Overhead cost is an ongoing expense of operating a business and is usually used to group expenses that are necessary to the continued functioning of the business, but cannot be immediately associated with the products/services being offered as in the costs do not directly generate profits. Overhead cost includes indirect product cost or indirect cost of responsibility center. Indirect product cost is known as manufacturing overhead whereas indirect cost of responsibility center is known as non-manufacturing cost. Manufacturing overhead is those manufacturing costs that are incurred to a variety of products. It cannot be traced to individual products like depreciation and insurance of manufacturing equipment, cost of occupying, managing and maintaining a production facility. Manufacturing overhead is the cost that could be traced to individual product but it is not worth the trouble to like cost of lubricants and glue used. Manufacturing overhead also include cost that is more appropriately Continue reading
Financial Concepts
Role of Stock Markets in an Economy
Financial market is one of the components of financial system. Financial market facilitates the efficient allocation of financial resources of the economy so as to achieve socially desirable and economically productive purposes. Existence of an efficient financial market is a pre requisite for promoting savings, investments and consequent economic growth. Financial markets are extremely important to the general health of an economy. The main function of financial system, viz. capital formation takes place practically in financial markets. Financial institutions work as financial intermediaries and establish link between suppliers and users of funds in financial market. Financial products, including the supply of credit, mortgages, company shares and insurance, are bought and sold in primary and secondary financial markets. Financial products and securities are first issued into primary financial markets, which is where all financial products originate and where contracts are first drawn up. Secondary markets exist to enable buyers and sellers Continue reading
Difference Between Money Market and Capital Market
In order to understand what the differences between things are you first need to understand what each of the items is. In this case before you can understand the difference between money market and capital market you are going to need to understand what money market is and what capital markets is. Once you understand the two items are it will be easier to see what the difference or differences are between the two markets. What is Money Market? Basically the money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a money market is about thirteen months or lower. Some of the more common types of things used in the money market are certificates of deposits, bankers’ acceptance, repurchase agreements and commercial paper to name a Continue reading
What is Financial Structure?
Financial structure refers to the way as to how the firm’s assets are financed. It includes both, long-term as well as short-term sources of funds. In other words, it refers to the left hand side of the Balance Sheet as represented by total liabilities. However, a more frequently used term is capital structure which is slightly different from financial structure. If short-term liabilities are removed from firm’s financial structure, what one obtains is its capital structure. So, financial structure is defined as the amount of current liabilities, long-term debt, preferred stock and common stock used to finance a firm. In contrast, capital structure refers to the amount of long-term debt, preferred stock and common stock used to finance a firm’s assets. Thus, capital structure is only a part of the financial structure and it represents the permanent financing of the company. Another term Capitalization refers to total long-term funds required Continue reading
How Interest Rates Can Influence Financial Decisions?
Interest rates exert the following economic influences. Interest rates in a country influence the foreign exchange value of the country’s currency. Interest rates act as a guide to the return that a company’s shareholders might want, and changes in market interest rates will affect share prices. A positive real rate of interest enhances an investor’s real wealth to the income he earns from his investments. However, when interest rates go up or down, perhaps due to a rise or fall in the rate of inflation, there will also be a potential capital loss or gain for the investor. In other words, the market value of interest-bearing securities will alter. Market values will fall when interest rates go up and vice versa. Interest Rates are Important for Financial Decisions by Companies Interest rate is important for financial decisions by companies. The incidence of the interest rates can have the following effects. Continue reading
Profit Maximization Objective of a Firm
In the conventional theory of the firm, the principle objective of a business firm is to maximize profit. Under the assumptions of given taste and technology, price and output of a given product under competition are determined with the sole objective of maximization of profit. Profit maximization refers to the maximization of dollar income of the firm. Under profit maximization objective, business firms attempt to adopt those investment projects, which yields larger profits, and drop all other unprofitable activities. In maximizing profits, input-output relationship is crucial, either input is minimized to achieve a given amount of profit or the output is maximized with a given amount of input. Thus, this objective of the firm enhances productivity and improves the efficiency of the firm. The conventional theory of the firm defends profit maximization objective on the following grounds: In a competitive market only those firms survive which are able to make Continue reading