346

CmPTBR VIII

FIIIAHGIkL l-'lMA GEIvEKT MP ACCOUNTIHG

V m . l Frame work;

In bus iness management, a very Ijiiportant place

amongst t h e f u n c t i o n a l a r ea s has been ass igned t o the

f inance f u n c t i o n . I t i s as much due t o the f a c t t h a t

almost a l l a c t i - v i t i e s in a Uis iness o r g a n i s a t i o n have

f i n a n c i a l i m p l i c a t i o n s in the f i n a l a n a l y s i s . Ear l ier^ . ,

the finajice funct ion \vas mainly confined t o the procurement '

of funds for bus ines s and keeping of accura te f i n a n c i a l

r e c o r d s . The modern concept of f inance func t ion h a s ,

however, expended far beyond these l i m i t e d f u n c t i o n s .

A.part from the t r a d i t i o n a l f unc t i ons of f i n a n c e , the

f i n a n c i a l manager i s now concerned v,;ith .(i) a l l o c a t i n g

funds t o s p e c i f i c a s s e t s , and ( i i ) o b t a m i n g the b e s t

mix of f inanc ing ±n r e l a t i o n to the o v e r a l l v a l u a t i o n ^

of the f i r m . For i d e n t i f y i n g the p r a c t i c e s in the a rea

of f i n a n c e , t he framework which we suggest here t a k e s

i n t o account an o v e r a l l view of the f inance f u n c t i o n .

As such, the ve r ious func t ions have been grouped under

two broacl c l r . s s i f i c a t i o n s , v i z . , ( i ) F inance , and

( i i ) Accounting and C o n t r o l .

V I I I . 1.1 Fin&nce;

The func t ions of f inance can be broken do\<m i n t o

t h r e e major d e c i s i o n s the firm must t ake^ • the inves tment

1. Van l lcrno, James C , F i n a n c i a l Management and P o l i c y , T h i i ' d L d . , P ren t ice - , HaJ.l of I n d i a , New D e l h i , 1975,P»3'

2 . I b i d . , p . 10.

347

decis ion, the financing decision, and the dividend decis ion.

F inancia l manageaient invol-ves dec i s ion-making in these

three a r ea s . Since these decis ions are i n t e r r e l a t e d ,

they Eust he ttilien j o i n t l y . ^ q)tiinum conibination of

these decisions v/ill "maximise" the objective of the firm.

VI I I . 1 .1.1 In-yeEtment Decision

Inves.Ui^cnt decision invol-ves managing the use

of funds in ousiness. Because the funds are invested dSSSJSt

e i the r in fixed/or in working c a p i t a l , these decisions

na tu ra l ly r e l a t e to the acquis i t ion and management of

00th fixed and'* current assets-, ^s regards fixed a s s e t s ,

a major as^yect of the decision relatt-;s to investment

policy, or what i s more commonly laio;^, c a p i t a l budgeting.

Capi ta l budgeting i s the a l locat ion of cap i t a l to investment

proposals whose benef i ts are to be r ea l i s ed over a long

period in tht fu.ture ^ In viev; of the uncer ta in ty and

r i s k associated \>Q.th the fu ture , c a p i t a l pro jec ts have to

be properly evaluated in r e l a t i o n to t h e i r expected

r e tu rn and r i s k , on the one hand, and the ' cos t of c a p i t a l '

for financing these pro jec t s , on the o ther .

In addit ion to se lect ing new investments, a firm

must manage ex is t ing asse ts e f f i c i e n t l y . However, here

the f inanc ia l manager i s more concerned with the management

of current a s s e t s , v i z . , inventory, receivables and cash.

Thus, inventory management, c rddi t policy and determination

of a proper l eve l of l i q u i d i t y for the firm become the

main concern of the f inanc ia l manager. 4.11 these decisions

348

involve the a l loca t ion and in-vestriient of capi ta l jno l e s s

thaji c ap i t a l budgeting. A.s such, the investment decision

perhaps becomes the most important of the three finance

functions and i t u l t ima te ly determines the t o t a l amount

and composition of asse t s held by a firm ( i . e . , i t s asse t -

s t ruc tu re ) as well as the f i rm ' s bus iness- r i sk complexion.

VIII . 1.1.2 Financing Decision

The second major area of finance is the financing

decis ion . I t involves managing the acquis i t ion of funds.

Here, the f inanc ia l manager i s d i r e c t l y concerned: with

the sources of funds - both long-term and short-terra

- available to hiin. Before taking the f ina l decisions

about the sources of financing, ho\7ever, he has to convince

hifciself about the i r d e s i r a b i l i t y . L.s such, fins.ncing

decision i s ju l t ima te ly j concerned with determining the

best financing mix, or c a p i t a l s t ructure of the firm.

An optimal mix i s one tha t minimises the overal l cost

of cap i t a l as well as the f inancia l r i s k .

The funds are required both for long-term and

short-term purposes. The long-iterm requirements of funds

would depend on cap i t a l expenditure incurred on acquiring

VcJ'ious physical resources for f a c i l i t a t i n g production

and other opera t ions . These funds are invested in fixed

assets l i ke plant and machinery, land and building (including

tea Ixishes in tea indus t ry ) , furni tures and f i x tu r e s ,

e t c . Since these a s se t s depreciate over a period of time

due to wear and tear or obsolesence, they need constant

replacements, addit ions and a l t e r a t i o n s . ^11 these aspects

349

ha^e to be studied not only for assessing the oA;erall

reouirernent of long-term funds tu t also for phasing out

the cap i t a l s t ructure in the hest i n t e r e s t of the firm.

The sh or t-term finane in g, on the other hand,

dependsupcn the v/orkjjig c a p i t a l needs Of the business .

ks mentioned e a r l i e r , the working c a p i t a l requirements

are determined by the le-vel of current a s se t s a. firm

has to keep. Because the current asse ts are convertible

in to cash within the short-run (one year ) , these funds

heep on c i r cu la t ing continuously - from cash to inventory

to rece ivables to cash - and, thus , determine the l i q u i d i t y

of a f irm. Liquidi ty, by de f in i t ion , i s the a b i l i t y to

r e a l i s e value in money, the most l i c p i d a s s e t s ; i t i s a

function of the time necessary to convert an asse t in to

money. Longer t h i s period, higher wil l be the requirement

of cash for meeting day to day expenditure, including

v;ages.

The sources of funds avai lable to a firm are

tvjo, viz .,U)internal, and ( i i ) ex t e rna l . The former cons is t s

cf o\^mership cap i t a l tha t comes e i ther from equity ( r i sk

cap i ta l ) or re ta ined earnings, or both . The external

scvirfe cf funds involves borrovjed c a p i t a l tha t may be both

long-term and short-term, depending upon the requirements

of a f irm. A.11 these sources cf funds u l t imate ly determine

the f i rm's c ap i t a l s t r uc tu r e , i t s f inanc ia l r i s k and i t s

cost cf c a p i t a l .

In dividend decision, the f inancia l manager i s

concerned with the management of income. Here, the decision

350

r e l a t e s to the dividend policy and in t e rna l financing

- tha t i s , the use of net inccnie af ter t a x e s . The dividend-

payout r a t i o determines the portion of income paid to

shareholders or the v/ithdra\^/als by the ovmers in the case

of non-incorporated firms as well as the aiiiount of earnings

re ta ined in the firm. This decision i s l inked with the

financing decision and depends, to a la.rge ex ten t , upon

the f i rm 's need for funds. The firm may need funds for

working c a p i t a l , replacement and renovation, expansion

ejid/or d ive r s i f i c a t i on , and re ta ined earnings may prove

to be a good and ready source of funds for these purposes.

VII 1.1.2 i c counting and Control :

i^ccounting may be defined as the process of

ident i fying, c lass i fy ing , recording, summarising, cuialysing,

and communicating economic information. The scope of

accounting has expanded tremendously over the years aixl

ncv; i t includes not only record keeping but also a host

of ana ly t i ca l and control tools and techniques. Cost and

management accounting have assumed a ro le of great

significance in 8.n accounting system. For the purpose

of present study, however, we ident i fy four major aspects

of accounting as our framework. These are :<i)Ilecord

keeping; ( i i ) Analyt ical viork or Tools; ( i i i ) Budgeting:

and ( iv) Report ing.

V m . 1.2.1 Record Keeping;

Record keeping, often knovm as book-keeping and

accounting, i s t r a d i t i o n a l l y the primary function of

accounting. Here we study the methods of recording

351

f inanc ia l t ransac t ions of a business e n t i t y , the i r

c l a s s i f i c a t i o n and surnnarisation in accordance with the

generally accepted p r inc ip l e s , conventions and concepts '

of accounting. The ul t imate purpose of record keeping

function of accounting i s to prepare, a t the end of an

accounting period, the f ina l accounts of the firm, v i z . ,

H ) Prof i t and Loss Ai-ccount, and ( i i ) Balance S-heet. These

are the tv/o most important f inancia l statements of a /"

firm in respect of i t s en t i r e business operations for a

given per iod. They are able to t e l l us about the f inancia l

pos i t ion of the firm, i t s c a p i t a l s t ructure ,and i t s

p r o f i t a b i l i t y as v;ell as overa l l cost s t ructure for a

given per iod.

VIII . 1.2 .2 A-nalytical VJ<ork

The ana ly t i ca l aspect of accounting comprises

the various too l s and techniques of f inancia l ana lys i s .

These may include, i n t e r - a l l a , Aj2counting Rat ios , Funds /

Flov; Statement, and Cost-Volume-Prof i t (CVP), Break-even

and a Marginal analyses, e t c . These analyses provide

useful information to management about the i r past performance

aPxd help them in planning and con t ro l ,

VI I I . 1.2.3 Budgeting

Budgeting i s a v;ell-developed system of pl,anning

and control of a f i rm's operations for a given period in

the fu tu r e . The future a c t i v i t i e s are guided by a number /

of budgets tha t a firm prepares . These budgets are divided

in to two pa r t , v i z . , ( i ) Capi ta l Budgeting which re la tes

to the long-term cap i t a l expenditure, and ( i i ) Revenue

352

Budgeting for short-term income and expendi ture . Hevenue

"Liidgets are generally prepared for a period of twelve

months and are su'o-di-vided in to ( i ) Sales Budget,

( i i ) Production Budget, ( i i i ) Direct Expenditure Budget,

(i"v) Ind i rec t Expenditure Budget, (-v) Cash Budget, and

the l i k e . Depending upon the nature and size of the business,

these re-venue budgets may be further divided into sub-

budgets. Uith the help of these budgets, the managements

are able to control the en t i r e operations by comparing

the ac tua l performance with the budget (or ' s t anda rd ' )

and taking necessary correc t ive act ions to cor rec t the

devia t ions , if any. This system of control through budgets

i s widely practised in large as well as small business

organisat ions , and i s known as Budgeting Control .

VIII .2 IRractices in Kangra Tea Industry

In general , a number of the functions of finance

are conspicuous by the i r absence in the small- industry

sector in Ind ia . More often than not , f inanc ia l management

in small u n i t s i s taken to mean merely prociarement of

funds and t r a d i t i o n a l accounting (record keeping) . Kangra

t e a indust ry i s no exception. As the study of the u n i t s

under reference shows, the management of these u n i t s are,

quite ignorant of most of the f inanc ia l management tools

and techniques. Even the i r accounting system is defec t ive .

A number of the u n i t s were not able to provide necessary

information, because often the i r accounting i s l imited

to a bare minimum, to f u l f i l ce r ta in s t a tu to ry requirements.

However, a general idea about the finance and accounting

p rac t i ce s in Kangra tea indus t ry can be had from the

353

analysis of cases . These are discussed belov;.

VIII .2 .1 Finance

I t has already been mentioned in Chapter I t h a t ,

apart from the cooperative u n i t , the present owners of

the tea u n i t s in Kangra acquired t he i r t ea gardens from

the i r o r ig ina l English owners a t quite low c o s t s . So

long the going was good,par t icular ly in the i n i t i a l stages

when- the bushes \^re young and ijroductive, they never

bothered about proper management of funds and income .

As a r e s u l t , earnings were not properly ploughed back for

replacement, renovation, rep lan ta t ion or augmenting v/orking

c a p i t a l . Other sources of funds, general ly avai lable to

tea indust ry in the country, tA ere not properly tapped.

There appears to be, since very beginning, no f inancia l

planning as regards investment, financing or dividend

dec i s ions . Hencejthe present pl ight of t h i s industry tha t

has landed almost every single tea u n i t in Kangra in to

dire f inanc ia l s t r i ngenc ie s .

In view of t h i s s t a te of a f f a i r s , our discussion

here has. been r e s t r i c t e d to ( i ) the c a p i t a l s t ructure of

the u n i t s under study, and ( i i ) the i r f inanc ia l requirements,

both long-term and shor t - term. &>. br ief reference sha l l

be made of the various sources of funds avai lable to the

indus t ry .

VIII .2 .1 .1 Capi tal Structure

S t r i c t l y speaking, c a p i t a l s t ructure r e f e r s to

the basket of financing avai lable to a firm on a par t icu la r

d a t e . Since the sources of funds in t ha t basket are generally

354

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funds are invested, these have tc be analysed alon^with

the l a t t e r . The study of c a p i t a l s t ruc tu re , therefore ,

r e l a t e s both to il) the L i a b i l i t y s t ruc tu re , and ( i i ) the

Afccets s t ructure of the u n i t s under study. The balaaice

sheets ai'e the riiain s t^ teuent s&iowing the cap i t a l stixicture

of a firm on a par t icu lar d a t e . Hci/e-ver, here our

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"i)» The management of u n i t Z refused permission to

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idea about the l i a b i l i t y and asse t pa t te rns may be had

therefrom. The asse t - s t ruc tu re in Kangra t ea u n i t s is

dominated by the fixed asse t s which account for 70 per cent

or more of t o t a l tangible a s s e t s . As regards the l i a b i l i t y

s t ruc tu re , the major sources of funds remain to be net

worth {owners' funds or equi ty) except in the case of

the co-operative un i t which has heavi ly depended on

borrowings from the Tea Board of India and s t a te government,

as t he i r c a p i t a l i s almost t o t a l l y wiped off due to

accumulation of losses over the years .

VIII .2 .1.2 F inaneia 1 Re qu irement s

i i . Long-term, heeds

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for nev; p lant ing, rep lan t ing , processing machinery and

factory "Duildings. In Chapter IX on rep lan ta t ion management,

i t has been explained tha t for t he survival of industry ,

r ep lan ta t ion has to be a continuous process and 6/0 of''

the area under tea has to be replanted every five years .

The rep lan ta t ion costs work out to be Rs. 12,000 per hec ta re .

The f inanc ia l needs of various un i t s under study may be

estiiiiated for next f ive yOcirs; i t wil l comprise the cost

of replac ing some machines plus the costs cf r ep l an t a t i on .

The di f ferent u n i t s have estimated the i r long-term fine^ncial

rccjuirements rougi ly on the above b a s i s . These are shovm

±n Table V I I I . 2 .

Costs of rep lan t ing in the tsCole VIII .2 have

been calculsited by imlt iplying the area byxis.12,000 and

tha t of i n f i l l i n g by multiplying the area by iLs.2250

(cf. chapter IX). Most of the planters are thinking of

get t ing the bulk cf the i r leaf processed by the co-operative

processing un i t ' s . S-o they do not wish to go for major

rei^lacements of machinery. of

The management I u n i t s under study fee l tiiat the i r

en t i re long-term cap i t a l requirements for the next five

years are not needed immediately, ivc cor ding to the i r

rep lan ta t ion plans and other needs, these may be phased

out, on an annual ba s i s , for the next five years . This

has been shovm in Table VII I .3

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Short-term fiinds are reauired to meet the ^•7orking

cap i t a l of the firm, v-iorking cap i t a l r epresen t s the funds

in-vested in current asse ts which, in the case of Kangra

tea indus t ry , represent a small Einicunt as compared to fixed

asse t s (cf . Table VI I I . i rO . The'reason fol' t h i s may be

sougtit in the fact tha t the t e a s manufactured by these

u n i t s are immediately t ransferred to e i the r the co-operative

marketing on weekly basis or sent to the jajiiritsar auct ion.

Since on del ivery , 60;;5 of the cost may be reco-vered in

cash, not much funds are blocked in inventory and receivables

Tlieir main requirement of funds i s for meeting the i r v/age

b i l l s ana other cos ts which account for a major port ion

cf the i r t o t a l cos^ of production. Their main problem i s ,

the re fore , of having reasonable l i q u i d i t y for racing these

expendi tures . Had the p r o f i t a b i l i t y been good^ the v/orking

cap i t a l problem would have been negl igible . But lo\; margins

end, in many cases huge losses ( e . g . , 3 Co-operat ive) ,

have created the problem^ of l i q u i d i t y . This problem cannat

be solved by siiiiply finding out new sources of \TOrking

cap i t a l f inance . I t s u l t imate solution v;ould l i e i n

increasing product iv i ty and p r o f i t a b i l i t y .

iiiS i t may be observed from the consolidated hixtance

sheet (Table VIII .1 ^ & 3^ , the net working cap i t a l of the

u n i t s under reference i s e i the r very small or nega t ive .

I t means tha t miargin avai lable from long-teri.i sources,

pc.a?ticularly net worth, for financing the permanent portion

of working c a p i t a l i s almost non-exis tent . Hence the

perpetual l i q u i d i t y problem. The solut ion would, therefore .

361

l i e in f inding out long-term funds for rep lan ta t ion and

replacement in order to increase productivi ty and decrease

pressures on v/orking c a p i t a l and l i c p i d i t y . Moreo-ver,

the management of these u n i t s must a lso t r y t o assess

the i r short-term requirements of flinds for off-season and

busy season on a more r a t i o n a l b a s i s . Unfortunately, not

much thought has been given to t h i s aspect of working

cap i t a l Tflanageiaent in Kangra t ea i ndus t ry . £>imply

finding out short-term sources of funds i s not going to

solve the problem of working c a p i t a l .

VI I I . 2 .2 Accounting Procedures and Br act ices

The main objective of maintaining records in the

p lan ta t ions i s to meet s t a tu to ry ob l i ga t i ons . For taxat ion

purposes, various accounts have to be prepared. The

accounts normally prepared, are t rading accounts, p ro f i t

and loss account, and balance shee t , ikpart from the

personal and general ledger accounts, r e ce ip t s and

disbursments (Cash book) and cost of production records

are also maintained. For the payment of excise duty^RG

(Rav; mater ia l ) and EB (Excise books) records have to be

prepared by a l l the t ea processing u n i t s . Most of the

p lanters thought that maintenance of a l l these records

was an obl igat ion forced on them by the s ta te ,

The double ent ry system of accounting i s invar iably

used, but the accounting personnel are i l l t r a ined . They

may be able to manipu4-ate the accounts for meeting s ta tu to ry

requirements; but they could not maintain the accounts or

provide data for the benefi t of decision making in finance

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or other sre&s of ox)eration. Thus, accounting prac t ices

a t best 3Xe r e s t r i c t e d to one purpose - record keeping,

hone of the u n i t s e"ver thought to use the accounting data

.or , . . . n , ^ . t . o . . . . . . . . . state.ent o. aeccnUn,

prac t ices tha t include accounting, accounts/records

maintained, and accounting personnel in -various u n i t s under

study ai^pear in Table YIII.^-.

The record keeping aspect of accounting, as

prevalent in Eangra tea industry, does not leave much to be

discussed, as the prevalent prac t ice i s t o keep the bare

miniauLi r ecords . Hov/ever, a general idea can be had from

these records cibout ( i ) the Prof i t performance, tmd

( i i ) the cost s t ructure of t t e u n i t s under study;

y 11 ;L . 2.2 .1 Trof i t Performance

Preparat ion of f inal accounta, i . e . , the Prof i t

and Loss account and the Balance Sheet, i s an importsjit

purpose of accounting. I t provides a "test-check" for

the f i r m ' s overal l economic 'ocrformEaice for the given

period and i t s f inanc ia l Position. Much, hov;ever, depends

upon the accuracy of income determination and a.ccounting

r e c o r d s . In t h i s respect the u n i t s under study have faile;J

miserably. Not only tha t the pr inc ip les of accounting

hsvve not been uniformally followed but even the records

are not lj3pt properly. Complete p r o f i t a b i l i t y data are

avai lable only from three un i t s under study. Even these

have to be res t ruc tu red and readjusted so as to prepare

the consolidated Prof i t and Loss Statement on sc i en t i f i c

l i n e s .

364

Prof i t a b i l i t y i s probably the bes t ci"v a l i ab le

t e s t of e f f i c i en t performance of riianagement. I t prc-vid.es

not only the motii/ation for far ther in^vestrnent taut also

underscores the long-tern! f inanc ia l posi t ion and. survival

of an occnoffiic e n t i t y . The Kangra tea jjadustry has reached

i t s present abyss mainly due to continued- low prof i t s or

even l o s se s , ^s the Consolidated I^c f i t and Loss Statement

for the 3^a.r 1973 (Table VIII . 5) shows, the B co-operative

un i t -rastained a net loss of about "Rs.^0,000 on i t s net

sa les of a l i t t l e l e s s than rupees 1,^ l akhs . The performance

of th i s un i t has been equally bad in e a r l i e r years , thereby

r e s u l t i n c in accumulated, loss as uuich as Rs.^66,122 v/hich

has (^aten up almost i t s en t i r e equi ty of Rs.^79,560. The

un i t has survived, simply because i t i s in the co-operative

sector and, as such i t could, have an easy access to

borrovTod cap i t a l from Tea Board of India and the S ta te

Government (vide Table VIII . 1 A.).

The other two u n i t s under study, X and Y, from

v^ich complete p r o f i t a b i l i t y data,\'jere ava i l ab le , did earn

some iirofit in 1973 tha t amounted to 12.5 per cent on net

sales of X u n i t and a mere 1,5 per cent for Y u n i t .

Iiov;ever, t he i r r e tu rn on cap i t a l (net i i rof i ts to net

v/orth/equity) com: s to as low as 5 ?er cent in X un i t

and 2 percent in Y u n i t . Other u n i t s under study, from

which complete fincuicial data were not ava i lab le , have

been sa i l ing in the same boat so far as the i r prof i t

performance i s concerned, ^n idea abai t the i r p r o f i t a b i l i t y

may be had from Table VIII .6 v/hich consol idates the p rof i t

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Table VIII . 6

Erof i t Performance of Units Under Study for three Years

Code of the net B?ofits or Losses un i t ( Axiiount in ru pees)

1970-71 1971-72 1972-73

B i e s se s -19,^23 -^0,233

K 13,537 12,699 3,653

M * 2^,000 -^-3,000 -52,000

X Losses 73,037 32,372

Y 6,^11 2,^n7 2,7^-1

z * 33,000 18,000 -62,000

Saarce : fiase Analys is . * Figures ri-ven for the u n i t s are approximate liiecause

the i r accounts cxe not a'vailable .

367

perfornance of a l l tlie u n i c t s under study for three

ye ar s .

VI I I .2 .2 .2 Cost Structure

Cos t ing , i s an important part of an accounting

system. The purpose i s t o ident i fy the major items of

cos ts tha t enter into the t o t a l cost of production and,

given the s e l l i ng p r i ce , u l t ima te ly determine the quantum

of p r o f i t s . I t a lso enables the management to determine

the u n i t cost of d i f ferent items or types of product.

This r equ i res proper a l loca t ion of i nd i r ec t cos t s or

overheads to d i f fe ren t products en some s c i e n t i f i c b a s i s .

This requi res proper a l loca t ion of i nd i r ec t costs of

overheads to d i f fe ren t products on some s c i e n t i f i c b a s i s .

This as t^ct of cost accounting assumes importance for the

management of Kangra t ea u n i t s in so far as i t f a c i l i t a t e s

decision-making in respect of producing (|reen teas or Black

t e a s , uihether concentratijig on the manufacture of Green

\ or_ Black t ea s i s more profi table i s an important decis ion

for small t ea u n i t s in Kangra. A.part from i t s other uses

in cost con t ro l , • cost accounting may be p a r t i c u l a r l y

helpful in t h i s r e s p e c t .

Unfortunately, the management of Kangra t ea u n i t s

under study have been quite oblivious of t h i s important fact

and do not have any cost ing data or records worth the name.

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the cos t - s t ruc tu re i s concerned i s bas£d on the•accounting

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period as consolidated in Table VII I .5 e a r l i e r . On the

bas is of these f igu res , a general idea about the cost

s t ruc ture of the three u n i t s under study can be had

(Table ^TIII.?).

Obviously, the compilation of the cos t - s t ruc tu re

in the table VIII .7 i s subject to the l im i t a t i on of cost

c l a s s i f i c a t i o n avai lable . If cost data for p lan ta t ion

v;ere separa te ly ava i l ab le , the cos t - s t ruc tu re would have

been more sc i en t i f i c and revealing., tbreover , the basis

of ca lcula t ing raw mater ia l cost i s not uniform in a l l

the u n i t s under re fe rence . That i s why, in X un i t raw

mater ia l s have been shown a t quite a low amount, because

perhaps here ,unl ike other u n i t s , the labour charges and

other d i rec t cos ts of farming have not been included in

the cost of raw mater ials but shovzn alongwith the factory

labour taid d i r e c t c o s t s . In any case, i t i s obvious that

the d i r e c t expenses cons t i tu te the major cost of production,

accounting for as much as 67-87 per cent of the t o t a l cos t .

Of t h i s , raw mater ia ls (tea leaf!) i s the most important

single item of c o s t . Ind i rec t expenses account for 12-33

percent of the t o t a l cost of production. Of these ,

establishment expenses and r e p a i r s and depreciat ion are most

importer.t. Hocsrever,these differences seem to a r i se more as a

r e s u l t of d i f fe ren t accounting p rac t i ces in the absence of a

well developed accounting system in t h i s . indus t ry . I or -/

example, commission on sales i s shown d i f fe ren t ly by a l l

u n i t s .

VIII . 3 . Finii:icii:,l Ilaruinciaont ikiid ..o.cGOuntinn System "^TA -FuncticruJ. Guidf l ine s/?r iriGJ-i^le s *» fU

Cii the basin of the: frcane'/orlc and iicactlccs discussed

above, ;?n attci.;pt hcs been i;ic;.:le in th i s section to arr ive at

ce r ta in p r inc ip les of f inanc ie l manageaent and accountinf-,

The*7e .,vinciples Iia-vc bran sui tably adapted and i^icdified so as to

serve as conceptual fra: .c-./orl: or functional ru iec l ines for

efff;ctiae eane{pr/'nt of tea industry , in general, and snai l

Kanffra tea u n i t s , in p a r t i c u l a r ,

VII I .3 .1 ?i:ienec: Function

do he\e e a r l i e r pointed out that there arc three

t^oe s of :' 'ecisicns hivolvoa in f inanc ia l management:

inveetejent, fincncinp and :blvidend dec is ions . And these

decis ions r-i- in te r l inaed e.nd, often, overlapaing. LQ such,

these have to bee seen in the i r t o t a l i t y , though for the

purpose of enelysis v/o discuss them separa te ly . Vfe sha l l

develop these functions h(jre, a l b e i t in a s l i gh t ly

differeni: forie, to serve as guidelines for tea indus t ry .

Using simpler tcri.iinology, as many experts of f inanc ia l

managcmeat do, ne iiay say tha t there arc three important

TJhases or elements of f inanc ia l administrat ion, njimely:

^1.^ I^etimation (of the fixed and ^Jor]:ing cap i t a l

re ru i rements) ;

2>> Cap i t a l i s a t ion , that includes (a) Fcrm.re'cion of the c a p i t a l s t ructure ( i . e . ,

determ.iiiction of the various types of ca ) i t a l funds and the i r r e l a t i v e proportion, v/hcre-^^he t o t a l c a p i t a l i s to be obtained) ,

' and

(b) Procurement of fixes and vorlcing c a p i t a l ( i . e . deterninat ion of the sources of c a p i t a l

supply); and

(3) hanagement of earnings .

VIII.3-1-I- ESTBJITIOH 3 7 | _

In order to find out the fixed and v/orl-iing capitr . l

requi rcncnts of a firm, \ 'arious components thereof are.

broken up, as far as poss ible , into unlforv.'; and homogeneous

u n i t s 3nd the cost of each un i t i s es t imated. For example,

\'ie wi l l have to assess as t o how much fixed and c i r cu l a t i ng

(current ) assets wi l l be needed and a t what cos t s they \,-ill be

ava i lab le t Obviously, t h i s wi l l depend, in ter a l i a , on

( i ) the nature of industry, ( i i ) Size of opjerations,

( i i i ) |)roccss of production, ( iv) method of handling products

(•v)terms of t r ade , c-ncl so on. For correc t es t imation,

however, f u l l hncv/ledgc of the d i f ferent recnairements of

business i s e s s e n t i a l . I .ore over, the com par i s ion method - i . e . ,

s tudies of es t imates made by other firms of simiilar nature

and size - may help in a r r iv ing a t the t o t a l re caiirements

and thiCir c o s t s . As a matter of f e e t , the ac tual est imation

as made by a firm in the dynamic s i tua t ion i s not as simple

as i t appears. For, there i s al;;ays a choice among

avai lable a l t e r n a t i v e s . Hence the importance of various

tools and tochnieues of f inanc ia l management, such as_,capital

budgeting, revenue budgeting, f inanc ia l ana lys i s , and so on.

VI I I .3 .1 .1 .1 F'miT) ASSETS

The pr inc ipa l purposes for v/hich funds are required

for fixed cap i t a l in 3. tea un i t may be l i s t e d as belows

( i ) Farm ( i . e . , Lend and Tea Dushes)

( i i ) Building

( i i i ) Plant and machinery for tea pro ce ssing u n i t

( iv) Rirni ture and f i t t i n g s

(v) Vehicles

(vi) Other fixed a s s e t s .

372 '-lliile assessing the requirements of these fixed

a s s e t s , the follovdng co:risiderations have to be taken into

account J-

1 . I f the Isjid, building and processing u n i t

recui re -very liuge investments some hi re- iurchase

system or ren t ing of factory premises can be

considered.

2 . Sometimes, the p o s s i b i l i t y of exploring purchase of second-hand machinery may also be looked into \ihen the ne\/ machinery i s beyond the means

of firm..

3 . The es ta t e may or may not process i t s o\m

green leaf . Sometimes, a p a r t i a l arrangement

of processing may also be made. Part of the

green leaf can be processed by the firm i t s e l f

aiid the r e s t handed over to the cooperative

processing u n i t s . This rec'uces the investment

in plant and machinery.

U-. its r ega rds , the reg^avenation of p lan ta t ion , a

number of a l t e rna t ive choices may be a v a i l a b l e .

Replantat ion, extension, or i n f i l l i n g of the

vacancies are the a l t e r n a t i v e * courses of

ac t ion . The firm has to take up any one of

these according to i t s needs and a v a i l a b i l i t y

of f inance .

Assessing the Financial Requirements, for fixed a s s e t s for an ejcTstinp; firm;

Funds in an ex i s t i ng tea un i t may be needed for

the following i i i rposes;-

( i ) The size of a garden may not be optimal,

but there may be fallov/ land lying v/ith the

ovmers. Extension of p lanta t ions in these

373

t r a c t s 01 land may be considered.

For every addi t ional hectare of land sought

to be planted the cost work out to be

around Rs. 13,000 (cf. Chapter IX).

( i i ) Re p l an t ing ; - If the bushes are ageing _

a fact in Kmgra tea industry - a phased

rep lan ta t ion prograranie has to be taken up .

Replantat ion requi res not only the costs

of planting but a lso the replenishment

of losses of crops . The costs of these

a c t i v i t i e s work out to be around Rs . 17,000 rer h e c t a r e .

( i i i ) I n f i l l i n g of Vacancies:- Another nethcd of

rejuvenating the garden i s f i l l i n g the

vacancies, which iii3.y exist ' in many gardens.

I n f i l l i n g can be taken up at cheaper r a t e s than

extension or r e p l a n t a t i o n . For i n f i l l i n g

the vacancies of the order of 2^% to kQ%

the costs may range frorn R s . 2,000 to

Rs . 3,000 per hec ta re .

( i v ) Costs of Processing Machinery;- The

machines weer out due to constant use fo r

ouite some time, or they become obsolete

due to the fact tha t nev/ processes of

manufacturing have been developed in tea

indus t ry . Therefore, the machines

need to be replaced or new machines have

to be added. New machinery i s na tu ra l ly

expensive and the p lan ters may l ike to

explore the pos s ib i l i t y of acquiring

second hcnd machinery. The r a t e s for

374

Table V n i . 3

Cost cf I-iachinery

Najne cf the llc.chinc P r i c e of nev/ .R?ice of Second-machine ( i n H s . ) hand machine ( in R s . )

1 . a c l l e r 3 0 , 0 0 0 ^ 5,000

2 . Dr ie r 100,000 20,000

3 . C.T.C. liachine 13,000 12,000

h, a t a l k : - x t r ac to r

( E l e c t r i c ) 11,OCX) 11,000(new)

5. C u t t e r ^+,500 2,000

6. Pucca Tea S o r t e r 8,000 3,500

7 . Tea Breaker 6,000 3,000

3 . Green Leaf So r t e r . 5,000 2,5oO

Source : Informat ion c o l l e c t e d from U n i t s Under S.tudy.

375

new ajid second hand u n i t s of processing

machinery are shov/n in Table V I I I . S .

<v) Renovation of Factory Buj.ldings;:- The

amount needed for t h i s pirpose depends upon

the type of f a c i l i t i e s to be added.

I n s t a l l a t i o n of fermentation f a c i l i t i e s

or pro-vision of e l e c t r i c supplies may

require considerable amounts of money.

Minor alteutions and r e p a i r s of the

bui ldings may also be taken up to su i t

the requirements without incurr ing heavy

c a p i t a l expenditure,

Ga~)it3-1 Budget inp;

&.S we have already seen i-^iile analysing the

c a p i t a l s t ructure of the tea u n i t s under study, the

asse t s t ruc ture i s overwhelmingly dominated by fixed

a s s e t s . In a composite tea u n i t with both farm and

factory, land, bu i ld ings , and plant and machinery involve

the major cap i t a l investment, land (including tea bushes])

being the most ii'nportant. In respect of processing

u n i t s l ike Y Tea Es ta tes and B Cooperative, buildings and

plant and machinery are obviously the major fixed a s s e t s .

Their requirements would indeed depend upo© the size of the

u n i t . ]poT the ex i s t ing u n i t s , hovrever, the major problem

i s of r ep lan ta t ion i n the farm and replacement in the

fac to ry , vie sha l l concentrate mainly on these two

aspects of cap i t a l expendi ture . Here, as a lso in a l l

376

cap i t a l expenditure dec is ions , the management of tea u n i t s

i s faced. \/ith the problem of maJiing a current im/estment in

which benef i t s are expected to be received beyond one year

in the fu tu re . The economic j u s t i f i c a t i o n for a cap i ta l

expenditure prc[Tsi:ime, thc;ref ore , recruires a long range

estimate of p ro f i t s v/liich in turn involves a project ion

of sales and costs of operations for a period of yea rs . Thus,

a c ap i t a l expenditure prograr.ime requ.ires proper matching of

cos ts snd benefi ts over a period of years and is best

evaluated as a c a p i t a l budgeting i^reject.

The very survival of Kangra tea industry depends

on reri lantation and replacement, Ov/ing to the far-reaching

implicat ions and invclvoinent of large investments, c a p i t a l

expenditures on these projects have to be undertaken in a

planned i:ianner. The management of tea u n i t s have to e s t ab l i sh

object ives and goals as p r r t of r. master plan for long-range

survival oiid/or gro^.;th. For grov.'th to become a r e a l i t y ,

management should estimate action on a time schedule i/hich wi l l d i r e c t c ap i t a l in to the projects for r a i s ing the

overa l l re tu rns on iiivestment.

Capi tal budgeting technicfues may be prof i tably used

by managcm^ent of tea u n i t s in t h i s a rea . As 7«rntioned

e a r l i e r , c ap i t a l 'oud.geting i s the planning of expenditure

whose r e tu rns s t re tch themselves beyond one-year period -

i t i s the process of deciding v/hether or not to coar^it

resources to a project whose benef i t s would be spread over

several t:uno per iods . I t considers :a?oposed cap i t a l

outlays and the i r fin.-.ncing. The m.ain exercise involved,

in cap i t a l budgeting i s to r e l a t e the benef i t s to costs

377 in soaie reasonable manner /iTich would be ccncis tent with

the. basic objocti'se s of the f i rm. The process of c a p i t a l

budf^eting, thorcforo, imjolves de^elorAn^i e-yaluatinp and

choosing--capital p ro jec t s for investment. Projects are

chosen for two reasons: ( i ) economic re tu rns and/or ous

( i i ) e s s e n t i a l i t y . The l a t t e r i s a disaster:^ approach, or

a t l e a s t a passive appror^ch, to cap i ta l budgeting v/hcre

cap i t a l expenditures are taken up when they become unavoidable

for the very survival of the u n i t , Cften, under such

circunst^aices, eccncmic j u s t i f i c a t i o n of the project is the

f i r s t casua l ty . The s i tua t ion in Kangra tea invdustry has

loerhaps reachc;d t h i s stage so far as r en lan ta t ion and

replaceaent cpe concerned and. dynamic approach to c a p i t a l

budgeting, -/here c a p i t a l expenditures are planned on a

long-term basis after ident i fying the sjTaptoms in advance

and scanning the changing envii'oninents and oppor tun i t i e s .

There are d i f f e ren t , well-developed c r i t a r i a or

techniques available tha t can be used for analysing the

economic j u s t i f i c a t i o n of reiiLantation and replacement pro jec ts

of tea. u n i t s . The two general c r i t e r i a to be used a re :

(1) Ab i l i t y to pay back the amount of c ap i t a l

investment as cuickly as possible - t h i s i s cal led

/ Pay-back method of c ap i t a l budgeting.

(2) Ab i l i t y to re turn a minimum desired rat';: on

cap i t a l investment. There are two methods by \7hich ^ rc:turn on Investment jiiay be computed, v i s . ,

(a) Ave:ragc :iato of Ileturn, and

(b) Discounted Cash Flow ( i . e . , In te rna l kate of

rieturn and ket .Hresent Value) .

378 llic ]payback metlica i s useful in respect of a u n i t

vmicli i s short of fun;ls an:' \/cints the i r in-vestment buck as

quickly as poss ib le . I t i s also a more p rac t i ca l approach

in so f:r . as the er t i t ia tes beyond a few years in the future

beconr: loss ce r ta in 5MC to uncer ta in ly ana r i s k , Vlliere the

est imates of future earnings/savings are not subject to v/ide

f luc tua t ions ana uncer ta in ly , the r a t e of r e tu rn method may be

more adviscuolc. The n,vf=rage r a t e of r e tu rn method may be

distinguishc.; from Discounted Cash Flow (DCF) . The former takes into consi:l"r.:'.ticn simole accoiinting r e tu rn , on an a-verage, for tha an t i re l i f e of the project and can be eas i ly calculated

if the or ig incl cost of tha project and estimates of future

earnings/sa'^-'-iaigs ara loaovm. In D.C.F. method, the future

e;.rnings crc reduced to the i r •rresont value, and these^matched

v;ith tha I n i t i a l invo stment/cost for f inding out the in t e rna l

(DCF) L'ata of r e t u r n . This method i s ce r t a in ly be t te r and more

s c i e n t i f i c , because tima involves cost ( i n t e r e s t ) and cash

receivad at Iciter date cannot be equated with the cash received

e a r l i e r . :-:;nca^tha faiturc r ece ip t s must be discounted a t a

r a t e of i n t e r e s t to arr ive a t the i r present values . In a

v;ay, i t i s a system of c - l cu la t ing com.pound r a t e of in te res t^

in revoi-'se order. The D.C-F-/;lntern3,l ro te of r e tu rn i s that

r a t e at whiich the present value of the future streams of

inccm.e -./111 be eeual to the present va2ue of cost or investment.

This r a t e i s usee'' as. tha cut-off ra te for the choice of a

p r o j e c t . I f the cost of c a p i t a l i s higher than t h i s r a t e , the •

nroject i s unprc f i t ab le . In tea industry, t h i s r a t e for

r en lan ta t ion or rr ^ll^!caa^nt will indicate the cost,ahdl.so the

sources; cf funds vmich may or may not be used for f:Lnancing

the sch:;:-ia, "fet j 'rosent value i s calcul;ited when the cost

of c a p i t a l or cut-off r a t e i s given anri we v/aiit to find oat

379 the p r o f i t a b i l i t y of the pro jec t . In t h i s ctsc the ertlinated

future c-riPnincs arc clisccunteJ cit thr 2i"ven ra te vnd the

present value ccinprrcd v/ith i n i t i a l invcstMent / c o s t . If the present value i s iti excess thcrrecf, the project i s clfe,sir-:ble,

1111 .3 .1 .1 .2 . \lGT]ilnr Capi ta l

The te rn './orklnp; c ap i t e l o rd ina r i ly stands for tha t

part of uhc: capita^, v/hich i s ri.jquirec' for the fini-ncin^ of ^vorking

or cur.-ent noc;e s of a f irm. These may be dor the purchase

of raw mater ia l s witli a viev/ to processing the ur.terie.ls into

f inished products end for meeting the dry-to-day expenses

iSMch as pa^TQsnt of s a l a r i e s anl \jarps, r e n t , r a t e s and taxes ,

s ta t ionery , e t c . I t i s usuel ly invested in rav; mate r ia l s ,

stock of per t ly oi' fu aiy finished goods, accounts rece ivab les , .marketable s e c u r i t i e s , and cash. Capi ta l in a l l these forms

i s ccnstont ly en:"! ruickl;/ beine converted into caslT 3Jid t h i s

cash f lovs out agein in exchoJige for other form of irorking

capitelL. Worlcing ca . - i ta l i s , t hus , constant ly ' revolv ing ' or

' c i r c u l a t i n g ' , or i t i s being' turned o v e r ' . Hence,it

generally involves t;;ii"; use of short-term funds in business ,

Adeouacy of -/orlcing c a p i t a l helps a l o t in m.aintaining the

l i q u i d i t y end the c red i t standing of a f i rm.

Quant i ta t ively speakjjig, working capite.l i s taken

to mean t o t a l current a s s e t s . This i s a good -./orking

de f in i t ion for assessing the short-term f inenc ia l recuirements,

as the current r s s e t s cons t i tu te the t o t a l funds avai lable for

operating purposes, ilany ex]>erts v.'ould, however, define

working cai . i te l as the excess of current a s se t s over current

l i a b i l i t i e s . To avoid confusion, \/e may c a l l the former as

'gross working c a p i t a l ' end the l a t t e r ' ne t working c a p i t a l ' .

380 The l a t t a r ic e. aualitati-ve cicfiniticn cf ^jorkiiig c a p i t a l , as

i t et^aiDlos the investors and c r e d i t o r s , as also the management,

of a fir.-i to judge i t s f inancia l rjcundness snd margin of

p ro tec t ion . Obviously', the, excess of current asse t s over current

l i a b i l i t i e s iiiust have been financed by some long-term sources

of funds lilcc re ta ined eoj-nings or fixed asse t s conversion

(deprec ia t ion) . The net working cap i t a l i s also iraportant from

rnaiagciicnt point of viei/, A-ltbcugh the en t i re current asse t s

sxe always revolving rvnf^. converted into cash within a short

r)eTlc:l, yet e portion cf the seiiie ali/ays remains blocked up .

This i s the permanent rjorticn of v/crking Ccipitel and may be

t rea ted l i ' ie cny other fixed a.'; set for f inancing. The net v;orking c a p i t a l , i f properly assessed, would represent the

permanent i/orking c a o i t a l . This assumes added significance for

^••rorliing cap i t a l managem.ent, as i t provides greater l i q u i d i t y

to the f i rm.

Liquidi ty Ilanagemenftt

Ilanagement of l i o u i d i t y aims a t deciding the optimum

amount c\nd compositions of assets and l i a b i l i t i e s . Every mix has

a particulaj" l eve l of r i s k and p r o f i t a b i l i t y . The greater the

r e l a t i v e "Droportions of l i au id a s s e t s , the less the r i s k of h

running out of cash, a l l other things being equa l . However,

in such a c;: sv, th? p rof i t ab i l i ty i s l e s s e r . Si i^ i lar ly , a long

maturity schedule of borrowings reduces r i s k of cash insolvency

but the prof i t l eve l i s l e s s . The l i q u i d i t y management, thus, involves a trade off between r i s k and p r o f i t a b i l i t y . Three specif ic ruor t ions , v/hich thp estat^"- management w i l l be required to ask i t s e l f , a re :

h. Van Ilorne, James C, , p-pcit, p . ^+15.

3S1

A M O U N T "3- > P^upgES

1 m

f

382 ( i ) Vlhat are the optimal le-vels of investment in variou;

current asF^ets? (ii)\:j;iiat i s the optim:a3- mix of short term in

r e l a t i on to long term financing?

( i i i ) VriTat are the appropriate means by v;hich to

finance on a short term basis?

To deciae the mix of company f inanc ia l needs to be

met by short term or long term, sources, an^ 'Hedging Approach'

may be suggested.

Hedging Ap-orocch

If the e s t a t e uses t h i s approa.ch, then every

f inanc ia l need wi l l bo met by a financing instrument of the

same matur i ty . For t h i s purpose, the working c a p i t a l needs

can be c lass i f ied as : Permanent needs and sea son aJ. n c d s .

For example, some permanent v;orkers have to be e.iiployed by

the es t a t e management and theii ' salai ' ies have to be paid and

at the peah. seasons addi t ional labour has to be contraicted and,

thus , addit ional v/ages liave to be paid. Thus, the volume of •..-..•'

working cap i t a l (current ac:sets) would vary from period to

period. I t w i l l be the highest in peaJ^ seasons and the lov/est in off-season. But i t wi l l not go below a absolute

minimum in any per iod . The amount of working c a p i t a l above

these minii.iums gc:'nerajly represents the f luc tua t ing or

seasonal workan[' c a p i t a l reouirements. This can be depicted

more striicLngly in the foriij of a diagram (figure V H I . l ) .

According to the hedging a.p'-iroach, f luc tua t ing

requirements of working cap i t a l have to 3e financed hy the

short- tcr.;, debt exc lus ive ly . The permanent working c a p i t a l ,

l ike fixed a s se t s , should be financed by long term sources of

funds. This ,jcu3_d ensure proper l i c iu id i ty . If v;e go to

finance the en t i re ./orking capita?^ nc? ds by long term funds,

383 th:.- l i r a i i^ l t ; ' vculJ, be the naxiiiium, but the cos t s wi l l be

jirohibiti-vG occuss ve ;7ij.l \:v-vo to Iveep some funds id le \jith

us e-ven •.f/.cn they :JT3 not neelod. Cn the countr;:a:*y, i f v;e

go for short- tena financing alone, the p r o f i t a b i l i t y .nay

incrcano Ijut l i r u i o i t y v/ij.l be adversely effected,

CT)eratina Cycle Concept of Uorkina Ca'Utal

Ihc cperatiny cycle (G.G.) conceat of -/orking cap i t a l

i s a new concept th:: t oay be prof i tably used by the liianagCEient

of t ea u n i t s to assess the i r ^•/orhlng cae i t a l requ;Lrencntson a

inor'- rat ional. Dasis.'^ in br ief , according to t h i s concept,

V7crking cap i t a l i s j'-iecnt to support a l l operational a c t i v i t i e s

of th-? f i r a ^iiC. cc::ts thereof. Under t h i s njethod, t o t a l -

operating exg^enses for a period are divieed by the number of

operating cycles in th'- re levant period to find out the cash

b^.sis of acrhing capitrd.. Cperatmg cycle re;n?esents the

aericd (s.) daring v/hic::- investiiient of one uni t of ijieney wil l

reaain blocked t i l l recovery cut of revenue or r e c e i p t .

The en t i r e czercise iiivclve s four ste;")s, v i z . ,

( i ) Coirgutaticn of Cperating Cycle Period;

(i i)huaber of Caerating Cycles for th:

( i l l ) Cp' r a t i a g expenses for the year; and

( iv) Ces): vForkiag G a d t n l rceuirr-iaent.

J - ^ - 5

5. A systeia-tic exposit ion of 0 .C . concept i s contained in C. Fori: ane J ,d .a iadson , 'dcrkina Ca^Utal, H;:cmii.lan Co., Pew York, 1953, Chapter 3, Also see Bhabatosh Brueerjee, 'Oi)eratJ2ir Cycle Ccnceat of hcrking Ca:" i ta l ' , Indian- Journp.1 of Accounting, Vol. I l l , Part I I , December, 1973, pp . i-i-6-53.

384 Cporrting Cycle period i s thr sura t o t a l of -lays for

w" icb cash funds reriain blocked in roA r ia ter i^ ls an" s to re s ,

procossinp, finisiiad goods in store and rece iabx^s le ss c r e d i t o r s '

turnoA/er (in cwiys). The nu.inbT'r of days for each of the abo^/e

items C^'H be ccs i ly cplculctcd frciii the accounting r rcords or'

the ^SL'-ofit and Loss statement.

The riunb'r of opcratina cycles i s deternined by di-vidlng the t o t a l period {36'^j days for a. year.) by thp operating cycle period. The conputation of cperatin/^ expenses i s not d i f f i c u l t , as these ere r ead i ly availalDle from the Prof i t and Loss

statement or frci:; the icccunting records . Total operc:.ting

expenses for tmy period wi l l include expenses l ike Mater ia l s ,

wages, pc:a;r -nd fue l , establishment and se l l ing and d i s t r i bu t i on

expenses. Depreciation or cuiiortisation of in tangibles have to

be exc;had:jd, r.s these are non-cash c o s t s . S imi lar ly , taxes and

e i-yiien.j •• ( or withdrawals) are also to be excluded in

computing Cj;^ating expenses for the period.

'.iciaiing e a a i t e l recnairevjent csxri nov; be ea s i l y computed

by dividing the operr-ttog expenses by the number of operating

cyc le s . This concept det^reeines the cash recaiirements of the working cap i t a l r e l c t i n g to opertLting as:>acts of the business , ,

v i z . , buying, manufacturing, se l l ing , e t c . Operating concept

of working c r p i t a l assumes imiDortance not only from the point I

of view of assessKient iDut also because i t f a c i l i t a t e s both

forecas t ing end control of working c a p i t a l , horeover, since

i t i s a function of the volume of a c t i v i t y , i t focuses

on demand for l irruid' i.ioney, i . e . , l i o u i e i t y .

38*5 VII I .3 .1 .2 . Gai) i tal isat ion^

;a GapitaliSc..tion, or cap i t a l s t ruc ture , of a tej

firm would l a rge ly depend on two th ings , v i z . , {i)

requirement of short terEi and long term funds, and

( i i ) the sources of these funds normally available to

the tea u n i t s in Kangra. Apart from the equity cap i t a l

and the plough-back, these u n i t s ^<^ll have to depend

upon the external sources for the i r f inanc ia l requirements.

Short Term Finances;

The Kaigra Tea P lan te r ' s Marketing Society

provides advances on the sa les proceeds to the tune

of 60;a of the value of seiles. These advances are used

by the p lan ters to meet the i r working c a p i t a l needs .

The Kangra Centr&l Cooperative Bank i s another agency

which c?.in provide short term loans to the tea p l a n t e r s .

In f ac t , the p lanters need a cash c red i t l imi t ra ther

than short term loans because the working cap i t a l

needs are not s ign i f ican t ,. vA i Operating Cycle i s

very short and there i s a very swift turnover.

Long Term Fincnces;.

For every conceivable long term requirement of

the p lan te rs Tea Boai'd of India provides f inances .

Various schemes of f inanc ia l assistance for tea industry

are outl ined in a brochure publ i shed^ea 3oard^i:ndia.

6. Pinancinr- of tea industry in K^angra i s studied jji d S ^ l s by iLgricultural Refinance Corporation in.Re£ort. O n l ^ a L Tea P l an t e r s , . ( 1965 ) . For schemes of H i S t l t r ^ i i t i H ^ s e e the ^^<^/^l%:'^^l^^,. FinanciaLAssisiance_For_Tea^Jndustn:y Calcut ta , 1973•

386

i±) Tea Plantat ion Finance Scheme;

(ii.) Re pi snta t ion Subsidy Scheme;

( i i i ) Tea Machinery Hire-Rirchase Scheme.

(1) Tea Plantat ion Finance Scheme;

The Tea Board pro-vides loan for 8 years for

the r ep lan t ing , replacements and/or extension of old

tea ai^eas through i t s replaj i ta t ion finance scheme to

the e s t a t e s , k. loan of Rs . 13j750/- per hectare

f o r ' h i l l gardens i s provided. The r a t e of i n t e r e s t

i s 7 % per annum with a rebate of 1/2^ for prompt

payment. The amount of loan i s recovered from 7th

t o l^th yevx after the loan i s advanced. The loan

i s given in four ins ta lments .

( i i ) Replantation Subsidy scheme;-

A rep lan ta t ion subsidy of R s . 5jOOO per hectare

i s provided to the p lan ters in h i l l s in s ix instalments.

Replacement planting i s allov/ed t h i s subsidy.

( i i i ) Tea Machinery Hire-Pur chase Scheme;-

Under t h i s hire-pirch&se scheme, the tea

Board provides a loan to the extent of Rs . 2 laWns

to tea e s t a t e s ' aiid f ac to r i e s engaged in manufacture

of t e a . I n t e r e s t i s charged a t the r a t e of 7 i ^ .

In the case of co-operative f a c t o r i e s , the r a t e of

i n t e r e s t i s 6-3- .

S t a t e Governments also give loans t o the

p lanters espec ia l ly to the co-operative processing

s o c i e t i e s . S ta te Government a lso cont r ibutes to

equity c a p i t a l of the co-operative processing

387 u n i t s .

VIII . 3 . 2 . Accountin£_andL_Gontrol. "

Any accounting as tern for small u n i t s s t a r t s

with record teeping. The objective should, howe-ver,

he two-fold, v i z . , ( i ) accurate determination of

incone as welj. as the f inanc ia l posi t ion of the firm

at the end of the accounting year, and ( i i ) use of

recorded fac t s for planning and decision making.

As regards the (i!), v/e suggest keeping of a complete

se t of books of accounts, of course " ccmensurate

T,ath the peculiar requirements of a tea u n i t , based

on the double ent ry system of book-keeping. The

accuracy and- consistency in record keeping requi res

proper understanding of the well-developed 'general ly

accepted p r i nc ip l e s , concepts and conventions' of

accounting. The prevai l ing system of accounting in

the u n i t s under study, as vje have observed e a r l i e r , i s

hopelessly inadequate and defective more due to the

pract ice of employing untrained and unqual if ied

accountants thani any thing e l s e . • I t hardly needs

r e i t e r a t i o n tha t improvement in the area of accounting

and control would la rge ly depend e i the r on the proper

t r a in ing of the ex i s t ing accountants or replacing

them v/ith the qual if ied ones ^ o are well-versed in the

modern account:Lng p r a c t i c e s .

Moreover, the requirements of the tea un i t s

wi l l also have to be taken in to account. The records

of a t ea u n i t w i l l obviously dif fer from those of

other manufacturing u n i t s in many respects I t i s

m

388

a d v i s a b l e , P a r t i m l a r l y from planning and c o n t r o l

po in t of view, to keep sepa ra t e account ing r e c o r d s

for the farm and the f a c t o r y , viiich could be l a t e r

s y n t h e s i s e d i n t o one composite u n i t for the purpose

of p r e p a r m g f i n a l accounts of the firm a t the c lose

of the f i n a n c i a l y e a r . Again , the r eco rd keeping

should no t be r e s t r i c t e d to f i n a n c i a l account ing

a l o n e . Both f i n a n c i a l £tnd n o n - f i n a n c i a l r e c o r d s / a c c o u n t s

have t o be mainta ined s e p a r a t e l y f o r p l a n t a t i o n

and p r o c e s s i n g . These account ing r e c o r d s , i f p roper ly

a i n t a i n e d , would n o t only r e s u l t in p rope r ly

ca s t ed P r o f i t and Loss Account and the Balance Shee t ,

bu t a l so i n t h e development of fu tu re p l ans of a c t i o n .

Use of v a r i o u s a n a l y t i c a l t o o l s of f i n a n c i a l management

and management account ing for decisL on-making,

p lanning and c o n t r o l i s then p o s s i b l e .

V I I I . 3 . 2 . 1 . Rrepara t ion of Income S ta t emen t s i n a P l a n t a t i o n System.

Stre J»r«J>ar«d The incane s t a t emen t s in an e s t a t e , in t h r e e

s t a g e s s -

( i ) Recording of v a r i o u s t r a n s a c t i o n s

in the farm, f a c t o r y and t r a n s p o r t a t i o n

system i s a cont inuous process through

out the y e a r ,

( i i ) B r e p a r a t i o n of Trading Account r e q u i r e s

the matching of the e n t i r e d i r e c t

expenses v;ith the revenues from o p e r a t i o n s

for the per iod and r e s u l t s i n e i t h e r

gross p r o f i t or g ross l o s s . The major

3S9 items of expense here are hired labour,

fuel and po\.;er charges and f e r t i l i z e r

c o s t s . The major sources of income

are the sales of t e a .

( i i i ) After preparing the Trading Account,

Prof i t and Loss Statement i s prepared

by taking into account i nd i r ec t expenses

and non-operating income. Indi rec t

expenses cannot be d i r e c t l y associated

vdth the revenue (sa les) but these are

associated with the period during ^ i c h

the revenue has been earned. Hence,

they are also known as period c o s t s .

These costs must be met o i t of the

gross margin to arr ive a t the net p ro f i t s

(or l o s s ) . I t i s advisable to arrange

ind i r ec t expenses under proper c l a s s i ­

f i c a t i o n s , such as establishment, s e l l i ng

and d i s t r i b u t i o n , r e p a i r s ajid depreciat ion

cos t s , e t c . , ^^^lere-ever possible so as

to ident i fy the areas where major costs

are incurred (cf. Table VIII 5)»

V I I I . 3 . 2 . 2 . Preparation of Balance Shee t ; -

, Before preparing the Balance Sheet ,a complete

jjiventory of the fw^A : a s se t s has J to be prepared.

The s ta teuent of these inventories va i l help in the

preparat ion of Balance Sheet on a more s c i e n t i f i c

b a s i s . These inventor ies provide de ta i led information

390 about the important asse ts of a firm. I t may,

hoTvever, be ncntioned tha t these statements are

based on T accounts prepared in f i rm's ledgers of

the per iod.

Once the general inventory of the es t a t e

i s taken, i t i s very simple to prepare the Balance

Sheet . . . The asset side of the Balance Sheet depicts

the value of fixed a s s e t s , investments, current

a s s e t s , locns end advances, e t c . On the l i a b i l i t i e s

s i d e , v;e have share c a p i t a l , reserve and surplus ,

secured lorj is , unsecured loans , current l i a b i l i t i e s

and provis ions , (cf. VIII.1 a & b ) . Brovisions

may also be shov/n on the as se t s s ides of the Balance

S,heet as deductions froiii the re levant a s s e t s ,

VIII ,3 .2 . 3 . Techniques of Financia l .knalysis:-

There are a number of tools and techniques

avai lable v.dth a f inanc ia l manager to analyse the

f inanc ia l posit ion of a f irm. But for a tea estgite

we sha]-l lii.iit our discussion to the following

techniques: -7

1 . Funds Flow Analysis :

Funds flow analysis i s the technique by which

we study the not funds flow between two points of

t ime. The period in between these tv/o points i s a

f inanc ia l ye tx . The flow of funds in a tea u n i t can

be studied by:

7 , Adapted fi'cm Van tlornfe , James C , Op.cit pp.677-78.

391 (i.) Classifying the chaiges occuring

in the Bal;.nce Sheet between two points

of t ime, in to those which increase

funds and those v/hich decrease funds;

( i i ) Classifying the factors In Income S t a t e ­

ment into those which increase the

ftinds and those which decrease these ,

and

( i i i ) Consolidating the information into

sources and uses of funds statement.

Infj.oA'7 of funds incurs \ hen there i s a net

decrease in current as:.'ets or fixed a s s e t s , a net

increase in any l i a b i l i t y and funds pro-vided by

opera t ions . Cutflow of funds v/ould r e s u l t from the

sita a t ions of a net increase in current a s s e t s , a

ne t increase in any l i a b i l i t y , any increase in fixed

a s s e t s , casljjayiiients to ovjners and investments made

by the firm, in outside s e c u r i t i e s . The t o t a l inflows

are equal to the outflows.

Information supplied by these statements gives

an i n ^ g h t into the f inanc ia l operations of the u n i t s .

I t helps in detect ing the snags in the functioning of

a u n i t . These statements t e l l how the funds v;ere

used in a pa r t i cu la r period and fran where they came,

thereby pointing out snags, i f any in f inaiicial policy

and i t s opera t ions . Balance Sheet alone cannot provide

t h i s information in such a strilcing manner .

392

I I . Ratio Analys i s .

Ratio aiialysis i s a system of deriving quant i ta t ive

measures or guides concerning the expected, of the firm

to Lieet i t s future f inanc ia l obligat ions or expocta t ions .

I t i s based on the corn imitation, analysis and in t e rp re t a t ion

of accounting r a t i o s . An accounting reitio i s an expression

of r e l a t ionsh ip hctv.'een two sets of accounting data

presented iji tli^ Bcdance Sheet and the Prof i t and Loss

account of a f irr.i. it. Isrge nutiber of accounting r a t i o s

may be calculated for analysis and in t e rp re t a t ion^ hov/sver,

here v/e v/culd lil':e to concentrate only on a fe-.-j ii.roortant

r a t i o s re levant to tea indus t ry . Ratios can be c l a s s i f i ed

in to four catogorios for our purposes:-

( i ) A-ctivit?/ Ratios v/hich r.ieasurc the efficiency of

management's use of i t s resources . The irai^ortant r a t i o s

under t h i s lie.-.d a r e : -

(.a.) Fixed .kssets Turnover Ratios

This r a t i o i s uocsured by the foriuula; Ifet Siales . Fixed Assets

Sales cjid fixed asEcts both are expressed in money va lue .

Since fixed as.aotc are reca;iired tc increase production,

the sa les ;.aist also increase and a proper balance betv/een

tiiese two I s a::iust. Higher the r a t i o , be t t e r wi l l be the

use of these a s s e t s .

(b) Tota^l Assets Turnover Rat io ;

Tills r a t i o i s given by Sa les . F^r- v/e not only Total Asse t s .

embrace fixed asr:ats but current asse t s a l so , because

393

a l l the a s se t s contribute tc prodxicticn and s a l e s .

This r a t i o v/ill indicate the fax:t tha t i f t h i s r a t i o

i s l e s s th-ia the standard or normal, fixed a sse t s

tornover oeiuic ncrna l , i t i s the i n c r e a s e ^ u r r e n t

assets wnich i s unse t t ing the balance.

( i i ) Licjuidity Hat ios :

These r a t i o s indicate the capacity of the

firiii t c meet i t s short term obligat ions in tihue . The

main r a t i o s to be disC'issed under t h i s head a r e ; -

Gurrcnt Ra t io ; This r a t i o gives ins igh t into

the present cash sol-vency of the firm and i t s

a b i l i t y to remain solvent in future , Current

r a t i o i s measured by current asse t s The

cur re nt l i ab H i t ie s .

higher the r a t i o , the greater i s the a b i l i t y of the

es ta te in Dooting i t s ob l iga t ions . But a very high

r a t i o may also indicate tha t the current asse ts are

lying id le and arc not ouiclily turnecj^ver.

liacll Tc s t Ilatio.; This is also ioicv/n as cpich

r a t i o atid i t tsJios into account only those

current as;:cts -.jhich could be cfuichly available

t c -neet the l i a b i l i t y . Inventories are the

l e a s t l i a ^ d portion- of the current a s s e t s , so

these arc subtracted fl-orn the current assets to

meaj^r, t h i s r a t i o . This r a t i o i s thus given bys n-n-wint /Vs'^ets Less-Inventor ies

Current L i a b i l i t i e s

This r a t i o concentrates on cash, marketable

s e c u r i t i e s and receivables in r e l a t i o n to current

394 l i a b i l i t i e s . This ind ica tes in a acre s t r ik ing manner

the liquid]ity of the f i rm. Though there i s no hard

and fas t r u l e , yet a quick r a t i o of 1:1 is supposed to

be quits sat isfactory/ .

Inventory Turnc-ver Hat io ; i s the r a t i o betv/een

the cost of goods sold and average Inventory

C' Opening Inventory + Closing InventoryQ i 2 - J .

This r a t i o t e l l s us hew soon (:xi.::ber of tiraes)

invsntcry i s being converted into sa les and as such

i t i s a good indicator of eff iciency in inventory or

working capital- ncnageuent. V&en the tv/elve months of

the yecJ" ±-: divided by the r a t i o Oi.e.,_12 l 0 Inventory Turnover X 5 Ratio 0

This gives the mi:-ber of ncnths ' production kept as

inventory. i«. lev/ turnover r a t i o or uore nuhiber of

months vrould indicate inventory accu-iulation.

( i i i ) O^mershin Rat ios ;

There are also "aiovrn as leverage r a t i o s and

these meas'jre the e r t en t to which the es ta te i s

financing i t s business by procurjjig d e b t s . This i s

an indicator of long-term liqu.idity and sclvcincy of

the firm. The following r a t i o s are studied under

t h i s head;

npbt Uruity i i a t i o : This i s obtained by dividjjig

the t o t a l debt of the firm (including the current

i i«b^"i i t ies) oy i t s ne t v/orth 0. Total Debt 0 . U l e t .iorth 0

Sometimes,if the intangible 'asse ts are s ign i f i can t ,

we subtract these from t o t a l 2fet Worth to com::xite

395

tangible Het Uortb.

^ low va'-ixie cf t h i s r a t i o indica tes that the e s t a t e

under study i s not t rading on equity, i . e . avai l ing of

the debt f a c i l i t i e s for financing i t s bus iness . Thus, a

s t r ingent f inancia l posi t ion has been imposed by the

managenent by discouraging deb t s . On the other hand,

a very high r a t i o would indicate too rmch dependence on borrov/ed funds v/ith a fixed charge. With low

overal l p r o f i t a b i l i t y , t h i s i s going to affect the long

term f inanc ia l posi t ion of the firm adversely. In

Kangra tea industry we find tha t apar t from the

Co-operatiV3 Unit , other u n i t s have very low debt

equity r a t i o . Cne of the reasons of t h i s i s that

re turn on c a p i t a l i n the industry does not favourably

match the cost cf deb t .

( iv) P r o f i t a b i l i t y Ratios

These r a t i o s measure the r e tu rns generated by

sales and investment and thus becom.e an indicator of

the eff ic iency of opers.tions of f irm.

P r o f i t n b i l i t y in Relat ions to Sales

Gross Prof i t margin and Ilet P ro f i t margin axe

two r a t i o s v/hich wc consider in r e l a t i o n to s a l e s . Gross ilargin, i . e . ,

Gross P ro f i t ncrgin = Scales Less Cost of Good SiOld Sales

and

Net Prof i t margin = Het Prof i t after_tax£S:L S i a l e s .

•V

396

For the mrpose of ana lys i s , the two r a t i o s

may be considered toge the r . If gross p ro f i t nargm

does not indicate r:7uch -variation, but net prof i t

margin is decl ining over a period of several years ,

we know tha t c::penses and taxes are increasing and thus^

remedial measures to r e t r i eve the p r o f i t a b i l i t y

posi t ion wil l hing around cu r t a i l i ng eijcpenses. If,

the case i s tha t gross "margin is undergoing change

tha t means, costs of production r e l a t i v e to sales

alue have increased, so v;e should t ry to cut costs

of production or increase our revenue by adjusting

cur p r i c e s ; i f poss ib le .

Us in,'-; l ia t io .Analysis:

Two typos of comparisons are made by firms v;hile

analysing the values of various r a t i o s . The r a t i o s of

the f i rm are compared over years and they are compared

vdth overal l industry averages. In f a c t , there are

no absolute values of these r a t i o s which can be

adhered to Ixit the r e l a t i v e posi t ion of the firm over

years and a lso in comparison to the u n i t s i n the same

industry ind ica tes viiether the f inanc ia l posit ion

of the company i s sound or not or >4iether i t i s

improving or d e t e r i o r a t i n g .

I l l . Break Bvon JLnalysis:

For finding the operating leverage of a

tea u n i t . Break Even M a l y s i s can be taken u p . The

analys is suggests a level of operation, the production

beyond which i d l l be p r o f i t a b l e . Hhile planning

397

production for achieving a ce r t a in r e t u r n , t h i s tool

can be used by the managers. A break up of t o t a l

costs in fixed and -variable costs has to be attempted,

at the c u t s e t . For example, the depreciat ion of

machinery and bushes m i l take place, regardless of

the leve l of production, a imi l a r l y , overheads in the

factory, , faxn and the office are a lso incurred,

regard less of the l eve l of production- a c t i v i t y .

But the d i rec t labour cos t s , pov/er, f ae l e t c . vary

with the l eve l of production. These form the

variable c o s t s . The revenue earned ^d l l again be

re la tod v/ith the l eve l of operat ion. Me have to

plan such a level of production, a t which vje meet

a l l ourfcosts and are l e f t with a margin of p r o f i t .

The margin on the f i r s t few u n i t s goes t o meet

fixed costs and then only we s t a r t earning net

p r o f i t s .

If ' F ' are the t o t a l fixed c o s t s , X the

nu..iber of u n i t s produced, V(X) the var iable costs

incurred in producing X u n i t s and P(X) the revenue

earned on the produce^ t o break even, F + V (X) =;1P(X)..1

here , V i s the var iable cost of production per un i t and

P the price per u n i t , then for cut off volume X,

C P - V) X = F,

or X = F :P - V

Or Brenk Even Point = Fixed Costs Kargin per u n i t .

398

To i l l u s t r a t e , l e t us tal^e a r ea l example from B

Cooperative U n i t . They have plans to s t a r t sa les

of t ea in consumer packs. The fixed costs of pack­

aging and adaitionc:,! overheads are estimated t o be

t o R s . 9,000 per annum. They hope to s e l l the tea

a t Rs . 8.00 per kg . , and the i r production costs _;

are Rs . k jor kg. The vtiriable cost for packing i s

Re. 1.00 per kg. The average price they r e a l i s e in

the market for t he i r loose teas i s Rs . V.5o, thus,

giving them a margin of 50 paise per kg . on the i r

loose t e a s . The margin on packing \^11 increase to

Rs . 3 /kg. , so the. margin shal l improve by Rs . 2.50

per kg .

The break even point for t h i s venture shal l be

3600 kgs. , i . e . i f the factory packages tea below t h i s

cut off volume, packaging wi l l not be a prof i table

venture .

IV. Cost of Production Anal?/sis.

h. u n i t of tea industry cons is t s of two production ut»it •

sub-systems - plejitation and processings^ I t i s

advisable to compute cost of production of the, two

sub-systems scpsxately. The costmg system most

appropriate for a tea u n i t shal l be a combination of

u n i t and process cos t ing . F i r s t l y , the cost of green

leaf has to be determined. The green leaf (f inished

product) of the farm wil l then be t ransfer red to the

factory, as raw mater ia l s for processing. The

system suggested involves the preparation of the

follpwiJig cost stEitements:-

399

GCaT CF EIOHJCTIOJT

(SIIEI^ LEAF)

To labour clacxgos (f arming j p r a c l i i n g , e t c . )

To F e r t i l i s e r s €: P e s t i c i d e s

To A .nor i i s - t i on of r e p l a n t a t i o n c o s t .

To Deprec ia t ion of Farra r" qu i IJM e n t s /Yci: i c i-C s

To Tr an spor t atio:;i of Green Leaf t c tbe F a c t o r y .

To Land Rcyerv.e.

0 By sa le of ^ firewood ^ and Grass , J e t c . , I 0 3y Cost of H Green Leaf C ( t r a n s f e r r e d 0 t c the 0 F a c t o r y ) . t K

I

Tot^a.:-

400

COST OF HIOPUCTIOIT OF F3I]aHED TEAiS

0 fi Coiaponent of Cos t . jj T o t a l (Us.) 0 Cost per k g . ( r s . )

Raw m a t e r i a l s ('green l e a f ) froPi tbe farm. ;

D i r e c t l abour (.Processing) ^

PD%^T and S 'uel .

Other D i r e c t I x f c n s e s . . .

Excise Duty/GesL..

Ai.Fricie Cos t .

Fac tory Overheads;

Super-visors ' S-alary, ' Maint3nance and Deprec i a t ion

- of ELant and Machinery/ Fac to ry B u i l d i n g . : \

S t o r e s . \

Other s .

B . Viorks Cost,

Es t ab l i shmen t Overheads: Office S a l a r y . Postage and S t a t i o n e r y ,

R e n t .

i o id i t F e e .

O t h e r s .

C. Office C o s t .

c c n t d , . . 2

401 SiTatement H contd.

Gonponcnt of Cost. j Total C^^.) J Cost per kg.(RsO.

Se l l ing and Dis t r ibu t ion Overheads.

TranspOrtation-»Cost. •

Salary of 3>ales personnel .

Goinrriissions on s^ l e s .

Vigrehousinr: Gl^rges.

D. Cost of Production:-

:PrGfit or Loss:

Value of s a l e s / s e l l i n g Pr ice :

402

In order to arri-ve a t the t o t a l and u n i t cos t

of production in the manner suggested above expense

accounts have to be properly c l a s s i f i ed and maintained

separa te ly . Since the se l l ing price of teas i s beyond

the control of tlie tea u n i t s , the prof i t i s the

difference between the se l l ing price and the cost of

production, ra ther than a margin decided by the

management and added to the c o s t .

In case, the firm manufactures two types of

t e a , v i z . , Green and Black, two cos t - shee t s

(Statement I I ) wi l l have to be prepared separately

for each v a r i e t y . Here, the main problem shal l

r e l a t e to the a l loca t ion of overheads. A.s regards

the manufacturjjig overheads, these may be a l loca ted

on the basis of 'machine hour r a t e ' . Under t h i s

method, the t o t a l cost (including labour, supervision

deprecia t ion, e t c . ) of operating a machine for one

hour i s calculated and t o t a l overheads are a l loca ted

on the basis of number of hcurs^ each machine i s used

for -processing a pa r t i cu la r type of t e a , mult ipl ied

by the machine hour r a t e . Other overheads:- e s t ab l i sh ­

ment, s e l l i ng end d i s t r ib i tion,may be a l located on the

bas is of quantity of each type of tea manufactured.

The over a l l cost ing system suggested above

may be iixiprcved further by introducing a t ransfer

price mechaivism. This i s a modern concept of

r e spons ib i l i t y accounting viith a strong motivational

overtone for the managers of sub-units of an

403 orgaii isat ion. Under t h i s system, i^lejitation i s to be

taken.as a seni-autonomous di-vision, cal led a ^ o f i t

centre^, of the tea u n i t . The manager of a p ro f i t

centre i s responsible not only for costs but a lso

for ec-j?ning p ro f i t s for h i s cen t r e . T^is i s done

by deciding upo4 a p r i ce , cal led t ransfer price^ to

be charged on the goods or services t ransfer red from

there to the ether u n i t s of the same organisat ion.

The t ransfer price i s an in t ra - f i rm system of

pr ic ing goods or ser-vices sold (or t rans fe r red) from

one prof i t centre to another. The t ransfer price ,g^ ,

in p r a c t i c e , MCJ^IBS froin cos t -p lus througli opportunity

cost to pre-vailing market p r i c e . What vye suggest

for Kangra tea u n i t s for deciding the t ransfer price

of green leaf i s the opportunity cost of not s e l l i ng

the green leaf to the Cooperative Processing Uni t s .

Therefore, the t ransfer price i s the market price

at which green leaf could be sold to the cooperative

processing u n i t . In t h i s v/ay, the p lanta t ion manager

of a tea u n i t \;culd t ransfer h i s output of green leaf

to the factory at price d i f ferent from his co s t .

Therefore, the Statement I of cost of production wcxild

be able to shov' the p ro f i t (or los s ) on planta t ion

a c t i v i t y . The Statement I I , on the other hand, would

indicate p ro f i t (or loss) only on processing a c t i v i t y .

The overa l l p r o f i t a b i l i t y cf.the firm would remain

the same, M t the system \/ould provide an i n - t u i l t

motivation to both planta t ion and factory managers

for cu t t ing down the i r costs to show be t t e r r e s u l t s

404

for t he i r p rof i t c en t r e s .

There are a host of other technicaies used

for excsrcis ing f inancia l and cost con t ro l . But

we have l imited our discussion in t h i s chapter

to a few techniques only. For lack of r e l i a b l e

da ta , LI l u s t r a t i ons of a l l tte techniques hs.ve not

been taken up which i s a l so beyond the purview

of t h i s particulcO? study. Budgeting i s one of

the concipicutcus omnissions among the techniques .

Me have only to suggest t ha t a master plan and

cash budget must be prepared by a l l the p lanters

with which tlx; f inancia l performance could be

checked up, to detect the deviat ions and necessary

correct ive action i n i t i a t e d .