management Accountancy, New Central Book Agency, Calcutta.  Keith Ward, Strategic Management Accounting, Butterworth Heirmann Pub.  John K. Shank, Cases in Cost Management: A Strategic Emphasis, South-Western Publishing, Thomson Learning. Website  https://www.accountingnotes.net/cost-accounting  https://www.yourarticlelibrary.com/accounting 63 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 5: PRICING DECISIONS AND STRATEGIES STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2 Meaning and Concept of Pricing Strategy 5.3 New Product Pricing Strategies 5.3.1 Price Skimming 5.3.2 Penetration Pricing 5.3.3 Difference between Price Skimming and Penetration Pricing 5.3.4 Premium Pricing 5.3.5 Cost-Plus Pricing 5.3.6 Competition Based Pricing 5.3.7 Value Based Pricing 5.3.8 Factors influencing Pricing Decision 5.4 Use of Costing Pricing 5.5 Price Sensitivity 5.5.1 Factors affecting Price Sensitivity 5.6 Summary 5.7 Keywords 5.8 Learning Activity 5.9 Unit End Questions 5.10References 5.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the concept of Pricing Strategy.  Describe the various Product pricing strategies. 64 CU IDOL SELF LEARNING MATERIAL (SLM)

 Outline the use of cost in pricing.  Explain the concept of Price sensitivity. 5.1INTRODUCTION In this Unit, we will learn how pricing strategies determine the prices that businesses charge for their goods. The price might be chosen to maximize profit from each sold unit or from the market as a whole. It can also be used to protect an existing market from new entrants, grow market share within an existing market, or join a new market. Pricing strategies can give a company both competitive benefits and disadvantages, and they can often determine whether a company succeeds or fails; therefore, choosing the proper approach is critical. 5.2 MEANING AND CONCEPT OF PRICIING STRATEGY Price is the value assigned to a product or service; it is the result of a complex combination of calculations, research and understanding,and the ability to take risks. The technique through which company’s price their products or services is referred to as pricing strategy. Penetration pricing, price skimming, discount pricing, product life cycle pricing, and even competitive pricing are all examples of pricing techniques. 5.3 NEW PRODUCT PRICING STRATEGIES A proper pricing strategy will assist you in determining the price point at which you can maximize earnings on product or service sales. When determining the price of your services, you must take into account a variety of criteria. These are some of them: Costs of production and distribution, competition products, positioning strategies, and the company's intended client group are all factors to consider.  Costs of production and distribution,  competition products,  positioning strategies,  company's intended client group At different stages of a product's life cycle, pricing strategies keeps on changing. Product introduction is the most difficult part of developing a pricing plan. Marketers face the issue of establishing prices for business offerings for the first time during this era. 65 CU IDOL SELF LEARNING MATERIAL (SLM)

Penetration Price Pricing Skimming Premium Cost Based Pricing Pricing Competition Value Based based pricing Priicing Fig 5.1 Pricing Methods 5.3.1 Price Skimming Setting rates high during the first phase is known as price skimming. This is intended to assist companies in increasing sales of new products and services. After the items or services are presented, the company gradually lowers the prices. As new competitor products enter the market, this is finally done. Price skimming has the advantage of allowing you to maximize earnings from early adopters. You finally lower the prices to attract more price-sensitive customers. Price skimming not only aids in the recoupment of development charges for your small company. When your product is first presented to the market, it also gives the impression of quality and uniqueness. 66 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 5.2 Price Skimming Advantages of Price Skimming 1. To enhance profit- The Company will aim to maximise profit during the initial product launch because they know that competitors will develop new goods with the same or better features, and their sales volume will decline over time. Furthermore, sales volume will drop with time, requiring the company to reduce some prices in order to maintain sales volume. They will lose money due to low margins, but it is preferable to enabling the buyer to acquire competitor's items. Because the company may have invested considerably in production equipment, they must accept a lesser profit rather than cope with significant fixed expenditures. 2. To maximise profit from various market segments- The Company recognizes that some customers are willing to pay more to be among the first to buy a product, while others are willing to wait for a pricereduction and pay for the best value. The company will be able to maximise earnings from both sorts of clients by adopting price skimming. 67 CU IDOL SELF LEARNING MATERIAL (SLM)

3. High Innovation product: Because it is new and inventive, the price of a new technological product is likely to rise more than the market price. The company believes that their products are difficult for competitors to imitate or are protected by copyright laws. Its price is determined not by the cost of production, but by the characteristics that are not accessible elsewhere. The competitors will take some time to reach up to our product. By the time they are able to build one similar to ours, we will have lowered our price to compete with them as well. 4. Technology improvement- As a result of the limitations of new technology, some products will be more expensive to make. However, as production costs reduce over time, we will be able to charge lower prices. 5. Short life product- Some products have a short lifespan, and demand decreases soon. As a result, the company must move quickly. For example, in the clothes business, new clothes are quite expensive because to the unique design and the willingness of people to pay for them. However, after a few months, the company will need to lower the price when the market shifts to a new trend. 6. To protect the brand value- Customers can be persuaded by high costs that our product is of great quality and features. It also distinguishes us from our competitors. Apple and Lamborghini, for example, are considered luxury brands due to their high price. Disadvantages of Price Skimming 1. Encourage the competitor to join the market- When we establish a high price for a product, we are implying that they will make a large profit. The competition sees an opportunity and will do all possible to break into the market. 2. Slow down product growth- The initial release of a product is the time when the company needs to increase marketing expenses in order to enhance sales. The high price, on the other hand, appears to be a deterrent to buyers purchasing our product. It will limit the product's potential growth and shorten the product's life cycle peak. 68 CU IDOL SELF LEARNING MATERIAL (SLM)

3. It will not last long— We may have a plan in place to lower pricing over time. However, competitors may release their goods ahead of schedule, putting pressure on us to lower the price sooner or risk losing sales volume. Our company model will be ruined as a result. 4. Problem if the demand is elastic- If demand is elastic, this might be a big issue because different products in different markets at different times have varying elastic levels. If we establish price skimming without conducting crucial market analyses, we will run into problems because demand is highly elastic because to the high price. Customers will be on the lookout for a similar but less expensive substitute product. It usually occurs during a market downturn, when people are attempting to preserve money. It can also happen when there are too many products on the market at various pricing. 5.3.2 Penetration Pricing Penetration strategies are designed to gain attention of customers by lowering the cost of goods and services. Increased awareness, on the other hand, can lead to increased revenues over time. It can also assist small businesses in standing out from the crowd. Companies frequently end up boosting their prices after sufficiently entering a market. This is done in order to better reflect their current market position. Fig 5.3 Penetration Pricing 69 Advantages of Penetration Pricing CU IDOL SELF LEARNING MATERIAL (SLM)

1. High adoption and diffusion: Penetration pricing enables a company to swiftly gain client acceptance and adoption of its product or service. 2. Market dominance: A penetration pricing plan usually catches competitors off guard and gives them little time to react. The business is able to take advantage of the opportunity to convert as many clients as possible. 3. Economies of scale: A pricing strategy that generates a large volume of sales allows a company to achieve economies of scale and lower its marginal cost. 4. Increased customer loyalty: Customers who find a good deal on a product or service are more likely to return to the company in the future. Furthermore, increasing goodwill generates favourable word-of- mouth. 5. Increased inventory turnover: Penetration pricing leads to a higher inventory turnover rate, which pleases vertical supply chain partners like retailers and distributors. Disadvantages of Penetration Pricing 1. Pricing expectation: Customers frequently expect low prices indefinitely when a company employs a penetration pricing approach. Customers may get unsatisfied and cease purchasing the goods or service if prices progressively rise. 2. Low customer loyalty: Penetration pricing appeals to bargain seekers and individuals who have a low level of attachment to a company. If they locate a better bargain, said clientsare likely to migrate to competitors. While price lowering can help you make some quick sales, it rarely leads to client loyalty. 3. Damage brand image: 70 CU IDOL SELF LEARNING MATERIAL (SLM)

Low costs may harm the brand's image, leading people to believe the brand is cheap or of poor quality. 4. Price War: This reduces overall market profitability, and the only companies strong enough to survive a long-term pricing war are usually not the newcomer who started it. 5. Inefficient long term strategy: Price penetration is not a sustainable long-term pricing strategy. Approachingthe market with a pricing strategy that your organisation can live with in the long run is usually a better choice. 5.3.3 Difference between Price Skimming and Price Penetration Price skimming and penetration pricing are two pricing methods used by businesses when they introduce a new product to the market; however, they are not the same. Consider the following distinctions between price skimming and penetration pricing: 1. Price skimming is a strategy in which a firm sets a higher price for a product when it is first offered and then gradually lowers the price, whereas penetration pricing is a strategy in which a company sets a lower price for a product at first and then gradually increases the price. 2. In the case of price skimming, it is difficult to sell large quantities due to the higher price, so the company must forego some sales while maintaining a healthy profit margin, whereas in the case of penetration pricing, the company is able to sell large quantities due to the low price of the product, but it must forego its profit margin. 3. The whole focus of the company under price skimming is on generating a premium section of clients who are quality concerned and willing to pay any price for a product, and hence little attention is paid to the cost of producing the product. However, in the case of penetration pricing, the entire focus is on lowering production costs and other product-related expenditures so that the product can be supplied at a cheap price to customers, allowing the company to quickly capture market share. 4. Price skimming necessitates extensive and aggressive product marketing that explains the product's qualities and distinctiveness in order for the company to justify the higher price of the product, whereas penetration pricing necessitates less marketing because the 71 CU IDOL SELF LEARNING MATERIAL (SLM)

product's low price attracts people. In other words, when it comes to price skimming, marketing expenditures are larger than when it comes to penetration pricing. 5.3.4 Premium Pricing Premium pricing is also referred to as image pricing or prestige pricing. Premium pricing is when a product is sold for a high price... Premium pricing produces a favorable perception among purchasers since they assume that the higher the price of items, the higher the quality.Companies employ this tactic to charge greater prices when compared to the prices of their competitors' products. Companies use their brand name, which has a market image, to demand greater costs for the same products. This tactic is also known as a skim pricing technique. Because a company seeks to skim the cream of the market with this method. Fig 5.4 Premium Pricing Advantages of Premium Pricing 1. Increased Profits: The first benefit of premium pricing is that profits are enhanced. A company that sells things at a discount or at a lower price can make the same profit by selling 10 pieces of merchandise as you do by selling one. 72 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Competitive Advantage: A company gains a competitive advantage over its competitors by using premium pricing. Because most people judge a product's quality depending on its price. They believe that the higher a product's price, the higher its quality. Because of its pricing and the implementation of the correct marketing approach, your product is seen as a prestigious product. Example: In the fast food industry, Dominos is a market leader. Nutrition, convenience, cost, innovation, quality, hygiene, and value added services have all been major competitive advantages. The organization's capacity to use its major assets in order to overcome deficiencies has been fundamental to its success. 3. Increased brand recognition: Premium pricing aids in the spread of your brand's message. Premium pricing elevates the status of your products in the eyes of your customers. They hold it in high regard because they feel that the higher a product's price, the higher its quality. Example: People on social media when they purchase an expensive pair of clothes or a household appliance, as opposed to the identical things of inferior quality. As a result, they accidentally recommend your goods and brand to their friends and family, bringing you more clients despite your expensive prices. Disadvantages of Premium Pricing: 1. Premium pricing not suitable for all goods and services: Premium pricing cannot be used to acquire all types of items and services, thus not every company can use it to boost sales. Premium pricing works best for items such as daily essential items, bags, shoes, clothes, cell phones, watches, and automobiles. Customers, on the other hand, will never be willing to pay exorbitant costs for things that they use on a daily basis. 2. High marketing costs: Another disadvantage of premium pricing is the high marketing costs. A company that offers its items at a premium price must engage heavily in marketing to raise product awareness. 73 CU IDOL SELF LEARNING MATERIAL (SLM)

Marketing can assist you in establishing a positive brand image for your firm in the marketplace. People will only prefer to buy your products if they have heard of your brand. 3. Rivalry: If you sell your products at a premium price, your competitors can be an issue. By proposing alternatives, they may impair the sales of your products. 4. Customer base is limited: Customer base gets restricted by charging premium prices for the products. This means that only the wealthiest buyers can afford your goods. People with lesser earnings are less likely to purchase your goods. 5.3.5 Cost – Plus Pricing Cost plus pricing means to arrive at a selling price, a markup is applied to the cost of goods and services. To calculate a product's pricing, add the direct material cost, direct labour cost, and overhead costs together, then multiply by a markup percentage. In a customer contract, cost plus pricing can be utilised when the customer reimburses the seller for all costs incurred as well as a negotiated profit on top of those costs. Fig 5.5 Cost plus Pricing Advantages of Cost plus Pricing: 1. Simple: It is simple to calculate a product price using this method, but you'll need to define the overhead allocation mechanism if you want to calculate pricing for several goods consistently. 74 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Contract earnings are guaranteed: Any contractor is eager to accept this strategy for a contractual arrangement with a customer since it ensures that its costs will be covered and that a profit will be made. On such a contract, there is no chance of loss. 3. Justifiable: When a supplier needs to persuade its clients that a price rise is necessary, the supplier can cite an increase in its costs as the basis for the increase. Disadvantages of Cost plus Pricing: 1. Ignores Competition: A company may set a product price using the cost plus formula, only to be astonished when competitors charge significantly different rates. This has a significant impact on a company's expected market share and earnings. The company either ends up pricing too cheap and squandering potential earnings, or it prices too high and only generates minimal revenue. 2. Overruns in product costs: The engineering department has no incentive to build a product with the right feature set and design qualities for its intended market if this strategy is used. Instead, the department just designs and launches the product that it desires. 3. Cost overruns on contracts: Any government organization that contracts a supplier under a cost plus pricing system has no incentive to save expenses; on the contrary, the supplier would likely put as many costs so that it can be reimbursed as soon as possible in the contract. As a result, a contract should incorporate cost-reduction incentives for the supplier. 4. Ignores the expense of replacement: The method is based on past costs, which may or may not have changed since then. The most recent replacement cost is more illustrative of the entity's expenses. 5.3.6 Competition Based Pricing: This type of pricing is commonly to assess product pricing, especially if you're new to the industry. To arrive at your own pricing strategy, you must conduct extensive research on what your competitors are doing, what they offer, and at what price they offer it. 75 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 5.6 Competition Based Pricing Advantages of Competition Based Pricing: 1. Straightforward implementation – A competitor-based pricing model is simple to implement because it just requires some basic research and insight into who your competitors are and what they're doing with their products and prices. It simply takes a few hours to make a decision in this regard. 2. Low Risk Because your competitors are well-known market players who have been around for a long time, the chances of your pricing plan going wrong if you model it on them are less 3. When combined with other pricing strategies, a company's pricing might be calculated using a value-based model or cost-plus pricing. However, before settling on a final price simply based on the two models above, you can compare yourself to the competition and adjust your pricing to keep up with them. 76 CU IDOL SELF LEARNING MATERIAL (SLM)

5.3.7 Value Based Pricing: It is the pricing strategy in which businesses determine the price of their products or services based on the perceived value or estimated value by customers. It's a customer-focused pricing strategy in which a product's price is determined not by the cost of manufacturing, but by the value it has in the eyes of its customers. The goal of this pricing strategy is to determine how much your customers are willing to spend to purchase your product.The value-based pricing technique differs from cost-plus pricing, which determines a product's price by factoring in various production expenses. The price of a product is exclusively determined by the worth of the product in the perspective of customers in the Value based Pricing strategy. Fig 5.7 Value Based Pricing Advantages of Value Based Pricing: 1. Increased Brand Value: The first and most important benefit of implementing Value-based Pricing is that the brand's value is increased. People believe that a product's high price indicates that it is of greater quality. As a result, the brand's perceived worth rises in the eyes of customers. 2. Increase in Profits: 77 CU IDOL SELF LEARNING MATERIAL (SLM)

This Pricing aids in boosting the company's earnings. If your customers value your product and are prepared to pay any price for it, you have the option of charging a premium price for it, allowing you to make a bigger profit by selling the same number of copies. 3. Customer Loyalty: Companies inquire about their consumers' needs and willingness to pay the product's pricing. Customers will feel loyal to your firm if you consider their opinions and offer products that meet their wants. However, if you want to earn your consumers' loyalty despite charging high costs, be sure that the product you sell justifies the high price. You will not only gain consumer loyalty and repeat business, but you will also gain referral business from your loyal customers if you create a high-quality product. Disadvantages of Value Based Pricing: 1. Niche market: Value-based pricing has the disadvantage of allowing you to target only a small number of clients who can purchase your goods. In a market, there are just a few buyers who can afford the high prices. With a small number of customers, you can only expand your business so far. 2. Expanding the business is difficult: Smaller businesses that sell highly specialised items can benefit from value-based pricing. Because this technique cannot be applied to a bigger audience, Value-based Pricing is the least advantageous pricing option for businesses looking to expand. 3. More expensive to produce: Producing customized items is more expensive. To deliver the best quality items, companies need highly trained personnel. 5.3.8 Factors influencing Pricing Decision The fixing of a selling price to a product or service given by the firm is referred to as pricing of a product or service. The selling price is the amount charged to clients for a product created or a service offered by the company. Both internal and external factors have an impact on price decisions. Customers, competition, and costs are three significant influencers on pricing decisions among the various elements that drive pricing decisions. 78 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Customers: Managers look at pricing issues from the perspective of their customers. Price increases may result in a customer defecting to a competitor or a consumer opting for a less priced replacement product. 2. Competitors: Business cannot operate in vacuum. Pricing decisions are influenced by competitors' reactions as well. Because of a competitor's aggressive pricing, a company may be forced to decrease its rates in order to compete. A company with no competitors, on the other hand, can charge more. A company that understands its competitors' technology, plant capacity, and operational strategies can predict their costs, which is useful information for price setting. When deciding on pricing, managers take into account both domestic and international competition. Firms with surplus capacity may price aggressively in their export markets since domestic demand is low. 3. Costs: Costs have an impact on pricing because they influence supply. The higher the quantity of product the company is willing to supply, the lower the cost relative to the price. A product that is consistently priced below its cost can deplete a company's resources in a big way. All three of the following elements play a role in price decisions. Companies, on the other hand, assess customers, competition, and costs differently when determining prices. In highly competitive markets, companies selling homogeneous items must accept the market pricing. Products are differentiated in less competitive marketplaces, and managers have some pricing control. Case 1: Kamlesh wants to enter the new market which is the south of India. He has appointed you as a consultant for the job. He seeks advice on the pricing strategy for his product .What is the pricing strategies you are going to suggest? Solution: The price might be chosen to maximize profit from each sold unit or from the market as a whole. It can also be used to protect an existing market from new entrants, grow market share within an existing market, or join a new market. Pricing strategies can give a company both competitive benefits and disadvantages, and they can often determine whether a company 79 CU IDOL SELF LEARNING MATERIAL (SLM)

succeeds or fails; therefore, choosing the proper approach is critical. Pricing strategies normally used are 1. Setting rates high during the first phase is known as price skimming. This is intended to assist companies in increasing sales of new products and services. After the items or services are presented, the corporation gradually lowers the prices. As new competitor products enter the market, this is finally done. 2. Penetration strategies are designed to gain attention of customers by lowering the cost of goods and services. 3. Premium pricing is also referred to as image pricing or prestige pricing. Premium pricing entails charging a high price for a product. Purchasers have a favorable image of premium pricing because they believe that the higher the price of an item, the higher the quality. 4. Cost plus pricing means to arrive at a selling price, a markup is applied to the cost of goods And services. To calculate a product's pricing, add the direct material cost, direct labor cost, and overhead costs together, then multiply by a markup percentage. In a customer contract, cost plus pricing can be utilized when the customer reimburses the seller for all costs incurred as well as a negotiated profit on top of those costs. 5. Competition based pricing is commonly to assess product pricing, especially if you're new to the industry. To arrive at your own pricing strategy, you must conduct extensive research on what your competitors are doing, what they offer, and at what price they offer it. Conclusion: Out of the above Competition based pricing is suitable for the client. 5.4 USE OF COSTS IN PRICING The major difference between the two is that the phrase ‘price' refers to the amount that buyers pay for a product, whereas the term ‘cost' refers to the amount that a company spends to manufacture that product. The term \"price\" refers to the amount of money that a client or consumer is willing to forego in order to obtain a particular product or service. It is measured in units, which are usually in the form of money. The term 'cost,' on the other hand, refers to the amount paid to develop a product or service before it is advertised or sold to the target customers. It simply refers to the cost of production, marketing, and distribution. 80 CU IDOL SELF LEARNING MATERIAL (SLM)

The most crucial factor in the pricing determining process is cost data. As a result, cost must be considered while deciding on a price, and under-estimation and exaggeration must be avoided. 1. Costs that may be incurred are determined by price: The product finally gets to the public, and their ability to pay is understood. Working backwards from the pricing, we arrive at the cost that the consumer can afford to pay. If the product's quality is to be increased, it may be possible only if customers are willing to pay a greater price, as costs will inevitably rise. 2. Relevant Cost: Direct expenses are more relevant for managerial decisions made in the short term. All costs in a single-product company are direct. The management would make every effort to cover all expenses. However, challenges with a multi-product company are more complicated. Relevant costs are those that can be directly linked to a certain product. All direct costs, both variable and fixed, that are related to the product must be covered by the selling price. 3. Demand Elasticity and Price Policy: A firm's price policy is also influenced by demand elasticity. If demand is inelastic, lowering prices will not be lucrative for the company. However, if the product's demand is less elastic, the company should avoid setting a very high price. In that circumstance, a price increase policy would be ineffective. 4. Cost Reduction, Elasticity, or Demand, and Price Policy: A company that can cut its costs must determine whether or not to lower its prices. The elasticity of demand must be considered here. If demand is elastic, lowering the price will be less profitable than keeping the price the same. 5.5 PRICE SENSITIVITY The degree or extent to which a consumer's purchasing behavior changes in response to a change in the price of a product or service is referred to as price sensitivity. Simply put, it determines how concerned buyers or consumers are about the price of a given product or service. The concept of price sensitivity aids organizations in determining the appropriate 81 CU IDOL SELF LEARNING MATERIAL (SLM)

price for a product or service for sale. It also allows business divisions to be more competitive and grow their revenue and sales volume. 5.5.1 Factors affecting Price Sensitivity Price sensitivity is a critical aspect in determining optimal pricing decisions in businesses. Understanding the customer's thinking and behavior, which determines their price sensitivity, is critical. The following are some of the factors that influence a product's or service's price sensitivity: End Benefit Price and Quality Unique Expenditure Value Inventory Fig 5.8 Factors affecting Price Sensitivity  Price and Quality: If the object given is of superior quality or defines their status quo, such as exclusive or luxury items, purchasers are less price sensitive.  Unique Value: Product differentiation and unique characteristics influence a customer's price sensitivity. The firm can outperform its competition by offering unique value products or services.  End Benefit: If a product's utility to the customer is high and it effectively fulfils the purchasing goal, the consumer is less concerned about the price. 82 CU IDOL SELF LEARNING MATERIAL (SLM)

 Expenditure: If a product requires a significant investment or has a high price tag, the consumer is likely to be price sensitive while making a purchase.  Inventory: When purchasers (often industrial buyers) must keep items in stock, they become more price- conscious.  Ease of Comparison: If a consumer can readily evaluate the numerous options offered in the market, he or she would be more price sensitive.  Perceived Substitutes: Consumers become very price-sensitive towards a product or service if a comparable substitute is available at a lower price.  Switching Cost: When switching from one company to another is prohibitively expensive, consumers are less price-conscious and stick to a single product or service. 5.6 SUMMARY  Price is the monetary worth assigned to a product or service.  Price skimming is a strategy in which a firm sets a higher price for a product when it is first offered and then gradually lowers the price.  Penetration pricing is a strategy in which a company sets a lower price for a product at first and then gradually increases the price.  Value based pricing is the pricing strategy in which businesses determine the price of their products or services based on the perceived value or estimated value by customers.  Cost plus pricing means to arrive at a selling price, a mark-up is applied to the cost of goods and services.  Premium pricing produces a favourable perception among purchasers since they assume that the higher the price of items, the higher the quality. 83 CU IDOL SELF LEARNING MATERIAL (SLM)

5.7 KEYWORDS  Niche- a specialized market for a specific type of goods or service.  Penetration- get access to (an organization, a location, or a system), particularly when doing so is difficult.  Switch-a process of switching to or accepting something in place of something else.  Sensitivity- The degree to which a financial instrument responds to changes in its underlying components is known as sensitivity.  Premium: the quantitywith the aid of using which the charge of a percentage or differentsafety exceeds its problemcharge, its nominal cost, or the cost of the property it represents. 5.8 LEARNING ACTIVITY 1. Define Price. ___________________________________________________________________________ ___________________________________________________________________________ 2. Define Cost. ___________________________________________________________________________ ___________________________________________________________________________ 5.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain the concept of Pricing Strategy. 2. What are the factors that influence Pricing decision? 3. Write a note on Price Sensitivity. 4. Distinguish between Penetration pricing and Price skimming. 5. Write a note on Competition Based Pricing. Long Questions 84 CU IDOL SELF LEARNING MATERIAL (SLM)

1. What do you mean by pricing strategy? Explain any 2 types of pricing strategy in details. 2. Explain the advantages and disadvantages of Penetration Pricing. 3. Discuss the advantages and disadvantages of Skimming pricing. 4. Explain the difference between Premium Pricing and Value Based Pricing. 5. What do you mean by Price Sensitivity? Explain the factors affecting price sensitivity. B. Multiple Choice Questions 1. ………is the monetary worth assigned to a product or service? a. Price b. Profit c. Loss d. None of these 2. Setting rates high during the first phase is known as………………... a. Competition based pricing b. Value based pricing c. Penetration pricing d. price skimming 3. Penetration pricing is a strategy in which a company sets a …………….price. a. lower b. higher c. maximum d. none of these 4. Premium pricing is also referred to as ………… a. Cost plus pricing b. Value based pricing c. Image pricing d. Competition price 85 CU IDOL SELF LEARNING MATERIAL (SLM)

5. The degree or extent to which a consumer's purchasing behaviour changes in response to a change in the price of a product or service is referred to as…………. a. Skimming pricing b. price sensitivity c. penetration pricing d. value based pricing Answers 1-a, 2-d, 3-a, 4-c, 5-b 5.10 REFERENCES References book  Charles T. Harngreen, Srikant M. Datar, George Foster, Cost Accounting,  A Management Emphasis, Pearson Education, 2008, p. 3. Managerial Accounting,  Cost Management Ibid Management Accounting,  A Strategic Approach Strategic Cost Management Cost Management,  A Strategic Emphasis Cost Management,  What is Strategy Cost Management, A Strategic Emphasis Ibid., et al., Ibid., Cost Management Ibid., et al, Ibid., et al., Ibid. Activity Accounting Textbook references  Ravi. M. Kishore, Cost Management, Taxman, Allied Services (p) Ltd.,  S. Mukherjee & A.P. Roychowdhury, Advanced Cost and Management Accountancy, New Central Book Agency, Calcutta.  Keith Ward, Strategic Management Accounting, Butterworth Heirmann Pub.  John K. Shank, Cases in Cost Management: A Strategic Emphasis, South-Western Publishing, Thomson Learning. Website  https://www.accountingnotes.net/cost-accounting  https://www.yourarticlelibrary.com/accounting 86 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 6: FINANCING OF WORKING CAPITAL STRUCTURE 6.0 Learning Objectives 6.1 Introduction 6.2 Meaning and Concept of Working Capital 6.2.1 Importance of Working Capital 6.2.2 Types of Working capital 6.3 Management of short term–term loans from banks 6.3.1 Types of Short Term Loans 6.3.2 Advantages of Short Term Loans 6.4Analysis of Working Capital in Pricing Decision 6.5Summary 6.6 Keywords 6.7 Learning Activity 6.8 Unit End Questions 6.9 References 6.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Outline the importance of working capital.  Describe the various types of Working Capital.  Explain the advantages of Short term loan.  Identify the types of short term loans.  Explain the analysis of working capital in pricing decision. 87 CU IDOL SELF LEARNING MATERIAL (SLM)

6.1INTRODUCTION In this Unit we will learn, how working capital finance is used to fund your company's investment in short-term, Working capital finance comes in a variety of forms. The study on pricing decision with view of working capital. Short terms loan and how are they managed. 6.2 MEANING AND CONCEPT OF WORKING CAPITAL Working capital management is a set of activities that a company undertakes to ensure that it has adequate resources to meet day-to-day operating costs while also retaining resources that can be put to productive use. The difference between a company's current assets and current liabilities is known as working capital. Cash, accounts receivable, and inventories are examples of current assets. Accounts payable, short-term borrowings, and accumulated obligations are examples of current liabilities. According to Weston & Brigham - “Working capital refers to a firm’s investment in short term assets, such as cash amounts receivables, inventories etc. 88 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 6.1 Working Capital Working capital is divided into two categories: quantitative and qualitative. Some individuals also use the terms gross concept and net concept to describe the two concepts. Working capital is defined as the total of current assets, according to a quantitative definition. In this idea, gross working capital is defined as current assets. The qualitative concept provides an indication of the capital source. Working capital is defined as \"the excess of current assets over current obligations,\" according to a qualitative definition. Example: PQR Limited has Current Assets of 4, 00,000 and Current Liabilities of 1, 80,000. Accounts receivable of 1, 50,000 included in current Assets are declared as Bad Debts and shall be written off to the Profit & Loss Account next year. Solution: In this case, although the Net Working Capital is positive, i.e., 2, 20,000 on paper, in reality, this would not be the true picture since 1, 50,000 is considered as Bad & Doubtful of Recovery. In true sense, the Net Working Capital will have to be adjusted with the Accounts Receivable portion to work out the Revised Net Working Capital of PQR Limited as this will impact the Strategic Decision making of the top management. 6.2.1Importance of Working Capital Working capital is a company's lifeblood and nerve center. Working capital is just as important to the successful operation of a firm as blood circulation is to the human body's survival. Without a sufficient quantity of working cash, no business can succeed. The following are importance of working capital: 1. Business solvency: Adequate working capital contributes to the business's solvency by ensuring a continuous flow of output. 2. Goodwill: Having enough working capital allows a company to make timely payments, which helps to build and sustain goodwill. 3. Easy loans: A company with sufficient working capital, strong solvency, and a solid credit rating can obtain loans from banks and other financial institutions on simple and favourable terms. 89 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Cash discounts: Having enough operating capital allows a company to get cash discounts on purchases, lowering costs. 5. Consistent raw material supply: Sufficient working capital enables consistent raw material supply and on-going production. 6. Regular payment of salaries, wages, and other day-to-day obligations: A company with abundant working capital may make regular payments of salaries, wages, and other day-to-day obligations, boosting employee morale, increasing efficiency, reducing waste and costs, and increasing productivity and profits. 7. Favourable market exploitation: Only businesses with sufficient working capital can take advantage of favourable market conditions, such as buying in bulk when prices are lower and keeping inventories for higher prices. 8. Regular and consistent return on investment: Every investor desires a quick and consistent return on his capital. Working capital sufficiency allows a company to pay timely and regular dividends to its shareholders because there is less incentive to reinvest profits. This increases investor confidence and creates a favourable market for raising further cash in the future. 9. Strong morale: Adequate working capital fosters a sense of stability, confidence, and high morale, as well as overall corporate efficiency. 6.2.2 Types of Working Capital 1. Current Ratio: The working capital ratio is also known as the current ratio. It assesses if the company has the resources to meet its short-term obligations. In other words, it refers to having enough cash on hand to satisfy your daily responsibilities. The current ratio is calculated using the following formula: Current Ratio = Current Assets / Current Liabilities Example 1: Current asset of a concern are Rs.9, 00,000 and on the same date, current liabilities are Rs.4, 10,000. Then- Current Ratio = Current Assets/ Current Liabilities = 9, 00,000/4, 10,000 =2.20:1 This ratio of 2.20: 1 indicates that for every one rupee of current liability, the concern has Rs2.20 in the form of current assets. In other words, it means that after paying current 90 CU IDOL SELF LEARNING MATERIAL (SLM)

liability of Rs.1 out of current assets of Rs. 2.20, the concern will have working capital of Rs. 1.20 2. Inventory Turnover Ratio: Inventory is a large part of a company's working capital, which is why it's important to track how well inventions are used. The inventory turnover ratio determines how often a company's inventory is sold and replaced over a given period of time. The formula for determining inventory turnover is as follows: Inventory Turnover Ratio = Sales / Closing Stock Example: Find the inventory turnover ratio and average selling Sales: 1, 50,000 Gross profit: 70,000 Opening inventory: 18,000 Closing inventory: 14,000 Solution: =80,000 / 16,000 =5 times Computation of cost of goods sold and average inventory: 1, 50,000 – 70,000 = 80,000 (18,000 + 14,000) / 2 3. Collection Ratio: The turnover receivable in days is represented by the collection ratio. This tells you how long it takes your consumer on average to pay. This ratio aids in the identification of consumers with a bad payment history. The collection ratio is calculated using the following formula: Collection Ratio = Receivable / Total Sales * 365 days Case 1: Raj is a finance manager always has trouble in maintaining working capital needs of the organization. 91 CU IDOL SELF LEARNING MATERIAL (SLM)

He always ends up with excess cash at his disposal .He seeks advise on the optimum structure of the working capital that he needs to maintain and how it can be done? Solution: Working capital is a company's lifeblood and nerve center. Working capital is just as important to the successful operation of a firm as blood circulation is to the human body's survival. Without a sufficient quantity of working cash, business cannot exist or live. The working capital should be based on calculation of current ratio, stock turnover ratio and collection ratio. The details are as follows: 1. Current Ratio: The working capital ratio is also known as the current ratio. It assesses if the company has the resources to meet its short-term obligations. In other words, it refers to having enough cash on hand to satisfy your daily responsibilities. The current ratio is calculated using the following formula: Current Ratio = Current Assets / Current Liabilities Example 1: Current asset of a concern are Rs.18, 00,000 and on the same date, current liabilities are Rs.8, 20,000. Then- Current Ratio = Current Assets/ Current Liabilities = 18, 00,000/8, 20,000 =2.20:1 this ratio of 2.20: 1 indicates that for every one rupee of current liability, the concern has Rs2.20 in the form of current assets. In other words, it means that after paying current liability of Rs.1 out of current assets of Rs. 2.20, the concern will have working capital of Rs. 1.20 2. Inventory Turnover Ratio: Inventory is a large part of a company's working capital, which is why it's important to track how well inventions are used. The inventory turnover ratio calculates how many times a company's inventory has been sold and replaced in a certain period of time. Inventory Turnover Ratio = Sales / Closing Stock 92 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Collection Ratio: The turnover receivable in days is represented by the collection ratio. This tells you how long it takes your consumer on average to pay. This ratio aids in the identification of consumers with a bad payment history. The collection ratio is calculated using the following formula: Collection Ratio = Receivable / Total Sales * 365 days 6.3MANAGEMENT OF SHORT TERM–TERM LOANS FROM BANKS Borrowings for a short period of time to address immediate monetary needs are referred to as short-term loans. Companies, for example, frequently take out short-term loans and bank overdrafts to meet their working capital needs. These loans come in a variety of sizes and shapes. Banks, financial organizations, and suppliers all offer short-term loans. Borrowers can apply for short-term loans either online or in person. When the loan is authorized, the lender analyses the loan applicant's creditworthiness, discusses the terms, completes documentation, and disburses the funds. 6.3.1 Types of Short Term Loan: Short Term Line of Loan Credit Merchant Pay Day Cash Loan Advances Bank Overdraft Fig 6.2 Types of Short Term Loan: 93 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Line of Credit(LOC) -A line of credit is a type of loan in which a bank or financial organisation establishes a maximum loan amount that a person can borrow. The borrower has the option of taking out the loan in one single sum or in instalments. Borrowers are only allowed to withdraw up to the amount indicated by their creditworthiness. In exchange, the bank only charges interest on the amount withdrawn, not on the remaining loan balance. When the dues are due, the borrower will not be allowed to withdraw until the principal and interest are paid in full. The borrower can restart using the line of credit service after paying the dues. When you need a steady flow of credit, a LOC is the ideal option. Types of Line of Credit: There are manyforms ofLOC, each of which is classifiedas safe orunsafe.Furthermore, each type of LOC has its own characteristics.  Personal Line of Credit: This LOC provides unsecured funds that can be borrowed, repaid, and re-borrowed. Opening a personal line of credit does not require a default credit history, a credit score of 670 or higher, and reliable income. Savingscan help, as can collateral in the form of shares or CDs, but personal LOC does not require collateral.The personal LOC is used for emergencies, weddings and other events, overdraft protection, travel and entertainment, and to help people with irregular incomes solve problems.  Home MortgageLine of Credit (HELOC): HELOC is the common secured LOC. HELOC uses the market value of the homeless the amount owed as collateral, which becomes the basis for determining the size of the line of credit. Generally, credit limits are equal to 75% or 80% of the home's market value, minus the mortgage balance.  Demand Line of Credit: This type can be guaranteed or unsecured, but is rarely used. With the demand LOC, the lender can claim the borrowed amount owed at any time. Repayment (until loan is recovered)may be interest only or interest plus principal, per the terms of the LOC. Borrowers can spend up to the credit limit at any time.  Securities BackedLine of Credit (SBLOC): 94 CU IDOL SELF LEARNING MATERIAL (SLM)

This is a LOC specialcollateral requirement in which collateral is provided by the borrower's securities. Generally, SBLOC allowsinvestorsto borrow 50% to 95% of the value of the assets in their accounts. SBLOC is a non-purpose loan, whichmeansthat the borrower cannot use the money to buy or trade securities. Almost any other type of expense is allowed. SBLOC requires the borrower to pay monthly interest until the loan is fully repaid or the broker or bank requires payment, which can happen if the value of the investor's portfolio islessthan the credit limit.  Commercial creditlines : Companies use these lines of credit to borrow as needed,ratherthan obtaining fixed loans.Financial institutions that extend the LOC assess the market value, profitability, and risksof the business, and extend the credit limit based on the assessment. LOC may not beable to guarantee or guarantee, depending on the size of the requested credit line and the evaluation result. Like almost all LOCs, interest rates are variable. 2. Short-Term Bank Loans-Loans, unlike a line of credit, have a set duration. As a result, if the borrower wants to borrow again, he or she may need to apply for a new loan. A personal loan to pay for a home renovation is an example. 3. Bank Overdraft- One of the most prevalent types of credit facility is a bank overdraft. If a bank account holder's account balance is inadequate to cover the amount they want to withdraw, the bank will cover the difference. In exchange, the bank charges interest, some of which are expensive. Every day, businesses do a large number of transactions, resulting in a rapidly depleting bank account. A bank overdraft service prevents business interruption owing to payments being denied due to a low balance. 4. Merchant Cash Advances- They is best for firms who do a lot of credit card/debit card transactions instead of cash sales, which means their customers pay with cards. A financial institution agrees to advance a lump sum payment to the borrower under this arrangement. Following that, the lender recovers the money as a proportion of the borrower's daily sales. A company borrows money from a bank or financial institution in exchange for money owed to it by its customers, i.e. account receivables. When clients take longer to pay their invoices, a company can borrow to cover its liquidity needs in the meantime. Lenders levy an invoice finance fee, which is deducted from the loan amount. Receivables can be used as collateral, allowing the bank to rely on them if the borrower defaults. 95 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Pay Day Loans- The borrowing amount for payday loans is determined by the borrowers' earnings, which is usually expressed as a percentage of their total income. Repayment is due when the next pay check/income is received. Payday loans have exorbitantly high interest rates and can be obtained online or in stores. 6.3.2 Advantages of Short Term Loan: 1. Small Loans: When people need money quickly, they don't always need to take out a mortgage loan. A short-term credit facility allows customers to borrow a modest sum of money from financial institutions to cover unexpected obligations such as medical bills or company expenses. 2. Quicker Approval: When compared to other types of loans, short-term loans don't require long approval processes. 3. Lower Accrued Interest: Because the repayment period is shorter, the borrower pays less interest. 4. Improves Credit Score: Obtaining such a loan and repaying it without default can boost the borrower's creditworthiness. 5. Unsecured: These loans are often unsecured, and borrowers are not required to put up any security, making it easier to obtain funds quickly. 6.4 ANALYSIS OF WORKING CAPITAL IN PRICING DECISION Working capital (WC), often known as net working capital, refers to the entire amount of liquid assets available to a firm to execute its operations. In general, the more working capital a company has, the less financial challenges it faces. Working Capital = Current Assets – Current Liabilities Example: Company has 20,000 in current assets and 16,000 in current liabilities. Calculation of Working capital: Working capital = 20,000 – 16,000 = 4,000 Working capital is a metric that assesses a company's efficiency in operations and short-term financial health. Positive working capital, for example, indicates that a company has sufficient finances to meet its short-term obligations. Negative working capital, on the other 96 CU IDOL SELF LEARNING MATERIAL (SLM)

hand, indicates that a company is having difficulty fulfilling its short-term responsibilities using current assets. The importance of net working capital as a key performance indicator (KPI) for CFOs and finance management cannot be overstated. If your net working capital has been decreasing over the last 12 months, quarters, or years, this could indicate a cash shortage and financial distress situation. 6.5 SUMMARY  Working capital management is a series of activities carried out by a firm to ensure that it has enough resources to cover day-to-day running expenses.  The difference between a company's current assets and current liabilities is known as working capital.  The inventory turnover ratio calculates how many times a company's inventory has been sold and replaced in a certain period of time.  Collection period tells you how long it takes your consumer on average to pay.  Borrowings for a short period of time to address immediate monetary needs are referred to as short-term loans  Net working capital as a key performance indicator (KPI) for CFOs and finance management cannot be overstated 6.6 KEYWORDS  Overdraft-When a customer's account reaches zero, the bank provides an overdraft, which allows them to pay bills and other expenditures.  Term Loan- Term loans are short-term loans given to enterprises for purposes such as capital investment and expansion.  Inventory- Inventory is a current asset that refers to all stock in various stages of manufacturing.  Qualitative: concerning to, measuring, or measured via way of means of the first-rate of somethinginstead of its quantity.  Goodwill: the hooked uprecognition of a commercial enterpriseappeared as a quantifiable asset and calculated as a part of its pricewhilstit's far sold. 97 CU IDOL SELF LEARNING MATERIAL (SLM)

6.7 LEARNING ACTIVITY 1. What is LOC? ___________________________________________________________________________ ___________________________________________________________________________ 3. What is Pay day Loan? ___________________________________________________________________________ ___________________________________________________________________________ 6.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Working Capital. 2. What do you mean by Current ratio? 3. Explain Inventory Turnover Ratio. 4. What are Short Term Loans? 5. Write a note on Line of Credit. Long Questions 1. Define Working Capital. Explain the types of Working capital. 2. Discuss the importance of Working Capital. 3. What is Short Term Loans? Explain the types of short term loans. 4. Discuss analysis of working capital of pricing decision. 5. Explain Working Capital in detail. Also differentiate between Current Ratio and Inventory Turnover Ratio. B. Multiple Choice Questions 1. The difference between a company's current assets and …………….is known as working capital. a. current liabilities 98 b. shareholder fund c. reserves CU IDOL SELF LEARNING MATERIAL (SLM)

d. provision 2. Cash, accounts receivable, and inventories are ………………. a. Current assets b. Current liability c. Short term loan d. Long term loan 3. The qualitative concept provides an indication of the ……………. Source. a. Current assets b. Current liability c. Short term loan d. Capital 4. Working capital ratio is also known as the ……… a. Liquid ratio b. Proprietary ratio c. current ratio d. turnover ratio 5. The turnover receivable in days is represented by the …………. a. Current assets b. collection ratio c. Short term loan d. Capital Answers 99 1-a, 2-a, 3-c, 4-c, 5-b 6.9 REFERENCES References book CU IDOL SELF LEARNING MATERIAL (SLM)

 Aswathappa, K. (2002). Human Resource Management. New Delhi: Tata McGraw- Hill.  Dessler, G. (2012). Human Resource Management. New Delhi: Prentice-Hall of India.  Rao, V.S.P. (2002). Human Resource Management: Text and cases. New Delhi: Excel Books.  Decenzo, A. & Robbins P Stephen. (2012). Personnel/Human Resource Management. New Delhi: Prentice-Hall of India.  Ivancevich, M John. (2014). Human Resource Management. New Delhi: Tata McGraw-Hill. Textbook references  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books.  French, W.L. (1990), Human Resource Management, 4th ed., Houghton Miffin, Boston.  H.J. Bernardin, Human Resource Management, Tata McGraw Hill, New Delhi, 2004. Website  http://www.slideshare.net/sreenath.s/evolution-of-hrm  www.articlesbase.com/training-articles/evolution-of-human-resource- management- 1294285.html  http://www.oppapers.com/subjects/different-kinds-of-approaches-to-hrm- page1.html 100 CU IDOL SELF LEARNING MATERIAL (SLM)