In the past, the vast majority of departments used direct labor hours as the only cost driver for applying costs to products. But direct labor hours is not a very good measure of the cause of costs in modern, highly automated departments. Labor-related costs in an automated system may be only 5 percent to 10 percent of the total manufacturing costs and often are not related to the causes of most manufacturing overhead costs. Therefore, many companies are beginning to use machine-hours as their cost-allocation base. However, some managers in modern manufacturing firms and automated service companies believe it is inappropriate to allocate all costs based on measures of volume. Using direct labor hours or cost-or even machine hours-as the only cost driver seldom meets the cause/effect criterion desired in cost allocation. If many costs are caused by non volume-based cost drivers, Activity Based Costing (ABC) should be considered Activity Continue reading
Economics Principles
Duality between Production Function and Cost Function
Production functions and cost functions are the cornerstones of business and managerial economics. A production function is a mathematical relationship that captures the essential features of the technology by means of which an organisation metamorphoses resources such as land, labour and capital into goods or services such as steel or cement. It is the economist’s distillation of the salient information contained in the engineer’s blueprints. Mathematically, let Y denote the quantity of a single output produced by the quantities of inputs denoted (x1,…, xn). Then the production function f(x1,…,xn) describes how a given output can be produced by an infinite combinations of inputs (x1,.., xn), given the technology in use. Several important features of the structure of the technology are captured by the shape of the production function. Relationships among inputs include the degree of substitutability or complementarily among pairs of inputs, as well as the ability to aggregate groups Continue reading
Objectives of Fiscal Policy
By fiscal policy we mean, the government’s tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Public borrowing involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation. The following are the objectives of fiscal policy: Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people Continue reading
Schumpeter’s Innovation Theory – Mechanism, Principles, Strengths, and Limitations
Schumpeter’s Innovation Theory provides that the leading role of an entrepreneur in the economic field is the introduction of innovations from which the reward is gaining profits. The model stipulates that entrepreneurship plays a decisive role in fiscal development and that successful creativities are the only way to achieve such goals as financial stability within an organization. It explains that invention could occur in such ways as launching or upgrading a product, introducing new production methods, acquiring advanced supply sources, and bringing unique business structures. The business approach was developed by Joseph Alois Schumpeter, an Austrian political economist and foundational contributor to the topic of development and technological advancements. The idea is based on the more elaborate theory of monetary growth, which focuses on entrepreneurship and its role in industrial empowerment with innovativeness as the linkage. In this regard, Schumpeter worked towards defining and explaining the change in a perspective Continue reading
Difference Between Economies of Scale and Economies of Scope
Economies of Scale The term economies of scale refers to a situation where the cost of producing one unit of a good or service decreases as the volume of production increases. Economies of scale arise when the cost per unit falls as output increases. Economies of scale are the main advantage of increasing the scale of production. Alfred Marshall made a differentiating concepts of internal and external economies of scale. That is that when costs of input factors of production go down, it is a positive externality for all the firms in the market place, outside the control of any of the firms. Internal Economies of Scale Internal economies of scale relate to the lower unit costs a single firm can obtain by growing in size itself. This means that the internal economies are exclusively available to the expanding firm. Internal economies of scale may be classified under the following Continue reading
The Role of Government in a Market Economy
In a market economy, commerce and customers make a decision of their own decision what they will consume and manufacture, and in which conclusions on the allotment of those sources are without government interference. Hypothetically this denotes that the manufacturer is required to decide what to produce, how much to produce, what prices to set up for consumers for those productions, what to pay workers, and so on. These conclusions in a market financial system are impacted by the forces of competition, supply, and demand. This is frequently distinguished with a premeditated economy, where central government concludes what will be manufactured and in what amounts. A market economy is also compared with the mixed economy where there are market processes through the system of markets that is not completely free but under some state control that is not widespread enough to comprise a deliberate financial system. In reality, there is Continue reading