Total Pageviews

VHSE SECOND YEAR MANAGEMENT English text only

Vocational Higher Secondary Education (VHSE) 

Second Year 

MANAGEMENT 

Reference Book 



CONTENTS 

Part AAbout the Course .......................................................................5 

Syllabus......................................................................................6 

Part B - Units 

1. Economic Environment for Management .............................9 

2. Working Capital Management ............................................ 19 

3. Long run Investment Decision – Capital Budgeting ...........27 

4. Production and Operations Management ............................ 38 

5. Quality Management........................................................... 54 

6. Measures of Central Tendency ........................................... 64 

7. Measures of Dispersion....................................................... 83 

8. Correlation .......................................................................... 96 

9. Index Numbers ................................................................. 106 

10. References ....................................................................... 114 

MANAGEMENTABOUT THE SUBJECT 

Management is a developing discipline. It ensures the accomplishment of the objectives of an organization within a set of constraints in scientific manner. Being the budding entrepreneurs, vocational higher secondary learners get ample knowledge, skills and attitudes on various aspects of management. The subject Management is introduced in VHSE as part of the commerce education in all commerce based vocational courses. It helps learners to acquaint with different management concepts and their application in business. Learners are also being introduced to certain tools for managerial decisions making from Economics and Statistics. 

Learners have acquired the basic concepts of management, its process, functions, objectives and its functional areas, recent trends and certain tools from economics and statistics, used in managerial decision making, during first year. In the second year, as a continuation of what they have studied, the economic environment for managerial decision making and the areas of short term and long term financial decision making, functional areas of management like production and operations management and quality management are included. More areas from Statistics like averages, dispersion, correlation and index numbers which are inevitable tools for managerial decision making are also included in the syllabus. 


SYLLABUS 

Unit I ECONOMIC ENVIRONMENT FOR MANAGEMENT (26 Periods) 

1.1. Economic environment – Meaning and Significance 1.2. Basic concepts in Economic Environment 1.2.1. National Income: Gross Domestic Product, Net Domestic Product, 

Gross National Product, Net National Product 1.2.1.1. Methods of Measuring National Income 

- Value Added Method - Income Method - Expenditure Method 1.2.1.2. Problems in the calculation of National Income 1.2.2. Business Cycle - Phases of Business Cycle 

Unit II WORKING CAPITAL MANAGEMENT (22Periods) 

2.1 Meaning and Concept of Working Capital 2.2 Components of Working Capital 2.3 Types of Working Capital 2.4 Meaning and significance of working capital management 2.5 Approaches to working capital Management Unit III LONG RUN INVESTMENT DECISION - CAPITAL BUDGETING 

(24 Periods) 

3.1. Meaning and Importance of Capital Budgeting 3.2. Capital Budgeting Process 3.3. Methods of Capital Budgeting – Traditional (Non- Discounted Cash Flow 

Methods) 3.3.1. Pay Back Method 3.3.2 Average Rate of Return Method 3.4. Methods of Capital Budgeting – Discounted Cash Flow Methods 3.4.1. Net Present Value Method 3.4.2. Profitability Index Method 3.4.3. Internal Rate of Return Method Unit IV PRODUCTION AND OPERATIONS MANAGEMENT (22 Periods) 

4.1. Meaning and Importance of Production and Operations Management. 4.2. Difference between Production and Operation 4.3. Major Decisions of Production Management 4.4. Plant Location and factors affecting plant location 

MANAGEMENT4.5. Plant Layout and different types of Plant Layouts 4.6. Aggregate Planning – Meaning, Importance and Strategies 4.7. Master Production Scheduling - Meaning, Significance and Development of 

Master Production Schedule (MPS) Unit V QUALITY MANAGEMENT (16 Periods) 

5.1. Meaning and Definition of Quality 5.2. Dimensions of Quality – Product and Service 5.3. Meaning and Concept of Quality Management 5.4. Principles of Quality Management 5.3. Quality Systems 

5.3.1. Elements 5.3.2. ISO 9000:2000 Unit VI MEASURES OF CENTRAL TENDENCY (32 Periods) 

6.1. Meaning and Significance of Central Tendency 6.2. Qualities of a good average 6.3. Types of Average 6.4. Simple Arithmetic Mean – Individual Observation, Discrete Series, Continuous 

Series. 6.5. Weighted Arithmetic Mean 6.6. Combined Arithmetic Mean 6.7. Correction in Mean 6.8. Median - Individual Observation, Discrete Series, Continuous Series. 6.9. Determination of Median Graphically. 6.10. Partition Values – Quartiles, Deciles and Percentiles 6.11. Quartiles - Individual Observation, Discrete Series, Continuous Series. 6.12. Percentiles - Individual Observation, Discrete Series, Continuous Series. 6.13. Mode - Individual Observation, Discrete Series, Continuous Series. 6.14. Locating Mode Graphically 6.15. Comparison of mean, median and mode Unit VII MEASURES OF DISPERSION (28 Periods) 

7.1. Meaning and Significance of Measures of Dispersion. 7.2. Methods of studying Dispersion. 7.3. Absolute and Relative Measures of Dispersion. 7.4. Range - Individual Observation, Discrete Series, Continuous Series. 


Reference Book 

87.5. Coefficient of Range. 7.6. Quartile Deviation -Individual Observation, Discrete Series, Continuous Series. 7.7. Co efficient of Quartile Deviation 7.8. Mean Deviation - Individual Observation, Discrete Series, Continuous Series. 7.9. Co efficient of Mean Deviation 7.10. Standard Deviation - Individual Observation, Discrete Series, Continuous Series. 7.11. Co efficient of Standard Deviation/Variance 7.12. Qualities of a good measure of Dispersion. 

Unit VIII CORRELATION (18 Periods) 

8.1. Meaning of Correlation 8.2. Types of Correlation 8.2.1. Simple, Partial and Multiple 8.2.2. Positive and Negative 8.2.3. Perfect and Imperfect 8.2.4. Linear and Non linear 8.3. Methods of studying correlation 8.3.1. Scatter Diagram method 8.3.2. Pearson’s Co-efficient of Correlation 8.3.3. Spearman’s Rank Correlation Unit IX INDEX NUMBERS (22 Periods) 

9.1. Meaning 9.2. Types of Index Numbers 9.2.1. Price Index 9.2.2. Quantity Index 9.2.3. Cost of Living Index 9.2.4. Whole Sale Price Index 9.3. Uses and Purpose 9.4. Methods of constructing Index Numbers 

9.4.1. Simple Index Number 9.4.2. Weighted Index Number 

Laspeyres’ Method Paasche’s Method 

MANAGEMENTUnit 1 Economic Environment for Management 

1.1. Economic environment – Meaning and Significance 1.2. Basic concepts in Economic Environment 

• National Income: Gross Domestic Product, Net Domestic Product, Gross National Product, Net National Product 

• Methods of Measuring National Income - Value Added Method - Income Method - Expenditure Method 

• Problems in the calculation of National Income 

• Business Cycle - Phases of Business Cycle 

Introduction 

The success of a business not solely depends on its internal management, but also on many external forces. These external forces include consumers, other business firms, general economic conditions, Government laws and regulations. Business has to monitor the changes happening in these external forces and adapt to these changes for its survival. Economic environment is one of the main elements in business environment. The economic environment is composed of various sets of economic policies, economic system, national income, per capita income, infrastructure, capital formation, development strategy for economic growth and development, resources mobilisation, business cycle etc. This chapter deals with national income and its basic concepts, methods for its measurement and problems in its calculation. 

Learning Outcomes 

The learner; 

• Identifies the meaning of economic environment 

• Explains basic concepts in economic environment 

• States the importance of economic environment 

• Explains various concepts of national income 

• Analyzes the various methods of measuring national income 

• Identifies the problem in the calculations of national income 

• Identifies the meaning of business cycle 

• Recognises the phases of business cycle 


Meaning of Economic Environment Economic environment refers to the economic factors like economic conditions, economic policies and economic systems that influence the business in a country. The basic concepts in economic environment are: 

1. Economic system 

Economic system is a system, which functions in a country for the purpose of production and distribution of goods and services to satisfy the needs of the people. Economic system can be; a. Capitalism-Capitalism believes in private ownership of production and distribution facilities. The United States, Japan and United Kingdom are examples of capitalist countries. b. Socialism-Socialist economy is one where all means of production are collectively owned and it also ascribe a large role to the state. The erstwhile USSR is an example for socialist country. c. Mixed economy-Existence of both private and public sectors. France, Holland 

and India are examples of mixed economies. 2. Economic policies 

Economic policies lay the framework within which every organisations has to function. Economic policies include; 

A. Monetary policy- Monetary policy is primarily concerned with the management of supply of money in a country. The main objective of monetary policy is to maintain price stability and ensure an adequate flow of credit to the productive sectors of the economy. In India, monetary policy is announced twice a year by Reserve bank of India. Monetory policy is also termed as credit control policy. Credit control can be of two types. 

(i) Quantitative credit control (ii) Qualitative credit control (i) Quantitative credit control - It regulates the volume of total credit and includes; 

Bank rate policy- The bank rate, is the rate at which central bank would re- discount the eligible bills already discounted by commercial banks. The central bank can control the money supply in the country by revising the bank rate upwards and downwards. 

Open market operations -The central bank may purchase or sell the securities in the open market and thereby control money supply in the economy. For example: suppose there is inflation, to bring down the money supply, the central bank would sell the securities. When there is deflation the central bank would buy the securities. 

MANAGEMENTVariable reserve ratio- Variable reserve ratio refers to the increase or decrease in the statutory liquidity ratio and cash reserve ratio. By increasing the ratio the commercial banks would be left with lesser volume of funds to grand loans and prevent the inflation. 

(ii) Qualitative credit control - Qualitative credit control means regulating the flow 

of credit through margin requirements, moral suasion, credit-rationing etc. 

B. Fiscal policy - It is the means by which a Government adjust its spending levels and revenue collection to monitor and influence a nation’s economy. In other words, fiscal policy is concerned with the determination of State income and expenditure policy. This is the policy, through which Government can encourage and restrict consumption, investment and saving habits in a country. One of the important goals of fiscal policy formulated by the Government of India is to attain rapid economic development of the country. The following are four important techniques of fiscal policy of india; 

1. Taxation policy 2. Public expenditure policy 3. Public debt policy 4. Deficit financing policy 

C. Foreign trade policy- Foreign trade policy determines the scope for trade between countries. A liberal policy would extend the scope for exports and imports while restrictive trade policy would narrow the scope for trade. D. Licensing policy- Till 1991, India adopted licensing policy to regulate the growth of industries in India. After 1991 India adoped the policy of liberalisation, liberating the economy from strict rules. 





E. Technology policy- The policy of using modern techniques in business. 

F. Price policy- Price policy refers to the controls that Government has on the price in a country. Through price policy the Government protects the interest of the people. Importance of Economic Environment 

There is a close and continuous interaction between the business and its economic environment. Economic factors such as per capita income, national income, exploitation of natural resources, employment generation, propensity to consume, industrial development and so on, influence the business environment. Likewise, the economic performance of a country also determines the business environment. The interaction helps in strengthening the business firm and using its resources more efficiently. Economic environment helps the business in the following ways: 

11 

Reference Book 

12 

• Identifying opportunities and threats. 

• Giving direction of growth. 

• Continuous learning. 

• Image building. 

• Meeting competition. 

• Identifying strength and weakness. 

Assessment Activity 

Suppose, as a result of budget announcement there will be a hike of 

10,000 in the price of two wheelers from April 2016. Analyse its impact on two wheelar market on the basis of a) Sales b) profitablity. National Income 

National income is the money value of all the final goods and services produced by a country during a period of one year. 

For example, national income consists of millions of metres of cloth, tonnes of sugar, and millions of litres of milk. How can we measure the total income in this case? Since these goods are measured in different physical units, it is not possible to add them together. So the value of all goods and services produced is measured in terms of money, which is the common measure of value. Basic concepts of National Income 

1.Gross Domestic Product (GDP) 

Gross domestic product is the money value of all final goods and services produced in the domestic territory of a country during a year. 

(a) Final goods – Final goods are those goods, which are being purchased for final use 

and not for resale or further processing. 

(b) Domestic territory- 

➢ Territory lying within the political frontiers, including territorial waters of the 

country 

➢ Ships and aircrafts operated by the residence of the country 

➢ Fishing vessels, oil and natural gas rigs and floating platforms operated by the 

residence of the country in the international waters. 

➢ Embassies, consulates and military establishments of the country located abroad. 

MANAGEMENT2. GDP at constant prices and current prices 

The domestic product estimated on the basis of the prevailing prices is called gross domestic products at current prices. 

The domestic product measured on the basis of fixed prices, in some base year, is known as gross domestic product at constant prices. 3. GDP at factor cost and GDP at market price 

GDP at market price is the money value of all goods and services produced in the domestic territory of a country during one year estimated at the prices prevailing in the market. 

GDP at factor cost is the estimation of gross domestic product in terms of the earning of factors of production. 

Conceptually, the value of GDP at market price and factor cost must be identical. This is because the final value of goods and services at market price must be equal to the cost involved in their production (factor cost). 4. Net Domestic Product (NDP) 

Gross domestic product does not represent the true national income because it includes the full value of all goods, even capital goods. When depreciation allowance is subtracted from GDP we get Net Domestic Product. 

Capital goods - Capital goods are those final goods which are durable and used in production process but do not get transformed in the production process. They form a part of capital and they gradually undergo wear and tear. For example machines, equipment, buildings etc. 

NDP = GDP - Depreciation 5. Gross National Product (GNP) 

Gross National Product is the total value of all goods and services produced by the nationals of a country within the country or outside the country. The value of goods and services produced by non- nationals in India will not be included in the Gross National Product of India. GNP = GDP + Income from abroad 6. Net National Product (NNP) 

Net National Product is the total value of final goods and services produced in an economy during a year after allowing for depreciation. Thus; 

NNP = GNP - Depreciation OR 

NNP= GDP + Income from abroad - Depreciation 

NNP is the ‘National Income’ of an economy. When NNP is divided by the Population of a country, we will get ‘Per capita Income’ 

13 

Reference Book 

7. NNP at factor cost 

NNP at factor cost is the volume of commodities and services turned out during an accounting year, counted without duplication. It can also be defined as the net value added at factor cost (by the resident) in an economy during an accounting year. 

Assessment Activity 

Form equations for different concepts of national income. 

GNP at market price- depreciation =NNP at market price. 

GNP at market price – net income from abroad = GDP at market price. 

GDP at market price – net indirect taxes =GNP at factor cost. 

NNP at market price – net income from abroad = NDP at market price. 

NNP at market price – net indirect taxes = NNP at factor cost. 

GDP at market price – net indirect taxes = GDP at factor cost. 

GNP at factor cost – depreciation =NNP at factor cost 

NDP at market price – net indirect taxes =NDP at factor cost. 

GDP at factor cost – depreciation = NDP at factor cost. Methods of measuring national income 

There are three methods of measuring national income: 

(1) Value added method or product method 

(2) Income method 

(3) Expenditure method 1. Value added method or product method 

According to value added method or product method or net output method, national income is measured by adding up the money value of all final goods and services produced in a country during one year. There are three steps in computing national income, under product method. They are: 

a. Classify the economy into; 

i. Primary sector i.e. producing commodities by exploiting natural resources like land 

and water e.g. agriculture, forestry, fishing, mining etc. 

ii. Secondary sector i.e. manufacturing sector–transfers one type of commodity into 

another eg. manufacturing,construction, electricity, gas, water supply etc. 

iii. Tertiary sector i.e. service sector e.g. trade and commerce, transport and 

communication, banking, insurance Government and professional services. 

14 

MANAGEMENTb. Estimation of net value added 

The second step is to find out the net value added at factor cost within the domestic territory of a country. 

c. Estimation of National Income 

The third step in estimating national income is estimating the net factor income earned from abroad. Net factor income from abroad consists of net compensation of employees, net income from property and entrepreneurship and net retained earnings of resident companies abroad. When we add the net factor income from abroad to the net domestic product we get the national income. 2. The income method 

The income method measures national income from the side of the payments made to the primary factors of production for their productive services in an accounting year. 

There are four steps involved in estimating national income by the income method. They are: (a) Identifying the production units employing factor services (b) Classifying factor payments (c) Estimating factor payments and (d) Estimating net factor income from abroad. 

(a) Identifying the production unitsinto primary sector, secondary sector and tertiary 

sector. 

(b) Classifying factor payments 

The factor payments are generally classified into; 

compensation of employees - salaries and wages, employers contribution to social security and welfare funds, ration, uniform, housing, medical and education benefits 

capital income- rent, interest, profits, royalties, dividends undistributed profits of companies etc. 

mixed income - earning from agriculture, trade, transport, income from professions. 

(c) Estimating factor payments 

The third step is to estimate factor payments i.e. the number of units of each factor employed is multiplied with the income paid to each unit. 

(d) Estimating net factor income from abroad 

This is the last step in estimating national income. Compensation of employee’s, capital income and mixed income earned by all the production units in the domestic territory of a country during an accounting year gives the domestic factor income. By adding the net factor income from abroad with the domestic factor income we get the national income. 

15 

Reference Book 

3. Expenditure method 

The expenditure method estimates national income by measuring final expenditure on gross domestic product. Final expenditure in an economy is the sum total of the expenditure incurred on final goods and services produced. It is the sum total of consumption expenditure and investment expenditure. The final expenditure on gross domestic products consists of: 

a. Private final consumption expenditure b. Government final consumption expenditure c. Gross fixed capital formation d. Changing stocks e. Net acquisition of valuables f. Net export of goods and services Problems in the estimation of national income 

Generally two types of difficulties are met within the estimation of national income. They are: - (a) conceptual difficulties (b) statistical difficulties (a). Conceptual difficulties – conceptual difficulties relate to definition of various concepts and terminology used in this process like definition of nation, method employed in the national income estimation, stage of economic activity at which national income is to be calculated and the type of commodities and services which are to be taken into account in national income. (b). Statistical difficulties – Lack of adequate data, lack of differentiation in economic function, double counting etc., are some of the statistical difficulties. In a developing country like India, a large portion of agriculture output does not come to the market at all and is retained either for barter purpose or for self-consumption. In unorganized sectors like small scale industries and trade, hotels and restaurants etc, data on production, capital formation etc are not satisfactory. In India, conditions not only differ between different states but also within each state. Information based on samples taken from a few districts may or may not be valid for the whole states. Occupational distribution of working population of India is not very clearly defined. Assessment Activity 

Calculate the value of goods produced by garment manufacturers assuming that cotton passes through four stages of production. 

Value added at different stages Stages of Production Value of output (Rs) Value added (Rs) 1 Cotton cultivation 100 100 2. Cloth Manufacturing 150 50 3. Garment Manufacturing 210 60 4. Retailer 250 40 

Total 710 250 

Explanation : If we add the value of different stages of production, total comes to 

710. The customers pay only 

250. This amount should be added while estimating the national income. This is because the value of the final product, i.e., the cotton garments is only 

16 

250. 

Business Cycles 

Economic activities never move on a straight line, it faces fluctuations. The wave like fluctuation in the level of economic activity is called business cycles. It may be defined as an alternate expansion and contraction in overall business activity, characterised by the periods-boom, recession, depression and recovery. Business cycle also known as trade cycle, affects the total income, investment, employment and output. Phases of a Business Cycle 

1.Boom (Prosperity or expansion): The boom phase means a state in which the real income consumed, the real income produced and the level of employment are higher or rising. All these bring up the economy to the peak. 

2.Recession (contraction): Once the economy reached thepeak, the course will change. A downward tendency in demand occurs. But the producers who are not aware of this go on producing. The supply now exceeds demand. When the producers come to know the situation they are compelled to give up the future investments. Business failures increase and unemployment expands. There is general distress. 

3.Depression: During the phase of depression economic activity is at its low ebb. Wages, costs and prices are very low. There is massive unemployment and a fall in the aggregate income of the people. The lowest point at this phase is called‘trough’ 

4.Recovery: Depression phase does not continue indefinitely. The idle workers now come forward to work at low wages, consumers start consuming, and banks come forward to give loans. Thus economic activity starts picking up. Business cycles and Managers 

Business cycles are reality. Every firm is a part of economy and hence cannot remain isolated. A thorough knowledge about business cycle , its impact on the economy are inevitable for business managers for forward planning and decision making. Periods of depression bring in pessimism and slacken business activity. Periods of boom create optimism and brighten business prospects. Signs of recession warn about probable losses and recovery signals potential opportunities. Thus the impact of every phase has to be analysed properly. 

peak 

MANAGEMENT17 

Reference Book 

TE Questions 

1. The economic environment of business includes 

a) Economic system b) Economic policies c) Economic conditions d) All of these 

2. Net national product at factor cost is – 

a) Equal to national income b) more than national income c) less than national income d) always more than the gross national product 

3. Which of the following is incorrect? 

a) GDP at market price = GDP at factor cost plus net indirect taxes 

b) NNP at factor cost = NNP at market prices minus net indirect taxes 

c)GNP at market prices = GDP at market prices plus net factor income from abroad 

d) None of the above. 

4. Expansion in general business activities : Inflation 

Contraction in general business activities : _______ 

5. Name the various methods of quantitative credit control policies of central bank. 

6. Differentiate GNP at market prices and NNP at market prices. 

7. Mention the three sectors in which an economy can be classified. 

8. Examine the various concepts related to national income. 

9. What are the various methods of estimating national income? 

10. What are the various difficulties involved in estimating national income in India? 

Extended Activities 

1. Prepare a note on the new initiatives and policies adopted in India for the development 

of start-ups, small, medium and micro business units. 

2. Collect national income and per capita income data from new Economic Survey 

report available in the web site www.finmin.nic.in 

3. Collect monthly sales data of a particular year from 5 shops doing similar business in your town and analyze it on monthly-wise. Link your findings with the different phases of business cycle. 

18 

MANAGEMENT19 

Unit 2 Working Capital Management 

2.1. Meaning and Concepts of Working Capital 2.2. Components of Working Capital 2.3. Types of Working Capital 2.4. Meaning and Significance of Working Capital Management 2.5. Approaches to Working Capital Finance 

Introduction 

Every organisation requires broadly two kinds of capital. One for investing in fixed assets and another for financing routine activities. Investment in fixed assets is called fixed capital and investment in current assets is called working capital. This chapter deals with how working capital is managed by maintaining an optimum level of current assets and current liabilities. 

Learning Outcomes 

The learner; 

• Identifies the meaning of working capital 

• States the importance of working capital 

• Explains the concepts of working capital 

• Compares gross working capital with net working capital 

• Explains different components of working capital 

• Identifies different kinds of working capital 

• Analysis the factors affecting working capital 

• States the meaning and importance of working capital management 

• Explains different approaches to working capital finance. 

Meaning and Importance of Working Capital 

If you propose to start a small business after completing the vocational higher secondary course, say a coffee shop. What all things do you need? 

You require building, furniture, utensils, sugar, coffee powder, cash to pay wages and other day-to-day expenses. For all these we need money or capital. 

Reference Book 

Every business needs funds for two purposes - for its establishment and to carry out its day-to-day operations. The investment made in the fixed assets like building, furniture, utensils etc. is called fixed capital. Funds needed for the purchase of sugar, tea powder etc. and payment of wages and other day to day expenses are known as working capital. Thus, working capital is the sum of money needed to finance current assets. 

No business can run successfully without an adequate amount of working capital. The importance of maintaining adequate amount of working capital is as follows: 

1. Solvency of the business-Adequate working capital ensures solvency of the busi- 

ness by providing uninterrupted flow of production. 

2. Goodwill-Sufficient working capital enables a business to make prompt payments and it will enhance the goodwill of the firm. It also helps to arrange loans on easy and favourable terms. 

3. Cash discount- With adequate amount of working capital the business can make 

cash purchases and thereby avail cash discount. 

4. Regular payments of salaries, wages and other day to day commitments-Regular and prompt payment of employees’ claims is possible only if sufficient working capital is available. This will raise their morale and eventually leads to increase in efficiency. 

5. Exploitation of favourable market conditions- Adequate amount of working capital helps the firm to exploit favourable changes in the market such as reduction in the price of raw materials, unexpected demand for product, etc. 

6. Ability to face crisis - Sufficient working capital provides a buffer to face uncertainties. 

7. High morale- Adequacy of working capital creates an environment of security, con- 

fidence, high morale and enhance overall efficiency in business. Concepts of Working Capital 

The different concepts of Working Capital are : 

(i) Gross Working Capital- The sum total of all current assets of a business concern is called as gross working capital. Current assets are those assets which can be converted into cash within a short period of time ie, one year. 

(ii) Net working capital- Net working capital is the difference between current assets and current liabilities. Current liabilities are those liabilities which are intented to be paid within one accounting year. 

Net working capital=current assets-current liabilities 

20 

MANAGEMENTNet working capital may be: 

(a) Positive working capital:- excess of current assets over current liabilities. 

(b) Negative working capital;- excess of current liabilities over current assets. 

iii). Permanent or fixed working capital: There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal busi- ness operations. For example, a minimum level of raw materials, work in progress, finished goods and cash balance. This minimum level of current assets is called fixed working capital 

iv). Temporary or variable working capital- This is the amount of working capital which is required to meet the seasonal demands and some special exigencies. 

Components of working capital 

Working capital is composed of various current assets and current liabilities, which are as follows; (A) Current Assets :Current assets include: 

a) Inventory 

i. Raw materials ii. Work-in-progress iii. Consumable stores iv. Finished goods b) Sundry debtors c) Bills receivables d) Pre-payments e) Short term investments f) Accrued income g) Cash and bank balances (B) Current liabilities:Current liabilities include: 

a) Sundry creditors b) Bills payables c) Accrued expenses d) Bank overdrafts e) Proposed dividends f) Short term loans g) Tax payments due 

21 

Reference Book 

Assessment Activity 

Compute gross working capital and net working capital from the given balancesheet 

Balancesheet of ABC ltd. as on 31.3.2015 

Liabilities Rs. Assets Rs. 

Equity shares 400000 Goodwill 40000 

8% debentures 200000 Land and building 300000 

Reserves & Surplus 100000 Plant and machinery 200000 

Sundrycreditors 300000 Finished goods 120000 

Bill payable 60000 Work-in-progress 80000 

Outstanding expenses 40000 Prepaid expenses 40000 

Bank overdraft 100000 Marketable securities 120000 

Provision for tax 40000 Sundry debtors 180000 

Proposed dividend 60000 Bill receivables 40000 

Cash & bank 180000 

Total 1300000 Total 1300000 

As per the balancesheet 1) Gross working capital= total of current assets 

ie., 120000 + 80000 + 40000 + 120000 + 180000 + 40000 + 180000 = 

7,60,000 2) Net working capital = current assets – current liabilities 

Current assets = 

7,60,000 Current liabilities = 300000+60000+40000+100000+40000+60000 = 

600000. Net working capital=760000-600000 = 

160000. 

Factors determining the working capital requirements 

The working capital requirements of a concern depend upon a number of factors such as: 

1. Nature of business-The working capital requirements of a firm basically depends upon the nature of its business. Public utility undertakings like electricity, water supply and railways need very limited working capital because they offer cash sales only and supply services, not products, and as such no funds are tied up in invento- ries and receivables. On the other hand, trading and financial firms require invest- ment of large amounts in current assets like inventories, receivables and cash. 

22 

MANAGEMENT2. Size of business- Greater the size of a business unit, generally larger will be the requirements of working capital. However, in some cases even smaller concern may need more working capital due to high overhead charges and other economic disadvantages of small size. 

3. Production policy-In certain industries the demand is subjected to wide fluctua- tions due to seasonal variations. If the policy is to keep production steady by accu- mulating inventories it will require higher working capital. 

4. Length of production cycle-In manufacturing business, the requirements of work- 

ing capital increase in direct proportion to length of manufacturing process. 

5. Working capital cycle- In a manufacturing concern the working capital cycle starts with the purchase of raw materials and ends with the realisation of cash from the sale of finished products. Larger the period of the cycle, larger is the requirement of working capital. 

6. Rate of stock turnover – A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turn- over. 

7. Credit policy- A concern that purchases its requirements on credit and sells its products on cash requires lesser amount of working capital. On the other hand, a concern buying its requirements for cash and allowing credit to its customers shall need larger amount of working capital. 

8. Business cycles- In a period of boom, there is a need for large amount of working 

capital. In times of depression there will be large amount of idle working capital. 9. Rate of growth of business - The working capital requirements of a concern increases with increase in the growth of business activities. For a firm with normal rate of growth and expansion of business, the retained profit may be used for additional working capital. But fast growing concerns require large amount of working capital. 10. Dividend policy- A firm that maintains a steady high rate of cash dividend needs 

more working capital than the firms that retains larger part of its profits. 11. Price level changes- Generally, the rising prices will require the firm to maintain larger amount of working capital to maintain the same level of current assets. 12. Other factors- Operating efficiency, management ability, irregularities of supply, import policy, importance of labour, banking facilities etc., also influence the require- ments of working capital. Working Capital Management: Meaning and Significance Working capital management means planning, organising directing and controlling of 

23 

Reference Book 

working capital. It is concerned with the management of current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained. The aim of working capital management is to deploy such amount of current assets and current liabilities so as to maximise short term liquidity. The two steps involved in the working capital management are; 

1. Forecasting the amount of working capital 2. Determining the sources of working capital Both excess as well as deficit working capital position are bad for any business. Working capital management policies of a firm have great effect on its profitability, liquidity and structural health of the organisation. Disadvantages of excessive working capital 

1. Idle funds earn no profits for the business. 2. Accumulation of inventories causing more chances of theft, waste and losses. 3. Defective credit policy cause higher incidence of bad debts. 4. Due to low rate of return on investments, the value of shares may fall. 5. The redundant working capital gives rise to speculative transactions. Dangers of inadequate working capital 

1. A concern with inadequate working capital cannot pay its short term liabilities in time. This will lose its reputation and shall not be able to get good credit facilities. 2. The concern cannot avail the benefit of bulk purchase and discounts. 3. It becomes difficult for the firms to exploit favourable market condition. 4. The firm cannot pay the day-to-day expenses of its operations. 5. The firm is not possible to utilise the fixed assets due to non – availability of 

liquid cash. 6. The rate of return on investment also falls with the shortage of working capital. 

Out of the two situations, i.e. excess or inadequacy of working capital, the inadequacy of working capital is more dangerous from the point of view of the firm. Approaches to working capital finance 

Broadly speaking, there are two sources for financing working capital requirements: 

a. Long term sources- share capital, debentures, public deposits, plough back of 

profits, loans from financial institutions etc. 

b. Short term sources- Short term fund from commercial banks, indigenous bankers, 

trade creditors, instalment credit, advances, accounts receivables etc. 

24 

MANAGEMENTThe management has to decide the proportion of short term and long term sources of finance to be included in the total working capital requirements. There are three basic approaches for determining the mix to finance working capital. They are: 

1. Conservative approach 

According to this approach, the entire estimated investment in current assets should be financed from long term sources, and short term sources should be used only for emergency requirements. The main features of this approach are: 

a) Liquidity is severally greater 

b) Risk is minimized 

c) The cost of financing is relatively high 

2. The aggressive approach 

The aggressive approach suggests that the entire estimated requirements of current assets should be financed from short term sources and even a part of fixed assets investments be financed from short term sources. The main features of this approach are: 

a) More risk b) Less costly c) More profitable 

3. The hedging or matching approach 

The term hedging usually refers to off setting transaction of a simultaneous but opposite nature which counters balance the effect of each other. The hedging approach suggests that the permanent working capital requirements should be financed with funds from long term sources while the temporary or seasonal working capital requirements should be financed with short term funds. 

TE Questions 

1. Gross working capital is equal to: 

a) Total of current assets 

b) Total of current liabilities 

c) Current assets-current liabilities 

d) None of the above 

2. According to conservative approach of working capital management, current as- 

sets should be financed from 

a) Long term sources 

b) Short term sources 

c) Both Long term sources and Short term sources 

d) None of the above 

25 

Reference Book 

3. Complete the diagram 


debtors 

raw materials 

work in progress 


4. Find odd one out and state reason. 

sales 

Land and building, cash in hand, cash at bank, sundry debtors. 

5. Give a short note on Hedging? 

6. List out the factors determining working capital requirements? 

7. What are the different components of working capital? 

Extended Activities 

1. Visit a small enterprise working in and around your location. Ask the entrepreneur how he arranged his working capital? Identify the major problems he faces in arranging working capital. 

2. Prepare a list of formal agencies in Kerala that provide working capital finance to 

small entrepreneurs. 

26 

MANAGEMENTUnit 3 Long Run Investment Decision – Capital Budgeting 

3.1. Meaning and Importance of Capital Budgeting 3.2.Methods of Capital Budgeting – Traditional 

• Pay Back Method 

• Average Rate of Return Method 3.3. Methods of Capital Budgeting – Discounted Cash Flow Methods 

• Net Present Value Method 

• Profitability Index Method 

• Internal Rate of Return Method 

Introduction 

The allocation of funds of a concern mainly depends on its investment decision. It is a choice of assets such as short term or current assets and long term or fixed assets where funds will be invested. The investment decision which relates to the short term or current assets is known as working capital management or current assets investment decision whereas the investment decision relating to the long term or fixed assets is known as capital budgeting or capital expenditure decision or long term investment decision. 

Learning Outcomes 

The learner; 

• Identifies the meaning of capital budgeting 

• States the importance of capital budgeting 

• Recognizes the process of capital budgeting 

• Classifies different types of capital budgeting methods 

• Explains the concept of Pay Back Period method 

• Explains the concept of Average Rate of Return method 

• Compares between Pay Back Period method and Accounting Rate of Re- turn method 

• Explains the concept of Net Present Value Method 

• Explains the concept of IRR Method 

• Explains the concept of Profitability Index Method 

• Classifies different types of Discounted Cash flow techniques 

• Differentiate between Traditional Methods and Discounted Cash flow techniques 

• Solves problems by using different formulae 

27 

Reference Book 

28Meaning of Capital Budgeting A progressive business firm continually needs to expand its fixed assets and other resources to be competitive in the race. Investment in fixed assets is an important indicator of business growth. The success of an organisation in the long run depends upon the effectiveness with which the management makes capital expenditure decisions. 

The term Capital Budgeting refers to the process of decision making with regard to the investment in fixed assets (ie, long term assets and capital projects). It involves long-term planning for proposed capital expenditure for maximizing return on investments. The capital expenditure may be; 

• Cost of acquisition of fixed assets. e.g., land, building and machinery etc. 

• Cost of mechanization, automation and replacement. 

• Investment on research and development. 

• Cost of development and expansion of existing and new projects. Importance of Capital Budgeting 

Capital budgeting is important because of the following reasons: 

➢ Cost: Initial investment is huge. Hence, these decisions are planned after care- 

ful evaluation of various projects. 

➢ Time: The effect of the decision is known only in the near future and not 

immediately. 

➢ Irreversibility: These decisions once taken are not easily reversible without 

incurring huge loss. 

➢ Risk: The longer the time period of returns, the greater is the risk. Hence 

decisions should be taken after a careful review of all available information. 

➢ Complexity: Decisions are based on forecasting of future events and inflows. Quantification of future events involves application of statistical and probabilis- tic techniques. Process of Capital Budgeting 

The process of capital budgeting decision involves five steps; 

1. Identify the Investment Projects -The first and crucial process of any invest- ment decision is the recognition of opportunities. Several opportunities are available for investment but only promising opportunities that are compatible with firms ob- jectives should be identified 

2. Evaluate the Investment Projects - It is necessary to estimate inflows and out- flows of each of the investment projects. Evaluations are done by using different capital budgeting techniques. 

3. Select Investment Project - After evaluation, the top management by consider- ing returns, risk as well as the cost of capital, chooses that project which maximises the shareholders’ wealth. 

4. Project Execution- Once the se- lection is made, the project will be implemented by acquiring neces- sary funds for financing the project. 

5. Feedback- After the execution of the project, its progress must be monitored with the help of feedback reports. Actual performance should be compared with the expected one and deviations, if any, should be properly addressed. Methods of Capital Budgeting Capital budgeting techniques (Investment appraisal criteria) can be divided into following two groups: Non-Discounted Cash Flow Methods (Traditional Methods) 

• Payback Period (PBP) • Accounting Rate Of Return (ARR) 

Discounted Cash Flow Methods (Modern or Time adjusted Methods) 

• Net Present Value (NPV) • Profitability Index (PI) 

• Internal Rate of Return (IRR) Non-Discounted Cash Flow Methods (Traditional Methods) 

(a) Payback Period (PBP) : The payback period (PBP) is a traditional method of capital budgeting. It is the simplest and perhaps, the most widely used quantitative method for appraising capital expenditure decisions. 

PBP is the number of years required to recover the original cash outlay invested in a project. 

Computation of PBP There are two methods of calculating the PBP. 

MANAGEMENT29 

Reference Book 

(a) The first method can be applied when the annual cash inflow is uniform. In such a situation the initial cost of the investment is divided by the constant annual cash flow: For example, if an investment of 

100000 in a machine is expected to generate cash inflow of 

20,000 per annum for 10 years. Its PBP will be calculated using following formula:PBP = Initial Investment / Constant Annual Cash Inflow 

= 100000/20000 = 5 years (b) The second method is used when a project’s annual cash inflows are not equal. In such a situation PBP is calculated by the process of cumulating annual cash inflows till the time when cumulative cash flow becomes equal to the original investment outlays. 

For example, A firm requires an initial cash outflow of 

20,000 and the annual cash inflows for 5 years are 

4000 respectively. Calculate PBP. Here, When we cumulate the cash flows for the first three years, 

19,000 is recovered. In the fourth year 

4000 cash flow is generated by the project but we need to recover only 

4000)× 12 months = 3 months. Thus, the PBP is 3 years and 3 months (3.25 years). Decision Rule: 

The PBP can be used as a decision criterion to select investment proposal. 

➢ If the PBP is less than the maximum acceptable payback period, accept the 

project. 

➢ If the PBP is greater than the maximum acceptable payback period, reject the 

project. 

This technique can be used to compare actual payback period with a standard payback period set up by the management in terms of the maximum period during which the initial investment must be recovered. Uses: 

The PBP can be gainfully employed under the following circumstances. 

1. The PB method may be useful for the firms suffering from a liquidity crisis. 

2. It is very useful for those firms which emphasizes on short run earning performance 

rather than its long term growth. 

3. The reciprocal of PBP is a good approximation of IRR (Internal Rate of Return) 

which otherwise requires trial & error approach. 

30 

1000. So the time required for recovering 

6000, 

8000, 

5000, 

4000 and 

1000 will be ( 

1000/ 

MANAGEMENTAdvantages 

1. This method is simple to calculate and easy to operate. 2. It is suitable in the case of industries where the risk of technological obsoles- 

cence is very high. 3. It clarifies the concept of profit or surplus. 4. When funds are limited projects having shorter payback should be selected. 5. This method promotes liquidity by stressing on projects with earlier cash inflows. Limitations 

1. It stress on capital recovery rather than profitability. 2. It does not consider post payback cash flows. 3. This method ignores time value of money. Assessment Activity 

From the following two projects find out the most feasible project according to Payback Period Method. 

Project A Project B Initial Investment 10000 10000 Cash inflow – Year 1 4000 3000 Cash inflow – Year 2 4000 3000 Cash inflow – Year 3 2000 3000 Cash inflow – Year 4 ------ 3000 Cash inflow – Year 5 ------ 3000 

(b) Accounting/Average Rate of Return (ARR): 

The ARR is the ratio of the average profit after tax divided by the average investment. 

This method is also known as the Return On Investment (ROI), Return On Capital Employed (ROCE) and is using accounting profit rather than cash flow to evaluate investment proposals. 

Accounting profit is the difference between total monetary revenue and total monetary costs, and is computed by using Generally Accepted Accounting Principles (GAAP). 

Accounting profit = total monetary revenue - total costs. 

Computation of ARR 

The most common method of computing ARR is 

ARR = Average Average Annual Annual Profit Investment after Tax ×100 31 

Reference Book 

For example, a project requires an investment of 

10,00,000. The plant & machinery required under the project will have a scrap value of 

80,000 at the end of its useful life of 5 years. The profits after tax and depreciation are estimated to be as follows: 

Year 1 2 3 4 5 Profit after 

tax (Rs) 5000 75000 125000 130000 80000 

We shall calculate ARR using above formula. 

ARR = (50000+75000+125000+130000+80000)/5 (1000000+80000)/2 × 100 = 17.04.% Decision Rule: 

The ARR can be used as a decision criterion to select investment proposal. 

➢ If the ARR is higher than the minimum rate established by the management, 

accept the project. ➢ If the ARR is less than the minimum rate established by the management, reject 

the project. The ranking method can also be used to select or reject the proposal using ARR. Highest rank would be given to a project with highest ARR and lowest rank would be given to the project with lowest ARR. This is the only method considering accounting profit for decision making and irrelevant for today’s business decisions. Discounted Cash Flow Methods 

Discounted Cash Flow Methods take into consideration time value of money. In an economy, money grows at a particular rate. Therefore, one rupee received today is more worthy than one rupee received tomorrow. This concept is called time value of money. The present value of future cash inflows is computed by discounting at an appropriate discount rate and projects are evaluated on that basis. These methods are also known as modern or time adjusted techniques. 

(a) Net Present Value (NPV) Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a proposed investment or project. NPV recognises that cash flow streams at different time period differs in value and can be computed only when they are expressed in terms of common denominator i.e. present value. 32 

MANAGEMENTThe procedure for determining the present values consists of two stages. The first stage involves determination of an appropriate discount rate. With the discount rate so selected, the cash flow streams are converted into present values in the second stage. 

Computation of NPV 

The important steps for calculating NPV are given below. 1. Annual cash flows of the investment project should be forecasted based on realistic assumptions. These cash flows are the incremental cash inflow after taxes but before depreciation. 

2. Appropriate discount rate should be identified to discount the forecasted cash flows. 

3. Present value (PV) of cash flows should be calculated by multiplying with appropriate 

discount rate. 

4. NPV should be found out by subtracting present value of cash outflows from present 

value of cash inflows. Decision Rule: 

The present value method can be used as an accept-reject criterion. The present value of the future cash streams or inflows would be compared with present value of outlays. The present value of outlays are the same as the initial investment. 

➢ If the NPV is greater than 0, accept the project. 

➢ If the NPV is less than 0, reject the project. Advantages 

1. It considers the concept of time value of money. 2. Unlike payback period, all cash flows are considered. Limitations 

1. It involves complex calculations in discounting and present value calculations. 2. It ignores the difference in initial cash outlays, size of different proposals 

etc. 

Assessment Activities 

Estimate cashflows 

1. From the diagram given, complete the empty 

circles. 




2. Calculate NPV for a Project X initially costing 

Rs.250000. It has 10% cost of capital. 

Find PV of 

expected ? cashflows 

33 

Reference Book 

It generates following cash flows: 

b) Profitability Index (PI) Profitability Index (PI) or Benefit-cost ratio (B/C) is similar to the NPV approach. PI approach measures the present value of returns per rupee invested. It is observed as a shortcoming of NPV that, being an absolute measure, it is not a reliable method to evaluate projects requiring different initial investments. The PI method provides solution to this kind of problem. It is a relative measure and can be defined as the ratio which is obtained by dividing the present value of future cash inflows by the present value of cash outlays. 

PI = Total discounted Cash inflows/ Initial cash outlay 

This method is also known as B/C ratio because numerator measures Benefits and denominator Cost. Decision Rule: 

Using the PI ratio, 

➢ Accept the project when PI>1 

➢ Reject the project when PI<1 

➢ May or may not accept when PI=1, the firm is indifferent to the project. Advantages 

1. This method considers time value of money. 

2. It is a better project evaluation technique than NPV, and helps in ranking projects 

where NPV is positive. Limitation 

1. It fails as a guide in resolving capital rationing problems, when projects are indivisible. 

c) Internal Rate of Return (IRR): 

Internal rate of return (IRR) is thediscount rate at which the net present value of an investment becomes zero. In other words, IRR is thediscount rate which equates the present value of the future cash flows of an investment with the initial investment. 

34 

Year Cashflows PV@10% 1 90000 .909 2 80000 .826 3 70000 .751 4 60000 .683 5 50000 .621 

IRR refers to that discount rate (Kt) such that ∑ {Period Cash Flow / (1+R)^T} - Initial Investment= 0 where R is the interest rate and T is the number of time periods. IRR is calculated using the NPV formula by solving for R if the NPV equals zero. Decision Rule Advantages 

1. Time value of money is taken into account. 

2. All cash inflows of the project, arising at different points of time are considered. 

3. Decisions are immediately taken by comparing IRR with the Firm’s cost of capital. 

4. It helps in achieving the basic objective of achieving shareholders wealth. 

If Decision IRR> Ko Accept the project. Returns over and above the cut-off rate 

is obtained. IRR= Ko Project generates cash flows at a rate just equal to the cost 

of capital. Hence, it may either be accepted or rejected. This constitutes the indifference point. IRR< Ko Reject the project. The project does not provide returns even 

equivalent to the cut-off rate. 

Limitations 

1. IRR is only an approximation and cannot be computed exactly without the use of 

computers. 

2. It is tedious to compute in case of multiple cash outflows. 

Example: 

The management of VGA Textile Company is considering to replace an old machine with a new one. The new machine will be capable of performing some tasks much faster than the old one. The installation of machine will cost 

8,475 and will reduce the annual labour cost by 

1,500. The useful life of the machine will be 10 years with no salvage value. The minimum required rate of return is 15%. 

Required: Should VGA Textile Company purchase the machine? Use internal rate of return (IRR) method for your conclusion Solution: 

To conclude whether the proposal should be accepted or not, the internal rate of return promised by machine would be found out first and then compare to the company’s minimum required rate of return. 

MANAGEMENT35 

Reference Book 

The first step in finding out the internal rate of return is to compute a discount factor called internal rate of return factor. It is computed by dividing the investment required for the project by net annual cash inflow to be generated by the project. The formula is given below: 

IRR Factor = Net Investment annual cash required inflow 

In our example, the required investment is 

36 

1,500. The cost saving is equivalent to revenue and would, therefore, be treated as net cash inflow. Using this information, the internal rate of return factor can be computed as follows: 

Internal rate of return factor = 

1,500 =5.650 

After computing the internal rate of return factor, the next step is to locate the discount factor in “present value of an annuity of 

1 in arrears table”. Since the useful life of the machine is 10 years, the factor would be found in 10-period line or row. After finding this factor, see the rate of return written at the top of the column in which factor 5.650 is written. That is 12%. It means the internal rate of return promised by the project is 12%. The final step is to compare it with the minimum required rate of return of the VGA Textile Company. That is 15%. 

According to internal rate of return method, the proposal is not acceptable because the internal rate of return promised by the proposal (12%) is less than the minimum required rate of return (15%). 

Notice that the internal rate of return promised by the proposal is a discount rate that equates the present value of cash inflows with the present value of cash outflows as proved by the following computation: 

Present value of cash outflow 

8,475 

Present value of cash inflow 1-10 year-period @ 12% 

8,475 Assessment Activity 

A company proposes to install a machine involving a capital cost of 

360000/-. The life of the machine is 5 years and its salvage value at the end of the life is nil. The machine will produce the net operating income after depreciation of 

68000/- per annum. The company’s Tax Rate is 45%. Calculate IRR of the proposal. The PV factors for 5 years is as under- 

Discounting factor 14 15 16 17 18 

Cumulative factor 3.43 3.35 3.27 3.20 3.13 

8,475 / 

8,475 and the net annual cost saving is 

8,475 × 1.000 = 

1,500 × 5.650 = 

TE Questions 

1. The value of a Rupee to be received in future is less than the value of a Rupee on 

hand today is the concept of; 

(a) Compounding (b) Discounting (c) Budgeting (d) Time Value of money 

2. Find the odd one out and state the reason. 

(a) NPV (b) IRR (c) ARR (d) Profitability Index 

3. Complete the series 

NPV = PV inflows – PV outflows 

.......... = PV inflows – PV outflows = 0 

4. What is meant by the concept of Accounting Profit? 

5. Briefly explain the importance of capital budgeting. 

6. What are the various steps involved in the capital budgeting process? Show the 

steps with the help of a diagram. 

7. Explain the advantages and disadvantages of Payback period method. 

8. You are required to find out the NPV of the following projects, assuming that the 

cost of capital is 10% and the initial investment is 

1600 each. 

Year Project A net 

Project B net cashflows (Rs) 

cashflows (Rs) 1 800 200 2 800 400 3 400 400 4 200 400 5 ..... 600 6 ..... 800 

Extended activity 

Visit a small scale industrial unit and examine their project reports and prepare an account of capital budgeting techniques used for the evaluation of projects. 

MANAGEMENT37 

Reference Book 

38 

Unit 4 Production and Operations Management 

4.1. Meaning and Importance of Production and Operations Management 4.2. Difference between Production and Operation 4.3. Major Decisions of Production Management 4.4. Plant Location and factors affecting plant location 4.5. Plant Layout and different types of Plant Layouts 4.6. Aggregate Planning – Meaning, Importance and Strategies 4.7. Master Production Scheduling - Meaning, Significance and Development of Master Production Schedule (MPS) 

About the Unit 

The reason for the existence of any organization is to fulfill the wants of the customer. These wants may be fulfilled through tangible products or intangible services. The management of manufacturing of products is referred to as Production Management and the functions dealing with the operation of services are covered under Operations Management. This unit throws light on the meaning and importance of Production and Operation Management and some important management concepts coming under the function of production and operation. 

Learning Outcomes 

The learner; 

• States the meaning and importance of production and operation management. 

• Distinguishes between production and operation 

• Identifies various types of decisions in production and operations management 

• Distinguishes between various types of decisions in production and operations management 

• Identifies the importance of plant location 

• Lists out various factors affecting plant location 

• Identifies concept of plant layout 

• States the importance of plant layout 

• Suggests suitable types of plant layout 

• Explains the concept aggregate planning, its meaning and importance 

• Identifies the strategies used in aggregate planning 

MANAGEMENT• Explains the Concept of master production scheduling 

• Develops a master production schedule (MPS) 

Meaning and Importance of Production/Operation Management 

• Meaning of Production Management 

Having once set up the enterprise, the future survival of enterprise whether micro, small, medium or large depends upon its profit earning capacity. The profit earning capacity of any enterprise depends upon the right decision taken by the entrepreneur regarding investment, location of the plant, product design, quality control, technology etc. All these decisions come under the purview of production management. 

The term production is used to indicate a process through which raw materials are converted into finished product. Production Management refers to the application of management principles to theproduction function in a factory. In other words, production management involves application of planning, organising, directing and controlling the production process. 

Assessment Activity 

Discuss the following and define the term production; 

• the process is carried out in a factory 

• management functions 

• application of management functions in production 

• Importance of Production Management 

The main aim of Production function is to produce the goods and services economically to the full satisfaction of the customer for which they are meant. In order to achieve this aim, it is essential to plan, organise, direct and control the production system. 

Assessment Activity 

Which one of the following is a correct statement ; 

1. Production and operation management helps to produce goods and services eco- 

nomically 2. Production and operation management helps to produce goods which satisfy the 

customers 3. Production and operation management plans, organises, directs and controls the 

production system 4. All the above 

39 

Reference Book 

Difference between Production and Operation 

The term production is strictly used in the sense of manufacturing tangible products. The term operation involves services. The differences between production and operations are as follows: 

Production Operation Manufacturing of tangible product Rendering of Services Used in narrow sense Used in broad sense Applied to manufacturing organisations Applied to non-manufacturing 

organisations Have closing stock No closing stock Demand is regular Demand fluctuate 

Assessment Activity 

Observe the following points and arrange them under the heads production and operation in a logical order. 

Fill the missing points. 

40 

no closing stock narrow sense non-manufacturing organisations closing stock regular demand tangible product services broad sense fluctuating demand manufacturing organisations 

Production Operation 

Manufacturing of ................ Rendering of ............ 

Used in ................. sense Used in ............. sense Applied to Organisations ................... 

Applied to ................... organisations 

Have closing stock .......................... 

.................. is regular Demand ...................... 

MANAGEMENTMajor Decisions of Production Management 

Decisions can be classified into a. Strategic b. Tactical and c. Operational. 1. Strategic Production Planning 

Strategic planning involves deciding and developing strategic plans to achieve strategic objectives (or goals). Top management typically develops strategic plans. These decisions or plans are normally long term decisions, which are having implications for the next five years and above. Lot of risk and uncertainty is involved in long term or strategic level planning. Strategic planning needs a through scanning and analysis of external environment to seek information. 

Strategic Planning include; 

• Technology decisions: Choice of appropriate technology, equipments, process choice and degree of automation. 

• Capacity decisions: Amount, timing and type. 

• Facilities decisions: Size, location and specializations 

• Vertical integration: Direction, extent and balance 2. Tactical Production Plan 

Tactical planning is done at middle management level medium term planning (ranging between 2 to 3 years) concerned with deciding specifically how the resources of the organization will be utilized to achieve the organizational strategic goals. Tactical planning involves less uncertainty and hence lower risk compared to strategic planning. Mainly the planning requires internally generated data. 

Tactical planning includes: 

• Establishing the parameters for measuring operational efficiency and productivity. Making plans to improve utilization of existing resources. 

• Prepare an equipment and manpower planning. 

• Planning for modernization of the facilitiess and automation. 

• Developing specific technology and tools to enhance production efficiency or pro- ductivity. 

• Prepares work plans for process redesign, methods improvement and job design. 

• Make or buy decision. 

• Projections regarding skill requirements for future work assignment and prepare the skill development plans. 

• Planning for medium term maintenance (preventive and condition monitoring) to enhance the availability of production facilities. 

41 

Reference Book 

3. Operational Level Production Planning: 

The operational planning decisions are taken at the lower level of management and these are routine decisions. These plans are prepared to establish actions necessary for achieving operational goals. These cover shorter time frame i.e. within a year. No or very less uncertainty in these plans and information needed is internal. They are stated in definite quantitative terms and can be spelt out in terms of time and targets. 

Operational level planning includes; 

• What is the job 

• On which machine/machines it is to be processed (sequence of operations) 

• Who should do this job – operator details 

• Starting and finishing times of each job in each of the workstation or machines or facilities 

• Quality specifications and inspection, and test details 

Thus, the operational production plan gives all the details regarding the processing of the product from raw material stage to finished goods ready for dispatch after quality check and performance testing. 

Assessment Activity 

a) Classify the following Decisions into Strategic, Tactical and Operational. 

• The type of technology to be adopted 

• Parameters for measuring operational efficiency 

• What type of job 

• Prepares work plans for process redesign and job design 

• Selects the machine for production 

• Who should be the operator 

• When should the job start 

• What should be the quality 

• Improve utilisation of existing resources 

• Plant capacity 

• Plan for modernisation 

• Specific technology and tools to enhance production efficiency or productivity 

• Make or buy decision 

• Location of the plant 

• Prepare equipment and manpower planning 

• Projection regarding skill requirements 

42 

MANAGEMENT• Plan for medium term maintenance (preventive and condition monitoring) to 

enhance the availability of production facilities 

b) Observe the following chart and prepare a short note on it; 

Major Decisions of Production Management 

Strategic 

Tactical 

Operational Planning 

Planning 

Planning 

Plant Location and factors affecting plant location 

The location of a plant should be fixed in such a manner that the firm can sell their products most profitably and manufacture them with the least expense. Factors affecting plant location 

Buying 

Nearness to raw materials Accessibility of raw materials Manufacturing 

Proximity to large adaptive labour Nearness to sources of power Ready accessibility to repair shops Nearness to good banking and credit facilities Adequate transport and communication facilities Ability to build and expand plant cheaply Government regulation and subsidy Adequate fire fighting facilities State of organisations and development of learning Suitable soil, climate and topography Association with other Industries 

Complementary industries Competing industries Momentum of an early start 

43 

Reference Book 

Assessment Activity 

CASE STUDY 

Study the following case and answer the questions below: 

Mr. Avinash wants to start a Prawn Processing industry in Kerala. He is a native of Idukki and wanted to start such factory in Thodupuzha, since it is in his own district and very accessible to Kochi. But when consulted with an owner of such a factory from Kollam district, his opinion was to start at Neendakara, Kollam. He tells Avinash that if he starts in Kollam he can easily avail the raw materials at competitive prices. There are also plenty of skilled labourers around and many such industries of the same nature nearby. So it will be easier to get license. Plant can be established without much difficulty and already there are supporting industries nearby. 

What are the advantages if a Prawn Processing industry is started in Kollam district 

What difficulties Avinash may face if he starts such a business in Thodupuzha? 

Plant Layout 

Plant layout refers to the arrangement of physical facilities such as machines, equipment, tools, furniture etc. in such a manner so as to have quick flow of material at the lowest cost and with the least amount of handling in processing the product from the receipt of raw material to the delivery of the final product. It is the physical arrangement of planned industrial operations. 

Assessment Activity 

Field Visit 

Visit a nearby Manufacturing Industry and list out the machines, equipments, furniture, buildings etc. used in the factory and sketch the location of each item on a chart paper. 

Need for Plant Layout 

• Establishment of new plants 

• Expansion of the capacity of existing plants 

• Incorporation of latest changes in technology, plant design, equipments etc 

• Increasing the efficiency of operations 

44 

MANAGEMENTAssessment Activity 

Read the following points and give tick mark on the boxes against to the points which need a decision of plant location. 

Increasing the quality of the product 

Establishment of a new plant 

Decrease the volume of production 

Forecast the future demand 

Increase the efficiency of operation 

Increasing the salary of the employees 

Expansion of the capacity of the existing plant 

Incorporate latest technology in the production process Types of Layout 

Product or Line Layout 

Process or Functional Layout Combination Layout Fixed Position or Location Layout Product or Line Layout 

In this layout, the machines and equipments are arranged in one line depending upon the sequence of operations required for the product. The output of one machine becomes input of the next machine. It requires a very little material handling. 

It is used for mass production of standardised products. 

Work Station 1 Work Station 2 Work Station 3 

Process Layout 

In this layout the machines of a similar type are arranged together at one place. This layout is used for batch production. It is preferred when the product is not standardized and the quantity produced is very small. 

Department 

Department 

45 Department 

Department 

Reference Book 

Combined Layout 

A combination of process & product layout is known as combined layout. Manufacturing concerns where several products are produced in repeated numbers with no likelihood of continuous production, combined layout is followed. 

Work Station 1 Work Station 2 Work Station 3 

Department Department 

Department 

Fixed Position or Location Layout 

Department 

Fixed position layout involves the movement of manpower and machines to the product which remains stationary. The movement of men and machines is advisable as the cost of moving them would be lesser. This layout is preferred where the size of the job is bulky and heavy. Example of such type of layout is locomotives, ships, boilers, generators, wagon building, aircraft manufacturing, etc. 

46 

Men 

Materials 

Assessment Activity 

Air Craft Assembly Unit 

Suggest a suitable type of layout for the following industries and justify your answers; 

Cashew Industry 

Ship Building 

Car Manufacturing 

Tyre Manufacturing 

Printing Press 

Bus Body Fabrication 

Building Construction 

Readymade Shirts 

Machines 

MANAGEMENTAggregate Planning 

An organisation can finalise its business plans on the recommendation of demand forecast. Once business plans are ready, an organisation can do backward working from the final sales unit to raw materials required. Thus annual and quarterly plans are broken down into labour, raw material, and working capital requirements over a medium-range period (6 months to 18 months). This process of working out production requirements for a medium range is called aggregate planning. The term aggregate implies that the planning is done for a single overall measure of output or, at the most, a few aggregated product categories. The aim of aggregate planning is to set overall output levels for short term and medium term in consideting the fluctuating or uncertainties in demand. 

Importance of Aggregate Planning 

• Achieving financial goals by reducing overall variable cost and improving the bottom line 

• Maximum utilisation of the available production facility 

• Provide customer delight by matching demand and reducing wait time for cus- tomers 

• Reduce investment in inventory stocking 

• Able to meet scheduling goals thereby creating a happy and satisfied work force Aggregate Planning Strategies There are three types of aggregate planning strategies; 1. Level Strategy : Level strategy looks to maintain a steady production rate and work force level. In this strategy, organisation requires a robust forecast demand as to increase or decrease production in anticipation of lower or higher customer de- mand. Advantage of level strategy is steady work force. Disadvantage of level strategy is high inventory and increased back logs. 2. Chase Strategy : Chase strategy looks to dynamically match demand with produc- tion. Advantage of chase strategy is lower inventory levels and decreased back logs. Disadvantage is lower productivity, quality and depressed work force. 

3. Hybrid Strategy : Hybrid strategy looks to balance between level strategy and 

chase strategy. 

Assessment Activity 

Identify the type of strategies followed by the following companies. 

1. Polo Furniture Pvt. Ltd. forecast a demand of 1500 units per week and they plan to 

produce 250 units per day uniformly. 

47 

Reference Book 

2. Tip Top Furniture calculates demand for the next 4 weeks as follows; 1400, 1300, 800 and 900. So they plan to produce 1410 units for the first week, 1305 units for the second week, 802 units for the third week and 905 units for the fourth week. 

3. Interior Furnishing Pvt. Ltd. forecast a demand for the next 4 weeks as follows; 1000, 1200, 800, 700. They plan to produce 1200 each for the first two weeks and 750 each for the next two weeks. Master Production Schedule (MPS) 

Aggregate production and capacity plan combine products into product groups, demand into monthly totals and personnel requirements across departments which altogether reflect the top management decisions. Eventually the time comes when individual ‘end item’ products and services must be scheduled at specific work centres. This is accomplished by master scheduling. Master scheduling means producing a supply plan, a time table including quantities, to produce specific items or provide specific services within a given time period. Master Scheduling calculates the quantity required to meet demand requirements from all sources. 

Assessment Activity 

Case Study Study the following case and suggest suitable solution to the problem faced by the firm. ABC (Pvt) Ltd. is an offset machine manufacturing company at Thiruvananthapuram. In the first week of April, 2016, they had an opening stock of 8 machines and had forecasted a demand of 5 machines per week. They needed a lead time of 1 week for the manufacturing of offset machines. On the first week they had an order of 4 machines and on the second week they had an order of 7 machines. On the third week of April they had an order of 6 machines and on the fourth week they had an order of 4 machines. There was shortage of stock to satisfy the customers and hence some customers cancelled their order and moved to some other suppliers. 

Significance of Master Production Scheduling 

• It enables marketing to make legitimate delivery commitments to field warehouses and final customers. 

• It enables production to evaluate capacity requirements in a more detailed manner. 

• It provides the management, opportunity to ascertain whether the business plan and its strategic objectives will be achieved. 

• The Master Production Schedule (MPS) is the primary output of the master sched- uling process. It is the ‘plan’ for providing the supply to meet the demand. 

48 

MANAGEMENTMaster Production Scheduling Process 

• A prospective MPS is created to test whether it meets the schedule with the resources. (eg. Machine capacities, labour, overtime and subcontractors) pro- vided for in the aggregate production plan. 

• Operations revise the MPS until it obtains a schedule that satisfies all resource limitations or determines that no feasible schedule can be developed. 

• If no feasible schedule can be developed, the production plan must be revised to adjust production requirements or increase authorised resources. 

• Once a feasible prospective MPS is accepted, operations use the authorised MPS as input to material requirements planning. 

• Operations then determine specific schedules for component production and assembly. 

• Actual performance data such as inventory levels and shortages are inputs to the next prospective MPS and the Master Production Scheduling process is repeated. 

Authorized 

Prospective M aster 

Production Plan 

Production Schedule 

49 NO 

YES 

Developing a Master Production Schedule 

The process of developing a master production schedule includes; 

1. Calculating the projected on hand inventory. 

2. Determining the timing and size of production quantities of specific products. Calculating Projected on hand inventory 

Projected on hand inventory is an estimate of the amount of inventory available each week after demand has been satisfied. 

A re resources Available ? 

Material 

Authorized Master Requirement 

Production Planning 

Schedule 

Reference Book 

50 

Projected 

Projected on 

MPS inventory at 

hand 

quantity of the end of 

inventory at 

the current this week 

the end of 

week last week 

Forcasted 

= + - 

demand or actual order which ever is higher 

Assessment Activities 

1. Geekan Seating Collections (Pvt.) Ltd. produces Executive Chairs and needs to develop an MPS for it. Marketing department has forecasted a demand of 30 chairs for the first week of April. But actual customer orders booked are for 38 chairs. The current on hand inventory is 55 chairs. No MPS quantity is due on week 1. Calculate the projected on hand inventory. 

(Projected inventory = 55 + 0 – 38 = 17) 

2. Study the following table, interpret and make a report 

Quantity on Hand 55 Week 1 APRIL 

Week 2 Forecast 30 30 

Customer Orders Booked 38 27 

Projected on hand Inventory 17 -13 

MPS quantity 0 0 

MPS start Explanation: Forecast is less than the booked orders in week 1. Projected on hand inventory = 55 + 0 – 38 = 17 

Forecast is more than the booked orders in week 1. Projected on hand inventory = 17 + 0 – 30 = -13. 

Determining the timing and size of production quantities of specific products. 

The purpose of determining the timing and size of MPS quantities is to maintain a non- negative projected on hand inventory. MPS quantities should be scheduled to cover the shortages. The scheduler adds the MPS quantity to the projected on hand inventory and searches for the next period when a shortage occurs. This shortage signals a need for a second MPS quantity and so on. 

MANAGEMENTIllustrative example of a Master Production Schedule 

Assessment Activity 

Complete the missing columns of the following Master Producution Schedule. 

KELACHANDRA RUBBER ROLLERS (PVT.) LTD. KOTTAYAM MASTER PRODUCTION SCHEDULE Item: Ruber Sheet Rolling Machine Order Policy - 50 units 

Lead Time - 2 weeks 

Quantity on hand 25 

51 MONTHS JULY AUGUST 

Weeks 1 2 3 4 5 6 7 8 Forecast 10 10 10 10 10 10 10 10 

Customer Orders (booked) 12 8 9 11 15 5 7 13 

Projected on hand inventory 13 ? 43 ? ? 7 ? 9 

MPS quantity 0 0 50 0 ? 0 50 0 

MPS start 50 ? 0 0 ? 0 0 0 Explanation: * the time needed to assemble 150 chairs is 1 week. So MPS start on week 1 to be completed on week 2. ** MPS quantity of 150 is needed to avoid shortage of projected on hand inventory. This is repeated in week 7 

Reference Book 

TE Questions 

1. Which of the following is a wrong statement; 

a. Production is concerned with tangible goods. 

b. Operation is concerned with services. 

c. Operation is used in a broader sense. 

d. In management, both production and operation are used in the same meaning. 

2. Decisions as to the use of technology is a type of; 

a. Operational Planning. 

b. Strategic Planning. 

c. Operational Planning. 

d. Middle level planning. 

3. The suitable lay out for ship building is; 

a. Product Lay out 

b. Process Lay out 

c. Combination Lay out 

d. Fixed Position Lay out. 

4. Steady Production Rate and Workforce Level - Level Strategy 

Dynamic matching of demand with production - .................. 

5. What do you mean by production management? 

6. What is the importance of production management? 

7. Differentiate between production and operation management. 

8. Which are the different types of decisions in production management? 

9. What do you mean by Strategic decision? Give an example. 

10. What do you mean by Tactical decision? Give an example. 

11. What do you mean by Operational decision? Give an example. 

12. Which are the factors affecting plant location? 

13. What do you mean by plant layout? 

14. Which are the different types of plant layout? 

15. What do you mean by fixed position layout? Give an example. 

16. What do you mean by aggregate planning? 

17. Which are the strategies used in aggregate planning? 

52 

MANAGEMENT18. What is Master Production Scheduling? 

19. Explain the master production scheduling process. 

20. Why is master production scheduling significant? 

21. What do you mean by Master Production Schedule? 

22. How is a Master Production Schedule prepared? 

23. Develop a Master Production Schedule from the following; 

The forecast is 84 units for the first period and 80 for the second week and 60 units for each of the next three weeks. The starting inventory is 20 units. The company uses a lot size of 50 units and the lead period is 1 week. Committed Orders are as follows: 

Week 1 2 3 4 5 

Customer Orders 82 82 58 40 20 

Extended Activity 

Meet some entrepreneurs working in and around your locality. Find out the various factors he/she considered while selecting location for his/ her enterprise. Analyse the same and suggest if he/she could have other better options available for selecting the location of the enterprise. 

53 

Reference Book 

54 

Unit V Quality Management 

5.1. Meaning and Definition of Quality 5.2. Dimensions of Quality – Product and Service 5.3. Meaning and Concept of Quality Management 5.4. Principles of Quality Management 5.3. Quality Systems 

• Elements 

• ISO 9000:2000 

Introduction 

In business, engineering and manufacturing, quality has a pragmatic interpretation as the non-inferiority or superiority of something; it is also defined as fitness for purpose. Quality is a perceptual, conditional, and somewhat subjective attribute and may be understood differently by different people. Quality management ensures quality in all areas of marketing, design, purchasing, production or operations and distribution. The entire organisation should excel on all dimensions of products and services that are important to the customer and to achieve Total Quality Management (TQM). 

Learning Outcomes 

The learner; 

• Identifies the meaning of quality 

• Recognizes the definitions of quality 

• Explains the various approaches to quality 

• Identifies various approaches to quality 

• Explains the various approaches to quality 

• Identifies various approaches to quality 

• States the meaning of Quality Management 

• Outlines the concept of Quality Management. 

• Describes the various principles of quality management. 

• Explains the meaning of Quality Management System 

• Identifies the elements of Quality management System 

MANAGEMENT• Identifies the concept of ISO standards 

• Explains the concept of ISO 9000:2000. 

Meaning & Definition of Quality 

Quality refers to a parameter which decides the superiority or inferiority of a product or service. It can provide a competitive edge to an organisation. The term “quality” has a relative meaning. It may be seen as the totality of features and attributes that satisfy a customer’s stated and implied needs.In simple words, one can say that a product has good quality when it “complies with the requirements specified by the client”. 

Quality is an attribute which differentiates a product or service from its competitors. It plays an essential role in every business. ISO defines quality as “the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs”. 

Now a days, quality standards and strict compliance to it is considered as the key to success in every field of business either in the form of product or service. Approaches to Quality 

Harvard professor David Garvin, in his book ‘Managing Quality’ summarised five principal approaches to defining quality: transcendent, product-based, user-based, manufacturing - based and value-based. Let’s discuss each one of them: 

1. Transcendental view of Quality: Those who hold transcendental view would say, “I can’t define it, but I know when I see it.”Advertisers are fond of promoting products in these terms. “Where shopping is a pleasure” (super market), “We love to fly and it shows” (airline), and “It means beautiful eyes” (cosmetics) are examples. 

2. Product-based view of Quality: Product based definitions are different. Quality is viewed as quantifiable and measurable characteristics or attributes. For example, durability or reliability can be measured (e.g. mean time between failure, fit and finish), and the engineer can design to that benchmark. Quality is determined objectively. Although this approach has many benefits, it has limitations as well. Where quality is based on individual taste or preference, the benchmark for measurement may be misleading. 

3. User-based view of Quality: User based definitions are based on the idea that quality is an individual matter, and products that best satisfy their preferences (i.e. perceived quality) are those with the highest quality. This is a rational approach but leads to two problems. First, consumer preferences vary widely, and it is difficult to aggregate these preferences into products with wide appeal. This leads to the choice 

55 

Reference Book 

56 

between a niche strategy or a market aggregation approach which tries to identify those product attributes that meet the needs of the largest number of consumers. 

4. Manufacturing-based view of Quality: Manufacturing-based definitions are con- cerned primarily with engineering and manufacturing practices and use the univer- sal definition of “conformance to requirements.” Requirements, or specifications, are established design, and any deviation implies a reduction in quality. The concept applies to services as well as products. 

5. Value-based view of Quality: Value-based quality is defined in terms of costs and prices as well as a number of other attributes. Thus, the consumer’s purchase deci- sion is based on quality (however it is defined) at the acceptable price. Dimensions of Quality 

Eight dimensions of product quality management can be used at a strategic level to analyse quality characteristics. The concept was defined by David Garvin. Some of the dimensions are mutually reinforcing, where as others are not. Improvement in one may be at the expense of others. Understanding the trade-offs desired by customers among these dimensions can help to build a competitive advantage. Garvin’s eight dimensions can be summarised as follows: 

1. Performance: Performance refers to a product’s primary operating characteris- tics. This dimension of quality involves measurable attributes; brands can usually be ranked objectively on individual aspects of performance. 

2. Features: Features are additional characteristics that enhance the appeal of the 

product or service to the user. 

3. Reliability: Reliability is the likelihood that a product will not fail within a specific time period. This is a key element for users who need the product to work without fail. 

4. Conformance: Conformance is the precision with which the product or service 

meets the specified standards. 

5. Durability: Durability measures the length of a product’s life. When the product can be repaired, estimating durability is more complicated. The item will be used until it is no longer economical to operate it. This happens when the repair rate and the associated costs increase significantly. 

6. Serviceability: Serviceability is the speed with which the product can be put into service when it breaks down, as well as the competence and the behaviour of the service person. 

7. Aesthetics: Aesthetics is the subjective dimension indicating the kind of response a 

user has, to a product. It represents the individual’s personal preferences. 

8. Perceived Quality: Perceived Quality is the quality attributed to a good or service based on indirect measures.Eight dimensions of quality 

Service Quality 

Service providers want to know what customers (internal or external) care about. Service quality is a good guess. After extensive research, Valerie Zeithaml, A. Parasuraman and Leonard Berry found five dimensions, customers use when evaluating service quality. They named their survey instrument SERVQUAL. The five SERVQUAL dimensions are: 

• TANGIBLES-Appearance of physical facilities, equipment, personnel, and com- munication materials. 

• RELIABILITY-Ability to perform the promised service dependably and accurately. 

• RESPONSIVENESS-Willingness to help customers and provide prompt service. 

• ASSURANCE-Knowledge and courtesy of employees and their ability to convey trust and confidence. 

• EMPATHY-Caring, individualised attention the firm provides its customers. 

MANAGEMENT57 

Reference Book 

Meaning and Concept of Quality Management 

Quality management is the act of overseeing all activities and tasks needed to maintain a desired level of excellence. This includes creating and implementing quality planning and assurance, as well as quality control and quality improvement. It is also referred to as total quality management (TQM). 

Quality management ensures that an organisation, product or service is consistent. It has four main components: quality planning, quality control, quality assurance and quality improvement. Quality management is focused not only on product and service quality, but also on the means to achieve it. 

Quality assurance (QA) is a broad concept that focuses on the entire quality system including suppliers and ultimate consumers of the product or service. It includes all activities designed to produce products and services of appropriate quality. 

Quality control(QC) has a narrower focus than quality assurance. Quality control focuses on the process of producing the product or service with the intent of eliminating problems that might result in defects. Assessment Activity 

Complete the components of Quality Management. 

58 

Quality Planning 


Quality Management 




MANAGEMENTPrinciples of Quality Management 

1. Customer focus : Organisations depend on their customers and therefore, should understand current and future customer needs. They should meet customer requirements and strive to exceed customer expectations. 

Key Benefits: 

• Increased revenue and market share obtained through flexible and fast responses to market opportunities 

• Increased effectiveness in the use of the organisation’s resources to enhance customer satisfaction 

• Improved customer loyalty leading to repeat business. 

2. Leadership : Leaders establish unity of purpose and direction of the organisation. They should create and maintain the internal environment in which people can become fully involved in achieving the organisation’s objectives. 

Key Benefits: 

• People will be motivated towards the organisation’s goals and objectives 

• Activities are evaluated, aligned and implemented in a unified way 

• Mal-communication between levels of an organisation will be minimised. 

3 . Involvement of people: People at all levels are the essence of an organisation and 

their full involvement should be focused for the benefit of the organisation. 

Key Benefits: 

• Motivated and committed people within the organisation 

• Innovation and creativity in furthering the objectives of the organisation. 

• People became accountable for their own performance 

· People participate and contribute to continual improvement. 

4 . Process approach : A desired result is achieved more efficiently when activities 

and related resources are managed as a process. 

Key Benefits 

• Lower costs through effective use of resources 

• Improved, consistent and predictable results 

• Focused and prioritised improvement opportunities. 

59 

Reference Book 

5 . System approach to management : Identifying, understanding and managing interrelated processes as a system contributes to the effectiveness and efficiency of the organisation in achieving its objectives. 

Key Benefits: 

• The desired r esult will be best achieved by Integration and alignment of the processes. 

• Ability to focus effort on the key processes 

• Providing confidence to interested parties as to the consistency, effectiveness and efficiency of the organisation. 

6 . Continual improvement : Continual improvement of the organisation’s overall 

performance should be a permanent objective of the organisation. 

Key Benefits: 

• Performance advantage through improved organisational capabilities 

• Alignment of improvement activities at all levels to an organisation’s strategic intent 

• Flexibility to react quickly to opportunities. 

7 . Factual approach to decision making : Effective decisions are based on the 

analysis of data and information 

Key Benefits: 

• Informed decisions 

• An increased ability to demonstrate the effectiveness of past decisions based on factual records 

• Increased ability to review, challenge and, change opinions and decisions if necessary. 

8. Mutually beneficial supplier relationships: An organisation and its suppliers are interdependent, and mutually beneficial relationship enhances the ability of both to create value. 

Key Benefits: 

• Increased ability to create value for both parties 

• Flexibility and speed of joint responses to changing market or customer needs and expectations 

• Optimisation of costs and resources. 

60 

Quality System 

It is the system that an organisation uses to manage the quality of their services or products. Quality management system is only one type of management systems; other examples include financial management systems, safety management systems and environmental management systems. 

The definition of a quality system from ISO (the International Organisation for Standardisation) is ‘the management system used to direct and control an organisation with regard to quality’. Elements of a Quality Management System 

The ISO 9001 standard is a model of a quality system, describing the processes and resources required for registration of a company’s quality system. A brief summary of the key elements are detailed below. 

➢ QMS - Document processes necessary to ensure product or service is of high 

quality and conforms to customer requirements. 

➢ Management Responsibility - Provide a vision. Show commitment. Focus on the 

customer. Define policy. Keep everyone informed. 

➢ Resource Management - Assign the right person to the job. Create and maintain 

positive work space. 

➢ Product Realisation - Clearly understand customer, product, legal and design 

requirements. Ensure that the specifications are followed. Check your suppliers. 

➢ Measurement, Analysis & Improvement - Identify current and potential problems. Monitor and measure customer satisfaction. Perform internal audits. Fix problems. 

MANAGEMENT61 

Reference Book 

International Organisation for Standardisation (ISO) : 

International Organisation for Standardisation (ISO) is an international standard-setting body composed of representatives from various national standards organisations.It is an independent, non-Governmental international organisation with a membership of 162 national standards bodies. Through its members, it brings together experts to share knowledge and develop voluntary, consensus-based, market relevant International Standards that support innovation and provide solutions to global challenges. 

ISO standards are documented rules and guidelines for implementing a quality system into a company. Specific technical specifications and/or other specific criteria may also be included depending on the standard, a company select. 

ISO 9000 : 2000 

ISO first published its quality standards in 1987 and later revised them in 1994. They were later revised in 2000. The quality standards of 1994 formed the ISO 9000 series. The series comprised ISO 9000, ISO 9001, ISO 9002, ISO 9003 and ISO 9004. Whereas ISO 9000 and ISO 9004 are only established guidelines for operations, ISO 9001, ISO 9002 and ISO 9003 were well defined standards. 

The new ISO 9000:2000 has done away with the previous ISO 9002 and ISO 9003 standards. The new series consists of: 

• ISO 9000:2000 - describes the fundamentals of a quality management system and specifies terminology. It presents guidelines. 

• ISO 9001:2000 - specifies requirements for a quality management system. 

• ISO 9004:2000 - guidelines for performance improvement. 

Most companies in the world today want to do business with companies and organisations that have ISO 9000 certification. The certification ensures that the company irrespective of language barriers, cultural and social differences, and technological variations has a quality system that meets uniform standards. The ISO 9000:2000 is the only standard that carries third party certification. A third party called Registrar, accredited by national body, is the only authorised entity that can award an ISO 9000 certification. ISO 9000 certification is only awarded after he is satisfied that the organisation meets the ISO 9001 requirements. This certification is recognised worldwide. 

62 

MANAGEMENTAssessment Activity 

List out the various types of quality standards suitable for different types of products or services. 

Quality standards Products/Services 

AGMARK ? 

? For eco-friendly products ? For precious metals like gold, platinum etc ? Quality Management System 

TE Questions 

1. A parameter which decides the superiority or inferiority of a product or service is; 

(a) Quantity (b) Value (c) Price (d) Quality 

2. The five SERVQUAL dimensions does not include; 

(a) Tangibles (b) Consistency (c) Empathy (d) Assurance 

3. Complete the series 

Fitness for purpose/Superiority of something - Quality 

System that an organisation uses to manage the quality of their services/products ............ 

4. What you mean by user-based view of quality? 

5. Briefly explain the elements of Quality Management System. 

6. Write a short note on ISO 9000:2000 quality standards? 

7. Explain the various dimensions of Quality with the help of a diagram. 

8. Discuss the various principles of Quality Management. 

Extended activities 

1. Visit the web sites of different companies and prepare a list of companies and the 

quality certification they have attained. 

2. Conduct a survey among people of your locality about the awareness of different 

quality standards. 

63 

Reference Book 

64 

Unit VI Measures of Central Tendency 

6.1. Meaning and Significance of Central Tendency 6.2. Qualities of a good average 6.3. Types of Average 6.4. Simple Arithmetic Mean – Individual Observation, Discrete Series, 

Continuous Series. 6.5. Weighted Arithmetic Mean 6.6. Combined Arithmetic Mean 6.7. Correction in Mean 6.8. Median - Individual Observation, Discrete Series, Continuous Series. 6.9. Determination of Median Graphically. 6.10. Partition Values – Quartiles, Deciles and Percentiles 6.11. Quartiles - Individual Observation, Discrete Series, Continuous Series. 6.12. Percentiles - Individual Observation, Discrete Series, Continuous Series. 6.13. Mode - Individual Observation, Discrete Series, Continuous Series. 6.14. Locating Mode Graphically 6.15. Comparison of mean, median and mode Introduction 

Statistics plays an important role in managerial decision making. Business managers use statistics to present and describe data and information properly, to draw conclusions about large population with samples and to make reliable forecast about a business activity. To describe the data condensation is necessary. This is because a large number of big figures are difficult to analyse. Therefore, in order to reduce the complexity of data and to make them comparable, it is necessary that various data are reduced to a single value. This can be done by using central tendency or averages which summarises the whole data in single value. The word average is commonly used in day-to-day life. eg.average production, average expenditure, average income, average marks obtained by students in a class etc. The concept of measure of central tendency is an important tool in the statistics. The measure of central tendency is also called Averages or Measure of location. This unit gives an idea on the concept of averages, qualities of good average and different types of average. It helps the learners to calculate different types of average. Learning Outcomes The learner: 

• Identifies the concept of Average 

• Explains requisites of a good average 

• Recognises the concept of mean 

MANAGEMENT• To calculate Mean for different series 

• Identifies the meaning of weighted arithmetic mean 

• Computes the weighted arithmetic mean 

• Compute combined Mean 

• Rectifies incorrect mean 

• Recognises the concepts of the term median 

• Computes the median in different situations 

• Identifies the concepts of mode 

• Recognises the concepts of locating median and mode graphically 

• Lists out the partition values 

• Computes the quartiles, deciles and percentiles 

• Compares Mean, Median and Mode. 

• Selects appropriate average to be used on different cases Measures of central tendency: Meaning Values of a statistical series shows a tendency to concentrate around a particular central value. This tendency is called central tendency. In other words, the central tendency is the extent to which all the data values group around a typical or central value. The typical or central value is called ‘average.’ 

“ An average is a significant single expression representative of the whole distribution”. A measure of central tendency will represent whole of the distribution ie. measure of central tendency summarises data in a single value which represent the entire data. Importance of Measures of central tendency 

a. To find representative value : Average is a single value which can represent the 

entire distribution. 

b. To condense data : Collected and classified figures are vast. To condense these 

figures, we use averages. c. To make comparison : To make comparison of two or more distributions , we have to find the representative values of these distributions. These representative values are found with the help of measure of the central tendency d. Helpful in further statistical analysis : Many techniques of statistical analysis like measures of dispersion, measures of correlation, Index numbers etc are based on measures of central tendency. 

65 65 

Reference Book Qualities of a good average For an ideal measure of central tendency , following qualities are necessary: 

a. It should be rigidly defined b. It should be representative of the entire data c. It should be based of all observation d. It should be easily calculated e. It should be capable of easy interpretation. f. It should be capable of further mathematical calculation g. It should not be influenced by the extreme value Types of Averages There are various types of measures of central tendency or Averages. Most important among them are: 

1. Arithmetic Mean 2. Median 3. Mode Assessment Activity 

Following table showing the land holding of 50 farmers in village. 

Land holdings in acre No. of families 

2 6 3 8 4 10 5 1 6 11 7 9 8 5 

Anil, one of the farmers holds 4 acres of land. Evaluate his economic condition by comparing his size of land with the size of land holdings of other farmers . For this , you may like to see through inspection, if the land owned by Anil is – 

A . above average in ordinary sense ? (see Arithmetic Mean) B. above the size of the what half the farmers own?(see the median) C. above what most of the farmers own ? (see the Mode) 

Arithmetic Mean 

This is the most commonly used measure of central tendency. It is defined as the sum of the values of all items divided by the number of items. It is denoted by X. Arithmetic mean may be of two types; Simple Arithmetic Mean and weighted Arithmetic Mean. 

66 

MANAGEMENTSimple Arithmetic Mean 1. Individual series 

Arithmetic mean for Individual series is the sum of all items in a series divided by the total number of item 

Example 

X = x∑ NCalculate Arithmetic mean from the data showing daily income of the families in a village 250,,275,280,300,500,250, 290,350,400,375 Solution : ∑ X = 250 + 275+ 280+ 300+ 500+ 250+ 290+ 350+ 400+375 =3270 ; 

N = 10 Mean = 3270/10 = 327 2. Discrete Series 

In case of discrete series, frequency against each of the item is multiplied by the value of the item. The value so obtained are summed up and divided by the total number of frequencies. In this series, Mean may be computed by applying (i) Direct method or (ii) Short-cut method. Direct Method : under this method, X = 

∑ the fX formula for computing Mean is Nwhere f = frequency ; X = the variable ; N= total of frequency ie. ∑ f Short cut method : In this method, calculation can be simplified by using Assumed mean. Hence according to this method , X = A+ ∑ Nfd where A = assumed mean 

d= ( X -A); N= ∑ f Example Marks obtained by students in a class are given below 

Marks 10 20 30 40 50 60 70 80 No. of students 12 20 18 18 11 9 8 4 

* How do you calculate average marks in this series? * what is the need of using two methods? * Whether the answers under two methods are one and same? 

67 67 

Reference Book 

Solution : (i) Direct method 

Marks(X) No. of students( f) fX 

10 12 120 

20 20 400 

30 18 540 

40 18 720 

50 11 550 

60 9 540 

70 8 560 

80 4 320 

Total 100 3750 

Mean = 

∑ fX = 3750/100=37.5 Average mark is 37.5 Solution : (ii) NShort –cut method 

Let us assume 40 as Assumed Mean=(A) 

Marks(X) No. of students(f) d (X – 40) fd 

10 12 -30 -360 

20 20 -20 -400 30 18 -10 -180 

40 18 0 0 

50 11 10 110 

60 9 20 180 70 8 30 240 

80 4 40 160 

Total 100 - 250 X = A+ ∑ Nfd = 40 + (-250)/100 = 40 + (-2.5) = 37.5 3. Continuous Series 

In continuous series, class intervals are given. The process of calculating arithmetic mean is same as that of a discrete series. The only difference is that the mid-points of various class intervals are taken. Here, arithmetic mean may be computed by applying any of the following methods. 

a. Direct method b. Short-cut method 

a. Direct method : In this method, each class frequency is multiplied by the mid- value of the class, the products added and the total of the product divided by the number of items. 

68 

MANAGEMENTwhere m= mid-value ; f = frequency of X each = class ∑ Nfm ; N = the total of frequency 

b. Short-cut method : Under short cut method the calculations are based on the 

deviations taken from the assumed mean . X = A+ ∑ Nfm where A = assumed mean; d = (m- A); N= Total of frequency Assessment Activity 

The following table showing marks of 70 students in a class 

Marks X No. of students-f 

0 -10 5 10 – 20 12 20 – 30 15 30 – 40 25 40 – 50 8 50 – 60 3 60 – 70 270 

* What is the main difference between calculation of mean in the continuous series 

and discrete series? 

* Compute arithmetic mean under two methods in continuous series Merits of Arithmetic Mean 

1. It is simple to understand and easy to calculate 

2. It is rigidly defined 

3. It is based on all the values of the series 

4. It is more reliable for comparison 

5. It can be calculated without arranging the data in any form 

6. It is capable of further mathematical treatment Demerits of Arithmetic mean 

1. It is very much affected by the extreme values of the variable 

2. It is difficult to calculate in open end classes 

3. It is not suitable for averaging ratios and percentages 

4. It can be a value which does not exist in the series 

5. It cannot be calculated in the absence of any of the item 

69 69 

Reference Book 

Weighted Arithmetic Mean 

In the calculation of simple average, each item of the series is considered as equally important. But there are certain cases where values are to be given appropriate weights. For example, to compute the average cost of food items of a person in Kerala, more weight should be given to rice than wheat. In such cases simple average is not suitable, hence we compute weighted average. 

The formula where X 70 for computing weighted X w = Weighted arithmetic w Arithmetic mean; = ∑ ∑WX 

WW = Mean weights is 

; X = the variable 

Assessment Activity 

Find out weighted arithmetic mean from the following data 

Group Index no- X Weights- W 

Food 300 40 

Fuel 220 10 

Cloth 210 8 

House rent 160 12 

Miscellaneous 200 14 

Combined Mean 

If a statistical series consists of two or more component series, and mean and number of each component series are known, we can compute mean of the entire series. That mean is called combined Mean . 

When two or more distributions are given with their number of items and arithmetic means ,we can calculate the combined mean as follows; 


12 = X N1 1NX If we have to find out the combined mean of three or more distributions, the above formula can be extended as follows 

X 123 = X1 N 1+ X2 N2+ X3 N3...... / N1 + N2 + N3 ...... where X1= Mean of first distribution; X2 = Mean of second distribution; N1= No . of items in the first distribution ; N2 = No. of the second distribution and so on. 

N 1 + + 

N 2 



MANAGEMENTAssessment Activity 

The Mean age of 40 students is 16 years and the mean age of another group of 60 students is 20 years. Find out the mean age of 100 students combined together. Correction in mean 

While calculating mean, wrong items crept in due to mistakes or oversight and thereby we get wrong mean. In order to correct such mistakes we have to deduct incorrect values and add correct values to the incorrect total (incorrect Mean x number of items), then find correct mean. 

Following formula is applied for the correction of mean. 

Total value of the observation (∑ X ) = X × N ( incorrect total value) correct ∑ X = Incorrect total value – wrong item + correct item Correct Mean = correct total value / N 

Example 

The average marks secured by 50 students was 44 . Later on it was discovered that score of 36 was taken as 56. Correct the mean. 

Solution : Total value of observation ( incorrect value) = 44 × 50 =2200 

Correct total value = 2200 – 56 + 36 = 2180 ; correct Mean = 2180 

50 =43.6 Assessment Activity 

Examine that the sum of the deviations of the items from the average is always equal to Zero, ie “ (X – Mean ) = 0 and Arithmetic mean is affected by extreme values from the following data.X : 4 8 12 14 16 20 24 Replace the value 4 by 74, what happens to the arithmetic mean? 

Median 

Arithmetic mean is affected by the values of the extreme items. It cannot be calculated for qualitative observation like honesty, intelligence, blindness etc. Moreover, if a frequency distribution includes open end class, arithmetic mean does not exist. In order to avoid these drawbacks, other measures of central tendency, median or mode is used. Median is the middle value when the data set is arranged in order of the magnitude. “ Median of a series is the value of that item, actual or estimated when series is arranged in order of magnitude which divides the distribution into two parts”. - Prof.H.Secrist. 

71 71 

Reference Book 

Thus median is the value of middle most observation in a data. It is that value of the variable which divides the distribution into equal parts, one part comprises all values greater than or equal to the median and the other comprises all values less than or equal to it. It is also called as positional average. Uses of Median Median is used 

1. to calculate the qualitative data like intelligence, honest etc 

2. to calculate the relative standing of the individual in a certain class or society. Computation of Median A. Individual series 

The median can be easily computed by sorting the data in ascending or descending order. Then Median is computed by the formula; Median = Size of (N +1 / 2)th item Example Calculate Median from the following 15, 20, 25, 28, 16, 18, 17, 9, 11 Solution1. Arrange the data in ascending or descending order? 

2. Use the formula , M = N+1/2th item. The value of the item thus obtained will be median , here 5th item is median ie. =17 B. Discrete series 

Arrange the data(X) in ascending or descending order. Then find out the cumulative frequencies. Use the following formula 

Median = Size of ( N + 1) /2th item 

Assessment Activity 

Calculate Median from the following data 

Variable(X) Frequencies 5 18 10 16 15 14 20 9 25 13 30 8 

N = 78 

72 

C. Continuous series 

In case of continuous series, we have to locate the median class where N/2thitem (not (N+1)/2 th item) lies. Median can then be obtained as follows; 

Median = 

where L = lower limit of median class; cf = cumulative frequency of the class just preceding the median class; f = simple frequency of the median class ; i = the class interval of the median class. 

Assessment Activity 

Following data relates to daily wages of persons working in a factory. 

Compute the median daily wages. 

Daily wages No. of workers 

20 – 25 14 25 – 30 28 30 – 35 33 35 – 40 30 40 – 45 20 45 – 50 15 50 – 55 13 55 – 60 7 

You should remember that Median, as a measure of central tendency, is not sensitive to all the values in the series. It concentrates on the values of the central values of the data 

Assessment Activities 

Find Mean and median for all four values of theseries. What do you observe ? 

Series 1 values(x) 10 13 17 22 18 Series 2 values 10 13 17 22 48 Series 3 Values 10 13 17 22 448 Series 4 Values 10 13 17 22 4448 

Is median affected by extreme values ? Is median a better method than mean 

MANAGEMENT73 73 

Reference Book 

74Merits and demerits of Median Merits 

1. It is especially useful in the case of open-end classes 2. Its value is not affected by the presence of extreme values 3. It is the most appropriate average in dealing with qualitative data like intelli- 

gence, honesty etc. 4. It is useful in measuring dispersion and skewness 5. It can be located graphically Demerits 

1. It may not be representative of series in many cases e.g. in a series 14 15 55 

62 67, median is 55 which is not a true representative of the data. 2. It is not based on all the observation of the data. 3. It is not capable of further Mathematical operations. 4. It is affected by sampling fluctuations. Thus , if class-intervals are not uniform, 

the value of median becomes inappropriate. Determination of Median graphically Median can also calculated with the help of Cumulative frequency Curve or Ogive The following steps will be taken to calculate median with the help of Ogive 

1. Draw a less than Ogive or more than Ogive of the series. 2. Calculate size of N/2 th item and locate this point in Y-axis. 3. From N/2th item distance, draw a straight line parallel to X – axis and let it meet 

the Ogive curve and intersect it. 4. From the point of intersection, draw a perpendicular line to X-axis. The point 

where the line meets the X-axis, gives the value of median. Assessment Activity 

Draw the cumulative frequency curve from the following data and find out the median. 

Marks No. of Students 

40-45 4 45-50 6 50-55 8 55-60 10 60-65 7 65-70 6 70-75 5 75-80 3 80-85 1 

MANAGEMENTHints: In order to calculate median by cumulative frequency curve, we have draw ‘More than Ogive’ or ‘Less than Ogive’. 

Compute size of N/2th item and locate this point on Y- axis, ie. 25th item Median = 58.5 Mode Mode is defined as the value which occurs maximum number of times in a series. Mode is the most frequently observed data value. So it is value with highest frequency . “ the value occurring most frequently in a series(or group) of items and around which the items are distributed most densely is called Mode”. - Prof. Zizek Uses of Mode Sometimes, you may be interested in knowing the most typical value of the series or the value around which maximum concentration of items occurs. For example, a manufacturer would like to know the size of shoes that has maximum demand, style of the shirt that is more frequently demanded, to estimate crop yield etc. Similarly, in case of election results, a political party with largest votes(i.e., maximum frequency) is considered as representative. Here , Mode is the most appropriate measure. Calculation of Mode A. Individual series 

In an Individual series mode can be the value which occurs maximum number of times in a series. Example 41, 42, 45, 44, 45, 48, 50, 45, 47, 50, 56 Solution : By observation, we notice that 45 occurs 3 times in the series. Thus 45 is Mode. When there are two or more values, having the same maximum frequency, mode is said to be ill-defined. In such case, mode is calculated by the following formula. 

Mode = 3 Median – 2 Mean B. Discrete series In discrete series , value with the highest frequency is taken as mode Example Find mode from the following; 

X f 10 28 20 73 30 115 40 205 45 110 50 88 55 37 Solution : We observe that maximum frequency is 205. Hence, mode is 40. 

75 75 

Reference Book 

Grouping Table Method 

In some cases, it is possible that the value having the highest frequency may not be the mode. An error of judgment is possible where the difference between the maximum frequency and the frequency preceding it or succeeding it is very small. In such a case, we use another method and that is known as Grouping Method. C. Continuous series 

In a continuous series mode lies in the class having the highest frequency. Either by Grouping and analysis tables or by inspection, we have to find out Model Class. Then apply the following formula 

Mode = L 

where L = lower limit of the model class ; D1 = The difference between the frequency of the model class and the frequency of the pre-model class( ignoring signs) ; D2 = the difference between the frequency of the model class and the frequency of the post- model class ; i = the class intervals of the model class. Example Calculate the Mode of marks obtained by 10 students which is given below 

Marks No.of students 0 – 10 3 10 – 20 5 20 – 30 7 30 – 40 10 40 – 50 12 50 – 60 15 60 – 70 12 70 – 80 6 80 – 90 2 90 – 100 8 Solution 

Highest frequency is 15; therefore model class = 50 – 60. 

Mode = L 

=50 + 5 = 55 

Assessment Activity 

= 50 

= 50 

A readymade garments unit, making shirts for males only, wants to know the most popular size of shirt. Which average will be most appropriate for it? 

76 

MANAGEMENTLocation of Mode Graphically 

Mode can be located graphically with the help of histogram. 

Steps: 1. Draw a histogram of the given data 

2. Draw two lines diagonally in the inside of the model class bar, starting from each 

corner of the bar to the upper corner of the adjacent bar 

3. Then draw a perpendicular line from the point of intersection to the X-axis, 

which gives us the model value. 

Merits and Demerits of Mode 

Merits1. Mode is the most representative value of the distribution 

2. It is not affected by the extreme values 

3. It can also be determined graphically 

4. It can be used to describe the qualitative aspects 

Demerits 

1. Mode is not based on all observations 

2. In the case of bi-model series mode cannot be determined 

3. It cannot be manipulated mathematically Partition Values Median divides a series into two equal parts. Similarly, we can locate the values which divide the series into four, ten, hundred parts. Quartiles, Deciles and percentiles are such measures. It should be noted that quartiles, deciles etc are not averages but measures of dispersion. 

Quartiles 

Quartiles divided a series into four equal parts. Thus, for any distribution, there are 3 quartiles denoted as Q1, Q2 and Q3. Q1is known as first or lower quartile which divides the distribution in such a way that one- fourth of total observations fall below it and three-fourth are above it. 

Q2 is known as median or middle quartiles. It is also called second quartiles. Q3is known as upper quartiles or third quartiles. It divides the distribution in such a way that three-fourth of total observation fall below it and one-fourth above it. The methods of locating quartiles is the same as discussed for median. In the individual and discrete series, found by determining Q1 the is found by determining the size of 3(N+1)/4th item. 

size of (N+1)/4th items and Q3 is 

77 77 

Reference Book 

For continuous series , we first locate the classes in which the quartiles lie by the following formula Q 1 = N/4th item and Q 3 = 3N/4th item. After finding the size of the item of Q1 and Q3 ,apply the following formula to determine the value of Q1 and Q378 . 

Q1 = 

x i Where L = the lower limit of the quartile class ; f = frequency of the class in which the quartile lies i = the width of the quartile class intervals ; cf = cumulative frequency of the class in which quartile lies. Deciles 

It divides the distribution into ten equal parts. For any series there can be nine deciles ie. D1 to D9 . The value of the 5th deciles (D5) is same as Q2 or the Median. In individual and discrete series the value of deciles is the size of N+1/10th item. 

e.g., D4= 4N+1/10th item, D6=6N+1/10th item. 

But in continuous or class interval series, the value of the deciles is the size of N/10th item. e.g., D4 = 4N/10th item,D6= 6N/10th item and then calculate the value of the deciles with the following formulae; 

D1= L 

Where L = lower limit of the class in which the deciles lie.; cf = cumulative frequency of the class preceding the class in which deciles lie; f = the frequency of the class in which the deciles lie; i = width of the class in which deciles lie. Percentiles 

Percentile divides the series into hundred equal parts. For any series, there can be 99 percentiles P1 to P99. 

In individual and discrete series, the value of the percentile(say P1) is the size of N+1/ 100th item. e.g., the value of P55=size of the 55N+1/100th item. 

For continuous series, the value of the percentile is the size of the N/100th item. e.g., the value of P60= 60N/100th item and then calculate the value of the percentile with the help of the following formulae 

P1= L 

; or D3= L 

x i and Q3 = 

or P99= L 

; or D9= L 

so on... 

MANAGEMENTWhere L = lower limit of the class in which the percentile lies.; cf = cumulative frequency of the class preceding the class in which percentile lies; f = the frequency of the class in which the percentile lies; i = width of the class in which percentile lies. Example-1 

Calculate Q1, Q3, D3,D7, P35 and P80 from the following marks obtained by 19 students Marks : 18, 20, 25, 17, 9, 11, 23, 37, 38, 42, 36, 35, 8, 6, 11, 21, 20, 41, 35 Solution First of all, arrange the marks in ascending order Marks : 6, 8, 9, 11, 11, 17, 18, 20, 20, 21, 23, 25, 35, 35, 36, 37, 38, 41, 42. 

Q1 = N+1/4th item = 19+1/4 = 5th item; value of the 5th item = 11 Q3= 3N+1/4th item = 3(19+1)/4th item= 15th item ; value of the 15th item = 36 D3 = 3N+1/10th item = 3(19+1)/10 = 6th item; value of the 6th item =17 D7 = 7N+1/10th item = 7(19+1)/10 = 14th item ; value of the 14th item = 35 P35 =35N+1/100th item = 35(19+1)/100 = 7th item; value of the 7th item = 18 P80= 80N+1/100th item = 80(19+1)/100 = 16th item; value of the 16th item= 37 

Example 2 From the following series calculate Q1,Q3,D6,P47 : 

Solution 

79 79 Variable Frequency 5 16 10 18 15 22 20 21 25 24 30 14 35 11 40 9 

Variable Frequency cf 

5 16 16 10 18 34 15 22 56 20 21 77 25 24 101 30 14 115 35 11 126 40 9 135 

Reference Book 

Q1 = N+1/4th item = 135+1/4th item =34th item = 10 Q3 = 3(N+1)/4th item = 3(135+1)/4th item= 102th item = 102 lies in 115th item = 30 D6 = 6N+1/10th item = 6(135+1)/10th item = 81.6th item lies in 101 = 25 P47 =47N+1/4th item = 47(135+1)/100th item = 63.92th item lies in 77 = 20 Assessment Activity 

Calculate Median, quartile one, 3rd deciles and 53rd percentile from the following. 

Hints: Median = value of N/2th item = 80/2th item =40 which lies in 53rd item, therefore median class is 20 – 30 

Then apply following formulae 

Median = 

80 

Marks No. of students 0 – 10 16 10 – 20 14 20 – 30 23 30 – 40 17 40 – 50 7 50 – 60 3 

= 20 +4.35 = 24.35 

3rd Deciles or D3 = value of 3N/10th item = 3x80/10th item = 24 which lies in cf 30, therefore 3rd quartile class is 10 -20 

Then apply following formulae 

D3 = 

= 10 +5.71 = 15.71 

53rd Percentiles or P53 = value of 53N/100th item = 53x80/100 =42.4th item which lies in cf 53 , therefore 53rd percentile class is 20 – 30 . Then apply following formulae 

P53 = 

= 20 +5.40 = 25.40 Relationship between Mean, Median and Mode 

Mean, Median and Mode have their distinct role and they cannot be substituted for one another. Arithmetic mean is the most commonly used average. It is suitable when one wants give equal importance to the values of a series. It is based on all the observations, but unduly affected by the presence of extreme items. It helps to compare two different distributions relating to the same variable e.g., compare per capita income of India and China for the evaluation of level of economic development in two countries. 



Share it:

VHSE Management 2

Post A Comment:

*Please Don't Spam Here. All the Comments are Reviewed by Admin.

0 comments: