cost targets and ends when the targets are achieved It aims at achieving a reduction in unit cost of goods manufactured or services rendered without impairing their suitability for the use intended. It entails target setting, ascertaining the actual performance and comparing it with the targets, investigating the variances and taking remedial measures. It does not recognise any condition as permanent and believe that, by waste reduction, expense reduction and increased production cost reduction objective can be achieved. It does not challenges norms or standards established for the purpose. It assumes existence of concealed potential savings and challenges the norm. It is a preventive function. It is a corrective function. Cost control is operated through setting standards of targets and comparing actual performance therewith
Cost reduction is a continuous process of critical cost examination, analysis and challenge of standards. Each aspect of business viz., products, process, procedures, methods, organization, personnel, etc. is critically examined and reviewed with a view of improving efficiency and effectiveness and reducing the costs. standards which are the basis of control are constantly challenged for improvement. Decision Making Types of Business Decision having economic Content: 1. Production Decisions: 2. Inventory Decisions: 3. Cost Decisions: 4. Marketing Decisions: 5. Investment Decisions: 6. Personnel Decisions
Decision Making Process: Setting Objectives Defining the problem Identifying Causal Factors Finding Alternative Solutions Gathering Information Evaluating Alternatives Implementing and Monitoring the Results Prof. Joel Dean says that Use of Economic analysis in formulating policies is known as Managerial Economics. According to Hail Stones and Rathanel: Managerial Economics is the application of Economic theory and analysis to practice by business firms.
Managerial Economics fills up the gap between abstract economic theories and its practical applicability. It integrates economic principles with business management. Hence Business Economics refers to the application of economic theories and concepts to find solutions to business and managerial problems.
Role of Managerial Economist To identify various business problems their causes, consequences and suggest the remedial measures: To provide a quantitative base for decision making and forward planning: To act as an economic adviser to the firm: To have a complete information about the environmental factors: To quickly respond to the changes:
Responsibilities of a Managerial Economist Reasonable profit, Business forecasting, To have contact with the data sources, Technological development, Government policies, Finance, Location, Objectives, To undertake Research Activities . Dynamic Theory of Profit: propounded by an American economist, J. B. Clark, according to whom, profit is a result of change. According to him, five changes are constantly taking place in society, which give rise to profit. They are:- (a) Changes in the size of the population (b) Changes in the supply of capital (c) Changes in production techniques (d) changes in the forms of industrial organization and (e) Changes in human wants. For example: if the demand for a commodity increases due to increase in population or increase in income of the people, the price of the commodity will rise and if the cost of production remaining the same, profits would accrue to the entrepreneurs producing the commodity. On the other hand, cost of production, may go down as a result of the adoption of a new technique of production, or as a result of cheapening of the raw material, and if price remains constant or doesnt fall to the same extent, the profit would emerge.
The Risk theory of Profit: This theory was formulated by F. B. Hawley in 1907. It was supported by Marshall. According to him, profit is the reward for risk taking in business. According to the Risk Theory, the entrepreneur earns profits because he undertakes risks. The manufacturer produces goods with a view to selling them. If the goods are not sold there is loss. No entrepreneur will incur this risk unless there is a prospect of corresponding gain. Profit is the reward of taking such risks. The reward is a necessary inducement without which entrepreneurs will not work. Hence higher the risk, the greater is the possibility of profit.
Uncertainty-bearing theory of Profit: An American economist F. H. knight, is the main profounder of this theory, according to whom, profit is the reward for uncertainty bearing. The main function of entrepreneur is to act in anticipation of future events. He produces goods in anticipation of demand and purchases goods in anticipation of resale. Entrepreneurs have to undertake the work of production under conditions of uncertainty, as nobody guarantees the sale of output in the market.
Wage theory of Profit: This theory was propounded by the American economist Prof. Taussig. It was supported by another economist Prof. Davenport. According to this theory, profit is also a type of wage which is given to the entrepreneur for the services rendered by him. In the words of Taussig: Profit is the wage of the entrepreneur which accrues to him on account of his special ability. This theory finds a perfect similarity between labour and Organization. Just as labour receives wages for his services, in the same manner entrepreneurship gets profit for the role played by him in the production process. The only difference between them is labour renders physical services and entrepreneurship renders intellectual work in production. Hence entrepreneur is not different from labour. Hence Prof. Taussig referred profit as A type of wage accruing to entrepreneurship
Innovation Theory of Profit: This theory was advocated by Prof. Joseph. A. Schumpeter. An innovation can be of any shape, say, introduction of a new product, introduction of a new production technique or a new machine or a new plant, a change in the internal organizational set-up of the firm, use of a new source of raw material or a new form of energy, change in the quality of the product or in the methods of salesmanship etc.,
According to Schumpeter, profit is the cause and effect of innovation. As a result of innovation, the cost of production reduces, which creates a gap between the existing price and the cost of production. Whenever any new innovation is introduced, it calls for a new combination of factors or reallocation of resources.
It is worth noting here, that profits caused by a particular innovation, is only temporary and tend to be competed away as others imitate and also adopt that. When an entrepreneur introduces a new innovation, he is first in a monopoly position, for the new innovation is confined to him only. He therefore makes large profits. When after sometime others also adopt it in order to get a share, profits will disappear.
Limiting factors of Profit Threat of Competition, Birth of substitutes, Heavy Taxation, Increased Wages, Increasing the cost of inputs, Ceiling on Profits.