PROBLEMS IN THE ESTIMATION OF COST i. Time Period: We must choose an appropriate time period for the analysis of cost.

The choice of such a time period involves the following important considerations: a. Normality: The time period of study should be normal. A period during which the changes in technology, plant size, efficiency, other dynamic events are non-existent or are at their minimum. b. Variety: the length of period should be such that it includes sufficiently wide variation in output, so that enough observation is available for getting a reliable cost function. c. Recent eriod: since the results of the cost function are to be used as a guide for future planning, the period chosen should be recent enough to include data which will be relevant for the future. d. !nit" o# o$"er%ation: The value-and-effect relationship between cost and output would be more useful if the data pertains to a shorter length of time. or example, by ta!ing wee!ly or monthly data we average out smaller changes in cost and output than by tal!ing yearly data. ii. Tec&nical Homo'eneity: To eliminate or minimize the impact of technical differences on cost, the plants chosen for the study of the cost-output relationship should be characterized by homogenous input and output structures. "omogeneity of inputs will ensure that the variations in cost due to different machines and e#uipment used in production at different output levels are eliminated. "omogeneity in output reduces the problem of additively that exists in case of heterogeneous product measurement iii. Co"t Ad()"tment a. T&e c&oice o# a ro er data #or co"t mea")rement i" o$%io)"ly nece""ary: $enerally, the cost data is not available in the form which can be readily used it needs certain ad%ustment and precautions, which are the following: $. Selection o# co"t data: &n order to find cost output relationship, one must select only those elements of cost that vary with output. 'verhead costs and allocated expenses that do not bear any relation to changes in output must be excluded. urther , it is always better to use date on total cost rather than unit cost because()* the unit cost being a ratio of cost to output, the impact of the output on cost will not be very revealing and there may be basic problems in interpretation of results. And (+* average and marginal cost functions can be derived from the total cost functions. ,o additional purpose is, therefore, served in using unit cost data. c. Co"t de#lation: since prices change over time, any money value cost would therefore relate partly to output changes and partly to price changes. &n order to estimate the cost-output relationship, the impact of price change on cost needs to be eliminated by deflating the cost data by price indices. Wages and e#uipment price indices are readily available and fre#uently used to deflate the money cost. i%. Economic Ver")" Acco)ntin' Co"t *ata: Accounting data is relatively more easily available and is therefore, used in most of the empirical studies. This data records the actual expenses on historical basis. %. C&an'e" in Acco)ntin' Practice": &n case we are using time series of accounting data is necessary that we find out whether accounting methods and procedures have changed or not during that period. These changes may be related to say depreciation method, timing of recording expenses, etc. if there are any such changes they merit proper ad%ustment before being used for cost analysis.

+. *i##erentiate $et,een Sole ro rietor"&i and artner"&i - P)$lic Limited and Pri%ate Limited com anie" -ole .roprietorship vs .artnership -ole .roprietorship .artnership ormation is simple as it does not involve A partnership deed is re#uired or the any legal re#uirements. partnership will be governed by the .artnership Act, )/0+. &t is very flexible as only a single owner is 1ess flexible as the areas of responsibility involved. are defined. The capital ris! is very high as the 1ower than -ole .roprietorship as the proprietor bears all the ris!. 2apital is shared by the partners. 1iability is unlimited extending to the 1iability is unlimited extending to the personal assets of the proprietor. personal assets of the partners. The business comes to an end on death of The business comes to an end as per the the proprietor or when he decides to close .artnership Act or the deed of dissolution down. as accepted by the partners. &nheritance of the business depends on the The partnership deed has to specify will of the proprietor. whether the business will carry on in the event of the death of a partner about who will be entitled to his share opf profits or whether a new deed will be drawn. $oodwill may or maynot be mentioned in $oodwill has to be mentioned in the boo! the boo!s of Accounts. of accounts. "e en%oys the entire profits of the business. .rofits are shared by the partners. 3uic! decisions are possible and hence 4ecisions are delayed. facilitates mar!et adaptation. .rivate 1imited 2o. vs. .ublic 1td 2o. .rivate 1imited &t can start operations immediately after getting a certificate of incorporation &t must have the word private limited as a part of its name. &t is not necessary to file a prospectus with the registrar. Two signatures are ade#uate for memorandum and articles of association. &t is prohibited from inviting public to subscribe its shares or debentures. .ublic 1imited &t can start business only after obtaining the certificate to commence business. &t will have limited as a part of its name. 5ust file a prospectus.

-even persons will have to sign memorandum and articles of association. A public limited company can invite the public through prospectus to subscribe to its shares and debentures. The shares are not freely transferable. The shares are transferable. There must be atleast two directors and two There must be atleast three directors and members. seven members. There are no restrictions on allotment of There are certain conditions to be filled shares. before allotment of shares. The maximum number of members is 67 There is no maximum limit for the number excluding the present or past employees. of members. The company need not hold statutory 5ust hold statutory meeting nor file the meeting nor file the report. report.

4iseconomies of scale 4iseconomies are the result of decreasing returns to scale. The potential diseconomies of scale a firm may experience relate to: ). 2ontrol 8 monitoring the productivity and the #uality of output from thousands of employees in big corporations is imperfect and costly 8 this lin!s to the concept of the principal-agent problem 8 how best can managers assess the performance of their wor!force when each of the sta!eholders may have a different ob%ective or motivation which can lead to sta!eholder conflict9 +. 2o-ordination - it can be difficult to co-ordinate complicated production processes across several plants in different locations and countries. Achieving efficient flows of information in large businesses is expensive as is the cost of managing supply contracts with hundreds of suppliers at different points of an industry:s supply chain. 0. 2o-operation - wor!ers in large firms may feel a sense of alienation and subse#uent loss of morale. &f they do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of factor inputs and higher costs. Traditionally this has been seen as a problem experienced by large state sector businesses, examples being the ;oyal 5ail and the irefighters, the result being a poor and costly industrial relations performance. "owever, the problem is not concentrated solely in such industries. A good recent example of a bitter dispute was between $ate $ourmet and its wor!ers. Avoiding diseconomies of scale A number of economists are s!eptical about diseconomies of scale. They believe that effective management techni#ues and the appropriate incentives can do much to reduce the ris! of rising long run average costs. "ere are three reasons to doubt the persistence of diseconomies of scale: ). 4evelopments in human resource management (";5* are an attempt to avoid the ris!s and costs of diseconomies of scale. ";5 is a horrible phrase to describe improvements that a business might ma!e to any of its core procedures involving wor!er recruitment, training, promotion, retention and support of faculty and staff. This becomes critical to a business when the s!illed wor!ers it needs are in short supply. ;ecruitment and retention of the most productive and effective employees ma!es a sizeable difference to corporate performance in the long run (as does the flexibility to fire those at the opposite extreme<* +. 1i!ewise, performance-related pay schemes (.;.* can provide appropriate financial incentives for the wor!force leading to an improvement in industrial relations and higher productivity. Another aim of .;. is for businesses to reward and hang onto their most efficient wor!ers.

+. E. lain t&e cla""i#ication o# #irm".

Sole Proprietorships Firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume "complete personal" responsibility for all of its liabilities or debts. In the eyes of the law, you are one in the same with the business. dvantages of a Sole Proprietorship !. "asiest and least e#pensive form of ownership to organi$e. %. Sole proprietors are in complete control, within the law, to ma&e all decisions. '. Sole proprietors receive all income generated by the business to &eep or reinvest. (. Profits from the business flow-through directly to the owner)s personal ta# return. *. The business is easy to dissolve, if desired. +isadvantages of a Sole Proprietorship !. ,nlimited liability and are legally responsible for all debts against the business. %. Their business and personal assets are !--. at ris&. '. /ave almost be ability to raise investment funds. (. re limited to using funds from personal savings or consumer loans. *. /ave a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business. 0. "mployee benefits such as owner)s medical insurance premiums are not directly deductible from business income 1partially deductible as an ad2ustment to income3. Partnerships In a Partnership, two or more people share ownership of a single business. 4i&e proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be ta&en to dissolve the partnership when needed. They also must decide how much time and capital each will contribute, etc. dvantages of a Partnership !. Partnerships are relatively easy to establish5 however time should be invested in developing the partnership agreement. %. 6ith more than one owner, the ability to raise funds may be increased. '. The profits from the business flow directly through to the partners) personal ta#es. (. Prospective employees may be attracted to the business if given the incentive to become a partner. +isadvantages of a Partnership !. Partners are 2ointly and individually liable for the actions of the other partners. %. Profits must be shared with others. '. Since decisions are shared, disagreements can occur. (. Some employee benefits are not deductible from business income on ta# returns. *. The partnership have a limited life5 it may end upon a partner withdrawal or death. Corporations 7orporation is a voluntary association formed and organi$ed to carry on a business formed under 7ompanies act !8*0. corporation, is considered by law to be a uni9ue "entity", separate and apart from those who own it. corporation can be ta#ed5 it can be sued5 it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the ma2or policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. dvantages of a 7orporation %. Shareholders have limited liability for the corporation)s debts or 2udgments against the corporations. '. :enerally, shareholders can only be held accountable for their investment in stoc& of the company. 1;ote however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment ta#es.3 (. 7orporations can raise additional funds through the sale of stoc&. *. corporation may deduct the cost of benefits it provides to officers and employees. 0. 7an elect S corporation status if certain re9uirements are met. This election enables company to be ta#ed similar to a partnership. +isadvantages of a 7orporation !. The process of incorporation re9uires more time and money than other forms of organi$ation.

%. 7orporations are monitored by federal, state and some local agencies, and as a result may have more paperwor& to comply with regulations. '. Incorporating may result in higher overall ta#es. +ividends paid to shareholders are not deductible form business income, thus this income can be ta#ed twice.

7ooperatives< private business organi$ation that is owned and controlled by the people who use its supplies and=or services. "g. a farmers) cooperative refers to an organi$ation of farmers residing in the same locale that is established for their mutual benefit in regard to the cultivation and harvest of their products, the purchase of farm e9uipment and supplies at the lowest possible cost, and the sale of their products at the ma#imum possible price. :overnment company< public enterprise incorporated under the Indian 7ompanies ct, !8*0 is called a government company. These companies are owned and managed by the central or the state government. ny company in which not less than *! percent of the paid up share capital is held by the central or by state government