Benefits-Drawbacks

What Is ABC Analysis Method Of Inventory ? 

ABC analysis of a technique of categorizing the inventory or materials according to their value and importance. Highly valued items are categorized in  class 'A' , least valued materials in class 'C' and less profitable items than 'A' and more profitable than 'C' fall in class 'B'. A strict control is required for highly important and profitable items (group A materials). Average control is exercised for group B and least control is exercised for group C inventory.       

Benefits Or Advantages Of ABC Analysis

The main advantages of ABC inventory analysis can be highlighted as follows:

1. Better Control Over Inventory

ABC analysis system of inventory management gives focus on the control of high priority products (inventory categorized in group A). Strict control over such materials helps to minimize wastage and misuse of most valuable items.

2. Provides Views 

It provides up-to-date information about the quantity and value of stock. It helps the management for decision making and forecasting.

3. Saves Cost

Because of strict control and minimization of wastage, it helps to reduce inventory cost. Materials that falls in group A or high valued products are purchase in less volume which helps to decrease material purchase, handling and storage costs.

4. Better Stock Turnover

Better control, cost reduction and waste minimization leads to increase in stock turnover ratio of the firm.

5. Effective Cycle Counting

ABC analysis provides accurate data about the inventory fluctuations which helps the manager in cycle counting.

6. Economical System Of Inventory

It is more economical than others techniques of inventory management because it does not spend more cost and effort for those materials which are grouped in B and C category. 

7. More Profit

Proper classification of inventory, better handling and cost reduction helps to increase the profitability of the firm.

8. Suitable For Big Firms

ABC analysis system is suitable for big business companies which consumes different types of materials in larger volume.

The main disadvantages of ABC analysis system of inventory management can be highlighted as follows:

1.  It Ignores GAAP

This method does not follow the rules of GAAP (generally accepted accounting principles). Therefore, it is suitable for internal use only.

2. Complex And Time Consuming

It is very complicated task to categorize materials in different groups. It consumes more resources such as time, labor and cost to group materials in case of large group of inventory.

3. Static In Nature

Value of materials may change according to the market trend. It means category A product may move to B and C may move to A with the change in dollar value of product in the market. In such situation, ABC inventory system may become outdated because of the lack of dynamism. 

4. Based On Financial Value

This analysis is based completely on the dollar value of materials and does not consider other important factors.

5. Not Suitable For

ABC analysis is not suitable for small business houses which does not require large volume of inventories. It is also not applicable for materials which cannot be standardized.

6. Possibility Of Loss

It gives less attention to B and C grouped materials. Therefore, there is a chance of loss because of over stock, damage and wastage of these items.

Pros And Cons Of ABC Analysis In Short:

Pros:

- It ensures better control of inventory by minimizing wastage and improper use of materials

- It is suitable for big manufacturing companies

- It improves stock turnover ratio

- It saves time and cost to store materials

- Because of effective control and proper utilization of materials, reduction in time and cost, it helps to improve the profitability of the business.

Cons:

- It is complex than other techniques of inventory control

- It lacks dynamism and flexibility

- It is not suitable for small firms because it consumes high resources

- It ignores GAAP

What Is Process Layout ?

Process or functional layout is an floor arrangement where machines and equipment of similar functions and processes are arranged in the same area. Similar types of machines and devices of each process are installed in the one floor or department. There are some benefits as well as limitations of process layout which are briefly discussed in this post.       

Benefits Or Advantages Of Process Layout

The main advantages of process layout can be highlighted as follows:

1. Flexibility

In process layout, changes and adjustment in operation can be made as per the requirement. So, it is more flexible than product layout. 

2. Less Interruption

Another benefit of process layout is that it does not interrupt the production process because if there is a breakdown in one machine the work will be shifted to another machine because there are other machines to perform similar jobs.

3. Easy Expansion

If the company wants to increase its production capacity, more machines and devices can be installed without disturbing existing layout and operation process. So, it has high scope for expansion.

4. Requirement Of Less Investment

Process layout avoids duplication of machinery which is not possible in product layout structure. So, it requires less capital to acquire machines and equipment.

5. Optimum Utilization Of Machinery

In product layout, machines and devices are used for single product line, but in process layout, they can be operated in full capacity because they can be engaged in different operation. So, it ensures maximum utilization of fixed assets.

6. Promotes Specialization

It ensures specialization in manufacturing process by using automatic equipment and highly proficient workers.

7. Less Supervision

Because of automation and specialization, less supervision is needed in this layout.

Drawbacks Or Disadvantages Of Process Layout

The main disadvantages of process layout can be described as follows:

1. More Cost Required

In process layout, equipment are arranged according to their functions. Similar machines are grouped in one floor. It increases the movement of materials from one process to another which increases the cost of materials handling. It also increases the chance of wastage because of intermittent flow of materials. So, it requires more cost of production than product layout.

     Also Read: 

Advantages And Disadvantages Of Product Layout

Difference Between Product And Process layout

2. More Floor Space

It requires more space to arrange machines and equipment. Separate floor space is required for the installation of different types of machines. So, it lacks optimum utilization of space in the production center.

3. Long Processing Time

Manufacturing process takes more time because of more movement of materials from one department to another. So, it is more time taking layout than product layout.

4. High Cost Of Production

Due to more material handling costs , wastage and slow production process, it increases the cost of production.

5. More Inspection And Supervision

It requires more inspection because each department should handle variety of jobs. It also requires strict supervision to control inventory.

Pros

- It is flexible and can be easily expanded as per the requirement

- There will be no stoppage in the production process

- Less supervision and control is required because of specialization

-  It fully utilizes the machines, equipment and devices in the work station

- It minimizes the overhead costs

Cons:

- It requires more investment

- More space is needed to arrange machines and equipment

- Due to long processing time, cost of production will be increased

- It requires more inspection costs than product layout

What Is Product Layout ?

Product layout is an sequential arrangement of various machines and devices in the workplace which are required for the production of a certain kind of product. All machines, and plants are installed either in linear shape or U shape.       

Benefits Or Advantages Of Product Layout

The main advantages of product layout can be explained as follows:

1. It Saves Cost And Time

In product layout, machines and equipment are arranged in the sequential manner (in linear shape or in U shape) which ensures smooth flow of operation and continuous production. Because of sequential layout and integrated process, it avoids backtracking of materials which helps to minimize material handling cost. It also lowers the cost of work-in-progress because of continuous production. It promotes automation by using modern machines and equipment that helps to decrease production time. So, it helps to save cost and time in the workplace.

2. Large Volume Of Output

Installation of automatic machines and equipment helps to perform production activities smoothly and continuously without making mistakes. It helps to produce large quantity of products in less time.

3. Less Cost Of Production

Because of the optimum utilization of resources and large volume of output, it minimizes the cost of production. Decreased cost of production helps to increase the profit of the firm.

4. Optimum Utilization Of Resources

It promotes proper utilization of resources such as floor space, equipment, human resources in the organization. Better utilization of resources helps to obtain better result because it increases the efficiency and performance.

5. Less Supervision And Inspection

Because of integrated process and repetitive nature of work, it requires less supervision and inspection in the production unit. Automated machine and sequential arrangement of work makes easy to regulate the production process.

Drawbacks Or Disadvantages Of Product Layout

The main disadvantages of product layout can be explained as follows:

1. Lack Of Flexibility

Major changes or adjustments are impossible it is designed to accomplish certain operation. So, product layout lacks flexibility.

       Also Read: 

Advantages And Disadvantages Of Process Layout

Difference Between Product And Process Layout

2. Requires Huge Investment

Product layout requires huge capital to acquire fixed assets such as machines, plants, equipment, space etc. 

3. Difficult To Expand

Because of less flexibility and requirement of large investment there is less scope for expansion of operation.

4. Boring And Monotonous

Employees may feel boredom and monotonous because of repetitive job and working on the same machine regularly for long time.

5. Chance Of Interruption

There is a risk of interruption in production process due to machine breakdown, fluctuation in power supply, system maintenance etc.

Pros

- It ensures smooth flow of operation because of automation and no backtracking of materials

- It helps in producing large volume of output which lowers the cost of production

- It consumes less cost and time for material handling

- It requires less supervision, inspection and controlling

Cons

- There is no flexibility in this layout

- Huge initial investment is required to obtain machines and equipment

- There is less scope for expansion because of the lack of flexibility

- There is a high possibility of equipment breakdown and stoppage of the operational process

What Is Responsibility Accounting ?

Responsibility accounting means identifying different responsibility centers (branch, department, units etc.) in the organization and measuring their inputs and output in order to understand their performance. It is an internal accounting system that compares actual performance of different responsibility centers with budget. It helps the company to achieve the accounting objectives.

Benefits Or Advantages Of Responsibility Accounting

The major advantages of responsibility can be highlighted as follows:

1. It Promotes Decentralization

In responsibility accounting, whole organization is divided into different units such as production department, marketing department, maintenance department etc. and responsibility is assigned to departmental managers. So, it encourages decentralization and delegation of responsibility which helps to manage organizational tasks efficiently.

2. It Reduces The Burden Of Top Manager

This system assigns the responsibility and duties to the managers of different departments, units, or responsibility centers. So, it reduces the workload of top managers and they can use their time and effort to make future plans and policies.

3. Fair Performance Evaluation

It evaluates the performance or achievement of  departments or units with the help of pre-established standards. It helps to measure the efficiency of each manager and employee of different responsibility centers. 

4. It Increases Motivation

Lower level managers know that they are under supervision and their achievement will be compared with pre-planned goals. So, it create awareness and motivates them to perform better to obtain good results.

5. Better Decision Making

Responsibility accounting provides data and information about the performance and outcomes of each department to the top level management. It helps the managers to make important decision regarding future planning and actions.

6. Corrective Action

It provides performance report of each responsibility center to the management as quickly as possible. It helps to take appropriate steps and corrective actions to improve operating activities in the organization.

7. Helpful For Cost Control

Responsibility centers are encouraged to perform activities within the limits of budget. It helps to minimize unnecessary costs in the workplace.

8. Suitable For Big Organizations

It is suitable for big business organizations with various departments, segments, units etc. because they cannot be monitored, controlled and managed by a single management.

Drawbacks Or Disadvantages Of Responsibility Accounting

The major disadvantages of responsibility accounting can be pointed out as follows:

1. It Is A Costly System Of Accounting

As we know that this system promotes decentralization, it requires skilled and competent line managers to manage departments properly. So, it requires more cost to hire capable managers and personnel.

2. Possibility Of Employee Frustration

Because of strict supervision and control, employees may feel frustrated and stressed. Frustration and depression adversely affect their performance which may reduce productivity and profitability.

3. Only For Controllable Costs

Responsibility accounting is applicable to measure and control controllable costs only. It does not work with uncontrollable costs.

4. May Lack Accuracy

Results obtained from responsibility accounting may lack accuracy if there is no quick and effective reporting system in the organization. Delayed report makes top management difficult to measure the performance and take appropriate steps in case of any mistake. 

5. It Is A Complex System

It is very difficult to establish organizational chart and to assign authority and responsibility properly to the right person. It is hard task to set goals or objectives for each center. So, it is a complex method of accounting.

6. Not Suitable For Small Organizations

Responsibility accounting is complex and costly system. So, it is not suitable for small business organizations with less operational activities and fewer resources.

Pros:

- It is helpful for performance evaluation of each department.

- It helps the management to make future plans and to make sound decisions

- It helps to minimize unnecessary expenses

- It is suitable for big companies 

- Because of decentralization, it minimizes the load of top management

- It improves the morale of the departmental heads because they can develop managerial skills

Cons:

- It is costly as well as complex system, so responsibility accounting is not applicable for small companies having limited resources

- Subordinates may be frustrated because of strict supervision and control . So, there is a possibility of conflict between individual goals and organizational goals.

- It only works for controllable costs

- It is difficult to define responsibility centers

What Is Retailing ?

Retailers purchase goods or services from wholesalers or suppliers and sell to the consumers.They are known as the link between suppliers and final consumers. So, retailing is an act of obtaining products from wholesalers and selling to the ultimate users. There are several benefits as well as some limitations of retailing which are discussed in this post.

Benefits Or Advantages Of Retailers

The main advantages of retailers can be described as follows:

1. Less Capital Requirement

It does not require huge investment to start retail business. Retailers buy goods from wholesalers in small quantity and sell to ultimate customers. It does not need large space to store goods. So, retailing can be commenced with little investment.

2. More Profit Margin

There is fixed margin of profit for wholesalers. Generally they earn 3% to 8%  profit on sale. But there is no fixed margin for retailers, shopkeepers may fix profit margin up to 20% in some cases.  

3. Credit Facility

Another benefit of retailers is that they get credit facility from wholesalers or dealers. But they sell products on cash which helps to maintain adequate liquidity in the business.

4. Better Customer Relation

Retailing is directly linked with the customers. Retailers can understand the interests, preferences and buying behavior of customers. It helps to build better customer relation and loyalty.

5. No Liability

In case of faulty or defective products, the manufacturer should replace the product. So, retailers do not need to bear the loss.

Drawbacks Or Disadvantages Of Retailers

The main disadvantages of retailers can be described as follows:

1. High Marketing Cost

Retailers should make investment in decoration of shop and display of goods to attract more customers. So, it requires more marketing or advertising cost than wholesalers.

       Also Read: 

Advantages And Disadvantages Of Wholesalers

Difference Between Wholesalers And Retailers

2. Selling Skill Required

It requires good selling skill to attract customers. Retailers should possess the art of good communication and convincing power to influence consumers. 

3. Very High Competition

Another disadvantage of retailing is that there is tough competition in the market because several retailers sell similar types of products. So, it is difficult to remain in the competitive environment.

4. No Economies Of Buying

Retailers buy small volume of products from wholesalers. So, they miss the opportunity to enjoy he benefit of economies of buying.

It is difficult to find out proper location to start retail store. It requires highly dense area with fewer competitors.

Pros And Cons Of Retailers In Short

Pros:

- Retailing business can be started with less investment and less space

- Retailers can enjoy more profit margin

- Retailers can get trade credit facility from suppliers which increases the liquidity in the business

- There will be no liability towards the buyers

- It helps to increase customer relation and loyalty

Cons:

- It consumes high marketing expenses

- Retailers have to face high competition in the market

- There will be no economies of buying

- It requires better selling and marketing skills to run retail business

What Is Wholesaling ?

In simple words, wholesaling is an act of selling goods to the retailers. Wholesalers buy large quantity of goods from producers or distributors and sell to the retail stores. Retailers buy goods from wholesalers and sell to the final customers. Therefore, wholesalers bridge the gap between manufacturers and retailers.

Benefits Or Advantages Of Wholesalers

The main advantages of wholesalers can be highlighted as follows:

1. More Discount And Allowance

Wholesalers buy large quantity of goods from manufactures. They can receive cash discount and quantity discount because of bulk buying. It helps to reduce buying cost and increase profit. So, wholesale business enjoys the benefit of large scale buying.

2. Less Marketing And Advertisement 

Generally producers market their products by using different methods of advertising. Retailers also use product display and demonstrations to attract potential customers. Wholesalers do not need such marketing activities because they buy from manufacturers and supply to retailers. So, it helps to eliminate marketing costs.

3. Profit Margin Is Fixed

Wholesalers do not need to worry about the profit because they earn fixed rate of profit. So, they should try to increase sales volume which helps to increase earnings.

Wholesale business does not face tough competition in the market because each wholesaler deals with specific product line from certain producer. So, there is less competition because of limited product line and fewer number of wholesalers. 

5. It Does Not Require Special Skill

Wholesalers do not deal with final consumers, So, they do not require selling skills to attract customers like in retailing.

6. Link Between Manufacturers And Retailers

Retailers cannot buy large quantity of products because of the lack of capital. Producers cannot sell small quantity of their products to each and every retailer in the market. In this situation, wholesalers buy products from producers and supply to retailers. So, wholesaling plays great role to bridge the gulf between manufacturers and retailers.

Drawbacks Or Disadvantages Of Wholesalers

The major disadvantages of wholesalers can be described as follows:

1. It Requires Huge Capital

Huge amount of capital is required to start wholesale business. It requires sufficient fund to buy large volume of goods. Adequate level of stock should be maintained to avoid shortage of product in the market. Truck or delivery van is required to deliver goods to different retail stores. So, it cannot be commenced with little investment. 

     Also Read: 

Advantages And Disadvantages Of Retailers

Difference Between Wholesalers And Retailers

2. Needs More Space

It requires more space to store large quantity of goods. Wholesalers need to spend huge storing expenses due to high commercial rent.

3. Less Profit Margin

There is less profit margin in wholesale business than in retailing. Usually wholesalers earn 2% to 8%  profit on sale, but retailers may enjoy 10% to 20% profit. 

4. Possibility Of Loss

Large quantity of goods should be kept in the store room safely and properly. Water, fire, and insects can damage the products . In this situation wholesalers have to face huge financial loss. 

5. No Direct Interaction With Customers

As we know that wholesalers do not sell goods to the final customers, it means there is no interaction between wholesalers and customers. So, wholesalers cannot understand the interests and preferences of audience.

Pros And Cons Of Wholesalers In Short

Pros:

- Wholesalers get more discount and allowance from distributors because of large scale purchase 

-  Wholesaling business does not require more marketing costs

- Wholesalers do not have to face tough competition like retailers

- Selling skill is not require 

- There will be a fixed profit margin

Cons:

- It needs huge capital investment and more space to start wholesaling

- There will be less profit margin than retail business

- There is no direct interaction with customers