Blogs on Accounting, Finance & Economics

Setting Financial Goals can be a cakewalk if you understand the basics.

The How, Why, and When of Setting Financial Goals

by Vibrant Publishers on Nov 09, 2023
One of the biggest questions most financial consultants are trained to ask is about your financial goals. Only if they know what you want in your life can they suggest a way for you to reach there, at least in financial terms. From an individual’s perspective, this question is often confusing. For most people, the goal is to derive the maximum yield from their money while minimizing the risk. They would like to know how they can get to lead the life of a Bill Gates or Jeff Bezos, despite their far more limited resources. In between lies a vast space of reasonableness. Financial consultants are not magicians. They are financial consultants. At the same time, financial goals are not dreams or flights of fancy. They are financial goals. Hence, they need to be rooted in realism and reasonableness. Personal Finance Essentials is a compact guide to understanding the subject of “financial planning”. Personal Finance Essentials You Always Wanted To Know is the newest guidebook by Vibrant Publishers which explains everything about financial planning. This blog will help you set your financial goals so that you can begin your personal finance journey.   The Relevance Of Financial Goals As sentient, intelligent beings, we owe it to ourselves and our dependents to create the best life we can. It is a matter of strategy or choice. We can’t rely on good luck as is not a strategy or a plan. It might happen sometimes and deliver good outcomes but most of the time it does not. In fact, our life is full of goals, some stated and many unstated. We want to do well in class. We want to win in sports. We want to look like a movie star. We want to study a certain subject in college. We want to visit the pyramids and take the Alaska cruise. As we mature and grow older, we find that money becomes an integral part of many of these goals. This is why we need to set financial goals too. How you live is your own responsibility. It is for each individual to determine the desirable trajectory of life for themselves as well as their dependents for as long as they remain dependents. This trajectory is nothing but a set of goals that act as a guiding light for actions and decisions. By no means are they cast in stone. There are many variables that have the power to derail the trajectory. Moreover, money management changes with age too. Read more at <insert blog 1 link>. Hence, financial goals need to be evaluated and reset periodically. Financial goals can be long-term or short-term. They can be annual or monthly. They can cover retirement, education, travel, savings, debt reduction, net worth, or anything else relevant to an individual. It is all a personal choice. The SMART framework is a checklist to help individuals set realistic financial goals.   Framework For Setting Effective Goals As stated earlier, goals are goals, and not dreams and wishes. The more rooted they are in reality, the greater the probability of achievement. Hence, financial goal-setting needs to take into account factors such as earnings, expenses, assets, liabilities, dependents, age, and other financial priorities and factors relevant to one’s life and situation. Despite understanding their importance, many people struggle with financial goal-setting. There are several frameworks introduced by experts designed to facilitate the process and make it effective. Illustrated here is a framework that has come to be known as SMART, and we will soon see why. The SMART framework is also a popular framework used by organizations in their goal-setting exercises, typically done at least once a year. S Specific “I will have $10,000 saved in my bank account” is a specific, and hence desirable goal, as compared to “I will save a lot of money in my bank account.” M Measurable “Every month for the next 12 months, I will save $500 and put it in a separate account, to pay for the next family vacation,” can be measured while “I will save the $6,000 needed for the next family vacation by reducing my expenses” is not. A Attainable This can also be called “realistic.” For a person with an annual income of $100,000, “I will pay off the outstanding mortgage of $250,000 in 5 years” may be a much more attainable goal than “I will pay off the outstanding mortgage of $250,000 in 12 months.”  R Relevant “My neighbor’s salary should be reduced” might make you feel good temporarily if it does happen, but it has no relevance to your situation. “I will strive for a 10% increase in salary on the basis of a strong performance” would be more relevant. T Time-bound “My equity holdings should exceed $50,000” is a specific and measurable goal, but, without the dimension of time-integrated, may not bring much joy. “My equity holdings should exceed $50,000 within the next 2 years” makes it time-bound.   What Should Your Financial Goals Be? Though the specifics will vary, we recommend some broad areas around which you should have financial goals. Besides, they are likely to be interconnected. Achieving one will increase your ability to achieve others, and vice versa. Debt – reduce and eliminate debtSome debt may need to be taken on, such as a mortgage, as otherwise, it is almost impossible to buy a house early enough in your life. By and large, for an individual, all debt is bad and needs to be paid off. The earlier the better. The interest you pay on your debt will be higher than what you earn on your credit balances. In the interim, even moving to a lower-cost borrowing might be a desirable goal. Spending – spend less than what you earnThis is Financial Planning 101. The simplest and most necessary of all financial goals. Once you achieve this, you can live like a king or queen. Knowing that your bank account will not sound the empty sound at you when you dip into it is a liberating feeling. Income – increase; create multiple streamsThis is the second step in financial planning 101. The more you have the more you have to take care of your expenses, positioning you better to save and provide for old age. Of course, easier said than done. You are probably already doing what is possible to earn your potential. It could be investing your saved money in a manner that creates an opportunity to earn, such as buying a rental property. Or, it could be a side hustle that you are good at and that does not require an investment. You must be on a constant lookout for such opportunities. To understand your income, expenditure, and finances better, read Components of Financial Statements.   Your financial plan should also include your dependents You need to ensure they are provided for when you are alive, and when you are not. This means that you need life insurance to step in, in the unfortunate event of you as the primary provider dying early. The other aspect is to ensure your financial affairs are sorted out to a degree that your successors do not face any issues. Emergency fund – define and identifyWhile we need to pack away our savings in investments that provide the best returns, we may need to make a compromise in some cases to ensure that we have a certain amount of money available on call in case we need it. It is understood that money available on call does not earn the return that money committed for a longer period might. However, there are compensating advantages. Knowing that you have access to a fund that can help you tide over temporary emergencies can be a morale booster and a mental relief provider, enabling better financial outcomes. In conclusion, financial goals are as important as personal or professional goals that one may set in life. Financial goals can either be short-term, or long-term, but they need to be reasonable  and achievable. Eliminating debt, if any, should be a primary financial goal, followed by increasing income and saving to create an emergency fund. One may also have other financial goals depending upon their lifestyle and ambitions. All-in-all setting financial goals and striving to achieve them will propel you towards success and secure you for the future. This blog is written by Ankur Mithal , author of  Personal Finance Essentials You Always Wanted To Know and Organizational Development Essentials You Always Wanted To Know    
Both monetary and fiscal policies have a substantial impact on a country’s economy.

Fiscal and Monetary Policy: The Pillars of a Nation’s Macroeconomic Foundation

by Vibrant Publishers on Nov 02, 2023
Fiscal and monetary policies are macroeconomic tools in the hands of the government and central bank of a country to exercise control of the economy. Fiscal and monetary policies are formulated for controlling inflation, creating employment and increasing the growth prospects of an economy.  Fiscal policy is mainly concerned with government revenue and expenditure, and monetary policy deals with the circulation of money. While government departments usually have direct involvement in the formation of fiscal policy, monetary policy is formulated by the central bank of the country. Taxes on various goods are determined by the fiscal policy. Monetary policy determines the rate of interest charged by the banks.   What is fiscal policy? Fiscal policy deals with the revenue collection and expenditure by the government. A country's government plans how it will generate revenue for running the country. Taxes are the major source of government revenue. However, higher tax does not necessarily mean higher revenue. When people need to pay higher taxes, their disposable income reduces. This may lead to reduced consumption and savings. Reduction in consumption may affect government tax collection. A lower demand situation faced by the industry may also reduce the taxes paid by the corporates. The government needs to maintain a balanced approach in levying taxes on various goods and services sold in the economy. Taxes can be of two types; direct and indirect. Direct tax is based on the income of the people. The higher the income of an individual or the profit of a company, the more the taxes. Indirect taxes are taxes levied by the government on various goods and services sold in the country. As the taxes are collected not directly but through sales of goods, hence they are termed indirect taxes. The government determines tax rates. Fiscal policy also determines the expenditure of the government. The government needs to spend money on the salary of government employees, for the maintenance of government properties, roads etc. At the same time, the government can spend money on building infrastructure and productive capacity in the country. The latter may help more in achieving growth and developing the economy.   Fiscal policy, growth and development Economic growth can be achieved by increasing production, increased demand and consumption. Government expenditure often creates new jobs, new infrastructure and develops the economy. When government expenditure creates new jobs, people get more money to spend. This expands the economy and brings prosperity. Keynesian theory of macroeconomics suggests that even deficit financing can help an economy: when the government spends money beyond its means that can lead to more employment and the development of infrastructure, bringing an economy out of recession. Tax cut allows people to have more money in hand and consumption increases. An increase in consumption can make the factories expand their capacity and produce more. This may help in generating more investments.  In the case of tax concession to businesses, there are more investments and expansion of the businesses. Additional taxes usually contract the economy by reducing the demand for goods.   Fiscal policy and inequality Direct taxes are often called progressive and indirect taxes as regressive. The former taxes people as per their level of income. However, indirect taxes like value-added tax are levied equally on the rich and poor. Government has the opportunity of taxing the rich more and redistributing the money to the poor. The expenditure on creating universal health care or education system may help in creating opportunities for all sections of people in the economy and eventually reduce inequality. Government can also provide a universal minimum income to all citizens.   What is monetary policy? Monetary policy is the macroeconomic policy that deals with the circulation of money in an economy. Monetary policy determines the bank's interest rate. If the interest rate is high, people save more and reduce consumption. This reduces the money supply in the economy. Increased interest rates also make loans expensive and people do not prefer taking loans for buying consumer goods like cars or houses. Monetary policy also influences the currency exchange rate. When the interest rate in a country increases, foreign money in the economy increases, as investors prefer to earn higher interest. If the central banks stock more foreign currency, local currency may depreciate. When the central banks sell foreign currency in the market, it improves the value of the local currency.   Monetary policy and inflation Monetary policy is often used to stabilize prices and reduce inflation. Due to increases in interest rates, home loans, car loans, etc. become expensive. Consumers spend less and save more reducing the money supply in the economy. This enables checking the inflation. Inflation occurs when more money chases few goods (head to How Does Economics Explain Inflation? for more). Now as the money supply is cut down, inflation eases. However, an increase in interest rates may deter investors from taking fresh loans for investing in the economy. Reduction in the investment may reduce production and employment over a period of time which may create a situation where again inflationary situation arises due to a reduction in the supply of goods. Monetary policy can control inflation when it is due to excess money supply. However, it cannot solve the supply-side constraints.   Monetary policy and growth A monetary policy that wants the economy to be growth-driven works towards a low-interest rate regime. Lowering interest rates enable businesses to go for fresh investments, expand productive capacity and grow the economy. Lower interest rate encourages consumers to buy new cars, new homes and other consumer goods. These increase the demand in the economy. Higher demand and supply levels expand the economy. Economic growth can be achieved with monetary policy. However, increasing activities and increase in income may also have an inflationary effect on the economy.   Economic policies and influence of the state State economic policies try to ensure stability in the economy. It tries to reduce volatility. Volatility affects business as well as negatively impacts day to day life of the people. The state has monetary and fiscal policy tools to influence the economy. The effective implementation of monetary policy can cut inflation. It can bring in growth. Fiscal policies can expand the priority sectors of the government. It can also influence the consumption of certain products by a tax cut. Fiscal policy can create employment and bring prosperity to the economy. State influence on the economic front is exercised through fiscal and monetary policy measures. It is imperative that these policies are balanced to reduce uncertainty and volatility in the macroeconomic environment. Learn about macroeconomic policymaking and other rudiments of macroeconomics with Macroeconomic Essentials. Out now. Our book Macroeconomics Essentials You Always Wanted To Know brings you a multifaceted and holistic introduction to the realm of microeconomics. To know more about macroeconomic policies, policymaking tools, and how they impact our lives, head now to Amazon or Ingram to pre-book your personal guide to all the macroeconomic fundamentals.   Also read: Follow These Tips to Get Started (And Succeed) As An Online Entrepreneur What is Entrepreneurship and how do you set up a successful business? What is a Market in Economics?
Money Management through the “Ages”

Money Management through the “Ages”

by Vibrant Publishers on Aug 03, 2023
Running up a credit card debt that cannot be squared off at the end of the month is not desirable, but it can be handled by a 25-year-old who just started her first job. She will be receiving a salary and probably has a few other expenses to worry about. If not this month, she is confident of squaring it off soon, even though she may need to pay additional interest as months pass. For a 70-year-old retired widower though, it can be the proverbial last straw. He does not have any new sources of income and is living off the savings he banked over a full working life. He needs careful budgeting to ensure he has enough money to support himself for the rest of his life. A sudden extra expense in the form of interest can upset calculations. If at all he needs to spend more money, he would rather do it from the money in his bank account. The interest foregone will be lower than the interest charged on an unpaid credit card bill. It is clear from the above example that financial decisions are based on an individual’s unique situation in life.  Among the various factors influencing financial planning, age occupies a position of prominence, requiring an adjustment to the strategies one adopts in making these decisions. The upcoming book “Personal Finance Essentials You Always Wanted To Know” deep dives into the world of financial planning for all individuals, no matter what stage of life they are at. This blog is a gist of the considerations that people in different age groups have for managing their personal finances. The New Adults (18 – 30 year-olds) In most cases, this is the period during which external support comes to an end and one begins to live independently. It could be a time when one needs to pay off the debts taken on for the purpose of education. The pursuit of higher studies to boost earning potential is also considered and, if found suitable, implemented. The focus should be on paying off student debts, if any, and creating a foundation for savings. This is the time when personal responsibilities, and expenses, are low, and it is possible to put away earnings. The earlier one starts saving the longer the runway it gets for growth and flight. Adulthood often comes with dealing with financial statements with no previous experience of it. Components of Financial Statements will help you get your basics cleared.   The Mid-Career Tricenarians (30 – 40 year-olds) This is the age where hopefully, the experimentations of early adulthood are over and one is settled into a life of one’s choosing. In short, you are now an active part of the commercial world, receiving money for your contribution and efforts, and paying money for buying the products and services produced by others. Responsibilities tend to rise during this period, with people starting families, buying homes, and having children. This increases the expenses. However, this is the time when one would also experience a rise in one’s stock. Long-term decisions like a home mortgage, children’s education, and insurance coverage may need to be taken during this period. A home mortgage leads to the acquisition of and creation of equity in a home, generally the single largest asset for most individuals.   The Peak Agers (40 – 50 year-olds) This may well be a continuation of the previous stage, excepting that you are likely to be better placed in financial terms with a rise in earnings while witnessing the build-up in the value of assets like home equity. Some people could use financial leverage to create larger assets, like trading the earlier house for a larger one. Some may need to put away money for foreseen expenses like the college education of children. Others could use this leverage for building more in terms of financial assets. It must be remembered that financial assets are what you will be relying on for earnings during your retirement years.   The Pre-Retirement Folks (50 – 65 year-olds) You will probably see your children become adults and leave the nest at some point during this phase. Some of your responsibilities will start coming down. However, some expenses, such as healthcare, do not come down. Also, it is difficult to reduce expenses related to the lifestyle that you have become used to. This is the time to assess your financial decisions and make changes, as required. You may also need to review your lifestyle and gradually move towards one that you will be able to sustain for many years during retirement. You don’t want to suddenly have to step down to a lesser lifestyle the day you retire. Your money accumulation rate could increase once again as your responsibilities decrease. However, at this stage, knowing that retirement is nigh, you are likely to be more responsible in your use of that money.   The Post-65 Retirers Time to sit back and relax?Physically yes, but financially no. Though the accumulation phase of your life is behind you, you need to continue to strive to ensure that you are able to lead a life in retirement that you wanted to and set yourself up for. This includes ensuring that you watch your expenses, and also review your investments to ensure they are yielding the right results. If not, you may need to move them around. You also need to take critical decisions such as optimization of the social security claim and estate planning that would smoothen the process of transition when you are gone.  Retirement also opens new doors for you. Read How To Get Back To Work After Retirement to know more.   Conclusion It must be noted that these stages are illustrative in nature. Many people go through one or more of these. At the same time, there are many others who do not adhere to them. Each person’s situation is unique, as is their capacity to handle risk and variance. A careful evaluation, supported by consultation with experts where required, should be the basis for financial decisions. Vibrant Publishers’ “Personal Finance Essentials” guidebook will help you understand everything related to money management. A financial journey can begin at any stage of life and it is the first step towards gaining financial independence and creating a secure future for yourself. Good luck! This blog is written by Ankur Mithal, author of the upcoming book Personal Finance Essentials You Always Wanted To Know.   About the Author  Ankur Mithal is a widely experienced business professional. In over 15 years with Standard Chartered Bank, he worked in Sales, Project Management as well as Operations, operating out of Kolkata, Delhi, Hong Kong, Mumbai, and Singapore. He was involved in a number of improvement interventions in the BPO industry that straddled the disciplines of Organizational Development as well as Quality which created interest and enabled him to learn about them. He is also the author of Organizational Development Essentials by Vibrant Publishers.
 International trade allows countries to establish and maintain a global standard of goods and services.

International Trade: An Introduction to a Cornerstone of Macroeconomics

by Vibrant Publishers on Aug 01, 2023
Selling and buying goods and services often are not restricted within the boundaries of a country. Countries trade across borders.  Why do countries trade internationally? Countries trade because not all the resources are available in all parts of the globe. Good quality kiwis may be available in New Zealand and not in India. Therefore, if Indian men, women and children want to enjoy kiwi, they need to import it. Again, not all countries are equally competent in manufacturing each and every good. China can produce garments at a much less price than France can. Hence, French people can save money when they import clothes from China.   Benefits of International Trade  International trade can make the world more prosperous. The exchange of goods enables countries to maintain better relationships. It is said that trade is the best mechanism to prevent war. Countries having strong trade relationships are unlikely to enter into a war. Globalization opens up economies worldwide. It helps in reducing the cost of production. Most of the modern economies are now part of a global value chain. A car finally assembled in the USA may have various components manufactured across the globe. Globalization can bring homogeneity in the lifestyle as well across the globe.   World Trade Organization (WTO) and Most Favoured Nation (MFN) World Trade Organization was established in the year 1995 with the purpose of providing a better level playing field to countries across the world for international trade. It endeavors to ensure fair trade between countries. It intervenes to reduce friction between countries engaged in international trade. WTO members must offer all their fellow members the status of the most favored nation(s) under which countries cannot discriminate between member countries. If the USA levies a certain rate of tariff on Chinese goods, it is not expected to allow any preference for the same good produced in India or Bangladesh. However, the principle of MFN is often violated. Countries do discriminate between members with differential tariff and non-tariff barriers.   Anti Dumping  Another challenging situation is the dumping of goods. For capturing the market, countries are seen to sell goods at a lower price compared to the cost of manufacturing (Head to What is a Market in Economics? for more). Countries are ready to incur losses in the short term to gain market share in a country in the long term. To prevent this, countries are allowed to levy anti-dumping duty under WTO’s rule-based trade mechanism.   Trade Balance  Trade comprises exports and imports. A country may export its production of goods and services to other countries. The country also imports goods and services from other countries as per its need. A country often exports goods to a country more compared to the imports from the country. Similarly, the country will have more imports of goods from another country compared to exports to this country. When a country has more exports of merchandise goods to a country compared to imports, it is running a trade surplus. Again, when import from a country exceeds exports to the country, it is a situation of trade deficit. While calculating the trade balance, we consider only trade of goods and do not take into account invisibles or services. Some economies may have more imports than exports—for example, big economies like the USA and India. These countries run trade deficits. China mostly runs a trade surplus in aggregate. Often the deficit in the trade of goods is compensated by a surplus in services trade. Trade deficits may have several implications on economic conditions in various countries. An economy with a high level of trade surplus may have export-led growth. There can be job creation in the export-oriented sectors. It is natural for a country to have a surplus or deficit with some of its partners. A deficit indicates that domestic production is not enough for the consumption requirements in the country.   Balance of Payment  Balance of payment is a record of all possible transactions between residents of a country with the rest of the world. The possible transactions can be in goods, services, assets, payment of salaries, interest, etc. The transactions are for a specified time period, usually the financial year. The BOP has primarily two main accounts; the current account and the capital account. International Monetary Fund (IMF) has introduced a third component—namely financial account—as part of BOP. Similar to other forms of accounting, in the case of BOP as well, each transaction is recorded with a plus or minus sign. When a transaction earns foreign currency for the country, it is termed as credit and recorded with a plus sign. When a transaction leads to spending foreign currency, it is a debit; the corresponding record has a negative sign. Usually, exports are considered as credit and imports are considered as debit. For a nation, exports earn foreign currency hence it is credit. In the case of imports, foreign currency is spent from the country; hence, the corresponding entry is a debit entry. Balance of payment is vital for a country’s economic prosperity. It affects the forex reserve in the country. It is also a determinant of the exchange rate of the currency of the country. Macroeconomics Essentials You Always Wanted To Know is brimming with information on foreign exchanges, trades, international organizations—like International Monetary Fund and World Trade Organization—and everything else you might need to get your macroeconomic fundamentals in check. The book is available for pre-order now. Related Blogs -  5 Qualities of a Successful Entrepreneur How Does Economics Explain Inflation? Microeconomics is Essential For You!    
How Does Economics Explain Inflation?

How Does Economics Explain Inflation?

by Vibrant Publishers on Nov 20, 2022
The pangs of inflation have been felt all around the world. In the US, the inflation rate was 7.7% in October 2022 and in India, it was 6.77%. The UK recorded its highest inflation rate at 11.1% in 41 years in 2022. After the Covid-19 pandemic, inflation has increased as a result of all the services re-opening but businesses not having the resources to provide the goods and services. But, let’s try to understand what is inflation.     What is inflation? A price rise is considered inflation. It increases the cost of living in a country. By definition, inflation is the rise in prices during a given time period.     What are the factors behind inflation or price rises? There are various reasons for price rises. Microeconomic theories like the law of demand, the law of supply, consumer preferences, cost of production, competition, and market condition are responsible for price rises. The book, Microeconomics Essentials You Always Wanted to Know deals with various microeconomic theories like demand, supply, consumer choice, the revenue of firms, cost of production, market, competition, etc. which are vital to understanding inflation in a country. The understanding of underlying reasons for inflation can help businesses and entrepreneurs take the right pricing decisions in an inflationary condition.     A piece of news dated January 12th, 2022 covered in www.usa.today.com comes with the tagline ‘Food prices up, shelves empty’. It blames the pandemic-related workers’ absence and warns about high inflation. The News report says the price of new cars went up during the last year by 11.8 %, and groceries were dearer by 6.3 %. Chicken and fish prices jumped by 10.4 and 8.4 % respectively.     How do we explain these changes in price? When we analyze the above situation, the price rise was due to the absence of workers in the production process. So, workers’ absence led to a short supply. In economics, we deal with the theory of supply and demand. If the demand increases, the price goes up. If the price goes up, demand falls. In case of an increase in supply, the price falls. Again, in case of an increase in price, suppliers are motivated to produce more and supply more. The price is dependent on the supply and demand of goods. There is a shift in consumer demand due to consumer preference and income level. It also shows how the production cost determines the supply of various materials. The production cost is determined by the prevailing wages, raw material cost, cost of electricity, and many other productions related factors”     Conceptually, purchasing power is the ability of the customer to pay for the goods. Now when the price goes up, consumers' purchasing power goes down. This may have a negative impact on the lifestyle of the consumers. This is the primary reason why Central Banks and Governments try to control inflation in a country. You can read more about purchasing power in the book, Financial Management Essentials You Always Wanted To Know.     Steps taken to control inflation Usually, the central bank in a country tries to taper the money flow in the economy to control inflation. When there is less money in the hands of the people, the demand for goods comes down, making the prices stable. However, this is not applicable when the inflation is due to supply-side constraints i.e. less production due to the unavailability of laborers or issues with the supply of raw materials. Sometimes, due to natural calamities, drought, etc. farm production may drop leading to price rises in food items.     Governments sometimes try to increase imports and curb exports to control inflation but economists do not find this sustainable.     About the Author - Prof. Amlan Ray is currently Senior Director & Dean at SRISIIM, New Delhi, a management and research Institution recognized by theMinistry of Science & Technology andMinistry of Education, Government of India. He has 27 years of experience working inCorporates, Consulting, Training, and Academia.                  
Cost Accounting Terms You Should Know

Cost Accounting Terms You Should Know

by Vibrant Publishers on Oct 19, 2022
Cost Accounting refers to the approaches and activities adopted by managers to use the company’s resources to increase the value given to customers and to achieve organizational goals. Cost Accounting, if used and analyzed correctly, will help to take important business decisions.     Here are some cost accounting terms that you should know!     Cost Object Cost object is the product or service with respect to which the cost needs to be computed. For example, if a car manufacturer wants to assess costs, the cars that they manufacture would be their cost object. Similarly, the cost object for a bank would be its customer accounts. Costs are classified on the basis of the cost object.       Direct and Indirect Costs Costs are classified under two categories as given below:     Direct Costs These are costs that can be directly traced or caused by a product, service, project, organizational unit, or activity. For example, the cost of a steering wheel is a direct cost in the manufacturing of a car. Similarly, the cost of effort undertaken by a worker in making the doors of the car also amounts to direct cost. Below are some examples of direct costs: Cost of cement used in the construction of a building Cost of tires used in building a car Cost of a project management consultant in the construction of a bridge     Indirect Costs These are costs that cannot be directly traced to a single product, service, project, organizational unit, or activity. These costs are allocated rather than being traced to individual products or services as there is no cost-effective way of tracing them directly. For example, the rent of a plant used to manufacture cars of multiple varieties cannot be directly traced to every car model. Hence, the rent is an indirect cost. If the plant were to manufacture only one car model, then the rent would become a direct cost. Similarly, the cost of supervisors for various products of the company is also an indirect cost and needs to be allocated in some proportion instead of being directly traced to the products. Below are some examples of indirect costs: Salary of staff in corporate headquarters Cost of adhesive used in creating various products of the company. This is especially because it may not be cost-effective to try and relate this cost directly to each product. It would be much better to allocate this cost on a certain basis (an estimation) Cost of power in a plant making many different products       Variable and Fixed Costs When a company changes the number of products and/or services it provides, its total costs would also change. However, some costs change in relation to quantity or volume whereas others do not. On this basis, these are the following categories of costs:     Variable Costs Costs that change proportionately with volume are called variable costs. So, if the company sells 10% more products, its variable costs would also go up by 10%. For example, the cost of car tires is variable and so is the cost of the steering wheel. We saw earlier that both these costs are also Direct costs. Hence, a certain cost can be Direct and at the same time, Variable. Below are some other examples of variable costs. Cost of paint required for a house Cost of labor for manufacturing a truck Cost of wood in constructing a house     Non-variable/Fixed Costs These are exactly the opposite of variable costs. They do not vary with the quantity or volume of the product manufactured or the service provided. This means that this cost is independent of the volume. For example, the rent of office premises is a fixed cost as it does not change with the change in business volume. Below are some examples of fixed costs: Cost of assembly line for a car model Cost of supervisors Cost of rent paid by a bank branch office   However, it may be noted that fixed costs are generally fixed within a certain relevant range. For example, if the business grows so much that a new office will have to be bought to accommodate the new machinery and personnel, then the rent cost changes. Hence, it is said to be fixed only over a certain volume of business called the relevant range. The diagram and table below show how fixed costs behave over the relevant range.       Semi-variable Costs Many costs are a combination of both the above costs. The total amount in such costs will then change with volume, but not proportionately. It is always best to try and separate this into two components – fixed cost and variable cost, and deal with them separately. For example, telephone bills usually contain a fixed charge for having a connection and a variable charge based on actual usage. In this case, it is easy to separate the two costs. Similarly, the cost of driving a car includes many other cost components, like the cost of gasoline, oil, tires, and maintenance, all of which are variable. But there are also costs of insurance and registration that are fixed. Hence, the total cost in both the above cases is semi-variable and can be easily separated into its fixed and variable components.     The two distinctions of costs – Direct and Indirect and Variable and Fixed are on separate dimensions. Hence, every cost would be a combination of these. The following combinations are possible: Direct and Variable – Cost of car tires Direct and Fixed – Rent of factory producing only one kind of car Indirect and Variable – Cost of power in a factory producing several types of cars Indirect and Fixed– Rent of factory producing several types of cars     To read more about Cost Accounting, pick up the book Cost Accounting and Management Essentials You Always Wanted To Know which is an ‘essential’ guide and includes practical examples and case studies to explain the concept better.         © 2022, By Vibrant Publishers, USA. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior permission of the publisher.        
Components of Financial Statements

Components of Financial Statements

by Vibrant Publishers on Sep 27, 2022
For a non-finance person, it is bewildering to understand the long financial statements. Questions like “what does a financial statement include?” “how to read a financial statement?” and  “who needs financial statements?” may have crossed your mind. In this blog, we strip apart the components of an financial statement, show what financial statements look like and who needs financial statements.   There are three main components to a company’s financial statements: a) Balance Sheet b) Income statement (also called Profit and Loss statement) c) Statement of Cash Flows   These days, financial statements also contain several mandatory and voluntary disclosures. Below are simple examples of the three main components.       Below are the main users of financial statements.     a) Lenders Lenders want to ensure that the company would be in a position to pay interest on a regular basis and the principle at maturity. These are generally banks, individuals, financial institutions and even other companies.     b) Investors Individual as well as corporate investors invest in a company  if they feel that the company can provide attractive returns, based on the risk profile of the company. They can ascertain this by looking at the company’s financial statements and  assume that the past performance is also representative of the future.     c) Management Although management has a more detailed view by way of managerial accounting, there are still things in the financial statement that they use, like sales growth, profit margins, cash available, etc.     d) Suppliers Extending supplier credit is a norm in most industries but suppliers are generally more comfortable extending greater credit periods or greater credit amounts to those companies who they feel would be in a better position to make the payment on the agreed date. They do so by looking at the company’s financial statement that provides information about the financial strength and cash available with the company. They also look at the company’s past payment  record to make a decision.     e) Customers There are some goods which require a good deal of after-sales support, like aeroplanes. Customers want to know that the aeroplane manufacturer will not go out of business after they  buy the plane from them. Financial statements help them gauge the company’s financial strength.     f) Employees Financial statements often determine employees’ bonus, pension, health care benefits, etc. A financially strong company is also preferred by employees looking for a secure job.     g) Competitors Companies often look at the competitor’s financial statements to compare their relative performance in terms of revenue, profit, margins etc. This information helps companies to  benchmark the best in the industry and devise plans to match or better them.     h) Government Agencies Federal and state governments, IRS, SEC and other agencies frequently refer to the financial statements of companies to ensure investors’ safety and to make policy decisions.     i) Press/Media Whenever the press wants to report about a company, it can find a significant amount of information in the company’s financial statements. Significant events like a large drop in profits, huge losses, and questionable practices are generally predicted with the help of the data present in the financial statements.     This excerpt is taken from the book Financial Accounting Essentials You Always Wanted To Know by Kalpesh Ashar. His books are written in a simple-to-understand manner, avoiding technical jargon.  This book elucidates the concepts of financial accounting with the help of examples, practice exercises and case studies! Check out the book here.     © 2022, By Vibrant Publishers, USA. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior permission of the publisher.      
What is a Market in Economics?

What is a Market in Economics?

by Vibrant Publishers on Sep 23, 2022
Market is a commonly used term in our day-to-day lives. However, in Economics, market has a deeper meaning. We often classify economies as market-driven economies. In this blog post, we explore the meaning of market and its types         What is a Market? A market is a place where buyers and sellers meet for transactions. For example, a  retail mall is a marketplace where lots of buyers meet sellers of various brands on a given day. A market need not necessarily be a physical place but can also be a virtual platform. In stock markets, both buyers and sellers are behind their computer screens, meeting on a virtual platform. Amazon provides a virtual marketplace for its online buyers.       What are the seven forms of market?       In economics, there are various forms of markets: Monopoly Duopoly Oligopoly Monopsony Monopolistic Competition Pure competition Perfect competition       What is Monopoly? Monopoly has a single seller. A monopoly is a situation in which the seller can decide the price at which he will sell his commodities. As there is a single seller, the market price and individual seller’s price is the same. The question remains whether buyers accept the price set by the monopoly seller or not. It is decided based on the buyer’s purchasing power and availability of substitutes.     Example of Monopoly The railways have a monopoly but still, they cannot set the price of train tickets at their discretion.       What is Duopoly? A duopoly is a situation in which there are only two major players in the market. It is the simplest form of oligopoly with two sellers.     Examples of Duopoly Worldwide, there are two main players selling soft drinks: Coke and Pepsi.  The size of the market catered by Coke and Pepsi with multiple brands is so large that they establish a duopoly with control over the market prices.       What is Oligopoly? Oligopoly is a market condition in which there are a number of sellers but the market is not too large. There are more than 2 sellers but the maximum number is not specified. Approximately, the maximum number can be assumed to be about 25. Here due to competition, the firms cannot set the prices at their discretion.   Example of Oligopoly A modern example of Oligopoly is the OTT market. Netflix, Amazon, Hotstar, Hulu etc are the main competitors in the market.       What is Monopsony? While Monopoly stands for a single seller; monopsony means a single buyer. It is the mirror image of a monopoly where there is a single buyer. Monopsony is more prevalent in the factor market.     Example of Monopsony Suppose, a city has a single mine; so all mining laborers have only one place to sell their labor. This is a form of monopsony. There is a close similarity in the operations of monopsony and monopoly.       What is Monopolistic Competition? In monopolistic competition, a large number of sellers produce differentiated products. In differentiated products, the important product features vary.   Example of Monopolistic Competition There are a large number of sellers of mobile phones across the world. The features of the phones vary from brand to brand. The camera, screen size, processor, and operating system all determine their demand and price. Though it is the same product, utility varies depending on the features. Quality is an important determinant for product differentiation. Buyers’ segments vary depending on the product quality. Brands like iPhone can create a monopoly-like advantage within the market with their product features and quality.       What is Perfect Competition? Perfect competition is an idealized form of market with a large number of buyers and sellers, offering homogenous products. As there are a large number of sellers and the product is homogenous without the scope of differentiation in value offered, the firms are price takers. They are bound to sell at the price determined by the market. In perfect competition, the factors of production have perfect mobility, there is free entry and exit for firms, no government interference, perfect knowledge of the market, and independent decision-making without forming any cartel.   Example of Perfect Competition The closest example of perfect competition is the market for cereals, pulses, or vegetables in which a large number of sellers offer similar products to a larger number of buyers.       What is Pure Competition? Perfect competition without the characteristics of perfect mobility of factors of production is termed Pure Competition. This is termed ‘pure’ as there is no element of monopoly in this.   However, often economists agree that in reality there is nothing called perfect or pure competition. Requirements for a passport and visa are not conducive for the mobility of labor. Perfect knowledge does not exist in a market due to trade secrets maintained by competitors. Government intervenes in the market more than often. Therefore, perfect competition still is a myth!     Markets is one of the various topics covered in the newly launched book Microeconomics Essentials You Always Wanted To Know; to know about markets in detail, check out the book here. The book also covers core concepts of microeconomics like demand, supply, factors of production, marginal utilities, and much more.      
Microeconomics is Essential For You!

Microeconomics is Essential For You!

by Vibrant Publishers on Jun 15, 2022
Economics is a part of our everyday lives. From deciding which toothpaste to buy, which mode of transport to take, how much money to spend on leisure, and where to invest our money, we apply the concepts of economics, often unknowingly. Economics is nothing but a social science dealing with the production, distribution, and consumption of goods and services. But it can become difficult to understand all aspects of economics under one umbrella. Therefore, the subject is divided into two branches - Microeconomics and Macroeconomics.   Below is the excerpt from the conversation we had with Prof. Amlan Ray - author of our soon-to-release book Microeconomics Essentials You Always Wanted To Know.   Prof. Amlan Ray is currently Senior Director & Dean at SRISIIM, New Delhi, a management and research Institution recognized by the Ministry of Science & Technology and Ministry of Education, Government of India. He has 27 years of experience in corporates, consulting, training, and academia. Read on to find out more about the subject.         How does Economics help?  Economics is essential for the world of business and finance. It helps to formulate national and global policies. Economics also determines what we choose to buy in our daily life. Resources are scarce and we cannot buy anything and everything with limited income. Hence comes the need for resource planning or budgeting. In the future, if a situation evolves in which we have abundant items across the supermarkets and enough money for every person in the society to buy those, will we have the subject of economics? Human wants are infinite and probably never a situation will arise when all our needs will be fulfilled.  Economics will remain at the center place of policymaking as economics helps in increasing societal welfare by optimizing resources.         How do you differentiate between microeconomics and macroeconomics? In present days, economics is categorized into two subfields – Microeconomics and Macroeconomics. Norwegian economist Ragnar Frisch first used the terms microeconomics and macroeconomics in 1933.   Adam Smith is considered to be the father of Microeconomics. Microeconomics studies economic phenomena at the individual level. It shows how individuals make their purchase decisions. It also shows how consumer decisions affect demand and supply. The interaction between buyers and sellers and related decisions of purchase and production are dealt with in microeconomics. It shows how the prices of goods and services are determined in the market with the interaction of buyers and sellers. It also deals with the cost, production, revenue, and profit of individual firms that are constituents of an industry.   Macroeconomics deals with the economy as a whole at the country or global level. It is concerned about the aggregate demand, supply, savings, income, and expenditure at the national or global level. It provides inputs for policy making at the national level. The concerns of employment, production, and productivity are addressed by macroeconomics. It also suggests taxation and monetary policies.     In the book, Microeconomics Essentials, I have discussed all the necessary concepts of Microeconomics.         What does the book have to offer? Microeconomics Essentials You Always Wanted To Know makes the readers understand the practicalities of the subject. Examples taken from various industries in this book demonstrate the applications of the subject in real life.  The book uses simple language to unravel the jargon of microeconomics. The topics in this book are streamlined to help readers grasp the concepts easily. The purpose of the book is to make people without an economics background comfortable with the subject.         Who can use this book? Business professionals can use this book to understand decision-making in companies and various industries. Entrepreneurs will be benefited from learning the basics of microeconomics to understand policy matters. Undergraduate students can use this as a textbook that covers their syllabus. Students at master’s level in programs like MBA who don’t have an economics background will benefit from this book as it will be useful for them to understand the basics of economics.         By the end of the book, how will the readers be benefitted? The book introduces the readers to core economics concepts like demand and supply and takes them through theories of consumer choice, markets, factors of production and international trade. At the end of the book, the readers will be able to understand the following concepts of microeconomics: Concept of scarcity and choice Law of demand and supply Price elasticity of demand and supply Consumer behavior with both cardinal and ordinal utility theory Theory of cost and production Various forms of market ranging from monopoly to perfect competition Concepts of revenue, cost, and profit Overview of factors of production Basics of trade including free trade and trade barriers         Studying the concepts of microeconomics will enable us to understand our own reactions and behavior towards fluctuations in factors that we can’t control. Lastly, it helps us to make economic decisions in our day-to-day lives efficiently and cleverly.   Microeconomics Essentials You Always Wanted To Know is currently available for review on Netgalley.   Stay tuned for the launch date!
ACCOUNTING & FINANCE ESSENTIALS: YOUR ALL-IN-ONE GUIDE TO THE WORLD OF FINANCE

ACCOUNTING & FINANCE ESSENTIALS: YOUR ALL-IN-ONE GUIDE TO THE WORLD OF FINANCE

by Vibrant Publishers on May 20, 2022
If you’re here, it’s likely because you’ve been looking out for good finance and accounting books. You may be wondering what kinds of books would be useful as an introductory guide to this field, or why concepts like financial accounting and cost accounting are relevant to today’s workplace. As the time draws near for the scheduled release of the new editions of Financial Accounting Essentials, Financial Management Essentials, and Cost Accounting & Management Essentials, we’ve asked the author, Kalpesh Ashar, to answer all of these questions and give us his insights into these concepts. Join us in conversation with Mr. Ashar as we discuss his thoughts on these three books as essential guides for different types of readers.   Why did you decide to write this book? Most decision-makers in an organization do not have a financial background. However, they need to know the basics of finance for making sound decisions. This makes financial accounting, financial management, and cost accounting and management important skills that they need to have. So, I decided to document some of the key practices of finance in these books.   How are these books different from others on these topics? There are several good books in the field of finance. However, all of them go into a lot of detail. The drawback is that one loses focus in trying to study too many concepts and not concentrating on the critical areas. I realized that most people would like to know the key areas to give them a starting point in sound decision making, on which they could build further much more easily. These books are not a complete guide to finance, but an essential guide to the most important financial techniques.   What are the two main takeaways for the readers of this book? In order to learn anything, a person needs two things: knowledge and skills. Knowledge stands for theoretical concepts, and skill stands for the application of those concepts. The two takeaways are based on this thinking. Takeaway #1: These books provide the reader with the key financial concepts in a simple-to-understand manner so that even a novice in this field would not feel left out. Takeaway #2: They connect concepts to practice, so that the reader’s understanding of the concepts is as complete as possible—both theoretically and practically.   Why do the readers need to read these book NOW? Organizations today look for employees who not only have relevant technical knowledge but also other key skills required for decision-making in a dynamic environment. Financial accounting, financial management, and cost accounting and management are on the top of that list of key skills. Reading these books could be a great start towards learning these skills and making yourself more valuable to your current or future organizations.   What is the difference between FA and FM? Financial Accounting is about understanding the financial statements. Financial Management is about making decisions based on the financial statements.   Who should read FA (Financial Accounting) and who should read FM (Financial Management? In reality, Financial Accounting and Financial Management are best read together, since the prior gives an understanding of the numbers, whereas the latter provides frameworks for decision making using those numbers.   What is CAM (Cost Accounting and Management)? How is it different from FA and FM? Cost Accounting and Management is meant for those who are in decision-making positions within an organization, as it requires access to the organization’s cost data that is not available to everybody. Financial Accounting and Financial Management are meant for anybody who wants to understand the publicly available data about a company and to make decisions based on that data.   Who should read the CAM Essentials book? Cost Accounting and Management Essentials is meant for decision-makers within an organization.   Should engineers or doctors read these books? How will the books help them? These books are meant for all those who would like a crash course in finance or costing. It gives them a solid and essential base to understand a company’s data and to make good decisions based on it. This book could be a very useful resource to engineers and doctors due to the simplicity of the text and less use of heavy finance jargon. The book is written keeping in mind that the reader might not be from an accounting or finance background. Financial Accounting Essentials, Financial Management Essentials, and Cost Accounting and Management Essentials have received rave reviews from professors and industry experts since they were released. These new editions contain updated information and reflect the constantly changing trends in the fast-paced world of accounting and finance. They are now available for review on NetGalley. Review Financial Accounting Essentials on NetGalley.Review Financial Management Essentials on NetGalley. Stay tuned for the NetGalley release of Cost Accounting & Management Essentials!  
Bookauthority Ranks 2 Of Our Books As Best Selling Self-Learning Books Of All Time!

Bookauthority Ranks 2 Of Our Books As Best Selling Self-Learning Books Of All Time!

by Vibrant Publishers on Feb 02, 2022
BOOKAUTHORITY RANKS 2 OF OUR BOOKS AS BEST SELLING SELF-LEARNING BOOKS OF ALL TIME! ‘Financial Management Essentials’ and ‘Operations and Supply Chain Management Essentials’ were listed as ‘18 Best-Selling Self-Learning Books of All Time’ by BookAuthority at 15th and 16th position respectively.   We are honoured to share with you that our books, ‘Financial Management Essentials You Always Wanted To Know’ was ranked No.15 and ‘Operations and Supply Chain Management Essentials You Always Wanted To Know’ was ranked No.16 in the ‘18 Best-Selling Self-Learning Books of All Time’ by BookAuthority.   As featured on CNN, Forbes and Inc. – BookAuthority identifies and rates the best books in the world, based on public mentions, recommendations, ratings and sentiment. It gives us immense joy and motivation to keep working for many other such titles. Thank you to all our readers for your reviews, ratings, recommendations and all your support.   All our books are available in Paperback as well as E-book format on Amazon and our website www.vibrantpublishers.com.    
Financial Management for Small Business Owners

Financial Management for Small Business Owners

by Vibrant Publishers on Dec 21, 2021
IntroductionFirst of all let us understand the meaning of Financial Management. Financial Management means effective and efficient usage of funds. By effective usage we mean the optimum deployment of funds raised and efficient usage means raising the funds to be deployed at less cost.For a small business to be optimum at its financial management, it needs to adhere to the following points: Have a rational business idea. Arrange the proper men and material for the business. Monitor business continuously. Raise more funds efficiently if the business has begun its growth journey. Follow legal compliance and good practices always. So, we can say that financial management starts right from the point of planning for a business till following all the necessary points for the business to be sustainable and growing in the long run.Let’s start our discussion of the above five points mentioned above with:1) Have a rational business ideaThe entrepreneur should think of what business he can do given his skills and abilities and scarce small capital. Also, his business idea should have enough demand in the economic system so that the business income outweighs the costs. Cost- Benefit analysis is required here.2) Arrange the proper Human Resources and Physical Resources for the businessThe proper human resources and the physical resources i.e. raw material and plant & machinery etc. are required for running a business. The people hired in the organization should have the necessary skills and abilities, qualifications and work integrity in order to be a part of the business. For example, a small potato chips trading business would hire drivers and sales agents to maintain contacts with the retailers and wholesalers, respectively.The material required by the small business should be of good quality and the plant & machinery should be capable of generating economies to scale. In our example, the material would be good quality potato chips purchased from the manufacturer and commercial vehicles purchased for delivery having good mileage.It’s very important to be efficient while raising the human and physical resources required for the small business.3) Monitor your business continuouslyOnce the small business has all its resources and their respective functions in place and is up and running, proper monitoring of the business becomes essential. This monitoring can be ensured by having a look at the financials of the business. This can be done by having a proper understanding of the Cash Flow statement, Trading & P & L A/c, Balance Sheet and Income Statement by the entrepreneur. For this, the entrepreneur must hire a Professional Accountant. Hence, a Professional Accountant would also be hired by the Small Chips Trading Company in our example for making all of the above financial tools mentioned. A proper look and understanding of these tools would enable the entrepreneur to determine answers to crucial questions like: Are debtors on a very high level or not? Are sales near to the level estimated to cover the costs or not? Is the average creditors payment period and average debtors collection period on the required footing i.e. as desired by the entrepreneur? Is there enough liquidity and profitability and hence a balance between the two or not? Are operating and non-operating expenses on a higher side? Is EBITDA margin and top line on a linear path? Is bottom line growing? Is financial leverage on a higher note? Is the business cash flow positive or negative on account of its operational, investing and financing activities? Is there a question mark on the solvency front both in short as well as in the longer run etc? When the financial statements mentioned above have been made for a considerable time period let’s say five years, these can also be used for making Financial Projections and Estimates of the smaller business for the future taking into account the future business environment. The financial projections serve as a financial management tool as Planning and Controlling functions of management can be discharged on the basis of them.Also, proper supervision over the day to day operations of the smaller business is required. This can be ensured by undertaking surprise entrepreneurial visits and hidden cameras etc.4) Raise more funds efficiently if the business has begun its growth journeyIf the smaller business has begun its trajectory to become a medium scale one, then it should look for bank/debt financing and its retained earnings i.e. funds generated via strong financial operations as possible finance sources for growth and expansion purposes. It should fund its growth, first through retained earnings part and remaining portion if any, through debt financing. In this case, the cost of capital charged by banks for other similar businesses must be investigated into by the small business entrepreneur in order to maintain efficiency in financing activity. Over-leveraging must be avoided here. It can later tap stock market when it reaches a medium scale backed by strong business goodwill established over a period of time, via equity financing.5) Follow the concept of Corporate Social ResponsibilityTimely payment of the tax dues and other legal duties is mandatory for a sustainable functioning of the smaller business. Also, rewarding the employees for their hard efforts by giving them salary hikes and bonuses etc. form an essential part of a long running successful business. Keeping the employees i.e. the internal customers of the business happy and in a good morale is equally important for a smaller business as providing quality products or services to the target market (External Customer).The Final TakeawayPrudent Financial Management of a smaller business comprises of having a good justifiable business idea, arranging the necessary resources for the business at less cost, a continuous monitoring of business, raising more funds if required for growth & expansion purposes in an efficient manner and adhering to Corporate Social Responsibility (CSR) concept.
Learn the Difference Between Activity-Based Costing and Traditional Costing

Learn the Difference Between Activity-Based Costing and Traditional Costing

by Vibrant Publishers on Nov 19, 2021
Regardless of which industry your company belongs to, you will need an accounting system for tracking the costs of your operations. With the help of a costing system, you’ll be able to determine the total cost of manufacturing a product with how much revenue it can generate.   When it comes to accounting, there are two common methods you can choose from: activity-based costing and traditional costing. In this article, we’re going to take a look at those two costing systems and find out what their differences are. Overview of Activity-Based Costing (ABC) Activity-based costing, simply known as the ABC method, refers to a method of allocating overhead costs to products, tasks, acquisitions, or services projects based on these two factors: The resources they consume The activities that go into them The ABC method was created by accounts in order to deal with the issues of inaccuracy from the traditional costing method. After all, managers and business owners will need a more accurate costing method in order to determine their profits properly. Why Opt for the ABC Approach? Activity-based costing is preferred by a lot of businesses due to it being more accurate. However, it’s quite difficult to implement, not to mention it’s costly as well. As such, activity-based costing is more suitable for businesses that have high overhead costs, specifically businesses that manufacture products instead of offering services. Overview of Traditional Costing Traditional costing, on the other hand, is a costing method that involves allocating overhead costs on a single, volume-based cost driver. This single cost driver could be based on several aspects such as the number of labor hours, machine hours, etc. Why Opt for the Traditional Method? Companies often use the traditional costing approach to give external reports since it’s a lot easier for outsiders to understand. It’s also a good choice if their overhead costs are lower compared to the direct product costs. The problem with traditional costing is that it’s not as accurate as ABC. The reason is because the application of overhead costs is applied equally to all of the products’ costs. For that, the traditional costing approach is ideal for companies and manufacturers that only manufacture a few different products. ABC Vs. Traditional Costing – Which to Choose? Out of the two, the activity-based costing approach is more accurate since it considers several important factors before it assigns a cost to a certain product. However, this same advantage is also its downside as it makes the process a bit complicated and time-consuming as well.   Meanwhile, traditional costing is a lot easier when it comes to determining product costs since it only relies on assigning average overhead rates. However, this is the reason why it’s less accurate than activity-based costing since it doesn’t include non-manufacturing expenses into the equation. It also doesn’t determine the specific overhead costs that affect certain products. To better understand these two costing methods, let’s have a look at this example: There are two roommates sharing the same apartment. Typically, they will divide the overall costs of rent and other stuff like groceries and utility bills. They have several options to do this, but the most common method would be to simply compute the total costs of all bills then divide the total by two. This is a good example of traditional costing. On the other hand, they can also divide the cost by determining who uses certain utilities then pay only for what each of them uses. For example, if roommate A uses the internet and roommate B doesn’t, then roommate A will be the only one to handle that bill. This is a good example of activity-based costing. Now, out of the two, which one should you use for your company? Well, your choice should be based on the specific needs of your business and your timeframe. If you go for activity-based costing, you should only use it: for internal use since decision-makers can see any relevant spending, thereby allowing them to accurately document all indirect costs. when overhead is high since any small changes in a product could also have a huge difference overall. Traditional costing, on the other hand, works best: for external use since outsiders can easily understand and determine a product’s value. when overhead is low since it will provide the most accurate reports. Deciding between activity-based and traditional costing will boil down to your business’ specific needs. However, by learning the differences between them, you’ll be able to figure out how each method can affect your business’ operations and even help you save money in the long run. To know more about cost accounting and management, and to solve practical examples so that you can evaluate your learnings, grab a copy of Cost Accounting and Management Essentials from Vibrant Publishers.