December 23, 2012

Management Theory Review - December

I am preparing Knowledge History Review sheet one for each calendar day. Collecting events in science, engineering, and management in it. Collecting also some interesting recent videos. I am also including two blog posts from this blog. Such inclusion should help revision of management knowledge by prompting some topics every day.

Knowledge History of The Day


December 10

December 15

December 20


December 21
December 22
Science, Engineering and Management - History - 23 December
December 24
December 25

December 26

December 27
December 28
December 29
December 30

December 31

This Knowledge Management History series helps me also to do revision reading.

August 23, 2012

Management Theory and Practice - Bulletin Board - August 2012


Usain Bolt explaining his mission success in London 2012 Olympics to IMD B-School people.

The editors of MIT Sloan Management Review are pleased to announce the winners of this year’s Richard Beckhard Memorial Prize: Rob Cross, Peter Gray, Shirley Cunningham, Mark Showers and Robert J. Thomas for their Fall 2010 article “The Collaborative Organization: How to Make Employee Networks Really Work.” In the article, the authors discussed how the most effective organizations make smart use of employee networks to reduce costs, improve efficiency and spur innovation.
Article available for free access for some days.


Social Media's Productivity Payoff
Your employees are active on Social media. Don't worry. The collaboration and communication facilitated by social media technologies help your knowledge workers to innovate and help your organization to grow
HBR Blog post by James Maryika, Michael Chui and Hugo Sarrazin, McKinsey & Co.

June 19, 2012

Management Theory and Practice - Bulletin Board - June 2012

Engineering and Management News  -  Knowledge@Wharton  - HBR Blogs


Value Stream Mapping enhanced with Industrial Engineering Tools

Sadono C. Djumin, Yuri Wibowo and Shahrukh A. Irani
Department of Industrial, Welding and Systems Engineering
The Ohio State University
Columbus Ohio 43210


Three pitfalls startup founders must avoid - HBR Video

The core tenets of social web - Free, Open, Participatory
HBR blog post, April 2011

Innovation Ambition Matrix - HBR Blog post
Core innovations and transformational innovations

2008 Meltdown and where the blame falls - Robert Lenzner 2.6.2012 in Forbes

Nonfinancial rewards are important to A-grade talent - HBR Blog post 24 May 2012

Updates to Management Theory Review Articles

The Legal Environment of HRM - Review Notes


Personal Productivity Secrets


IMD World Competitiveness Yearbook 2012





May 31, 2012

Management Theory and Practice - Bulletin Board - May 2012

Engineering and Management News  -  Knowledge@Wharton  - HBR Blogs

Cost Accounting Introduction - Updated

Risk Manager's job is to quantify the risk and when the project is approved by management with the quantified risk, the project managers is allowed to fail and the failure is well tolerated by the organized.
Permission to fail - HBR blog post by Aaron Brown 30 May 2012

Innovation Projects need to be supported by Executives who can say Yes without Permission
Vijay Govind Rajan and Mark Sebell in HBR blogs
29 May 202

Six Keys to Being Excellent at Anything
Tony Schwartz
HBR Blogs August 2010


Marketing Management - Online Book
updated with more entries

Managing Risky Behavior
HBR Insight Center

Leaders Make or Break Employee Engagement


Lecture Transcripts of Financial Accounting Course

Professor Larry Tomassini

Professor provides transcripts for all his courses and additionally video lectures and audio lectures.

Management Videos

What are strategies?
_____________________________ _____________________________
Integrity - What  is it?

_____________________________ _____________________________
Electronic Records Management
UC Berkeley Even April 2012
______________________________ _______________________________

Five Employee Management Strategies To Start Using ASAP


Management Theory - Literature Review Papers

Strategic Issue Management Theory
Peter Kunnas

May 30, 2012

Decision Making


Decision making is the actual selection from among alternatives of a course of action.
Decision making is involved in various functions of management. Hence, it is a step in planning. Planning occurs in managing organizations or in personal life whenever choices are made in order to gain a goal in the face of such limitations as time, money, and the desires of other people. The steps involved in planning are:
1. Being aware of opportunity
2. Establishing objectives
3. Premising
4. Determining alternative courses of action
5. Evaluating alternative courses
6. Selecting a course
7. Formulating derivative plans

Developing Alternatives

Planning comes into picture whenever a goal is to be attained. Choice of goal itself is a planning problem. If we assume that there is a goal to be achieved, the next step in the planning is to develop planning premises. Premises are planning assumptions, the future setting in which planning takes place. We can term them as the environment of plans in operation. Premises include forecast data of a factual nature, applicable basic policies, and existing company plans.
Developing alternative courses of action is taken as the first step in decision making. Managers have to develop alternative courses for any decision to be made. A sound adage for the manager is that, if there seems to be only one way of doing a thing, that way is probably wrong. More rationally, a planning priniciple called principle of alternatives can be specified. In every course of action, alternatives exist, nd effective planning involves a search for the alternative representing the best path to a desired goal.
The ability to develop alternatives is often as important as making a right decision among alternatives. Ingenuity, research, and perspicacity are required to make sure that the best alternatives are considered before a course of action is selected.

Principle of Limiting Factor

Chester Barnard has written, "the analysis required for decision is in effect a search for the "strategic factors."

Stategic factors and limiting factors are synonyms but Barnard suggests that we use the term limiting factor for physical things and when personal or organizational action is the element, we should use the term strategic factor. When we want to achieve some goals of system, we examine its parts or factors. Strategic factors or limiting factors are those parts or factors which if changed would accomplish the desired purpose if other factors or parts remain unchanged. The principle of limiting factor says, if in developing alternatives, the more an individual can recognize and solve for those factors that are limiting or critical to the attainment of a desired goal, the more effectively and efficiently he can select the most favorable alternative.
Discovery of limiting factor lies at the basis of selection from alternatives and hence of planning.
Process of Evaluation
After a reasonable number of alternatives have been developed, the next step in decision making is evaluating these alternatives. In most decisions, there are certain tangible factors to be assessed in terms of dollars, man-hours, machines hours, units of output, rates of return on investment, or some other quantitative unit. There are other factors that can be hardly quantified. However, both the tangible and intangible factors must be weighed in deciding upon a course of action.

Basis for Selection Among Alternatives

Business Research and Analysis
Operations Research

Evaluating the Decision's Importance

Size or length of commitment: If a decision commits the enterprise to heavy expenditure of funds it should be subjected to suitable attention at top management level.
Flexibility:Decisions involving inflexible courses of action need attention.
Certainty of goals and premises: Production decisions based on order backlog are more routine in comparision to made to stock decisions.
Quantifiability of variables: If variable can be quantified decision making is more routine.
Human impact: Where the human impact of a decision if great, its importance is high.
 Rationality in Decision Making

Economics is a subject that is developed under the assumption that people take rational decisions. When is a person thinking or deciding rationally? A rational decision making implies that the decision maker has a clear understanding of all alternative courses of action by which the goal sought can be reached under existing circumstances and limitations. The decision maker also must have the knowledge to analyze the alternatives in light of the goal sought with a desire to find out the best solution that effectively and efficiently satisfies the goal achievement.

Herbert Simon proposed that managers may not achieve complete rationality in many decisions. It is difficult to recognize all alternatives to reach a goal and also it may not be possible to analyze all alternatives. Hence managers resort to satisficing and find solutions that appear satisfactory to them and their associates in the circumstances.

Creativity and Innovation

Developing alternatives and finding novel ways that are profitable alternatives requires creative thinking. Weihrich and Koontz explain creative thinking as four step process.

1. Unconscious scanning
Allowing the mind to think over the problem and do its process without a conscious effort.

2. Intuition
Intuition is an answer to the problem that is thrown up by the mind. This is the output of the unconscious scanning effort.

3. Insight
Insight also an idea that comes up during investigations to solve a problem. They are to be captured immediately on paper to make us of them later.

4. Logical formulation or verification
Intuition as well as insight is to be tested through logic or experiment. The logical verification is done first by the person himself and then by inviting critiques from others.


Video Lecture - Presentation - Making Great Decision


Updated 29.5.2012
Original knol - 2utb2lsm2k7a/ 188

Business Logistics - An Introduction

Logistics – Introduction

A dictionary definition of logistics is “the branch of military science having to do with procuring, maintaining, and transporting material, personnel, and facilities.”
The definition promulgated by the Council of Logistics Management (CLM), is: “Logistics is the process of planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.”
Ballou explained that in the context of manufacturing it appears from the definition that the logistician is concerned with flow of goods to and from his firm. But the responsibility extends to the flow of components and goods through the production process as well. But the logistician may not deal with detailed production processes, machine scheduling, quality control etc. in the production process. Also the manufacturing logistics definition excludes maintenance which is a part of military logistics.
The mission of logistics in a business firm is to get the right goods or services to the right place, at the right time, and in the desired condition, while making the greatest contribution to the firm. Value in logistics is a combination of time, place and cost.
Logistics is about creating value – value for customers, value for suppliers and value for the firm’s stakeholders.

The Activities of Logistics Function

Council of Logistics Management identified the following:

  • Customer Service
  • Demand Forecasting
  • Distribution Communications
  • Inventory Control
  • Material handling
  • Order Processing
  • Part and Service Support
  • Plant and Warehouse Site Selection
  • Purchasing
  • Packaging
  • Return Goods Handling
  • Salvage and Scarp Disposal
  • Traffic and Transportation
  • Warehousing and Storage

Case for Organizing a Separate Logistics Department

Both marketing and production have recognized the importance of logistical activities. According to Philip Kotler, “Marketing management is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges with target groups that satisfy individual and organizational objectives.”

Therefore distribution of goods is identified as an important activity in marketing. Ballou quotes, McClain and Thomas, who stated that operations management has the responsibility for the production and delivery of physical goods and services. Hence delivery of goods at destinations required by the customer or the sales department is recognized as a part of operations management function.

But Ballou argued that both marketing and production have more important core activities to perform and hence logistic activities may not get adequate attention. According to him marketing may be given the job of creating possession value and production may be given the job of creating form value. A separate logistics department would be concerned with providing time and place value. Ballou recognized the interface problems that arise as more departments are created and hence stresses the need for coordination.

Objectives of Business Logistics Function

The logistics function has to earn the highest possible return on investment over time as far as internal objective is concerned. But to achieve this internal objective it has to first achieve external objectives. It has to earn revenue and minimize costs.

Therefore a logistics system has to be designed and operated considering its impact on revenue contribution that comes through the quality of customer service provided and cost of logistics facilities, system and operation.

Costs of logistics function include capital costs are operating costs. Wages, public warehousing (rented warehouses or warehouse space) expenses, public transport expenses, financial expenses related to inventory investment, other administrative expenses are examples of operating costs. Capital costs are one time costs, own warehouse, own trucks are examples of capital costs.

The financial objective of the logistics function can be expressed as “Maximize over the time the ratio of the annual revenue (due to the customer level provided) less the operating costs of the logistics system to the annualized investment in the logistic system.”

Time value of money may be considered and the objective can be expressed in net present value (NPV) terms or internal rate of return (IRR) terms.

Study of Logistics

Study of logistics can focus on management process and the skills needed to perform the activities involved. Management process can be briefly described as planning, organizing and controlling. The three important domain areas of logistics are facilities location, inventory levels and mix, and transport facilities. Logistics function is concerned with providing service levels to customers and managing costs appropriately for the company. All decision making requires information. Study of logistics includes principles and practices related to the above issues.  Some of the issues are discussed in detail in specialized texts related to those areas and a logistician has to examine them now in the context of logistics.


Ronald H. Ballou, Business Logistics Management, Fourth Edition,  Prentice Hall Int. Inc., USA,  1999.
Joh O. McClain and L. Joseph Thomas, Operations Management: Production of Goods and Services, Second Edition, Prentice Hall, USA, 1985.

Dean Clemente - Presentation on Logistics and Distribution

______________ 2utb2lsm2k7a/ 1384

Financial Management - An Overview

Financial Management - An Overview

Financial Management - An Overview

Financial management revision article series


Financial Management - The Scope

Financial management is concerned with monitoring financial markets, approving financial investment projects in the organization, procuring the finance from the market to finance the project, and conforming to the contracts signed with the providers of finance.
Thus the important activities are
1. Monitoring financial markets to understand the desires of the providers of finance
2. Investment decisions within the company
3. Financing decisions - From whom to procure funds?
4. Dividend decisions - Conforming to the contracts.

Evolution of Corporate Finance Area or Subject

The early phase of corporate finance subject had  focus on episodic events in the life cycle of a corporation. The typical and popular book of this phase is the book, The Financial Policy of Corporations by Arthur S. Dewing, Professor of Finance at Harvard University (published in 1918). The book had a descriptive and institutional material regarding formation of company, issuance of capital, major expansion, merger, reorganisation, and liquidation.
In the early 40s a transition occurred and along with the external focus related to major events, greater emphasis was placed on the day-to-day internal activities of financial management in the area of funds requirement analysis, planning, and control. A representative work of this phase is Essays on Business Finance by Wilford J . Eiteman et al. (published in 1953).
The modern phase began in mid-fifties with application of economic theory and quantitative methods of analysis. Financial decision making has become analytical and quantitative and financial decision making activity has become dominant.

Goals of Financial Management

Financial theory, rests on the premise that the objective of the firm should be to maximize the value of the firm to its equity shareholders.
This value is could be equal to the market price of shares in stock market with good liquidity. But financial managers may have to calculate the discounted value of expected future cash flows and compare with the market price. In case of discrepancies they may have to communicate to the financial markets their point of view.

Basic Considerations of Financial management: Risk and Return

In the context of evaluating an investment proposal, from the point of view of finance function, risk and return are the relevant dimensions. Higher return from a proposed project increases market value and higher risk decreases market value.

Financial Decisions in a Firm

While a formally specified person performs the financial market monitoring and procurement of finance functions, the investment decisions and performance of investments are in the hands of operating executives. Finance sense has to be there in each and every employee of an organization to make an organization financially viable and successful.
The marketing persons who do market research provide estimates of market size, revenue generation which form the basis of project proposals.
The engineers, who select location for the plant, equipment shape the investment decision of the firm by providing various alternatives.
The purchase managers actions influence the level of inventories.
The sales managers' assessments determine the receivables policy.
Department managers actually plan and control expenditures.
Thus many activities that are a part of financial function are performed by operating executives. But there are many tasks of finance function that can be done by specialist financial officers. Traditionally, the financial officers are grouped into controller's office and treasurer's office.
The treasurer's office is responsible for
Obtaining finance
Banking relationship
Cash management
Credit administration
Controller's office is responsible for
Financial accounting
Internal auditing
Management accounting and control



Prasanna Chandra, Financial Management, 5th Ed.,  Tata McGraw Hill, 2001
Brealey and Myers, Corporate Finance, Fifth Edition, Prentice Hall India, 2001


 Video Lecture on Introduction to  Financial Management

__________ __________

May 8, 2012

Management Theory and Practice - Bulletin Board - April 2012

May 2012
How to engage your customers and employees?

April 2012

Leadership Issues

How to become better leader by improving Big Five Personality Traits

Relational intelligence for managers

Supply Chain Themes

1980s - JIT
90s Outsourcing
2001 to 10 Internet
2010s - What is the theme? Sustainability or Supplier Innovation?

Increasing Supplier Driven Innovation

Sustainability Ideas for Supply Chain Managers

What the current supply chain strategic issues?
Supply chain issues become value chain issues.

Supply Chain Cost Reduction Potential - How to identify it?

Supply Chain Key outputs are now Six
Cost, Responsiveness, Security, Sustainability, Resilience and Innovation

Greeting Transportation in the supply chain

April 20, 2012

Selection of Motor - A Design Engineer's Problem - Engineering Economic Analysis

A design engineer has to select a 100 hp motor for a plant that operates 2000 hours in year. Model A-90 costs Rs.2,00,000 and has a full load efficiency of 89.5%. Model A-91 costs Rs.2,40,000 and has a full load efficiency of 91%.
Energy costs Rs. 2 per KWH. (0.746 KW = 1 hp).
The life of the motors are expected to be 12 years and the salvage value will be 5%. Which motor is to be specified by the design engineer?
Original Knol - 598

April 18, 2012

Analysing Financial Performance using Financial Statements

Financial management revision article series

Analytical Methods or Components

Ratio analysis

Ratios are calculated using line items from financial statements. For certain ratios there are ideal values indicated in the financial literature. Certain ratios need to have specific values based on company's declared policies. Like debtor turnover ratio must have a range of values based on the credit period specified or offered by the company to its credit customers.

Dupont analysis

It breaks down the return on equity into component parts.

Comparative analysis

Comparing similar ratios of other companies, one can assess the relative strength of the company under consideration.


Assessment of Financial Health of the Company

Statistical models using financial information or ratios

Two statistical models designed to predict the likelihood of severe financial distress for a corporation. One of these models is the Altman Z-Score [Altman, 2002]. This model is applicable to any type of firm. The other model is a scoring approach developed by Pilarski and Dinh that is applicable specifically to air carriers [Pilarski and Dinh, 1999].

Altman's 1968 Model
The following calculation is used to arrive at the total Z-Score:
Z = 1.20(X1) + 1.40 (X2) +3.30(X3) +.60(X4) + .99(X5)

X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings before Interest and Taxes / Total Assets
X4 = Market Value Equity / Book Value of Total Debt
X5 = Sales / Total Assets
Z = Overall Score

Credit granting decisions

Equity investment decisions


Different company may use accounting policies with some differences. Hence comparison may sometimes create problems.

Concept of Balanced Scorecard
Prasanna Chandra, Financial Management, 5th Ed.,  Tata McGraw Hill, 2001
Brealey and Myers, Corporate Finance, Fifth Edition, Prentice Hall India, 2001

Original Knol - 338

March 30, 2012

February 29, 2012

February 16, 2012

Budget, Budgeting and Budgetary Control


A budget is a formal quantitative expression of management plans.
Budgets can be made by managers at any level including a single person managing a machine or operating a machine. In the context of business, budget may have revunue, expenses and profits, all in a single statement. But one can think of a budget for revenues alone, budget for expenses alone.

Master Budget

Master budget for a big organization summarizes the goals of all subunits of an organization - either business divisions if the company is organized along divisional lines or managerial functions if the company is organized along functional lines.
The master budget consists of expected or projected income statement, balance sheet, and a cash flow statement, along with supporting schedules.

Benefits of Budgeting or Imperative for Budgeting

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.
The formal budgeting system has the following major benefits.
1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.
2. Budgeting, due to its approval and authorization  by the superiors, provides definite expectations that are the best framework for judging subsequent performance.
3. Budgeting helps in coordinating the various departements of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).
Budgetary control at department level is encouraging department level personnel to plan their operations for the forth coming period. Both outputs and inputs are to be planned. If possible outputs and inputs are converted into revenues and costs.

The accounting system of the company will prepare the actual revenues and costs generated at the end of the period as well as during the period. The department managers have to responsibility to carry out the day to day activities to achieve the best possible results with their plan/budget as the guiding document.

Budgets can be made flexible so that cost estimates are in relation to the output produced.

Variance analysis can be done to pin point the variables that changed during the period and their effect on actual results.

Budgetary control system facilitates participation of department managers as well as senior level managers in explicitly planning for the future. The plan can be optimized with various optimization techniques.

These techniques include linear programming (for product mix problems), transportation (for planning transport of finished goods) and assignment (assigning machines for jobs or operators for jobs) and other operations research techniques. A formal budgeting system can question the department managers on whether they have applied the optimization techniques or not and where necessary advise them to use those techniques and provide specialist support in cases where necessary.


Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management Accounting, 13th Ed., Prentice Hall, 1999.




_____________ _____________ ______________

For Further Study or More Information


 Knol no. 62

February 6, 2012

Principles of Efficiency - Harrington Emerson

Harrington Emerson contributed to the systems efficiency focus of industrial engineering. His book Twelve Principles of Efficiency was classic.

He discussed efficiency design of organization through 12 principles:

1. Clearly defined ideals.
2. Common sense
3. Competent counsel
4. Discipline
5. The fair deal
6. Reliable, immediate and adequate records
7. Despatching
8. Standards and schedules
9. Standardized conditions
10. Standardized operations
11. Written standard-practice instructions
12. Efficiency-reward

Standards and standardization as a basis for efficiency was strongly advocated by him. Nearly two hundred companies adopted various features of the Emerson Efficiency system, which included production routing procedures, standardized working conditions and tasks, time and motion studies, and a bonus plan which raised workers' wages in accordance with greater efficiency and productivity [Guide].

Harrington Emerson (1853-1931) was one of America's pioneers in industrial engineering and management and organizational theory. His major contributions were to install his management methods at many industrial firms and to promote the ideas of scientific management and efficiency to a mass audience [Guide].

After a successful tenure as a general manager of a small Pennsylvania glass factory in 1900, Emerson resolved to take up efficiency engineering as a profession. Through meetings of the American Society of Mechanical Engineers, he became personally acquainted with the pioneering work of Frederick W. Taylor, the founder of scientific management, ans assimilated much of the methodology for standardizing work and remunerating workers in accordance with productivity.

Between 1907 and 1910, the Emerson Company  consulted over 200 corporations, submitting reports for which they were paid twenty-five million dollars. Emerson efficiency methods were applied to department stores, hospitals, colleges, and municipal governments. Between 1911 and 1920 Emerson's firm averaged annual earnings of over $100,000.00.

To distinguish his methods from those of Taylor, Emerson published three books: Efficiency as a Basis for Operation and Wages (1909); The Twelve Principles of Efficiency (1912); and Colonel Schoonmaker and the Pittsburgh and Lake Erie Railroad (1913).

The 1910 Eastern Freight Case brought much wider public attention to Emerson's ideas.  Emerson served as Louis D. Brandeis's star witness in the appeal of major eastern trunk railroads to the Interstate Commerce Commission for a rate increase. Emerson testified that the railroads wasted one million dollars daily by not applying efficiency methods. His brief against the railroads won wide acclaim and marked the growth in public awareness of scientific management.  Emerson became known as the "High Priest of Efficiency." He spoke more frequently about his effficiency ideas to businessmen, civil organizations, and management and engineering students. In 1912, Emerson helped to found the New York Efficiency Society which promoted and disseminated the ideals of reform through scientific management. Emerson joined  other progressive engineers in founding the Society of Industrial Engineers in 1917.

Through the decade of the 1920s, Emerson publicized the potential for promoting efficiency on a global scale. He was one of eighteen prominent engineers chosen by Secretary of Commerce Herbert Hoover in 1921 to serve on a committee investigating the elimination of waste in industry.

Emerson documents are available in Pennsylvania State University Library. for reference.


Access the books by Emerson from
The Twelve Principles of Efficiency (1912)
Efficiency as a Basis for Operation and Wages

Quotations by Harrington Emerson

"The twentieth century dawns with as yet unaccomplished task of conservation, of eliminating wastes-wanton and wicked wastes of all kinds, wastes that make our civic governments a by-word, our destruction of natural resources a world scandal, our complacent industrial efficiency a peculiarly national disgrace, of all nations, we Americans ought to know better."
The Twelve Principles of Efficiency (1912) P.9]

"Efficiency like hygiene is a state, an ideal not a method" P.23

Strenuousness and efficiency are not only not the same, but are antagonistic. To be strenuous is to put forth greater effort; to be efficient it to put forth less effort.  (P.39)

"He did not know that efficiency reward  ought to be preceded by the careful, systematic, and expert application of  eleven other principles, of which "Wages" is a minor element of one."  P.41
Accounting in all its phases is a minor division of one of the twelve efficiency principles, trustworthy, immediate and adequate records. P.43
An efficiency engineer ought similarly to act as funnel, being equipped to gather from all available sources whatever is of operating value for the organization he is advising. P.54
If all the ideals animating all the  organization from top to bottom could be lined so as to pull in the same straight line, the resultant would  be a very powerful effort. P.60
The railway line between st. Petersburg and Moscow cost $337,000 a mile for a distance of 400 miles. In Finland similar line was made for $23,000 a mile P. 65 (Sentence rewritten)
The ideas of one company are that its customers shall be treated with absolute fairness, that its employees shall be of higher skill and be better paid than those of neighboring competitors, that they shall have permanence of employment.P.84
There are only a dozen shops in the United States in which any scientific standards of man and machine efficiency exist. P.111
The legal counselor does not, cannot know all the laws and proper legal formalities in every state, and he therefore employs junior and often senior counsel. Similarly a counselor as to efficiency, would not pretend to be expert as to all efficiency, but it would be his duty to be in touch both as to men and scientific reports with all that was latest and best and make it all available for his employer whether individual or corporation. P.129

There is nothing men will not attempt when great enterprises hold out the promise of great rewards. - Livy

Out of eighteen items of operating costs, as distinguished from selling costs, only one is directly influenced by the worker, that is time-quality of the work. P.355

Efficiency reward is not a money payment, this is only one of its myriad forms. Men have been willing to die for a smile.  P.365-66

The ideal that inspires the formulation of the principles of efficiency is elimination of waste, of wastes of all kinds resulting finally in wastes of the collective soul. P.371

The ideal that inspires the formulation of the principles of efficiency is elimination of waste, of wastes of all kinds resulting finally in wastes of the collective soul. P.371

The ideals of United States Steel Corporation

The ideals of the corporation seem to have been
(1) Law abidence
(2) Rational publicity
(3) Steady prices at a high level
(4) maximum tonnage
(5) Permanence for its own business by the purchase of large ore and coal reserves
(6) Rapid improvement of the properties so as to make them worth the capitalized value
(7) Maintenance of a high level of wages
(8) Identification of the worker with the profits of his work, thus increasing his interesting in his occupation.

Does the Steel Corporation know as to every detail what ought to be as well as it knows what has been? P.391

Efficiency in Printing and Packaging Processes A Webinar - 2 Parts




Industrial Engineering Knowledge Revision Plan - One Year Plan

January - February - March - April - May - June

January 27, 2012

Cost Accounting - Introduction

Cost accounting measures and reports financial and nonfinancial information that relates to the cost of acquiring or consuming resources by the organization.

Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount (or money) that must be paid to acquire goods and services.

Cost accounting measures and reports financial and nonfinancial information that relates to the cost of acquiring or consuming resources by the organization.

Cost Terminology

Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount (or money) that must be paid to acquire goods and services.

Budgeted cost is provided in the plan. Forecasted cost is an estimate. Actual cost is the cost actually incurred at the time of transaction.

Cost Object: Cost object is anything for which a separate measurement of cost is desired.
A cost system accumulates costs and the assigns them to various cost objects. This cost accumulation process follows the financial accounting system process of documents of financial transactions, journal entry, ledger entry. In ledger accounts, cost accounting system require more accounts that deal with various cost centers of the organization.

Cost accumulation is the collection cost using documents like purchase orders, invoices, various expense vouchers, and issue receipts of materials, wage and salary schedules. These documents are entered in journals and ledgers like the financial accounting or book keeping procedure.

Cost assignment is a term that encompasses both (1) tracing accumulated costs to a cost object, and (2) allocating accumulated costs to a cost object.

Direct cost: Directs of a cost object are related to the particular cost object and they can be traced to the cost object through accounting documents as and when they are incurred in an economically feasible way.

Indirect cost: Indirect costs are also related to the cost objects but they cannot be identified with cost objectsa the time they are incurred in an economically feasible way. Hence they are accumulated without explict reference to the cost obejcts at the time they are incurred and then allocated to various cost objects at a later date to find out the costs of cost objects.

Variable cost: A variable cost with reference to a cost object changes in total in proportion to changes in the level of total activity or volume of output. With reference to an automobile, petrol is an example of variable cost. If one drives more, more petrol is consumed.
Fixed cost: A fixed cost remains unchanged for a given time period despite changes in the level of activity or volume of output. Insurance premium for a car, an annual tax for a car can be given as examples. They are not related to the distance travelled by a car in a period.

Cost driver: Cost driver is a factor, that has a causal relation with a cost over a given time span. In the case of variable costs, activity volume or output volume are cost drivers. that is at the total variable cost level, more output would mean more total cost.

Fixed cost: Fixed cost has no cost driver in the short term. But in the long term it also has cost drivers.

Inventoriable costs: These costs are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold.

Period costs: These costs are treated as expenses of the period in which they are incurred because it is presumed that they do not benefit future periods.

Prime cost and conversion costs are terms used in manufacturing companies. Prime costs are all direct manufacturing costs. Conversion costs are all manufacturing costs other than direct material costs.

Overhead cost: Costs which are not directly related to the production of goods being produced and sold are classified under overhead costs. They are essential for the production and selling process but they are not accounted directly on the job cards or batch cards of the goods being produced and sold.

Cost Accounting: A Managerial Emphasis, Charles T. Horngren, George Foster, and Srikant M. Datar, Prentice Hall Inc.,2000

Video Lecture by Prof Bassell On Cost Classification and Terminology



Kaizen Costing and Kaizen Cost Management

Kaizen costing is variant of standard costing. Standard costing specifies a cost target for the production team for the coming period. Normally standard cost is set for an year. It will be revised every year. It is constant for an year as a planning device. Any variances from it are examined and the reasons are identified and understood.

Kaizen costing is cost planning that incorporates kaizen philosophy or philosophy of continuous improvement and implementation of the principles of learning effect.

According to learning effect principle, the average cost of an item is certain percentage of average cost of earlier volume. It is expressed  as  volume of production and sales doubles(X becomes 2X), the average cost of total sales (2X) is say, 90% of the average cost of producing and selling X units. There is a learning effect in every activity undertaken by the organization right from the lowest cadre employee to the CEO and Board and cost comes down.

Japanese implemented this cost reduction philosophy in a systematic manner. They made planned reductions in the standard costs of an item every year. So the production and sales team have to plan their department and activity cost to achieve reduction in standard cost. The idea was extended by them to monthly costs. They said we cannot achieve cost reduction in one day. So having a standard cost for an year and then asking for reduction in it next year is not the right approach for cost reduction. They came with a reducing cost target for every month. Such a reducing cost target for every month demands some effort on cost reduction by departments every month. Hence cost reduction is on the monthly agenda of every department in the company. Kaizen costing is providing the monthly cost target information and accounting for actuals durng the month.

For More Detailed Reading

Kaizen Costing and Value Analysis

Control Measures for Kaizen Costing - Formulation and Practical Use of the Half-Life Model

Introduction to Kaizen Budgeting

 B. Modarress;  A. Ansari; D. L. Lockwood,  “Kaizen costing for lean manufacturing: a case study” International Journal of Production Research, Volume 43, Issue 9 May 2005 , pages 1751 - 1760.

Index of articles on Cost Accounting, Costing and Cost Management


Value Chain Analysis - IMA Guideline

A summary of IMA guideline

I. Need

     Value chain analysis is a strategic tool to measure the customer's perceived value. The analysis enables companies to determine the strategic advantages and disadvantages of their value creating processes and activities.

II. Value Chain - Definition

Customer value accumulates along the  chain of activities that a firm performs and delivers an end product or service to customers.
Activities and processes are performed by the firm to understand market, design, produce, sell (market), deliver and support its product.
A firm's value chain structure and the way the individual activities in the  value chain are  performed are a reflection of the firm's history, its current strategy, its approach to implementing its strategy and the underlying economics of the activities.
The activities in a value chain are categorised as primary and support activities.

III. Competing in the Market, Customer Value and Competitive Advantage

In order to compete in a market as a supplier of a product or service a firm must supply what customers want to buy. It has to create customer value so that customer pays a price for the offering. In any market there are competitors. The firm has to be provide some unique benefits to a certain section of persons in the target market to survive the competition.
The competitive advantage of a firm derives from the difference between the value it offers to customers and its cost of creating that customer value.
Thus the competitive advantage is obtained from two sources:
1. Differentiation advantage. Customer perceives more value from the firm's products.
2. Low cost advantage. The firm is able to provide the service or product at a cost lower than the market average.

IV. The Role of Management Accountant

Champion the use of value chain analysis.

V. Value Chain Analysis - Procedure

Internal cost analysis
Internal differentiation analysis
Vertical linkage analysis

VI. Strategic Frameworks for Value Chain Analysis

From the strategy theory the following concepts or frameworks are relevant for value chain analysis
Industry structure analysis
Core competencies
Segmentation analysisi

VII. Limitations of Value Chain Analysis

It is not an exact science. It is not easy. Finding costs, revenues and assets for each activity sometimes presents serious difficulties.
Despite such difficulties, experience indicates that value chain analysis yields firm swith invaluable information on their competitive situation, cost structure, and linkages with suppliers and customers.

VIII. Organizational and Managerial Accounting Challenges

Value chain analysis offers an opportunity to integrate strategic planning and management accounting. Management accounting department has to champion this to maintain its critical role as the information profession.

Index of articles on Cost Accounting, Costing and Cost Management

Cost Accounting, Costing and Cost Management - Article Directory

Originally posted in Knol

Post updated 24.9.2012

The Role of Accounting in Organizations

Accounting is a major means of helping managers of an organization, equity investors of an organization, potential equity investors, creditors and bond holders of an organization, potential creditors and bond holders of an organization, suppliers and customers of an organization and other stake holders to take decisions.


Purposes of Accounting Systems

Accounting is a major means of helping managers of an organization, equity investors of an organization, potential equity investors, creditors and bond holders of an organization, potential creditors and bond holders of an organization, suppliers and customers of an organization and other stake holders to take decisions.
Accounting provides information for three major purposes:
1. External reporting: These reports are used investors, creditors, government authorities, and other outside parties.
2. Routine internal reporting: These reports which are periodically generated are used by managers of the company for their internal decisions.
3. Nonroutine internal reporting: This information or reports are generated to support projects and other decisions that come up as the need arises from them.
While the reports are prepared in different formats and basic data is manipulated or summarized in various ways to facilitate decision making, there is one data base maintained by the accounting system that contains data in the form debits and credits to various accounts maintained in the accounting system. Accountants combine these data items in various ways to provide information to internal or external users.

Distinction Between Financial Accounting, Cost Accounting and Management Accounting

Horngren’s distinction between them is interesting.
Management accounting as a discipline focuses on accounting information that facilitates decision making by managers of the organization. If focuses on routine and nonroutine accounting reports.
Financial accounting measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP). Executive compensation is tied to profit figures reported in the financial statements and equity share valuation is also based to a large extent on these financial statements.
Cost accounting provides information to facilitate both management accounting and financial accounting. Its focus is measuring and reporting financial and nonfinancial information that is related to the cost of acquiring or consuming resources by an organization.

Cost Management

Cost management is an activity of managers related to planning and control of costs. Managers have to take decisions regarding use of materials, processes, product designs and have to plan costs or expenses to support the operating plan for their department or section. All these activities come under cost management. Information from accounting systems help managers in cost management activities.  But the cost accounting system and the reports it generates is not the cost management system. Accounting system can be interpreted as a part of cost management system of an organization.
Cost management is not cost reduction alone. It is much broader.  Organization increase advertising expenditure to increase sales, increase research and development expenditures to promote new products. Here the concerned managers are deliberately incurring additional costs in a period (compared to the previous period) as they expect profits from such decisions or expenditures. Cost management system has to ensure that a cost is incurred with the expectation of profit.

The Role of Management Accounting

The role of management accounting is also described as problem solving, score keeping and attention directing.
Problem solving: The role of accounting in problem solving is to provide information useful in evaluating alternatives.
Scorekeeping: Scorekeeping records the results of various actions of the managers and helps in assessing whether the results expected from the various actions are realized or not.
Attention directing: The scorekeeping function in combination with expected results, and comparative analysis of scores of various companies, divisions and departments, comparative analysis of present period scores or results with previous periods show opportunities of focusing attention of managers to improve things.


Value Chain

Value chain is a visualization of complete business as a sequence of activities in which usefulness is added to the products or services produced and sold by an organization. Management accountants provide decision support for managers in each activity of value chain.

Design of Management Accounting System

The design of management accounting system has to take into consideration the decision needs of the managers. Also it has to take into consideration the new themes and challenges that managers face currently.
Horngren identified four such themes in the tenth edition of his book.
1. Customer focus: The challenge for managers it invest sufficient resources to enhance customer satisfaction. But every action of the organization has to result enhanced profitability or maintained profitability for the organization.
2. Key Success Factors: These are nonfinancial factors which have an effect on the economic viability of the organization.
Cost, quality, time and innovation are important key success factors. Management accounting systems need to have provisions for tracking the performance of the organization and its divisions as well as competitors on these success factors.
3. Continuous improvement: Continuous improvement or kaizen is a popular theme. Innovation related to this area in costing is kaizen costing .
4. Value Chain and Supply Chain Analysis: Value chain as a strategic framework for analysis of competitive advantage was promoted by Michael Porter. Management accountants have to become familiar with the framework and provide information to implement the framework by strategic planners.
The term supply chain describes the flow of goods, services and information from cradle (the mines sources of raw materials) to grave (where discarded products or dumped), regardless of whether those activities occur in the same organization or many organizations.

Key Guidelines for Management Accounting System Design

Cost Benefit Approach: In the system design resource allocation decisions are to be made. Examples would be software to buy and associates to employ. A cost-benefit approach should be used for all such decisions. Resources should be spent only when there is profit to the organization due to that expenditure.  Each incremental addition to the accounting system must be supported by incremental profit to the organization.
Behavioral and Technical Considerations: Management has human dimension and it has to focus on how to help individuals to do their jobs better. Managing people involves discussion of managers with his associates on improving performance. The behavioral responses of people to reports highlighting their underperformance have to be understood. Management accounting should lead to cordial relations and climate.
Different Costs for Different Purposes: It is to be noted that there are several cost concepts and cost measures can be created for each of these concepts. Cost accountants have to careful to provide appropriate cost to the managers. The accounting system has to have some precautions to make sure that the accountant understands the decision situation of a manager and provides appropriate cost measures.

Professional Ethics

Like other professionals, accountants also face ethical dilemmas. They need ethical guidelines.  Institute of Management Accountants (IMA), USA published guidance note on ethics to be followed by management accountants.
Competence, confidentiality, integrity and objectivity are important themes of the guidance note.


Horngren, Charles T., George Foster, and Srikant Datar, Cost Accounting: Managerial Emphasis, Tenth Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey, USA, 2000
Cost Accounting - Horngren et al., Book Information and Review

Originally Posted in 

January 22, 2012

Organization Behavior – History of Development of The Discipline

Organization Behavior Article Series

The academic field of organizational behavior has been around for at least the past thirty to forty years (Luthans, 2005). This statement motivated me to trace the development of ‘Organizational Behavior’ as a subject in this article.


The academic field of organizational behavior has been around for at least the past thirty to forty years (Luthans, 2005). This statement motivated me to trace the development of ‘Organizational Behavior’ as a subject in this article.

Classical Theory of Organization

The following questions were important in organizing work.

How should work be divided by departments and by individuals?
How much authority should be given to the incumbent of each position?
What should his duties be?
What mean of coordination should be provided?

Both managers and writers on management had in the past tried to discover principles to answer the questions and the quest is continuing now also.

Fayol’s analysis of management and principles that he stated regarding organization became the basis for many writers to develop their thinking on this issue. The most commonly stated principles from this approach are expressed as OSCAR: Objectives, specialization, coordination, authority, and responsibility (Dale, 1965). This thinking of this group of writers who followed and developed Fayol’s thoughts is termed as classical theory of the organization.

The criticism of the classical theory includes the opinion that it is too mechanistic. The theory seems to assume that top management only needs to know what is to be done or what it wants to be done. It will arrange for an organization in which all roles are exactly dovetailed. It will issue the necessary orders down through the chain of command, and hold each person accountable for the performance. Each person is spurred into appropriate action by the hope or reward and fear or penalties. Classical school expressed the belief that, if these steps are followed, the organization will function harmoniously and effectively. No doubt, they laid stress on the principle of esprit de corps, but its implication was not explored.

Behavioral Theory – Organization Behavior

The criticism of classical theory as too mechanistic results in a new theory of organization that emphasized that organizations are made up of human beings and orders and policies will be subject to reinterpretation in the light of psychological “set” of those who transmit them or carry them out as well as the social environment. The people in the organization are motivated by many forces beside those taken into account by the classicists and employees of an organization are often seeking goals different from those expressed in the organization manual. Theory developed in the field of organization design and management based on behavioral variables of human beings in the subject of organization behavior. Chester Barnard was probably the first of the behavioral theorists of organization (Dale, 1965).

Chester Barnard

Barnard stressed the influence of psychological and social factors on organization effectiveness and emphasized that the economic motive, on which business organization depends for incentive, is only of those that influence human beings, even when they are part of organizations as employees after signing a contract. 

Chester Barnard’s book, The Functions of the Executive was published in 1938(Barnard, 1938).

Herbert A. Simon

Barnard’s theories were further developed by Herbert A. Simon in his book Administrative Behavior (Simon, 1957).

E. White Bakke

Bakke pointed out that the individual in organization hopes to use the organization to further his own goals, while the organization attempts to use the individual to further its goals. In the process of working, the organization to some degree remakes the individual and the individual to some degree remakes the organization (Bakke, 1953).

Bakke put forward the concepts of personalizing process and fusion process in organizations. The attempt to make the formal organization a mean of accomplishing the personal goals of its employees is the “personalizing process” and the fusion or integration of the personalizing process and the “socializing process” of the organization is “fusion process.”

Likert’s Motivational Approach

Behavioral theorists take a motivational approach to the company structure and management. They are concerned with the ways in which the goals of individuals and those of the organization can be made to fuse, or at least coincide to some extent. But Rensis Likert has christened a special approach as motivational approach. He said,

“ …management will make full use of the potential capacities of its human resources only when each person in an organization is a member of one or more well knit, effectively functioning work groups that have high skills of interaction and higher performance goals.”

Early Books in Organization Behavior

Bennis, Warren G. (1966), Changing Organizations, McGraw-Hill, New York.

Filley, Alan C., and Robert J. House (1969), Managerial Process and Organizational Behavior, Scott, Foresman and Company.

Luthans, Fred (1973), Organizational Behavior, McGraw-Hill, New York.



Barnard, Chester, The Functions of the Executive, 1938

Luthans, Fred, Organizational Behavior, Tenth Edition, McGraw-Hill, 2005

Simon, Herbert A., Administrative Behavior, 1957

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