September 29, 2013
FinNiche
FinXpress
FinXpress Volume 10 Sept 29,2013
From The Editorial
CONTENTS
Had It All Week
From The Editorial In Focus: Activity Based Costing Opinion: Indian Government V/S RBI Market This Week News Fun Corner
With the seniors finishing their term exams the Summer Internship Week started with 20 Companies visiting the campus on Day 0 and 59 students getting placed. The Placement Committee and the Seniors helped simulate the process. The placement week ended on a positive note with top companies like– Marico, Perfetti Van Melle, HSBC, Goldman Sachs, JPMC, JPMS, Mahindra & Mahindra, RBS offering enviable profiles to prospective interns at IMT taking the number to over 160 students. Team FinNiche gives heartiest congratulations to all the students who have been placed. However, the campus is still abuzz with summer placement activity as a number of reputed companies are expected to visit the campus in the days to come. In this edition of FinXpress, we have the Opinion section on “Activity Based Costing” and In Focus section on “The Indian Government v/s The RBI”. Also don't miss the news section and market to get a glimpse of the major happenings of the week. We hope that you find the content engaging and informative. We hope you enjoy the various articles in this edition of FinXpress. We look forward to your comments, acknowledgements and criticisms regarding our online magazine. Your opinions are most welcome. All the Best!!! Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. September 2013
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IN FOCUS
FinNiche
ACTIVITY BASED COSTING Traditionally, in a job order cost system and process cost system, overhead is allocated to a job or function based on direct labor hours, machine hours, or direct labor dollars. However, in some companies, new t e ch n o l og i e s ha ve ch a n ge d the manufacturing environment such that the number of hours worked or dollars earned by employees are no longer good indicators of how much overhead will be needed to complete a job or process products through a particular function. In such companies, activity‐based costing (ABC) is used to allocate overhead costs to jobs or functions. Activity‐based costing assumes that the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. Each overhead cost, whether variable or fixed, is assigned to a category of costs. These cost categories are called activity cost pools. Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase. The number of times materials are ordered, the number of production lines in a factory, and the number of shipments made to customers are all examples of activities that impact the costs a company incurs. When using ABC, the total cost of each activity pool is divided by the total number of units of the activity to determine the cost per unit. A per unit cost is calculated by dividing the total dollars in each activity cost pool by the number of units of the activity cost drivers. As an example to calculate the per unit cost for the purchasing department, the total costs of the purchasing department are divided by the number of purchase orders. Once the per unit costs are all calculated, they are added together, and the total cost per unit is multiplied by the number of units to assign the overhead costs to the
September 2013
—- By Nikhil
units. While using cost drivers to assign overhead costs to individual units works well for some activities, for some activities such as setup costs, the costs are not incurred to produce an individual unit but rather to produce a batch of the same units. For other costs, the costs incurred might be based on the number of product lines or simply because there is a manufacturing facility. To assign overhead costs more accurately, activity‐based costing assigns activities to one of four categories: Unit‐level activities occur every time a service is performed or a product is made. The costs of direct materials, direct labor, and machine maintenance are examples of unit‐level activities. Batch‐level activities are costs incurred every time a group (batch) of units is produced or a series of steps is performed. Purchase orders, machine setup, and quality tests are examples of batch‐level activities. Product‐line activities are those activities that support an entire product line but not necessarily each individual unit. Examples of product‐line activities are engineering changes made in the assembly line, product design changes, and warehousing and storage costs for each product line. Facility support activities are necessary for development and production to take place. These costs are administrative in nature and include building depreciation, property taxes, plant security, insurance, accounting, outside landscape and maintenance, and plant management's and support staff's salaries.
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IN FOCUS
The costs of unit‐level, batch‐level, and product‐line activities are easily allocated to a specific product, either directly as a unit‐ level activity or through allocation of a pooled cost for batch‐level and product‐line activities. In contrast, the facility‐level costs are kept separate from product costs and are not allocated to individual units because the allocation would have to be made on an arbitrary basis such as square feet, number of divisions or products, and so on.
FinNiche
of millions of dollars through this program that it introduced in the early 1990s. ABC showed that the true cost of certain parts that Chrysler made was 30 times what had originally been estimated, a discovery that persuaded the company to outsource the manufacture of many of those parts
Introducing activity-based costing is not a simple task—it is by no means as easy as ABC. For a start, all business activities must be broken down into their discrete components. As part of its ABC program, for example, ABB, a Swiss-Swedish power
company, divided its purchasing activity into things like negotiating with suppliers, updating the database, issuing purchase orders and handling complaints. Nevertheless, ABC has many satisfied customers. Chrysler, an American car manufacturer, claims that it saved hundreds
September 2013
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OPINION
FinNiche
THE INDIAN GOVERNMENT VERSUS THE RBI —- By Subhankar
These are difficult times for the Indian economy. A ballooning inflation, heightened current account deficit and a depreciating rupee are among the primary parameters to note the depth of the Indian economy’s plunge. So whose fault is it? Is it the RBI that failed to control inflation and boost growth? Or is it the government’s that systematically botched promises of economic development and prosperity? In a socialist country, one could argue that the government and the central bank have to work together to maintain economic stability, and that’s probably true. In a country that follows Keynesian Economics, both the institutions, although apart, should complement each other. But do we blame both the institutions for this economy’s debacle?
India’s control. However, the author of this article believes that it is the government that is primarily responsible for the damage done towards this economy. The central government got arbitrary and retrospectively taxed the telecom sector. They even arbitrarily awarded licenses for power sector projects. Corruption got rampant and the courts ordered a blanket ban on iron-ore mining. If that was not enough, the government failed to clear manufacturing bottlenecks. Regulations got stricter and input costs rose. Even the SEZ policies came out more as land scam procedures rather than industrial policies. As a result, production came down, disposable income got reduced and the country depended more on imports.
A central bank faces the dilemma to limit inflation or to give an impetus to growth. Achieving both is quite tricky and commendable. By lowering interest rates, the central bank, in theory, gives stimulus to growth but at the same time risks giving rise to speculative bubbles. Increasing those rates controls money supply and thereby limits inflation. However, such an action puts the brakes on development by limiting access of funds at low interest rates. This forms the bedrock of the RBI’s chief monetary policy function. The government, on the other hand, has access to greater powers of stimulating growth and is directly accountable to the citizens. Through its fiscal and administrative policies, the government has the ability to make radical impact on a country’s economy.
Further, with the rising trade deficit, the government went on with its plans to pass the Food Security Bill – a costly agenda that would surely push up food inflation prices. And it is quite a wonder whether we can afford to give such subsidies. Although FDI was opened in several sectors, companies like POSCO and ARCELORMITTAL refrained from starting plants in India. All such bad policies harm the economy directly by failing to boost domestic production and attract foreign investors.
Although RBI’s functions form the backbone of India’s economy, it is the government that has failed to deliver this time. The government’s policies have cost us dearly. The RBI might be able to control the damage but the government brought about the essential impairment. It would be One could assert that the RBI should interesting to see how both the institutions have kept interest rates lower to stimulate bring about changes in the nose-diving widespread growth in India’s economy. One economy in the days to come. could also make the claim that this debacle was due to extraneous conditions outside
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week The Sensex continued its down trend this week with a fall of 536 points after the RBI increased the interest rates by 25 basis points last week. The increase in lending rates has hit hard on rate sensitive sectors like banking and real estate. The domestic investors as well as the FII’s were very skeptic about investing in the Indian markets and the markets went into a consolidation phase. There was no major event that happened during the week and the market is eyeing the FED’s decision on QE tapering in October. FII’s had a subdued week with a net investment of Rs. 843 crore excluding the 27th September data.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
19,153.27 19,291.85 19308.38 19395.99
CNX Nifty
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FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages
5655.03 5713.72 5800.85 5841.18
Thirty Days Fifty Days Hundred And Fifty Days Two Hundred Days
Commodities Commodity Gold Silver Crude Oil
Unit 10 grams 1 kg 1 bbl
Rs/Unit 30,737 49,570 6538
% Change 2.76 -0.53 -3.92
Lending / Deposit Rates
Base rate Savings Deposit rate Term deposit rate
9.70-10.25 % 4% 8.0-9.0 %
Key Policy Rates and Reserve Ratios
Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Rate Statutory Liquidity Ratio
9.5% 7.5% 6.5% 4.0% 23.0%
Exchange Rates INR/USD INR/EURO INR/Pound Sterling INR/100 Japanese Yen
September 2013
62.51 84.51 100.86 63.64
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FINANCIAL KNOWLEDGE
NEWS Brokers may boycott trading on MCX: NSEL Brokers may boycott trading on the Multi Commodity Exchange ( MCX ) for a day as a protest against the government authorities' "failure" to resolve the National Spot Exchange Ltd (NSEL) payment crisis. A panel headed by economic affairs secretary Arvind Mayaram had been tasked to look into alleged irregularities in the functioning of NSEL, which is grappling with a Rs 5,500crore payment crisis.
forecast to 4.7% Barclays has lowered India's FY14 GDP forecast for the current fiscal to 4.7 percent, saying the growth and fiscal health of the country are likely to remain under pressure, with 2014 election dynamics adding to uncertainties. India's economic growth had slumped to decade low of 5 percent in 2012-13. It had slid to 4.4 percent during April-June quarter, the lowest in past several years, pulled down by drop in mining and manufacturing output.
Wall Street falls as US government faces Moily hints at reduction in petrol price possible shutdown Oil Minister M Veerappa Moily on Friday US stocks declined on Friday and the S&P hinted at a reduction in price of petrol in next 500 and Dow posted their first weekly drop in few days, the first cut in rates in over five four, as Democrat and Republican months. The reduction in rates is likely to be lawmakers struggled to agree on an announced by the month end as per the emergency funding bill to avert an US practice of fortnightly revision in prices, and government shutdown day away. The S&P has been made possible due to appreciation 500 declined 1.1 percent for the week and is of rupee against the US dollar. roughly 2 percent below its record high set September 18 when the Federal Reserve Fin-Min approves Rs 5500cr as SBA to announced it would keep its stimulus pay fertilizer subsidy program unchanged for the present. Finance ministry has agreed for Rs 5,500 PM invites US companies to invest in crore against Rs 12,000 crore sought by the Department of Fertilisers under a special India banking arrangement (SBA) to pay part of Citing long-term opportunities in sectors like the subsidy bill to the industry which is facing infrastructure and defense, Prime Minister a liquidity crunch. Manmohan Singh yesterday invited US companies to invest in India while asserting Govt notifies implementation of GAAR that concerns about the country's growth rules from April 2016 prospects and economic policy environment The government has notified the are "mistaken". Seeking to assure the controversial anti-avoidance tax rules, which foreign investors, he told US industry leaders will be implemented from April 2016 and here that virtually all political parties in India apply to business arrangements with a tax have supported the process of reforms since benefit exceeding Rs 3 crore. The General 1991 which gives confidence about the Anti Avoidance Rules (GAAR) provisions will future direction of the country's economic come into force from April 1, 2016, the policies. Central Board of Direct Taxes (CBDT) said Barclays lowers India's FY14 GDP growth in a notification dated September 23.
September 2013
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FinNiche
Fin-Fun
Fin- Fun Who does not wants to be rich and what better than to feature in the top of the Forbes’ list. So here we present to you some of the very inspirational RAGS-TO-RICHES STORIES that will definitely make you wonder ‘Am I in the right profession?’
FRANCOIS PINAULT, A HIGH SCHOOL DROPOUT NOW LEADS LUXURY GOODS GROUP PPR Pinault was teased for his poor background during high school. He quit his schooling in the year 1947 and joined his family's timber trading business. He began buying up smaller firms in the 1970s and his ruthless business tactics — including slashing jobs and selling his timber company only to buy it back at a fraction of the cost when the market crashed — gave him a reputation as a "predator.” He had similar tactics in the real estate business, and did well buying French junk bonds and taking government money to save businesses from bankruptcy. His self-made worth helped him start PPR, a luxury goods group that sells brands like Gucci and Stella McCartney. At one point the richest man in France, Pinault is now worth a cool $8.7 billion and is the father-in-law of actress Salma Hayek.
INGVAR KAMPRAD WHO CREATED A MAIL-ORDER BUSINESS THAT BECAME IKEA Kamprad lived the farm life growing up. But he always had a knack for business, buying matches in bulk from Stockholm to sell to his neighbors. He later expanded to fish, Christmas decorations, and pens. Not satisfied with the small stuff, Kamprad took money from his father (a reward for good grades) and created a mail-order business that eventually became IKEA (the name comes from his initials plus those of his village and family farm). Furniture became the company's biggest seller, and Kamprad's use of local manufacturers kept his prices low. Once one of the world's richest, his value has fallen recently to a still-amazing $6 billion.
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September 2013
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