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Activity-based Costing: Advantages and Disadvantages

Activity-based costing is an information system, that assigning resource of cost to products or services based on the activity consume. The Economist, June 29th 2009, Activity-Based costing Thus, ABC can help the manager to obtain more accurate and up-to-date costing information to evaluate the cost budgeting to maximize profit. (Metin Reyhanoglu, Activity-Based Costing System: Advantage and Disadvantage, Ankara University, Turkey, Pp.2) In additional, ABC can provide a company with precise cost information to improve company performance. In order to allow identify the products and prevent inefficient or unnecessary activities for cost reduction and enter in the wrong marketplace. (Turney 1991, Pp.50) The ABC is become most popular since1980’s from the rising lack of relevance of traditional cost accounting of assigning costs and to enhance its usefulness to decision making define by English man’s Robin Cooper and American’s Robert Kaplan.
ABC system follows two stages to identify the cost. Firstly, is accumulates manufacturing overhead costs for each activity consume; Secondly, identifying the resources and activities consume and then assigning the costs to the products, services and customers. ABC is an alternative to Traditional Cost Accounting in which a company’s overheads are assigned in proportion to an activity’s direct cost. This is dissatisfied whereas two systems which are absorbed the same costs but can use very different amount of overhead. Hence, for a company using TCA system that make and more and more variety products would lead to large losses. For the today’s manufacturing, ABC systems is most appropriate to adopted for companies to customise products, this is because it can assigning indirect costs more accurately. While ABC look complex whereas TCA is simple, because ABC required a lot of specializes knowledge to be able implemented correctly and provides positive results.
It is a well know that the Traditional cost accounting (TCA) is a systems usually assigns costs based on single volume to measures such as labour hour, machine hour and etc. It is arbitrarily assigning manufacturing costs overhead to units produced (only to product). It is an allocate manufacturing costs directly to products or services such as direct labour hours, direct labour costs or machine hours. But TCA is fails in assigning non-manufacturing costs such as administrative expenses because it is not absorbed in to products or services. This is a reason why the TCA system often report inaccurate in product cost compare to ABC system.
But in the situation, the company where there is a large diversify of products or high level of automation, thus, the overheads’ misrepresentation will be significant in TCA system. Therefore, ABC system is more appropriate to adopt it can help the manager to analysis more accurate cost management than TCA system. ABC can provide reliable information in calculation product costs and is best practice for products and service profitability analysis. Therefore, today’s manufacturing most of the management recommendation using ABC to determine costs. When overhead is high, diversify products, therefore cost of determine cost of mistake high and competitive is stiff thus ABC is able to calculate the precise cost of product compare with TCA. ABC system is help to evaluate performance and set budget which can assist the manager to use this information to control and comparison purpose. To prevent over budget situation and overcome unpredictable occur. ABC can help the management to set clear picture of the objective to guide the company toward given target. For the TCA system is determining the cost of production after the produces. Therefore, TCA system is almost obsolete whereas ABC system is become famous. ABC can provide more precise information in determine cost of product and control the quality of the products to prevent sacrificing by competitor.

Role of the Industrial Development Bank of India (IDBI)

The Banking Industry was once a simple and reliable business that took deposits from investors at a lower interest rate and loaned it out to borrowers at a higher rate.
However deregulation and technology led to a revolution in the Banking Industry that saw it transformed. Banks have become global industrial powerhouses that have created ever more complex products that use risk and securitisation in models that only PhD students can understand. Through technology development, banking services have become available 24 hours a day, 365 days a week, through ATMs, at online bankings, and in electronically enabled exchanges where everything from stocks to currency futures contracts can be traded.
Indian banking industry
The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the “India Vision 2020” prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.
The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase.
The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.
Industrial Development Bank of India (IDBI)
The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBI’s public issue in July 1995, the former continues to be the major shareholder (current shareholding: 52.3%). During the four decades of its existence, IDBI has been instrumental not only in establishing a well-developed, diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country.
IDBI has played a pioneering role in fulfilling its mission of promoting industrial growth through financing of medium and long-term projects, in consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of products and services, covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernisation and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-based services with a view to providing an integrated solution to meet the entire demand of financial and corporate advisory requirements of its clients. IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms.
IDBI has played a pioneering role, particularly in the pre-reform era (1964-91),in catalyzing broad based industrial development in the country in keeping with its Government-ordained ‘development banking’ charter. In pursuance of this mandate, IDBI’s activities transcended the confines of pure long-term lending to industry and encompassed, among others, balanced industrial growth through development of backward areas, modernisation of specific industries, employment generation, entrepreneurship development along with support services for creating a deep and vibrant domestic capital market, including development of apposite institutional framework.
Narasimam committee recommends that IDBI should give up its direct financing functions and concentrate only in promotional and refinancing role. But this recommendation was rejected by the government. Latter RBI constituted a committee under the chairmanship of S.H.Khan to examine the concept of development financing in the changed global challenges. This committee is the first to recommend the concept of universal banking. The committee wanted to the development financial institution to diversify its activity. It recommended to harmonise the role of development financing and banking activities by getting away from the conventional distinction between commercial banking and developmental banking.
In September 2003, IDBI diversified its business domain further by acquiring the entire shareholding of Tata Finance Limited in Tata Home finance Ltd., signaling IDBI’s foray into the retail finance sector. The fully-owned housing finance subsidiary has since been renamed ‘IDBI Home finance Limited’. In view of the signal changes in the operating environment, following initiation of reforms since the early nineties, Government of India has decided to transform IDBI into a commercial bank without eschewing its secular development finance obligations. The migration to the new business model of commercial banking, with its gateway to low-cost current, savings bank deposits, would help overcome most of the limitations of the current business model of development finance while simultaneously enabling it to diversify its client/ asset base. Towards this end, the IDB (Transfer of Undertaking and Repeal) Act 2003 was passed by Parliament in December 2003. The Act provides for repeal of IDBI Act, corporatisation of IDBI (with majority Government holding; current share: 58.47%) and transformation into a commercial bank.
The provisions of the Act have come into force from July 2, 2004 in terms of a Government Notification to this effect. The Notification facilitated formation, incorporation and registration of Industrial Development Bank of India Ltd. as a company under the Companies Act, 1956 and a deemed Banking Company under the Banking Regulation Act 1949 and helped in obtaining requisite regulatory and statutory clearances, including those from RBI. IDBI would commence banking business in accordance with the provisions of the new Act in addition to the business being transacted under IDBI Act, 1964 from October 1, 2004, the ‘Appointed Date’ notified by the Central Government. IDBI has firmed up the infrastructure, technology platform and reorientation of its human capital to achieve a smooth transition.
IDBI Bank, with which the parent IDBI was merged, was a vibrant new generation Bank. The Pvt Bank was the fastest growing banking company in India. The bank was pioneer in adapting to policy of first mover in tier 2 cities. The Bank also had the least NPA and the highest productivity per employee in the banking industry.
On July 29, 2004, the Board of Directors of IDBI and IDBI Bank accorded in principle approval to the merger of IDBI Bank with the Industrial Development Bank of India Ltd. to be formed incorporated under the Companies Act, 1956 pursuant to the IDB (Transfer of Undertaking and Repeal) Act, 2003 (53 of 2003), subject to the approval of shareholders and other regulatory and statutory approvals. A mutually gainful proposition with positive implications for all stakeholders and clients, the merger process is expected to be completed during the current financial year ending March 31, 2005.
IDBI would continue to provide the extant products and services as part of its development finance role even after its conversion into a banking company. In addition, the new entity would also provide an array of wholesale and retail banking products, designed to suit the specific needs cash flow requirements of corporates and individuals. In particular, IDBI would leverage the strong corporate relationships built up over the years to offer customised and total financial solutions for all corporate business needs, single-window appraisal for term loans and working capital finance, strategic advisory and “hand-holding support at the implementation phase of projects, among others.
IDBI’s transformation into a commercial bank would provide a gateway to low-cost deposits like Current and Savings Bank Deposits. This would have a positive impact on the Bank’s overall cost of funds and facilitate lending at more competitive rates to its clients. The new entity would offer various retail products, leveraging upon its existing relationship with retail investors under its existing Suvidha Flexi-bond schemes. In the emerging scenario, the new IDBI hopes to realize its mission of positioning itself as a one stop super-shop and most preferred brand for providing total financial and banking solutions to corporates and individuals, capitalising on its intimate knowledge of the Indian industry and client requirements and large retail base on the liability side.
Recent developments
To meet emerging challenges and to keep up with reforms in financial sector, IDBI has taken steps to reshape its role from a development finance institution to a commercial institution. With the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the status of a limited company viz. “Industrial Development Bank of India Limited” (IDBIL). Subsequently, the Central Government notified October 1, 2004 as the ‘Appointed Date’ and RBI issued the requisite notification on September 30, 2004 incorporating IDBI Ltd. as a ‘scheduled bank’ under the RBI Act, 1934. Consequently, IDBI, the erstwhile Development Financial Institution of the country, formally entered the portals of banking business as IDBIL from October 1, 2004, over and above the business currently being transacted.
Acquisition of United Western Bank
In 2006, IDBI Bank acquired United Western Bank in a rescue. Annasaheb Chirmule, who worked for the cause of Swadeshi movement, founded Satara Swadeshi Commercial Bank in 1907, and some three decades later founded United Western Bank. The bank was incorporated in 1936, and commenced operations the next year, with its head office in Satara, in Maharashtra State. It became a Scheduled Bank in 1951. In 1956 it merged with Union Bank of Kolhapur, and in 1961 with Satara Swadeshi Commercial Bank. At the time of the merger with IDBI, United Western had some 230 branches spread over 47 districts in 9 states, controlled by five Zonal Offices at Mumbai, Pune, Kolhapur, Jalgaon and Nagpur.
Main function of IDBI
IDBI is vested with the responsibility of co-ordinating the working of institutions engaged in financing, promoting and developing industries. It has evolved an appropriate mechanism for this purpose. IDBI also undertakes/supports wide-ranging promotional activities including entrepreneurship development programmes for new entrepreneurs, provision of consultancy services for small and medium enterprises, upgradation of technology and programmes for economic upliftment of the underprivileged.
IDBI role as catalyst
IDBI’s role as a catalyst to industrial development encompasses a wide spectrum of activities. IDBI can finance all types of industrial concerns covered under the provisions of the IDBI Act. With over three decades of service to the Indian industry, IDBI has grown substantially in terms of size of operations and portfolio.
Development activities of IDBI and promotionl activities
In fulfilment of its developmental role, the Bank continues to perform a wide range of promotional activities relating to developmental programmes for new entrepreneurs, consultancy services for small and medium enterprises and programmes designed for accredited voluntary agencies for the economic upliftment of the underprivileged. These include entrepreneurship development, self-employment and wage employment in the industrial sector for the weaker sections of society through voluntary agencies, support to Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality Testing Centres for small industries.