My Journey to the IIM !!

Re: WORST CASE SOME ONE!!!

MODERN MANAGEMENTThe ideas of classical theorists, neoclassical writers, behavioral scientists, and management scientists have many applications in the management of today’s organizations. However, modern management theory highlights the complexity of modern organizations and integrates ideas from the other management theories. Likewise, since individuals are complex and people’s motives, needs, aspirations, and potentials vary, there can be few static or universal managerial principles. It is this distinction (few static or universal principles) that characterizes modern managerial theories, which leads to the application of a complex view of employees and organizations.

Complex View
The premises of the complex view (Figure 2-5) emphasize the need for a variety of managerial strategies for dealing with people and organizations.19 This view is built on the belief that people differ too much for any one approach to be all-encompassing. Companies such as NCR, Levi Strauss, and General Motors recognize differing values and attitudes between older and younger workers, differing motives between some men and women, and the need to provide a work environment flexible enough to accommodate these various needs. Two modern management theories are the result of managerial application of the complex view: systems theory and contingency theory.

1. People are both complex and variable. They have many motives that can be hier­archically arranged, but the arrangement is changeable.

2. People can learn new motives through experience. Hence the employee and the organization are related by complex interactions between the employee’s initial; motives and organizational experiences.

3. Employee motives may be different in different organizations or in different parts of the same organization.

4. Managers can employ many different strategies depending on their own skills, needs, and motives and on the nature of organizational factors. There is, no single managerial strategy that works for all people at all times.

5. Because organizations’ are complex, analytical tools may be useful when applying managerial strategies.


FIGURE 2-5. The Complex Employee View

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Systems Theory
A system is an entity made up of two or more interdependent parts that interact to form a functioning organism. Regardless of the type of system, whether the human body or a social system such as a business firm, there are four components. As Figure 2-6 indicates, they are inputs, transformation processor, outputs, and feedback. Examples of each of the components are identified for a bank in that figure.




FIGURE 2-6. Simple Bank System and its Components

Source: Robert L. Mathis and John H. Jackson, Personnel: Human Resource Management (St. Paul: West Publishing Co., 1985): 27.

Open System From a manager’s perspective, two parts of systems theory should be emphasized. The first is that an organization is an open system that interacts regularly with external forces such as government agencies, customers, and sup­pliers. These external forces, such as government regulations on equal employment and safety/health issues, impact organizational practices. Other external forces also are shown in Figure 2-6. Conversely, an organization has an impact on its environment. When the organization changes the prices of its products, competitors and customers are affected. It is this interaction between the organization and its environment that makes it necessary to view the organization as an open system.

Interdependency A second part of systems theory is the impact of changes within an organization. According to systems theory, changes in one part of the organization affect all other parts of the organization. If pay for the production employees at Levi Strauss is increased, employees in other operations (for example, salespeople, clerks, receptionists) will become aware of it and may also request pay changes. This interdependence complicates a manager’s job because a wide range of possible results of actions must be considered.
 
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Contingency Theory
Because of the complexity of organizations today, no single managerial strategy is correct for all situations. The approach that describes the application of this view-point in managerial practice is contingency theory. It depends on knowledge of and research into organizations as systems, and stresses the need for managerial strategies based on all relevant facts.

In this approach, each managerial situation must be viewed separately, and a wide range of external and internal factors must be considered. The emphasis is on diagnosis, and managers must have different approaches for situations when different constraints prevail. For example, at 3M Corporation these contingent approaches guide the investment of venture capital to help employees pursue ideas for new products or policies with the existing structure. The decision whether the new product or policy should be added to the internal structure or kept as a separate organizational entity depends on various factors that must be analyzed. Factors that lead to different approaches are: (1) the compatibility of the new product or policy with existing products and policies, (2) the skills and abilities of the employee who created the idea, and (3) constraints imposed by existing production processes.

Thus, the contingency approach focuses on actions that best fit the situation. It emphasizes development of the managerial skills that are most useful in identifying important situational factors. This emerging approach has been applied most often to the managerial activities of motivating, leading, and structuring the organization.

Motivating Contingency theorists believe that behavior results from individual reactions to important aspects of the environment. They do not believe that individuals simply respond to their basic instincts or needs but rather are motivated: by influences around them. For example, a student wants to take a course in art appreciation but knows that a prospective employer would give more importance to a course in marketing. Therefore, the student’s behavior must be the result of both her own needs and environmental influences.

Leading Contingency approaches suggest that managers must be flexible leaders. It is not enough for them always to be kind and considerate to subordinates; they must do so at the right time. At other times managers may have to be more authoritative and exert more control over subordinates. Contingency leadership approaches discuss the aspects of the leadership situation that influence how a leader should behave.
 
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One of the most successful companies of the largest 1,000 from 1980 to 1985 was ServiceMaster. During that time it averaged over 40 percent return on equity, and earnings grew as well. However, the 1986-1987 years represented challenges because of a number of changes. To understand them, it is necessary to know more about ServiceMaster.

ServiceMaster was founded to provide cleaning services to hospitals and other businesses. Based in a Chicago suburb, the firm has four official goals, which include values associated with pursuing excellence and prosperity, efficiency, helping people, and honoring God. In fact, the company name came from the phrase “Service to the Master.”

The heart of ServiceMaster’s business is threefold. First, it both operates or franchises area cleaning services operated by others engaged in commercial and specialty cleaning.

Over 3,000 franchises provide residential and commercial housekeeping services. Second, it provides hospitals with a variety of services including food services. Third, it provides maintenance and cleaning services for schools and manufacturing facilities.

ServiceMaster has grown because it has a reputation for quality, service, and efficiency. Regarding efficiency, ServiceMaster uses task studies to develop manuals containing standardized procedures for many cleaning jobs. For instance, the manual on polishing a floor is three inches thick and a ServiceMaster worker uses a very specific floor finish with a precise drying time when polishing a floor.

ServiceMaster also has developed and makes its own equipment and chemicals. If the firm does not manufacture them, it designs them and gives suppliers detailed specifications to be met. For example, a special battery-powered ServiceMaster vacuum cleaner is used.

Changes in the health care industry led to decreased earnings growth in 1986. Federal government regulations on health care costs and reimbursements affected ServiceMaster’s growth and earnings. Consequently, the firm had to expand into other fields. It acquired Terminix International, the second-largest pest control firm in the United States, for $165 million and American Food Management, a food service company serving colleges and universities, for $40 million. These and other actions indicate that managers at ServiceMaster are using a variety of management strategies and tactics to build on its past for the future.
Structuring The organizational structure depends on many factors, as do managerial practices. The structure of the organization must be designed to fit its situation. Specifically, the structure must be suited to the organizational environment and the technology it uses. Many researchers have found that the more complex and changing the environment, the more flexible the structure must be. On the other hand, a more bureaucratic structure is effective in a stable, unchanging environment. Therefore, effective structures depend on the type of environment in which the organization operates. As described in “When Things Go Right,” ServiceMaster has had to adapt due to a changing environment.

Another influence on the structure of organizations is the type of technology used by the organization. A manufacturing organization may need a bureaucratic structure, while a research and development organization may find a more flexible structure to be most effective.

CONCEPT SUMMARY: Modern Management Theories

Key Notion
Rationale

Systems
Organizations must be thought of as open systems.

Contingencies
Managerial actions must be set up on a contingent basis.

Human Needs
Organizations must be designed to consider a variety of individual needs.

Management Science
Quantitative tools may be useful in analyzing managerial problems.

Sources of Contribution
Useful ideas have been contributed by many different views of management.


Contributions and Critique of Modern Management
The major contribution of these new approaches to managerial excellence is the emphasis on decision-making analyses as opposed to blind application of universal principles. These approaches recognize certain important factors that necessitate different applications of managerial procedures and styles. They also encourage managers to respond quickly to changes that occur in the environment, such as new technology and different societal values.

However, these concepts are more difficult for new managers to understand. It is very easy to learn sets of “universal management principles” without regard to the possibility that they may be wrong for some situations. It is much more difficult to understand systems and contingencies. Still, modern management uses each of the concepts discussed here, as well as relevant concepts from classical and neoclassical theory, to develop effective management. Therefore, students of management must understand both the history and development of managerial thought, and the systems and contingency approaches to today’s organizations.
 
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SUMMARY
Management ideas have been applied for thousands of years, at least as far back as 4000 s. C.

¾ In the 1500s Machiavelli presented his ideas about managing through fear instead of love.

¾ The rational economic view of people was the key assumption underlying classical management theory. This view assumed that people choose a course of action to maximize their economic rewards.

¾ Scientific management, developed by Frederick W. Taylor, was an attempt to identify the one efficient way to perform jobs. Time-and-motion studies used by the Gilbreths were vital, and piece-rate incentives were used to reward employees for performing jobs efficiently.

¾ Administrative theorists such as Fayol described the ideal way for organizations to be structured and administered.

¾ Max Weber’s concepts of bureaucracy were designed to promote a well-defined organization and rational, impersonal administration.

¾ Although classical theory is quite useful in the early stages of economic development, it is not an adequate explanation of how to administer organizations in a complex, developed society.

¾ The Hawthorne studies led to the development of neoclassical theory and the human relations approach to management. Based upon a social view of workers, this approach expanded management practices, but it also assumed too much similarity in why people work.

¾ The behavioral science approach of the organizational humanists was built upon a self-actualizing view of workers. However, not all workers want or are able to achieve their ultimate self-potential on the job.

¾ Use of mathematical models and quantitative tools is at the heart of the man­agement science approach.

¾ Modern management takes a complex view of people at work. Because people differ and work situations vary, this view is more realistic. Both systems theory and contingency theory are built on the complex view.

¾ Systems theory emphasizes that organizations are open to environmental forces, and that the internal parts of organizations are interdependent.

¾ Contingency theory essentially recognizes that organizations and people differ; consequently, a variety of management styles and practices are needed.
 
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REVIEW QUESTIONS
What is classical theory, and how does its view of the rational economic person permeate the branches of classical theory?

2. Why is the human relations approach considered an extension of classical theory rather than a radically different theory?

3. Some scholars have called the Hawthorne studies the most significant research ever done on management. Why do you think they believe this?

4. Compare and contrast the social and self-actualizing views of management.

5. What is organizational humanism? Why has it been criticized?

6. What is management science?

7. Discuss this statement: “An organization is an interdependent open system.” 8. Explain how contingency theory is really a combination of many other theories.

FOR FURTHER DISCUSSION
Which lessons contained in the history and development of managerial thought seem to have the most usefulness in organizations today? Why?

2. As U.S. organizations strive to become more competitive with international competition from Japan, Korea, and European countries, which factors seem to be most important in making necessary managerial adjustments?

3. Why is it more difficult to learn contingency and systems theories than to learn sets of universal principles
 
Re: WORST CASE SOME ONE!!!

Increasing pressure from global competition has prompted managers and academic researchers alike, to reconsider the issues surrounding formulation of global strategy and the globalization of markets. Recent years have seen the emergence of a heated controversy about the design and applicability of such strategies. At one end of the spectrum, advocates of standardization argue that although differences between countries and/or cultures may exist, basic human needs are the same throughout the world. Therefore, managers need not address these differences specifically in their international strategies. The same products sold domestically can be sold in international markets with only minor changes in product attributes. This practice has the obvious benefits of economies of scale (Levitt 1983; Yip, Loewe, & Yoshino 1988), preserving the home country image, minimizing costs of alteration (Buzzell 1986), handling, and stocking the product, speeding up delivery (Buatsi 1986), and saving managerial time and effort (Buzzell 1986; Levitt 1983).

At the other end of the spectrum, advocates of the concept of market orientation using adaptation or local adaptation argue that while basic human needs may be similar everywhere, differences in cultural and other environmental factors significantly influence the buying behavior of people in different countries. These important differences suggest a global strategy of universal product standardization may not be appropriate in many circumstances
 
Re: WORST CASE SOME ONE!!!


Standard costing is an important subtopic of cost accountng. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.

Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.

Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
 If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.
 If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.
The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts.

If we assume that a company uses the perpetual inventory system and that it carries all of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs:

1. Direct material
2. Direct labor
3. Manufacturing overhead
a. Variable manufacturing overhead
b. Fixed manufacturing overhead

Usually there will be two variances computed for each input:
Input for Product Variance #1 Variance #2
Direct material Price (or cost) Usage (or quantity)
Direct labor Rate (or cost) Efficiency (or quantity)
Manufacturing overhead-variable Spending Efficiency
Manufacturing overhead-fixed Budget Volume
Let's assume that your Uncle Pete runs a retail outlet that sells denim aprons in two sizes. Pete suggests that you get into the manufacturing side of the business, so on January 1, 2006 you start up an apron production company called DenimWorks. Using the best information at hand, the two of you compile the following estimates to use as standards for 2006: Standards Table for DenimWorks
Large Apron Small Apron
Denim material needed for each apron* 2.0 yd. 1.3 yd.
Time required to cut and sew each apron 0.3 hr. 0.2 hr.
Denim cost per square yard $3
Labor cost per hour (includes payroll taxes) $10
Electricity and supplies used per hour of labor $2
Rent for space per month (includes heat/air) $600
Rent for equipment per month $100
Planned production for the year 2006 5,000 aprons 3,000 aprons
Planned yards of denim needed for 2006 13,900 yd. 10,000 yd. 3,900 yd.
Planned hours to cut and sew in 2006 2,100 hr. 1,500 hr. 600 hr.
The denim comes on rolls that are one yard wide, so one yard (yd.) of denim is the same as one square yard of denim.


The aprons are easy to produce, and no apron is ever left unfinished at the end of any given day. This means that your company never has work-in-process inventory.

When we make your journal entries for completed aprons (shown below), we'll use an account called Inventory-FG which means Finished Goods Inventory. (Some companies will use WIP Inventory or Work-in-Process Inventory). We'll also use the account Direct Materials Inventory. (Other account titles often used for direct materials are Raw Materials Inventory or Stores.)
Direct materials refers to just that—raw materials that are directly traceable into a product. In your apron business the direct material is the denim. (In a food manufacturer's business the direct materials are the ingredients such as flour and sugar; in an automobile assembly plant, the direct materials are the cars' component parts).

DenimWorks purchases its denim from a local supplier with terms of net 30 days, FOB destination. This means that title to the denim passes from the supplier to DenimWorks when DenimWorks receives the material. When the denim arrives, DenimWorks will record the denim received in its Direct Materials Inventory at the standard cost of $3 per yard (see standards table above) and will record the liability at the actual cost for the amount received. Any difference between the standard cost of the material and the actual cost of the material received is recorded as a purchase price variance.

Examples of Standard Cost of Materials and Price Variance

Let's assume that on January 2, 2006 DenimWorks ordered 1,000 yards of denim at $2.90 per yard. On January 8, 2006 DenimWorks receives 1,000 yards of denim and an invoice for the actual cost of $2,900. On January 8, 2006 DenimWorks becomes the owner of the material and has a liability to its supplier. On January 8 DenimWorks' Direct Materials Inventory is increased by the standard cost of $3,000 (1,000 yards of denim at the standard cost of $3 per yard), Accounts Payable is credited for $2,900 (the actual amount owed to the supplier), and the difference of $100 is credited to Direct Materials Price Variance. In general journal format the entry looks like this:
Date Account Name Debit Credit

Jan. 8, 2006 Direct Materials Inventory
3,000
Accounts Payable
2,900
Direct Materials Price Variance
100


The $100 credit to the price variance account communicates immediately (when the denim arrives) that the company is experiencing actual costs that are more favorable than the planned, standard cost.

In February, DenimWorks orders 3,000 yards of denim at $3.05 per yard. On March 1, 2006 DenimWorks receives the 3,000 yards of denim and an invoice for $9,150 due in 30 days. On March 1, the Direct Materials Inventory account is increased by the standard cost of $9,000 (3,000 yards at the standard cost of $3 per yard), Accounts Payable is credited for $9,150 (the actual cost of the denim), and the difference of $150 is debited to Direct Materials Price Variance as an unfavorable price variance:
Date Account Name Debit Credit

Mar. 1, 2006 Direct Materials Inventory
9,000
Direct Materials Price Variance
150
Accounts Payable
9,150


After the March 1 transaction is posted, the Direct Materials Price Variance account shows a debit balance of $50 (the $100 credit on January 2 combined with the $150 debit on March 1). A debit balance in a variance account is always unfavorable—it shows that the total of actual costs is higher than the total of the expected standard costs. In other words, your company's profit will be $50 less than planned unless you take some action.

On June 1 your company receives 3,000 yards of denim at an actual cost of $2.92 per yard due for a total of $8,760 due in 30 days. The entry is:
Date Account Name Debit Credit

June 1, 2006 Direct Materials Inventory
9,000
Direct Materials Price Variance
240
Accounts Payable
8,760


Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards at $3 per yard), Accounts Payable is credited for the actual amount owed, and the difference of $240 is credited to Direct Materials Price Variance. A credit to the variance account indicates that the actual cost is less than the standard cost.

After this transaction is recorded, the Direct Materials Price Variance account shows an overall credit balance of $190. A credit balance in a variance account is always favorable. In other words, your company's profit will be $190 greater than planned due to the favorable cost of direct materials.

Note that the entire price variance pertaining to all of the direct materials received was recorded immediately. In other words, the price variance associated with the direct materials received was not delayed until the materials were used.
 
Re: WORST CASE SOME ONE!!!

Under a standard costing system, production and inventories are reported at the standard cost—including the standard quantity of direct materials that should have been used to make the products. If the manufacturer actually uses more direct materials than the standard quantity of materials for the products actually manufactured, the company will have an unfavorable direct materials usage variance. If the quantity of direct materials actually used is less than the standard quantity for the products produced, the company will have a favorable usage variance. The amount of a favorable and unfavorable variance is recorded in a general ledger account Direct Materials Usage Variance. (Alternative account titles include Direct Materials Quantity Variance or Direct Materials Efficiency Variance.) Let's demonstrate this variance with the following information.

January 2006
In order to calculate the direct materials usage or quantity variance, we start with the number of acceptable units of products that have been manufactured—also known as the good output. At DenimWorks this is the number of good aprons physically produced. If DenimWorks produces 100 large aprons and 60 small aprons during January, the production and the finished goods inventory will begin with the cost of the direct materials that should have been used to make those aprons. Any difference will be a variance.




NOTE
We are not determining the quantity of aprons that DenimWorks should have made. Rather, we are determining whether the 100 large aprons and 60 small aprons that were actually manufactured were produced efficiently. In the case of direct materials, we want to determine whether or not the company used the proper amount of denim to make the 160 aprons that were actually produced. (For the purposes of calculating the direct materials usage variance, it does not concern us whether DenimWorks had a goal to produce 100 aprons, 200, aprons, or 250 aprons.)





Standard costs are sometimes referred to as the "should be costs." DenimWorks should be using 278 yards of denim to make 100 large aprons and 60 small aprons as shown in the following table.



Large Aprons Small Aprons Total
Actual aprons manufactured 100 60

Standard yards of denim per apron manufactured 2.0 yd. 1.3 yd.

Total standard yards of denim for the actual good aprons manufactured—the number of yards of denim that should have been used to make the good output 200 78 yd. 278 yd.



We determine the total standard cost of the denim that should have been used to make the 160 aprons by multiplying the standard quantity of denim (278 yards) by the standard cost of a yard of denim ($3 per yard):



Large Aprons Small Aprons Total
Total standard yards of denim for the actual good (aprons) manufactured 200 yd. 78 yd. 278 yd.
Standard cost per yard $3 $3 $3
Standard cost of denim in the good output—the aprons actually produced in January $600 $234 $834



An inventory account (such as F.G. Inventory or Work in Process) is debited for $834; this is the standard cost of the direct materials component in the aprons manufactured in January 2006.
The Direct Materials Inventory account is reduced by the standard cost of the denim actually removed from the direct materials inventory. Let's assume that the actual quantity of denim removed from the direct materials inventory and used to make the aprons in January was 290 yards. Because Direct Materials Inventory reports the standard cost of the actual materials on hand, we reduce the account balance by $870 (290 yards used $3 standard cost per yard). After removing 290 yards of materials, the balance in the Direct Materials Inventory account is $2,130 (710 yards x $3 standard cost per yard).

The Direct Materials Usage Variance is: [the standard quantity of material that should have been used to make the good output minus the actual quantity of material used] X the standard cost per yard.

In our example, DenimWorks should have used 278 yards of material to make 100 large aprons and 60 small aprons. Because the company actually used 290 yards of denim, we say that DenimWorks did not operate efficiently—an extra 12 yards of denim was used (278 vs. 290 = 12). When we multiply the 12 yards by the standard cost of $3 per yard, the result is an unfavorable direct materials usage variance of $36.

Let's put the above information into a format commonly used for computing variances:

Direct Materials Usage/Quantity/Efficiency Variance Analysis




2. Credit Direct Materials Inventory for the actual yards of denim used x the standard cost per yard of denim


3. Direct Material Usage Variance (Std Yd - Act Yd) x Std Cost 1. Debit Inventory-FG for the standard yards of denim that should have been used to make the good output x the standard cost per yard of denim


Act Yd x Std Cost Difference Std Yd x Std Cost


290 act yd x $3 (12 yd) x $3 278 std yd x $3


$870
$834



$36 Unfavorable




The journal entry for the direct materials portion of the January production is:


Date Account Name Debit Credit

Jan. 31, 2006 Inventory-FG 834
Direct Materials Usage Variance 36
Direct Materials Inventory 870




February 2006
Let's assume that in February 2006 DenimWorks produces 200 large aprons and 100 small aprons and that 520 yards of denim are actually used. From this information we can compute the following:



Large Aprons Small Aprons Total
Actual aprons manufactured 200 100

Standard yards of denim per apron manufactured 2.0 yd. 1.3 yd.

Total standard yards of denim for the actual aprons manufactured 400 yd. 130 yd. 530 yd.
Standard cost per yard $3 $3 $3
Standard cost of denim in the good output $1,200 $390 $1,590



Let's put the above information into our format:

Direct Materials Usage (or Quantity) Variance Analysis




2. Credit Direct Materials Inventory for the actual yards of denim used x the standard cost per yard of denim


3. Direct Material Usage Variance (Std Yd - Act Yd) x Std Cost 1. Debit Inventory-FG for the standard yards of denim that should have been used to make the good output x the standard cost per yard of denim


Act Yd x Std Cost Difference Std Yd x Std Cost


520 act yd x $3 10 yd x $3 530 std yd x $3


$1,560
$1,590



$30 Favorable




The journal entry for the direct materials portion of the February production is:


Date Account Name Debit Credit

Feb. 28, 2006 Inventory-FG 1,590
Direct Materials Usage Variance 30
Direct Materials Inventory 1,560
 
Re: WORST CASE SOME ONE!!!

Direct labor" refers to the work done by those employees who actually make the product on the production line. ("Indirect labor" is work done by employees who work in the production area, but do not work on the production line. Examples include employees who set up or maintain the equipment.)

Unlike direct materials (which are obtained prior to being used) direct labor is obtained and used at the same time. This means that for any given good output, we can compute the direct labor rate variance, the direct labor efficiency variance, and the standard direct labor cost at the same time.


January 2006
Let's begin by determining the standard cost of direct labor for the good output produced in January 2006:



Large Aprons Small Aprons Total
Actual aprons manufactured 100 60

Standard hours of direct labor per apron manufactured 0.3 hr. 0.2 hr.

Total standard hours of direct labor for actual aprons manufactured 30 hr. 12 hr. 42 hr.
Standard cost per direct labor hour incl. payroll taxes $10 $10 $10
Standard cost of direct labor in the good output $300 $120 $420



Assuming that the actual direct labor in January adds up to 50 hours and the actual hourly rate of pay (including payroll taxes) is $9 per hour, our analysis will look like this:

Direct Labor Variance Analysis for January 2006:



4. Credit Wages Payable for the actual direct labor cost.



5. Direct Labor Rate Variance
Act Hr x (Std Rate - Act Rate)

2. Actual hours of direct labor used x the standard hourly pay rate


3. Direct Labor Efficiency Variance (Std Hr - Act Hr) x Std Cost 1. Debit Inventory-FG for the standard hours of direct labor that should have been used to make the good output x the standard hourly pay rate
Act Hr x Act Rate Difference Act Hr x Std Rate Difference Std Hr x Std Rate
50 act hr x $9 50 hr x $1 50 act hr x $10 (8 hr) x $10 42 std hr x $10
$450
$500
$420

$50 Favorable
$80 Unfavorable




In January, the direct labor efficiency variance (#3 above) is unfavorable because the company actually used 50 hours of direct labor—this is 8 hours more than the standard quantity of 42 hours allowed for the good output. The additional 8 hours is multiplied by the standard rate of $10 to give us an unfavorable direct labor efficiency variance of $80. (The direct labor efficiency variance could be called the direct labor quantity variance or usage variance.)

Note that DenimWorks paid $9 per hour for labor when the standard rate is $10 per hour. This $1 difference—multiplied by the 50 actual hours—results in a $50 favorable direct labor rate variance. (The direct labor rate variance could be called the direct labor price variance.)

The journal entry for the direct labor portion of the January production is:


Date Account Name Debit Credit

Jan. 31, 2006 Inventory-FG 420
Direct Labor Efficiency Variance 80
Direct Labor Rate Variance 50
Wages Payable 450



February 2006
In February your company manufactures 200 large aprons and 100 small aprons. The standard cost of direct labor for the good output produced in February 2006 is computed here:





Large Aprons Small Aprons Total
Actual aprons manufactured 200 100

Standard hours of direct labor per apron manufactured 0.3 hr. 0.2 hr.

Total standard hours of direct labor for actual aprons manufactured 60 hr. 20 hr. 80 hr.
Standard cost per direct labor hour incl. payroll taxes $10 $10 $10
Standard cost of direct labor in the good output $600 $200 $800



If we assume that the actual labor hours in February add up to 75 and the hourly rate of pay (including payroll taxes) is $11 per hour, the total equals $825. The analysis for February 2006 looks like this:

Direct Labor Variance Analysis for February 2006:



4. Credit Wages Payable for the actual direct labor cost.



5. Direct Labor Rate Variance
Act Hr x (Std Rate - Act Rate)

2. Actual hours of direct labor used x the standard hourly pay rate


3. Direct Labor Efficiency Variance (Std Hr - Act Hr) x Std Cost 1. Debit Inventory-FG for the standard hours of direct labor that should have been used to make the good output x the standard hourly pay rate
Act Hr x Act Rate Difference Act Hr x Std Rate Difference Std Hr x Std Rate
75 act hr x $11 75 hr x ($1) 75 act hr x $10 5 hr x $10 80 std hr x $10
$825
$750
$800

$75 Unfavorable
$50 Favorable




Notice that for the good output in February, the total actual labor costs amounted to $825 and the total standard cost of direct labor amounted to $800. This unfavorable difference of $25 agrees to the sum of the two labor variances:


Direct labor efficiency variance $50 Favorable
Direct labor rate variance $75 Unfavorable
Total Direct Labor Variance $25 Unfavorable



The journal entry for the direct labor portion of the February production is:




Date Account Name Debit Credit

Feb. 28, 2006 Inventory-FG 800
Direct Labor Rate Variance 75
Direct Labor Efficiency Variance 50
Wages Payable 825
 
Re: WORST CASE SOME ONE!!!

Manufacturing overhead costs" refer to any costs within a manufacturing facility other than direct material and direct labor. Manufacturing overhead includes such things as indirect labor, indirect materials (such as manufacturing supplies), utilities, quality control, material handling, and depreciation on the manufacturing equipment and facilities.

"Variable" manufacturing overhead costs will increase in total as output increases. An example is the cost of the electricity needed to operate the machines that cut and sew the denim. Another example is the cost of the manufacturing supplies that increase when production increases (such as needles and thread). In our example we assume that these variable manufacturing overhead costs fluctuate in response to the number of direct labor hours. Recall the original estimates made when DenimWorks was formed:




Large Apron Small Apron
Time required to cut and sew
0.3 hr. (18 min.) 0.2 hr. (12 min.)
Electricity and supplies used per hour of labor $2





January 2006
Let's begin by determining the standard cost of variable manufacturing overhead for the good output that DenimWorks produces in January 2006:



Large Aprons Small Aprons Total
Actual aprons manufactured 100 60

Standard hours of direct labor per apron manufactured 0.3 hr. 0.2 hr.

Total standard hours of direct labor in the good aprons manufactured 30 hr. 12 hr. 42 hr.
Standard cost of variable manufacturing overhead per direct labor hour $2 $2 $2
Standard cost of variable manufacturing overhead in the good output $60 $24 $84



Recall that there were 50 actual direct labor hours in January. Let's assume that the actual cost for the variable manufacturing overhead (electricity and manufacturing supplies) during January is $90.

Our analysis will look like this:

Variable Manufacturing Overhead Analysis for January 2006:



4. Actual variable manufacturing overhead used



5. Variable manufacturing overhead spending variance Act Hr x (Std Rate - Act Rate)

2. Actual hours of direct labor used x the standard variable manufacturing overhead rate


3. Variable manufacturing overhead efficiency variance (Std Hr - Act Hr) x Std Rate 1. Debit Inventory-FG for the standard hours of direct labor that should have been used in the good output x the standard variable manufacturing overhead rate
Act Hr x Act Rate Difference Act Hr x Std Rate Difference Std Hr x Std Rate
50 act hr x $1.80* 50 act hr x $0.20 50 act hr x $2 (8 hr) x $2 42 std hr x $2
$90
$100
$84

$10 Favorable
$16 Unfavorable

*Actual cost of $90 divided by 50 actual hours.



Notice that for the good output produced in January, the actual cost of variable manufacturing overhead was $90 and the total standard cost of variable manufacturing overhead cost allowed for the good output was $84. This unfavorable difference of $6 agrees to the sum of the two variances:


Variable manufacturing overhead efficiency variance $16 Unfavorable
Variable manufacturing overhead spending variance $10 Favorable
Total Variable Manufacturing Overhead $ 6 Unfavorable



Variable Manufacturing Overhead Efficiency Variance
As the above analysis shows, DenimWorks did not produce the good output efficiently—it used 50 actual direct labor hours instead of the 42 standard direct labor hours allowed.

The additional 8 hours no doubt caused the company to use additional electricity and supplies. Measured at the originally estimated rate of $2 per direct labor hour, this amounts to $16 (8 hours x $2). This is referred to as an unfavorable variable manufacturing overhead efficiency variance.


Variable Manufacturing Overhead Spending Variance
In the analysis above, item 2 shows that based on the 50 direct labor hours actually used, electricity and supplies could reasonably add up to $100 instead of the standard of $84. (If the good output took 8 actual direct labor hours more than the standard hours to cut and sew the denim, the company will likely have additional electricity and supplies costs since it is operating the machines for an additional 8 hours.) We find, however, that the actual cost of the electricity and supplies is $90, not $100. This $10 favorable variance indicates that the company did not spend the planned $2 per direct labor hour. (Perhaps electricity rates were lower than the rates anticipated when the standard costs were established.)

Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable. For example:


Date Account Name Debit Credit

Jan. 31, 2006 Var. Mfg. O/H Incurred 90
Accounts Payable 90



Another entry records how these overheads are assigned to the product based on standard costs:


Date Account Name Debit Credit

Jan. 31, 2006 Inventory-FG 84
Var. Mfg. O/H Applied 84



As our analysis notes above and these entries illustrate, DenimWorks has an actual variable manufacturing overhead of $90, but only $84 (the standard amount) was applied to the products. The $6 difference is "explained" by the two variances:


Variable manufacturing overhead efficiency variance $16 Unfavorable
Variable manufacturing overhead spending variance $10 Favorable
Total Variable Manufacturing Overhead $ 6 Unfavorable



February 2006
Recall that in February 2006 the company produced 200 large aprons and 100 small aprons. We use that good output to compute the standard cost of variable manufacturing overhead for February 2006:



Large Aprons Small Aprons Total
Actual aprons manufactured 200 100

Standard hours of direct labor per good apron manufactured 0.3 hr. 0.2 hr.

Total standard hours of direct labor in the good aprons manufactured 60 hr. 20 hr. 80 hr.
Standard cost of variable manufacturing overhead per direct labor hour $2 $2 $2
Standard cost of variable manufacturing overhead in the good output $120 $40 $160



Given that there were 75 actual direct labor hours in February and assuming that the actual cost for the variable manufacturing overhead in February was $156, our analysis will look like this:

Variable Manufacturing Overhead Analysis for February 2006:



4. Actual variable manufacturing overhead used



5. Variable manufacturing overhead spending variance Act Hr x (Std Rate - Act Rate)

2. Actual hours of direct labor used x the standard variable manufacturing overhead rate


3. Variable manufacturing overhead efficiency variance (Std Hr - Act Hr) x Std Rate 1. Debit Inventory-FG for the standard hours of direct labor that should have been used in the good output x the standard variable manufacturing overhead rate
Act Hr Act Rate Difference Act Hr x Std Rate Difference Std Hr x Std Rate
75 act hr x $2.08* 75 hr x ($0.08) 75 act hr x $2 5 hr x $2 80 std hr x $2
$156
$150
$160

$6 Unfavorable
$10 Favorable

*Actual cost of $156 divided by 75 actual hours.



The favorable difference between the actual cost of $156 and the standard cost of $160 agrees to the sum of the two variances:


Variable manufacturing overhead efficiency variance $10 Unfavorable
Variable manufacturing overhead spending variance $ 6 Favorable
Total Variable Manufacturing Overhead $ 4 Unfavorable



Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable. For example:


Date Account Name Debit Credit

Feb. 28, 2006 Var. Mfg. O/H Incurred 156
Accounts Payable 156



Another entry records how these overheads are assigned to the product:


Date Account Name Debit Credit

Feb. 28, 2006 Inventory-FG 160
Var. Mfg. O/H Applied 160



As our analysis notes above and as these entries illustrate, even though DenimWorks had actual variable manufacturing overhead of $156, the standard amount of $160 was applied to the products. For the month of February 2006 the company applied more variable manufacturing overhead to its products than it actually incurred
 
Re: WORST CASE SOME ONE!!!

Fixed" manufacturing overhead costs remain the same in total even though the volume of production may increase by a modest amount. For example, the property tax on the manufacturing facility might be $50,000 per year and it arrives as one tax bill in December. The amount of the property tax bill was not dependent on the number of units produced or the number of machine hours that the plant operated. Other examples include the depreciation or rent on production facilities; salaries of production managers and supervisors; and professional memberships and training for personnel in the manufacturing area. Although the fixed manufacturing overhead costs present themselves as large monthly or annual expenses, they are, in reality, a small part of each product's cost.

DenimWorks has two fixed manufacturing overhead costs:


Rent for space per month including heat/air $600
Rent for equipment per month $100
Total Fixed Manufacturing Overhead per Month $700



A small amount of these fixed manufacturing costs must be allocated to each apron produced. This is known as absorption costing and it explains why some accountants say that each product must "absorb" a portion of the fixed manufacturing overhead costs.

A simple way to assign or allocate the fixed costs is to base it on things such as direct labor hours, machine hours, or pounds of direct material. (Accountants realize that this is simplistic; they know that overhead costs are a result of—or are driven by—many different factors.) Nonetheless, we will assign the fixed manufacturing overhead costs to the aprons by using the same method we used for variable manufacturing overhead—by using direct labor hours.

Establishing a Predetermined Rate
Companies typically establish a standard fixed manufacturing overhead rate prior to the start of the year and then use that rate for the full year. Let's assume it is December 2005 and DenimWorks is developing the standard fixed manufacturing overhead rate to use in 2006. (As mentioned above, we will assign the fixed manufacturing overhead on the basis of direct labor hours.)

Step 1. Project/estimate the fixed manufacturing overhead costs for the year 2006.

We indicated above that DenimWorks' only fixed manufacturing overhead costs are rents of $700 per month (space and equipment) totaling to $8,400 for the year 2006.


Step 2. Project/estimate the total number of standard direct labor hours that are needed to manufacture your products during 2006.


We can do that from the information given earlier (and repeated here):



Large Apron Small Apron Total
Time required to cut and sew - the standard 0.3 hr. (18 min.) 0.2 hr. (12 min.)

Planned production for the year 2006 5,000 aprons 3,000 aprons

Total standard direct labor hours in the planned production for the year 2006 1,500 600 2,100



Step 3. Compute the standard fixed manufacturing overhead rate to be used in 2005.


= Expected fixed manufacturing overhead for 2006

÷ Expected total standard direct labors hours (DLH) for 2006
= $8,400 ÷ 2,100 Standard DLH


= $4 per Standard Direct Labor Hour







NOTE
One of the reasons a company develops a predetermined annual rate is so that the rate is uniform throughout the year, even though the number of units manufactured may fluctuate month by month. For example, if the company used monthly rates, the rate would be high in the months when few units are manufactured (monthly fixed costs of $700 ÷ 100 units produced = $7 per unit) and low when many units are produced (monthly fixed costs of $700 ÷ 350 units = $2 per unit).






Fixed Manufacturing Overhead Budget Variance
The difference between the actual amount of fixed manufacturing overhead and the estimated amount (the amount budgeted when setting the overhead rate prior to the start of the year) is known as the fixed manufacturing overhead budget variance.

In our example, we budgeted the annual fixed manufacturing overhead at $8,400 (monthly rents of $700 x 12 months). If DenimWorks pays more than $8,400 for the year, there is an unfavorable budget variance; if the company pays less than $8,400 for the year, there is a favorable budget variance.


Fixed Manufacturing Overhead Volume Variance
Recall that the fixed manufacturing overhead (such as the large amount of rent paid at the start of every month) must be assigned to each apron produced. In other words, each apron must absorb a small portion of the fixed manufacturing overhead. At DenimWorks, the fixed manufacturing overhead is assigned to the good output by multiplying the standard rate by the standard hours of direct labor in each apron. Hopefully, by the end of the year there are enough good aprons produced to absorb all of the fixed manufacturing overhead.

The fixed manufacturing overhead volume variance compares the amount of fixed manufacturing overhead budgeted to the amount that was applied to (or absorbed by) the good output. If the amount applied is less than the amount budgeted, there is an unfavorable volume variance—there was not enough good output to absorb the budgeted amount of fixed manufacturing overhead. If the amount applied to the good output is greater than the budgeted amount of fixed manufacturing overhead, the fixed manufacturing overhead volume variance is favorable. In summary, if DenimWorks applies more than the amount budgeted, the volume variance is favorable; if it applies less than the amount budgeted, the volume variance is unfavorable.


Illustration of Fixed Manufacturing Overhead Variances for 2006
Let's assume that in 2006 DenimWorks manufactures (has actual good output of) 5,300 large aprons and 2,600 small aprons. Let's also assume that the actual fixed manufacturing overhead costs for the year are $8,700. As we calculated earlier, the standard fixed manufacturing overhead rate is $4 per standard direct labor hour.

We begin by determining the fixed manufacturing overhead applied to (or absorbed by) the good output produced in the year 2006:



Large Aprons Small Aprons Total
Actual aprons manufactured 5,300 2,600

Standard hours of direct labor hours per apron manufactured 0.3 hr. 0.2 hr.

Total standard hours of direct labor in the good aprons manufactured 1,590 hr. 520 hr. 2,110 hr.
Standard cost per direct labor hour for fixed manufacturing overhead $4 $4 $4
Standard cost of fixed manufacturing overhead in (applied to) the good output $6,360 $2,080 $8,440



Our analysis looks like this:

Fixed Manufacturing Overhead Analysis for the Year 2006:



4. Actual fixed manufacturing overhead



5. Fixed manufacturing overhead budget variance Budgeted Amount - Actual Amount

2. Fixed manufacturing overhead budget for the year 2006


3. Fixed manufacturing overhead volume variance

(1 - 2) 1. Debit Inventory-FG for the standard hours of direct labor that should be in the good output x the standard fixed manufacturing overhead rate
Actual Amount Difference Annual Budget Difference Std Hr x Std Rate




2,110 std hr x $4
$8,700
$8,400
$8,440

$300 Unfavorable
$40 Favorable




This analysis shows that the actual fixed manufacturing overhead costs are $8,700 and the fixed manufacturing overhead costs applied to the good output are $8,440. This unfavorable difference of $260 agrees to the sum of the two variances:


Fixed manufacturing overhead volume variance $ 40 Favorable
Fixed manufacturing overhead budget variance $300 Unfavorable
Total Fixed Manufacturing Overhead Variance $260 Unfavorable



Actual fixed manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable or Cash. For example:


Date Account Name Debit Credit

During 2006 Fixed Mfg. O/H Incurred 8,700
Accounts Payable 8,700



Another entry records how these overheads are assigned to the product:


Date Account Name Debit Credit

During 2006 Inventory-FG 8,440
Fixed Mfg. O/H Applied 8,440
 
Re: WORST CASE SOME ONE!!!


If the direct labor is not efficient at producing the good output, there will be an unfavorable labor efficiency variance. That inefficiency will likely cause additional variable manufacturing overhead—resulting in an unfavorable variable manufacturing overhead efficiency variance. If these inefficiencies are significant, it is possible that the company may not be able to produce enough good output to absorb the planned fixed manufacturing overhead—resulting in an unfavorable fixed manufacturing overhead volume variance.

We will pursue the interdependence of variances in the following examples.

Example 1
Assume your company's standard cost for denim is $3 per yard, but you buy some denim at a bargain price of $2.50 per yard. For each yard of denim purchased, DenimWorks reports a favorable direct materials price variance of $0.50.

Let's also assume that the quality of the low-cost denim ends up being slightly lower than the quality to which your company is accustomed. This lesser quality denim causes the production to be a bit slower as workers spend additional time working around flaws in the material. In addition to this decline in productivity, you also find that some of the denim is of such poor quality that it has to be discarded. Further, some of the finished aprons don't pass the final inspection due to occasional defects not detected as the aprons were made.

You get the picture. If the favorable $0.50 per yard price variance correlates with lower quality, that denim was no bargain. The $0.50 per yard favorable variance may be more than offset by the following unfavorable quantity variances:
direct material usage variance
direct labor efficiency variance
variable manufacturing overhead efficiency variance

Keep in mind that the standard cost is the cost allowed on the good output. Putting material, labor, and manufacturing overhead costs into products that will not end up as good output will likely result in unfavorable variances.


Example 2
Let's assume that you decide to hire an unskilled worker for $9 per hour instead of a skilled worker for the standard cost of $15 per hour. Although the unskilled worker will create a favorable direct labor rate variance of $6 per hour, you may see significant unfavorable variances such as direct material usage variance, direct labor efficiency variance, variable manufacturing overhead efficiency variance, and possibly a fixed manufacturing volume variance.

These two examples highlight what experienced managers know—you need to look at more than price. A low cost for an inferior input is no bargain if it results in costly inefficiencies.




What To Do With Variance Amounts

Throughout our explanation of standard costing we showed you how to calculate the variances. In the case of direct materials and direct labor, the variances were recorded in specific general ledger accounts. The manufacturing overhead variances were the differences between the accounts containing the actual costs and the accounts containing the applied costs. Now we'll discuss what we do with those variance amounts.


Direct Materials Price Variance
Let's begin by assuming that the account Direct Materials Price Variance has a debit balance of $3,500 at the end of the accounting year. You can see from the following journal entry (a hypothetical entry which assumes that all of the direct materials were purchased at one time) that a debit balance is an unfavorable variance:


Account Name Debit Credit

Direct Materials Inventory (standard cost) 10,000
Direct Materials Price Variance 3,500
Accounts Payable (actual cost) 13,500



Because of the cost principle, DenimWorks is obligated to report its transactions at their actual cost in the financial statements that are made available to the public. If none of the direct materials purchased in this journal entry was used in production (all of the direct materials remain in the direct materials inventory), the company's balance sheet needs to report the direct materials inventory at $13,500—the actual cost. In other words, the balance sheet will report the direct materials inventory as the standard cost of $10,000 plus the price variance of $3,500. If all of the materials were used in making products, and all of the products have been sold, the $3,500 price variance is added to the company's standard cost of goods sold. If 20% of the materials remain in the direct materials inventory and 80% of the materials are in the finished goods that have been sold, then $700 of the price variance (20% of $3,500) is added to the standard cost of the direct materials inventory. $2,800 (80% of $3,500) is added to the standard cost of goods sold.

Let's say the direct materials are in various stages of use: 20% have not been used yet; 5% are in work-in-process; 15% are in finished goods on hand; and 60% are in finished goods that have been sold. We need to apportion the $3,500 direct materials price variance to each of these stages. Since the $3,500 is an unfavorable amount, the following amounts are added to the standard costs:


Direct materials inventory $ 700 (20% of $3,500)
Work-in-process inventory 175 ( 5% of $3,500)
Finished goods inventory 525 (15% of $3,500)
Cost of goods sold 2,100 (60% of $3,500)
Total $3,500



The accounting professional follows a materiality guideline which says that a company may make exceptions to other accounting principles if the amount in question is insignificant. (For example, a large company may report amounts to the nearest $1,000 on its financial statements, or an inexpensive item like a wastebasket can be expensed immediately instead of being depreciated over its useful life.) This means that if the total variance of $3,500 shown above is a very, very small amount relative to the company's net income, the company can charge the entire $3,500 to cost of goods sold instead of allocating some of the amount to the inventories.

If the balance in the Direct Materials Price Variance account is a credit balance of $3,500 (instead of a debit balance) the procedure and discussion would be the same, except that the standard costs would be reduced instead of increased.


Direct Materials Usage Variance
Let's assume that the Direct Materials Usage Variance account has a debit balance of $2,000 at the end of the accounting year. A debit balance is an unfavorable balance resulting from more direct materials being used than the standard amount allowed for the good output.

The first question to ask is "Why do we have this unfavorable variance of $2,000?" If it was caused by errors and/or inefficiencies, it cannot be included as part of the cost of the inventory. Errors and inefficiencies are never considered to be assets; therefore, the entire amount must be expensed.

If the unfavorable $2,000 variance is the result of an unrealistic standard for the quantity of direct material needed, then we should allocate the $2,000 variance to wherever the standard costs of direct materials are physically located. If 90% of the related direct materials have been sold and 10% are in the finished goods inventory, then the $2,000 should be allocated and added to the standard direct material costs as follows:


Direct materials inventory $ 0
Work-in-process inventory 0
Finished goods inventory 200 (10% of $2,000)
Cost of goods sold 1,800 (90% of $2,000)
Total $2,000



If $2,000 is an insignificant amount relative to a company's net income, the entire $2,000 unfavorable variance can be added to the cost of goods sold. This is permissible because of the materiality guideline.

If the $2,000 balance is a credit balance, the variance is favorable. This means that the actual direct materials used were less than the standard quantity of materials called for by the good output. We should allocate this $2,000 to wherever those direct materials are physically located. However, if $2,000 is an insignificant amount, the materiality guideline allows for the entire $2,000 to be deducted from the cost of goods sold on the income statement.


Other Variances
The examples above follow these guidelines:
If the variance amount is very small (insignificant relative to the company's net income), simply put the entire amount on the income statement. If the variance amount is unfavorable, increase the cost of goods sold—thereby reducing net income. If the variance amount is favorable, decrease the cost of goods sold—thereby increasing net income.
If the variance is unfavorable, significant in amount, and results from mistakes or inefficiencies, the variance amount can never be added to any inventory or asset account. These unfavorable variance amounts go directly to the income statement and reduce the company's net income.
If the variance is unfavorable, significant in amount, and results from standard costs not being realistic, allocate the variance to the company's inventory accounts and cost of goods sold. The allocation should follow the standard costs of the inputs from which the variances arose.
If the variance amount is favorable and significant in amount, allocate the variance to the company's inventories and its cost of goods sold.

The following table can also serve as a guide:


Name of Variance What It Tells You Where Does It End Up?
Any variance that is insignificant in amount (small in relationship to the company's net income). Don't be concerned with insignificant, immaterial amounts. Put the insignificant variance amounts on the income statement without allocating any amount to inventories.
The following variances are assumed to be significant in amount...


Direct Materials Price - Favorable Company paid less than its standard cost for the direct materials it purchased. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Direct Materials Price - Unfavorable Company paid more than its standard cost for the direct materials it purchased. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Inventory amounts are subject to lower of cost or market.)
Direct Materials Usage - Favorable Company used less quantity of direct materials than called for by the company's standards. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Direct Materials Usage - Unfavorable Company used more quantity of direct materials than called for by the company's standards. If variance results from inefficiencies, expense the entire amount. If variance results from unrealistic standards, allocate the variance to inventories and cost of goods sold.
Direct Labor Rate - Favorable Company paid less than its standard cost for the direct labor it used. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Direct Labor Rate - Unfavorable Company paid more than its standard cost for the direct labor it used. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Inventory amounts are subject to lower of cost or market.)
Direct Labor Efficiency - Favorable Company used less hours of direct labor than called for by the company's standards. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Direct Labor Efficiency - Unfavorable Company used more hours of direct labor than called for by the company's standards. If variance results from inefficiencies, expense the entire amount. If variance results from unrealistic standards, allocate the variance to inventories and cost of goods sold.
Var. Mfg. O/H Spending - Favorable (assume the overhead is applied on machine hours) The company's actual variable manufacturing overhead costs were less than the amount expected for the actual machine hours used. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Var. Mfg. O/H Spending - Unfavorable (assume the overhead is applied on machine hours) The company's actual variable manufacturing overhead costs were more than the amount expected for the actual machine hours used. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Inventory amounts are subject to lower of cost or market.)
Var. Mfg. O/H Efficiency - Favorable (assume the overhead is applied on machine hours) The company's actual machine hours were less than the standard machine hours for the good output. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Var. Mfg. O/H Efficiency - Unfavorable (assume the overhead is applied on machine hours) The company's actual machine hours were more than the standard machine hours for the good output. If variance results from inefficiencies, expense the entire amount. If variance results from unrealistic standards, allocate the variance to inventories and cost of goods sold.
Fixed Mfg. O/H Budget - Favorable The company spent less on the actual fixed overhead than the amount budgeted. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Fixed Mfg. O/H Budget - Unfavorable The company spent more on the actual fixed overhead than the amount budgeted. Allocate to inventories and cost of goods sold based on where the related standard costs are residing.
Fixed Mfg O/H Volume - Favorable The company applied more fixed manufacturing overhead to the good output than the budgeted amount of fixed manufacturing overhead. Allocate to inventories and cost of goods sold based on where the related standard costs are residing. (Will reduce the standard cost amount.)
Fixed Mfg O/H Volume - Unfavorable The company applied less fixed manufacturing overhead to the good output than the budgeted amount of fixed manufacturing overhead. Put the entire unfavorable amount on the income statement.
 
Re: WORST CASE SOME ONE!!!

A person starting a new business often asks, "At what level of sales will my company make a profit?" Established companies that have suffered through some rough years might have a similar question. Others ask, "At what point will I be able to draw a fair salary from my company?" Our discussion of break-even point and break-even analysis will provide a thought process that may help to answer those questions and to provide some insight as to how profits change as sales increase or decrease. Frankly, predicting a precise amount of sales or profits is nearly impossible due to a company's many products (with varying degrees of profitability), the company's many customers (with varying demands for service), and the interaction between price, promotion and the number of units sold. These and other factors will complicate the break-even analysis.

In spite of these real-world complexities, we will present a simple model or technique referred to by several names: break-even point, break-even analysis, break-even formula, break-even point formula, break-even model, cost-volume-profit (CVP) analysis, or expense-volume-profit (EVP) analysis. The latter two names are appealing because the break-even technique can be adapted to determine the sales needed to attain a specified amount of profits. However, we will use the terms break-even point and break-even analysis.

To assist with our explanations, we will use a fictional companAt the heart of break-even point or break-even analysis is the relationship between expenses and revenues. It is critical to know how expenses will change as sales increase or decrease. Some expenses will increase as sales increase, whereas some expenses will not change as sales increase or decrease.


Variable Expenses
Variable expenses increase when sales increase. They also decrease when sales decrease.

At Oil Change Co. the following items have been identified as variable expenses. Next to each item is the variable expense per car or per oil change:
Motor oil $ 5.00
Oil filter 3.00
Grease, washer fluid 0.50
Supplies 0.20
Disposal service 0.30
Total variable expenses per car $ 9.00

The other expenses at Oil Change Co. (rent, heat, etc.) will not increase when an additional car is serviced.

For the reasons shown in the above list, Oil Change Co.'s variable expenses will be $9 if it services one car, $18 if it services two cars, $90 if it services 10 cars, $900 if it services 100 cars, etc.


Fixed Expenses
Fixed expenses do not increase when sales increase. Fixed expenses do not decrease when sales decrease. In other words, fixed expenses such as rent will not change when sales increase or decrease.

At Oil Change Co. the following items have been identified as fixed expenses. The amount shown is the fixed expense per week:
Labor including payroll taxes and benefits $1,200
Rent and utilities for the building it uses 700
Depreciation, office and professional, training, other 500
Total fixed expenses per week $2,400


Mixed Expenses
Some expenses are part variable and part fixed. These are often referred to as mixed or semi-variable expenses. An example would be a salesperson's compensation that is composed of a salary portion (fixed expense) and a commission portion (variable expense). Mixed expenses could be split into two parts. The variable portion can be listed with other variable expenses and the fixed portion can be included with the other fixed expenses.
y Oil Change Co. (a company that provides oil changes for automobiles). The amounts and assumptions used in Oil Change Co. are also fictional. At the heart of break-even point or break-even analysis is the relationship between expenses and revenues. It is critical to know how expenses will change as sales increase or decrease. Some expenses will increase as sales increase, whereas some expenses will not change as sales increase or decrease.


Variable Expenses
Variable expenses increase when sales increase. They also decrease when sales decrease.

At Oil Change Co. the following items have been identified as variable expenses. Next to each item is the variable expense per car or per oil change:
Motor oil $ 5.00
Oil filter 3.00
Grease, washer fluid 0.50
Supplies 0.20
Disposal service 0.30
Total variable expenses per car $ 9.00

The other expenses at Oil Change Co. (rent, heat, etc.) will not increase when an additional car is serviced.

For the reasons shown in the above list, Oil Change Co.'s variable expenses will be $9 if it services one car, $18 if it services two cars, $90 if it services 10 cars, $900 if it services 100 cars, etc.


Fixed Expenses
Fixed expenses do not increase when sales increase. Fixed expenses do not decrease when sales decrease. In other words, fixed expenses such as rent will not change when sales increase or decrease.

At Oil Change Co. the following items have been identified as fixed expenses. The amount shown is the fixed expense per week:
Labor including payroll taxes and benefits $1,200
Rent and utilities for the building it uses 700
Depreciation, office and professional, training, other 500
Total fixed expenses per week $2,400


Mixed Expenses
Some expenses are part variable and part fixed. These are often referred to as mixed or semi-variable expenses. An example would be a salesperson's compensation that is composed of a salary portion (fixed expense) and a commission portion (variable expense). Mixed expenses could be split into two parts. The variable portion can be listed with other variable expenses and the fixed portion can be included with the other fixed expenses
Revenues (or sales) at Oil Change Co. are the amounts earned from servicing cars. Oil Change Co. charges one flat fee of $24 for performing the oil change service. For $24 the company changes the oil and filter, adds needed fluids, adds air to the tires, and inspects engine belts.

At the present time no other service is provided and the $24 fee is the same for all automobiles regardless of engine size.

As the result of its pricing, if Oil Change Co. services 10 cars its revenues (or sales) are $240. If it services 100 cars, its revenues will be $2,400. An important term used with break-even point or break-even analysis is contribution margin. In equation format it is defined as follows:
Contribution Margin = Revenues – Variable Expenses



The contribution margin for one unit of product or one unit of service is defined as:
Contribution Margin per Unit = Revenues per Unit – Variable Expenses per Unit



At Oil Change Co. the contribution margin per car (or per oil change) is computed as follows:
Contribution Margin per car = Revenues per car – Variable Expenses per car
Contribution Margin per car = $24 – $9

Contribution Margin per car = $15



The contribution margin per car lets you know that after the variable expenses are covered, each car serviced will provide or contribute $15 toward the Oil Change Co.'s fixed expenses of $2,400 per week. After the $2,400 of weekly fixed expenses has been covered the company's profit will increase by $15 per car serviced.
The break-even point in units for Oil Change Co. is the number of cars it needs to service in order to cover the company's fixed and variable expenses. The break-even point formula is to divide the total amount of fixed costs by the contribution margin per car:
Break-even Point in Cars per Week = Fixed Expenses per week ÷ Contribution Margin per car
Break-even Point in Cars per Week = $2,400 per week ÷ $15 per Car
Break-even Point in Cars per Week = 160 Cars per Week


It's always a good idea to check your calculations. The following schedule confirms that the break-even point is 160 cars per week:
Oil Change Co.
Projected Net Income
For a Week
Sales (160 cars serviced at $24 per car) $ 3,840
Variable Expenses (160 cars at $9 per car) – 1,440
Contribution Margin
2,400
Fixed Expenses – 2,400
Net Income $ 0
 
Re: WORST CASE SOME ONE!!!

Let's say that the owner of Oil Change Co. needs to earn a profit of $1,200 per week rather than merely breaking even. You can consider the owner's required profit of $1,200 per week as another fixed expense. In other words the fixed expenses will now be $3,600 per week (the $2,400 listed earlier plus the required $1,200 for the owner). The new point needed to earn $1,200 per week is shown by the following break-even formula:

Break-even Point in Cars per Week = Fixed Expenses per week ÷ Contribution Margin per car
Break-even Point in Cars per Week = $3,600 per week ÷ $15 per Car
Break-even Point in Cars per Week = 240 Cars per Week


Always check your calculations:
Oil Change Co.
Projected Net Income
For a Week


Sales (240 cars serviced at $24 per car) $ 5,760
Variable Expenses (240 cars at $9 per car) – 2,160
Contribution Margin 3,600
Fixed Expenses – 2,400
Net Income $ 1,200


The above schedule confirms that servicing 240 cars during a week will result in the required $1,200 profit for the week.

One can determine the break-even point in sales dollars (instead of units) by dividing the company's total fixed expenses by the contribution margin ratio.

The contribution margin ratio is the contribution margin divided by sales (revenues).
The ratio can be calculated using company totals or per unit amounts. We will compute the contribution margin ratio for the Oil Change Co. by using its per unit amounts:
Revenues or Sales per car $24
Variable Expenses per car – 9
Contribution Margin per car $15



Contribution Margin Ratio = Contribution Margin ÷ Revenues or Sales
Contribution Margin Ratio = $15 ÷ $24


Contribution Margin Ratio = 62.5%




The break-even point in sales dollars for Oil Change Co. is

Break-even Point in Sales $ = Total Fixed Expenses ÷ Contribution Margin Ratio
Break-even Point in Sales $ = $2,400 per week ÷ 62.5%
Break-even Point in Sales $ = $3,840 per week


The break-even point of $3,840 of sales per week can be verified by referring back to the break-even point in units. Recall there were 160 units necessary to break-even. At $24 per unit the necessary sales in dollars would be $3,840.

Let's assume a company needs to cover $2,400 of fixed expenses each week plus earn $1,200 of profit each week. In essence the company needs to cover the equivalent of $3,600 of fixed expenses each week.

Presently the company has annual sales of $100,000 and its variable expenses amount to $37,500 per year. These two facts result in a contribution margin ratio of 62.5%:
Sales $100,000
Variable Expenses – 37,500
Contribution Margin $ 62,500



Contribution Margin Ratio = Contribution Margin ÷ Sales
Contribution Margin Ratio = $62,500 ÷ $100,000


Contribution Margin Ratio = 62.5%




The amount of sales necessary to give the owner a profit of $1,200 per week is determined by this break-even point formula:

Break-even Point in Sales $ per week = Fixed Expenses per week ÷ Contribution Margin Ratio
Break-even Point in Sales $ per week = $3,600 per week ÷ 62.5%
Break-even Point in Sales $ per week = $5,760 per week



To verify that this answer is reasonable, we prepared the following schedule:
Per Week 52 Weeks
Sales $ 5,760 $ 299,520
Variable Expenses (37.5%) – 2,160 – 112,320
Contribution Margin 3,600 187,200
Fixed Expenses – 2,400 – 124,800
Profit $ 1,200 $ 62,400


As you can see, for the owner to have a profit of $1,200 per week or $62,400 per year, the company's annual sales must triple. Presently the annual sales are $100,000 but the sales need to be $299,520 per year in order for the annual profit to be $62,400.
 
Re: WORST CASE SOME ONE!!!

When analyzing computing financial ratios and when doing other financial statement analysis always keep in mind that the financial statements reflect the accounting principles. This means assets are generally not reported at their current value. It is also likely that many brand names and unique product lines will not be included among the assets reported on the balance sheet, even though they may be the most valuable of all the items owned by a company.

These examples are signals that financial ratios and financial statement analysis have limitations. It is also important to realize that an impressive financial ratio in one industry might be viewed as less than impressive in a different industry.

Our explanation of financial ratios and financial statement analysis is organized as follows:

1. Balance Sheet
a. General discussion
b. Common-size balance sheet
c. Financial ratios based on the balance sheet

2. Income Statement
a. General discussion
b. Common-size income statement
c. Financial ratios based on the income statement

3. Statement of Cash FlowsThe balance sheet reports a company's assets, liabilities, and stockholders' equity as of a specific date, such as December 31, 2005, September 28, 2006, etc.

The accountants' cost principle and the monetary unit assumption will limit the assets reported on the balance sheet. Assets will be reported

(1) only if they were acquired in a transaction, and
(2) generally at an amount that is not greater than the asset's cost at the time of the transaction.

This means that a company's creative and effective management team will not be listed as an asset. Similarly, a company's outstanding reputation, its unique product lines, and brand names developed within the company will not be reported on the balance sheet. As you may surmise, these items are often the most valuable of all the things owned by the company. (Brand names purchased from another company will be recorded in the company's accounting records at their cost.)

The accountants' matching principle will result in assets such buildings, equipment, furnishings, fixtures, vehicles, etc. being reported at amounts less than cost. The reason is these assets are depreciated. Depreciation reduces an asset's book value each year and the amount of the reduction is reported as Depreciation Expense on the income statement.

While depreciation is reducing the book value of certain assets over their useful lives, the current value (or fair market value) of these assets may actually be increasing. (It is also possible that the current value of some assets–such as computers–may be decreasing faster than the book value.)

Current assets such as Cash, Accounts Receivable, Inventory, Supplies, Prepaid Insurance, etc. usually have current values that are close to the amounts reported on the balance sheet.

Current liabilities such as Notes Payable (due within one year), Accounts Payable, Wages Payable, Interest Payable, Unearned Revenues, etc. are also likely to have current values that are close to the amounts reported on the balance sheet.

Long-term liabilities such as Notes Payable (not due within one year) or Bonds Payable (not maturing within one year) will often have current values that differ from the amounts reported on the balance sheet.

Stockholders' equity is the book value of the company. It is the difference between the reported amount of assets and the reported amount of liabilities. For the reasons mentioned above, the reported amount of stockholders' equity will therefore be different from the current or market value of the company.

By definition the current assets and current liabilities are "turning over" at least once per year. As a result, the reported amounts are likely to be similar to their current value. The long-term assets and long-term liabilities are not "turning over" often. Therefore, the amounts reported for long-term assets and long-term liabilities will likely be different from the current value of those items.

The remainder of our explanation of financial ratios and financial statement analysis will use information from the following balance sheet:

Example Company
Balance Sheet
December 31, 2005

ASSETS LIABILITIES
Current Assets Current Liabilities
Cash
$ 2,100 Notes Payable
$ 5,000
Petty Cash
100 Accounts Payable
35,900
Temporary Investments
10,000 Wages Payable
8,500
Accounts Receivable - net
40,500 Interest Payable
2,900
Inventory
31,000 Taxes Payable
6,100
Supplies
3,800 Warranty Liability
1,100
Prepaid Insurance
1,500 Unearned Revenues
1,500
Total Current Assets 89,000 Total Current Liabilities 61,000
-
Investments 36,000 Long-term Liabilities
Notes Payable
20,000
Property, Plant & Equipment Bonds Payable
400,000
Land
5,500 Total Long-term Liabilities 420,000
Land Improvements
6,500
Buildings
180,000
Equipment
201,000 Total Liabilities 481,000
Less: Accum Depreciation
(56,000)
Prop, Plant & Equip - net 337,000
-
Intangible Assets STOCKHOLDERS' EQUITY
Goodwill
105,000 Common Stock
110,000
Trade Names
200,000 Retained Earnings
229,000
Total Intangible Assets 305,000 Less: Treasury Stock
(50,000)
Total Stockholders' Equity 289,000
Other Assets 3,000
-
Total Assets $770,000 Total Liabilities & Stockholders' Equity $770,000

One technique in financial statement analysis is known as vertical analysis. Vertical analysis results in common-size financial statements. A common-size balance sheet is a balance sheet where every dollar amount has been restated to be a percentage of total assets. We will illustrate this by taking Example Company's balance sheet (shown above) and divide each item by the total asset amount $770,000. The result is the following common-size balance sheet for Example Company:

Example Company
Balance Sheet
December 31, 2005

ASSETS LIABILITIES
Current Assets Current Liabilities
Cash
0.3% Notes Payable
0.6%
Petty Cash
0.0% Accounts Payable
4.7%
Temporary Investments
1.3% Wages Payable
1.1%
Accounts Receivable - net
5.3% Interest Payable
0.4%
Inventory
4.0% Taxes Payable
0.8%
Supplies
0.5% Warranty Liability
0.1%
Prepaid Insurance
0.2% Unearned Revenues
0.2%
Total Current Assets 11.6% Total Current Liabilities 7.9%
-
Investments 4.7% Long-term Liabilities
Notes Payable
2.6%
Property, Plant & Equipment Bonds Payable
52.0%
Land
0.7% Total Long-term Liabilities 54.6%
Land Improvements
0.8%
Buildings
23.4%
Equipment
26.1% Total Liabilities 62.5%
Less: Accum Depreciation
(7.3%)
Prop, Plant & Equip - net 43.7%
-
Intangible Assets STOCKHOLDERS' EQUITY
Goodwill
13.6% Common Stock
14.3%
Trade Names
26.0% Retained Earnings
29.7%
Total Intangible Assets 39.6% Less: Treasury Stock
(6.5%)
Total Stockholders' Equity 37.5%
Other Assets 0.4%
-
Total Assets 100.0% Total Liabilities & Stockholders' Equity 100.0%



The benefit of a common-size balance sheet is that an item can be compared to a similar item of another company regardless of the size of the companies. A company can also compare its percentages to the industry's average percentages. For example, a company with Inventory at 4.0% of total assets can look to its industry statistics to see if its percentage is reasonable. (Industry percentages might be available from an industry association, library reference desks, and from bankers. Generally banks have memberships in Robert Morris Associates, an organization that collects and distributes statistics by industry.) A common-size balance sheet also allows two businesspersons to compare the magnitude of a balance sheet item without either one revealing the actual dollar amounts.
 
Re: WORST CASE SOME ONE!!!

Financial statement analysis includes financial ratios. Here are three financial ratios that are based solely on current asset and current liability amounts appearing on a company's balance sheet:



Financial Ratio


How to Calculate It What It Tells You
Working Capital =

=

= Current Assets – Current Liabilities

$89,000 – $61,000

$28,000 An indicator of whether the company will be able to meet its current obligations (pay its bills, meet its payroll, make a loan payment, etc.) If a company has current assets exactly equal to current liabilities, it has no working capital. The greater the amount of working capital the more likely it will be able to make its payments on time.
Current Ratio =

=

= Current Assets ÷ Current Liabilities

$89,000 ÷ $61,000

1.46

This tells you the relationship of current assets to current liabilities. A ratio of 3:1 is better than 2:1. A 1:1 ratio means there is no working capital.
Quick Ratio
(Acid Test Ratio) =


=


=

= [(Cash + Temp. Investments + Accounts Receivable) ÷ Current Liabilities] : 1

[($2,100 + $100 + $10,000 + $40,500) ÷ $61,000] : 1

[$52,700 ÷ $61,000] : 1

0.86 : 1

This ratio is similar to the current ratio except that Inventory, Supplies, and Prepaid Expenses are excluded. This indicates the relationship between the amount of assets that can quickly be turned into cash versus the amount of current liabilities.



Four financial ratios relate balance sheet amounts for Accounts Receivable and Inventory to income statement amounts. To illustrate these financial ratios we will use the following income statement information:



Example Corporation
Income Statement
For the year ended December 31, 2005



Sales (all on credit) $500,000
Cost of Goods Sold 380,000
Gross Profit 120,000


Operating Expenses
Selling Expenses 35,000
Administrative Expenses 45,000
Total Operating Expenses 80,000


Operating Income 40,000
Interest Expense 12,000


Income before Taxes 28,000
Income Tax Expense 5,000


Net Income after Taxes $ 23,000






(To learn more about the income statement, go to Explanation of Income Statement, Drills for Income Statement, and Crossword Puzzle for Income Statement.)



Financial Ratio


How to Calculate It What It Tells You
Accounts Receivable Turnover =


=

= Net Credit Sales for the Year ÷ Average Accounts Receivable for the Year

$500,000 ÷ $42,000 (a computed average)

11.90

The number of times per year that the accounts receivables turn over. Keep in mind that the result is an average, since credit sales and accounts receivable are likely to fluctuate during the year. It is important to use the average balance of accounts receivable during the year.
Days' Sales in Accounts Receivable =


=

= 365 days in Year ÷ Accounts Receivable Turnover in Year

365 days ÷ 11.90

30.67 days

The average number of days that it took to collect the average amount of accounts receivable during the year. This statistic is only as good as the Accounts Receivable Turnover figure.
Inventory Turnover =


=

= Cost of Goods Sold for the Year ÷ Average Inventory for the Year

$380,000 ÷ $30,000 (a computed average)

12.67

The number of times per year that Inventory turns over. Keep in mind that the result is an average, since sales and inventory levels are likely to fluctuate during the year. Since inventory is at cost (not sales value), it is important to use the Cost of Goods Sold. Also be sure to use the average balance of inventory during the year.
Days' Sales in Inventory =


=

= 365 days in Year ÷ Inventory Turnover in Year

365 days ÷ 12.67

28.81

The average number of days that it took to sell the average inventory during the year. This statistic is only as good as the Inventory Turnover figure.



The next financial ratio involves the relationship between two amounts from the balance sheet: total liabilities and total stockholders' equity:



Financial Ratio


How to Calculate It What It Tells You
Debt to Equity =


=

= (Total liabilities ÷ Total Stockholders' Equity) : 1

( $481,000 ÷ $289,000) : 1

1.66 : 1

The proportion of a company's assets supplied by the company's creditors versus the amount supplied the owner or stockholders. In this example the creditors have supplied $1.66 for each $1.00 supplied by the stockholders.
 
Re: WORST CASE SOME ONE!!!

bonddonraj said:
friends i am in bad mood today...dont know why i am sharing all this from you all .... but i feel without clearing all this i cant move ahead so i am starting this thread ..... i want genuin reply from all you frinds .... will help me alot...
following is the letter i wrote to one of the iim-a lecturar till now i have not got the responce but i need it from you .............
i CHOSE TO BE EKLAVYA NOW STANDING OUTSIDE IIM-A FRINDS HERE IS THE LETTER.............



respected sir,
i have accumulated a lot of courage to write this to you kindly read it and guide me taking some time out of you busy schedule..
i am 30 yr old dreamt hard for iim-a quit all for cat exam, but in last 2months before exam i was hospitalised .so lost the game..i have 7 yrs of marketing experience, my past acdemic record is not good got 49% in graduation, i am joining a b-school in delhi affilated to hissar university...after my mba i plan for NET exam and PHd..
respected sir my dream is still standing in front of me to be in iim-a ..now as a faculty one day..if i dare say so..may i dream so! what can i do to realise this sole dream i can put all myself in coming years how ever long route will be i shall keep running on this path....kindly guide me ,may i dream so with such bad case in my lap...if yes how shall i walk for it ..one thing i must say i can not look back my dream and decisions so far are on logical grounds (according to my frame of refrence)...i just want to know can such person still dream so according to your frame of referance...if yes what should be my path..
i shall always wait for yor kind reply
thank you
yours faithfuly
Click to expand...


THAT WAS THE DAY I STARTED ALL .........NOW IS THE DAY I AM MOVING ...........AND YA I FEEL THIS DIFFERENCE............
 
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