Reasons for Merger

Reasons for Merger

Reasons of merger includes Time saving, saving of set up costs, buying of Goodwill, Creation of monopoly, risk diversification, and asset backing for the company.

1.    Time Saving

The building a new business is a time taken exercise, on other hand buying a business is not a time consuming job. Some business buying deals can be finalized in weeks, while some business development can take several years.

2.    Saves Set up Charges

There are number of costs involved in setting a new business, which can be saved by buying a business. These costs include different types of installation costs, initial production losses, trial production etc.

3.    Buying of Goodwill

A new business have no goodwill, therefore goodwill is always come with purchase of a business. Goodwill creation is a difficult task and depends on many factors. Therefore people prefer to buy business with goodwill than creating goodwill.

4.    Creation of Monopoly

Elimination of competition may be the reason of merger. Many multinational companies adopt this strategy to eliminate the local competitors. With elimination of competition, company is in a position to charge high prices and high profit on its product.

5.    Risk Diversification

Risk diversification may also be an important reason for merger. A lot of risk is involved, if a company is engaged in only one business. For example a company is producing umbrella, and if there is no rain in the summer, the company is expected to suffer heavy losses. This risk can be avoided by investing in a ice cream factory.

6.    Asset Backing

A company with good asset backing may be acquired as strategy, because earning can fall sharply but asset does not loss value sharply, instead some asset gain value (Land).

Reasons of inflation

Reasons of inflation

Situation of rising prices is known as inflation, and factor influences such rise are known as causes of inflation. There are number of causes for inflation in economy.

1.    Population is Rise

Population rate in the country may be a reason for inflation. It means that many people are chasing limited goods.   Country economy is not growing with the same pace as population. Such population can be controlled by reducing population growth.

2.    Money Supply

Money supply in the country plays a key role in increase of inflation. In old days this was regarded as only reason for inflation. Government monetary policy tool to control the money supply in the country. Contractionary policy is used to control the inflation in the country.

3.    Supply Shortages

Supply shortages may be a reason for inflation in the country. Sometimes producer use this tool (shortage of supply) to increase the price for profit maximization.  However, there may be real shortage of supply. There are number of reason for shortage of supply i.e. increases demand, natural disaster, and rise in cost of production.

4.    Increase in Production Cost

Prices will rise due to increase in production cost in the country. For example if the wage rate is increase due to demand of trade union, then prices of goods will follow this increase. Producer will increase the price to secure the desired profit levels. This type of inflation is known as cost push inflation.

5.    High Public Expenditure

High public expenditure will also create a lot of demand in the country, and supply may not be available to meet this demand, therefore expansionary fiscal policy (high public expenditure) will create a pressure on prices.

6.    Increase in Disposal income

Increase in income level of the people will also increase consumption & investment in the country. Therefore increase prices of factor of production may also results in inflation. It is important to note that increase income will effect inflation in two way cost push inflation & demand pull inflation.

7.    Black Money

Black money may be a reason for high inflation rate; easy coming easy going rule is applicable in case of black money. If there is a lot of black money in the economy, it will raise the demand for good, especially luxury goods and thus a pressure on price will create.

8.    Obsolete Method of Production

Out dated technology and use of obsolete production process also results in cost push inflation. Thus inflation can be controlled by improving & introducing modern production techniques & methods.

Reasons for Committing Fraud

Reasons for Committing Fraud

1.    High Competition

First reason to commit fraud may be high completion. For example due to high competition the profit margin has reduced, which has adversely affected the management performance. Therefore management would try to overstate the revenue.

2.    Decline Customer Demand

Decline in customer demand is another pressure to commit fraud. Again a decrease in demand would negatively affect the profits and management would try to overstate the profit by overstating the revenue or understating the costs.

3.    Operating losses

Third pressure for fraud commitment may be continuance operating losses. These losses are negatively affecting the market value of the entity and there is fair chance of liquidation, therefore management would try to hide these losses.

4.    Finance Arrangement

Fourth pressure to commit fraud is finance arrangement. Financial institution put some condition for financing, and organization may try to show such financial position to get finances.

5.     market expectation

Fifth reason for fraud may be market expectation about the financial result of the entity. Management would try to meet the market expectation by manipulating results.

6.    Management Financial interest

Sixth pressure for fraud may be the financial interest of the management. For example management has shareholding in the entity and profitability would raise the share price. Therefore management would overstate profitability.

7.    Management Self interest

Seventh pressure for fraud is management self interest in the entity results. For example management may be interested in high salary and bonuses, therefore management would overstate the profit.

Reasons for Change in Presentation

Reasons for Change in Presentation

 Change in presentation is allowed due to more appropriate presentation, disposal or acquisition of business and regulatory requirement.

1.    More Appropriate

Change in presentation may result in more appropriate & logical presentation. It means that new presentation would be more relevant to user information needs.

2.    Disposal or Acquisition

Change in presentation may also be result due to disposal of substantial portion of business operations. An acquisition of new business (operation) may also require change in presentation.

3.    Regulatory Requirement

Change in presentation may be due to regulatory requirement. In this case entity has no option other than to apply change as required by regulator of the country.

4.    International Accounting Standard

International accounting standard may also require change in presentation. Management is supposed to comply the requirement of international accounting standard.

Reasons of Liquidity Reduction

Reasons of Liquidity Reduction

Liquidity reduction is referred to a situation, where current asset are not increasing with same rate as current liabilities. It means when current liabilities are rising at higher rate than current asset. This situation will result in more current liabilities and less current asset.

1.    Operating Losses

Liquidity reduction reason includes operating losses i.e. operating losses is financed by the current assets and therefore current asset are reducing. It means to improve current asset ratio, organization must improve its profitability.

2.    Purchase of Fixed Asset

Liquidity reduction reasons also include purchase of fixed assets i.e. utilization of cash for the purpose of fixed asset; it means that no less cash is available for operational payment.

3.    Loan Repayment

Liquidity reduction may also be due to a loan repayment. It means that due to huge cash outflow of loan installment, current asset has declined. Loan payment will deteriorate the liquidity within organization.

Reasons of Favorable Material Usage Variance

Reasons of Favorable Material Usage Variance

Favorable material usage variance would be achieved, when the actual material used in the production is lower than standard usage. This can be achieved by introducing and implementing following measures

1.    High Quality Material

Use of high quality material would lower the material wastage, and this would result in favorable material usage variance.

2.    High Skilled Labour

Use of high skilled labour would also achieved favorable material usage variance, because material would be handled more carefully by the skilled people.

3.    Training of Labour

Material handling training of labour would also improve material handling, thus such training would helps in achieving favorable material usage variance.

4.    Advance Technology

Use of advance machinery & technology would help in improving material handling and reducing the material wastage. Thus a favorable material usage variance can be achieved.

Reasons for Adverse Material Price Variance

Reasons for Adverse Material Price Variance

Adverse material price variance would result when actual prices are more than standard prices, Therefore reasons of raise in price are reasons of adverse material price variance. Those reasons include poor negotiation with supplier, inflation, and discount withdrawal by the supplier, shortage in market, and increase in demand of material.

1.    Inflation in the Economy

In case of inflation (situation of rising prices) material price variance would be unfavorable or adverse, because material prices would have rising tendency i.e. actual expenditure would be more than expected expenditure.

2.    Discount withdrawal

Discount withdrawal by the supplier would also result in unfavorable material price variance because cost would rise, and actual expenditure on material would be higher than expected expenditure.

3.    Shortage of Material

Shortages in material supply would also raise the prices, which would ultimately impact the material price variance adversely.

4.    More Demand

Raise in demand of material would also push the prices upward and such upward trend may result in adverse material price variance.

Reasons of Favorable Material Price Variance

Reasons of Favorable Material Price Variance

Reasons for favorable material price variance include deflation in the economy, price negotiation with the supplier, high discount on bulk purchases etc. whenever actual price fall below the standard price, the favorable price variance would be achieved.

1.    Deflation in the Economy

In case of deflation in the economy the material prices would fall and thus favorable price variance may be achieved by the company i.e. actual cost of material used may be lower than standard cost.

2.    Bulk Purchases Discount

In case of discount on bulk purchases, a favorable material price variance would be achieved by the company, because such price may lower the actual price below the standard price.

3.    Cost Reducing Negotiation

Effective cost reducing negotiation or reviewing the supply chain for cost reduction would also result in favorable material price variance. (Actual cost is lower than standard cost).

4.    Fall in Material Demand

Fall in material demand may also lower the prices of material and such situation may result in favorable material price variance.

5.    Excess Supply of Material

Excess supply of material may also push the price downward, which may produce favorable material price variance for the company.

Reasons of Adverse labour rate variance

Reasons of Adverse labour rate variance

Adverse labour rate variance mean actual cost of labour is more than total expected cost. Adverse labour rate variance results due to high actual unit labour cost than unit standard cost, because quantity of labour would be same for both costs (i.e. actual quantity).

1.    High Skilled labour

Adverse labour rate variance may result due to high skilled labour, because high skilled labour would demand high wage, which might be higher than standard cost. The higher actual cost than standard cost would result in adverse labour rate variance.

2.    Raise in labour Demand

Adverse labour rate variance may be caused due to raise in labour demand. High demand of labour would push the labour rate upward, which may be higher than standard labour rate.

3.    Inflation

Adverse labour rate reason may be due to inflation in the market. Inflation (increase in price) would raise the actual rate of labour than standard rate, which would create a situation of adverse labour rate. (Actual cost is more than expected cost).

Reasons of Favorable Labour Rate Variance

Reasons of Favorable Labour Rate Variance

When the actual cost is lower than standard cost, then variance is said to be favorable labour rate variance. Reasons for favorable Hiring of lower quality of labour, lowering the wage rate for the labour, and deflation in the economy.

1.    Unskilled labour

Favorable labour rate variance may be achieved by applying low skilled labour, as the rate of low skilled labour would be lower, which would result in favorable labour variance.

2.    Low Wage Rate

Favorable labour rate variance can be obtained by lowering the wage rate or wage cut. This would again lower the total actual cost against total standard cost.

3.    Deflation in the economy

Economy slow growth rate also lower the wage rate in the economy. This is due to low demand of labour in the economy and more supply of labour.

Reasons of Favorable Efficiency Variance

Reasons of Favorable Efficiency Variance

Reasons of favorable efficiency variance are high skilled labour, effective supervision, working environment, employees’ incentives. These reasons have been explained below;

1.    High Skilled & Experienced Labour

Favorable efficiency variance may result in, by using high skilled & experienced labour. Because such labour will take less time to do the job than standard time, and thus favorable efficiency variance would emerge.

2.    Effective Supervision

Favorable efficiency variance may also result due to supervision & mentoring. Effective supervision would reduce the time wastage by the labour.

3.    Improving Working Environment

Favorable efficiency variance may be obtained by improving the working environment. It is obvious that suitable working environment would improve the efficiency of labour i.e. labour would work more efficiently.

4.    Incentive

Favorable efficacy variance may also result by introducing the different incentive scheme for labour. Such schemes would encouraged the labour to work more efficiently, provided that such scheme should be performance based (efficiency based).