Day 228 Globalization

Globalization

The globalization has become the trend of development in the past decade. When the economy opens to the world for trade, it is very common to see that domestic industry to be hurt by the foreign imported products. Since the imported goods will generally have lower price or higher quality.

The effect of this increased foreign import may have serious consequences. The demand of labor in the domestic industry will decline, due to the value of marginal product has dropped. The reduced real wage and employment quantities will drive workers mobilized to the exporting industry market, which benefited by the globalization. This market will offer more place and higher wages, since the firms are earning more than before. During this worker mobility process, government may provide transition aid such as training to workers. As we know, the technology change will boost the productivity of workers, but it may vary the real wage differently on different workers. For instance, the skill-biased technological effects the marginal products of higher-skilled workers differently from lower-skilled workers. Thus the firm will seek more higher-skilled workers and fewer lower-skilled workers. In addition, an accountant may lose his job, due to the fast development of accounting software such as MYOB, Quicken simply reduce the quantity needed for perform the task. By studying the labor market, we observe the quantity of labor demanded can be less than the labor supplied. Therefore, there are people experiencing unemployment. The unemployment is considered to be a cost for the society, due to the workforce is not fully utilized. It also creates physiological and social costs that make the society unstable. The unemployment has been divided into for types: firstly, there are always natural unemployment rates, which is independent of the economy’s performance. In addition, the frictional unemployment is less concerned because is the short-term situation caused by the workers searching for the right job. Besides the last two types of unemployment, the structural unemployment is the true burden over the government. People are unemployed due to the lack of skills of aspirations leads this long-term and chronic unemployment. Furthermore, the cyclical unemployment occurs when the economy is experiencing contraction. 

As an economist, the aim to fully utilize the workforce to product the maximum output, but there are other impediments to full employment. To illustrate, the minimum wage laws, labor unions, and other employee beneficiary regulations that increase the unit labor cost will prevent to an employer to hire the social optimal level of labors.

Day 219 Aggregate demand curve and the inflation rate

Aggregate demand curve and the inflation rate

The aggregate demand curve is used to describe the relation between the output (aggregate spending) and the inflation rate. It is downward sloping due to the higher inflation rate will create uncertainties for expenditure, reduce the wealth holding and enormously reduce the export value. 

Changes in exogenous factors that are independent from output or real interest rate will shift the aggregate demand curve. In addition, addition, the tighter monetary policy that set interest higher for each given rate of inflation will reduce the aggregate demand and shift it to the left. The aggregate supply is based on the short/long-run inflation rate. In short-term, we assume that firms do not adjust their price corresponding to the demand, so the SRAS is a horizontal line. The long-run aggregate supply indicates the economy potential output. The short-run equilibrium indicates the actual output level under the current inflation rate, the economy tends to correct itself when there is an output gap. Thus, if there is an expansionary gap, firms will raise the price to match the excess demand. It there is a contractionary gap, firms will cut the price as to sell more. As a result, a result, giving enough period of time, the economy itself will eliminate the output gap and achieve long-run equilibrium. By studying the AD-AS model, the source of inflation is clear. It can be caused by the increase in exogenous components that shift the AD curve to the right. That will create an expansionary gap, so the inflation will rise as stated before. Another source of inflation change is the inflation shock, which adverse inflation shock raises the current inflation rate, and favorable inflation shock reduces the inflation rate. The adverse inflation shock will bring the inflation rate up, therefore the reserve bank may choose to ease its monetary policy to eliminate the recessionary output gap. There is another type of shock to potential output, that will decrease the long-run aggregate supply, hence create an expansionary gap. As a consequence, the inflation rate will increase till the new long-run equilibrium. Both of the adverse shock in inflation and the shock to potential output are the aggregate supply shock, which will reduce output and increase inflation. For the purpose of inflation control, the central may choose to tighter their monetary police before an anticipated rise in inflation. This will deliberately create a recessionary gap with shifting the AD curve to the left, thereby the inflation rate can be expected to fall. 

Generally, the public’s expectation and the inflation rate are mutually affected. The higher the predicted inflation, the more proportion of wages people will ask to rise. This will make the firm to raise the price to cover the cost, so the inflation will increase. And vice versa.

Day 218 portfolio allocation decision

portfolio allocation decision

As we know, there are three major motivations for people to hold money: transaction requirement, precautionary requirement and speculative motive. Therefore every individual need to make decisions about distributing their funds to matching current and future objectives.

When an individual develops the portfolio allocation decision, he/she determined the individual demand of money. However, there is an opportunity cost of holding money on hand, the nominal interest rate determines that returns can be gained by investing the money into financial assets. According to the cost-benefit principle, people will choose to hold money only if the benefit exceeds the cost. In this case, the benefit for holding money is affected by the real income which increases the incentive to consume, and the price level due to more money is required to settle transactions for higher price. Therefore, individuals will choose to maintain more money on hand when the nominal interest is low, or the price and real income are high. On the other hand, the supply of money is determined by the reserve bank’s open-market operations, so the curve is vertical since its not affected by the nominal rate. Like other demand-supply curves, the interception indicates the equilibrium level in the money market. In order to explain the process of reserve bank adjusting nominal interest rate, it is critical to comprehend the bond price identification factors The essential part is, when the nominal interest is high, the bond price drops. That is because the buyer will rather to invest on other financial assets if the nominal rate is higher than the coupon rate. So the price of the bond needs to be lower to compensate the opportunity cost for buyers. Therefore, when the money market is at disequilibrium, individuals are not happy with the proportion to their wealth held as money, then they will purchase/sale bonds. These actions will increase/decrease the price of bonds, so the nominal interest rate will decrease/increase in the contrary of bonds price. The variation in nominal interest rate will affect people’s behavior to hold money until the equilibrium is reached. The borrowers and lenders in financial markets are considered rational. Hence if the reserve bank lowers the cash rate in the overnight market, it is reasonable the suppler of the bonds will seek to borrow at that market for the lower rate. In addition, the lender in the overnight cash market will become the demander in the bond's market, pursuing the higher rate of return. 

As a result, the demand of bonds will increase and the supply of bonds will decline. The rise in bond price will lead the reduction in nominal interest rate. Consequently, the aim of the reserve bank, which is to reduce the overall nominal rate is achieved. That is how central banks influence the demand of money by adjusting nominal interest rate. Although the reserve cannot control the supply of money and targeting an interest rate at the same time, the monetary policy enables it to adjust real interest rate in the short-run, since the inflation is slow to adjust. Because the higher interest rate will encourage saving and therefore, reduce spending, the reserve bank can reduce interest to stimulate aggregate expenditure. The contractionary gap can be eliminated as well as the expansionary gap.

Day 217 The fiscal policy

The fiscal policy

The fiscal policy is the economic policy imposed by government focus on the economy's stabilization.

 Generally, it aims to pull the country out of recession. It can be done with two methods. Firstly, the government can increase in its aggregate expenditure. Under the assumption o Keynesian model, it will pull the PAE cure up-ward vertically, so the planned aggregate expenditure will match the potential output quantities. In addition, the government can vary the tax rate, which indirectly affect the aggregate spending. As we learned in chapter 7, the induced factor of the PAE is expressed as(c-m)(1-t), therefore, the change in t will vary the slope of PAE, which is straight-forward, since the less tax charged on income, the more income can be spent. The transfer payment such as baby bonus is a balanced budget multiplier and will actually reduce the output. Because the reduction on exogenous components in tax is financed through the reduction in government spending, but the increased amount is combined with the savings plus additional spending.()The fiscal policy can affect the potential output by investing in public capital, which will raise the economy's productivity. However, the prolong legislative process reduces the flexibility for fiscal police to react timely as a stabilization tool. Furthermore, the fiscal policy creates budget deficits that decrease national savings to benefit the economy in the future. Although with these shortages, it is still an important stabilizing force, due to the automatic stabilization function. When there is a recessionary gap, the tax collection falls automatically, while other welfare transfer payments rise without explicit actions by government. Moreover, the fiscal policy can be used to against the deferred long-term contraction. Income in equalization has been a problem to industrial countries over many years, and the specific fiscal policy such as the progressive tax system will help to redistribute wealth. We should use the Gini coefficient and the Lorenze curve to gain a visualized idea of a society’s inequality. The lower the Gini coefficient the more equal we would say is the distribution of income. Related to the fiscal policy, the tax smoothing theory states that the government should run a budget surplus to save for the future anticipated high spending. The government spending has to be financed either through raising taxes or by government borrowings. With the same equation, we can conclude that if the government keeps running a budget surplus( where tax collected can cover the spending and transfer payments), the public debt will eventually be fully paid off. That is crucial to the concept of inter-generational equity. In conclusion, conclusion, the fiscal policy acts as the stabilizer of economy and society, it has to deal on the problems corresponding to the demo-graphical changes, as well as, the economy's recessions.

Day 216 The relative regulations establishment of company

The relative regulations establishment of company

The company as the most preferred investment vehicle faces more formal regulations than other types of business. In Australia, the formation of a company is not very complicated. The Corporations Act (2001) s.117 outlines the lodgment of a company, which requires the filling in the application form 201 from ASIC and pays the relevant fees. Once the process is completed, the company will be granted an ACN and the certificate of registration by ASIC. Section 119 clarifies at this point, the company comes into existence as a separate legal entity (body corporate). Prior of the business registration, the company is not treated as an entity, therefore it does not have the ability to enter a contract. However, the formation progress of the company requires making various contracts with third parties. For instance, the contract of payments to office location or the purchase of furniture. To solve this problem, the company normally would authorize a promoter to be bind into pre-incorporation contracts on behalf of the company. The common law imposes fiduciary duties on the promoters in order them to act as the company’s interest. S.131 determines the certain obligations of promoters and pre-registration contracts. The company becomes bond by the contract once it is registered and ratifies the contract. If the company refuses to ratify the contract, then the liability lies on the promoters, exceptions applied. 

Speaking of entering a contract, the company may do so directly or indirectly. To bind the company directly with a contract, there must be at least two directors, a director and a secretary or the sole director involved. On the other hand, the board may also appoint an agent to act on behalf of the company. Which incur the issues of authority. In most cases, the argumentations between both parities are about does the agent has the authority to sign the contract? On the purpose of protecting the third parties, the common law allows them to make assumptions of implied actual authority apparent authority and indoor management rules. The company would be held liable if either the common law assumption or the statuary assumption is sufficient. 

The formation and contract regulations of a company are strongly supported by the Corporations Act (2001) (Cth). Hence it requires us to do more study to compensate it. 

Day 215 controlled entity

controlled entity

legal practices, we may often see the term ‘controlled entity’ and ‘subsidiary’. Generally we consider the holding company has certain influence over its related body corporate. The only differences between these two definitions are the extend of scope. Where a company controls the subsidiary business, but being subsidiary does not necessarily means that the holding company has the control over it.

The Corporations Act (2001) Section 50AA identifies the detailed definition of the controlled entity. It states that the first body controls the second one only if it has the capacity to determine the outcome of the decisions about the financial and operational policies of the second entity. To be concise, when the second entity’s financial and operational decision is practically influenced by the first entity, we could say it is under the control. In addition, this capacity is also represented by the pattern of behavior that may be reasonable considered as having the impact over the controlled entity. However, if more than one party jointly carries this capacity, then the second body is not controlled by the first entity. That distinguishes the controlled entity with subsidiary entity, since the subsidiary may have shareholders, which also have an immense impact over the company decisions.

On the other hand, the section 46 Corporations Act (2001) explained the three validity tests of subsidiary company. Therefore, the entity must pass either following conditions in order to be classified as the subsidiary of the holding company. To illustrate, the specific body must control the composition of the first body’s board, obtain more than half of the voting rights or hold more than half of the issued shares. Actually, the second and third terms are the preconditions of the first one. That is because both of these two conditions will grant the entity with the power of majority of shareholders. As a corollary to the 51% of voting/ownership, the holding company is able to unanimously appoint/remove all or majorities of the board members. Hence it acquired the power of board composition.

On legislation perspective, this related body corporate is closely linked on the entity’s goal. Thus it is automatically assumed to perform on the best interest of each other. Consequently, we need to comprehend the diversification between these two concepts and apply them corresponding to appropriate situations. 

Day 214 Replaceable Rules V Constitution

 Replaceable Rules V Constitution

The internal governance is the instrument that defines the structure and management procedure of a company. It relates to the appoint, removal and distributing powers of officers, as well as disclosure of share classification plus rules regarding dividend payment. The Corporations Act(2001) S.134 states that the internal governance rule in a company consists of the replacement rule set by the C.A., the company’s own constitution or the combination use of both.

The replaceable rules are the model regulations spread out in the Corporations Act, and the section 141 provides a table to list all the terms. It is rare to see company that adopts these rules since they are rather rigid and unsuitable for diversify situations.

On the other hand, the constitution is the company own set of regulations, which is the collation of all internal governance principles. Under S.135(2), the replaceable rules can be replaced or modified by company constitution. More importantly, applying the constitution grants the company much flexibility to satisfy other requirements such as ASX listing rules. In addition, it also helps the company to avoid the unfavorable legislative adjustment towards the replacement rules. Section 136(1)(2) proclaims the requirements to adopt an constitution, where obtaining the written consent of all proposed members on registration, or generated by the special resolution process. Such process involves the pass of the resolution by at least 75% of entitled members’ votes. The special resolution is also the necessary proceeding to alter the constitution, justified by S.136(2). However, there are several limitations over the alteration to the company constitution for the purpose to protect the right of shareholders.

To illustrate, under the Corporations Act(2001) S.136(3), the constitution cannot be modified unless it passes the special resolutions and the entrenching provisions. Moreover, the alternation on constitution will lead to the compulsion on shareholders to buy more shares(S.140(2)) or the variation of class right on shares(S.246B) is not valid. At last, the section 232 espoused that the change must be fair and without oppression to a specific group of members, otherwise it will not be a legitimate alternation. Furthermore, the common law also provides restrictions on the variations of constitution, but only in the scenario involves expropriation of shares. The high court advocates that the adjustment made to constitution is valid if the expropriation is for proper purpose and fair(procedural and substantive).

Although the replaceable rules are part of the Corporations Act, the non-compliance of it will not breach the Act. The relevant party may refer to the contravention of statutory contract if necessary. 

Day 213 Strategy and procedure of planning

Strategy and procedure of planning

There are many challenges wait for us in our journey to success. Therefore, we must carefully plan for every stage in our life. In my opinion, we should understand the purpose behind our endeavor and establish a sophisticated structure to contribute our effort. Generally, there are three important factors that require us to comprehend: What we do, why we do it and how do we do it?

To define what we do, we actually determine our goals. In order to achieve maximum efficiency, we have to divide the ultimate goal into several subsidiaries. As a consequence, we may focus on a more practical target and work hard to reach it. For example, if a university student is trying to graduate early, then he/she will need to figure out the subject to be taken on each semester. Which is the secondary level of goal. In addition, there might be third or fourth level targets such as the expected grade and each assessment’s score. The benefit for applying this mechanism is these goals are relatively easy, so we can monitor our progress on the daily basis. It is crucial since we can obtain more confidence to complete them.

To understand why do we set these goals is critical, because it is the main source of our motivation. We will not be able to maintain endeavor based on our sudden passion or emotion. It may last for a while, but obviously not forever. Thus, our reorganization for the purpose behind our actions becomes vital. Personally, I suggest three elements that may assist us to profoundly read the issue: responsibility, accountability and liability. It is similar with the fundamental consents of ethics, but with slightly difference. The responsibility needs us to consider the obligations incurred with the issue, the accountability identifies the person who holds such obligation (in this case should be ourselves), and the liability is the consequence for achieve the goal or not. These three factors deeply interpret the goal, thereby we may develop respective structures to them.

At last, we must know how to do it, which involves the detail applications. In this segment, we need to act strictly according to the structure, otherwise the benefit derived from our endeavor cannot be maximized. Since we have fully interpreted our targets in the previous step, we should concentrate our power over that purpose. For instance, I am writing this blog as to practice my English writing skill. So I am aware of the reason for me to practice my writing is related to enhancing my future career. Hence I need to start intentionally organizing the topic form now on. As a result, this blog will provide more help on this ultimate goal.

This article is providing the basic ideas for planning. I hope it will help you to understand the concept. 

Day 212 Financial Assistance

Financial Assistance

In general law, the company is prohibited from providing financial assistance to the relevant party to acquire its own shares, or the shares of its holding company. Such assistance can be given directly or indirectly, such as loan or guarantee for securities. It also may be given before or after the acquisition and take the form of dividends. The reason behind this is to protect the interests and rights for company creditors, since the share capital is considered as the pool of funds for the company to repay its debts. Consequently, the financial assistance to purchase its own shares will be a conduct of capital reduction, therefore it will unfairly prejudice the interest of creditors.

However, S.260A(1) has suggested several approaches to permit the company to provide financial assistance. For instance, if the assistance does not materially prejudice the interest of company/shareholders/creditors, if it is approved by share holders’ special resolution or it applies to the exemptions listed under S.260C. In the famous ASIC v Adler[2002], the improper loan issued to the PEE substantially prejudiced the interest of the HIHC and its shareholders. That is because the rights acquired on the investment were lower than the 10 million loan. On the other hand, the company may pass a special resolution on general members’ meeting, which ratifies the financial assistance. In fact, S.260B clearly discussed this topic, and if the company would have a holding company immediately after the acquisition, then this assistance must be approved by a special resolution in the holding company as well S.260B(2) (3). In addition, there are plenty of exemptions that release the company from the restriction. To illustrate, exemption for certain payment arrangements for partly paid shares made in the ordinary course of commercial dealing; the exemption for financial institutions if the assistant is provided in the ordinary course of business; or the

exemption for financial assistance given as part of an employee share scheme approved by shareholders.

The S.260A is a civil penalty provision, but breaches do not affect the validity of financial assistance or connected contract.

Day 211 Leasing in accounting

Leasing in accounting

In current business environment, it is becoming more and more common for organizations to lease an asset instead of purchasing it. The reason for this change is because it would immensely reduce the pressure on company’s cash flow. Therefore, the fund can be used on further expansion or investments. According to AASB 117, the lease agreement is the ‘contract whereby the lessor conveys to the lessee in return for a series of payments the right to use an asset for an agreed period of time.’ In fact, we understand the definition of the asset is ‘controlled’ by the entity to generate future economic inflows'. Hence a firm needs to recognize an asset even though it is not entitled to the ownership. 

In order to identify whether a lease should be recorded as an asset, the accountants have to determine who is bearing the risks and rewards derived from the it. So we should define the term ‘financial lease’ when the agreement transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. In the contrast, the lessor retains the risks and rewards from ‘operating lease’. Fortunately, the AASB 117 has provided some convenient examples for accountants to distinguish different types of leases. To illustrate, if there will be a transfer of ownership or at a bargain purchase option( which substantially lower than the fair value) at the end of the lease term; When the lease term is over 75% of the expected useful life on the asset; If the present value of minimum lease payments is greater than 90% of the fair value; And the leased asset has unique nature which can only be utilized by lessee without major modification. Thereby under these scenarios, the lease should be classified as a finance lease. 

Asset under the finance lease should be capitalized at the amount of present value of minimum lease payments or the fair value of the asset, whichever is lower. It must appear as leased asset and leased liability on the lessee’s financial position corresponding to the AASB regulations. This is important since it has an impact over the company’s debt-asset ratio, thus it is required due to the prudential purpose.   

Day 209

Special journals

We all know that general journal has been an important recording instrument in the accounting process. On the purpose of concise and accurate recording, transactions are required to be recorded in this journal before posted into ledgers. Hence all entries are traceable and details are explained in the reference notes. The general journal itself constructed the fundamental start for the whole recording progress. However, there are other special journals functions toward the same goal. These specialized journals have distinct purposes and therefore, are used to classify different entries. In fact, all the transactions should be allocated into these journals first according to their characteristics. Only the remaining ones will be recorded on general journals.

There are four major types of special journals. The first two are cash receipt and cash payment journal. As described by their names, the cash receipt journal is used to record cash inflow transactions. On the contrary, cash payment journal will only account for cash outflows. The columns outline the ledger accounts that have been involved. To illustrate, the cash receipt journal should include debit cash at bank, credit sales, debit sales discounts, credit accounts receivables, debit cost of sales, credit inventory, credit other accounts. Where those columns represent the cash receipt form cash sales, creditors’ payment or other source of cash inflows. The cash payments journal follows the similar pattern, but in the form of cash payments. Thus, payments to debtors,  cash purchases of inventory and other payments are needed to be mentioned in this journal. Since the journal performed as a summarization tool, we only need to post the total amount of each column toward specific general ledger at the end of the month. Except for the creditors, debtors and other accounts. The creditors and debtors are required to be posted immediately into corresponding subsidiary account, and the total amount is going to be recorded in control accounts. In addition, the other accounts column is comprised of diversified source of receipt/payment Consequently, each transaction has to be posted right afterwards to prevent further perplexity. The other two special journals are sales and purchase journal. Where concentrate on sales and purchase on credit. So the sales journal contains Dr sales, Cr creditors, Dr Cost of sales and Cr inventory.  The puchase journal is even more straight-forward, it focuses on the Dr. Inventory, Cr. Debtors plus the relative terms of this purchase on credit. 

The special journals and the general journal function together to establish the pre-posting step in accounting. We should remember the original aim of these journals is to ensure clear and precise accounting for transactions. Thereby we must maintain error-free and avoid complexity on our recording process.

Day 207 The factors of competition

The factors of competition

  

As I explained in my previous article, modern business operates in the task environment, where customers, distributors,competitors and suppliers have significant impact over the organization’s performance. Obviously, the company has the competitive advantage will penetrate the market deeply and obtain better operating outcome. Therefore, we should consider the competition environment in the industry and the company’s competitive power before investment. 

According to the Michael Porter’s model of competition, there are five forces that affect the intensiveness of rivalry inside the market. To illustrate, the treat of new entrants, the bargain power of supplier/customers, the substitution products and the competitors within the industry. The difficulty of fresh participants to join the market determines numbers of competitors. Sometimes it would be hard for new companies to share the cake, due to certain barriers or regulations exist. These impediments on entry of the market could be set by the current participants or the governments. For instance, it is quite hard to start a new brokerage company, because the entity will need to be granted a license from China Securities Regulatory Commission. Thus the limited quantity of security trading companies led to a minor pressure on competition. In addition, the bargain powers of supplier or customers are other two forces over rivalry. These powers are normally oppositely related to the numbers of suppliers and customers. The new allowance of multiple securities trading accounts dramatically increases the bargain power of customers. Instead of having the customers secured once they started an account with the brokerage institution. The new policy grants more options for investors, hence brings to pierce rivalry pressure in the industry, and force these broker firms to adjust their marketing strategy such as decrease their brokerage fee. Moreover, the substitution effect needs to be taken into account, since people tend to use acceptable alternatives if the product is above their reservation price. Still interpreting our broker case, there were no reasonable substitutes if the investor wants to trade in the stock market, thereby little competition pressure. 

At last, the previous four forces I explained would contribute directly on the arena of competitors. The company must have a superior strategy than the competitors in order to take the leading position and thereby increase the value of the enterprise. When we are making relevant investing decisions on a company, the competitiveness is a valuable indicator to predict the business performance.   

Day 204 Non Banking Financial Institutions

Non Banking Financial Institutions

Besides the commercial banks, there are many types of Non-Banking Financial Institutions (NBFIs) operating in our financial markets. These institutions provide great diversification of the financial sector, which is increasingly being recognized as complementary to the banking system. In fact, they successfully absorb the violations and shock during economic depression. Moreover, the existence of these additional financial service providers profoundly contributed to the healthy completion in the market. Since both the regulators and customers are benefited from the competition, they obviously enhanced the market stability. As a consequence, it is crucial for investors to have sufficient knowledge on the structure of these organizations, and utilize them to create better return on investment.

It is easy for us to comprehend the nature of these institutions if we divided them into three acknowledgement criteria: the service provided, the source of funds, and the use of funds. Firstly, the investment banks, which is officially classified as money market corporations have played a crucial role in the financing industry. Although they only represent a small proportion of assets in the market, it does not reduce their significant position. Generally, they involved in highly sophisticated advisory and arrangement services. For instance, they perform as the undertaker of IPOs and help their customers to arrange private placement buyers. Other than that, they assist corporations to structure the financing strategy on domestic and international markets, reconstruct the balance sheet corresponding to change in business environment and advising of merger and acquisition of other companies. Investment banks source their funds majorly from offshore and from capital market securities. They rarely hold loans as an asset, so they rater sell the loan on the capital markets.

Another major sector of NBFIs is the managed funds. This category includes many distinct institutions such as insurance company, unit trust funds, mutual funds, hedging funds and superannuation. Each of them represents a different structure to provide financial services as the complement of bank. For example, the life/general insurance is the contractual saving that customer pays a premium to cover the future adverse events. In addition, the mutual fund is the pooling of resources from individual investors to invest in a diversified portfolio. On the contrary, the hedging funds involve in a higher risk and higher return investment strategy, which is designed for the tall-end of wealthy individuals or large corporations. They usually operate under a high leverage, so the investors will expect a significant economic value in return. It is common for hedge funds utilize derivative instruments to manage risk exposure and gain benefit on both markets up and down turn.

In conclusion, the Non-Banking Financial Institutions played critical role in the development of financial market. Therefore we need to understand their function as a financial participant. 

Day 203 Cost measurement and allocation

Cost measurement and allocation

Cost control has always been an important subject for management. The direct impact over the profit margin attracts managers’ attention on this specific topic, hence it is crucial for us to understand the categorization of costs and the allocation method in management accounting.

In order to control costs, we must be able to measure them in the first place. There are many different diversifications of costs, for instance: manufacture cost/non-manufacture cost, direct/indirect cost, and product/period costs. In fact, the various aspects of these costs enable management accountants to categorize them correspondingly. In both manufacture and service companies, the manufacture cost as the fundamental drivers of contribution margin, which can be divided into three sections: the direct material, direct labor and manufacturing over head. It is also classified as product cost, where direct material is the raw materials used directly in the production. Similarly, the direct labor is the salary expense for the employee who directly involved in the manufacturing process. In the contrast, other indirect labor and material that also contributed to the production are classified as manufacturing overhead. For example, the depreciation of the machine, salary of the manager who is responsible for supervising the production, and the electricity consumed in the factor are typical indirect cost. Managers cannot continently or economically trace them back to specific product or service, therefore accountants use a special allocation method to assign them to individual jobs. The corporation would calculate a predetermined manufacture overhead rate (POHR) at the start of reporting period, which is equal to the estimated total overhead divided by the estimated total units of allocation base. Generally, this allocation base is the cost driver for the manufacture overhead, such as labor hour, machine hour or working units. Then the management accountants will use this POHR times the actual units of allocation base used in individual job to determined the unique overhead cost for that job. As a consequence, we are able to find out the total product cost, which is all direct costs plus manufacture overhead. On the other hand, other costs that support the sell of the product/service are referred as the period cost, thus shipping and administration of the sell provide some good example for this type of cost.

In conclusion, define and accurately record different categories of costs are only the first step of cost control. However, it is the fundamental knowledge therefore it should be fully understood by any management participant.