Author Archives: Swati

Short Answer Type Question:

Q.1 What is informal communication? 

ANSWER: Communication between employees who are not officially related to each other is called informal communication, this type of communication may flow in any direction thus it is also called ‘grapevine’. Informal communication involves the flow of information in all directions without regard for the level or authority of the sender. 

Informal communication arises from the need for employees to exchange ideas that cannot be done through formal channels. The informal communication spreads information rapidly and sometimes generates rumors.

Q.2 Which style of leadership does not believe in use of power unless it is absolutely essential? 

ANSWER: Laissez Faire, or free rein leadership does not believe in using power unless it is absolutely necessary. Subordinates are given complete decentralisation of authority under such leadership. Hence, the subordinates are given complete autonomy and are encouraged to make their own decisions.

Q.3 Which element in the communication process involves converting the message into words, symbols, gestures etc.?

ANSWER: Encoding is the step in the communication process that involves converting the message into words, symbols, gestures, and so on.

Q.4 The workers always try to show their inability when any new work is given to them. They are always unwilling to take up any kind of work. Due to sudden rise in demand a firm wants to meet excess orders. The supervisor is finding it difficult to cope up with the situation. State the element of directing that can help the supervisor in handling the problem

ANSWER: The element is motivation. 

Also, the firm can do the following to enhance workers motivation:

• Supervisor can provide monetary incentives like wages linked with productivity to motivate the employees.
• He can encourage the workers to work by making them understand that this work will lead to increased exposure to industry and will have better job prospects.
• Opportunity for effective leadership should be provided to employees so that they get motivated, and have a sense of responsibility.
  

Q.5 What are semantic barriers of communication? 

ANSWER: Semantics is a branch of linguistics that studies the meaning of words and sentences. Semantic barriers are problems and impediments in the process of encoding and decoding messages into words or impressions. Typically, such barriers arise as a result of the use of incorrect words, erroneous translations, or differing interpretations. Some of the causes of semantic barriers are as follows.

1. Badly expressed message: The information may not be clearly expressed at times due to a lack of vocabulary or incorrect word usage.
2. Symbols with different meanings: A word may have more than one meaning at times, or two or more words may have the same pronunciation (such as idle and idol). The correct interpretation of the word remains ambiguous in such cases.
3. Faulty translations: In some cases, the proficiency of a language varies between workers and managers. In such cases, a translation of the information into a language that the workers can understand is required. However, some words or sentences may be misinterpreted during the translation process. For example, the meaning of certain words may change in a translation of an instruction from English to Hindi.
4. Technical jargon: When giving instructions, the senior or specialist may use technical terminology that the subordinates may find difficult to understand( such as the meaning of drawings for a commerce student and some either person is different).
5. Body language and gesture decoding: Every movement of the body conveys some meaning. The communicator’s body movement and gestures are extremely important in conveying the message. Communications may be misinterpreted if there is a mismatch between what is said and what is expressed through body movements. As in your face expression reveals anger, while your hand movements reveal otherwise.
6. Unclarified assumptions: Certain assumptions in some communications may be open to different interpretations.
   

Q.6 Explain the process of motivation with the help of a diagram. 

ANSWER: Motivating someone entails inducing and stimulating them to act in a certain way. The following points describe the motivational process.

1. Unsatisfied need: The motivation process begins with an individual’s unsatisfied need.
2. Tension: As the desire goes unsatisfied, frustration builds up in the individual’s mind.
3. Motives/Drives: Frustration motivates the individual to seek out alternatives to meet his needs.
4. Search Behaviour: He selects one of several options and begins acting in accordance with it.
5. Satisfied Needs: After a period of time, he evaluates whether or not his need has been met.
6. Reduced Tension: Once the need is met, the individual’s frustration and tension are relieved.

Example: Assume a person wishes to advance in his or her career. This makes him uneasy, and he begins to look for other ways to advance in his career. He may consider working harder and bettering his performance. After consistently working hard, he may receive recognition and a promotion, which will finally satisfy his desire and alleviate his frustration.

The process of motivation explains by the following diagram:

(Image Will Be Updated Soon)

Q.7 Explain the different networks of grapevine communication? 

ANSWER: Grapevine communication, also known as informal communication, is a communication that develops as a result of social interaction among employees and spreads without following the formal communication path. The types of grapevine communication networks are as follows.

1. Single Strand Network: In this network, information spreads from one person to the next person in a certain sequence. That is, one person communicates with another, who then communicates with yet another. Hence , information is passed through a line of persons.
2. Gossip Network: In a gossip network, one person spreads information to a large number of people. Such as gossip about the new employee who recently joined the organization etc.
3. Probability Network: In a probability network, an individual shares information with other people at random. That is, the individual is unconcerned about who he shares the information with.
4. Cluster Network: Information in this network is first shared between two people who trust each other. One of them then passes the information on to another, who then passes it on to another, and so the information spreads.
   

Q.8 Explain the three principles of directing? 

ANSWER: Management’s function of directing is quite complex. Certain principles have been developed to aid in the directing process. The principles of directing are as follows.

1. Maximum Individual Contribution: A manager should use directing techniques that encourage employees to perform to the best of their abilities, according to this principle. It should motivate employees to work toward the organization’s goals. That is, each individual should make the greatest possible contribution to the organization’s goals. Managers, for example, can use appropriate incentive and motivation techniques to encourage employees to perform better.
2. Appropriateness of Direction Technique: This principle states that the direction technique to be used should be appropriate. It should be appropriate for the employees’ needs and attitudes. For example, one employee may be motivated by praise, whereas another requires monetary compensation. As a result, the manager should employ appropriate directing techniques based on the situation.
3. Managerial Communication: Effective communication is essential for effective directing. The superior’s instructions and commands must be clear and easily understood by the subordinates. Furthermore, subordinates must be able to communicate with superiors without hesitation. They must be able to freely express their opinions and suggestions. As a result, effective two-way communication between the superior and the subordinates is required.
   

Q.9 In an organisation, one of the departmental manager is inflexible and once he takes a decision, he does not like to be contradicted. As a result, employees always feel they are under stress and they take least initiative and fear to express their opinions and problems before the manager. What is the problem in the way authority is being used by the manager? 

ANSWER: The manager is an autocratic leader.

An autocratic leader gives orders and expects others to obey them. The decision-making power is centralized. Due to the inflexibility of the leader, employees feel demotivated and discouraged due to the leader’s unwillingness to take their suggestions, and the productivity is also impacted due to demotivated employees.

To solve this issue, the manager needs to be a little flexible, and foster positive communication with its employees, as well as welcome suggestions from them.

Q.10 A reputed hostel, GyanPradan provides medical aid and free education to children of its employees. Which incentive is being highlighted here? State its category and name any two more incentives of the same category.

ANSWER: Gyan Pradhan has provided its employees with perquisites and fringe benefits such as free education for children and medical aid. This comes under Financial incentives.

Other financial incentives include:

• Bonus: An additional reward given in addition to the salary, such as gifts, a festival bonus, and so on.
• Retirement Benefits: Providing employees with retirement benefits such as pensions, gratuities, provident funds, and so on.
• Stock option: Providing employees with shares of the company at a lower price than the market price.
• Profit-Sharing: It is the practice of sharing a portion of a company’s profits with its employees (any two)
  

Long Answer Type Questions:

Q.1 Explain the principles of Directing.
ANSWER: Principles of Directing
(i) Maximum Individual Contribution
This principle emphasises that directing techniques must help every employee to contribute to his maximum potential in order to achieve the organisational goals. It should help in bringing out unused or dormant potential of an employee to improve the efficiency of the organisation, e.g., suitable and appropriate incentives should be given to encourage employees to improve their performance.
(ii) Harmony of Objectives Most of the time it happens that the organisational objectives and individual objectives move in opposite directions. The person in charge of a team of workers should guide and instruct his team in such a manner that they realise the importance of both the objectives.
(iii) Unity of Command This principle insists that a person in the organisation should receive instructions from one superior only. If instructions are received from more than one, it creates confusion, conflict and disorder in the organisation. Adherence to this principle ensures effective direction.
(iv) Appropriateness of Direction Technique According to this principle, appropriate motivational and leadership technique should be used while directing the people based on subordinate needs, capabilities, attitudes
etc, e.g., combination of both monetary and non-monetary incentives should be used to elicit the right response from the employees.
(v) Managerial Communication Directing should convey clear instructions to create total understanding to subordinates. Through proper feed back the manager should ensure that subordinate understands his instructions clearly.
(vi) Use of Informal Organisation Informal groups or organisations exist within every formal organisation and every manager should spot and make use of such organisations for effective directing
(vii) Leadership While directing the subordinates managers should exercise good leadership as it can influence the subordinates positively without causing dissatisfaction among them.
(viii) Follow Through Mere giving of an order is not sufficient. Managers should follow it up by reviewing continuously whether orders are being implemented accordingly or any problems are being faced by the subordinates.

Q.2 Explain the qualities of a good leader. Do the qualities alone ensure leadership success?
ANSWER: Some of the qualities required by all leaders are
(i) Physical Features
It is believed that good physical features attract people. Height, weight, health, appearance determine the physical personality of an individual.
(ii) Knowledge A good leader should have required knowledge and competence. Only such person can instruct subordinates correctly and influence them.
(iii) Integrity He should be a role model to other regarding the ethics and values. A leader should possess high level of integrity and honesty.
(iv) Initiative A good leader never waits for opportunities to come to his way rather he grabs the opportunity and use it to the advantage of organisation.
(v) Communication and Motivation Skills A leader should be a good communicator. He should have the capacity to explain his ideas and make the people to understand his ideas. He should also understand the needs of people and motivate them through satisfying their needs.
(vi) Self Confidence A high level of self confidence is very important for any leader. He should not loose his confidence even in most difficult times. A person who is not himself confident will never be successful in providing confidence to his followers.
(vii)Decisiveness Leader should be able to take decisions while managing the work. Once he is convinced about a fact, he should be firm and should not change opinions frequently.
(viii) Social Skills A leader should be sociable and friendly with his colleagues and followers. He should understand people and maintain good human relations with them.
Many times, the success of an organisation is attributed to the leader, but due credit is not given to the followers. Many followers related factors like their skills, knowledge, commitment, willingness to co-operate team spirit etc make a person an effective leader. It is said that followers make a person, a good leader by acceptance of leadership. Therefore both followers and leaders are playing an vital role in leadership process.

Q.3 Discuss Maslow’s need Hierarchy theory of motivation.
ANSWER: Maslow’s need Hierarchy Theory of Motivation Motivation is a psychological term and the needs of an employee plays an important role in motivation. In order to study motivation various researchers developed theories on them. Among them Abraham Maslow’s need Hierarchy theory is considered of worth. As per him, their exists a Hierarchy of five needs these are
(i) Basic Physiological Needs These needs are most basic in the hierarchy and corresponds to primary needs. Food, clothing shelter are a few examples of this type of need. Basic salary helps to fulfill these needs.

(ii) Safety/Security Needs When the basic needs satisfied, people start thinking of future. These needs provide security and protection from physical and emotional harm in coming future e.g., job security, pension plans etc.
(iii) Affiliation/Belonging Need These needs refer to human feeling of belongingness. We all as human beings look forward to being accepted in the society e.g., friendship.
(iv) Esteem Needs These include factors such as self-respect, autonomous status, attention. An individual wants a respect and recognition from others in this need.
(v) Self-actualisation Needs It is the highest level of need in the hierarchy. It refers to the drive to become what one is capable of becoming. The needs include growth self-fulfillment and achievement of goals etc.

Q.4 What are the common barriers to effective communication suggest measures to overcome them?
ANSWER: Common Barriers to Effective Communication Managers in all organisations face problems due to communication barriers. These barriers may prevent a communication or filter part of it or carry incorrect meaning due to which misunderstanding may be created. Therefore all managers should take some steps to overcome these barriers.
There are broadly four groups of barriers
(i) Semantic Barriers Semantic barriers are concerned with problems and obstructions in the process of encoding and decoding of message into words or impressions. Normally, such barriers result on account of use of wrong words, faulty translations, different interpretations etc. These are discussed below
(a) Badly Expressed Message Sometimes the message is not communicated correctly by the manager because of inadequate vocabulary, usage of wrong words, omission of needed words etc.
(b) Symbols with Different Meaning A word may have several meanings. Receiver has to perceive one such meaning for the word used by communicator.
(c) Faulty Translations Sometimes while translating if incorrect translation is done due to poor command over both the languages then meaning of the message changes. This leads to cause different meanings to the communications.
(d) Unclarified Assumptions Sometimes communication may have certain assumptions which are subject to different interpretations The one should always clear the meaning of what he is instructing the worker to do, so that the worker has no doubts in his mind.
(e) Technical Jargon Sometimes specialists may use technical words in their communication by which the receiver is not aware.
Therefore, they may not understand the complete conversation.
(f) Body Language and Gesture Decoding The body movement and body gestures plays an important role in conveying the message.
If there is no match between what is said and what is expressed in body movements, communications may be wrongly perceived.

(ii) Psychological Barriers
Emotional or psychological factors acts as barrier to communications e.g., a person who is worried cannot understand what is being told. Some of the psychological barriers are
(a) Premature Evaluation  Sometimes people evaluate the meaning of message before the sender completes his message. Such premature evaluation may be due to pre-conceived notions.
(b) Lack of Attention If the mind is pre-occupied then the result is non-listening of message by receiver act as a major psychological barrier.
(c) Lon by Transmission and Poor Retention When message passes through various levels, successive transmission of message results in loss of information. It happenes mostly with oral communication. Also people cannot retain the information for a long time if they are inattentive or not interested.
(d) Distrust If the communicator and communicatee do not believe on each other, they can not understand each others message in its original sense as they are not giving importance to the information exchanged.

(iii) Organisational Barriers The factors related to organisation structure, authority relationships, rules and regulations may sometimes act as barriers to effective communication some of these barriers are
(a) Organisational Policy If the organisational policy is not supportive to free flow of communication, it may hamper effectiveness of communications.
(b) Rules and Regulations Rigid rules and cumbersome procedures may be a hurdle to communication similarly, communication through prescribed channel may result in delays.
(c) Status Status of superior may create psychological distance between him and his subordinates. The people working at higher level may not allow his subordinates to express their feelings freely.
(d) Complex Organisational Structure In an organisation where there are number of managerial levels, communications gets delayed and distorted as number of filtering points are more.
(e) Organisational Facilities For smooth clear and timely communication proper facilities are required like frequent meetings suggestion box, internet connection, inter-com facility. Lack or ineffectiveness of these facilities may create communication problems.

(iv) Personal Barriers
The personal factors of both sender and receiver may exert influence on effective communication. Some of the personal barriers are
(a) Fear of Challenge to Authority If a superior feels that a particular communication may affect his authority negatively then he/she may not speak it out clearly and openly.
(b) Lack of Confidence of Superior on his Subordinate If superiors do not have confidence on their subordinates, they may not seek their advice or opinions.
(c) Unwillingness to Communicate Sometime subordinator may not be prepared to communicate with their superiors, if they think that it may adversely affect their interests.
(d) Lack of Proper Incentives If there is no reward for communication then employees may not be motivated to communication, e.g., if there is no reward or appreciation for a good suggestion, the subordinate may not be willing to offer useful suggestions again.
Some measures which can be adopted by organisations to improve communications are
(i) Clarify the Ideas Before Communication The entire message to be communicated should be studied in depth, analysed and stated in such a manner that it is clearly conveyed to subordinates. The message should be encoded in simple language which is understandable.
(ii) Communication According to the Needs of Receives All managers should be aware of the understanding level of his/her subordinates. He should adjust his communication and select the words according to the education and understanding levels of subordinates
(iii) Consult Others Before Communicating Before communicating anything, others who are linked with it in some way or the other should be taken into confidence for developing a better plan.
(iv) Beaware of Languages, Tone and Content of Message
The language used for communication should be understandable to the listener. The tone of the appropriate and the matter should not be offending to anyone.
(v) Convey Things of Help and Value to Listener
It is always better to know the interests of the people with whom you are communicating. If the message relates directly or indirectly to such interests and needs it certainly evokes response from communicatee.
(vi) Ensure Proper Feedback
The receiver of communication may be encouraged to respond to communication. The communication process may be improved by the feedback received to make it more responsive.
(vii) Follow up Communication
There should be a regular follow up and review on the instructions given to subordinates. Such follow up measures help in removing hurdles if any in implementing the instructions.
(viii) Be a Good Listener
Manager should be a good listener. Patient and attentive listening solves half of the problems. Managers should also give indications of their interest in listening to their subordinates

Q.5 Explain different financial and non-financial incentives used to motivate employees of a company.
ANSWER: Financial Incentives Financial incentives refer to incentives which are in direct monetary form or measurable in monetary term and serve to motivate people for better performance. The financial incentives used in organisations are listed below
(i) Pay and Allowances For every employee, salary is the basic monetary incentive. It includes basic pay, DA and other allowances. Salary system consists of regular increments in the pay every year and enhancement of allowances from time to time.
(ii) Productivity Linked Wage Incentives Several wage incentives aim at linking payment of wages to increase in productivity at individual or group level.
(iii) Profit Sharing Profit sharing is meant to provide a share to employees in the profits of the organisation. This serves to motivate the employees to improves their performance and contribute to increase in profits.
(v) Co-Partnership/Stock Option Under these incentives schemes, employees are offered company shares at a set price which is lower than market price. The allotment of shares creates a peeling of ownership to the employees and makes them to contribute more for the growth of the organisation.
(vi) Retirement Benefits Several retirement benefits such as provident fund, pension and gratuity provide financial security to employees after their retirement. This act as an incentive when they are in service in the organisation.
(vii) Perquisites
In many companies perquisites and fringe benefits are offered such as car allowance, housing, medical aid, and education etc over and above the salary. These measures help to provide motivation to the employees/managers.
Non-financial Incentives
Incentives which help in fulfilling our psychological, emotional and social needs are known as non-financial incentives. Some of the non-financial incentives are
(i) Status Status means ranking or high positions in the organisation. Whatever power position prestige an employee enjoys in the organisation are indicated by his status. Psychological, social and esteem needs of an individual are satisfied by status given to their job.
(ii) Organisational Climate This indicates the characteristics which describe an organisation and distinguish one from the other. Individual autonomy, reward orientation, consideration to employees, etc are some of the positive features of an organisation. If managers try and include more of these in an organisation helps to develop better organisational climate.
(iii) Career Advancement Opportunity Managers should provide opportunity to employees to improve their skills and be promoted to the higher level jobs appropriate skill development programmes and sound promotion policy will help employees to achieve promotions. Promotions have always worked as tonic and encourages employees to exhibit improved performance.
(iv) Job Enrichment Job enrichment is concerned with designing jobs that include greater variety of work contentment, require higher level of knowledge and skill, give workers more autonomy and responsibility and provide opportunity for personal growth and a meaningful work experience.
(v) Employee Recognition Programmes Recognition means acknowledgement with a show of appreciation. When such appreciation is given to the work performed by employees, they feel motivated to perform/work at higher level, e.g.,
(a) Congratulate the employee
(b) Displaying names of star performers
(c) Installing awards
(d) Distributing mementos
(vi) Job Security
Employees want their job to be secure. They want certain stability about future income and work so that they do not feel worried on these aspects and work with greater zeal. There is only one problem with this incentive i.e., when people feel that they are not likely to lose their jobs, they may become relaxed.
(vii) Employee Participation
It means involving employees in decision making of the issues related to them. In many companies, these programmes are in practice in the form of joint management committees, work committees canteen committees etc.
(viii) Employee Empowerment
Empowerment means giving more autonomy and powers to subordinates. Empowerment makes people feel that their jobs are important. This feeling contributes positively to the use of skills and talents in the job performance.

Short Answer Type Question:

Q.1What is meant by staffing?

ANSWER: Staffing is a management function that entails hiring candidates who are a good fit for the organization by evaluating their skills and knowledge and assigning them specific roles based on their skill set. It is involved in meeting an organization’s human resource requirements. 

Q.2 State the two important sources of recruitment? 

ANSWER: The process of searching for and attracting qualified candidates for a job is referred to as recruitment. In other words, it is the process of identifying potential candidates and encouraging them to apply for a position. The two most important sources of recruitment are as follows.

1. Internal sources: Internal sources of recruitment are those that come from within the organization. That is, jobs are filled from within the organization using internal resources. Transfers and promotions are two examples. The job of a specific profile is filled through transfers by transferring a suitable person from another department of the organization to the concerned department. Similarly, by promoting lower-level employees, higher-level job vacancies in the organization are filled.
2. External Sources: External sources of recruitment are those that come from outside the organization. Jobs in an organization are filled by bringing in new people from outside sources. External sources are used to find new talent and a broader range of options. One of the external sources of recruitment, for example, is ‘direct recruitment,’ which entails posting a notice board outside the office and then following the recruitment process on a specific date. Similarly, placement agencies serve as an external source by acting as a matchmaker between job seekers and employers.

Q.3 The workers of a factory are unable to work on new machines and always demand for help of supervisor. The Supervisor is overburdened with their frequent calls. Suggest the remedy.

ANSWER: This situation can be managed by providing workers with proper machine-use training. This can be done through an off-the-job training method, that is vestibule training should be provided to employees, in which they will be trained regarding the use and other intricacies of the operation of machinery. It will boost their self-esteem and skill set, and will also result in faster working with no delays in task completion.

Q.4 The quality of Production is not as per standards. On investigation it was observed that most of the workers were not fully aware of the proper operation of the machinery. What could be the way to improve the quality of production to meet the standards? (training).

ANSWER: Employee training can help to improve the quality of the production. This can be done through an off-the-job training method, and under this vestibule training should be provided to employees, in which they will be trained regarding the use and other intricacies of the operation of machinery. Employees can learn and practice under the supervision of a master worker for a period of time before working on their own. This type of training will assist an employee in working more efficiently.

Q.5 The workers of a factory remain idle because of lack of knowledge of hi-tech machines. Frequent visit of engineer is made which causes high overhead charges. How can this problem be removed?

ANSWER: This type of issue is addressed by providing workers with appropriate training. These workers can be given vestibule training, which will reduce the engineer’s frequency of visits. Vestibule training is a type of training in which workers practice on dummy machines, which are models of industrial equipment that the workers will be working on. Once they have gained sufficient experience, the workers can be transferred to the factory to perform the work.

Q.6 What is meant by recruitment? How is it different from selection? 

ANSWER: The procedure of locating and encouraging qualified candidates to apply for a specific job is referred to as recruitment. In contrast, selection is the process of screening and selecting the appropriate candidates from a pool of candidates. The distinctions between recruitment and selection are highlighted in the following points.

Basis of difference	Recruitment	Selection
Meaning	The process of locating and enlisting the necessary personnel for a job is referred to as recruitment.	The process of selecting the best candidate from a pool of candidates gathered during the recruitment process is referred to as selection.
Sequence	Recruitment is the second stage of the staffing process.	Selection is the third stage of the staffing process, following recruitment.
Employment contract	The organization does not offer any employment contracts to the candidates gathered through recruitment.	The organization offers an employment contract to candidates who successfully complete the selection process, which includes information such as the date of joining, terms and conditions, and so on.
Characteristic	The recruitment process entails attracting as many candidates as possible for the job.	The selection process entails selecting only the best candidates and rejecting the rest.

Q.7 An organisation provides security services. It requires such candidates who are reliable and don’t leak out the secrets of their clients. What steps should be incorporated in selection process?

ANSWER: Various steps could be incorporated  by the company such as:

• Personality tests are one type of test that can be used to conduct such a selection process. Such tests will assist recruiters in identifying candidates with the most stable personalities who are appropriate for the job type being offered.
• Reference and background checks can be done to ensure the nature and behaviour of the prospective candidate.
• A confidentiality clause could be added in the contract of employment, which states that the employee will not be allowed to lead any confidential information about the company to the outsider or the clients.

Q.8 A company is manufacturing paper plates and bowls. It produces 1,00,000 plates and bowls each day. Due to local festival, it got an urgent order of extra 50,000 plates and bowls. Explain the method of recruitment that the company should adopt in the given circumstances to meet the order.

ANSWER: In this situation, approaching labor contractors is the best option. Paper plates and bowls are manufactured by workers or laborers with limited skills. Labour contractors have access to laborers looking for work and will thus be able to provide the necessary manpower at short notice.

Q.9 Distinguish between training and development. 

ANSWER: Training and development are two separate but related concepts. Though both concepts are concerned with personal development, their perspectives differ. 

On the one hand, training refers to the provision of skills and abilities for a specific job. Development, on the other hand, refers to the concept of an individual’s overall growth.

The following points emphasize the distinction between training and development.

Basis of difference	Training	Development
Meaning	Training is the process of improving an employee’s skills and competence required to perform a specific job.	The process of an employee’s overall growth is referred to as development.
Scope	Training is limited in scope and focuses on how to become more efficient in one’s intended job.	Development is broader in scope and focuses on the employee’s overall personality development. Training is a component of development.
Focus	The focus of training is on the specific job requirement, so it is job-oriented.	The focus of development is on overall growth and, as a result, is career oriented.

Q.10 Why are internal sources of recruitment considered to be more economical? 

ANSWER: Internal sources of recruitment are those that are endogenous to the organization, that is, they come from within the organization. Internally, there are two options for filling positions: transfers and promotions. It has the advantage of being less expensive than other sources of recruitment. Filling jobs internally is less expensive in terms of both time and money, as shown below:

1. Simplicity: Internal recruitment simplifies the selection and placement process. Candidates who are already employed by the company can be evaluated more accurately and economically. Because the candidates are already known to the organization, this is a more reliable method of recruitment.
2. No induction required: Transfer is a training tool used to prepare employees for higher-level positions. In addition, people hired from within the organization do not require induction training.
3. Balance between departments: Transfer has the advantage of shifting workforce from overburdened departments to understaffed ones. Thus, in comparison to other sources, internal sources of recruitment are more cost-effective.

Long Answer Type Questions:

Q.1Define the staffing process and the various steps involved in it.
ANSWER: Staffing process of the management is concerned with acquiring, developing, employing, remunerating and retaining people or we can say it is the timely fulfilment of the manpower requirements with in an organisation.
(i) Estimating the Manpower Requirements The first step in the staffing process is determining the present manpower inventory and assessing the present and future manpower requirements of the organisation keeping in mind the production schedule, demand etc.
(ii) Recruitment Recruitment may be defined as the process of searching for prospective employees and stimulating them to apply for jobs in the organisation. For this various sources can be used like transfer, promotion, advertising, job consultants etc.
(iii) Selection Selection is the process of choosing from among the pool of the prospective job candidates developed at the stage of recruitment. It involves a host of tests and interviews.
(iv) Placement and Orientation Orientation is introducing the selected employee to other employees and familiarising him with the rules and policies of the organisation. He is taken around the work place and given the charge of the job for which he has been selected. Placement refers to the employee occupying the position or post for which the person has been selected.
(v) Training and Development All organisations have either in-house training centres or have forged alliances with training and educational institutes to ensure continued learning of their subordinates. By offering the opportunities for career advancement to their members, organisations are not only able to attract but also retain its talented staff.
(vi) Performance Appraisal After the employees have undergone a period of training and they have been on the job for some time, there is a need to evaluate their performance. The employee is expected to know what the standards are and the superior is to provide the employee feedback on his/her performance. The performance appraisal process, therefore, will include defining the job, appraising performance and providing feedback.
(vii) Promotion and Career Planning It is very important for all organisations to address career related issues and promotional avenues for their employees. They must provide opportunities to everyone to show their potential and in return promotions can be provided.
(viii) Compensation All organisations need to establish wage and salary plans for their employees. There are various ways to prepare different pay plans depending on the worth of the job. Compensation therefore, refers to all forms of pay or rewards going to employees.

Q.2 Explain the procedure for selection of employees.
ANSWER:  The important steps in the process of selection are as follows
(i) Preliminary Screening It helps the manager eliminate unqualified or unfit job seekers based on the information supplied in the application forms.
(ii) Selection Tests An employment test is a mechanism that attempts to measure certain characteristics of individuals. These range from aptitudes, such as manual dexterity, to intelligence to personality.
(iii) Employment Interview Interview is a formal, in depth conversation conducted to evaluate the applicant’s suitability for the job.
(iv) Reference and Background Checks Many employers request names, addresses and telephone numbers of references for the purpose of verifying information and gaining additional on an applicant.
(v) Selection Decision The final decision has to be made among the candidates who pass the tests, interviews and reference checks.
(vi) Medical Examination Before the candidate is given a job offer he/she is required to go through a medical test.
(vii) Job Offer Job offer is made through a letter of appointment/confirm his acceptance. Such a letter generally contains a date by which the appointee must report on duty.
(viii) Contract of Employment After the job offer has been made and candidate accepts the offer, certain documents need to be executed by the employer and the candidate. There is also a need for preparing a contract of employment. It includes job title, duties, responsibilities, date when continuous employment starts etc.

Q.3 What are the advantages of training to the individual and to the organisation?
ANSWER: Training helps both the organisation and the individual.
Benefits to the Organisation
(i) Training is a systematic learning which reduces the wastage of efforts and money.
(ii) Enhances employee productivity.
(iii) Training helps a manager to handle an emergency situation.
(iv) Training motivates workers and thus reduces absenteeism.
(v) Helps in adjusting to the changing environment (technological).
Benefits to the Employee
(i) Better career opportunities due to improved skills and knowledge.
(ii) Earnings can be increased due to improved performance.
(iii)Trained workers can handle machines more efficiently.
(iv) Employees always remain motivated and satisfied.

Q.4 The staffing function is performed by every manager and not necessarily by a separate department. Explain.
ANSWER:  Staffing is a function which all managers need to perform. It is the responsibility of all managers to directly deal with and select people to work for the organisation. When the manager performs the staffing function his role is slightly limited. In small organisations, managers may perform all duties related to employees salaries, welfare and working conditions but as organisation grow and number of persons employed increases, a separate department called the human resource department is formed which has specialists in managing people.

Short Answer Type Question:

Q.1 Define ‘Organising’?

ANSWER: Organising can be defined as a process that initiates impleme­ntation of plans by clarifying jobs and working relationships and effectively deploying resources for attainment of identified and desired results.

Q.2 What are the steps in the process of organising?

ANSWER: The steps in the process of organising are:

→ Identification and division of work:  The first step in the process of organising involves identifying and dividing the work that has to be done in accordance with previously determined plans.

→ Departmentalisation: Once work has been divided into small and manageable activities then those activities which are similar in nature are grouped together.

→ Assignment of duties: It is necessary to define the work of different job positions and accordingly allocate work to various employees.
→ Establishing reporting relation ships: Each individual should also know who he has to take orders from and to whom he is accountable.

Q.3 Discuss the elements of delegation.

ANSWER: The elements of delegation are:

→ Authority: It refers to the right of an individual to command his subordinates and to take action within the scope of his position. It also refers to the right to take decisions inherent in a managerial position to tell people what to do and expect them to do it.

→ Responsibility: Responsibility is the obligation of a subor­dinate to properly perform the assigned duty. It arises from a superior – subordinate relationship because the subor­dinate is bound to perform the duty assigned to him by his superior.

→ Accountability: It implies being answerable for the final outcome. Once authority has been delegated and responsibility accepted, one cannot deny accountability.

Q.4 What does the term ‘Span of management’ refer to?
ANSWER: Span of management refers to the number of subordinates that can be effectively managed by a superior. This determines the levels of management in the structure.

Q.5 Under what circumstances would functional structure prove to be an appropriate choice?

ANSWER: If an organisation is large, has a diversified activities and operations require a high degree of specialisation then functional structure prove to be an appropriate choice.

Q.6 Draw a diagram depicting a divisional structure.

ANSWER:

Q.7 Can a large sized organisation be totally centralised of decentralised? Give your opinion.
ANSWER: No, a large sized organisation can never be completely centralised or decent­ralised. As it grows in size and comp­lexity , there is a tendency to move towards decentralised decision making. This is because in large organisations those employees who are directly and closely involved with certain operations tend to have more knowledge about them than the top management which may only be indirectly associated with individual operations. Hence, there is a need for a balance between these co­existing forces. Thus, it can be said that every organisation will be characterised by both centralisation and decentralisation.

Q.8 Decentralisation is extending delegation to the lowest level. Comment.

ANSWER: Decentralisation is extending delegation to the lowest level. Decentralisation refers to delegation of authority throughout all the levels of the organisation. Decision making authority is shared with lower levels and is consequently placed nearest to the points of action. Delegation refers to the downward transfer of authority from a superior to a subordinate. Delegation is a process and decentralisation is end result.
For Example: If a CEO of an organisation gives responsibility to production head for the production for specific units of products. The production head shares his responsibility of hiring workers with his managers. Managers shares his responsibility of supervising the workers with supervisors. Therefore, the delegation at each level leads to decentralisation.

Long Answer Type Questions:

Q.1Why is delegation considered essential for effective organising?
  ANSWER: Effective delegation leads to the following benefits
(i) Effective Management By empowering the employees, the managers are able to function more efficiently as they get more time to concentrate on important matters. This makes the working of all the levels effective and efficient.
(ii) Employee Development As a result of delegation, employees get more opportunities to utilise their talent and this may give rise to talent abilities in them. It makes them better leaders and decision makers. Delegation empowers the employees by providing them with the chance to use their skills, gain experience and develop themselves for higher positions.
(iii) Motivation of Employees Delegation helps in developing the talents of the employees. It also has psychological benefits. Responsibility for work builds the self-esteem of an employee and improves his confidence. He feels encouraged and tries to improve his performance further.
(iv) Facilitation of Growth Delegation helps in the expansion of an organisation by providing a ready workforce to take up leading positions in new ventures. Trained and experienced employees are able to play significant roles in the launch of new projects.
(v) Basis of Management Hierarchy Delegation of authority establishes superior-subordinate, which are the basis of hierarchy of management. The extent of delegated authority also decides the power that each job position enjoys in the organisation.
(vi) Better Co-ordination Due to delegation work, duties, power all becomes very clear. This helps to avoid overlapping of duties and duplication of effort as it gives a clear picture of the work being done at various levels. Such clarity in reporting relationships help in developing and maintaining effective coordination amongst the departments, levels and functions of management.

Q.2 What is a divisional structure? Discuss its advantages and limitations.
ANSWER: A divisional structure comprises of separate business units or divisions. Each unit has a divisional manager responsible for performance and who has authority over the unit. Generally, manpower is grouped on the basis of different products manufactured.
Merits
(i) Skill Development Product specialisation helps in the development of varied skills in a divisional head and this prepares him for higher positions as he gains experience in all functions.
(ii) Accountability Divisional heads are accountable for profits, as revenues and costs related to different departments, can be easily identified and assigned to them. This provides proper basis for performance measurement.
(iii) Quick Decision Making It promotes flexibility and initiative because each division functions as an autonomous unit which leads to faster decision making.
(iv) Facilitates Expansion It facilitates growth as new divisions can be added without interrupting the existing operations, by merely adding another divisional head and staff for the new product line.
Demerits
The divisional structure has certain disadvantages
(i) Conflicts Conflicts may arise among different divisions with reference to allocation of funds.
(ii) Higher Cost Providing each division with separate set of similar functions increases expenditure.
(iii) Ignoring Organisational Goals It provides managers with the authority to supervise all activities related to a particular division. In course of time, such a manager may gain power and in a bid to assert his independence may ignore organisational interests.

Q.3 Decentralisation is an optional policy. Explain why an organisation would choose to be decentralised.
ANSWER:  Decentralisation is much more than mere transfer of authority to the lower levels of management hierarchy. Its importance can be understood from the following points
(i) Develops Initiative Among Subordinates When lower managerial levels are given freedom to take their own decisions they learn to depend on their judgement. A decentralised policy helps to identify those executives, who have the necessary potential to become dynamic leaders.
(ii) Develops Managerial Talent for the Future Formal training plays an important part in equipping subordinates with skills that help them rise in the organisation, but equally important is the experience gained by handling assignments independently. It gives them a chance to prove their abilities and creates a reservoir of qualified manpower.
(iii) Quick Decision Making In a decentralised organisation, however, since decisions are taken at levels, which are nearest to the points of action and there is no requirement for approval from many levels the process is much faster.
(iv) Relief to Top Management Decentralisation leaves the top management with more time, which they can devote to important policy decisions rather than occupying their time with both policy as well as operational decisions.
(v) Facilitates Growth Decentralisation awards greater autonomy to the lower levels of management as well as divisional or departmental heads. This allows them to function in a manner best suited to their department and develops a sense of competition amongst the departments, consequently, the productivity levels increase and the organisation is able to generate more returns, which can be used for expansion purposes.
(vi) Better Control Decentralisation makes it possible to evaluate performance at each level and the departments can be individually held accountable for their results. The extent of achievement of organisational objectives as well as the contribution of each department in meeting, the over all objectives can be ascertained

Q.4 How does informal organisation support the formal organisation?
ANSWER: The informal organisation offers many benefits. Important among them are given as follows
(i) Quick Feedback Prescribed lines of communication are not followed. Thus, the informal organisation leads to faster spread of information as well as quick feedback.
(ii) Social Needs It helps to fulfill social needs of the members and allows them to find like minded people. This enhances their job satisfaction, since it gives them a sense of belongingness in the organisation.
(iii) Organisational Objectives It contributes towards fulfilment of organisational objectives by compensating for inadequacies in the formal organisation e.g., feedbacks on new policies etc can be tested through informal network.

Q.5 Distinguish between centralisation and decentralisation.
ANSWER: Difference between centralisation and decentralisation.

Q.6How is a functional structure different from a divisional structure?
ANSWER:  Difference between functional and divisional structure

Short Answer Type Question:

Q.1 What are the main points in the definition of planning.

ANSWER: The main points in the definition of planning are:
• It means deciding in advance what to do and how to do.
• A basic managerial function.
• It requires taking decisions since it involves making a choice from alternative courses of action.
• It involves setting objectives and developing appropriate courses of action to achieve these objectives.
• It has to have a given time frame.

Q.2 How does planning provide direction?

ANSWER: Planning provide direction by stating in advance how work is to be done. It ensures that the goals or objectives are clearly stated so that they act as a guide for deciding what action should be taken and in which direction. If goals are well defined, employees are aware of what the organisation has to do and what they must do to achieve those goals.

Q.3 Do you think planning can work in a changing environment?

ANSWER: No, planning may not work in a changing environment because it becomes difficult to accurately assess future trends in the environment if economic policies are modified or political conditions in the country are not stable or there is a natural calamity. Competition in the market can also upset financial plans, sales targets may have to be revised and, accordingly, cash budgets also need to be modified since they are based on sales figures. Planning cannot foresee everything and thus, there may be obstacles to effective planning.
Q.4 If planning involves working out details for the future, why does it not ensure success?

ANSWER: Planning does not guarantee success. The success of an enterprise is possible only when plans are properly drawn up and implemented. Any plan needs to be translated into action or it becomes meaningless. Managers have a tendency to rely on previously tried and tested successful plans. It is not always true that just because a plan has worked before it will work again. Besides, there are so many other unknown factors to be considered. This kind of complacency and false sense of security may actually lead to failure instead of success.

Q.5 Why are rules considered to be plans?

ANSWER: Rules are specific statements that inform what is to be done. They do not allow for any flexibility or discretion. It reflects a managerial decision that a certain action must or must not be taken. They are usually the simplest type of plans because there is no compromise or change unless a policy decision is taken.

Q.6 What kind of strategic decisions are taken by business organisations.

ANSWER: Major strategic decisions will include decisions like whether the organisation will continue to be in the same line of business, or combine new lines of activity with the existing business or seek to acquire a dominant position in the same market.

Long Answer Type Questions:

Q.1 Why is it that organisations are not always able to accomplish all their objectives?

ANSWER: Organisations are not always able to accomplish all their objectives due to the following reasons
(i) Planning Leads to Rigidity In an organisation a well defined plan is drawn up with specific goals to be achieved, with in a specific time frame. These plans then decide how the work will progress in the future and managers may not be in a position to change it. This creates a problem as flexibility is very important. Always adhering to the plan may not give us the desired results always.
(ii)Planning May not Work in a Dynamic Environment The business environment is dynamic, nothing is constant. The business environment is a totality of external forces, where in some changes or the other keep on taking place. Plans decide in advance what has to be done in future. Planning cannot foresee everything and thus there may be obstacles to effective planning.
(iii) Planning Reduces Creativity Planning is generally done by the top management. Usually the rest of the members just implements these plans. As a consequence, middle management and other decisions makers are neither allowed to deviate from plans nor are they permitted to act on their own, thus planning in a way reduces creativity since people tend to think along the same lines as others, there is nothing new or innovative.
(iv) Planning Involves Huge Cost Planning involves huge cost in their formulation. These may be in terms of time and money. The costs incurred sometimes may not justify the benefits derived from the plans.
(v) Planning is a Time Consuming Process Sometimes plans to be drawn take up so much of time that there is not much time left for their implementation and the objectives to be achieved.
(iv) Planning does not Guarantee Success Any plans needs to be translated into action or it becomes meaningless. Managers have a tendency to rely on previously tried and tested successful plans. It is not always true that just because a plan has worked before it will work again.

Q.2 What are the main features to be considered by the management while planning?
ANSWER: The main features to be considered by the management while planning are
(i) It Focuses on Achieving Objectives Planning is purposeful. Planning has no meaning unless it contributes to the achievement of predetermined organisational goals
(ii) It is the Primary Function Planning lays down the base for other functions of management. All other managerial functions are performed within the framework of the plans drawn. Thus, planning precedes other function.
(iii) Planning is Pervasive Planning is required at all levels of management as well as in all departments of the organisations. The top management undertakes planning for the organisation as a whole. Middle management does the departmental planning. At the lowest level, day-to-day operational planning is done by supervisors.
(iv) Planning is Continuous Plans are prepared for a specific period of time, may be for a month, a quarter or a year. At the end of that period, there is need for a new plan to be drawn on the basis of new requirements and future conditions. Hence, planning is a continuous process.
(v) Planning is Futuristic The purpose of planning is to meet future events effectively to the best advantage of an organisation. It implies peeping into the future, analysing it and predicting it.
(vi) Planning Involves Decision Making Planning essentially involves choice from among various alternatives and activities. If there is only one possible goal then there is no need for planning. The need only arises when alternatives are available. Planning thus, involves thorough examination and evaluation of each alternative and choosing the most appropriate one.
(vii) Planning is a Mental Exercise Planning is basically an intellectual activity of thinking rather than doing, because planning determines the action to be taken. Planning requires logical and systematic thinking rather than guesswork or wishful thinking.

Q.3 What are the steps taken by management in the planning process?
ANSWER: The planning process involves the following steps
(i) Establishing Objectives The first step in planning is to determine objectives which must be realistic, specific and clear so as to specify what is to be accomplished by the network of policies, procedures, strategies etc.
(ii) Developing Premises They include assumptions or forecasts of the future and unknown conditions that will affect the operations of the plans. They provide an idea about the future which facilitates the work of planning.
(iii) Identifying the Alternative Courses of Action The next step in planning is to identify the various alternatives available to achieve the objectives.
(iv) Evaluating Alternative Courses The merits and demerits of different courses of actions are evaluated in the light of objectives to be achieved and their feasibility is judged i.e., how far they will be successful in helping to achieve the objective.
(v) Selecting an Alternative The next step is to find out the most suitable course to be followed. The efforts are directed towards selecting that course. Which increases efficiency in the organisation by maximising output and profits at the minimum costs.
(vi) Implement the Plan At this step the best alternative chosen is put to use.
(vii) Follow Up Only putting the best alternative to action is not enough. The future is uncertain and dynamic. Therefore, it becomes important to check back whether the plan is giving results or not

Q.4 Is planning actually worth the huge costs involved? Explain.

ANSWER:  Planning involves huge cost, when plans are drawn up huge costs are involved in their formulation. These are in terms of time, money, effort etc. Detailed plans require scientific calculations to ascertain facts and figures. The costs incurred sometimes may not justify the benefits derived from the plans. There are a number of incidental costs as well (which are indirect) like expenditures on organising a meeting, consultation fees given to professional experts, market survey etc. But despite the high cost no firm can work without proper planning if used properly.

Short Answer Type Question:

Q.1What do you understand by business environment?

ANSWER: The business environment means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. The economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment also the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment.

Q.2 Why it is important for business enterprises to understand their environment? Explain briefly.

ANSWER: It is important for business enterprises to understand their environment because:

→ It enables the firm to identify opportunities  and  getting the first mover advantage: Environment provides numerous opportunities for business success. Early identification of opportunities helps an
enterprise to be the first to exploit them instead of losing them to competitors.

→ It helps the firm to identify threats and early warning signals: Besides opportunities, environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as an early warning signal.

→ It helps in tapping useful resources:Environment is a source of various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financiers, government and suppliers.

→ It helps in coping with rapid changes: Today’s business environment is getting increasingly dynamic where changes are taking place at a fast pace. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suit- able courses of action.

→ It helps in assisting in planning and policy formulation: Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy).

→ It helps in improving performance: Many studies reveal that the future of an enterprise is closely bound up with what is happening in the environment. And, the enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

Q.3 Mention the various dimensions of business environment.

ANSWER: The various dimensions of business environment are:

→ Economic Environment: This consists of interest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee that can affect management practices in a business enterprise.

→ Social Environment: It include the social forces like customs and traditions, values, social trends, society’s expectations from business, etc.
→ Technological  Environment: It includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business.

→ Political Environment: Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business.

→ Legal Environment: Legal environment includes various legislations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government – centre, state or local.

Q.4 Briefly explain the following:
(a) Liberalisation
(b) Privatisation
(c) Globlisation

ANSWER:

(a) Liberalisation: It means liberalising the business andindustry from all unnecessary controls and restrictions of the government in the form of licenses, permits and quotas. In India, liberalisation of industries initiated in 1991.

(b) Privatisation: It is a set of economic reforms aimed at giving greater role to the private sector in the nation building process and reducing the involvement of public sector. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991, adopted
the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction.

(c) Globalisation: It means the integration of the various economies of the world leading towards the emergence of a cohesive global economy.

Q.5 Briefly discuss the impact of Government policy changes on business and industry.

ANSWER:

The impact of Government policy changes on business and industry are:

→ Increasing competition: The competition has increased due to entry of new players due to liberalisation and globalisation.

→ More demanding customers: Customers today have become more demanding because they are well-informed also increased competition in the market gives the customers wider choice.

→ Rapidly changing technological environment: The rapidly changing technological environment creates tough challenges before smaller firms.

→ Necessity for change: After 1991, the market forces have become unstable as a result of which the enterprises have to continuously modify their operations.

→ Need for developing human resource: The new market conditions require people with higher competence and greater commitment. Hence the need for developing human resources.

→ Market orientation: There is a shift to market orientation in as much as the firms have to study and analyse the market first and produce goods accordingly.
→ Loss of budgetary support to the public sector: The public sector undertakings have realised that in order to survive and grow, they will have to be more efficient and generate their own resources for the purpose.

Long Answer Type Questions:

Q.1How would you characterise business environment? Explain with examples, the difference between general and specific environment.
ANSWER: Features of business environment
(i) Totality of External Forces Business environment is aggregative in nature as it is the sum total of all things external to business firms.
(ii) Inter-relatedness Different elements of business environment are closely related to each other, e.g., increased awareness of health care have increased the demand for many health products.
(iii) Dynamic Nature The business environment is highly dynamic. It keeps on changing. Sometimes there is a change in technology, tastes and preference of consumer etc.
(iv) Uncertainty The environment cannot be predicted. It is highly uncertain and unpredictable.
(v) Complexity Since there are many elements of business. Environment and they are inter-related and dynamic in nature. Therefore, it becomes very difficult to understand them as a whole.
Difference between Specific and General Environment There are two types of forces operating in business environment specific and general. Specific forces affect the individual enterprises directly and immediately, e.g., customers, suppliers.
General forces affect the firms and only indirectly e.g., social conditions or political conditions.

Q.2 How would you argue that the success of a business enterprise is significantly influenced by its environment?
ANSWER:  Importance of business environment
(i) It Enables the firm to Identify Opportunities and Getting the First Mover Advantage
Environment provides numerous opportunities for business success. Early identification of opportunities helps an enterprise to be the first to exploit them instead of loosing them to competitors, e.g., Eureka Forbes introduced Aquaguard and took away the cream of demand.
(ii) It Helps the Firm to Identify Threats and Early Warning Signals Environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as an early warning signals e.g., Lakme took serious steps to improve the quality and types of products as foreign multinational cosmetics companies started coming to India after 1991.
(iii) It Helps in Tapping Useful Resources Environment offers various resources for running a business in return the business enterprise supplies the environment with its outputs such as goods and services for customers, taxes for government. In order to arrange for the best possible resources, better understanding of the environment becomes important.
(iv) It Helps in Coping with Rapid Changes It is not the fact of change itself that is so important as the pace of change. There are many changes taking place in the environment and at a fast speed. In order to effectively cope with these changes, managers must understand and examine the environment and develop suitable courses of action.
(v) It Helps in Assisting in Planning and Policy Formulation Since environment is a source of both opportunities and threats, its understanding and analysis only helps in formulating the best possible policies to handle the future properly.
(vi) It Helps in Improving Performance Continuous monitoring and adopting changes in an enterprise will help in improving not only their present performance, but also continue to succeed in the market in long run.

Q.3 Explain with examples, the various dimensions of business environment.
ANSWER:  Dimension of business environment
(i) Economic Environment It includes the changes in the system due to economic policies made by the government. Reserve Bank of India is the key regulator of country’s economic environment since it
(a) influences the interest rates
(b) controls the flow of money in the economy
(c) regulates the working of banks
Example When the banks reduce the interest rates on long term loans, automobiles and construction industries get a boost to the business as more spending is made on the purchase of homes and cars through loans.
(ii) Social Environment
The social environment of business include the social forces like customs and traditions, values, social trends, society’s expectations from business etc. In business terms, these values translate into freedom of choice in the market. Major elements of social environment are
(a) life expectancy
(b) shifts in the presence of women in the workforce
(c) consumption habits
Example Due to the shift in the presence of women in the workforce, the demand for readymade ladies formal wear, cosmetics, packed/processed food, electronic gadgets has gone up.
(iii) Technological Environment
Technological environment includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business.
Example Because of technological advancement, it has become possible to book railway tickets through internet from home, office etc.
(iv) Political Environment
Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business. It is only of use when a business enterprise can predict its business activities under stable political conditions. Major elements of political environment are
(a) The constitution of the country
(b) The nature and profile of political leadership and thinking of political personalities
(c) Political ideology and practices of the ruling party.
Example After the NEP of 1991, due to globalisation the foreign companies started coming to India, but due to the bureaucratic red tape it became difficult for them to cut through it to do business here. As a result, these companies were discouraged in our country regarding investments. The situation has improved overtime.
(v) Legal Environment
Legal environment includes various legislations passed by the Government administrative orders issued by government authorities, court judgements as well as the decisions rendered by various commissions and agencies. It is imperative for the management of every enterprise to obey the law of the land. Therefore, an adequate knowledge ohrules and regulations framed by the government is a pre-requisite for better business performance.
Example There is a government regulation to protect consumer’s interest e.g., the advertisements of alcoholic beverages is prohibited.

Q.4 What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry?
ANSWER:  Economic changes initiated by the government under the Industrial Policy, 1991
(i) The government reduced the number of industries under compulsory licensing to six.
(ii) The role of public sector was reduced. It was now limited only to four industries of strategic importance.
(iii) Disinvestment was carried out in case of many public sector industrial enterprises.
(iv) Foreign Direct Investment was permitted.
(v) Automatic permission was now granted for technology agreements with foreign companies.
(vi) Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India.
The Indian corporate sector has come face-to-face with several challenges due to government policy changes. Some of them are
(i) Increasing Competition The competition has increased due to entry of new players (privatisation and globalisation).
(ii) More Demanding Customers Customers today, has become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.
(iii) Rapidly Changes Technological Environment The rapidly changing technological environment creates tough challenges before smaller firms.
(iv) Necessity for Change After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.
(v) Need for Developing Human Resources Earlier, Indian enterprises worked with inadequately trained personnel. The new market conditions require people with higher competence and greater commitment. Hence, the need for developing human resources.
(vi) Market Orientation Before 1991, all firms worked with production oriented marketing operations. In a fast changing world, there was a shift to market orientation. The firms had to study and analyse the market first and produce goods accordingly.
(vii) Loss of Budgetary Support to the Public Sector The public sector undertakings have realised that in order to survive and grow, they will have to be more efficient and generate their own resources for the purpose.

Q.5 What are the essential features of
(a) Liberalisation
(b) Privatisation
(c) Globalisation
ANSWER: Essential features of
(a) Liberalisation
(i) Abolishing licensing requirements in most of the industries except a short list.
(ii) No restriction on expansion or contraction of business.
(iii) Free movement of goods and services.
(iv) Freedom in fixing the prices of goods and services.
(v) Reduction in tax rates.
(vi) Simplifying procedures for imports and exports.
(vii) Making it easier to attract foreign capital and technology to India.
(b) Privatisation
(i) The government redefined the role of public sector.
(ii) Policy of planned disinvestments of the public sector.
(iii) Refining of sick enterprises to the Board of Industrial and Financial Reconstruction.
(c) Globalisation
(i) Import liberalisation
(ii) Export promotion
(iii) Foreign exchange reforms

Short answer Type Question:

Q.1 How is the Principle of ‘Unity of Command’ useful to management? Explain briefly.

ANSWER:
According to the Principle of ‘Unity of Command’ there should be one and only one boss for every individual employee. If an employee gets orders from two superiors at the same time the principle of unity of command is violated. It is very useful for a management as it prevent confusion regardingtasks to be done. For example: a sales person is asked to clinch a deal with a buyer and is allowed to give 10% discount by the marketing manager. On the other side, finance department tells her/him not to offer more than 5% discount. This violates the principle which leads to confusion.

Q.2 Define scientific management. State any three of its principles.

ANSWER:
Scientific management means knowing exactly what you want men to do and seeing that they do it in the best and cheapest way.
Three principles of scientific management are:→ Science not Rule of Thumb
→ Harmony, Not Discord
→ Cooperation, Not Individualism

Q.3 If an organisation does not provide the right place for physical and human resources in an organisation, which principle is violated? What are the consequences of it?

ANSWER:
The principle of order is violated in the given case. As per the Principle of Order, there should be a place for everything and everything in its place. Thus, when this principle is violated then a lot of time will waste in locating different resources. This will lead to decreased productivity and efficiency.

Q.4 Explain any four points regarding significance of Principles of Management.
ANSWER:
The four points regarding significance of Principles of Management are:
→ Providing managers with useful insights into reality: The principles of management provide the managers with useful insights into real world situations. These principles will add to their knowledge, ability and understanding of managerial situations and circumstances. It will also enable managersto learn from past mistakes and conserve time by solving recurring problems quickly.
→ Optimum utilisation of resources and  effective administration: Resources both human and
material available with the company are limited. Principles equip the managers to foresee the cause and effect relationships of their decisions and actions. Thus, the wastages associated with a trial-and-error approach can be overcome.
→ Scientific decisions: Decisions must be based on facts, thoughtful and justifiable in terms of the intended purposes. Management principles help in thoughtful decision-making. They emphasise logic rather than blind faith.
→ Meeting changing enviornment requirements: Management principles are flexible to adapt to dynamic business environment. For example, management principles emphasise division of work and
specialisation. In modern times this principle has been extended to the entire business whereby companies are specialising in their core competency and divesting non-core businesses.

Q.5 Explain the principle of ‘Scalar Chain’ and gang plank.

ANSWER:
An organisation consists of superiors and subordinates. The formal lines of authority from highest to lowest ranks are known as scalar chain. For example: Let us consider a situation where there is one head ‘A’ who has two lines of authority under her or him. One line consists of B-C- D-E-F. Another line of authority under ‘A’ is L-M-N-O-P. If ‘E’ has to communicate with ‘O’ who is at the same level of authority then she/he has to traverse the route E-D-C-B-A-L-M-N-O. This is due to the principle of scalar chain

However, if there is an emergency then ‘E’ can directly contact ‘O’ through ‘Gang Plank’. This is a shorter route and has been provided so that communication is not delayed.

Long Answer Questions:

Q.1 Explain the principles of scientific management given by Taylor.

ANSWER: Principles of scientific management are given by FW Taylor
(i) Science, Not Rule of Thumb When different managers use their own different methods to get the work done it is rule of thumb. Taylor believed that there was only one best method maximise efficiency. Taylor advised that every organisation should compare the results of different methods, test them again and again and finally select one best method of getting the work done.
(ii) Harmony, Not Discord Managers are an extension of the management and serve as a link between workers and the owners. Workers have to take the instructions from the managers and managers have to get the work done through the workers. Sometime the relation between them is spoilt, which is very harmful for everyone-workers, managers and owners. This class conflict should be replaced by harmony between the two. Both should change their thinking towards each other. This is known as mental revolution.
(iii) Co-operation, Not Individualism There should be complete co-operation between the labour and the management instead of individualism. This principle is an extension of principle of harmony, not discord. The management and the workers should not compete with each other rather co-operate with each other. Management should consider all good suggestions made by the employees which can help in cost reduction. At the same time workers should never think of going on strikes in order to get their unreasonable demands fulfilled.
(iv) Development of Each and Every person to His or her Greatest Efficiency and Prosperity
Scientific management also stood for worker development. Taylor believed that workers should be aware of the ‘best method’. On the other hand, all organisations should select employee carefully in order to get maximum efficiency. When the duties are allotted, perfect match should be made between the requirements of the job and the capabilities of the worker. Training should be provided to improve the skills further. In this way, efficiency will go higher resulting in prosperity for both workers and company.

Q.2 Explain the following principles of management given by Fayol with examples.
(a) Unity of direction
(b) Equity
(c) Espirit de Corps
(d) Order
(e) Centralisation and decentralisation
(f) Initiative

ANSWER: Fayol introduced general principles of management. Some of them have been explained below
(a) Unity of Direction
All the units of an organisation should be moving towards the same objective. Each group of activities having the same objective must have one head and one plan. Each group should have its own incharge and on no account the working of two divisions neither be overlaped.
(b) Equity
This principle emphasise kindliness and justice in the behaviour of managers towards workers. This will ensure loyalty and devotion. Lazy personnel should be dealt sternly and strictly. There should be no discrimination against anyone on account of gender, religion, caste, language or nationality etc. All decisions should be merit based.
(c) Espirit de Corps
This principle emphasises on building harmony and team spirit among employees. In a large organisation due to a large work force teamwork is very important. Teamwork leads to better co-ordination while working. The head of each team should give credit of good result to the whole team rather than confining it to his ownself.
(d) Order
A place for everything and everyone in his/her place. Basically it means orderlinss. If there is a fixed place for different things in a factory and they remain in their places then no time is wasted in locating them. Same way if every personnel is allocated an area to operate from then his co-workers, head or subordinates, anyone can contact him easily.
(e) Centralisation and Decentralisation Concentration of authority in a few hands is centralisation and its dispersal among more number of people is decentralisation. Fayol believed that an organisation should not work with anyone of them in isolation. A combination of both is important simple, easy and work of routine type should be decentralised and critical important type of work should be centralised.
(f) Initiative Initiative means taking the first step with self-motivation workers should be encouraged to develop and carry out their plans for improvements according to Fayol. Initiatives should be encouraged. A good company should invite suggestions from employees which can result in substantial cost/time reduction. Rewards can be given to fruitful suggestions.

Q.3 Explain the technique of ‘Functional Foremanship’ and the concept of ‘Mental Revolution’ as enunciated by Taylor.

ANSWER: Functional Foremanship Taylor advocated separation of planning and execution functions. This concept was extended to the lowest level of the shop floor. It was known as functional foreman ship.

Under the factory manager, there is a planning incharge and a production incharge.
Under the planning incharge, the work goes as follows
(i) Instruction Card Clerk Draft instructions for the workers.
(ii) Route Clerk Specify the route of production.
(iii) Time and Cost Clerk Prepare time and cost sheet.
(iv) Disciplinarian Ensure discipline.
Under the production incharge, the work goes as follows
(i) Speed Boss Timely and accurate completion of work.
(ii) Gang Boss Keeping tools and machines ready for operation by workers.
(iii) Repairs Boss Ensure proper working conditions of machines.
(iv) Inspector Check the quality of work.
Mental Revolution
In a factory, the managers served as a link between the owners and the workers. The managers have to get the work done from the workers which created sometimes problem between the two. Taylor emphasized that there should be harmony between the management and workers. Both should realise that each one is important. For this both had to change their thoughts for each other, This is known as ‘Mental Revolution’. Management should share the gains of the company with the workers and at the same time workers should work hard and be ready to accept any change made for the betterment of the organisation.

Q.4 Discuss the following techniques of scientific work study
(a) Time study
(b) Motion study
(c) Fatigue study
(d) Method study
(e) Simplification and standardisation of work

ANSWER: Some of the techniques of scientific work study are
(a) Time Study It determines the standard time taken to perform a well-defined job. The standard time is fixed for the whole of the task by taking several readings. The method of time study will depend upon volume and frequency of the task, the cycle time of the operation and time measurement costs. There are three objectives achieved through time study.
(i) Determine the number of workers.
(ii) Frame suitable incentive schemes.
(iii) Determines labour costs.
e.g., if standard time taken to do a piece of work in 20 minutes then one work can be done 3 times in an hour and total 21 times (3×7 hours per day) the work can be done on a single day.
(b) Motion Study Motion study refers to the study of movements like lifting, putting objects, sitting and changing positions. On close examination of body motions, e.g., it is possible to find out three types motions
(i) Motions which are productive.
(ii) Motions which are incidental.
(iii) Motions which are unproductive.
Out of the above, three workers were motivated to eliminate the third type completely and reduce the second one to the minimum. This help in increasing productivity.

(c) Fatigue Study Fatigue study seeks to determine the amount and frequency of rest intervals in completing a task. A person is bound to feel tired physically and mentally if he does not take rest while working. The next intervals will heip one to regain stamina and work again with the same efficiency for e.g., in an organisaton working hours are 9 to 5. There is a lunch break of an hour for the workers to take rest similarly in a school there is a break for the students and teachers after 4 periods of continuous learning.
(d) Method Study The objective of method study is to find out one best way of doing the job. Different managers would use their own different methods of getting the work done. But there is always one best method. Right from procurement of raw materials till the final product is delivered to the customer every activity is the part of method study. The objective of whole exercise is to minimise the cost of production and maximise the satisfaction of the customer.
(e) Simplification and Standardisation of Work Standardisation refers to the process of setting standards for every business activity e.g., process, raw material, time, product, machinery, methods or working conditions. The objective of standardisation are
(i) To reduce product to fixed types, sizes, features etc.
(ii) To establish interchangeability of various parts.
(iii) To establish standards of excellence and quality in materials.
(iv) To establish standards of performance of men and machines.
Simplification aims at eliminating unnecessary diversity of products. It results in savings of cost of labour, machines and tools. It implies reduced inventories, fuller utilisation of equipment and increasing turnover.

Q.5 Discuss the differences between the contributions of Taylor and Fayol.

Q.6 Discuss the relevance of Taylor and Fayol’s contribution in the contemporary business environment.
ANSWER:  Relevance of Taylor and Fayol’s contribution in the contemporary business environment.
Both Fayol and Taylor have given principles of management to improve efficiency in an organisation. Taylor gave us scientific principles of management which are being adopted by all organisations to improve its productivity at the shop floor level, the principles help in giving effective results. In the same manner, Henry Fayol gave in general principles of management which when implemented at any of the levels-top, middle or lower and helps in achieving better co-ordination, remove ambiguity and encourage the employees to improve their work performance.

Short answer Type Question:

Q.1 What is meant by Management?

ANSWER: Management refers to the process of managing people and tasks efficiently and effectively using the right techniques and methods. It is an integrated process which involves a series of functions like Planning, Organising, Staffing, Directing and Controlling.

Q.2 Name any two important characteristics of management.

ANSWER: The two characteristics of management are as follows:

• Management is a goal-oriented process: Each and every organisation has a set of goals to be achieved in a certain period of time. Different organisations have different types of goals depending upon the reason for its existence.
• Management is a dynamic function: The world is changing at a very fast pace and has become very dynamic. Management has to adapt itself as per the changing environment. Various external factors like social, political, economic factors have to be taken into consideration in order to survive.

Q.3 Identify and state the force that binds all the other functions of management.

ANSWER: Coordination binds all the other functions of management. It is also considered as the essence of management. Coordination as a process begins from the first step of management i.e planning. This is the process through which all the activities are lined up and put to action.

Q.4 List any two indicators of growth of an organisation.

ANSWER: The two indicators are:

• Increase in the sales volume of an organisation.
• Increase in number of employees over a period of time.

Q.5 Indian Railways has launched a new broad gauge solar power train which is going to be a path breaking leap towards making trains greener and more environment friendly. The solar power DEMU (Diesel Electric Multiple Unit) has 6 trailer coaches and is expected to save about 21,000 liters of diesel and ensure a cost saving of Rs 12, 00,000 per year. Name the objectives of management achieved by Indian Railways in the above case.

ANSWER: Social objectives of the management of Indian Railways have been achieved in the above case, as the organisation succeeded in saving diesel and costs, by making the trains environment friendly. 

Q.6 Ritu is the manager of the northern division of a large corporate house. At what level does she work in the organisation? What are her basic functions?

ANSWER: Ritu works in the middle-level management, being the manager of the northern division of a large corporate house.

The basic functions of the middle level managers are:

• They interpretes and explain the organisational plans and policies to line managers.
• They recruit and select the appropriate personnel.
• They are responsible for organising required resources for effective implementation of plans.
• They assign duties and responsibilities to first line managers.
• They motivate lower level management to achieve the best of their potential.
• They represent the complaints and problems of lower level management to top level management.

Q.7 State the basic features of management as a profession.

ANSWER: The basic features of management as a profession are:

• Well defined body of knowledge: Manager is a professional who can acquire specialised knowledge through books for joining specific courses.
• Restricted entry: Professional degree is a must to become a professional but an individual with managerial skills can become a manager despite having no professional degree.
• Professional association: Professionals need to be associated with respective professional bodies. They are professional bodies for management as well but it is not compulsory for managers to join.
• Ethical code of conduct: Professionals are bound by the code of conduct laid bi associations they are associated with. Managers are expected to be ethical but there is no specifically laid down code of conduct for them.
• Service motive: A professional and a manager both aim to provide dedicated and committed services towards the increase of their clients.

Q.8 Why is management considered a multi-dimensional concept?

ANSWER: Management is considered to be a multi-dimensional concept because it involves:

• Management of work: Each and every organisation has some work to perform. The management translates the work into goals to achieve and also the means used to achieve it. 
• Management of people: Human Resource is an organisation’s greatest asset. The task of management involves making people work, dealing and communicating with them, strengthening their positive aspects, and working upon their weaknesses
• Management of operations: Each and every organisation has some basic products to serve and some services to provide for survival. This requires a process through which the input materials are transformed into desired output. 

Long Answer Questions:

Q.1 Management is considered to be both an art and science. Explain.
ANSWER: Art is the skillful and personal applications of existing knowledge to achieve desired goal.
Management is considered an art due to the following reasons
(i) Existence of Theoretical Knowledge :All art subjects are based on theoretical knowledge e.g., written material is available on dancing, time arts, music etc same way there is lot of literature available on management and its branches – finance, marketing, human resource etc.
(ii) Personalised Application :The use of this basic knowledge differs from one individual to the other. Two painters, two dancers or two singers all use their knowledge in their own way. Same way two managers who have acquired the same knowledge may use it in their own different ways to get the work done.
(iii) Based on Practice and Creativity : All art is practical. It involves creative practice. The more we practice it better we become at it. It also requires creativity.
Same way a manager applies his acquired knowledge in a unique manner.
More practice makes him a better manager and he also develops his own style of management.
Management is an In-exact Science
(i) Systematised Body of Knowledge :Science is a systematised body of knowledge. Its principles are based on cause and effect relationship, e.g., water evaporates on being heated. Same way management is a body stigmatised Knowledge. All managerial principles have cause and effect relationship.
(ii) Principles Based on Experimentation :Scientific principles are first developed through observation and then tested through repeated experimentation. Same way management principles are also propounded after observation and repeated experimentation.
(iii) Universal Validity :All scientific principles have universal validity. They give same result wherever applied.
Principles of management do not have Universal validity. They have to be adjusted and applied according to the need of the situation.
Thus, management is an in-exact science.

Q.2 Do you think management has the characteristics of a full fledged profession?
ANSWER:  No, management does not possess all the characteristics of a full fledged profession. The reasons go as follows
(i) Well-defined Body of Knowledge All professions are based on a well-defined body of knowledge that can be acquired teaching – learning process. This feature of a profession is possessed by management as well. There is vast knowledge available on management in the form of definitions, concepts, theories, principles etc.
(ii) Restricted Entry All professions have a restriction or the entry of its practitioners. They have to acquire a specific degree to be professional e.g., LLB for a lawyer MBBS for a doctor etc. But a manager can be an MBA qualified or not.
(iii) Professional Association All professions are affiliated to a professional association which regulates entry, grants certificate of practice and formulates a code of conduct e.g., ail lawyers have to be a member of Bar Council to practice law. It is not compulsory for all managers to be a member of AIMA.’
(iv) Ethical Code of Conduct All professions are bound by a ethical code of conduct which guides the behaviour of its members. But as it is not compulsory for all managers to be members of AIMA, they all may not be aware of the prescribed code of conduct of AIMA.
(v) Service Motive All basic motive to serve their client’s interest, e.g., -lawyers to get justice for their clients, doctors to treat the patients etc. All managers also work in a manner where by they show their effectiveness and efficiency in the form of good quality goods provided to the customer at a reasonable price.
Thus, management possesses some characteristics of a profession but not all.

Q.3 Co-ordination is the essence of management. Do you agree? Give reasons.
ANSWER: Co-ordination plays a vital role as it binds all the other functions of management. It is the common thread of all activities such as purchase, production, sales etc that runs through. Some of the basic features are as follows
(i) Integrates Group Efforts Co-ordination brings unity to all. It gives a common focus to group efforts.
(ii) Ensures Unity of Actions It acts as a binding force between departments and ensures that all action is aimed at achieving the goals of the organisation.
(iii) It is a Continuous Process Co-ordination is not a one time function but a continuous process. It begins at the planning stage and continues till controlling.
(iv) It is an All Pervasive Function Co-ordination is required at all levels of management due to the interdependent nature of activities of various departments. It integrates the efforts of different departments and different levels.
(v) It is the Responsibility of All Managers All managers need to co-ordinate something or the other. A manager of production department needs to co-ordinate the work within his department and also with the other departments at the same time.
(vi) It is a Deliberate Function Whatever the managers are doing in an organisation they are doing it knowingly. Co-ordination is one of the most important functions of all managers. Thus co-ordination is also done deliberately. Whatever the managers do, they do it deliberately to achieved the predetermined goals and objectives.
Thus, we can say co-ordination is the essence of managment after analysing these points.

Q.4 “A successful enterprise has to achieve its goals effectively and efficiently” Explain.
ANSWER: “A successful enterprise has to achieve its goals effectively and efficiently”. Thus, management has to see that task are completed and goals are achieved with the minimum resources.
Management is thus getting things done with the aim of achieving goals effectively and efficiently. Being effective or doing work effectively basically means finishing the given task. It is concerned with end result, it is achieved or not. Efficiency means doing the work correctly and with minimum cost. If by using less resources more benefits are derived then efficiency has increased. It is thus essential for any organisation to focus on efficiency as well as effectiveness. It is not only important to complete the work correctly but equally important to complete it with minimum cost. In the same manner, it is not only important to reduce cost but equally important to complete the work correctly.

Q.5 Management is a series of continuous inter-related functions. Comment.
ANSWER: Management is a series of continuous inter-related functions. Each one of them performed to guide and direct the efforts of others.
(i) Planning Planning is the primary function which runs through all other functions. It is the process of thinking before doing. It bridges the gap between where we are and where we want to go.
(ii) Organising It is the process of defining the formal relationship among people and resources to accomplish the desired goals. It involves
(a) Identification and division of work
(b) Departmentalisation
(c) Assigning of duties
(d) Establishing reporting relationships
(iii) Staffing Organisational goals can be achieved only through human efforts. It is the duty of management to make the best possible use of this resource. Thus, placing the right person on the right job is very important. Staffing helps management to motivate, select and place the right person on the right job.
(iv) Directing Directing involves leading, influencing and motivating employees to perform the tasks assigned to them. This requires establishing an atmosphere that encourages employees to do their best. Directing comprises of four elements; supervision, motivation, leadership and communication.
(v) Controlling Controlling is the management function of monitoring organisational performance towards the attainment of organisational goals. The task of controlling involves
(a) Establishing standards of performance
(b) Measuring current performance’
(c) Comparing this with established standards
(d) Taking corrective action

Short answer Type Question:

Q.1State the difference between dissolution of partnership and dissolution of partnership firm.

ANSWER:

Basis of Difference	Dissolution of Partnership	Dissolution of Partnership firm
Meaning	It means change in the partnership deed (or the agreement) among the partners.	It means that the business is wound up and the firm is dissolved.
Discontinuation	Business is not discontinued.	Business is discontinued, as the firm is dissolved.
Closure of Books of Accounts	Books of accounts are not closed, as there is only change in the existing agreement between the partners.	Books of accounts are closed, as the business is discontinued.
Assets and Liabilities	In this case, the assets and liabilities are revalued.	In this case, all the assets are sold off in order to pay the liabilities of the business.
Role of Court	There is no intervention by the court.	Dissolution of a partnership firm may be done with the consent of the court.
Nature	It is voluntary in nature.	It may be voluntary (as per the discretion of the partners) or compulsory (as per the order of the court).
Effect	It may or may not involve dissolution of the firm.	It necessarily involves dissolution of both the partnership as well as of the partnership firm.

Q.2 State the accounting treatment for:

i. Unrecorded assets

ii. Unrecorded liabilities

ANSWER:

i) Accounting Treatment for Unrecorded Assets

 Unrecorded asset is an asset, the value of which has been written off in the books of accounts but the asset is still in usable position. The accounting treatment for unrecorded asset is:

a) When the unrecorded asset is sold for cash

Cash A/c	Dr.
	To Realisation A/c
(Unrecorded assets sold for cash)

b) When the unrecorded asset is taken over by any partner

Partner’s Capital A/c	Dr.
	To Realisation A/c
(Unrecorded asset taken over by the partner)

ii) Accounting Treatment for Unrecorded Liabilities

 Unrecorded liabilities are those liabilities which are not recorded in the books of account. The accounting treatment for unrecorded liability is:

a) When the unrecorded liability is paid off

Realisation A/c	Dr.
	To Cash A/c
(Unrecorded liability paid in cash)

b) When the unrecorded liability is taken over by a partner

Realisation A/c	Dr.
	To Partner’s Capital A/c
(Unrecorded liability  taken over by the partner)

Q.3 On dissolution, how you deal with partner’s loan if it appears on the

(a) Assets side of the Balance Sheet

(b) Liabilities side of the Balance Sheet

ANSWER:

a) If partner’s loan appears on the assets side of the Balance Sheet then it implies that the partner has taken loan from the business and is liable to pay back to the business. In such case, the loan amount is transferred to his capital account. Thus the accounting entry will be:

Partner’s Capital A/c	Dr.
	To Partner’s Loan A/c
(Partner’s loan transferred to Partner’s Capital Account)

b) If partner’s loan appears on the liabilities side of the Balance Sheet then it implies that the partner has forwarded loan to the firm and the firm is liable to pay back the amount to the partner. In such case, partner’s loan is paid off after paying all the external liabilities. The partner’s loan is not transferred to the Realisation Account, in fact, it is paid in cash. The following accounting entry is passed.-

Partner’s Loan A/c	Dr.
	To Cash/Bank A/c
(Partner’s loan paid in cash)

Q.4 Distinguish between firm’s debts and partner’s private debts.

ANSWER:

Basis of Difference	Firm’s Debts	Partner’s Private Debts
Meaning	It refers to those debts that are borrowed against the name of the firm.	It refers to those debts that are borrowed personally by the partner.
Liability	All the partners of the firm are jointly and separately liable for the firm’s debt.	The concerned partner is personally liable for his private debts.
Settlement of debts by private assets	If the firm’s debt exceeds the firm’s assets, then private assets of the partners may be utilised to pay back the firm’s debt, if only  the partner’s  private assets exceeds his/her own private debts.	Private debts are settled against the partner’s private assets. Subsequently, if any surplus exists then this may be utilised to settle the firm’s debts.
Settlement of debts by firm’s assets	Firm’s debts are settled against the firm’s assets. Subsequently, if any surplus exists, then this is distributed among the partners.	After paying off firm’s debts, the surplus of firm’s assets, if any is distributed among the partners.  The personal share of the partner in this surplus can be utilised to settle his/her own private debts.

Q.5 State the order of settlement of accounts on dissolution.

ANSWER:

The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.

1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:

a) First of all the external liabilities and expenses are to be paid.

b) Then, all loans and advances forwarded by the partners should be paid.

c) Then, the capital of each partner should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.

2. Treatment of Loss: In case of loss and any deficiency of capital this should be paid in the following order:

a) First these should be adjusted against firm’s profits.

b) Then, against the total capital of the firm.

c)Even if  there exists any loss and deficiencies then it should be borne by all the partners individually in their profit sharing ratio.

Q.6 On what account realisation account differs from revaluation account.

ANSWER:

Basis of Difference	Realisation Account	Revaluation Account
Meaning	It records the sale of various assets and payment of various liabilities.	It records the effect of revaluation of assets and liabilities on the eve of admission, retirement, death and change in the profit sharing ratio.
Time	It is prepared at the time of dissolution of firm.	It is prepared when admission/retirement/death or change in profit sharing ratio takes place.
Objective	To find profit or loss on realisation of assets and payment of liabilities.	To find out profit or loss on revaluation of assets and liabilities.
Amount	Assets and liabilities are shown at the book value.	Increase or decrease in the value of assets and liabilities are shown in this account.
Records	All assets and liabilities are recorded here.	Only those assets and liabilities are recorded here whose values have changed over a period of time.
Effect	All accounts of assets and liabilities are closed.	No account is closed on revaluation of assets and liabilities.

LONG ANSWER TYPE QUESTIONS:

Q.1 Explain the process of dissolution of partnership firm.
ANSWER: Dissolution means breaking of relationship among the partners. As per Section 39 of the Indian Partnership Act 1932, the dissolution of firm implies that not only partnership is dissolved but the firm losses its existence, i.e., after dissolution the firm does not remain in business.
Dissolution of partnership firm implies discontinuation of the business of the partnership firm. Dissolution involves winding up of business, disposal of assets and paying off the liabilities and distribution of any surplus or borne of loss by the partners of the firm. As per the Partnership Act 1932, a partnership firm may be dissolved in the following manners.

(i) Dissolution by Agreement As a firm is formed with the consent of all partners with a mutual agreement. Dissolution can also be there with
the help of agreement. It happens in following two ways.
A firm may be dissolved
(a) When all the partners agree to dissolve the firm.
(b) When there is any term related to dissolution of firm in the partnership agreement.
(ii) Compulsory Dissolution A firm may be dissolved compulsorily in the following condition
(a) In case, all the partners or all except one partner become insolvent or insane.
(b) If the business becomes illegal.
(c) Where all the partners except one decide to retire from the firm.
(d) Where all the partners except one die.
(iii) Dissolution by Notice When partnership is at will then the partnership firm may be dissolved, if any partner give notice in writing to all the other partners expressing his/her intention to dissolve the firm.
(iv) Dissolution by Court A court may order for dissolution if a suit is filed by a partner, as per Section 44 of Indian Partnership Act, 1932. The court may order to dissolve a partnership in following conditions
(a) A partner becomes insane.
(b) A partner commits breach of agreement wilfully.
(c) When a partner’s conduct affects the business.
(d) When a partner transfers his interest to a third party.
(e) If business cannot be continued.
(f) If a partner becomes incapable of doing business.
(g) If court thinks dissolution to be just and equitable on any ground.
Besides these, above mentioned circumstances, a partnership firm may be dissolved if the court at any stage finds dissolution of the firm to be justified and inevitable.

Q.2 What is a Realisation Account?
ANSWER:  On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named realisation account. The main purpose to open realisation account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the partner’s capital account in their profit sharing ratio.
Concisely, following are the important objectives of preparing realisation account
(i) To close all the books of account.
(ii) To record transactions relating to the sale of assets and discharge of liabilities.
(iii) To determine profit or loss due to the realisation of assets and liabilities.
Features of Realisation Account
(i) In realisation account, sale of assets is recorded at their realised value.
(ii) Payment to liabilities (creditors) is recorded at their settlement value.
(iii) After all the transactions have been recorded, there will be balance, which may be profit or loss.
(iv) Profit arises in two situations
(a) When assets are realised at more than their book value.
(b) When liabilities are settled at less than their book value.
(v) If the two conditions are vice versa, the net result will be loss.
(vi) The net profit or loss on realisation is to be transferred to the partner’s capital accounts in their profit sharing ratio.

The format for realisation account is as follows

Q.3 Reproduce the format of Realisation Account.
ANSWER:

Q.4 How deficiency of creditors is paid off?
ANSWER: When a firm gets into the situation of dissolution, first of all the amount received from the sale of firm’s assets are utilised to pay the creditors. After that, if the sale receipts of assets fall short, then partners’ private assets are used for settling the dues of the firm’s creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of
creditors. This deficiency is handled in the following two ways
(i) In first case, deficiency is transferred to the Deficiency Account.
(ii) In second case, the deficiency is transferred to the partner’s capital account.
In first case, a separate account is prepared for the firm’s creditors. Then in ‘ order to ascertain the firm’s cash balance accruing from the sale of the firm’s
assets and partners’ private assets, cash account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account.
In the second case, the creditors are paid by the cash available with the firm
including the partners’ individual contribution. The deficiency or unpaid creditors amount .is transferred to the partner’s capital account. Thus, the deficiency of the creditors is borne by all the partners in their profit sharing ratio. If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm.
‘ If the partnership deed is silent, about such capital loss in the fact of insolvency of a partner, the deficiency on the insolvent partner’s capital ’ account must be borne by the other solvent partners, in proportion to their capital. In that case, we should apply Garner vs Murray decision in solving problems in partnership.

Short Answer Type Question:

Q.1 What are the different ways in which a partner can retire from the firm?

ANSWER: The following are the different ways in which a partner can retire from a firm.

i. With the consent of all other partners: A partner must take the consent of all the co-partners of the firm before his/her retirement. Thereafter, the partner can retire from the firm if and only if all the partners agree on the decision of his/her retirement.

ii) With an express agreement by all the partners: In case of written agreement among the partners a partner may retire from the firm by expressing his/her intention of leaving the firm though a notice to the other partners of the firm.

iii) By giving a written notice: If partnership among the partners is at will then a partner may retire by giving notice in writing to all the other partners informing them about his/her intention to retire.

Q.2 Write the various matters that need adjustments at the time of retirement of partner/partners.

ANSWER: The following are the various matters that need to be adjusted at the time of retirement of partners/partner.

1. Calculation of new gaining ratio of all the remaining partners of the firm.

2. Calculation of new ratio of the remaining partners of the firm.

3. Calculation of goodwill of the new firm and its accounting treatment.

4. Revaluation of assets and liabilities of the new firm.

5. Distribution of accumulated profits and losses and reserves among all the partners (including the retiring partner).

6. Treatment of Joint Life Policy

7. Settlement of the amount due to the retiring partner

8. Adjustment of capital accounts of the remaining partners in their new profit sharing ratio.

Q.3 Distinguish between sacrificing ratio and gaining ratio.

ANSWER:

Basis of Difference	Sacrificing ratio	Gaining Ratio
1. Meaning	It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partners/partner	It is the ratio in which continuing partner acquires the share of profit from outgoing partner/partner
2. Calculation	Sacrificing Ratio = Old Ratio – New Ratio	Gaining Ratio = New Ratio – Old Ratio
3. Time	It is calculated at the time of admission of new partners/partner.	It is calculated at the time of retirement/death of old partners/partner.
4. Objective	It is calculated to ascertain the share of profit and loss given up by the existing partners in favour of new partners/partner.	It is calculated to ascertain the share of profit and loss acquired by the remaining partners (of the new firm in case of retirement) from the retiring or deceased partner.
5. Effect	It reduces the profit share of the existing partners.	It increases the profit share of the remaining partners.

Q.4 Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?

ANSWER: At the time of retirement or death of a partner, it becomes inevitable to revalue the assets and liabilities of the firm for ascertaining their true and fair values. The revaluation is necessary as the value of assets and liabilities may increase or decrease with the passage of time. Further, it may be possible that there are certain assets and liabilities that remained unrecorded in the books of accounts. The retiring or the deceased partner may be benefited or may bear loss due to change in the values of assets and liabilities. Therefore, the revaluation of the assets and liabilities is necessary in order to ascertain the true profit or loss that is to be divided among all the partners in their old profit sharing ratio.

Q.5 Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

ANSWER: Goodwill is an intangible asset of a firm that is earned by the efforts of all the partners of the firm. After the retirement or death of a partner, the fruits of the past performance and reputation will be shared only by the remaining partners. Thus the remaining partners should compensate the retiring or the deceased partner by entitling him/her a share of firm’s goodwill.

Long answer Type Question:

Q.1 Explain the modes of payment to a retiring partner.
ANSWER: Payment to a retiring partner can be made in the following ways
(i) Lump Sum Payment : A lump sum payment can be made to the retiring partner in full settlement. In that case, the following Journal entry will be passed

(ii) Opening the Loan Account Sometimes the amount due to the retiring partner is paid in instalments then the balancing figure of his/her capital account is transferred to his/her loan account, in this case, the retiring partner receives equal instalments along with the interest on the amount outstanding. In that case the following journal entries will be passed for transferring the amount paid to him/her in retiring partner’s loan account.

(iii)Some Payment in Cash and Some in Instalment Sometimes the amount due to the retiring partner is paid partly in cash and partly in equal instalments in that case a certain amount is paid in cash to the retiring partner and the rest amount due to him/her is transferred to his/her loan account. The following necessary journal entry is to be passed.

Q.2 How will you compute the amount payable to a deceased partner?
ANSWER:  In case of a death, the legal executor of the deceased partner is entitled for a claim which includes his share of profit or loss, interest on capital, interest on drawings In that case for computing the amount payable is calculated by preparing the deceased partner’s capital account as follows

Note: In the above capital account, the legal executor will be entitled for the balancing
figure that is the excess of the credit side over the debit side of the deceased partner’s capital account.

Q. 3 Explain the treatment of goodwill at the time of retirement or on the event of death of a partner.
ANSWER:  At the time of retirement or is the event of death of a partner, the goodwill of the firm is adjusted among the partners in their gaining ratio with the share of goodwill of the retiring or the deceased partner. At the time of retirement or on the event of death of a partner, goodwill account is not opened hence only two situations are left for treating the goodwill first when
goodwill account is already there in the book or it appear in the books and second when the amount of goodwill is not appearing in the books.
The treatment of goodwill will be as follows in the above two situations
First Situation When Goodwill Already Appears in the Books of the Firm
Step 1 Write-off the Existing Goodwill When goodwill account already exist in the book of the firm or mentioned in the book first of all, it will be written oft and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. In that case, the journal entry will be as follows

Step 2 Adjusting Goodwill Through Partners’ Capital Account
After writing off the old goodwill, the amount of goodwill now needs to be adjusted through the partner’s capital account with the share of the goodwill of the retiring orthe deceased partner. The following journal entry is passed.

Second Situation When No Goodwill Appears in the Books of the Firm
In second case, when no goodwill appears in the books of the firm, the amount of goodwill will be adjusted through the partner’s capital account with the share of the goodwill of the retiring or the deceased partner. The following journal entry’is passed

Q.4 Discuss the various methods of computing the share in profits in the event of death of a partner.
ANSWER:  Computation of profit will be different in case of death of a partner as compare to the retirement. The reason is that in case of retirement everything is pre-planned but in case of death nothing is planned. In case of death, the share of profit.can be calculated by one of the two methods.
(i) On the Basis of Time
In this method, profit upto the date of the death of the partner is calculated on the basis of time passed till the death of the partner from the beginning of the year on the bases of the last year’s/years’ profit or average profit of last few years.
The assumption in this method is that the profit will be uniform throughout the current year. The share of the deceased partner profit will be calculated as follows

Example A, B, C and D are equal partners. The profit of the firm for the years 2009, 2010 and 2011 are ? 5,00,000, ? 7,00.000 and <9,00,000 respectively. C dies on June 30, 2012. The share of C in the firm’s profit will be calculated on the basis of average profit of last three years. Firm closes its books every year on December 31.
In this case, C’s share in the profits will be calculated for four months. i e., from January 1. 2012

(ii) On the Basis of Sale
In this method, profit up to the date of the death of the partner is calculated on the basis of sales affected till the date of the’ death of the partner from the beginning of the year. The assumption in this method is that the net profit margin for current year will be same as the previous year. The share of the deceased partner profit will be calculated as follows

Example A, B and C are equal partners. The last year’s sales and profit were ? 40,00,000 and ? 4,00,000. C died on June, 2012. Sales of the current year till the date of C’s death amounts to ? 15,00,000. Firm closes its books on December 31 every year.

Short Answer Type Question:

Q.1Identify various matters that need adjustments at the time of admission of a new partner.

ANSWER: The following are the various items that need to be adjusted at the time of admission of a new partner.

1. Profit Sharing Ratio: Calculation of new profit sharing ratio.

2. Goodwill: Valuation and adjustment of goodwill among the sacrificing old partners.

3. Revaluation of Assets and Liabilities: Assets and liabilities are revalued to ascertain the current value of the assets and liabilities of the partnership firm. Moreover, the profit or loss due to the revaluation need to be distributed among the old partners.

4. Accumulated profits, losses and reserves are distributed among the old partners in their old ratio.

5. Adjustment of capital of the partners.

Q.2 Why i is it necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

ANSWER: When new partner/s is/are admitted, then the old partners in the partnership firm need to sacrifice their share of profit in favour of the new partner/s. This reduces the share of profit of the old partners ,hence, it is necessary to ascertain the new profit sharing ratio even for the old partners in the event of admission of new partner/s.

Q.3 What is sacrificing ratio? Why is it calculated?

ANSWER: Sacrificing ratio refers to the ratio in which the old partners of a partnership firm surrender their share of profit in favour of the new partner/s. It is calculated as a difference between the old ratio and the new ratio of the old partners.

Sacrificing Ratio = Old Ratio − New Ratio

It is very important to calculate this ratio, as the new partner need to compensate the old partners for sacrificing their share of profit. The new partner compensates the old partners by making payment to them in the form of goodwill that is transferred among the old partners in their sacrificing ratio

Q.4 On what occasions sacrificing ratio is used?

ANSWER: The following are the different situations when sacrificing ratio is used.

1. When the existing partners of a partnership firm agree to change the share of profit among themselves.

2. When a new partner is admitted in the partnership firm and the amount of the goodwill brought by him/her is transferred among the old partners in sacrificing ratio of the old partners.

Q.5 If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?

ANSWER: If goodwill already appears in the books of old firm (before the admission of new partner), then this should be written off among the old partners in their old profit sharing ratio. The following Journal entry is passed.

Old Partner’s Capital A/c	Dr.
To Goodwill A/c
(Goodwill written off in old ratio among the old partners)

Q.6 Why is there need for the revaluation of assets and liabilities on the admission of a partner?

ANSWER: At the time of admission of a new partner, it becomes very necessary to revalue the assets and liabilities of a partnership firm for ascertaining its true and fair values. This is done because the value of assets and liabilities may have increased or decreased and consequently their corresponding figures in the old balance sheet may either be understated or overstated. Moreover, it may also be possible that some of the assets and liabilities are left unrecorded. Thus, in order to record the increase and decrease in the market value of the assets and liabilities, Revaluation Account is prepared and any profits or losses associated with this increase or decrease are distributed among the old partners of the firm.

Long Answer Type Question:

---

Q.1 Do you advise that Liabilities and Assets must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?

ANSWER: It is logical to revalue Liabilities and Assets when a new partner gets admitted in the firm, as it is helpful in determining the true value of them on that day. Revaluation is helpful as the value of Liabilities and Assets may increase or decrease and as such their values in existing balance sheet may be not justified, also some assets or liabilities may not be recorded at all. Hence, for recording the changes in market value for the Liabilities and Assets, a revaluation account is needed to be prepared and the associated profits or losses needs to be distributed between the existing partners of firm.

Following journal entries are added to the account on the date a new partner is admitted in a firm.

i. When asset value increases:

Assets A/c Dr.

To Revaluation A/c

(For increase in asset value)

ii) When asset value decreases:

Revaluation A/c	Dr.
	To Asset A/c
(For Decrease in asset value)

iii) When Liabilities increase:

Revaluation A/c	Dr.
	To Liabilities A/c
(For increase in liabilities value)

iv) When liabilities decrease:

Liability A/c	Dr.
	To Revaluation A/c
(For decrease in liabilities value)

v) To record assets that are unrecorded:

Unrecorded Assets A/c	Dr.
	To Revaluation A/c
(Recording unrecorded assets)

vi) To record liabilities that are unrecorded :

Revaluation A/c	Dr.
	To Unrecorded Liabilities A/c
(To record unrecorded liabilities)

vii) Transferring credit balance of Revaluation account:

Revaluation	Dr.
	To Old Partner’s Capital A/c
(Transfer of profit earned from Revaluation to Old Partners as per existing profit sharing ratio)

vii) Transferring debit balance of Revaluation account:

Old Partner’s Capital A/c	Dr.
	To Revaluation A/c
(Transfer of loss on revaluation to Old Partners as per existing profit sharing ratio)

Q.2 What is goodwill? What are the factors that affect goodwill?

ANSWER: Goodwill refers to the intangible asset that represents the firms value and reputation and the brand name that it carries in the market. Goodwill is earned by a firm from the work it does which helps earn people trust by meeting all customer demands both in quality and quantity. Having a positive goodwill is very much helpful for a firm to earn extraordinary profits in comparison to its competitors. It also ensures profits that keep coming in the future and helps in retaining old customers.

Factors affecting firms’ goodwill are:

1. Product Quality: A firm which is constantly delivering the best product for its customers will have a greater goodwill.

2. Location: A central location makes it easy to reach and attracts more footfalls which leads to higher sales and more goodwill.

3. Management: Cost efficiency and higher productivity can be achieved by having an efficient management in place, also it ensures quality products at less price which increases goodwill.

4. Market Structure: A firm will enjoy more benefits of goodwill if the market is monopolistic in nature and there are no substitutes, it will add more goodwill to the firm.

5. Other Advantages: A firm that is getting benefits such as continuous supply of fuel, power and raw materials and uses it to produce quality goods enjoys a higher goodwill.

Q.3 Explain various methods of valuation of goodwill.

ANSWER: There are four different methods of goodwill valuation:

1. Average Profit Method: In this method, the calculation of goodwill is done based on the average profits of the past years. It can be calculated as

Goodwill = Average Profit × No. of Years Purchase

Here, the number of years of purchase signifies the years till which the firm expects profits to generate in the same way as current period

Following steps are involved in this method

1. Determine total profit of past years

2. Add all losses which are abnormal in nature such as theft, fire etc.

3. Add all normal income, if not done previously

4. Deduct all incomes that are not obtained from business, and all such abnormal incomes for e.g winning a lottery

5. Deduct all normal expenses, if not deducted previously

6. Calculate the average profit, by dividing total profit determined in the previous step

7. Multiply the average profit hence obtained to the number of year’s purchases in order to determine goodwill.

Example:

Last 5 years profits are 3,00,000,  9,00,000,   (6,00,000),  15,00,000,  24,00,000.

Goodwill calculated as:

Goodwill = 9, 00,000 × 4 = 36, 00,000

2. Weight Average Method: In this method, weights are allocated to each year’s profit with the highest weight given to recent year’s profit and lower weights marked for past years profits. The product of the profits and weights are added and divided by the total weight to determine weighted average profits. It is a modified version of Average Profit Method. The following formulae is used.

The following steps are involved:

1. Assign highest weightage to recent year’s profit and lowest weightage to past years profits.

2. Multiply weights with the profits corresponding to each year

3. Determine product total

4. Divide the product total with total of weightage to find Weighted Average Profit

5. Multiply the weighted average profit with number of years purchase

For example:

Last 5 years profits are ₹ 3,00,000,   ₹ 9,00,000,   ₹ (6,00,000),   ₹ 15,00,000,   ₹ 24,00,000.

Goodwill calculated as:

Profit/Loss ₹	Weights	Product ₹
3,00,000	1	3,00,000 × 1 = 3,00,000
9,00,000	2	9,00,000 × 2 = 18,00,000
(6,00,000)	3	(6,00,000) × 3 = (18,00,000)
15,00,000	4	15,00,000 × 4  = 60,00,000
24,00,000	5	24,00,000× 5  = 1,20,00,000
Total	15	₹ 1,83,00,000

3. Super Profit Method:  In this method, goodwill is determined on excess profit earned by a firm as compared to profit earned by rivals in the same industry. The excess profit earned over normal profit is called as Super Normal Profit

Following steps are involved:

1. Calculate the average profit

2. Calculating average capital engaged

3. Calculating normal profit

4. Calculation of Super Normal Profit using the formulae: Super Normal Profit = Average Profit – Normal Profit

5. Multiply super normal profit with number of years purchase to determine goodwill.

4. Capitalisation Method: Goodwill is determined by two ways as follows:

a) By Average Profit capitalisation. b) By Super Profit capitalisation.

a) By Average Profit capitalisation

Following steps are involved:

1. Average profit is calculated

2. Calculating average profits capitalised value using the formulae

3. Determine Actual Capital Employed

4. Deduct Actual Capital Employed from Capitalised Average Profit to calculate goodwill.

Goodwill = Capitalised Average Profit – Actual Capital Employed

b) By Super Profit capitalisation.

Following steps are involved:

1. Capital Employed for calculation

2. Calculation of Normal profit

3. Calculation of average profit

4. Calculating Super Normal Profit:

Super Normal Profit = Average Profit – Normal Profit

Step 5: Goodwill calculation by the following formula:

4. If it is agreed that the capital of all the partners be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

When a new partner is admitted to the firm, the capital of all partners must be determined using new profit sharing ratio. In such cases new capital of each partner is determined and is dependent on the following instances:

1. New partner’s capital is given

2. Firm’s total capital is given

1) New partner’s capital is given

It involves the following steps

1. Calculation of total capital of firm based on the new partners’ capital

2. Divide total capital of the firm by individual share of partner’s profits to determine each partner’s new capital

3. After posting adjustments determine each partner’s capital balance

4. The capital determined previously is written in Partners Capital account on the credit side

5. Calculation of surplus or deficit. If new capital is more than the old share, then it needs to be contributed by old partners and is termed deficit and if new capital is less than old capital, it is called surplus and the difference is paid to old partners.

Let us understand the above steps with the help of an example.

A & B are partners in business who share profits and losses equally. They agree to admit C for
share in profit. C brings ₹ 1, 00,000 as capital. A and B have old capital of ₹ 80,000 and ₹ 60,000 respectively, at the time admission of C.

Step 3:

	A	B
New Capital	100,000	100,000
Less: Existing Capital	(80,000)	(60,000)
Withdrawal (deposit)	(20,000)	(40,000)

So both A and B need to pay 20,000 and 40,000 more as share for their new capital.

2) When new firms’ total capital is known:

When new partner’s capital is not mentioned, then new capital is determined based on the total capital of the firm on a proportionate basis. The amount that is determined has to be brought in by the new partner as capital. Following steps are taken to determine the new partners’ capital:

1. Finding the total old capital of the existing partners after performing all adjustments.

2. Finding total capital of the new firm by multiplying old capital of existing partners with the reciprocal of old partners total share.

Q.4 The new capital of each partner is determined on the basis of total capital calculated which is multiplying new profit ratio with the total capital, individually for all partners. Here is an example to help understand the concept.

ANSWER: Ram and Shyam are partners in a firm sharing profit and loss equally. They agree to admit Anil for 1/3^rd share in profit and decided to share future profit and loss equally. X’s capital is ₹ 1, 00,000 and Y’s capital is ₹ 50,000. Z brings sufficient capital for his share in profit.

1. Old Capital= ₹ 1, 00,000 + 50,000 = 1, 50,000

2. Calculation of total capital

3. New Partners Capital

Q.5 Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash?

ANSWER: The situation in which a new partner is unable to bring his share of goodwill in cash, the goodwill account gets adjusted through Old Partners account. New partners’ capital account is debited with the share of goodwill and the same gets credited to Old Partner’s account.

New Partner’s Capital A/c	Dr.
	To Old Partners’ Capital A/c
(New Partner account debited)

Note: According to Para 16 of Accounting Standard 10, Goodwill is recorded only when it is any transaction equivalent to money or money’s worth. It is a mandatory practice that is followed.

Q.6 Explain various methods for the treatment of goodwill on the admission of a new partner?

ANSWER: Goodwill is treated in the following ways on introduction of a new partner:

1. Premium Method

2. Revaluation Method

When a new partner pays the share of goodwill in the form of cash, it is called as premium method. There can be two scenarios:

1. New partners pays directly to old partners

2. Partner brings goodwill in form of cash and it is retained in the business.

The corresponding entries are:

(i) When goodwill brought in cash by new partner

Cash/Bank A/c Dr.

To Premium for Goodwill A/c

(Amount of goodwill brought in by new partner)

(ii)When goodwill is retained by business:

Premium for Goodwill A/c Dr

To Sacrificing Partners’ Capital A/c

(Goodwill brought by new partner distributed among old partners as per the sharing ratio)

Revaluation Method: Situations when new partner is unable to bring goodwill in form of cash

New Partner’s Capital A/c Dr. (Goodwill amount not brought by new partner)

To Old Partners’ Capital A/c

(Goodwill of new partner distributed to old partners as per their sharing ratio)

Note: According to Para 16 of Accounting Standard 10, Goodwill is recorded only when it is any transaction equivalent to money or money’s worth. It is a mandatory practice that is followed.

Q.7 How will you deal with the accumulated profit and losses and reserves on the admission of a new partner?

ANSWER: A new partner is not entitled to bear the losses or enjoy the profits of a previous business. Hence, when a new partner is added to the firm, the accumulated profits or losses, reserves needs to be distributed to current partners (partners of old firm) in their profit sharing ratio.

Treatment of accumulated losses, profits and reserve

Profit and Loss A/C Dr.

General Reserve A/C Dr.

Contingency Reserve A/C Dr.

When losses accumulate over a period.

For Profits and losses

Deferred Advertising expense Dr.

(Losses accumulated shared to old partners as per sharing ratio)

Q.8 At what figures the value of Liabilities and Assets appear in the books of the firm after revaluation has been done? Show with the help of an imaginary balance sheet.

ANSWER: After revaluation has been done, the Liabilities and Assets appear at their current market values in the Balance Sheet of the reconstituted firm. This can be better explained with the help of the below explained example.

Anil & Bijay shares profit and loss equally.

Balance Sheet of A and B as on April 01, 2019
Liabilities	Amount ₹	Assets	Amount ₹
Sundry Creditors	1,00,000	Cash in Hand	8,000
Capital Accounts		Cash at Bank	1,78,000
Anil 1,50,000		Debtors	40,000
Bijay 1,50,000	3,00,000	Stock	36,000
				Furniture	38,000
			Plant and Machinery	1,00,000
	4,00,000		4,00,000

1) On that date Chetan is admitted as new partner for 1/3^rd share and offers 2, 00,000 as capital.

2) Value of stocks increased by ₹ 7,000.

3) A ₹ 2,000 provision has been created against Debtors.

4) ₹ 35,000 value obtained after revaluating furniture.

5) A machinery costing ₹ 100,000 purchased is not recorded in books.

6) Outstanding rent ₹ 2,000.

Prepare Revaluation Account, Partners’ Capital Account, Cash Account and Balance Sheet.

Revaluation Account
Dr.			Cr.
Particular	Amount ₹	Particular	Amount ₹
Rent Outstanding A/c	2,000	Stock	7,000
Provision for Debtors	2,000	Machinery	100,000
Furniture	35,000
Profit transferred:
	Anil’s Capital A/c	50,000
	Bijay’s Capital A/c	50,000	100,000
	107,000		107,000

Anil’s Capital Account
Dr.						Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance c/d		2,00,000		Balance b/d		150,000
					Revaluation A/c		50,000
			2,00,000				2,00,000

Bijay’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance c/d		2,00,000		Balance b/d		150,000
					Revaluation A/c		50,000
			2,00,000				2,00,000

Chetan’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance c/d		2,00,000		Cash A/c		2,00,000
			2,00,000				2,00,000

Cash Account
Dr.							Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance b/d		8,000		Balance c/d		2,08,000
	Chetan’s Capital A/c		2,00,000
			2,08,000				2,08,000

Balance Sheet of Anil, Bijay & Chetan as at April
Liabilities	Amount ₹	Assets	Amount ₹
Sundry Creditors	1,00,000	Cash in hand	2,08,000
Rent Outstanding	2,000	Cash at Bank	178,000
		Debtors	40,000
		Less: Provision	2,000	38,000
Capital Account
Anil	2,00,000		Stock	43,000
Bijay	2,00,000		Furniture	35,000
Chetan	2,00,000	6,00,000	Plant and Machinery	2,00,000
	7,02,000		7,02,000