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NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 12 Consumer Protection Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Consumer Protection NCERT Solutions for Class 12 Business Studies Chapter 12

Consumer Protection Questions and Answers Class 12 Business Studies Chapter 12

True Or False

State whether the following statements are true or false.

(i) Consumer Protection has a moral justification for business.
Answer:
True.

(ii) In addition to rights, a consumer also has some responsibilities.
Answer:
True.

(iii) A complaintcan to be made to a District Forum when the value of goods.or services in question, along with the compensation claimed, exceeds its. 2.1 Lakhs.
Answer:
False.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

(iv) The Consumer Protection Act provides for six consumer Rights.
Answer:
True.

(v) ISI is the quality certification mark used in case of food products.
Answer:
False.

(vi) Under the Consumer Protections^ a complaint can be filed by a consumer for a defective good aiq ais0 for deficiency in service.
Answer:
True.

Short Answer Type Questions

Question 1.
Explain the importance of consumer Protection from the point of view of business.
Answer:
Importance of Consumer Protection : Consumer protection has a wide agenda. It not only miuc[es educating consumers about their rights and responsibility, but is0 helps in getting their grievances readressed. It not only requires, judicial machinery for protecting the interests of consumers but also requires the consumers to get together and form themselves into consumers associations for protection and promotion of their interests.

At the same time, consumer protection has a special significance for business too. From the point of view of business . A business must also lay emphasis on protecting the consumers and adequately satisfying them. This is important because of the following reasons

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

1. Long-term interest of business Enlightened business realize that it is in their long-term interest to satisfy their customers. Satisfied customers not only lead to repeat sales but also provide good feed back to prospective customers and thus, help in increasing the customers base of business. Thus, business firms should aim at long¬term profit-maximisation through customer satisfaction.

2. Business uses society’s resources :- Business organisations use resources which belong to the society, thus, they have a responsibility to supply such products and render such services which are in public interest and would not impair public confidence in them.

3. Social Responsibility :-Abusiiess has social responsibilities towards various interest groups. Bupbess organizations make money by selling goods and providing sences to consumers. Thus, consumers form an important group amon? the many stake holders of business and like other stake holders, meir interests has to be well taken care of.

4. Moral Justified*011ft is the moral duty of any business to take care of consul1^s interests and avoid any form of their exploitation. Thus J business must avoid unscrupulours, exploitative and unfair tradepmetices like defective goods and unsafe products, adulteration.‘alse and misleading advertising, hoarding, black marketing ec-

5 government Intervention :- A business engaged in any form of expaltative trade practices would invite government intervention or aoon. This can impair and tarnish the image of the company. Thus, its advisable that business organisations voluntarily resort to such .jractices where the customer’s needs and interests will well be taken care off.

Question 2.
Enumerate the various Acts Passed by the Government of India which helps in protection of Consumers interests.
Answer:
The Indian Legal Framework consists of a number of regulations which provide protection to consumers. Some of these regulations are as under.

1. The Consumer Protection Act, 1986 : The Consumer Protection Act, 1986 seeks to protect and promote the interests of consumers. The Act provides safeguards to consumers against defective goods, deficient services, unfairtrade practices, and other forms of their exploitatioin.

The Act provides for the setting up of a three-tier machinery, consisting of District Forums, State commissions and the National commissions. It also provides for the formation of Consumers Protection Council in every District and State, and at the Apex level.

2. The Contract Act, 1872 The Act lays down the conditions in which the promises made by parties to a contract will be binding on each other. The Act also specified the remedies available to parties in case of breach of contract.

3. The Sale of Gopds Act, 1930 The Act provides some safeguards and reliefs to the buyers of the goods in case the goods purchased do not comply with express or implied conditions or warranties.

4. The Essential Commodities Act, 1955 : The Act aims at controlling production, supply and distribution of essential commodities checking inflationery trend in their prices and ensuring equal distribution of essential commodities. The Act also provides for action against anti-social activities of frofitbeers, boarders and black-marketers.

5. The Agricultural Produce (Grading and Marketing) Act, 1937 : The Act prescribed grade standards for agricultural commodities and live-stock products. The Act stipulates the conditions which govern the use of standards and lays down the procedure for grading, marketing and packing of agricultural produce. The quality mark provided under the Act is known as AGMARK, an acronym for Agriculatural Marketing.

6. The Prevention of Food Adulteration Act, 1954 The act aims to check adulteration of food articles and ensure their purity so as to maintain Public Health.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

7. The Standards of Weights aVid Measures Act, 1976 : The provisions of this Act are applicable in case of those goods which are sold or distributed by weight, measures or number. It provides protection to consumers against the malpractice of under-weight or under-measure.

8. The Trade Marks Act, 1999 The Act has repeated and replaced the Trade and Merchandise MarksAct, 1958. The Act prevents the use of fraudulent marks on products and thus, provides protection to the consumers against, such products.

9. The Competition Act, 2002 The Act has repeated and replaced the Monopolies and Restrictive Trade practices Act, 1969. The Act provides protection to the consumers in case of practices adopted by business firms which hamper competition in the market.

10. The Bureau of Indian Standards Act, 1986 : The Bureau of Indian Standards has been set up under the Act. The Bureau has two major activities: Formulation of quality standards for goods and their certification through the BIS Certification Scheme.

Manufacturers are permitted to use the ISI Mark on their products only after ensuring that the goods conform to the prescribed quality standards. The Bureau has also set up a grievence cell where consumers can make a complain about the quality of products carrying the ISI Mark.

The most important of these regulations is the Consumer, Protection Apt which provides for consumer rights and helps consumers in getting their grievances redressed for any shortcoming in the goods purchased or services availed.

Question 3.
What are the responsibilities of a consumer?
Answer:
Responsibilities of Consumers :-
A consumer should keep in mind the following responsibilities while purchasing, using and consuming goods and services.

1. Beaware about various goods and services available in the market so that an intelligent and wise choice can be made.

2. Buy only standardized goods as they provide quality assurance. Thus, look for ISI Mark on electrical goods. FPO Mark on food products, Hallmark on jewellery etc.

3. Learn about .the risks associated with products and services, Follow, manufacturer’s instructions and use the products safely.

4. Read labels carefully so as to have information about prices, net weight, manufacturing and expiry dates etc. ,

5. Assert yourself to ensure that you get a fair deal.

6. Be honest in your dealings, choose only from legal goods and services and discourage unscrupulous practices like black-marketing, hoarding etc.

7. Ask for a cash memo at the time of purchase of goods or services. This would serve as a proof of the purchase made.

8. File a complaint in an approapiate consumer forum in case of a shortcoming in the quality of goods purchased or services availed. Do not fail to take an action even when the amount involved is small.

9. Form Consumer Societies which would play an active part in educating consumers and safeguarding their interests.

10. Respect the Environment. Avoid waste, littering and contributing to pollution.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Question 4.
Who can file a complaint in a Consumer Court?
Answer:
A complaint before the appropriate Consumer Forum can be made by ,

  • Any Consumer
  • Any registered Consumers’ Association;
  • The Central Government or any State Government;
  • One of more consumers, on behalf of numerous consumers having the same interest; and
  • A legal heir or representative of a deceased consumer.

Question 5.
What kind of cases can be filed in a State Commission?
Answer:
The following types of cases can be filed in a State Commission’s juridiction.
(i) The State Commission can entertain complaints/cases where the value of goods or services and the compensation exceeds Rs. 20 lakhs but does not exceed Rs. 1 crore (As per Amendmend 2002).

(ii) The State Commission also has the powers to entertain appeals against the orders of any District Forum within the State.

(iii) The State Commission also has the power to call the record and pass appropriate orders in the cases against the orders of District Forum within the state.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Question 6.
Explain the role of Consumer organisation and NGO’s in protecting and promoting consumer’s interests. .
Answer:
Role of Consumer organisations and NGO’s : In India, several consumer organisations and Nori-govemmental organisation (NGO’s) have been set up for the protection and promotion of Consumer’s interests. Non-governmental organisations are non¬profit organisations which aim at promoting the welfare of people. They have a constitution of their own and are free from government interference.

Consumer organisations and NGO’s perform several functions for the protection and promotion of interest of consumers These include

1. Educating the general public about Consumers rights by organising training programmes, seminars and workshops.

2. Publishing periodicals and other publications to impart knowledge about consumers problems, legal reporting, reliefs available and other matters of interest.

3. Carrying out comparative testing of consumers products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers.

4. Hncourging consumer to strongly protest and take an action against unscrupulous, exploitative and unfair trade practices of sellers.

5. Providing legal assitance to consumers by way of providing aid, legal advice etc. in seeking legal remedy.

6. Filing complaints in appropriate consumer courts on behalf of the consumers.

7. Taking an intiative in filing cases in consumer courts in the interest of the general public, not for any individual.

Some of the important consumer organisations and NGO’s engaged in protecting and promoting Consumer’s include the following.

  • Consumer Coordination Council, Delhi
  • Common Cause, Delhi
  • Voluntary Organisation in Interest of Consumer Education (VOICE) Delhi.
  • Consumers Education and Research Centre (CERC), Ahmedabad.
  • Consumer Protection Council (CPC), Ahmedabad
  • Consumer Guidance Society of India (CGS1), Mumbai.
  • Mumbai Grahak Panchayat, Mumbai
  • Karnatake Consumer Service Society, Bangalore.

Long Answer Type Questions

Question 1.
Explain the rights and responsibilities of a consumer.
Answer:
The Consumer Protection Act, 1986 : The CPA seeks to protect and promote the consumer’s interest through speedy and inexpensive redressal of their grievances. The scope of the Act is very wide. It is applicable to all types of undertakings, big and small, whether in the private or public sector, or in the co-operative sector, whether a manufacturer or a trader, and whether supplying goods or providing services.

The Act confers certain rights to consumers with a view to empowering them and to protect their interests.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Consumers Rights
The consumer Protection Act provides for six rights of consumers. The Consumer Protection Councils set-up under the Act are intended to promote and protect the various rights of consumers. These rights include the following

1. Right to Safety The consumer has a right to be protected against goods and services which are hazardous to life and health. For instance, electrical appliances which are manufactured with substandard products or do not conform to the safety norms might cause serious injury. Thus, consumers are educated that they should use electrical appliances which are ISI marked as this would be an assurance of such products meeting quality specifications.

2. Right to be informed The consumer has a right to have complete information about the product he intends to buy including its ingredients, date of manufactures, price, quantity, directions for use, etc. It is because of this reason that the legal framework in India requires the manufactures to provide such information on the package and label of the product.

3. Right to choose The consumer has the freedom to choose from a variety of products at competitive prices. This implies that the marketers should offer a wide variety of products in terms of quality, brand, prices, size, etc and allow the consumer to make a choice from amongst these.

4. Right to be heard The consumer has right to file a dissatisfaction with a good or a service. It is because of this reason that many enlightened business firms have set up their own consumer service and grievance cells. Many consumer organizations are also working towards this direction and helping consumers in redressal of their grievances.

5. Right to seek redressal The consumer has a right to get relief in case the product or service falls short of his expectations. The Consumer Protection Act provides a number of reliefs to the consumer including replacement of the product, removal of defect in the product, compensation paid for any loss or injury suffered by the consumer, etc.

6. Right to Consumer education The consumer has a right to acquire knowledge and to be a well-informed consumer through out life. He should be aware about his rights and the reliefs available to him in case of a product or service falling short of his expectations. Many consumer organisations and some enlightened business are taking an active part in educating consumers in this respect.

The Consumer Protection Act by conferring these rights o the consumers empowers them to fight against any unscrupulous, exploitative and unfair trade practices adopted by sellers. Consumer rights, by themselves, cannot be effective in achieving the objective of consumer protection can, in effect, be achieved only when the consumer also understand their responsibilities.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Responsibilities of Consumers
A consumer should keep in mind the following responsibilities while purchasing, using and consuming goods and services.
1. Beaware about various goods and services available in the market so that an intelligent and wise choice can he made.

2. Buy only standardized goods as they provide quality assurance. Thus, look for ISI Mark on electrical goods. FPO Mark on food products, Hallmark on jewellery etc.

3. Learn about the risks associated with products and services, Follow, manufacturer’s instructions and use the products safely.

4. Read labels carefully so as to have information about prices, net weight, manufacturing’and expiry dates etc.

5. Assert yourself to ensure that you get a fair deal.

6. Be honest in your dealings, choose only from legal goods and services and discourage unscrupulous practices like black-marketing, hoarding etc.

7. Ask for a cash memo at the time of purchase of goods or services. This would serve as a proof of the purchase made.

8. File a complaint in an approapiate consumer forum in case of a shortcoming in the quality of goods purchased or services availed. Do not fail to take an action even when the amount involved is small.

9. Form Consumer Socities which would play an active part in educating consumers and safeguarding their interests.

10. Respect the Environment. Avoid waste, littering and contributing to pollution.

Question 2.
What are various ways in which the objective of consumer protection can be achieved? Explain the role of consumer organisation and NGO’s in this regard.
Answer:
A consumer’s awareness about his rights and responsibilities is just one of the ways in which the objective of consufner protection can be achieved. There are other ways in which this objective may be achieved.
1. Self Regulation by business Enlightened business firms realize that it is in their long term interest to serve the customers well. Socially responsible firms follow ethical standards and practices in dealing with their customers. Many firms have set up their customer service and grievance cells to redress the problems and grievances of their consumers.

2. Business AssociationsThe associations of trade, commerce and business like Federation of Indian Chambers of commerce (FICCI) and Confederation of Indian Industries (CII) have laid down their code of conduct which lay down for their members the guidelines in their dealings with the customers.

3. Consumer Awareness A consumer, who is well informed about his rights and the reliefs available to him, would be in a position to raise his voice against any unfair trade practices or unscrupulous exploitation. In addition to this, an understanding of his responsibilities would also unable a consumer to safeguard his interests.

4. Consumer OrganisationsConsumer organisations play an important role in educating consumers about their rights and providing protection to them. These organisations can force business firms to avoid malpractices and exploitation of consumers.

5. GovernmentThe government can protect the interests of the consumers by enacting various legislations. The legal framework in India emcompasses various legislations which provide protection to consumers. The most important of these regulations is the Consumer Protection Act, 1986. The Act provides for a three-tier machinery at the District, State and National levels for redressal of consumer grievances.

Role of Consumer organisations and NGO’s

‘ In India, several consumer organisations and Non-governmental organisation (NGO’s) have been set up for the protection and promotion of Consumer’s interests. Non-governmental organisations are non¬profit organisations which aim at promoting the welfare of people. They have a constitution of their own and are free from government interference. Consumer organisations and NGO’s perform several functions for the protection and promotion of interest of consumers

These include :-
1. Educating the general public about Consumers rights by organising training programmes, seminars and workshops.

2. Publishing periodicals and other publications to impart knowledge about consumers problems, legal reporting, reliefs available and other matters of interest.

3. Carrying out comparative testing of consumers products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers.

4. Encourging consumer to strongly protest and take an action against unscrupulous, exploitative and unfair trade practices of sellers.

5. Providing legal assitance to consumers by way of providing aid, legal advice etc. in seeking legal remedy.

6. Filing complaints in appropriate consumer courts, on behalf of the consumers.

7. Taking an intiaive in filing cases in consumer courts in the interest of the general public, not for any individual.
Some of the important consumer organisations and NGO’s engaged in protecting and uromoting Consumer’s include the following.

  • Consumer Ceerdination Council, Delhi
  • Common Cause, Delhi
  • Voluntary Organisation in Interest of Consumer Education (VOICE) Delhi.
  • Consumes Education and Research Centre (CERC), Ahmedabad.
  • Consumer Protection Council (CPC), Ahmedabad
  • Consumer Guidance Society of India (CGSI), Mumbai.
  • Munibai Grahak Panchayat, Mumbai
  • Karnatake Consumer Service Society, Bangalore.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Question 3.
Explain the redressal machanism available to consumers under the Consumer Protection Act, 1986.
Answer:
Redressal Agencies under the Consumer Protection Act : For the redressal of consumer grievances, the Consumer Protection Act provides for setting up of a three-tier enforcement machinery at the District, Sate, and the National levels, known as the District Consumer Dispute Redressal Forum, State Consumer Disputes Redressal Commission, and the National Consumer Disputes Redressal Commission.

They are briefly referred to as the ‘District Forum’, ‘State Commission’, and the ‘National Commission’, respectively. While the National Commission is set up by the Central Government, the State Commissions and; the District Forums are set up, in each State and District, respectively, by the State Government concerned.

Figure 1 shows the hierarchical structure of this three-tire machinery/Before studying the set-up and
functioning of these redressal agencies let see how the Consumer Protection Act defines a consumer and who can file a complaint under the Consumer Protection Act.
NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Consumer A ‘consumer’ is generally understood as a person who uses or consume goods or avails of any service. Under the Consumer Protection Act, a consumer is defined as :-

a. Any person who buys any goods for a consideration, which has been paid or promised, or partly paid and partly promised, or under any scheme of deferred payment. It includes any user of such goods, when such use is made with the approval of the buyer, but does not include a person who obtains goods for re-sale or any comercial purpose.

b. Any person who hires or avails of any service, for a considerations which has been paid or promised or partly paid and partly promised or under any system of deferred payment. It includes any beneficiary of services when such services are availed of with the approval of the person concerned, but does not include a person who avails of such services for any commercial purpose.

Let us now see how the consumer grievances are redressed by the three-tier machinery under the Consumer Protection Act.

District Forum . The District Forum consists of a President and two other members, one of whom should be a woman. They all are appointed by the State Government concerned. A complaint can to be made to the appropriate District Forum when the value of the goods or services in question, along with the compensation claimed, does not exceed Rs. 20 Lakhs.

On receiving the complaint, the District Forum shall refer the complaint to the party against whom the complaint is filed. If required, the goods or a? sample there of, shall be sent for testing in a laboratory. The District Forum shall pass an order after considering the test report from the Laboratory and hearing to the party against whom the complaint is filed. In case the aggrieved party is not satisfied with the order of the District Forum, he can appeal before the State Commission within 30 days of the passing of the order.

State Commission Each State Commission consists of a President dnd not less than two other members, one of whom should be a woman. They are appointed by the State Government concerned. A complaint can to be made to the appropriate State Commission when the value of the goods or services in questions, along with the compensation claimed, exceeds Rs. 20 lakhs but does not exceed Rs. 1 crore.

The appeals against the orders of a District Forum can also be filed before the State Commission. On receiving the complaint, the State Commission shall refer the complaint to the party against whom the complaint is filed. If required, the goods or a sample thereof, shall be sent for testing in a laboratory.

The State Commission shall pass an order after considering the test report from the laboratory and hearing to the party against whom the complaint is filed. In case the aggrieved party is not satisfied with the order of the State Commission, he can appeal before the National Commssion within 30 days of the passing of the order.

National Commission The National Commission consists of a President and at least four other members, one of whom should be a wpman. They are appointed by the Central Government. A complaint can to be made to the National Commission when the value of the goods or services in question, along with the compensation claimed, exceeds Rs. 1 crore. The appeals against the orders of a State Commission can also be filed before the National Commission.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

On receiving the complaint, the National Commission shall refer the complaint to the party against whom the complaint is filed. If required, the goods or a sample there of shall be sent for testing in a laboratory. The National Commission shall pass an order after considering the test report from the laboratory and hearing to the party against whom the complaint is filed.

An order passed by the National Commission in a matter of its orginal jurisdiction is appealable before the Supreme Court. This means that only those appeals where the value of goods and services in question, along with the compensation claimed, exceeded Rs. 1 crore and where the aggrieved party

Was not satisfied with the order of the National Commission, can be taken to the Supreme Court of India. Moreover, in a case decided by the District Forum, the appeal can be filed before the State Commission and, thereafter, the order of the State Commission can be challenged before the National Commission and no further.

Relief Available If the consumer court is satisfied about the genuiness of the complaint, it can issue one or more of the following directions to the opposite party.
1. To remove the defect in goods or deficiency in service.
2. To replace the defective product with a new one, free from any defect.
3. To refund the price paid for the product, or the charges paid for the service.
4. To pay a resonable amount of compensation for any loss or injury suffered by the consumer due to the neglience of the opposite party.
5. To pay punitive damages in appropriate circumstances.
6. To discontinue the unfair/restrictive trade practice and not to repeat it in the future.
7. Not to offer hazardous goods for sale.
8. To withdraw the hazardous goods from sale.
9. To cease manufacture of hazardous goods and to desist from offering hazardous services.
10. To pay any amount (not less than 5% of the value of the defective goods or deficient services provided), to be credited to the Consumer Welfare Fund or any other organisation/person, to be utilized in the precribed manner. ‘
11. To issue corrective advertisement to neutralize the effect of a misleading advertisement.
12. To pay adequate costs to the appropriate party.

Application Based Questions

Question 1.
Visit a consumer organisation in your town. List down the various functions performed by it.
Answer:
As mentioned in the question, students are advised to pay a visit to any consumer organisation operating in their town or nearby city and make a note of various functions performed by that organization to protect the consumers under Consumer Protection Act 1986, Mainly the functions of these organisation is to safeguard the interests of consumer against hazardous products and services or any deficiency in their delivery.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Question 2.
Collect some newspaper cuttings of some consumer cases and the rulings given therein.
Answer:
Students are advised to visit website of various Consumer forums like National Consumer Disputes Redressal Commission i.e. www.necrc.nic.in. They may collect some newspaper cuttings of different court’s judgements on the topic.

Case Problems

Now, filing complaint is just a click away. Filing a complaint in consumer court’s going to get a lot easier by the-end of this year, virtually. No matter which part of the country you’re in, it’s going to happen at the click of a mouse.

The project, called Confonet (Computerisation and Computer Networking of Consumer Fora), is being executed on a turnkey basis by the National Informatics Centre (NIC).

“Online registration of complaints, the government hopes, will promote e-governance, transparency, efficiency and streamlining of consumer fora,” said an official in the consumer affairs ministry. Of Rs. 48.64 crore set aside for the project, the government has released Rs. 30.56 crore so far, the official added.

“Besides software development and testing, networking and project implementation, integration and site preparation, it will include purchase of hardware for all the 583 district fora, 35 state commissions and the National Commission,” the official said.

At present, computer systems and system software have been delivered to 25 state commissions and 300 district fore – never mind the fact that it’s sometimes a long wait before the hardware is finally unpacked and set up in some of the districts. Meanwhile, training of staff, sometimes in the classroom and sometimes through e-learning sessions, are in full swing.

“But just setting up an online complaint filing system won’t ensure a strong consumer protection movement in the country – for that .we’re working on GenNext and the next way to do that is tojro to schools,” the official said.

The government is, therefore, involving school children to form consumer clubs so as to involve them in various consumer welfare activities.

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

Part of the funding for running the club is to come from various State Governments, with an equally matching grant from the Centre. Howevera number of state governments are yet to sanction the fund – some of these include Uttar Pradesh, Madhya Pradesh and Kerala. (Source – www.economictimes.indiatimes.com downloaded on 14/3/2007

Question 1.
What new measure is the ministry of consumer affairs taking to make filing of complaint easy?
Answer:
In the above case, filing a complaint in a consumer court, the government is going to get it easier. Online registration of complaints suggested by the respective state government will promote e-governance, transparency, efficiency and streamlining of complaints . in consumer fora. Rs. 48.64 crores set aside for such protect. “But just setting up an online complaint filing system won’t ensure a strong consumer protection movement in the country.

Question 2.
What role can you as a student play to contribute to the cause of consumer protection?
Answer:
The Government should work on GenNext and the best way to do that is to go to schools. The government is, therefore, involving school chi ldren to form consumer clubs so as to involve them in.various consumer welfare activities. Part of the funding for running such clubs is to come from various state governments, with an equally matching grant from the centre.

Question 3.
What scenario of consumer protection do you foresee when the measures proposed in the above news report are implemented?
Answer:
At present, Computer systems and system software have been delivered to 25 state commission and 300 districts forum. Meanwhile, training of staff, sometimes in the class rooms and sometimes through e-learning sessions, are in full swing. When all the state government will make serious attempt for strengthening the consumer’s rights, this Act will be a boon for redressing the consumer’s grievances.

(Teachers are advised to help students to study judgements of various consumer forums including National Consumer 5 Disputes Redressal Commission at www.ncdrc.nic.in. This initiative will help the pupils to understand the role of consumer protection in India better. Various published material can also be used. Consumer, clubs in schools can also help the students in this regard)

NCERT Solutions for Class 12 Business Studies Chapter 12 Consumer Protection

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NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 11 Marketing Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Marketing NCERT Solutions for Class 12 Business Studies Chapter 11

Marketing Questions and Answers Class 12 Business Studies Chapter 11

Question 1.
Explain the advantages of branding to marketers of goods and services.
Answer:
Advantages of Branding to Marketers
(i) Enables marking Product differantiation Branding helps a firm in distinguishing its product from that of its competition. This enables the firm to secure and control the market for its products;

(ii) Helps in advertising and display programmes A brand aids a firm in its advertising and display programs. Without a brand name, the advertiser can only create awareness for the generic product and can never be sure of the°sale for his product;

(iii) Differential Pricing Branding enable a firm to charge different price for its products than that charged by its competition. This is possible because if, customers like a brand and become habitual of it, they do not mind paying a little higher for it.

(iv) Ease in introduction of new product: If a new product is introduced under a known brand, it enjoys the reflected glory of the brand and is likely to get off to an excellent starts. Thus, many companies with established brand names decide to introduce new products in the same name.

For example, Foods Specialities Ltd. has a has a succesful brand Maggie noddles. It extended this name to many of its new products introduced such as Tomato Catch Up, Soups, etc. Similarly Samsung extended the brand name of its Television to Washing Machines and other durable products, like Microwave oven etc.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 2.
List the characteristics of a good brand name.
Answer:
Branding is a managerial function. It is general term covering various activities, such as giving a brand name to a Resigning a brand mark, establishing it and popularising it. In selecting a good brand name various aspects requires careful consideration. The following are some general considerations which must be considered for selecting and deciding the brand name of the product.

1. Simple, Short and SweetThe brand name should be simple so that it could be easily understandable and short so that it could be easy to rememeber and sweet appealing to eyes, ears and brain, for example Tata, Bata, Dalda, Nirma, Maruti, Lux, Hamam, Surf, Rin, Sony etc.

2. Easy Pronounciation : The brand name should be so easy to pronounce as no difficulty faced by the children, youngsters, old, woman, literate, illiterate, rural and urban population. It could be easily pronounced in different languages, for example Maggie Lipton, Surya; BPL, LG, DCM etc.

3. Recognisable : The brand name should not be imitation of other and other cannot copy it easily. It should be original and distinctive of the product and the manufacturers. For example Godrej, Liberty, HMT, Philips, Nerolac, Titan, Colgate, Limca etc.

4. Suggestive : The brand name should go along with the functions, benefits and the special qualities of the product. For example Goodnight, Allout, Milkmaid, Keshnikhar, Aquaguard, Sunsilk, Neem , soap, Dhara, Frooti, Hotline, Symphony etc.

5. Economical : A good brand name should be economic to reproduce. No more expenditure should be incurred on printing, writing, or exhibiting the same. Certain names can be easily designed and graphed, advertised and promoted. For example Nirma, Maggie, Surf, Rin, Everest, Dev Darshan, Atlas, Hero etc.

6. Regally Protectable The brand should be such which can be easily registered under the Trade and Merchandise Act 1958. Section 11 and 12 of Trade and Merchandise 1958 lay down certain conditions. Any name selected cannot be registered as trademark. The name should 4 not be too closely associated with an existing trademark.

7. Helpful in advertisingThe name and mark of brand should be,skillfully selected so that it may be easily used in advertising and should make the advertisement more attractive such as Nirma, Milkfood.

8. Far from obescence Any type of vulgarity should not be demonstrated through the brand. It should not harm the emotions of any individual group or religion. Such as Bakeman, Britannia etc.

9. Heart touching : The name of brand, its mark and picture should be of such nature as to merge with the mind and heart of the viewer and could impress him. Such as Shahnaz, Ebony, Galaxy etc.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

10. Suitable to buyers The brand name should be such which suits the buyers. For exampleWomen, consumers are more attracted by feminine names e.g. Lakme (Cosmetics), Lady Birds (cycle) and men to masculine ones e.g. Ruf and Tuf (Jeans). Axe (deodorant) etc, Above points makes it clear that the home or mark of a brand must be selected only after due consideration.

The goodwill of the firm and success of marketing efforts of a firm gains popularity among customers, the demand for that product goes very high. Now -a-days we fi nd many examples of product success because of brand popularity.

Question 3.
What is the societal concept of marketing?
Answer:
The marketing concept, as described in the proceeding section cannot be considered as adequate if we look at the challenges posed by social problem like environmental polluton, deforestation, shortage of resourse, population explosion and inflation. It is so because any activity which satisfies at large cannot be justified. The business orientation should therefore not be short -signted to serve only consumers needs.

It is an undisputed fact that a company’s survival does not depend upon its consumers alone, but a diverse set of segments like the government, religious leaders social activists, NGO’s, Media etc.

Hence, earning the satisfaction of these segments is also an imperative as they add to the power of the brand by word of mouth. The social concern adds to the strength of the brand. Corporate that embraced the deepest social value, have been successful in building powerful brand and eventually, robust customer relationship.

The area of corporate social justice fall under two broad catagories. The issue such as are the nutrition of children, child care, old-age homes, amelioration of hunger, offering aid to those affected by natural calamities etc. needing instant attention with a humanitarial perspective, comes under the first category.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

The issues that contribute to making society at pleasant place to live in the long run, may be grouped under the second catagory. Health awareness and aid, education, environmental protection. Women’s employment and empowerment, preventing unjust discrimination (an the basis of caste, community, religion, ethnicity, race and sex), eradication of poverty through employment, preservation of culture, value and ethics contribution to reasearch etc. come under the second category.

The societal marketing concept holds the task of any organisation is to identify the needs and wants of the target market and deliver the designed satisfaction in an effective and efficient manner so that the long term well being of the consumers and the society is taken ‘ care of. Thus, the societal marketing concept is the extension of the ’ marketing concept as supplemented by the concern for the longer term welfare of the society. Apart front the customer satisfaction, it pays attention to the social, ethical and ecological aspects of marketing.

Question 4.
List the characterstics of convenience products.
Answer:
The consumer products which a consumer usually purchases frequently, immediately and with minimum effort are called as convenience products. For example bathing soap, toothpaste, Bread, newspaper, cigarette, matchbox, medicine, cold drinks, grocercy items Convenience products oftenly are for immediate consumption. These are bought frequently and the consumer habits play an effective role in buying of convenience products. These products have the following features. ,
(i) These are less priced product.
(ii) These products are consumable or not durable products and cannot be stored for a long period.
(iii) Demand for these products is subject to daily needs, habits and consumer behaviour.
(iv) The buyers buy these product from the nearby shop.
(v) These products are easily available and thus take less shopping time.
(vi) These products are purchase frequently in small quantities according to daily needs.
(vii) Buyer generally knows the price of the product.
(viii) These products are not affected by fashion and style.
(ix) These products have no brand preference except those products which are demanded because of habit i.e. cigarette etc.
(x) Mass distribution policy is followed. Such products are available at every possible sales outlet.
(xi) Because of easy availability and close competition the price
of convenience products remain stable and low. ‘
(xi) The advertising and sale promotion activities are performed by the manufacturer.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 5.
Enlist the advntages of packaging of a consumer product.
Answer:
Consumer packaging : A consumer package is one which holds the required volume of a product needed for ultimate consumption and is within the means of a buying household. It is the package.in which the consumer actually gets the products.

Consumer packages are available in different sizes i.e. small, medium and large. The consumer has the option to purchase the pack size that suits his family size and budget. For examle package of tooth pastes, hair oils, soups, shampoo, face cream etc. Consumer packaging must be handy and attractive. – ‘ ”

Advantages of Packaging Packaging is beneficial for manufacturer, middlemen and consumer in the following manners.
1. Advantages of Packaging to the manufactures.
(i) Keep the product safe
(ii) Facilitates storage .
(iii) Enhances goodwill
(iv) Promotes product
(v) Prevents adulteration
(vi) Helpful in advertising and sales promotion
(vii) Facilitates distribution
(viii) Increases profit.

2. Advantages of packaging to the middlemen
(i) Facilitates storage .
(ii) Self advertising
(iii) Easy display
(iv) Helps in transmit
(v) Facilitate retailer’s function
(vi) Helpful in increasing sale and profit.

3. Advantages of packaging to the consumers
(i) Minimum possibility of adulteration .
(ii) Convenient handling and storage
(iii) Provides necessary information about the product
(iv) Helps memory and recognition
(v) Protects the contents
(vi) Payment of appropriate price.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 6.
What are the limitations of a advertising as a promotional tool? Enlist.
Answer:Limitations of Advertising
(i) Less forceful Advertising is an impersonal form of communication. It is less forceful than the personnal selling as there is no complusion on the prospects to pay attention to the message.

(ii) Lack of feed back The evaluation of the effectiveness of advertising message is very difficult as there is no immediate and accurate feed back mechanism of the message that is delivered.

(iii) Inflexibility Advertising is less flexible as the message is standardised and is not tailor made to the requirements of the different customer groups.

(iv) Low Effectiveness : As the volume of advertisement is getting more and more expanded it is becoming difficult to make advertising messages heard by the target prospects. This is affecting the effectiveness of advertising.

Question 7.
List five shopping products purchased by you or your family during the last few months,
Answer:
Shopping products : Shopping products are those products which are purchased by the customers only after comparing their quality, price, style, suitability etc. The customers of these products collect information of the price, shops, design, quality, utility etc. from different stores before the actual purchase. That is why these products are called as bargain products. Furniture, readymade garments, sarees, dress materials, shoes etc. are some examples. –
Features
(i) These products are available in good variety. They exhibit a high degree of differentiation.
(ii) Unit price of these products are higher that the convenience products.
(iii) These products are durable in nature.
(iv) These products are consumed slowly, so they are purchased less frequently.
(v) Shopping products are generally purchased occasionally by
the consumers. Such as Birthday, Wedding day, Diwali, New Year etc. .
(vi) These products are more complex, so consumer take more time in deciding what to purchase.
(vii) Consumers usually like to visit different stores or shopping centres before making their purchase.
(viii) Such products are influenced by fashion and style.
(ix) Mass distribution arrangement are not necessary since customers are not happy in deciding what to buy.
(x) Advertising and sales promotion activities are conducted by manufactures and middlemen both.
(xi) Rural buyer are generally interested to purchase such product from the nearby city.
(xii) Brand name, fashion and style, packaging store reputation, display and demonstration play an important role in boosting the sale of shopping products.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Shopping products are both homogeneous and heterogenous. Homogeneous shopping products are shoes, kitchenware, cosmetics, cookery, readymade garments etc. The price is an important factor for purchase of homogeneous shopping products.

Quality and style are relative!ytmore important factor for purchasing homogeneous shopping products like furniture, textile, household goods etc. These are the features of shopping products which a marketer must understand for framing a successful marketing strategy.

Short Answer Type Questions

Question 1.
What is marketing? What functions does it play with process of exchange of goods and services? Explain.
Answer:
Marketing includes all those activities, which are related to purchase and sale of goods and service. Business activities are not complete without marketing. Main functions are associated with management and marketing is most important among them.

Initially marketing implied purchase and sale of goods and services. However, at present it includes all those activities undertaken before and after purchase and sale of goods and services. In modern times, marketing includes consumer research, advertisement, sale policy and services rendered to consumers after the sale of goods and services.

Every institution undertakes work of two types
1. Production of goods and services.
2. Marketing of goods and services.

Both these functions are included in marketing. In this connection. Harry Hepner is of the view, “All those activities are included in marketing which help the goods to reach consumers from producers.” These include advertisement policies, price-determination, production planning and market analysis on the basis of customer to be found in future.

Definitions of Marketing
The definitions of the term ‘Marketing’ is classified in two categories for convenient study. These are
1. Definition in old, narrow sense or product oriented definition.
2. Definition in new broad sense or customer oriented definition.

1. Old, narrow sense or product-oriented definitions : These definition include most ancient, narrow physical distribution
of commodities and their production related activities.
(i) According to Tousley, Clark and Clark, “Marketing consists of those efforts which effect transfers in the ownership of goods and services which provide for physical distribution.” This definition include the transfer of ownership and physical distribution in the meaning of marketing.

(ii) According to Pyle
“Marketing comprises both buying and selling activities.” This definition of marketing consists only of the purchase and sale. It ignores the function of physical distribution and auxilliaiy function of marketing.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(iii) According to America Marketing Association Definition committee, “Marketing is the performance of business activities that direct the flow of goods and services from producer-to consumer or users.” This definition is an important over the earlier two definitions. It includes all the business activities relating to the production and d istribution of goods and services to the consumer or user.

Functional Activities
It includes the following functions
1. Market Research According to W.J. Stanton, “Marketing research is the systematic search for and analysis of facts related to a marketing problem. Its emphasis in shifting from fact finding information rathering activity to a problem solving and action recommending function.” Marketing research help in analysing the buyers’ habits, relative popularity of product, effectiveness of advertisement, media etc. Its major task is to provide the marketing manager with timely and accurate information so that better decisions can be made. The scope of marketing research is very wide. It may cover all the areas of business which have a bearing on the marketing function.

2. Product Planning Product: Planning is a process in which the form and design of product is determined on the basis of the facts obtained with the help of market research and then to make arrangement for the production of that product as per requirement. It is also an important function of the marketing nfanager. ,

3. Branding : A brand may be a name, a symbol, a sign, a picture or even the initials of the company’s name. The main aim of branding is to identify-distinctly the product of the company from similar products of the-competitors. It enables the consumers to differentiate the product of similar types and to make their choice of goods from among the various brands. The brand ensures the quality and standard of the product. It help a company in creating an image for its product in the market.

4. Purchase : Purchase is one of the important function of marketing. It is the first step in the process of marketing. A manufacture is required to buy raw materials for production purpose. Similarly, a whole-saler has to buy goods to sell them to a retailer. A retailer who has a direct link with the consumer has’also to buy goods to be sold to the latter. Thus, in all functions of exchange one aspect is purchase.

5. Standardising and Grading : Standardising and grading are the two very important aspects of present day marketing because with the help of these two aspects, marketing functions become easy, production becomes uniform, price become equal and marketing becomes extensive.

Therefore nowadays, the goods are produced on the basis of definite standards as to the quality of product, size of product, colour of product, weight of product, price of product etc. Standardising and grading make it easy v for both the consumer and seller to achieve their individual objects. This is the reason why sale and purchase of most of the goods become very easy on the basis of standardisation and gradation.

6. StorageStorage becomes necessary under two conditions :
when production is seasonal but consumption is perennial and also when production is continuous but consumption is seasonal. In other words, storage involves holding any preserving of goods between the time of their production and the time of their use. It facilitates a steady Flow of commodities to market throughout the year.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

7. Transportation The function of transportation is to convey commodities from where their utility is relatively low to places where it is higher. Concentration of natural resources at certain place makes it necessary for industries to concentrate there.

This geographical division of labour and its advantages are made possible with the help of transportation.
The pricipal economics basis for transportation is in enhancing the value of goods by the creation of place utility. Even in the case of simplest marketing mechanism, where the consumer buys directly from a local firm or a factory, transportation is involved and must be undertaken either by the buyer or the seller.

8. Packaging Packaging is concerned with formulating container or wrapper for the product. Its main objective is to provide convenience in handling, ensure freshness and quality and to preven. adulteration. It also help in distinguishing the product of the company from that of competitors.

9. Selling Selling is another important function which involves transfer of the title of goods to the buyers. Selling is important from the point of view of the seller, the consumer and the general public. Efficiency in selling is the most important factor that effects the existence of a firm. The prime objective (viz profit) of a business concern is sucessfully carries out through sale of goods.

10. Advertising Advertising has become an important function of marketing in the competitive world. It helps to spread the message about the product and thus promote its sale, it facilities creation of a non-personal link between the advertisor and the receivers of the message. The importance of advertising has increased in the modern era of large scale production and tough competition in the market.

11. Pricing Pricing is also an important function which is closely linked to selling. Price policy of the concern directly affects the profit element and therefore its successful functioning. In determining the price policy, several factors are to be born in mind such as, cost of the product, competitors, prices, marketing, policies, government policy or customary or convenient prices, etc.

12. Finance It is the most important function of marketing. These are various kinds of finance requires, short-term finance, medium-term finance, long-term finance etc. There are various source of marketing finance too. For example, commercial banks, cooperative credit societies, government agencies etc. No Firm can depend solely on its own capital. Every business service borrows those products which were widely available at an affordable price.

Thus, availability and affordabililty of the product were consideres to be the key to the success of a firm. Therefore, greater emphasis was placed on improving the production and distribution efficiency of the firms resources. Marketing finance is necessary for the performance of various marketing functions. A business firm needs capital to hold inventories and to meet expenses of buying and selling goods. It also requires finance to provide credit facility to its regular buyer as considerable sales are on credit.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

13. Risk TakingMarketing of goods involves innumerable risks :due to theft, deterioration, accidents etc. The most important factor responsible for the risk is flutuation in prices. The other factor may be change in fashion, competition in the market, change in habit of the consumers, natural clamities, etc.

Question 2.
Distinguish between the product concept and production concept of marketing.
Answer:
Marketing Management Philosophies In order to achieve desired exchanged outcomes with target market it is important to decide what philosophy or thinking should guide the marketing efforts of an organisation. An understanding of the phi I osophy or the concept to be adopted is important as it determines the emphasis or the weightage to be put on different factors in achieving the organisation.

For example, whether the marketing efforts of an organisation will focus on the product-saydesigning its features etc. or on selling techniques or on customer’s needs or the social concerns. ‘ The concept or philosophy of marketing has evolved over a period of time, and is discussed as follows:

Product Concept
As a result of emphasis on production capacity during the earlier days, the position of supply increased over period of time. Mere availability and low price of the product could not ensure increased sale and as such the survival and growth of the firm. Thus, with the increase in the supply of the products, customers started looking for products which were superior in quality, performance and features.

Therefore the emphasis of the firm shifted from quantity of production to products. The focus of business activity changed to bringing continuous improvement in the quality, incorporating’ new features etc. Thus, product improvement new features etc. Thus, product improvement become the key to profit maximisation of a firm, under the concept of product orientation.

Production Concept

During the earlier days of industrial revolution, the ^demand for industrial goods started picking up but the number of producers were limited. As a result, the demand exceeded the supply. Selling was no problem, Anybody who could produce the goods was able to sell. The focus of business activities was, therefore, on production of goods. It was believed that profit could be maximised by producing at large scale, thereby reducing the average cost of production. It was also assumed that consumers would favour.

Question 3.
Product is a bundle futilities? Do you agree? Comment.
Answer:
Product is the most important variable in marketing; second only to consumers. “If the first command in marketing is known the customer, the second is known the product”. This statement proves the importance of product in marketing. Product is the central hub of all the marketing activities of an entreprise. It is the soul of all the marketing efforts of an enterprise.
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

No marketing activities, production or sales, advertisement or sales promotion, price determination or physical distribution, can be imagined without the existance of a product. Product is the soul of all our marketing activities. Without a product, marketing cannot be imagined.

If a business and industrial enterprise is a body, management is its heart and market is its blood, it » will have to be in active without soul, in the same way as all the resources of an enterprise remain inactive without product. All the marketing programmes, policies, and pricing strategies are prepared for the product. All the marketing efforts begin with product and end with the product.

A successful marketing manager is one who concentrates upon the qualities and characterstics of the product of his enterprise. He must make his best efforts to study the needs, wants, tastes and habit of his customers and convert these specifications into product. No enterprise can be successful in achieving its marketing objectives if its products are not in accordance with the needs and wants of its consumers.

Therefore, it is necessary for all the business and industrial enterprises that they must maintain quality of their product which may meet the needs and wants of their consumers. They should fix the price of their products which can be afforded by their consumers and they should make these goods and services available to their consumers at right time and at right place and right quantity.

Product is a tool in the hands of the management through which it gives life to all marketing programmes. So, the main responsibility of the management should to know the product well. Someone has said, “If the first commandment in marketing is to know their customer, the second is to know their product.” In short, the importance of the product can be judged from the following facts

(i) Product is the central point for all marketing activities Product is the pivot and all the marketing activities revolve around it., Marketing activities, selling, purchasing, advertisement distribution, j sale promotion are all useless unless there is a product. It is a basic tool by which profitability of the firm is bargained.

(ii) Product is the starting point of Planning No marketing programme will be prepared if there i%no product because planning for all marketing activities like distribution, price, sales promotion,
advertising etc. is done on the basis of the nature, quality and the demand of the product. Product policies decide the other policies.

(iii)Product is an end The main objectives of all marketing activities is to satisfy the customers. It is the philosophy of the modem marketing concept. Various policy decisious are techniques to provide the customers benefits, utilies, and satisfication through product. Thus product is an end (satisfication of customers) and the product, therefore, must insist on the quality, size etc. of the product so that it may satisfy the customer’s needs. .

Thus, it is clear that the product is a must for marketing activities. It is true that all marketing activities are done for the satisfaction of customer and the producers must know their customers and their needs. The product must contain the qualities which can satisfy the customers.

The product, on one hand satisfies the needs of consumers and provides on the other hand, employment to crores of people in the activities of production^ distribution and advertisement, sale promotion transportation, warehousing etc. In this way product is most important from the point of view of the sellers, consumers and the society.

Question 4.
What are industrial products? How are they different from consumer products? Explain.
Answer:
Industrial products
Industrial product are the products which are used in producing other goods or services. These goods are not directly used by consumers. Raw materials, machinery, electric meters etc. are examples of industrial products. American Marketing Association has defined industrial good as “industiral goods are goods which are destined to be sold primarily for use in producing other goods or rendering services they include equipments (installed and accessory), Component

parts, repair and operating supplies, raw materials and fabricating materials.” This definition makes it clear that industrial goods are meant for use in producing consumer goods. Some are the goods which have common features of consumer goods as well as industrial goods such as tyre, sugar, coal and water etc.

Tyres serve as industrial goods when sold to the manufactures of vehicles and as consumer goods when sold to the owner of private vehicles. The number of buyers of industral goods is very limited. The buyers of industrial goods purchase these [ goods in bulk quantity. Price is an important consideration in the mind 1 of industrial buyers. Industrial goods may further be divided into four v parts as under:-

(i) Production facilities and equipmentProduction facilities !. and equipment include the facilities and equipments which help in , the process of production, For example, factory building, plant, fixtures spare parts, office equipment etc. These goods do not become a part of the finished goods. Generally these products are of technical nature. The price size, design and utility are the main considerations in the , mind of buyers of these goods. As price per unit of product is high and buyers are limited, the sellers requires continuous efforts for the , sale of such product.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(ii) Production Materials Production Materials include ‘ following three types of product.
(a) Raw Materials Generally, raw materials are supplied by ‘ natural resources such as agriculture product, mines and forests etc. Most of the agricultural products are the raw materials which require further processing and after such processing they are converted into consumer goods. The examples of raw materials are natural rubber, cotton, sugarcane etc. The cost of raw materials consitutes a large part of the total cost of producing a product.

(b) Semi-finished goods Semi-finished goods are the good which are finished goods for one unit and raw and materials for another unit. It is supplied by one industrial unit to another, such as :- iron, steel, and leas etc. Generally, semi-finished goods are manufactured at a large-scale and are directly supplied to their users.

(c) Fabricating parts Fabricating goods are the goods which are manufactures by one industrial unit and used by another industrial unit, without any further processing in producing consumer goods.” The important difference between the fabricating goods and semi-finished goods its that the fabricating goods are used by another industrial unit as these are supplied by the former unit while semi¬finished goods are further processed by the receiving unit. Examples of fabricating parts are-speaker of T.V, cabinet of T.V., tyre and tyre tube, light, horn, plug etc. of scooter.

(iii) Production supplies Production supplies are the product : which are necessary for the operation of industrial units but do not become the part of finished goods. The examples of production supplies are coal, gas, fuel, electric power, diesal, nuts, bolts, cleaning materials and lubricating oil etc.

(iv) Management Products : Management goods are the materials which are used in the process of management and administration of an enterprise etc. These include stationary books, typewriter, Fax machine, computers, registers etc. These goods are meant for use in business and not for producing a product.

Difference Between Industrial Product And Consumer Product

There are importance difference in marketing the industrial products and marketing consumer products. The main difference are as under
(1) Demand The prime difference in the marketing of these two goods is in the nature of their demand. The demand of consumer goods is original while that of industrial goods is derived. The industry is to supply the goods according to the wants of actual consumers or users. It means that the demand of industrial products is derived from the demand of consumer product in which the industrial products may play an important part.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(2) Market expansion Number of customers for industrial goods is very limited in comparison to consumer goods.

(3) Customer Customers of industrial goods are industrialists and manufacturers, while the buyers of consumer goods are the limited consumers.

(4) Product analysis Buyers of industrial product are well versed. They go by the merits and demerits of the product. They make detailes analysis of the product before buying. Whereas buyer of consumer products are both aware of the merits and demerits of the product. They do not make detailed analysis of the product before buying.

(5) Nature of Sales In the sale of industrial goods the personal contact with buyers plays an important role, whereas advertising programme and sales promotion play an important role in the sale of consumer products.

Question 5.
Distinguish between convenience product and shopping product.
Answer:
Convenience Product
The consumer goods which a customer usually purchases frequently and wants immediately and with minimum of efforts are called convenience goods. This category includes a wide range of household product of low unit value like soap, ball pen, pencil, exercise book, thread, biscuits, toffee, salt, newspapers, drugs etc.

These are the goods which are required by consumers frequently and ‘ immediately. These goods are of non-durable nature. The purchase of these goods are dominated by the buying habit of consumers. Generally consumer want to purchase these goods from the nearest shop or store. Easy and quick availability of these goods are the main charaeterstics  Kof purchase of these goods.

Shopping Products
Shopping product are the goods, which the consumers select and buy after making comparision of substitutes on such criteria as suitability, quality, price and style. In case of a shopping product, a substantial number of consumers habitually make shopping comparision before they take a buying decision.

Woolens, furniture items, dress materials, shoes, sarees and jewellery arethe example of shopping goods. A shopping item is durable and is used up slowly.The consumers has to compare different manufacture offering and devote considerable time and effort to take buying decision. Generally in big cities there are specific markets for these product, such as Karol Bagh, Chandni Chowk, Cannaught Place in Delhi and Railway Road in Rohtak.

The marketing problem of the manufactures of such type of product are different from the convenience products. The institutions selling such products usually are large size and they buy the product in bulk quantity. The manufactures of such product usually deliver their product directly to the retailers of a large size. The marketing manager should emphasise on the advertisement and sales promotion programmes of such product in the nature that can reveal their superiority before consumers over other products in the market.

Question 6.
“Product is a mixture of tangible and intangible attributes”. Discuss.
Answer:
A product is anything which is bought and sold in the market. Various authors define the term ‘product’ in the following manner According to W. Alderson, ” A product is a bundle of utilities consisting of various features and accompanying services.”

According to Philip Kotler, ” A product is anything that can be offered to a market for attention, acquistion and consumptipn that might satisfy a want or need. It includes physical objects, services, persons, places, organisations and ideas.”

According to William J. Stanton, “A jproduct is a set of tangible and intangible attributes, including packaging, colour, price, manufacturers and retailers prestige and services, which the buyer may accept as offering satisfaction of wants and needs.”

According to Rustam S. Davar, “A product may be regarded from the marketing viewpoint as a bundle of benefits which are being offered to consumer”.

From the above definitions it is clear that anything that possesses utility is described as product. A product is both what a seller has to sell and what a buyer has to buy. Buyer will buy a product which can offer him expected satisfaction. In other words what a buyer buys is a mixture of expected physical and psychological satisfaction.

Thus, the term product does not mean only the physical product but the total product including brand, package, label, status of manufacturer and seller and the service offered to the customer. Prof. Philip Kotler has given an elaborated definition of the product including in it the services, persons, places, organisation and ideas.

Characteristics Or Essential Features Of Product

From the meaning and definitions of product, we can draw the following essential features of a product:
(i) Tangible attributes The first important feature of product is its tangibility. It means that it can be touched, seen and its physical presence felt. It is made up of glass, wood, metal etc. in a particular shape, size, colour, design, weight, length, taste,.fragrance, etc. for example, cycle, fridge, T.V. bread, bulb, etc.

(ii) Intangible attributes The product may be intangible in the form of service, such as banking, insurance, transportation, warehousing, etc.

(iii) Associated attributes From the marketing point of view the product should have some associated attributes such as brand name, package, warranty, etc. These attributes are helpful in differentiating the product of different manufacturers and create a distinct image of the product in the mind of the consumer, for example – LG, BPL, Philips, Sony, etc.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(iv) Exchange Value Whether the product is tangible and intangible it should have exchange value and should be capable of being exchanged between the buyer and seller for a mutually agreed price.

(v) Customer satisfaction Product should have the ability to offer value satisfaction to the consumer. The satisfaction may be both real and psychological, for example, when we buy Kwality Icecream, we also buy taste and flavour. ’

(vi) Satisfaction of business needs The last but also equally important feature of a product is that it’should also satisfy the business. From these essential features of a product it is clear that product may be a physical product or a service. From the marketing point of view, a product is bundle of expectation and benefits which are being offered to the consumers.

Question 7.
Describe the function of labelling in the marketing of products.
Answer:
A simple looking but important task in the marketing of goods relates to designing the label to be put on the package. The label may vary from a, simple tag attached to the product (such as in case of local unbranded products like sugar, wheat, pulses, etc.) indicating some information about the quality or price, to complex graphics that are part of the package, like the ones on branded products (say the graphic of boat and patwar on the pack of old spice, after shave lotion or of a lady offering a pen to solicit the views of the users, on the label of surf-excelnatic, a detergent powder manufactured by

Hindustan Lever Ltd). Labels are useful in providing detailed information about the product, -its contents, method of use, etc. What functions are performed by a Label? Let us look at some of the labels. The label on the package of a local tea company describes the company.

’Mohini Tea Company, Kanpur, an ISO 9001 : 2006 certified company. Dermicool Prickly heat powder, describes how the product provide relief from prickly heat and control growth and infection, giving caution forbidding its application on cuts and wounds. Pack of Maggie noodles describes the procedure of cooking noodles.

The package of Pepsodent list The ‘Ten Teeth and Gum problems’, which the product fights’with its ‘Complete Germicheck formula; Dabur Vatika enriched coconut oil describes the product as pure coconut oil with heena, amla, lemon and specifies how these are good for hair. Thus, one of the most important function of labels is to describe the product, its usage, caution in use, etc. and specify its contents.

The other important function performed by labels is to help in identifing the product or brand. For example, the name Parle Monaco imprinted on the pack help us to identify from numbers of packs which one is Parle’s Monaco biscuit. Also the common identification information provided by most lables is of manufacturer, net weight when packed, manufacturing date, maximum retail price and batch number.

The third function performed by labels is to help grading the products into different categories. Sometimes Marketers assign different grades to indicate different features or quality of the product. For example, Garpier hair conditioner comes in different categores for different hair, say for ‘normal hair’ and for other categories. Hindustan lever sells different types of tea under yellow, red and green label categories.

The fourth important function of label is to aid in promotion of the product. A carefully designed label can attract attention and give reason to’purchase. We see many product labels providing promotional messages,ibr example, the pack of Dabur Amla hair oil states, “Baalon mein dum, life mein fun”.

The label on surf excelmatic says, “Keep cloth look good and your machine in to conditions”. Labels play important role in sales promotional schemes launched by companies for exmple the label on pack of Dettol shaving cream mentions in different colours “40% extra free” or pack of Colgate toothpaste mentioning, “Free Toothbrush Inside”, or “Save Rs 15”.

Lastly, labelling performs the function of providing information required by law. For example, the statutory warning on the package of cigarette or pan masala, “Smoking is injurious to health” or “ChewingTobacco is injurious to health”. Such information is required on processed foods, drugs and tobacco products. In case of hazardous or poisonous material, appropriate safety-warning need to be put on the label.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 8.
Discus the role of intermediaries in the distribution of consumer non-durable products.
Answer:
Before analysing the functions and importance of middlemen or intermediaries in the distribution of products and services of non¬durable nature, it is pertinent to define in brief the meaning of non¬durable products and services and middlemen or intermediaries which may be defined as under :-

Non-Durable Products
According to America Marketing Association (AMA), “Non¬durable products are those products which can be used for one time or a few times.”

Non-durable products are tangible products that are normally consumed with one or a few uses. Non-durable products are divided into two parts :-
(i) One time use products;
(ii) A few time use products.

One time use products
These are generally perishable products, which can be used for only one time, for the direct satisfaction of human wants. Such as, Milk, Butter, Ghee, Vegetables, Fruits, Sweets:, Chocolates, Cigarettes, other eatables etc. The price of such products is normal. The are generally convenience products.

Demand for these products depend upon daily needs and habits of the consumers. There is less brand preference. These products are easily available in every market areas. Consumers demand these products according to their daily needs. These products are mostly purchased very frequently.

A few time use products
These are consumable products, which are consumed after a few uses. For example, Bathing soap, Washing soap, Refills, Toothpaste, Shaving cream, Shoe polish, Cosmetic items etc. If customer is satisfied there are more chances for repeat purchases. Advertising is the best way to promote these products. Heavy promotional expenses are needed for these products with a view to build up preference and loyalty among the customers.

Mass distribution policy is adopted for these products and these products are available at most of the shops with small profit margin. The marketing strategy for durable and non-durable products are quite different. Durable products need specific marketing through authorised dealership. The sales promotion activities are performed by the manufacturers and dealers both.These products have regular demand. This classification is also important for deciding the marketing strategy.
Services’

These are activities or benefits that provide satisfaction to the consumers. They cannot be stored and as such are perishable in nature. Its sales depend on quality as well as goodwill of the service provider, e.g. Services of Banks, Insurance Companies, Financial Institutions, Consultants, Chartered Accountants, Health Clubs, Fitness centres, Repair shops etc.

Meaning of Marketing Middlemen

Marketing middlemen or intermediaries are the persons or the organisations who provide a link between the manufacturers and the consumers. They facilitate the purchase and sales of goods and services and also perform the marketing functions such as buying and assembling, selling, packaging, financing, warehousing, transportation, advertising, risk taking, consumer research, after sale services, etc.

Marketing middlemen play an important role in marketing the products. In the distribution channel, there are manufactures and consumers, and in between them there.are some middlemen – wholesalers and retailers. In our marketing point of view the middlemen and intermediaries are the same.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

The advertising agencies, warehouses, insurance companies, banks etc. facilitating functions in marketing, but cannot be called middlemen. Middlemen perform the marketing functions more economically than the manufacturers, at a given cost. Their specialisation and experience, offer to the manufacturer more than that what manufacturer can achieve at his own. Hence, marketing middlemen are intermediaries in between the producer and the consumer.

Definitions of Middlemen
1. “Middleman is one who specialises in performing operations or rendering services that are directly involved in the purchase and sale of goods in the process of their flow from producer to final buyer.” – American Marketing Association

2. “Middleman is an independent business concern situated in marketing channels at points between producer and consumers.” – Bechman

From the above definitions it is clear that, marketing middlemen/ intermediaries are the individuals and the organisations that perform various functions to connect the producers with the end-users.

Functions of Marketing Middlemen
Wroe Alderson is of the opinion that the main objective before marketing middlemen is to match the demand and supply of each segment. For this purpose, marketing middlemen perform various functions. He explained the following functions
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 1

1. Boost large scale production : The wholesalers give bulk orders to the manufacturers, which ‘ boost the large-scale production.

2. Purchase of raw materials : Some middlemen collect the raw materials from their areas and sell the same to the manufacturers in bulk quantity. They also provide raw-materials on credit basis.

3. Price determination : Middlemen have close relation with the buyers. They know their spending power, so they are best judge for accurate price determination. Thus, they assist the manufacturers in determining the prices of their products.

4. Demand forecasting : They provide necessary information relating to the future demand on the basis of their experience and knowledge.

5. Warehousing facilities : The middlemen give bulk order to the manufacturer even prior to production. The manufacturer sends the goods to middlemen just when goods are manufactured. The manufacturer, thus, does not require collection of the products.

6. Financial assistance : They make advance payment to the manufacturer for the purchase of goods. They also provide short-term financial assistance to the manufacturers during season period.

7. Standardisation and grading : The middlemen does grading of the goods on the basis of size, shape and other product standards after purchase made from the manufacturer.

8. Transport facilities : The wholesalers buy goods in bulk quantity. They also have their own vehicles to carry the goods from producer to consumers.

9. Advertising function : The middlemen advertise the products on which they deal and its advantage goes to the manufacturer.

10. Launching of new product : The middlemen introduce the consumers with new products and distribute free samples.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Importance of Marketing Middlemen

The marketing middlemen constitute an important link in the channel of distribution. They help the marketers in selling their products and the consumers in getting the want-satisfying products. The production process has now become so complex that a manufacturer is not in a position to make a direct contact with the consumers. The manufacturer has therefore, required assistance from the middlemen for the delivery of goods to the consumers.

Middlemen made the distribution easy and smooth. Many organised markets are created by them. They create time, place and possession utility. Middlemen concentrate their efforts on marketing and distribution of products. Middlemen are the link between the manufacturer and the ultimate consumers.

They direct the flow of goods and services from producer to consumers. Large-scale prodution become possible and profitable because of marketing middlemen. They perform the important function of advertising and publicity. They are the demand creators and match the demand with the production. The marketing middlemen provide invaluable services towards manufacturers, consumers and the society as a whole.

Question 9.
Explain the factors determining choice of channels of distribution.
Answer:
Distribution channels are an important part of the marketing mix of any business concern. Selection of appropriate distribution channel is very important because several elements of the marketing mix like price mix and promotion mix are closely interrelated with and interdependent on the distributing mix.

A good number of distribution channels are available to the manufacturer for bringing his product to the ultimate consumers or industrial users. Out of alternative channels, it is essential to make a right choice of distribution channel. The choice of the appropriate channel of distribution is not a simple job.

The manufacturer or the marketer has to make decision regarding the choice of most suitable distribution channel at minimum cost and attaining the desired level of sales volume. There are various factors both objectives and subjectives, which govern channel choice and vary from company to company.

While selecting a distribution channel, the marketer should carefully consider the following factors : –
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 2

Question 10.
Explain briefly the components of physical distribution.
Answer:
Components of physical distribution – I Physical distribution management is that part of general management which is responsible for the design, administration and operation of the system to control the movement of raw materials and finished products. The structure of physical distribution is made up of ‘ following broad component namely
(i) Transportation
(ii) Warehousing
(iii) Inventory control
(iv) Material handling
(v) Order processing
The scope of Physical distribution is illustrated in the following diagram.
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 3
These components are dissimilar but they are all related to the common objective of maximisation of customer satisfaction and minimisation of costs. In order to achieve the various objectives and advantages of physical distribution various decision are to be taken by the management. These decision are known as physical distribution decisions.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 11.
Define advertising. What are its main features? Explain.
Answer:
Meaning of Advertising In marketing advertising is very important. No business can survive without advertising. So advertising is a must. The aim of every business is to earn profit and this aim can be achieved by selling goods at reasonable prices. The sales are possible only if the target audience knows about the availability of goods and they are persuaded to buy it. All this is possible through advertising which is deliberate action to popularise the product or service.

Thus advertising is commonly understood to communicate about a product or a service. But it is not correct and complete to understood so. Actually, advertising includes all the activities performed by an enterprise to present the goods and service to the consumers and to motivate them to buy these goods and services. In general term advertising is to announce publicity. Advertising is derived from a Latin word ‘adverto’. ‘ad’ means towards and ‘verto’ means turn. Thus, advertising means to turn attention towards a specific thing.

In other words, “Advertising consist of all the activities involved in presenting to a group, a non personal, oral or visual, openly sponsored message regarding a product or service or idea, this message called an advertisement, is disseminated through one or more media and is paid for by the identified sponsor”.

In this era of mass production and mass distribution where the firms land up with similar kinds of products, they face intense competition. To face competition, they need to widely publicise their product and try to portray their products as superior to’that of the competitors. And this is possible through advertising.

Definitions
(i) According to Americal Marketing Association “Advertising has been degined as ‘any paid form of non-personal presentation and promotion of goods, service or ideas by an identified sponsor.”

(ii) According to Mason and Rath “Advertising is a salesmanship without a personal salesman.”

(iii) According to Dr. Jones “Advertising is a sort of machine- made mass production method of selling which supplements the voice ‘ and personality of the individual salesman.”

(iv) According to Dr. Burden “Advertising includes those activities by which visual or oral messages are addressed to the public . for the purpose of informing them and influencing them either to buy any merchandise or to act to be indined favourably towards ideas, institutions or persons featured.”

(v) According to Sheldon “Advertising is a business force, which through the printed words, sells or help sale, builds reputations and fasters goodwill”.

(vi) According to Frank Presbrey : “Advertising is printed, written spoken or graphic salesmanship. Advertisement are designed to sell the products of the advertiser and to influence favourably the public mind individually and collectively – with respect to the interest of the advertiser.”

An analytical study of the above definition makes it clear that advertising includes all the activities through which a written or oral or visual messages regarding a product or a service or idea may be communicated to the people so that they may be persuaded to buy that product or service or idea. Thus, advertising means spreading of information.

Features of Advertising :-
On the basis of above definitions, the main characteristics or nature of advertising are an under
(i) Mass Communication : It is a unique means of mass communication announcing the sale of goods or services. It can help to introduce a new product quickly. Thus if any manufacturer request for purchase of a product at a time to only one or two customers, it cannot be said as advertising. However, it will be called advertising if uniform information is accessed to a number of persons at the sa’me time.

(ii) Non-Personal Presentation The advertising is a non¬personal salesmanship performing similar function like personal salesmanship. It is silent but forceful non-personal salesmanship.

(iii) Informative Advertisements are informative and provide valuable informations to the customers. These informations are in the form of information regarding the new product, regarding the characteristics of product and regarding the manner of use, etc.

(iv) Buying motive An advertisement inspires the consumers for purchase of a product., it lures the consumers for the purchase of the product by raising passion in their heart.

(v) Advertising expenses Money is incurred on advertising and such expenses are incurred by the person who is advertiser. The dissemination of information regarding service of the product, without such expenses, cannot be an advertisement.

(vi) Marketing toolAdvertising is a tool of marketing and it is a part of sales promotion.

(vii) Identified sponsor It is an openly sponsored sales message regarding and product or service i.e., the sponsor can be identified.

(vii) Commercial objects Commercial activities through advertising is made with an objective to increase the profit of an institution by enhancement of the sales of a product or service. All communication made with an additional objective to increase the sale by a commercial institution are left out of the limit of advertisement.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 12.
Describe the role of’sales promotion’ as an element of promotion mix. ‘
Answer:
“Selling” and “promotion” are often used synonymously selling has been degined as “the personal or impersonal process of assisting and/or persuading prospective customer to buy a commodity or a service Or to act favourably upon an idea that has commercial significance to the seller”.

Promotion is a broader term. It includes advertising personal selling, sales promotion and other selling tools. Promotion and sales promotion are different terms. Sale promotion is only a part of promotion. Promotion is a very wide term including advertising, personal selling, sales promotion and other promotional tools that can be devised to reach the goals of the sales programme.

The main purpose are to attract customers, awaken their demand and stimulate them to act in the desired manner. Sales promotion act as a bridge between advertising and personal selling to coordinate efforts in these two areas. The main tasks of promotional activities are to establish and maintain communication with large market segments.

Sales Promotion Sales promotion includes activities other than advertising, personal, selling, publicity and public relations which are used in promoting sales of the product or in persuading the customer to purchase the product. It serves as a bridge between personal selling and advertising. It is an aggresive method of selling.

According to American Marketing Association “Sales promotion includes the marketing activities other than personal selling, dealer effectiveness, such as displays shows and demonstrations, expositions and various current selling efforts, not in ordinary routine.”

It consists of short-term and temporary inantives to induce sales such as <i> Displays, <ii> Demonstration, <iii> sales contest, <iv> premium packs, <v> gift, <vi> exchange offer, <vii> coupons, <viii> off season discount, <ix> sampling, <x> exhibitions and fairs.

Long Answer Type Questions

Question 1.
Define Marketing. How is it different from selling? Discuss.
Answer:
(i) New Broad or Customer-oriented concept of Marketing. The concept of Marketing lays more emphasis upon customers than production. Therefore, this concept is known as customer-oriented concepts. Main definitions of this concept are as follows.

(ii) According to Cundiff and Still, “Marketing is the business process by which products are matched with and through which transfers of ownership are effected.” This definition of marketing is clear that the producer produces goods and services, according to the needs and requirements of market or of Customers. Thus, it is clear that the functions of marketing commence well in advance before production. lliam J. Stanton, “Marketing is total system of interacting business activities designed to plan, price, promote and distribute want-satisfying products and services to present and potential customers.”

This definition, though very small in size, is perhaps the widest definition of marketing. It means that the function of marketing is to produce new and improved goods and service and to create the demand for these goods and services so that the standard of living of the society may be improved or the standard of living, once achieved by the society many be maintained.

(iii) According to Philip Kotler, “Marketing is the analysing organising, planning and controlling of the firms’s customer impinging resources, policies and activities wih a view to satisfy the needs and wants of chosen customer groups at a profit.
This definition makes very clear that all the marketing activities cluster around the needs and wants of consumers. These activies start with the discovery of such needs and end with the satisfaction of these needs.

(iv) According to Prof. Malcolm McNair, “Marketing is the creation and delivery of standard of living.”
This definition, though very small in size is perhaps the widest definition of marketing. It means that the function of marketing is to produce new and improved goods and services and to create the demand for these goods and services so that the standard of living of the society may be improved or the standard of living, once achieved by the society may be maintained.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(v) According to Institute of Marketing of U.K., “Marketing is the creative management which promotes direct employment by assessing consumer needs and initiating research to develop them. It co-ordinates the resources of production and distribution of goods services.

It determines and directs the nature and scale of the total efforts required to sell at maximum profitability the production to the ultimate users.” This definitions explains all the activities of marketing in quite detail. This definition also stremes upon the satisfaction of needs and wants of consumers.

(vi) According to Prof. H.L. Hansen, “Marketing is the process of discovering and translating consumer needs and wantsinto product and service specifications creates demand for these products and services and then in turn expanding this demand.”

This definition is considered to be a very important definition of marketing. It explains some very important fact of the meaning of marketing. First, Marketing function do not start with the production. They start well before production. First of all the needs and want of comsumers are discovered. Second, When the needs and wants of consumers are discovered, goods and services are produced to meet these wants and needs.

Third, demand is created for these goods and services and then this demand is expanded. Thus, this definition includes investigation regarding needs and taste of consumers planning for production of goods and services so that these needs may be effecively satisfied and the determination of marketing policies arid programmes.

(vii) According to E. Terome Me Charthy, “Marketing is the response of businessman to the needs to adjust production capabities to the requirements of consumer demands. This definition of marketing it clear that marketing is an activity of producing the goods and services to meet the demands of consumers. Thus, this definition also emphasises upon the demand and choice of consumer.

Conclusion
Thus modern marketing begins with the customer not with production cost, sales, technological landmarks and it ends with the customer satisfaction and social well-being. Under the market-driven economy buyer or customer is the boss.

Marketing is a total system of business, an on going process of
(1) Discovering and translating consumer needs and desires into t products and services (through planning and producing the planned products).
(2) Creating demand for these products and services (through \ promotion and pricing)
(3) Serving the consumer demand (through planned physical distribution) with the help of marketing channels, and then.
(4) Expanding the market even in the pact of keen competition.

The modern marketer is called upon to set the face of keen competition. The modern marketer is called upon to set the marketing objectives, develop the marketing plan, organise the marketing function, implement the marketing plan or programme (marketing mix) and control the marketing programme to ensure the accomplishment of the set marketing objectives. The marketing programme covers product planning or merchandising, promotion and physical distribution.

Difference Between Marketing and Selling . The words “Marketing” and “Selling” are often used as if they had the some meaning. It is however advisable to be clear as to the difference in meanings involved. Selling to normally concerned with the plans and ideas of trying to market the consumer exchange what he has (money) for what we have (i.e. goods or services).

Selling concentrates on sales, volume, whereas marketing is concerned with the needs of the buyer. Selling is preoccupied with the idea of satisfying a consumers requirements by means idea of the seller’s need to convert his product into cash. Marketing is concerned with the idea of satisfying a consumer’s requirementslbyjneans of the as well as by providing the customer with value-satfsfaction.

Difference between marketing and selling can be explained as under
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 4
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 5

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 2.
What is the marketing concept? How does it help in the effective marketing of goods and services.
Answer:
Definitions of Marketing concept :-
Cundiff, Still, and Govani in their, Basic Marketing states that, “Marketing concept is a philosophy of management that strongly influences the management of marketing efforts in those companies . who adopt it.”

Philip Kolter in his book, ‘Marketing Management’ states that, “Marketing concept is customer oriented backed by integrated marketing aimed at generating customer satisfaction as the key to satisfying organisational goals.”
According to Arthus p. Felton, “Markeitng concept is a corporate , of mind that insists on the integration and co-ordination of all marketing functions, which in turn are welded with all the other corporate functions, for the basic objective of producing maximum long range corporate profit.

From the above definitions’ of marketing concept, we can conclude that “Marketing concept is a management that acts as a lamp-post for marketing activities, those are consumer oriented and stressed on the integration of marketing activities to earn adequate profit.”

New Concept of Marketing

The New Concept is consumer oriented. It considers consumer as the king around which all business activities rotates. It stresses on profit earning by providing the consumer with his desired products. Therefore, all the activities of the firm in the area of production, engineering finance and marketing of goods and services must be direction engineering, finance and marketing of goods and services must be directed primarily to determine what the consumer’s want and then satisfy these wants.

The consumer makes purchases. With certain expectations relating to price, quality, quantity and timely supply. A marketer who fails to identify these preferences fails to satisfy the consumer and as such he cannot run his business with success. Hence, all polices plans and programmes of the firm should be made so efficient that they might cater the need and wants of the consumers.

The new modern concept of marketing says that all business activities are integrated. Integration means composite functioning of all department of an organisation. Consumer satisfaction is the main stay of modern marketing concept. It realises that the business is a marketing organisation where all activities are directed towards the satisfaction of human wants. It believes it can win consumers loyalty and confidence by satisfying their wants. Modem concept totally accept the sovereignty of the consumer and.consider ‘Consumer is the King’.

The new concept of marketing can be illustrated as under
Definitions of new concept of Marketing
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 6

Modern authors view that, marketing is more than an physical process of distributing goods the services. They feel that marketing represents a distinct philosophy of business that has emerged over the recent years. The marketeers following this philosophy recognize and accept ‘customscriented’ way of doing the business. Different authors have given their definitions on new/modern concept of marketing.

According to Philip Kolter. “The marketing concept is a custome-oriented backed by integrated marketing aimed at generating customers satisfaction as the key to satifying organisational goals.” William J. Stanton, has defined the modern marketing as,

“In its fullest sense the marketing concept a philosophy of business which states that the consumers want satisfaction of the economic and social justification of a company’s existence. Consequently, all company’s activities in production, engineering and finance as well as in marketing must be devoted to first determining what the customer’swants and then, satisfying these wants still marking reasonable profits.”

The customer oriented idea of modern concept has been supported by many other authors also such as :
“Marketing is the creation and delivery of standard of living to the society.” – Malcom Me Nair

“Marketing is the managerial process by which products are matched with markets and through which transfers of ownership are affected. – Cundiff, Still and Govani

Significances of New Concept of Marketing:-
The adoption of New marketing concept is benefitted of for the business firm in the following ways

1. Helpful in product development:-Modern concept assumes : I consumer as a king of the market. Thus, the producer through its intensive market research try to identify the needs, wants and behaviour of the consumers and thus helps in discovery and development of new products.

2. More social satisfaction :- Under this concept only standard quality goods, are produced and are provided to the customer at reasonable price can easily be afforded by the consumers in sufficient quantity by them through the channel which is most suited to them and at the place and time of their choice. With the creation and delivery of standard of living, social satisfaction increases.

3. Positive impact on profitability The customer-oriented and co-ordinated approach to marketing has positive impact on the profitability of firm. It emphasised on earning profit through customes satisfaction.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

4. Interaction with customers Modern Marketing concepts has both strategic and philosophical values. It assists the management in directing organisation efforts toward the long-term goals prolonged interation with customers also become possible.

5. Overall improvementOne of the important principles of modem marketing concept is co-ordinated and integrated marketing. The integrated marketing efforts are helpful in bringing overall improvement in marketing operations.

6. Useful in competitive market:- Attention towards customers needs is helpful for the management in spotting new products opportunities more quipkly. In a competitive market where existing products and brands are under constant attack by the competitors the development of new products is must. The best sources of new product idea is unsatisfied needs of the company’s customers.

7. Complete evaluation Modern marketing concept leads to follow on integrated and co-ordinated approach to marketing. By concentrating on consumer’s wants management can evaluate contributions made by the different departments of the firm in a better way.

8. Growth of the firm :- Modern marketing concepts has strategic implication as it allows the business firm to direct its activities towards broader and long range objectives. Like sustained interaction with the customers, and stability and growth of the firm.

Finally the interest of the company/firm and the interests of the society are harmonize. The management realises that its interest and the interests of the society are one and same and that the future profit of the company should come through the satisfaction and welfare of human want and needs.

Question 3.
What is marketing mix? What are its main elements? Explain.
Answer:
Meaning of Marketing mix
Marketing mix is the policy framework adopted by the marketeer to get success in the field, of marketing. It refers to the amounts and kinds offnarketing variables, the firm is using at a particular time. Under .marketing mix, we include product mix, promotion mix and distribution mix.

It is rightly remarked that it is not the product but the satisfaction ‘ that are sold now-a-days in order to be a successfull marketeer. One ‘must care for customer satisfaction. For this one should know the real need of his customer and then use the resources to purchase the products which will best satisfy the identified needs. A customer- oriented firm performs number of functions to satisfy customer needs.The effective coordination of these function is often called as marketing mix.

Definition of Marketing Mix

Marketing mix is the combination of the product, the distribution system, the price structure and the promotional activities. Different authors define the term marketing mix in the following manner :
According to R.S. Davar, “The policies adopted by the manufacturer to attain success in the market constitute the marketing

According to Me Carthy, “Marketing mix in the park of four sets of variables namely product, price, promotion and place variables. According to William J. Stanton, “Marketing mix is the term used to describe the combination of the four inputs which constitute , the core of a company’s marketing system – the product the price structure, the promotional activities and the distribution system.

Marketing mix is a term generally used to denote a particular combination of marketing variables which are controllable by an Sb enterprise and which are used to appeal a particular market segment.

Philip Kotler has defined it as, “the set of controllable variables that firm can use to influence the buyer’s responce.” Hence, the marketing mix can be regarded as the ‘core of the company’s marketing system.

Nature of Marketing Mix
Marketing mix is the instrument for the attainment of marketing goals. Marketing mix denotes a combination of various element which in their totality constitute firm’s marketing system. It should be noted that four ingredients, elements of marketing mix are interrelated because the decision takes in one area usually affects the other. The nature of marketing mix concept should be clean from the following explanation : .

I. Product Mix The product itself element. Product must satisfy consumer needs, product mix includes the physical product,- product services, branding, packaging, colouring, standardising, planning and developing right.
The product is the focus of all marketing activities.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Product is sum total of tansible and intansible attributes including, product design style-size, quality colour, brand name, packaging, labelling after, sales services etc. Production mix also include product differentiation, standardisation and grading, product lines etc. Hence, product mix is the total of allproduct, offered for sale by a company. Some important variables of product mix are explained here :
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 7

1. Product design Product design is a very important feature especially in consumer products like shoes, readymades garments furniture, crockeiy, automobily etc. Product should be designed in a manner as desired by the target consumers.

2. Product line Product line is a group of closely related products which are able to satisfy a similar class of need for example, BPL Co manufacturing Television, Refrigerators. Music System, Washing, Machines, etc.

3. Product quality Product quality depends on design, material used, manufacturing process, workmanship packaging etc. Generally, specific grade or standards of quality of the product are determined either by agreement among the producer or by law. The quality can be fixed interni of size weight colour, shape, appearance, flavour, finish, strength and other physical features depending upon the nature of the product.

(ii) Price Mix The second element which effect the volume of sale is the price mix includes determing pricing objective and policies prices. Fixation discount polity concession policy, profit margin, terms of payment, credit policy etc. Price of the value of a product expressed in terms of money.

It is a matter of vital importance to the buyes and the seller. Exchange of goods and services take place only when the price is. agreed upon between buyes and the seller. Price is the primary source of revenue to a firm. The success or failure of a firm depends upon its pricing policy. That is why every marketeer takes special interest in fixing and implementing his pricing, policy. The price mix of a firm include the following items :

Pricing objectives, pricing policies, prices determination, term of credit discount policy, concession policy, term of delivery, leve of margin, resale price maintenance.

(iii) Promotion Mix The third element of marketing mix persuade and attract the customers. Promotion is the persuasive communication about products of the company. Promotion mix includes : Personal selling, advertising sales, promotion activities public relations displayed and demonstrations participation in trade , fairs and exibitions etc.

(iv) Place Mix The fourth element creates time place and possession utilities. The place mix also known as distribution mix is the co/nbination of decisions relating to distribution channels storage facility location inventory level transportation warehousing etc.

These four elements of marketing mix are co-equal interdependent and essential. The decissions on the four elements of marketing mix must be properly coordinated and balanced in order to achieve an optimum marketing mix.

Elements of Marketing Mix

According to Neil H. Borden, Marketing mix consists a list of the important element or ingredients that make-up the marketing ; programme.”

Elements of marketing mix means composition of marketing mix. The marketing mix is dynamix in nature. It changes with the change in internal and external forces. Each marketing firm has its own unique marketing mix. Such inter-firm deviations arises due to the differences in their product policy price policy promotion policy and distribution 5 policy. Moreover different authors explain the elements of marketing mix in different ways.

1. Prof. Albert W. Frey in his book, “Advertising has explained the element of marketing mix using two dimenstons.
(i)Product related variables :- (i.e. offering) if include product, Brand Packages, Prices service etc.
(ii) Procedure related variables : (i.e. tools) it Includes, advertising distribution channel, personal selling promotion etc.
(iii) H.A. Lipson and J.R. Darling in their book, “Introduction to Marketing Adminstration has explained four types of element such as :-

  • Product
  • Condition of sales
  • Distribution
  • Communication

(iv) Jerome E. Me Casthy in his book “Basic Marketing explained four types of element of marketing mix in term of’four Ps’ because each element start with the English alphabets ‘p’. These are :- Product, Price, Place and Promotion. These four fold classification of marketing mix and are accepeted by many , scholars.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 4.
How does branding help in creating Product differentiation? Does it help in marketing of goods and services? Discuss.
Answer:
Before answering the importance of branding the meaning of branding is essential.
Branding One of the most important decisions that a marketer has to take in . the area of’product’ is in respect of branding. He has to decide whether the firm’s products will be marketed under a brand name or a generic name. Generic name refers to the name of the whole class o’ the product.

For example, a book, a wristwatch, tyre, camera, toilet soap, etc. If products were sold by generic names, it would be very difficult for the marketers to distinguish their products from that of their competitors.

Thus, most marketers give a name to their product, which helps in identifying and distinguishing their products from the competitor’s products. This process of giving a name or a sign or a symbol etc., to a product is called branding. The various terms relating to branding are as follows ’

(i) Brand A brand is a name, term, sign, symbol, design or some combination of them, used to identify the products – goods or services of one seller or group of sellers and to differentiate them from those of the competitors. For exmaple, some of the common brands are Bata, Lifebuoy, Dunlop, Hot Shot, and Parker. Brand is a comprehen sive term, which has two components – brand name and brand mark. For exmaple,-Asian Paints has the symbol of Gattu on its pack, which is its brand mark. .

(ii) Brand NameThat part of a brand, which can be spoken, is called a brand name. In other works, brand name is the verbal component of a brand. For example, Asian paints, Saffola, Maggie, Lifebuoy, Dunlop, and Uncle Chips are the brand names.

(iii) Brand MarkThat part of a brand which can be recognised but which is not utterable is called brand mark. It appears in the form of a symbol, design, distinct colour, scheme or lettering. For example, the Gattu of Asian paints or devil of Onida or symbol of Yogkshma of LIC, or four fingers and a palm of Anacin are all brand marks.

A very important decision area for marketing of most consumer products is whether to sell the product in its genric name (name of the category of the product, say Fan, pen, etc) or to sell them in a brand name (such as Polar Fan or Rottomac pen) Brand name helps in creating product differentiations i.e. providing basis for distinguishing the product of a firm with that of the competitor, which in turn, helps in building customer’s loyality and in promoting its sale.

The important decision areas in respect of branding include deciding the branding strategy, say whether each product will be ” given a separate brand name or the same brand name will be extended to all products of the company, say Phillips Bulbs, Tubes and Television or Videocon Washing Machine, Television, and Refrigerator. Selection of the brand name plays important role in the success of a product.

Advantages to the Marketers
(i) Enables marking product differentiation Branding helps a firm in distinguishing its product from that of its competitors. This enables the firm to secure and control the market for its products.

(ii) Helps in advertising and display programmes :-A brand aids a firm in its advertising and display programs. Without a brand name, the advertiser can only create awareness for the generic product and can never be sure of the sale for his product.

(iii) Differential Pricing Branding enables a firm to charge : different price for its products than that charged by its competitors. This is possible because if customers like a brand and become habitual 1 of it, they do pot mind paying a little higher for it;

(iv) Ease in introduction of new productIf a new product is introduced under a known brand, it enjoys the reflected glory of the brand and is likely to get off to an excellent start. Thus, many companies with established brand names decide to introduce new products in the same name. For example, Food Specialties Ltd. had a sucessful brand Maggie (noodles), It extended this name to many of its new products introduced such as Tomato Catch Up, Soups, etc. Similarly Samsung extended the brand name of its Television . to Washing Machines and other durable products, like Microwave oven.

Advantages to Customers

(i) Helps in product identification Branding helps the customers in identifying the products. For example, if a person is satisfied with a particular brand of a product, say tea leaves or detergent , soap, he need not make a close inspection every time he has to buy
that product. Thus, branding greatly facil itates repeat purchase of the products.

(ii) Ensures Quality Branding ensures a particular level of quality of the product. Thus, whenever there is any deviation in the quality, the customers can have recource to the manufacturer or the marketer. This builds up confidence of the customers and helps in increasing his level of satisfaction.

(iii) Status symbolSome brands become status symbols because of their quality. The consumers of those brands of products feel proud of using them and adds to the level of satisfaction of the customers.

Question 5.
What are the factors affecting determination of the price of a- product or service? Explain.
Answer:
The price of a product influences its wage, rent interest and the profit. It again influences the economic means. High wage attract the labourers and high rate of interest attarcts investment.

Promotion and advertisement of a product too depend on its price. If the product has the capacity to bear such expenses, these are incurred, otherwise the firm obstains from incurring it.

There are some laws for imposing restrictions on the prices in every country and these influence the price policies and the strategies, Other laws of similar nature are made for the distribution, advertisement, packaging etc. on account of these rules, no manufacturer reveals his price policy.

Therefore, pricing decisions play a very important role in the desing of the marketing mix. Pricing strategy determines the firm’s position in the market against its rivals. Price is a powerful marketing instrument. As a marketing weapon, pricing is the big-gun. However, it must be used with great caution as is dangerous and explosive market force. It may doom a good product to failure.

Therefore, all marketing managers must make accurate and planned pricing decisions.
Factors Affecting Pricing Decisions

The pricing decisions are influenced by many factors. The price policies should be consistant with pricing objectives. The influencing factors for a price decision can be divided into two groups.
(1) Internal factors and
(2) External factors.

1. Internal Factors

(i) Organisational factor’s Princing decisions occur on two levels in the orgnisational overall price strategy is dealt with by top executives. They determine the basic rates that the product falls into in terms of market segments. The actual mechanics of pricing are dealt with at lower levels in the firm and focus on individual product strategies, Usually, some combination of production and marketing , specialists are involved in choosing the price. –

(ii) Marketing Mix : Price is the one of the important elements of the marketing mix. Marketing experts view price as only one of the many important elements of marketing mix. A shift is any of the elements has an immediate effect on the other three-production, promotionand N distribution. In some industries, a firm may use price reduction as a marketing technique, others firms may raise.

prices as a deliberate strategy to built a high – prestige product line. In other case, the effort will not succed unless the price change is combined with a total ’ marketing stratgey that supports. A firm that raises its prices may add a more impressive looking package and may begin a new advertising compaign.

(iii) Product Differentiation Generally, the more differentiated a product is from competitive products, the more leeway the Firm has in setting prices. When a Firm’s Product is basically the same as that of its competitors, the firm can differentiate its own image by building a solid reputation among customers, by charging different prices.

(iv) Objectives of the enterprise Objectives of the enterprise affect pricing decisions to a significant extent. There may be many objects of the business and industrial enterprises. Some important objects of a business and industrial enterprises may be to earn proper return on investment, to earn maximum profits through maximum sales, to bring price stability, to bring stability in the margin of profit, to face the competition, to increase market share or to maintain it, to determine the prices of products according to the paying capacity of consumers and long-term welfare of the enterprise.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(v) Cost factors Cost factors are the most important factors affecting pricing decision of an enterprise. Cost factors include the following,

  • Cost of. raw materials
  • Manufacturing cost,
  • Administrative overheads
  • Cost of transportation
  • Cost of storage
  • Cost of advertisement
  • Cost of distribution, and
  • Cost of Selling etc.

2. External Factors
These are the factors over which the firm has no control, and therefore marketers have to face many difficulties while determining the price of a product. Such factors are

(i) Demand It has a large impact on pricing since demand is affected by such factors as the number and size of competitors, what they are charging for similar products, the prospective buyers, their capacity and willingness to pay, and their preference, these factors need be taken into consideration while fixing the price.

(ii) Competition : The knowledge of what price the competitors are charging for similar product and what possibilities lie for raising or lowering prices also affect pricing.

(iii) Suppliers of Raw Materials Suppliers of raw materials and other articles can have a significant role on the price of a product. The price of a finished product is directly linked with the price of the Raw Material etc. Hence, if the suppliers raise the price, the ultimate result is a raise in price by the manufacturer, who ultimately passes it on to consumers. Scarcity or abundance of the raw materials also affects pricing.

(iv) Channels of Distribution of the product If a product passes through many channels of distribution from producer to consumers, the price of such product will be higher because every channel of distribution has to be paid some remuneration will have to be paid to its channels of distribution.

(v) Economic conditions The inflationary or deflationary tendency affects pricing. In recession period, the prices are reduced to a sizeable extent to maintain the level of turnover. On the other hand, the prices are increased in boom period to cover the increasing cost of production and distribution. To meet the changes in demand, prices etc. several pricing decisions are available

  • Prices can be boosted to protect profits against rising cost
  • Prices protection systems can be developed to link the price on delivery to current costs
  • Emphasis can be shifted from sales volume to profit margin and cost reduction etc.

(vi) Buyers The various consumers and businesses that buy a company’s products or services may have on influence in the pricing decision. Their nature and behaviour for the purchase of a particular product, brand or service etc. affect pricing whom their number is large.

(vii) Pricing policies of competitors Pricing policies of competitors of a product also play an important role in the determination of price of the product. If the price determined by the competitors for their product is low, the enterprise will also have to keep its price low.

(viii) Trade conditions and customs Prevailing conditions and customs in marketing a particular product also affect pricing decisions of an enterprise. For example, guarantee of free service for a certain period has been a common practive for consumer products of technical nature, such asT.V., Refrigerator and Tape-Recorder etc. Therefore, the price of such products must be determined keeping in view the estimated cost of repair of these products for such period.

(ix) Government Regulations Price discretion is also affected by the price – control by the government through enactment of legislation, when it is throught proper to arrest the inflationary trend in prices of certain products. The prices cannot be fixed higher, as government keeps a close watch on pricing in the private sector.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Question 6
What do you mean by ‘Channels of distribution’? What functions do they play in the distribution of the goods and services? Explain.
Answer:
It is not enough to produce the goods and services of best quality at minimum cost, it is equally important, rather more important that these goods and services must be made available to the consumers at proper time and at proper places because ultimate object of every manufacturer is to earn maximum profit through maximum sales and the object can be achieved only if the goods and services are rightly distributed to their consumers. Goods and services may be distributed to the consumers through different ways. The ways through which the goods and services are distributed from manufacturer to the consumers, are called channel of distribution.

Definitions

(i) According to Philip Kotler”Every producer seeks to link together the set of marketing intermediaries that best fulfil the firm’s objectives. This set of Economic intermediatories is called the marketing channel.”

(ii) According to William J. Stanton “A channel of distribution for a product is the route taken by the title of the goods as they move from the producer to the ultimate consumers or Industrial user.”

(iii) According to Me Carthy “Any sequence of Institutions from the producer to the consumer including none or any number of middlemen is called a channel of distribution.”

On the-basis of analytical study of above definations it can be concluded that a channel of distribution is a chain through which a producer transfers the ownership of his goods and services to his consumers. Channels of distribution are also knwon as middlemen, agents of distribution, and distribution chains. A channel of distribution is a bridge to cover the gap between a manufacturer and consumers.

Channels of Distribution.
In case of large number of consumer products, the potential buyers are scattered over wide geographical area. In order to contact these people efficiently and efficiently, it is important to take the help of number of intermediaries as contacting them directly may not be cost effective and may be difficult even otherwise for example, a manufacturer of detergent powder in Gujarat would find it very difficult to directly approach customers, say in Delhi, Thirvant purarn, Bhubneshwar, Hydrabad, Srinagar and other for off places.

Therefore, he/she would supply a %ti$e quantity of his/her product to a big merchant, say in Hydrabad this big merchant would then supply detergent power to relatively small sellers in various towns of Hydrabad. These sellers would in turn, resell the goods to consumerIn this manner, goods are distributed from the place of production to | the place of consumtion. These people, institutions merchants, and l functionaries, who take part in distribution function, are called L ‘Channels of distribution’.

Channels of distribution are set of firms and individuals that take title, or assist in transferring title to particular goods or services as it moves from the producers to the ponsumers. In other words, channel refers to a team of merchants, agents and business Institutions that i combine physical movement and title movement of products to reach ! specific destinations.
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 8

Mostly goods and servies are distributed through a network of marketing channels, for example we buy merchandise of our need such as salt,.bulb, tea, sugar, soap, paper, books, flour,.etc. from retail sellers.

The channels bring economy of effort. This can be better understood with the help of an example. Let us say you have to buy four things, viz, sugar, bulb, coffee and ink. Most probably you would walk into a general merchant’s shop and buy all the articles from one place. Imagine what would happen if there were no middlemen or general merchants available. In that case you would have to buy directly from the manufacturers of these products.

You will have to make four contacts, each with the producer of sugar, bulb, coffee and ink. Compared to this, there was only one contact when all the things were bought from the same general merchants. Now let us assume that there are four customers. Needing the same four articles. In all sixteen contact would have to be made. In case middleman are used, as shown in the part II of figure, only eight contacts could be needed. Thus, use of middleman brings economy of efforts.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

A part from the economy of effots, middleman help to cover large geographical area and bring efficiency in distribution, including transportation, storage and negotiation. They bring convenience to customers as they make various items available at one store and also serve as authentic source of market information as they are in direct contact with the consumers.

Functions of Distribution Channels Channles of distribution smoothen the flow of goods by creating possession, place and time utilities. They facilitate movement of goods by overcoming various time, place and possession barriers that exits between the manufacturer and consumers. The important functions performed by middleman are as follows ,

(i) SortingMiddleman procure supplies of goods from a vairety of sources, which is often not of the some quality, nature, and size, for example, a wholesaler of cashew nuts may procure a large quantity from different cashew nut producing areas, which would contain nuts of varied quality and sizes. He/She then sorts the nuts into homogenous groups on the basis of the size or quality.

(ii) Accumulation This function involves accumulation of goods into larger homogeneous stocks, which help in maintaining continious flow of supply.

(iii) AllocationAllocation involves breaking homogenous stock & into smaller, marketable lots for example, once cashew nuts are graded . and large quantities ate built, these are divided into convenient packs of say 1 kg, 500 grams and 250 gms, to sell then to difffernent types of buyers.

(iv) Assorting Middleman build assortment of products for resale. There is usually a difference between the product lines made by the users, for example, a cricket player may need a bat, a ball, wicket, gloves, helmet, a T-shirt, and a pair of shoes.

(v) Product Promotion Mostly advertising and other sales promotion activities are organised by manufacturers.

(vi) Negotiation Channels operate with manufacturers on the other hand and customers on the other Arriving at deals that satisfy both the parties is another important function of the middleman.

(vii) Risk Taking In the process of distribution of goods the merchant middleman take title of the goods and thereby assume risks on account of price and demand fluctuations, spoilage, destruction,etc.

Question 7.
Explain the Major activities involves in the physical . distribution of Products.
Answer:
Physical distribution is the process of reaching the product i to the consumers it encompasses all the activities involved in the physical flow of products from producers to consumer. Physical * distribution creates ‘time’ and ‘place’ utility which maximize the value

of a product “by delivering them to the right customer at the right time and place”. In otherwords, its objectives is to “put the product . within an arm’s length of desire” Physical flow of – (a) Raw Materials

(b) Finished products from the points of origin to the point of use/consumption to meet the customer needs at a profit. Physical distribution may be defined as “a term employed in ‘ manufacturing and commerce to describe the broad range of activities.

Concerned with efficient movement of finished products from the end of production line to the consumer. Recently, physical distribution has been expanded into the broader concept of supply chain management. This modem concept is the heart of today’s market logistics systems.

Deflations
According to W.J. Stanton, “Physical distribution involves the management of the physical flow of products and the establishment and operation of flow system.” .

According to Me Carthy, “Physicdistribution is the actual handling and moving of goods within individual firm and along channel system”.

On the basis of analytical study of above definitions. It can be concluded that physical distribution of goods and services includes all the activities to be performed from the stage of production to the stage of consumers of these goods and services.

Activities of Functions Performed in Physical Distribution ‘ System
Physical distribution process involves co-ordination and integration of many managerial decisons.
(1) Size of Inventory
(2) Warehousing
(3) Transportation „
(4) Material Handling
(5) Size of the order
(6) Procedure to process the order
All six decisions areas are interrelated and interdependent. What is done in one area certainly affects decision-making in other related areas.

(1) Size of Inventory The very decision to be taken by Management of an enterprise in the Management of physical distribution of products is in regards to the size of Inventory.

(2) Warehousing The next decision regarding Physical distribution is the decision on ware housing location. The decision is closely related to the decision on inventroy size.

(3) Transportation :- Decision on modes of transportation largely depends upon the size’of inventories and the location of the storage, so that which are interrelated because economy in transportation charges may increae the storage cost or vice versa.

(4) Material Handling Handling of products is an important function to be performed in the process of management of physical distribution.

(5) Size of the order Size of order is one of the significant factors to be considered. While taking a decision in respect of packaging and means of transportation. Orders of less quantities will increase the cost of handling because the handling process will be done entirely by hand instead of machines.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

(6) Procedure to process the order It is a very important for the management how tjre orders will -be processed. The management must arrange all the physical and human resources of the enterprise in such a manner that the orders received in the enterprise can be processed at the earliest because it increases the goodwill of the enterprise and if helps in increasing the sales of the enterprise.

Question 8.
‘Expenditure on advertising is a social waste’. Do you agree? Discuss.
Answer:
Though there are many advantages of advertising, it cannot be said that there is no disadvantage of advertising and that it is free from critical. The fact is that it has been strongly criticised by many eminent scholars because of many reasons. Some scholars have commented that, “Money spent on advertising is wasteful.

Some other scholars have commented. “Advertising leads to falsehood in Business.” In the light of such strong criticisms, it becomes necessary to analyse the reasons for which it is criticised, Important disadvantages of advertising may be explained as under .

(1) Increase in Price The expenses incurred on advertising are added to the sale price of the product it increases the price of a commodity unduly. Generally, manufactureres spend a lost of money on advertisement, which increase the cost of production.

(2) Increases in Consumer needs It just takes business from one concern and gives, it to another for example, people today are acquainted with the use of soap, paste, telcom powder.

(3) Advertising is not productiveIt is true that the advertising does not produce any tangible goods. But all productive work not necessarily results in tangible goods.

(4) Advertising forces people to desire and buy things which in fact are not with in their means ft is true that advertising arouses interest for buying. But there is no physical force exerted on customers to buy things. ‘

(5) Tendency of MonopolyAdvertising encourages monopoly because almost all the effective media of advertisement are too costly to be afforded by the manufacturers of large scale only which encourages monopoly.

(6) Use of obscene advertisementThe statement, pictures etc. in many cases are offensive, vulgar and immoral.

(7) Social evilCigarattes, biri, wine, etc. are harmful to health. Advertising makes people to buy these, ft affects their health.

(8) False advertisementThere is often superlative description or false description of the product in the advertisement. Every advertiser portrays his product as the best, e.g. ’Number one in India,’ ’Best Product’.

Money spent on Advertisement is not a Waste . It is often said that advertising is a waste. Advertisement increases cost and the money spent on advertisement is fruitless, as such it should be stopped. Advertising has proved its success and effectiveness in enhancing the consumtion and production. Some of the criticism above may be true but not absolutely correct. Following are the arguments advanced against above criticims.

(1) False advertisementMany advertisement; give superflows and false statements claiming their product to be the best. There is exaggeration of real facts. But such products are short lived. Such products soon go out of the market.

(2) Cost of advertising is not a burden upon consumers One of’the strong criticisms against advertising is that the cost of advertisement is added to the cost of production which increase the cost per unit and in this manner proves a burden upon
consumers. Increase in scale of production brings savings as it decreases per unit cost of production.

(3) It does not encourage monopoly Advertising is strongly criticised on the ground that it encourages monopoly but it is also not ture. It creates healthy competitive market for the products.

(4) No wastage of Natural and National resources Some of the critics of the advertising argue that it involves the wastage of natural and national resources. This argument cannot be regarded well as it supported the use of resources for right purpose.

(5) Social evils It is said that advertising is responsible for causing and creating many social evils but it is not absolutely true.

(6) It does not encourage the use of Luxuries The criticism that advertising encourages the use of luxuries is also not very true. The fact is that is makes the new products and their uses known to the consumers which helps in making their selections and in increasing their standard of living.

(7) It does not make the selection difficult Advertising is said to make the selection difficult but the fact is that it helps the consumers in making their selections because with the help of advertisement, consumers can decide what to purchase and from where to purchase.

Question 9.
Distinguish between advertising and personal selling.
Answer:
Advertising
“If you’re trying to persuade people to do something, or buy something it seems to me you should use their language, the language in which they think.” – David o gilvy

“We find that advertising works the way the grass grows, you can never see it but every week you have to mow the lawn”. – Andy Travis

We generally come across hundreds of advertising messages everyday, which tell us about various products such as toilet soaps, detergent powder, soft drinks and services such as hotels, insurance policies, etc. –

The important distinguishing features of advertising are as follows:-
(1) Paid form Advertising is a paid form of communication. That is, the sponsor has to bear the cost of communication with the prospects.
(2) Impersonality There is no direct face to face contact between the prospect and the adviser. It is therefore referred to as impersonal method of promotion.
(3) Identified sponsor Advertisement is undertaken by some Identified Individual or company, who makes the advertising efforts and also bears the cost of it.

Personal selling
“Most people think “Selling” is the same as “Talking”. But the most effective sales people know that listening is the most important part of their job.” -RoyBartell
You don’t close a sale, you open a relationship if you want to build a long term successful enterprise.” – Patricia Fripp

Features of Personal selling

(i) Personal form In personal selling a direct face to face dialogue takes place that involves an interactive relationship between the seller and the buyer.

(ii) Development of Relationship Personal selling allows a sales person to develop personal relationship with the prospective customers, which may become important in making sale.

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

Difference between Advertising and Personal selling
The major differences between advertising and personal selling are as follows
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 9
NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 10

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing 11

NCERT Solutions for Class 12 Business Studies Chapter 11 Marketing

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NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 10 Financial Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Financial Management NCERT Solutions for Class 12 Business Studies Chapter 10

Financial Management Questions and Answers Class 12 Business Studies Chapter 10

Multiple Choice Questions

(i) Primary and Secondary Markets …………
(a) Compete with each other
(b) Complement each other
(c) Function Independently
(d) Control each other
Answer:
(c) Function Independently.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

(ii) Total number of Stock Exchanges in India are
(a) 20
(b) 21
(c) 22
(d) 23
Answer:
(d) 23.

(iii) The settlement cycle in NSE is
(a) T + S
(b) T + 3
(c) T + 2
(d) T + 1
Answer:
(a) T + 5.

(iv) National Stock Exchange of India was recognised as stock exchange in the year
(a) 1992
(b) 1993
(c) 1994
(d) 1995
Answer:
(b) 1993.

(v) NSE commenced future trading in the year
(a) 1999
(b) 2000
(c) 2001
(d) 2002
Answer:
(b) 2000.

(vi) Clearing and settlement operations of NSE is carried out by
(a) NSDL
(b) NSCCL
(c) SBI
(d) CDSL
Answer:
(a) NSDL.

(vii) OTCEI was started on the lines of
(a) NASDAQ
(b) NYSE
(c) NASAQ
(d) NSE .
Answer:
(a) NASDAQ.

(viii) To be listed on OTCEI, the minimum capital requirement for a company is
(a) Rs. 5 crores
(b) Rs. 3 crores
(c) Rs. 6 crores
(d) Rs. 1 crores.
Answer:
(b) Rs. 3 Crores

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

(ix) Treasury Bills are basically
(a) An intrument to borrow short term funds
(b) An instrument to borrow long term funds
(c) An instrument of Capital market
(d) None of the above.
Answer:
(a) An intrument to borrow short term funds.

(x) REPO is ………..
(a) Repurchase Agreement
(b) Reliance Petroleum
(c) Read and Process
(d) None of the above.
Answer:
(a) Repurchase Agreement.

Short Answer Type Questions

Question 1.
What are the functions of financial markets?
Answer:
Financial markets play an important role in the allocation of scare resources in an economy by performing the following four important functions.
(1) Mobilization of savings and channeling them into the most productive uses : A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.

(2) Facilitate price discovery : We all know that the forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.

(3) Provide liquidity to financial assets : Financial markets facilitate easy purchase and sale of financial , assets. In doing so they provide liquidity to financial assets, so that ‘ they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.

(4) Reduce the cost of transactions : Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend 😮 try and find each other. The financial market is thus a common platform where buyers and sellers can meet for fulfillment of their individual needs.

Question 2.
“Money Market is essentially Market for short terms funds”. Discuss.
Answer:
Money Market : The money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded everyday.

It has no physical location but is an activity conducted over the telephone and through the internet. It by selling a security “held on a spot (scady) basis and repurchasingthe same on a forward basis. Reverse repo is a mirror image of repo as in the case of former, securities are acquired with a simultaneous commitment to resell.

Subsequent to the irregularities in securities transaction, repos were initially allowed in the Central Government. Treasury billstand dated securities created by converting some of the treasury bills. In order to activate the repos market essentially to be an equilibrating .

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

force between the money market and the government securities market, the Reserve bank gradually extended repos facilities to all central government dated securities and treasury bills of all maturities. Recently, while the state government securities were made eligible for repos, the Reserve Bank also allowed all non-banking entities with its Mumbai office, to undertake repos (including revenue ‘ repos). Furthermore, it has been decided to make PSU bonds and private corporate securities eligible for repos to broaden the repos market.

The Reserve Bank also undertakes repo-reverse repo operations with PDs and scheduled Commercial Banks, as part of its open market operations. It also provides liquidity support to SDs and 100 percent gilt mutual funds through reverse repos. There is no limit on the tenure of repos.

The Reserve bank initially conducted repo operations for a period of 14 days. Since November 1996, the Reserve Bank has been conducting 3-4 days repo auctions, synchronizing with working day and weekend liquidity conditions, in order to modulate short-term liquidity. With the introduction of liquidity Adjustment Facility (LAF) from June 5,2000. the Reserve Bank has been injecting liquidity into the system through reverse rgpos and absorbing liquidity from the system through repos on a dally basis.

These operations are conducted on all- working days except on Saturdays, through uniform price auctions and are restricted to scheduled Commercial Banks and PDs.  This is apart from the liquidity support extended by the Reserve Bank to PDs through refinance/reverse repo facility at a fixed price. Repos have often been used to provide banks an avenue to part funds

generated by capital inflows to provide a floor to the call money market. During times of foreign exchange market volatility, repos have been used to prevent speculative activity as the funds tend to flow from the money market to the foreign exchange market, for instance, a fixed rate repo auction system was instituted in November 1997 with a view to ensuring an effective floor for the short-term interest rates in order to ward off the spread of contagion during the South-East Asian crisis. The repo rates were reduced with the return of capital flows, which imported stability to the foreign exchange market.

Question 3.
Distinguish between Capital Market and Money market.
Answer:
Distinction between Capital Market and Money Market:-
Both the money market and the capital market are the centres which arrange for the transfer of funds from the suppliers of funds to the users of funds. They differ, however, in regard to the maturity periods of the financial assets created and dealt with you effecting the transfer of funds. Money market arranges for short term and capital market provides for medum to long term funds. The time length in respect of short term funds is less than and upto one year.

Question 4.
What are the functions of Stock Exchange?
Answer:
Stock Exchange : A stock exchange is an institution whiclrprovides a platform for buying and selling of existing securities. As a market, the stock exchange facilitates the exchange of a security (share, debenture etc.) into money and vice-versa. Stock exchanges help companies raise finance, provide liquidity and safety of investment to the investors and enhance the credit worthiness of individual companies.

Meaning of Stock Exchange
According to Securities Contacts (Regulation) Act 1956, Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities.

Functions of a Stock Exchange : The efficient functioning of a Stock Exchange creates a conducive climate for an active and growing primary market for new issues. An active and healthy secondary market in existing securities leads to positive environment among investors.

The following are some of the important functions of a stock exchange.
1. Providing Liquidity and Marketability to Existing Securities : The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to invest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.

2. Pricing of Securities : Shares prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.

3. Safety of Transaction : The membership of a stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal on the market.

4. Contributes to Economic Growth : A stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth.

5. Spreading of equity cult : The stock exchange can play a vital rote in ensuring wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.

6. Providing scope for speculation : The stock exchange provides sufficient scope within the provision of low for speculative activity in a restricted and controlled manner. It is generally accepted that a certain degree of healthy speculation is necessary to ensure liquidity and price continuity in the stock market.

Question 5.
What are the objectives of SEBI.
Answer:
The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market. Following are tHe objectives of SEBI
(1) To regulate stock exchanges and the securities industry to promote their orderly functioning.
(2) To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
(3) To prevent trading malpractices and ach ieve a balance between self-regulation by the securities industry and its statutory regulation.
(4) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc. with a view to making them competitive and professional.

Question 6.
What are the objectives of NSE?
Answer:
Objectives of NSE
NSE was set up with the following objectives
(a) Establishing a nation wide trading facility for all types of securities.
(b) Ensuring equal access to investors all over the country through an appropriate communication network.
(c) Providing a fair, efficient and transparent securities market using electronic trading system.
(d) Enabling shorter settlement cycles and book entry settlements.
(e) Meeting international benchmarks and standards.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

Within a span of ten years, NSE has been able to achieve its objectives for which it was setup. It has been playing a leading role as a change agent in transforming the Indian capital market. NSE has been able to take the stock market to the door step of the investors.

It has ensured that technology has been harnessed to deliver the services to the investors across the country at the lower cost. It has provided a nation wide screen based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location.

Question 7.
What is OTCEI?
Answer:
Over The Counter Exchange of India (OTCEI) : The OTCEI is a company incorporated under the Companies Act 1956. It was setup to provide small and medium companies an access to the capital market for raising finance is a cost effective manner. It was also meant to provide investors with a convenient, transparent and efficient avenue for capital market investment.

It is fully computerized, transparent, single window exchange which commenced tracing in 1992. This exchange is established on the lines of NASDAQ (National Association of Securities Dealers Automated Quotations) the OTC exchange in USA. It has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Capital markets and can Bank
Financial Services.

Over the counter market may be defined as a place where buyers seek sellers and vice versa and then attempt to arrange terms and conditions for purchase/sale acceptable to both the parties. It is a negotiated market place that exists anywhere as apposed to the auction market place, represented by the activity on securities exchanges.

Thus in the OTC exchange, trading takes place when a buyer or seller walks up to an OTCEI counter, taps on the computer screen, finds quotes and effects a purchase or sale depending on whether the prices meet their targets. There is no particular market place in the geographical sense.

The objectives of OTCEI are to provide quicker liquidity to securities at a fixed and fair price, liquidity for less traded securities or that of small companies, a simplified process of buying and selling and easy and cheaper means of market, public sale of new issue.

Advantages of OTCI Market
(1) It provides a trading platform to smaller and less liquid companies as they are not eligible for listing on a regular exchange.
(2) It is a cost effective method for corporates as there js a lower cost of new issues and lower expenses of servicing the investors.
(3) Family concerns and closely hold companies can go public through OTC.
(4) Dealers can operate both in new issues and secondary market at their option.
(5) It gives greater freedom of choice to investors to choose stocks by dealers for market making in both primary and secondary markets.
(6) It is a transparent system of trading with no problem of bad or short deliveries.
(7) Information flows are free and more direct from market makers to customers since there is close contact between them.

Long Answer Type Questions

Question 1.
Explain the various Money Market Instruments?
(a) Commercial Paper : Commercial paper is a short term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is used by large and creditworth companies to raise short term funds at lower rates of interest than market rates.

It usually has a maturity period of 15 days to one year. The insurance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. It is sold at a discount and reedeemed at par.

The original purpose of commercial paper was to provide short terms funds for seasonal and working capital needs. For example companies use this instruments for purposes such as bridge financing Example Suppose a company needs long term finance to buy some machinery.

In order to raise the long term funds in the capital market the company will have to incur floatation costs (costs assciated with floating of an issue such as are brokerage, commission, printing of applications and advertising etc.). Funds raised through commercial paper are used to meet the floatation costs. This is known as Bridge Financing.

(b) Call Money : Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash reserve ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks.

Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate. It is a highly volatile rate that varies from day to day and sometimes even from hour to hour.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

There is an inverse relationship between call rates “and Other short term money market instruments such as certificates of deposit and commercial paper. A rise in call money rates makes other sources of finance such as commercial paper and certificates of deposit cheaper in comparision for banks raise funds from these sources.

(c) Certificate of Deposit : Certificate of deposit are unsecured, negotiable short term instruments in bearer form, issued by commercial banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilize a large amount of money for short periods.

(d) Commercial Bills : A commercial bill is a bill of exchanges used to finance the working capital requirements of business firms. It is a short term, negotiable, self liquidating instrument which is used to finance the credit sales of firms. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future.

The seller could wait till the specified date or make use of bill of exchange. The seller of the goods draws the bill and the buyer accepts it. On being accepted, the bill becomes a marketable instrument and is called a trade bill. These bills can be discounted with a bank if the seller needs funds before the bill matures. When a trade bill its accepted by a commercial bank it is known as the commercial bill.

Question 2.
What are the methods of floatation in Primary Market?
Answer:
The primary market is also known as the new issue market. It deals with new securities being issued for the first time. The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time.

The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. A company can raise capital through the primary market in the form of equity shares, preference shares debenture, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, modernization of existing projects, merges and takeovers etc.

Methods of Floatation

These are various methods of floating new issues in the primary market

(a) Offer Through Prospectus : Offer through prospectus is the most popular method of raising funds by public companies in the primary market. This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazine.

The issues may be underwritten and also are required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provision of the Companies Act and SEBI disclosure and investor protection guidelines.

(b) Offer for Sale : Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enblock at an agreed price to brokers who, in turn, resell them to the investing public.

(c) Private Placement : Private placement is the allotment of securities by a company to intitutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market . can be expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore cannot afford a public issue and choose to use private placement.

(d) Rights Issue : “B is is a privilege given to existing shareholders to subscribe to a new’issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.

(e) E-IPOs : A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. SEBI registered brokers have to be appointed for the purpose of accepting applications and placement orders with the company.

The issuer company should also appointed a registrar to the issue having electronic connectivity with the exchange. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities. The lead manager coordinates all the activities amongst intermediaries connected with the issue.

Question 3.
Explain the Capital Market reforms in India’.
Answer:
Recent Capital Market Reforms : Policy initiative and Developments : The Indian capital market which has a long history spanningwer 100 years, is currently passing through the most radical phase. Although the Indian Capital market witnessed some significant changes during the eighties, both the primary and the secondary segment – continued to suffer from some serious deficiencies.

Many unhealthy practices prevailed in the primary market to attract the retail investors. Another disturbing features was the high cost of new issues. Although over the years, a number of agencies came into existence offering different types of services in connection with the new issues of capital, their activities were not overseen by any regulatory authorities.

The problem were even more serious in the secondary market, the general functioning of stock exchange was not satisfactory. The exchanges were governed by their internal buy laws and managed by their govering bodies, which were dominated by elected member brokers.

Trading members were also not adequately capitalised. Indian trading was rampant and was one of the major causes of excessive speculative activity, leading to default by stock brokers, frequent payment crises and disruption of market activity. The stock exchanges followed inefficient and outdated trading systems. This,,in turn, led to lack of transparency in trading operations, besides resulting in long and uncertain settlement cycles.

The risk management system in the market was also not satisfactory. Though the margin system was operative, the margins were inadequate and the system of collection of margins was not enforced strictly. Post-trade settlement procedure also suffered from some serious drawbacks, such as, high share of bad deliveries, delayed settlements, same times clubbing of settlements, etc. The procedures relating to investors protection were also not satisfactory.

Some measures were initiated to reform the capital market in the’90’s. .
Primary Market Developments
(i) The freedom to issue debt security without listing equity, hitherto granted to infrastructure companies and municipal corporation, has been extented to all companies. This is subject to certain conditions issues below Rs. 100 crore shall carry an investment grade creditrating; issues above Rs. 100 crore shall carry an investment grade credit rating from two credit rating agencies, the issuer shall company with the provisions of Rule 19(2)

(b) of the Securities Contracts (regulation) Act (SCRA), 1956 regarding the size of the public offer, and the promotors shall bring in the equity contribution of 20 per cent and lock in the same for three years.

(ii) The SEB1 : DIP (Disclosure and Investor Protection) guidelines, 2000 were amended. The main provisions include: Permission to foreign venture capital investors (FVCIs) registered with SEBI and State Industrial Development Corporation to participate in public issues through the book building route as qualified Institutional Buyers (QIBs); no lock-in requirements for the pre-issue share capital of an unlisted company held by venture capital funds (VCFs) and FVCIs; removal of exemption for public offer requirement in view of reduction in quantium from 25 per cent to 10 per cent and removal of the restriction of a minimum public issue size of Rs. 25 crore in respect of a IPO through the book building route.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

(iii) Since a substantial proportion of the non-SLR securities are issued via the private placement market. RBI issued guidelines to banks in June 2001, which relate, inter alia, to prudential limits on investments, due diligence, and internal ratings in respect of unrated issues.

Further guidelines are proposed to be issued by RBI with a view to strengthening the internal rating system, fixing sub-limits for privately placed securities, and diselosoures regarding issuer composition and non-performing assets.

Secondary Market Developments
(i) SEBI notified the SEBI (investment advice by intermediatiaries) (Amendment) Regulation 2001. The main provisions are appointment of a compliance officer by market intermediaries (like Bankers to an issue, Credit Rating Agencies, Debenture trustees, stock brokers and mutual funds) to independently report to SEBI on non-compliance with rules/regulatioris issued by Government and regulators and restrictions on investment advice by intermediaries and their employees on any security in the publicity accessible media.

(ii) Government constituted a National Advisory Committee on accounting standard to be adopted by the companies under the Companies Act.

(iii) All scripts include intheALBM/BLESS or MCFS in any stock exchange or in the BSE 200 list were brought under rolling settlement with effect from july 2,2001. This raised the total number of scripts under rolling settlement to 414. The remaining securities have come under rolling settlement with effect from December 31,2001.

(iv) With effect from March 8,2001 all sales transaction were to be backed by delivery unless the sale transaction was preceded by a purchase position of at least an equivalent amount in the name of the same client in the same or any other exchange. This was applicable to proprietery trading by member.

(v) Restrictions on short sales were withdrawn with effect from July 2,2001.

(vi) Stock exchanges were allowed (subject to conditions) to use the Settlement Guarantee funds (SGFs) for meeting shortfalls caused by non-fulfillment/partial fulfillment of obligations by members before declaring them defaulters.
SEBI’s group on Risk Management for equity Market discussed the issues concening risk management is rolling settlement and based on the discussion, SEBI took the following decisions.

For the newly added 266 scrips, including the 15 scrips under deferral products, the stock exchange will calculate scrip-wise var and index-based var and will apply the higher or the two as the margin percentage. For the 148 scrips already in the rolling settlement, the margin is 3 timed the daily index VaR.

The minimum daily index VaR has been fixed at 5 percent of the cases, an additional margin has been prescribed to address the 1 percent of the cases, and this has been fixed at 12 percent based on the historical data of individual stock VaRs.

(vii) Government amended the securities contracts (Kejulation Rules, 1957 to standardise listing requirements tin stock exchanges. The main provisions are : a public company seeking listing of its securities in a stock exchange is required to satisfy the exchange that the lest 10 percent of each class-kind of Securities issued by it was offered to the public or subcription through advertisement in newspapers for a period of not less than two days and applicants in pursuance of such offers were allotted securities.

This requirement is subject to the following conditions minimum 20 lakh securities (excluding reservation, firm allotment, and promoters’ contribution) was offered to the public; the size of the offer to the public (offer price multiplied by number of securities offered to the public) was a minimum Rs. 100 crore; and the issue was made only through the book-building route with allocation of 60 percent of issue size to the qualified institutional buyers as specified by SEBI/ If a company is unable to fulfill the above conditions it has to satisfy the exchange that atleast 25 percent of each class-kind of securities issued by it was offered to the public for subscription through advertisement in newspapers for a period of not less than two days and that the applications in pursuances of such offer were alloted securities.

Question 4.
Explain the objectives and functions of SEBI?
Answer:
Securities and Exchange Board of India (SEBI) : The Securities and Exchange Board of India was established by the Government of India on 12th April, 1988 as an interim administrative body to promote orderly and healthy growth of securities market and for investor protection.

It was to function under the overall administrative control of the Ministry of Finance of the Government of India.The SEBI was given a statutory status on 30th January, 1992 through an ordinance. The ordinance was later replaced by an Act of Parliament known as the Securities and Exchange Boards of India Act, 1992.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

Reasons for The Establishment of SEBI

The capital market has witnessed a tremendous growth during 1980’s characterized particularly by the increasing participation of the public. This ever expanding investors population and market capitalization led to a variety of malpractices on the part of companies, brokers, merchant bankers, investment consultants and others involved in the securities market.

The glaring examples of these malpractices include existence of self-styled merchant bankers unofficial private placements, rigging of prices, unofficial premium on new issue, non-adherence of provisions of the Companies Act, violation of rules and regulations of stock exchanges and listing requirements, delay in . deliveryof shares etc.

These malpractices and unfair trading practices have eroded investor confidence and multiplied investor grievances. The government and the stock exchanges were rather helpless in redressing the investor’s problems because of lack of proper penal provisions in the existing legislation. In view of the above, the government of India decided to set up a separate regulatory body known as Securities and Exchange Board of India.

Purpose and Role of SEBI :
The basic purpose of SEBF is to create an environment to facilitate efficient mobilization and allocation of resources through the securities markets. It also aims to stimulate competition and encourage innovation. This environment includes rules and regulations, institutions and their inter relationships, instruments, practices, infrastructure and policy framework.
This environment aims at meeting the needs of’the three groups which basically constitute the market, viz, the issues of securities, the investor and the market intermediaries.

  • To the issuers, it aims to provide a market place in which they can confidently look forward to raising finances they need in an easy, fair and efficient manner.
  • To the investors, it should provide protection of their rights and interests through adequate, accurate and authentic information and disclosure of information on a continuous basis.
  • To the intermediaries, it should offer a competitive, professionalized and expanding market with adequate and efficient infrastructures so that they are able to render better service to the investor and issuers.

Objectives of SEBI
The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market.

This may be elaborated as follows
(1) To regulate stock exchanges and the securities industry to promote their orderly functioning.
(2) To protect the rights and interests of investors, particularly individual investor’s and to guide and educate them.
(3) To prevent trading malpractices and achieve a balance between self regulation by the securities industry and its statutory regulation.
(4) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc, with a view to making them competitive and professional.

Functions of SEBI
Keeping in mind the emerging nature of the securities market in India SEBI was entrusted with the twin task of both regulation and development of the securities market.

Regulatory functions
(1) Registration of brokers and sub-brokers and other players in the market.
(2) Registration of collective investment schemes and mutual funds.
(3) Regulation of stocks Bankers and portfolio exchanges, and merchant bankers.
(4) Prohibiton of fraudulent and unfair trade practices.
(5) Controlling insider trading and takeover bids and imposing penalties for such practices.
(6) Calling for information by undertaking inspection, conducting enquires and audits of stock exchanges and intermediaries.
(7) Levying fee or other charges for carrying out the purpose of the Act.
(8) Performing and exercising such power under SCR Act 1956, as may be delegated by the Government of India.

Development functions
(1) Investor education
(2) Training of intermediaries.
(3) Promotion of fair practices and code of conduct of all SRO’s.
(4) Conducting research and publishing information useful to all market participants.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

Question 5.
Explain the various segments of NSE.
Answer:
National Stock Exchange of India (NSE) : The National Stock Exchange is the latest, most modern and technology driven exchange. It was incorporated in 1992 and was recognized as a stock exchange in April 1993. It started operations in
1994, was trading on the wholesale debt market segment.

Subsequently, it launched the capital market segment in November 1994 as a trading platform for equities and the futures and options segment in June 2000 for various dervative instruments. NSE has set up a nationwide fully automated screen based trading system.

The NSE was set up by leading financial institutions, bank, insurance companies and Other financial intermediaries, it is managed by professionals, who do not directly or indirectly trade on the exchange.

The trading rights are with the trading members who offer their services to the investors. The board of NSE comprises of senior executives from promotor institutions and eminent professional, without having any representation from trading members.

Market Segments of NSE

The exchange provides trading in the following three segments

Whole Sale Debt Market Segment: This segment provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bills, state development loans, bonds issued by public sector undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial paper, certificate of deposit corporate debentures and mutual funds.

Capital Market Segment: The capital-market segment of NSE provides an efficient and transparent platform for trading in equity, preference, debentures, exchange traded funds as well as retail government securities. O Futures and options segment.

Projects and Assignments

Question 1.
Collect the information about the companies that have mobilised resources through primay market.
Answer:
As suggested, the students are required to collect various informations about the companies to mobilised resources through primary market. For their convenience a brief introduction regarding primary market and dealing in it is hereby give. Primary market is that market in which shares, debentures and other securities are sold for the first time for collecting long term capital. Market is mainly concerned with new issue of capital through Initial Public Offer (IPO).

Question 2.
Collect the information on various measures taken by – SEBI to protect the interests of investors since its inception.
Answer:
In order to answer this question, students are advised to read in detail the SEBI and its objectives and functions. Briefly mentioning, the main functions of SEBI to protect the interests of investors are the followings

(1) to check unfair trade practices like supply of misleading statements to investor.
(2) to check the insiders role in trading in securities i.e; role of Directors, promotors etc. who have secret information about the company may not take the advantages of such information.
(3) to provide education to investor relating to dealing in securities.

Question 3.
Send a group of students to a trading terminal in your city to gain first hand information on securities trading and prepare a report.
Answer:
As mentioned in the question, kindly form a group of 4-5 students in order to get first hand information from nearby Securities Exchange or a terminal dealing in such securities and prepare a report.

Question 4.
Collect date abou the movements in SENSEX and NIFTY during the last one month. Find out whether the two move in same or opposite direction.
Answer:
SENSEX and NIFTY are the indices of stock exchange which provides information on the trend of shares and securities in a market. The students may consult the web-site or viewed T.V. channels like ‘ CNBC, Profit etc to update the movement in SENSEX and NIFTY and compare the data so collected,

Question 5.
Collect information about SEBI action for Investor Protection taken during last two years.
Answer:
The students are advised to visit the Stock-Exchange located nearby to your city along with the teacher and collect the various literature available there on these topics. The students may also make a habit to check the newspapers daily (specifically business pages) in order to obtain the requisite informations.

Question 6.
Collect information about e-IPO’s in the Indian Market in the last one year.
Answer:
Students may obtain information with the help of web-sites, the informations about e-IPO (electronic initial public offer) with the help of internet.

Try and solve this crossword
NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market 1
Clues to the Crossword Across
1. Commission Agent who transacts in securities on behalf of
non members or members (6).
2. Changes in the price of securities in the stock market. (12)
3. Inclusion of securities in the official trade list of securities in stock market. (7)
4. Place of trade I securities. (6)
5. Result of selling shares at a price loyer than the purchase price. (4)
6. An independent dealer in securities (6)
7. Includes-shares, scripts, bonds, debentures (10)
8. Speculator who expects the prices to go down (4)
9. Buying and selling of securities to manipulate the market (7)
10. Speculator who deals in new securities only (4)
Down
1. Speculator expecting a rise in the prices. (4)
2. Means ‘with’ (3)
3. Means a part or fraction of capital (6)
4. Fraction of profit paid to govt. (3)
5. Illegal, game based on chance (8)
6. Official statement of securities- in the stock market (5)
7. Those who buy and sell securities with objective of profit (10)
8. Money invested in business (7)
9. Return on shares out of profits. (8)
10. Instrument acknowledging a debt (9)
11. Govt, document acknowledging a debt (5)
12. Profit or yield (4)
Answers to the crossword
Across
1. Broker
2. Fluctuations
4. Listing
8. Market
9. Loss
13.Jobber
15. Securities
16. Bear
17. Rigging
18. Stag

Down
1. Bull
3. Cum
5. Stocks
6. Tax
7. Gambling
9. Lists
10. Speculator
11. Capital
12. Dividend
14. Debenture
16. Bonds
19. Gain.

Case Problem -1

‘R’ Limited is a real estate company which was formed in 1950. In about 56 years of its existence the company has managed to carve out a niche for itself in this sector. Lately this sector in witnessing a boom due to the fact that the Indian economy is on the rise. The incomes of middle class are rising. More people can afford to buy homes for themselves due to easy availability of loans and accompanying tax concessions.

To expand its business in India and abroad the company is weighing various options to raise money through equity offerings in India. Whether to tap equity or debt, market whether to raize money from domestic market or international market or combination of both? Whether to raize the necessary finance form money market or capital market.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

It is also planning to list itself in New York Stock exchange to raise money through ADR’S. To make its offerings attractive it is planning to offer host of financial plans products to its stakeholders and investors and also expand it’s listing at NSE after complying with the regulations of SEBI.

Question 1.
What benefits will the company derive from listing at NSE?
Answer:
In the above case, Company ‘R’ Limited a real estate company in order to expand its business and options to raise money through equity offering must registered itself with NSE (National Stock exchange of India) With the help of NSE, Company enjoyed various benefits as under
(1) Placing the order for buying and selling of securities by the investor.
(2) Accepting the order after matching process completed with the help of computer which provides a list on the computer screen. This information tells at what rate, time and with what party one’s order has been transacted.
(3) Delivery and payment are also made with the help of NSE after the transactions has been settled.

Question 2.
What are the regulations of SEBI that the company must comply with ?
Answer:
SEBI (Securities and Exchange Board of India) made certain regulations which the company should complied with
(1) to register brokers, sub-brokers, transfer-agents merchant banks, underwriters etc.
(2) to register and regulate credit rating agency.
(3) to register and regulate venture capital fund.
(4) to carry out audit of the share markets.
(5) to publish different kinds of information for the convenience of all the parties operating in the capital market.

Question 3.
How does the SEBI exercise control over ‘R’ Limited in f the interest of investors?
Answer:
In the case of’R’ Limited, SEBI can control over brokers, sub-brokers and agents by keeping an eye on the activities of such middlemen. r Another important step to be taken is the transparency in transactions by the company which increases the confidence of investors. SEBI may alsocheck that the company should not delay transfers, and-ensure timely , payment of interest and dividend to investors.

Case Problem – II NSE Indices
NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market 2

Last updated Mar 14,2007, 12:00:00 hours 1ST (Source – www.nesindia.com on 14th march 2007 at 10.50 PM)
The above figures are taken from the website of national stock exchange of India. They illustrate the movement ofNSE stock indices as well as world stock indices on the date indicated.

Question 1.
What do you mean by a stock index? How is it calculated?
Answer:
Case problem clearly mentioned that students themselves with the help of teacher solve these questions. They may visit the websites to collect the relevant material and make themselves understable regarding the stock market. A brief answer of the above questions for the convenience of students are hereby given.

A stock index is a barometer of market behaviour. It measures overall market seniment through a set of stocks that are representative of all the market. It reflects market direction and indicates day-to-day fluctuations in stock prices. It is calculated on the basis of net assest method, Earning capacity method or dividend yield method of company’s assest and profits available in a current year.

Question 2.
What conclusions can you draw from the various movements of NSE stock indices?
Answer:
NSE has been playing a leading role as a change agent in Indian capital market. It has ensured that technology has been harnessed to deliver the services to the investors across the country at the lowest cost. It has provided a nation wide screen based automatic trading system with a high degree of transparency and equal access to investor irrespective of the locations are certain concluding factors for the success of NSE stock indices movements.

Question 3.
What factors affect the movement of stock indices? Elaborate on the nature of these factors.
Answer:
Various factors like savings, forces of demand and supply in commodity or service market, likely suppliers of funds and users of fund are the household and firms in the financial market, liquidity of financial assests and cost of transactions are the factors responsible for movement of stock indices. An ideal market is one where finance is available at reasonable cost.

Question 4.
What relationship do you see between the movement of indices in world markets and NSE indices?
Answer:
With the help of internet or electronic trading system adopted by NSE provides a fair, efficient and transparent securities transactions. The gap between Indian stock market and international stock indices are bridged by NSE. NSE is meeting international benchmarks and standards which makes, the indices of both Indian and international securities are almost equal with a slight movement due to differences in exchange rates.

Question 5.
Give details of all the indices mentioned above. You can -> find information on the web or business magazines.
Answer:
As per mentioned in the questions students are advised to visit the Website or Consult business magazines like “Business Today” “Business Management,” “Economic Review” etc.

(The teacher should help the students in answering these questions. They can look at the website mentioned above and also website of SEBI i.e. www.sebi.gov.in for educational material. This exercise will help the students in understanding the sock markets clearly and also create interest therein.)

Project Work

Question 1.
Study the website of Mumbai Stock exchange i.e. www.besindia.com and compile information which you find useful. Discuss it in your class and find out how it can help you should you decide to invest in the stock market. Prepare a report on your findings with the help of your teacher.
Answer:
The students are advised to download the data from web¬site mentioned on the problem, i.e. www.bseindia.com. Such informations will help the students to gain know ledge about the trends and growth of various securities in the market, which will help in selecting the investment opportunities. A regular and frequent visit to website will provide current overview of the market.

Question 2.
Prepare a report on the role of SEBI in regulating the Indian stock market. You can get this information on its website namely www.sei.gov.in. Do you think something else should be done to increase the number of investors in the stock market?
Answer:
Again in order to overcome the problem, students should visit another Website i.e. www.sebi.gov.in to collect various informations regarding the role of SEBI and proposed amendments helpful to regulate the Indian Stock Market in a more comprehensive and lucid manlier.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market

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NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 9 Financial Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Financial Management NCERT Solutions for Class 12 Business Studies Chapter 9

Financial Management Questions and Answers Class 12 Business Studies Chapter 9

Question 1.
The cheapest sources of finance is ………….
(a) debentures
(b) equity share capital
(c) preference share
(d) reterised earning
Answer:
(a) Debentures.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Question 2.
A decision to acquire a new and modern plant to upgrade an old one is a ……..
(a) financing decision
(b) working capital decision
(c) investment decision
(d) dividend decision
Answer:
(c) Investment Decision.

Question 3.
Other things remaining the same, as increase in the tax rate on corporate profits will
(a) make debt relatively cheaper
(b) make debt relatively less cheap home
(c) No impact on the cost of debt
(d) We can’t say
Answer:
(a) Make debt relatively cheaper.

Question 4.
Companies with higher growth paternal are likely to ………..
(a) pay lower dividends
(b) pay higher dividends
(c) dividends are not affected by growth considerations
(d) none of the above
Answer:
(b) Pay higher dividends.

Question 5.
Financial leverage is called favorable if ………..
(a) Return of Investment is lower than cost of debt
(b) ROI is higher than cost of debt
(c) Debt is nearly available
(d) If the degree of existing financial leverage is low
Answer:
(b) ROI is higher than cost of debt.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Question 6.
Higher debt equity ratio Equity results in
(a) lower financial risk
(b) higher degree of operating risk
(c) higher degree of financial risk
(d) higher EPS
Answer:
(a) Lower financial risk.

Question 7.
Higher working capital usually results in
(a) higher current ratio, higher risk and higher profits
(b) lower current ratio, higher risk and profits
(c) higher equitably, lower risk and lower profits
(d) lower equitably, lower risk and higher profits
Answer:
(a) Higher current ratio, higher risk and higher profits.

Question 8.
Current assets are those assets which get converted into cash
(a) within six month
(b) within one year
(c) between one and three year
(d) between three and five year
Answer:
(b) Within one year.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Question 9.
Financial planning arrives at
(a) minimising the external borrowing by resorting the equity issues
(b) entering that the firm always have sinthicicanlty more fund than required so that there is no pugnacity of funds
(c) ensuring that the firm paces neither a shortage nor a glut of unusable funds
(d) doing only what is possible with the funds that the firms has at its disposal
Answer:
(c) Ensuring that the firm paces neither a shortage nor a glut of unusable funds.

Question 10.
Higher dividends per share is associated with
(a) high earnings, high cash flows, unusable earnings and higher growth opportunities
(b) high earnings, high cash flows, stable earnings and lower high growth opportunities.
(c) high earnings, high cash flows, stable earnings and lower growth opportunities.
(d) high earnings, low cash flows, stable earnings and lower growth opportunities.
Answer:
(b) high earnings, high cash flows, stable earnings and lower high growth opportunities.

Question 11.
A fixed asset should be financed through
(a) a long term liability
(b) a short term liability
(c) a mix of long and short term liabilities
Answer:
(a) A long term liability.

Question 12.
Current assets of a business firm should’be finance through
(a) Current liability only
(b) long term liability only .
(c) party from both types i.e. long and short term liabilities
Answer:
(c) Party from both types i.e. long and short term liabilities.

Short Answer Type Questions

Question 1.
What is meant by capital structure ?
Answer:
Meaning of capital structure : The term’capital structure’refers to the proportion between the various long term sources of finance in the total capital of the firm.

The major sources of long term finance include ‘Proprietor’s Funds’ and ‘Borrowed Funds’. Proprietors Funds include equity capital, preference capital, and reserves and surpluses (i.e., retained earnings) and Borrowed funds include long term debts such as loans from financial institutions, debentures etc. In the capital structure decisions, it is determined as to what should be the proportion of each of the above sources of finance in the total capital of the firm.

In other words, how much finance is to be raised from each of these sources. These sources differ from each other in term of risk and their Cost to the enterprise. Some sources are less costly but more risky wheres others are more costly but less risky. To illustrate, debentures are least costly source of finance (because rate of interest is usually lower than the rate of dividend and interest paid on debentures is deducted from profits while calculating the tax) but these are most risky

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

(because it involves a burden to pay the interest irrespective of the profits earned by the company and the debenture ’ holders can move to the court to recover the interest and the principal amount. On the other hand, equity share capital is the most costlier ” source of finance (as return expected by equity share holders is greater than the interest on debentures and the dividend on preference share) but these are least risky (as there is no fixed commitment to i, pay dividend and the return of equity capital).

Preference share capital lies between debentures and equity capital in terms of risk and cost.
While choosing the source of finance a financial manager makes f an attempt to ensure that risk as well as cost of capital is minimum. For this purpose he has to answer the following questions.

  • How much amount should be raised through issue of equity?
  • How much amount should be raised through issue of perference share capital?
  • How much amount should be raised through debentures and, other long term debts?

While deciding the proportion of finance raised from’various sources, the financial manager weighs the pros and cons of various sources of finance and select the most advantageous source. The selection also depends on various internal and external factors and hence the pattern of capital structure can be different among different businesses and also among the different companies in the same business.

Question 2.
Discuss the two objectives of financial planning.
Answer:
Financial planning is an important function of plan financial management. This function has to be performed whether the business is big or small. Similarly, a new as well as an existing business must perform this’function very carefully because it is concerned with the procurement and effective utilisation of funds. A carefully prepared financial plan will not only ensure the economical and sufficient procurement of funds but their proper utilisation also.

Meaning of Financial Planning.

Different authors have different views about the meaning of financial planning. These views can be classified into two groups.
(i) Narrow concept of financial planning and
(ii) Broader concept of financial planning
(i) Narrow concept of Financial Planning
In the narrow concept, there are two views : According to first view, some authors are of the opinion that financial planning means estimating or forecasting the financial requirements of the business. According to second view, some other authors are of the opinion that financial planning means determining the capital structure of the business.

According to the supporters of second view, financial planning is related to capital structure, i.e. determining the proportion in which the funds are to be raised by various sources such as equity shares, preference shares, debentures etc.

Both of these views are considered faulty because the first view emphasises only the estimation of financial requirements but ignores the determination of capital structure whereas the second view ignores the estimation of financial requirements.

(ii) Broader concept of Financial Planning : In the broader concept, financial planning means estimation of financial requirements and the determination of capital structure. According to this concept, the following activities may be induded in the term financial planning.

  • Estimating the financial requirements of the business.
  • Determination of capital structure, i.e. the determination of the proportion in which finance will be raised from various sources of finance.
  • To establish the policies to be pursued for the flotation of various securities.
  • To-establish and maintain a system of financial control governing the allocation and utilisation of funds.

Walker and Baughn also view the financial planning in a broader concept, According to them :
“Financial planning pertains to the function of finance and includes the determination of the firms’ financial objectives, financial policies and financial procedures.” – Walker and Baughn

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Objective of Financial Planning
Following are the main objectives of financial planning :

  • To provide adequate funds to the business. Neither the funds should be short nor, in excess of the needs of business.
  • To raise the funds in a manner that the cost of capital is minimum.
  • To ensure flexibility in capital structure so that changes in the sources of funds may be made according to the changing conditions.
  • To ensure simplicity in the capital structure.
  • To ensure sufficient liquidity of funds.

All of these objectives should be kept in mind while preparing a financial plan. However, which objective is to be given more importance and which objective is to be considered less important depends upon the actual circumstances prevailing at the time of preparing the financial plan. Also, necessary changes are made in the financial plan according to the change in circumstances.

Question 3.
What is ‘Financial Risk?’ Why does it arise?
Answer:
Risk consideration : Financial risk refers to a position when a company is unable to meet its fixed financial charges namely interest payment, preference dividend and repayment obligation. Apart from the financial risk, every business has some operating risk, (also called business risk).

Business risk depends upon fixed operating costs. Higher fixed operating costs result in higher business risk and vice- versa. The total risk depends upon both the business risk and the financial risk. If firm’s business risk is lower, its capacity to use debt is higher and vice-versa.

Question 4.
Define a ‘Current Assets’ and give four examples?
Answer:
Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operation of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets. Examples of current assets, in order of their liquidity, are as under.

  • Cash in hand/Cash at Bank
  • Marketable securities
  • Bills receivable
  • Debtors
  • Finished goods inventory
  • Work in progress
  • Raw materials
  • Prepaid expenses

These assets, are expected to get converted into cash or cash equivalents within a period of one year. These provide liquidity to the business. An asset is more liquid if it can be converted into cash quicker and without reduction in value. Insufficient investment in current assets may make it more difficult for an organisation to meet its payment obligations. However, these assets provide little or low return. Hence, a balance needs to be struck between liquidity and profitability.

Current liabilities are those payment obligations which, when they arise, are due for payment within one year, such as Bills payable, creditors, outstanding expenses, advances received from customers etc. Some part of current assets is usually financed through short term sources i.e; current liabilities. The rest is financed through long-term sources and is called net working capital. Thus NWC=CA-CL.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Question 5.
Financial management is based on three broad financial decisions, what are these ?
Answer:
There are three basic functions of financial management. These are

  • raising finance
  • investing in assets and
  • distributing returns earned from assets to shareholders.

These three functions are respectively known as financing decision, investment decision and dividend policy decision. While performing these functions, various other functions have also to be performed such as taking working capital decisions and planning and controlling the finance.

Certain routine functions are also performed for the effective execution of all these finance functions. Hence, the functions of finance are:

(i) Determining the financial Needs
(ii) Financing Decision
(iii) Investment Decision
(iv) Working Capital Decision
(v) Dividend policy Decision

(i) Determining the financial Needs : The first task of the financial management is to estimate and determine the financial requirements of the business. For this purpose, the short tern) and long-term needs of the business are estimated separately.

Financial needs are estimated with a long-term view so that necessary funds will be available for expansion and renewal of plant and machinery in future. While determining the financial needs the financial management should take into consideration the nature of the business, possibilities for future expansion, attitutde of the management towards risk, general economic circumstances, etc.

(ii) Financing Decision : This function is related to raising of finance from different sources. For this purpose the financial manager is to determine the proportion L of debt and equity. In other words, what proportion of total funds will 1 be raised from loans and what proportion will be provided by share J. holders. The mixing of debt and equity is known as the firm’s capital structure or leverage.

Raising of funds through debts results in a higher return to the share holders but it also increases risk. Hense, a proper balance will have to be ensured-between debt and equity. A capital [ structure with a reasonable proportion of debt and equity capital is ‘ termed the ‘optimum capital structure’.

When the return to share-holders is maximized with minimum risk, the per-share market value of company’s shares will be maximized and the firm’s capital structure will be considered optimum. In order to raise the capital, a prospectus is issued and services of underwriters are used.

(iii) Investment Decision : Investment Decision also known as ‘Capital Budgeting’ as related to the selection of long-term assets or projects in which investments will be made by the business. Long-term assets are the assets which would yield benefits over a period of time in future.

Since the future benefits are difficult to measure and cannot be predicted with certainty, investment decision involve risk. Investment decision should, therefore, be evaluated in terms of both expected return and risk. Further, a minimum required rate of return also known-as cut-off rate l is also determined against which the expected return from new I investment can be compared.

(iv) Working Capital Decision : It is concerned with the management of current assets. It is an | important function of financial management since short-term survival of the firm is a pre-requisite for its long-term sucess. Current assets should be managed in such a way that the investment in current assets is neither inadequate nor unnecessary funds are locked up in current assets.

If a firm does not have adequate working, capital, that is its investment in current assets is inadequate, it may become illiquid and as a result may not be able to meet its current obligations and,thus, invite the risk of bankruptcy. On the other hand, if the investment in current assets is too large, the profitability of the firm will be adversely affected because idle current assets will not earn anything.

Thus the financial management must develop a sound technique of managing current assets. It should properly estimate the current assets requirements of the firm and make sure that funds would be made available when needed.

(v) Dividend policy Decision : The financial management has to decide as to which portion of the profits is to be distributed as dividend among shareholders and which portion is to be retained in the business.

For this purpose the financial management should take into consideration the factors of dividend stability, bonus shares and cash dividends in practice. Usually, tHe profitable companies pay cash dividends regularly. Periodically, the bonus shares are also issued to the existing equity shareholders.

Question 6.
What is the main objectives of financial management? Briefly explain.
Answer:
Objective or Goals of financial Management : It is the duty of the top management to lay down the objectives or goals which are to be achieved by the business. In order to make wise financial decisions a clear understanding of the objectives of the business is necessary. Objectives provide a framework within which various decisions relating to investment, financial and dividend are to be taken.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

In other words, objectives lay down a criterion by which the efficiency and profitability of a particular decision is evaluated. The choice of such a criterion lies between profit maximization and wealth maximization. Hence, there are two approaches in this regard :
(1) Profit Maximization and
(2) Wealth Maximization

(1) Profit Maximization : According to this approach, all activities which increase profits should be undertaken and which decrease profits should be avoided. Profit maximization implies that the financial decision making should be guided by only one test, which is, select those assets, projects and decisions which are profitable and reject those which are not. The following arguments are advanced in favour of this approach :

(i) Profit is a test of economic efficiency of a business. It is a yard stick by which the economic performance of a business can be judged.

(ii) This approach leads to efficient allocation and utilisation of scare resources of the business because sources tend to be directed to uses which are most profitable.

(iii) Profitability is essential for fulfilling the goal of social welfare also. Maximization of profits leads fo the maximization of social welfare.

(iv) Profit acts as motivator or incentive which induces a business organisation to work more efficiently. If profit motive is wilthdrawn the pace of development will be reduced.

(v) Economic and business conditions go on changing from time to time. There may be adverse business conditions like recession, competition etc. Under adverse circumstances a business will be able to survive only if it has some past earnings to rely upon. Hence, a business should maximize its profits when the circumstances are favourable.

(vi) Profits are the major source of finance for the growth of a – firm.However, the profit maximization approach has been criticised on several grounds :

(i) Ambiguous : One practical difficulty with this approach is that the term profit is vague and ambiguous. Different people take different meaning of term  profit. For example, profit may be short term or long-term, it may be ‘ before tax or after tax, and it may be total profit or rate of profit.

‘Similarly, it may be return on total capital employed or total assets or ‘ share holders funds and so on. Further, it is possible that total profits may increase but earnings per share may decrease. To illustrate, if a company has 1,00,000 shares and earns a profit of Rs. 10,00,000,earning per share is Rs. 10.

Now, if the company further issues 50,000 shares and earns a total profit of Rs. 12,00,000; the total profits have increased by Rs. 2,0, 000; but the earning per share declined to Rs. 8
\(\left\{\text { i.e. } \frac{\text { Rs. } 12,00,000}{1,50,000}\right\}\)

Hence, the question aries, which of these profits should a firm try to maximize? .

(ii) Ignores the Time Value of money : This approach ignores the time value of money, i.e. it does not make a distinction between profits earned over the different years. It ignores the fact that the value of one rupee at present is greater than the value of same rupee received after one year.

Similarly, the value of profit earned in first year will be more in comparison to the equivalent profits earned in later years. To illustrate, the profits of two different projects are

YearProject AProject B
1.1,50,000…………….
2.4,50,0004,00,000
3.2.00,0004,00,000
Total8.00,0008,00,000

The total profits of both the projects are Rs. 8,00,000 in 3 years and hence, if the profit maximization approach is adopted both the projects will be considered equally profitable. But it can be seen that project A earns higher profits in ealier years and hence is more profitable in terms of time value of money. The profits earned in earlier years can be reinvested to earn more profits.

(iii) Ignores Risk factor : This approach ignores the risk associated with the earnings. If the two firms have the same total expected earning, but if earnings of one firm fluctuate considerably as compared to the other, it will be more risky. Investor in general, have a preference for a less income with less risk in comparison to high income  greater risk. But this approach does not pay any attention to these factor.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

It is, thus, clear that profit maximizariterion is inappropriate and unsuitable. It is not only ambiguous kuf$gnis to solve the problems of time value of money and the risk. An alternative to profit maximization, which solves these problems* is the criterion of wealth maximization.

2. Wealth Maximization : This approach is now universally accepted as an appropriate criterion for making’financial decision as it removes all the limitations of profit maximization approach. It is also known as net present value (NPV) maximization approach. According to this approach the worth of an asset is measured in terms of benefits received from its use less the cost of its acquisition.

Benefits are measured in terms of cash flows received from its use rather than accounting profit which was the basis of measurement of benefits in profit maximization approach. Measuring benefits in terms of cash flow avoids the ambiguity in respect of the meaning of the term profit.

Another important feature of this approach is that it also incorporates the time value of money. While measuring the value of future cash flows an allowance is made for time and risk factors by discounting or reducing the cash flows by a certain percentage. This percentage is known as discount rate.

The difference between the present value of future cash inflows generated by an asset and its cost is known as net present value (NPV). A financial action (or an asset or a project) which has a positive NPV creates wealth for shareholders and therefore is undertaken.

On the other hand, a financial action resulting in negative NPV 1 should be rejected since it would reduce shareholder’s wealth. If one out of various projects is to be choosen, the one with the highers NPV is adopted. Hence, the shareholder’s wealth will be maximized if this criterion is followed in making financial decisions.

The NPV can be calculated with the help of the following Formula:-
\(\mathrm{W}=\frac{\mathrm{A}_{1}}{(1+\mathrm{K})}+\frac{\mathrm{A}_{2}}{(1+\mathrm{K})^{2}}+—-\frac{\mathrm{A}_{\mathrm{n}}}{(1+\mathrm{K})^{\mathrm{n}}}-\mathrm{C}\)
Where W = Net Percent worth
A1 , A2 — An = Stream of cash flows expected to occur from a course of action over a period of time.
K = Apporopriate discount rate to measure risk and time factors.
C = Initial outlay to acquire an asset or pursure a course of action.

If W or NPV is positive, the firm should acquire the asset or pursure a particular course of action. On the contrary, If W is negative the asset should not be acquired or that particular course of action should not be taken.

The wealth maximization approach is superior then the profit maximization approach. Firstly, because it uses cash flows instead of accounting profits which avoids the ambiguity regarding the exact meaning of the term profit. Secondly it gives due importance to the time value of money by reducing the future cash flows by an appropriate discount or interest rate.

If higher risk and longer time period are involved, higher rate of discount or interest will be used to find out the present value of future cash benefits. The discount or interest rate will be lower for the projects which involve low risk.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Question 7.
Discuss about working capital affecting both the liquidity as well as profitability of a business.
Answer:
Management of working capital : The goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that working capital is maintained at a satisfactory level. The current assets should be large enough to pay the current liabilities in time while not keeping too high a level of anyone of them.

The interation between, current assets and current liabilities is, therefore, the main objective of management of working capital. According to Smith, K.V., “Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the after relationship that exists between them?’
Following are the main objectives or aspects of working capital management:

(1) To determine the adequate or optimum quantum of investment in working capital.
(2) To determine the composition or structure of current assets.
(3) To maintain a proper balance between liquidity and profitability.
(4) To determine the policy or means of finance for current assets.

(1) To determine the adequate or optimum quantum of investment in working capital : As discussed, a firm should maintain adequate or reasonable investment in working capital. Investment in working capital should neither be excessive nor inadequate.

(2) To determine the composition or structure of current assets : The financial management is required to determine the , composition of current assets. It should decide how much amount 1 should be invested in each individual current assets. For this purpose, it should fix the average amount invested in Stock, debtors, marketable securities and the level of cash balance.

(3) To maintain a proper balance between liquidity and profitability : While managing working capital, management will have to reconcile two conflicting aspects. The confliciting aspects are liquidity A I and profitability. If the quantum of working capital is relatively large, -it will increase the liquidity but decrease the profitability.

The reason is that a considerable amount of firm’s funds will be tied up in current assets, and to the extent this investment is idle, the firm will have to forego profits. On the other hand, if the quantum of Working capital is relatively small, it will decrease liquidity but will result in increase in V the profitability. This is because the less funds are tied up in idle current assets.

(4) To determine the policy or means of finance for current assets : Another important aspect of working capital management is determining the financing mix i.e. what will be the sources of financing the current assets. There are mainly two sources from which funds can be raised for current assets financing

  • Short-term sources Such as short-term bank loan and other current liabilities such as creditors, bills payable etc.
  • Long-term sources :- Such as share capital, long-term borrowings, retained earnings etc.

Long Answer Type Questions

Question 1.
What is meant by working capital. How is it calculated? Discuss five important determinants of working capital requirements.
Answer:
Working capital management is an important aspect of financial management. In business, money is required for fixed assets and working capital. Fixed assets include land and building, plant and machinery, furniture and fittings etc. Fixed assets are acquired to be retained in the business for a long period and yield returns over the life of such assets.

Working capital, on the other hand,, is required for the efficient and effective use of fixed assets. The main objective of working capital management is to determine the optimum amount of working required.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Definition of working capital
There are two concepts of working capital :-
(i) Gross working capital concept
(ii) Net working capital concept

(i) Gross working capital concept:- According to this concept, working capital means gross working capital which is the total of all the current assets of a business.
Gross Working Capital = Total Current Assets
Definitions favouring this concept are .

1. “Working capital means total of current Assets” – Mead, Mailott and Field
2. “Any acquisition of funds which increases the current Assets increases working capital, for they are one and the same” Bonneville and Dewey .

Persons acknowledging the total of current assets as working capital give the following arguments in their favour.

(i) Just as fixed assets are considered as the symbol of fixed capital, current assets must also, be considered as symbol of working capital.

(ii) Any acquisition of funds increases the working capital. This statement proves true according to this concept whereas it does not hold true according to the second concept.

(iii) Most of the managers plan their business operations according to the current assets concept because these are the assets used in day- to-day business operations.

(iv) Utility of current assets remains the same whether financed from long-term loans or short-term loAnswer:Hence, the total amount of current assets must be treated as working capital.

2. Net working capital concept According to this concept, working capital means net working capital which is the excess of current assets over current liabilities.
Net working Capital = Current Assets – Current liabilities Definitions favouring this concept are :-

  • “It has ordinarily been defined as the excess of current assets over current liabilities.” – C.W. Gestenbergh.
  • The most common definition of net working capital is the difference of firm’s current assets and current liabilities” – Lawrence . J, Gitmen

Persons favouring this concept give the following arguments in their favour:
(i) This concept gives the true information about the liquidity of a concern. According to first concept, the working capital appears to be increased merely by taking a short-term loan whereas in the second concept working capital remains unchanged by doing so. Thus, the second concept looks more logical. In actual sense, working capital increases only by ploughing back of profits or when a long-term loan is obtained.

(ii) Exess, of current assets over current liabilities will indicate whether or not the concern will be able to meet its current liabilities when they fall due. First concept does not disclose this fact.

(iii) It is on the basis of this concept that the short-term lenders, bankers etc. calculate the safety margin regarding the timely payment of their debt.

(iv) Excess of current assets over current liabilities will determine whether or not the concern will be able to face the depression or any other contingent need of the business.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

(v) According to this concept a comparison can be made between the financial position of two firms whose current assets are equal. As discussed, net working capital is the excess of current assets over current liabilities. If current assets are equal to current liabilities, net working capital will be zero and if current liabilities are more than current assets, net working capital will be negative.

Current assets mean those assets which are converted into cash within a short period of time not exceeding one year, eg. cash, bank balance debtors, bills receivable, stock, accured income etc.

Current liabilities mean those liabilities which have to be paid within a short period of time in no Case exceeding one year, e.g. creditors, bills payable, outstanding expenses, short-term loans etc.

Factors affecting Working Capital
or
Determinants of Working Capital
A firm should have neither too much nor too little working capital. The working capital requirement is determined by a large number of factors but, in general, the following factors influence the working capital needs of an enterprise :-

1. Nature of Business : Working capital requirements of an enterprise are largely influenced by the nature of its business. For instance, public utilities such as railways, transport, water, electricity etc. have a very limited need for working capital because they have to invest fairly large amounts in fixed assets.

Their working capital need is minimal because they get immediate payment for their services and do act have to maintain big inventories. On the other extreme are the trading and financial enterprise which have to invest less amount in fixed assets and a large amount in working capital.

This is so because the nature of their business is such that they have to maintain a sufficient amount of cash, inventories and debtors. Working capital needs of most of the manufacturing enterprises fall between these two extremes, that is, between public utilities and trading concerns.

2. Size of Business : Larger the size of the business enterprise, greater would be the need for working capital, The size of a business may be measured in terms of scale of its business operations.

3. Growth and Expansion : As a business enterprise grows, it is logical to expect that a larger amount of working capital will be required. Growing industries require f more working capital than those that are static.

4. Production Cycle : Production cycle means the time span between the purchase of raw materials and its conversion into finished goods. The longer the production cycle, the larger will be the need for working capital because the funds will be tied up for a longer period in work in process. If the production cycle is small, the need for working capital will also be small.

5. Business Fluctuations : Business fluctuations may be in the direction of boom and depression. During boom period the firm will have to operate at full capacity to meet the increased Remand which in turn, leads to increase in the level of inventories and book debts. Hence, the need for working capital in boom conditions is bound to increase. The depression phase of business fluctuations has exactly a opposite effect on the level of working capital requirement.

6. Production Policy : The need for working capital is also determined by production . policy. The demand for certain products (such as woolen garments) is seasonal. Two types of production policies may be adopted for such products. Firstly, the goods may be produced in the months of demand and secondly, the goods may be produced throughout the year.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

If the second alternative is adopted, the stock of finished goods will accumulate progressively upto the season of demand which requires an increasing amount of working capital that remains tied up in the stock of finished goods for some months.”

7. Credit Policy Relating to Sales : If a firm adopts liberal credit policy in respect of sales, the amount tied up in debtors will also be higher. Obviously, higher book debts mean more working capital. On the other hand, if the firms follows tight credit policy, the magnitude of working capital will decrease.

8. Credit Policy Relating to Purchase : If a firm purchases more goods on credit, the requirement for working capital will be.less. In the other words, if liberal credit terms are available from the suppliers of goods (i.e. creditors) the requirement for working capital will be reduced and vice versa.

9. Availability of Raw Material : If the raw material required by the firm is available easily on a continuous basis, there will be no need to keep a large inventory of such material and hence the requirement of working capital will be less. On the other hand, if the supply of raw material is irregular, the firm will be compelled to keep an excessive inventory of such materials which will result in high level of working capital.

Also, some raw materials are available only during a particular season such as oil seeds, cotton, etc. They would have to be necessarily purchased in the season and have to be kept in stock for a period when supplies are lean. This will require more working capital.

Question 2.
Capital structure decision is essentially optimisation of risk-return relationship. Comment.
Answer:
Importance of Capital Structure Capital structure decision is one of the strategic decisions taken by the financial management. Considerable attention is required to decide the mix up of various sources of finance.

A judicious and right capital structure decision reduces the cost of capital and increases the value of a firm while a wrong decision can adversely affect the value of the firm. As discussed earlier, various sources of finance differ in terms of risk and cost. Hence, there is utmost need of designing an appropriate capital structure.

Capital structure decisions are of great significance due to the following reasons
(i) Capital structure determines the risk assumed by the firm.
(ii) Capital structure determines the cost of capital of the firm.
(iii) If affects the flexibility and liquidity of the firm.
(iv) It affects the control of owners on the firm.

Optimum Capital Structure : The capital structure which maximises the value of the firm is called optimum capital structure. In other words, the capital structure is said to be optimum when cost of capital is minimum and total value of the firm is maximum. Hence, in the order to achieve the objective of maximisation of shareholder’s wealth, the financial manager should determine an optimum capital structure for the firm. Following are the benefits of capital structure

1. Minimum Risk : Capital structure should ensure minimum risk. The use of excessive debt threatens the solvency of the firm because it involves a fixed commitment to pay the interest irrespective of the profits. Debt should be used to the extent it does not add significant risk. Beyond this, the use of debt should be avoided.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

2. Minimum cost of Capital : Cost of capital means interest on debts or divident on shares. Debt is a cheaper source of finance in comparison to equity capital because rate of interest is lower than the return expected by equity shareholders and the tax deductibility of interest further reduces the cost of debts. The preference share capital is also cheaper than equity capital, but not as cheap as debt. Thus, optimum capital structure should include sufficient amount of debt since it is the cheapest source of finance.

3. Sufficient liquidity : Liquidity means the ability of the firm to pay interest as well as principal in time. A firm is considered liquid if it is able to pay the interest and principal under reasonably predicted adverse conditions. Hence, while determining the optimum amount of debt it should be carefully analysed as to how a firm’s liquid Will be maintained under recession conditions.

4. Maximum Profitability : Capital structure of the company must provide maximum return to equity’ shareholders. If there is a probability of earning higher return on company’s assets in comparison to the cost of debt, a large amount of debt can be used by the firm to maximise its profitability, otherwise the firm should refrain frc n employing debt capital. .

5. Retaining control : Capital structure should help the present management in retaining the control the company. For this purpose debt should be preferred in comparison to issue of equity capital while raising further funds. Debt . holders do not possess voting rights in company’s meetings and hence cannot elect the directors of the company whereas equity shareholders possess voting rights.

6. Avoidance of Unnecessary Restrictions : Capital structure should avoid unnecessary restrictions on the firm. For instance, term loans from financial institutions should be avoided because these institutions impose a number of restriction on further borrowing of the company.

Question 3.
A capital budgeting decisions is capable of changing the financial fortune of a business. Do you agree? Why or why not?
Answer:
The most important function of financial management is not only the procurement of external funds for the business but also to make efficient and wise allocation of these funds. The allocation of funds means the investment of funds in various assets and other activities. It is also known as ‘Investment Decision’, because a choice is to be made regarding the assets in which funds will be invested.

The assets which can be acquired fall into two broad categories
(i) Short-term or Current Assets
(ii) Long-term or Fixed Assets

Accordingly, we have to take two types of investment decisions.
First type of investment decisions related to the short-term assets are ‘ called short-term investment decisions or current assets management. These are popularly termed as working capital management.

Second type of investment decisions related to long-term assets are called long-term investment decisions. These are widely known as capital budgeting or capital expenditure decisions.

Nature of Capital Budgeting
Nature includes meaning and feature of capital budgeting.

Meaning of Capital Budgeting
Capital budgeting is the technique of making decisions for investment in long-term assets. It is a process of deciding whether or not to invest the funds in a particular asset, the benefit of „which will be available over a period of time longer than one year.

“Capital budgeting consists in planning the deployment of available capital for the purpose of maximizing the long-term profitability of the firm.” – R. M. Lynch

“Capital budgeting involves the planning of expenditure for assets, the returns from which will be realized in future time periods. – Milton H. Spencer

Thus, a capital budgeting decision may be defined as the firm’s decision to invest its funds in the long-term assets in anticipation of an expected flow of benefits over the lifetime of the asset. These benefits may be either in the form of increased sales or reduced costs. Capital budgeting decisions generally include decisions regarding expansion, acquisition, modernisation and replacement of the long term assets.

Features of Capital Budgeting Decisions

The main features of the capital budgeting may be summarised as follows :-
1. Funds are invested in long-term assets.
2. Funds are invested in present times anticipation of future profits.
3. The future profits will occur to the firm over a series of year.
4. Capital budgeting decisions involve a high degree of risk because future benefits are not certain.

Importance of Capital Budgeting

Capital budgeting decisions are of paramount importance in financial decision making. The following reasons make such decisions very important:

1. Such Decisions Affect the Profitability of the Firm: Capital budgeting decisions affect the long-term Profitability of a
firm because of the fact that they relate to fixed assets.

The fixed assets, in a sense, reflect the true earning capacity of the firm. They enable a firm to produce finished goods which is ultimately sold for profit. Hence, a correct investment decision can yield spactacular profits, whereas, an ill-advised and incorrect decision can endanger the very survival of the firm.

2. Long Time Periods: The effect of a capital budgeting decision will be felt by the firm over a long time span, and thu%-affects the future cost structure of the firm. To illustrate, if a compa% purchase a new plant to manufacture a new product, the company  have to incur a sizable amount of fixed costs, in terms of labour, supervisor’s salary, insurance, rent of building etc.

If, in future, the products turns out to be unsuccessful or if it yields (ess profit than anticipated, the company will have to bear the burden of heavy fixed costs. Hence, the future costs, sales and profits will all be determined by the capital budgeting decisions.

3. Irreversible Decisions : Capital budgeting decisions, once taken, are not easily reversible without heavy financial loss to the firm. This is because it is very difficult to sell the second hand plant.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

4. Involvement of large Amount of Funds : Capital budgeting decisions require large amount of funds and most of the firms have limited .financial, resources. Hence, it is absolutely necessary to take thoughtful and correct investment decisions because an incorrect decision would not only result in losses but also prevent the firm from earning profits from the alternative investments which had to be dropped because of thq paucity of funds.

5. Risk: Investment in fixed assets may change the risk complexion of the firm. This is because different capital investment proposals have different degree of risk. If thev adoption of an investment proposal increases average gain, but causes frequent fluctuations in the profits of the firm, the firm will become more risky. As such, investment decisions shape the basic character of a firm

6. Most difficult to make : These decisions are among the most difficult decisions to be taken by a firm. This is, because they ire an assessment of future events which are uncertain and difficult to predict. For example, estimating the future cash inflows and life of the project is really a complex problem.

Kinds of Capital Budgeting Decisions : A firm may have various investment proposals for its consideration, it may select all of them, one of them or some of them depending upon the various types of proposals

(i) Accept-Reject Decisions : This is a fundamental decision in capital budgeting. Proposal (or project) is accepted, the firm would invest in it and if the proposal is rejected, the firm would not invest in it. In general, all those proposals (or projects) which yield a rate of return higher than a certain required rate of return are accepted and the rest are rejected.

By applying this criterion, all independent proposals are either accepted or rejected. Independent proposals are those which do not compete with one another and all proposals can be accepted simultaneously. Hence, all independent proposals which satisfy the minimum investment criterion should be implemented.

(ii) Mutually Competitive Decisions : These are related to the proposals which compete with other projects in such a way that the acceptance of one will automatically result in the rejection of others. For example, a company is considering two sites X and Y for the construction of its plant. It site X is selected, site Y will be automatically rejected.

(iii) Priority Order Decisions In case where a firm has unlimited funds, all those independent projects are accepted which yield a higher cate of return as against some predetermined rate. However, in actual practice most of the firms have limited funds. The firm, therefore, must fix a priority order for investing these funds.

The firm allocates funds to various x projects in a manner that the long term profits are maximised. The priority of projects will be determined on the basis of a pre¬determined criterion such as the rate of return. In this way, the projects yielding the maximum return will be selected and all other projects will be rejected.

Question 4.
Explain factors affecting the dividend decision.
Answer:
The following are the factors which generally affect the dividend policy of a firm

1. Financial Needs of the Firm : Financial needs of a firm are directly related to the investment opportunities available to it. If a firm has abundand profitable investment opportunities, it will adopt a policy of distributing lower dividends. It would like to retain a large part of its earnings because it can reinvest them at a higher rate than the shareholder can.

Other reason for retaining the earnings is, that, issuing new share capital is inconvenient as well as involves flotation costs. On the other hand, if the firm has little or no investment opportunities, it should retain only a small portion of its earnings and should distribute the rest as dividends.

2. Stability’ of Dividends : Investors always prefer a stable dividend policy. They expect that they should get a fixed amount as dividends which should increase gradually over the years. Hence while determining the dividend policy, the merits of stability of dividends like investor’s desire for current income, resolution of investor’s uncertainly, requirement of institutional investors etc. should be given due consideration.

3. Legal Restrictions : The firm’s dividend policy has to be formulated within the legal provisions and restrictions. For instance, section 205 of the Indian Companies Act provides that dividend shall be paid only out of the current profits or past profits after providing for depreciation.

Like wise, if there are past accumulated losses, they must be first set off against current year’s profits before the declaration of any dividend. , Similarly, a firm is prohibited from declaring any dividends if its ‘ libilities exceed its assets.

4. Restrictions in Loan Agreements : Lenders, mostly the financial institutions, put certain restrictions on the payment of dividend to safeguard their interests. For instance, a loan agreement may prohibit the payment of any dividend as long as the firm’s current ratio is less than, say, 2:1 or debt equity ratio is more than, say 1.5:1.

They may allow the payment of dividend only when some minimum amount has been transferred to a sinking fund established for the redemption of their debt. Likewise they may prohibit the payment of dividends in excess of a certain percentage, say, 10%. Alternatively, they may fix the maximum limit of profits that may be used for dividend, say not more than 40% of the net profits can be paid as dividends. When such restrictions are put, the company will have to keep a low dividend payout ratio.

5. Liquidity : Payment of dividend causes sufficient outflow of cash. Although a firm may have adequate profits, it may not have enough cash to pay the dividends. It may happen when most of the sales are on credit and firm’s cash resources have been utilized in the expansion of assets or payment of its liabilities.

This situation is common for growing firms which need funds for their expanding activities and permanent working capital. Thus, the cash position is a significant factor in determining the size of dividends. Higher the cash and overall liquidity position of a firm, higher will be its ability to pay dividends.

6. Access to Capital Market : A company which is not sufficiently liquid can still pay dividends if it has easy acessibility to the capital market. In other Words, if a company is able to raise debt or equity in the capital market, it will be able to pay dividends even if its liquidity position is not good.

While evaluating the ability to raise funds in the capital market, the cost of funds and the promptness with which funds can be raised must be considered. Usually, mature firms have greater acess to capital market than the new firms.

7. Stability of Earnings : Stability of earnings also has a significant effect on the dividend policy of a firm. Normally, the greater the stability of earnings, greater will be the dividend payout ratio.

The reason is, that such firms are more confident of maintaining the higher dividends from year to year. For instance, the earnings of public utility companies are relatively stable and hence their dividend payout ratio is usually high.

8. Objective of Maintaining Control : Sometimes the present management employs dividend policy to retain control of the company in its own hands. When a company pays larger dividends, its liquidity position is adversely affected and it may have to issue new shareto raise funds to finance its investment opportunities.

If the existing shareholders do not want or cannot purchase the new shares, their control over the company will be diluted. Under such circumstances, the management will declare lower dividends and earnings will be retained to finance the investment opportunities.

9. Effect on Earning Per Share : As discussed above, high dividend payout ratio affects the liquidity posi tion adversely and may necessitate the issue of new equity shares in the near future, causing an increase in the number of equity shares and ultimately the earning per share may reduce. On the other hand, by keeping a low dividend payout ratio the firm can retain and plough back larger portion of its earnings resulting in increase in future and thereby an increase in earning per share.

10. Firm’s Expected Rate of Return : If the firm’s expected rate of return would be less than the rate which could be earned by the shareholders themselves from external investment of their funds, the firm should retain smaller part of its earnings and should opt for a higher dividend payout ratio.

11. Inflation : Inflation may also act as a constraint on paying larger dividends. Depreciation is charged on the original cost of the asset and as a result, when there is an increase in price level, funds generated from depreciation’ become inadequate to replace the obsolete assets.-

Consequently, companies will have to retain more of its earnings to provide funds to replace the assets and hence their dividend payout ratio will be low during periods of inflation.

12. General State of Economy : Earnings of a firm are subject to general economic conditions of the country. If the future economic conditions are uncertain, it may lead to retention of larger part of the earnings of a firm to absorb any eventuality. Likewise, in the event of depression, when the level of business activity is very low,’the management may reduce the dividend payout ratio to preserve its liquidity position. All the above factors must be carefully considered before formulating a dividend policy.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Question 5.
Explain the term ’Trading on Equity’. Why, when and how it can be used by a business organisation?
Answer:
Trading on Equity : The use of fixed cost sources of finance, such as debts and preference share capital is termed as trading on equity or financial leverage. In case the assets acquired from the debt funds yield a return greater than the cost of debts, the profits available to equity shareholders or the earning per share (EPS) will increase.

EPS will also increase by the use of preference share capital but it will increase more in case of use of debt because the interest paid oil debt is deductible from profits while calculating the tax. Hence, the alternative methods of financing must be analysed by the management to examine their effect on E.P.S. To Illustrate :

Suppose that a firm has an all-equity capital structure consisting of 2,00,000 equity shares of Rs. 10 each. The firm now desire to raise Rs. .5,00,000 to acquire additional and is considering three alternative methods of financing :

(i) to issue 50,000 equity shares of Rs. 10 each, or

(ii) to raise a debt of Rs. 5,00,000 at 12% rate of interest, or

(iii) to issue 5,000 preference shares of Rs. 100 each at 12% rate of dividend . If the firm’s earnings before interest and taxes after additional assets acquire are Rs. 8,00,000 and the tax rate is 40% the effect on the earning per share under the three alternatives will be as follows
NCERT Solutions for Class 11 Business Studies Chapter 9 Financial Management

It is clear from the above example that the firm will be able to maximise its EPS when it uses debt financing. But the debt financing will have an adverse effect on EPS if the company is not able to earn a rate of return on its assets greater than the interest rate on debt.

Case Problems

1.’S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about Rs. 5000 crores to set up and about Rs. 500 crores of working capital to start the new plant.

Question 1.
What is the role and objectives of financial management for this company?
Answer:
As we know that Financial Management is concerned with optimal procurement as well as usage of finance. The financial management of this company, for optimal procurement, identify the different available sources of finance and compare them in terms ; of their costs and associated risks.

It aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds. It also aims at ensuring availability of enough funds whenever required as well as avoiding idle finance. It is very much clear that the overall financial health of a business is determined by the quality of company’s financial management.

The main objective of financial management of this company is to maximise share holder’s wealth. In fact, in all financial decisions, major or minor, the ultimate objective that guides the decision-maker is that some value addition should take place so that the market price of equity shares is maximised. It should select best financing alternative to collect Rs. 5000 crores to set up and 500 crores as F working capital.

Question 2.
What is the importance of having a financial plan for this company? Give an imaginary plan to support your answer.
Answer:
Financial planning is essentially preparation of a financial blue print of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time’Financial plan is an important part of overall planning of any business enterprise. It aims at enabling the company to tackle the uncertainty in respect of the availability and timing of the funds and helps in smooth functioning of an organisation.

The financial plan for this company tries to forecast what may happen in future under different business situation, so that company face the eventual situation in a better way. It makes the firm better prepared to face the future. It also helps company in avoiding business shocks and surprise.

By providing cleat policies and procedures, it helps company in coordinating various functions. It reduces waste, duplications of efforts and gaps in planning. It also provides continuous line between investment and financing decisions.

Question 3.
What are the factors, which will affect capital structure of this company?
Answer:
One of the important decisions under financial management of this company is to relates to the financing pattern or the proportion of the use of different sources in raising funds. On the basis of  ownership the sources of business finance can be broadly classified into two categories viz ‘owner funds’ and ‘borrowed funds’.

Capital structure refers to the mix between owners and borrowed funds. Deciding about the capital structure of a company involves determining the relative proportion of various types of funds. This depends upon various factors, which are following :

  • Cash Flow Statement
  • Interest Coverage Ratio (ICR)
  • Debt Service Coverage Ratio (DSCR)
  • Return on Investment (ROl)
  • Cost of debt
  • Tax Rate
  • Cost of Equity
  • Floatation Costs
  • Risk Consideration
  • Flexibility
  • Control
  • Regulatory Framework
  • Stock Market Conditions
  • Capital structure of other Companies.

Question 4.
Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer.
Answer:
As it is a highly capital intensive sector, there are so many factors that will affect the fixed and working capital of this company which are following:

Factors affecting the Fixed Capital :

1. Nature of Business As, it is a manufacturing company of steel, it needs huge fixed capital as compared to trading.concern.

2. Scale of Operations It is a large organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisations. ,

3. Technique of Operations It is a highly capital intensive organisation, so it requires higher investment in plant and machinery, which require high fixed capital.

4. Growth Prospects Higher growth of an organisation generally requires higher investment in fixed assets. ‘S’ Limited is growing fast and expected to grow more so it requires huge fixed capital.

5. Financing Alternative If a company’s management arranged some fixed assets on lease or rent, then it requires less fixed capital otherwise it requires large sum of fixed capital.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Factors affecting the working capital

1. Nature of Business The requirement of working capital of
this type of large manufacturing concern is very big.

2. Scale of Operations For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore requires large amount of working capital. ‘

3. Production cycle Steel plant at this large scale has-a long production cycle, so it requires the large sum of working capital.

4. Credit Policy The credit policy of these industries, very much affects the working capital of the company. It takes long period to receive their due, so it requires large sum of working capital to run day to day operations.

5. Availability of Raw Material If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. Higher the read time, higher the quantity of material to be stored and higher is the amount of working capital requirement.

6. Growth Prospects The growth potentials of this steel plant of’S’ Ltd. is perceived to be higher, it will require higher amount of working capital so that is able to meet higher production and sales , target whenever required.

Project Work

Question 1.
Pick up annual reports of 2 or more companies engaged . in the same line of business. You can access this data on the respective web sites of the companies and other sources. Compare their capital structures. Analyse the reasons for the difference. You can also use ratio analysis for this. Prepare a report of your findings and discuss it in the class with the help of your teacher.
Answer:
In such work, students are advised to consult business dailies and magazines. Various newspapers like “Economic Times”, “Financial Express,” Business line etc. provides a detailed glimpses of business view points. As mentioned in the questions students may check the data on web sites of the companies and download the annual reports of various companies and then analyse to draw conclusions. It is your self-learning to broaden your viewpoints in studying the financial statements of a company.

Question 2.
From the annual reports that you use in activity I analyse the working capital of the companies. You can use short-term solvency ratios. Study the operating cycle of the line of business you have chosen and prepare a report as to the soundness of the working capital management of the companies you are studying. Prepare a report of your findings and discuss it in class with the help of your teacher.
Answer:
After downloading the annual reports of various companies, the students are supposed to calculate various short-term solvency rate like Current Ratio, Acid Test-Ratio, Cash holding Ratio etc. The students may also draw a operating cash flow to judge the soundness of working capital requirements of the business.

Wherever necessary, teacher’s help may also be sought as mentioned in the activity. The students are advised to form a group and seriously adhered to the problem of the activity undertaken by alloting work assignments according to interest in the subject.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

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NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 8 Controlling Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Controlling NCERT Solutions for Class 12 Business Studies Chapter 8

Controlling Questions and Answers Class 12 Business Studies Chapter 8

Multiple Choice Question

For the following, choose the right answer.

Question 1.
An efficient control system helps to:
(a) Accomplish organisational objectives
(b) Boosts employee morale
(c) Judge accuracy of standards
(d) All of the above
Answer:
(d) All of the above.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 2.
Controlling function of an organisation is
(a) Forward looking
(h) Backward looking
(c) Forward as well as backward looking
(d) None of the above
Answer:
(c) Forward looking and backward looking function.

Question 3.
Management audit is a technique to keep a check on the performance of ……………
(a) Company
(b) Management of a company
(c) Shareholders
(d) Customers.
Answer:
(b) Management of the company.

Question 4.
Budgetary control requires the preparation of
(a) Training schedule
(b) Budgets
(c) Network diagram
(d) Responsibility centres
Answer:
(b) Budgets.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 5.
Which of the following is not applicable to restorability a courting.
(a) Investment center
(b) Andocentric center
(c) Profit center
(d) Cost center
Answer:
(c) Andocentric center.

Short Answer Type Questions

Question 1.
Explain the meaning of controlling.
Answer:
” An adequate control system should disclose where failures are occurring, who is responsible for them and what should be done about them.” – Konntz and O’Donnel!

Control is the last step in the Process of management because it arises need only after the other managerial steps like planning, organising and directing etc. Control is considered to,be an important means of administration since olden times. The managerial function of controlling involves the measurement of actual Performance, comparing it.

With the Planned standards and correcting deviations to ensure attainment of predetermined objectives. Thus, even though control is the last step in the Process of management, it is equally important for efficient, smooth, speedy and proper attainment of organizational goals.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Meaning and Definitions of Control : Control in context to management refers to initiating such action which make the actual process in accordance with the expected progress. It includes all those activities which direct and motivate the action to achieve the Predetermined objectives of the enterprise. It is not any means to put restrictions but it is a means through which a manager directs the behaviour of his subordinates in the desired direction by resorting to delegation and decentralisation with trust and confidence.

The modem managers believe that the meaning of control is not to establish an empire over the employees but it is a such an activity through which the activities of the. employees are directed and co-ordinated for the attainment of Pre-determined objectives. The essence of control is to see that all the activities are moving towards the attainment of desired goals or not. In other words, the meaning of control is to ensure that all the activities are Occurring according to the Plans.

Various Scholars have defined Control in different ways. Some of the important definitions are.
According to Henry Fayol, ” Control consists of verifying whether everything occurs in conformity in the plans adopted, the instruction issued and principles established. lt has for its object, to point out weakness and errors, in order to rectify them and prevent recurrence”.

  • According to Joseph L. Massie,” Control is the process of taking steps to bring actual results and desired results closer together”.
  • According to Philip Kotleiy “Control is the process of taking steps to bring actual result and desired result closer together.”
  • According to Dale Henning, “Control is the process of bringing about Conformity of performance with planned action.”
  • According to Marry Cushing Niles, “Control is the maintaining Of the balance between activities directed towards a goal or set of goals.”
  • According to Billy E. Goetz, “Management Control seeks to compel events to conform to plans.”

On the basis of all the above definitions we can say that controlling includes verifying whether everything is happening properly, according to the plans, if not then finding out the obstacles and making efforts to remove them. For this purpose, the actual work progress is-measured and compared to the standard already determind in order to find out the deviations and remove such deviations by taking corrective action.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 2.
“Planning is looking ahead and controlling is looking back”. Comment.
Answer:
Planning is done always for the future. It is a well thought outline of the future events. According to George Terry, “Planning is oriented to and requires a feeling for the future. It is an investment of thought and time in the present for reaping the benefits in future. Some people believe’ that planning is unearthing the things for a better future.” It is called looking ahead because a well thought procedure is following in the future.

According to Allen, “Plan is a trap which is laid down to catch the future.” Thus it is clear that planning involves making estimates for the future, the more correct the estimates the more successful would.be the PlAnswer:Thus it is true that planing is looking in to the future.

It contrast to planning, control is called a looking back because a manager makes a comparison with the laid down standards Only after certain activity has been performed is compared with the- predetermined standards. Since both these activities have been already performed hence to compare them is in fact looking back. Looking back means, evaluating the work or performance which has already been done.

The thought of looking back in context to control is partially – correct. Control is not only looking back but also looking ahead. This has two reasons – First, the corrective action which is an important part of control is one of the measures of looking ahead. Second a good control system is the one which informs about the deviations even before their occurrence and prevents their reoccurrence. In other words, control is not only a remedial action but also a preventive action which reduces the possibilities of deviations.

Question 3.
“An effort to control everything may end up in controlling nothing”*. Explain. ‘ *
Answer:
Management control is that process of ensuring that actual activities conform to planned activities. Controlling helps in accomplishing organizational goals, judging accuracy of standards, ensuring different utilization of resources, but an effort to control everything sometimes create problems in controlling.

Controlling, suffers from certain limitations. An organization has no control over external function The control system of an organization may face resistance from its employees. Controlling also looses its effectiveness when standards cannot be defined in quatitative terms which makes the measurement of performance arid their comparison with standards a difficult task. Controlling is a costly affair as it involves lot of expenditure, time and effort. A small enterprise cannot afford to control an expensive control system.

Control is often resisted by employees. They see it as a curb to their freedom. External factors like government policies, technological changes, competition etc. cannot be controlled. Therefore, an effort to control everything is not justified. Overall organizational objectives should be kept in mind while controlling the activities in an organization.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 4.
Write a short note on budgetary control as a technique of managerial control.
Answer:
Budgetary control : Budgetary control is a system of management control in which all operation are planned ahead in the form of budgets and actual results are compared with budgetary Satandards and the necessary actions are taken to ensure attainment of organisational objectives.

According to G.R. Terry “Budgetary control is a process of comparing the actual results with the corresponding budget data in order to approve accomplishments or to remedy differences by either adjusting the budget estimate or correcting the cause of the differences”.

Thus, in budgetary control first of all, the budgets for all the activities of the Organisation are prepared, then the actual result are compared with these budgets and if any diviations are found on comparison then the reasons for them are located.

If the deviations are able to be remove on correcting the reasons then the same is done otherwise necessary amendements are made in the. Plans Before studying budgetary control in detail it is necessary to understand the three related terms : budget, budgeting and budgetary control Budget.

A budget’is a financial or quantitative expression of the plan of a action to be presumed in a definite future period. In other words, a budget presents financial or quantitative details of what is to be done in future.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Budgeting.

The process of preparing a budget is called budgeting. In other words, the process of collecting the necessary information and data and presenting them in the form of a statement in numerical terms is called budgeting.

Budgetary control
Budgetary control is a process of exercising control through budgets. It is a system of comparing actual result with the budgets and taking necessary steps to correct the deviations.

Characteristics of Budgetary Control
The main characteristics of budgetary control are as follows
(i) Process of Comparing : It is a process of comparing the actual results with the estimated figures.

(ii) Finding out the Deviations : On comparing the actual results with the estimated ones, certain deviations are found. Steps are taken to find out the causes for. such deviations.

(iii) Taking corrective action : After finding out the causes for deviations, corrective action is taken to remove the cause of such deviations.

(iv) Budgets are based on Forecasts : The budgets are the estimates which are based on scientific forecasts.

(v) Separate Budgets are prepared for all the Departments.

Different budgets are prepared for all the Departments or activities and later all these budgets^are included in the form of a common budget for the entire enterprise, which is called a master budget.
Requisites for success of Budgetary control . To make the budgetary control successful following factors must be considered.

(i) Full Support : The budgetary control must receive full support of the top executives of the enterprise.

(ii) Full participation : The budgetary control can be. successful only when all the executives associated with its emplementation actively participate in its formation.

(iii) Sound Organisation structure : The structure of the organisation should be according to the budget arrangements so that the specific responsibilities can be handed over to specific people.

(iv) Clear Defination of Budget authority and Responsibility: The authority must and responsibility of making and executing the budget must be clearly defined.

(v) Flexibility : A budget should be flexible enough to be changed according to . the changes in the situation.

(vi) Motivation : For the success of budgetary control it must have arrangement for rewarding the efficient employee and punishing the inefficient ones.

(vii) Feed back system : There must be proper arrangements of transmission of the progress report of various departments to the budget official. Also the opinion and suggestions of various officers responsible for implementing the budget must also reach the budget officials. This helps in bringing about improvements in the budget in the future.

(viii) Adequate Time : The decisions of the success or failure of the budgetary control cannot be taken in short time. It can be taken only after the passage of some time.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 5.
Explain how management audit serves as an effective technique of controlling.
Answer:
Management Audit : The quality of management is the main determinant for the success or failure of an organisation. Management audit focuses attention on evaluation of quality of management.

It is an independent and critical examination of total management process of planning, organising, staffing, directing and controlling. It helps in locating the deficiencies in the performance of these managerial functions and advice the top management for necessary adjustments in order to make the organisation more effective.

Management audit is nothing but an extension of financial audit and its functions begin from where the functions of financial audit end. According to Koontz and O’ Donnell, management audit, “Auditing the quality of managers through appraising them as individual managers and appraising the quality of the total system of managing in an enterprise.”

Thus, we can say that the main objectives of management audit is to conduct a systematic and unbiased analysis and evaluation of a entire management system. It makes a critical analysis of the organisational structure, its various departments, Plans of management, Policies, work-procedures, use of human and physical resources and various other achievements and failures with a view to determine the afficiency of the managers. So as to bring about improvement in them.

Procedure of Management Audit : The following Procedure is normally followed for conducting management audit.

(i) Preliminiary Decisions : First of all, the board of directors of the organisation or the managing director decides about the objectives of the management audit, what shall be included in it, when it shall be done and who shall be its auditors.

(ii) Audit : After making the initial decisions the actual work of the management audit begins. It includes various activites like determination of the’sources and means of information, making the audit Programme, inspection of necessary records and reports, interviewing the managers, making surveys, inspection of the organisation structure, inspection of various techniques of motivation, communication and control, considering their suitability, reporting the difficulties etc. Apart from this, he judges the quality of managerial decisions taken in various field of management.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

(iii) Critical Appraisal : After obtaining all the necessary informations, the management auditor makes a critical evaluation of it and tries, to find out unneccessary activities, differentiate between the activities which are required and which are not required for the achievement of objectives, what are the various problem related with the implementation of various Policies, Procedures and decisions.

(iv) Suggestions for improvement : After making such analysis the auditor suggests the remedial actions which are based on his experience, suggestions of various executives and the directions of the top executives to bring about improvement in the management of the company.

Long Answer Type Questions

Question 1.
Explain the various steps involved in the Process of control.
Answer:
Control Process : The Process of control involves the setting of standards comparison of actual result with the standards, detection and correction, of the deviations if any.
Thus, the Process of Control involves four steps:-

  • Setting standards
  • Measurement of Actual Performance.
  • Comparison of actual Performance with the standards and calculating Deviations.
  • Taking corrective Action.

1. The Process of control can be presented by way of diagram as follows
NCERT Solutions for Class 11 Business Studies Chapter 8 Controlling 1
Setting Standards : The first step in the control Process is the setting up of control standards. Standards Present the criteria against which actual Performance is measured. Standards serve as the bench marks because they reflect the desired results or Performance. The standard can be laid down in terms of physical terms like quantities of the Product, labour-hours, units of service, speed, etc. or in monetary terms like sales value, costs, capital espenditure or Profit etc.

These standards must be easily attainable through the available capability and resources. The standard must also be according to the Plans of Process of the enterprise. While setting the standards the managers should keep in mind that they are

  • Simple and easily attainable
  • definite
  • measurable
  • according to the objectives
  • flexible
  •  timely and
  • economical.

To make standrds effective it should be ensured that different standards are laid down for different responsibility centers so that it becomes easier to motivate the employees of different centers.

The extent of deviations which shall be considered as normal should also be laid down because some deviations between the standards and actuals are inevitable. Thus, the limits up to which deviations shall be tolerated must be established. such limits must neither be too high nor too low.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

2. Measurement of actual Performance : The next step in the Process of Control is the measurement of actual Performance. While measuring actual Performance it should be ensured that

  • The date of Progress should be prepared regularly and constantly.
  • So far as possible measurement should be done during the course of Performance.
  • The figures of date of measurement should be accurate and reliable.
  • Report regarding important deviations should reach the manager very quickly so that corrective action may be taken immediatey.

While Preparing the report maximum emphasis should be given to the deviations which are highly important because the top managers do not have must time and they are expected to concentrate only on important deviations. The managers may not pay need to the deviations which are with in the prescribed limits.

3. Comparison of Actual Performance with Standards and Calculations of Deviation . The third major step in the control.Process involves the comparison of actual Performance with the Standard Performance. Such comparison will reveal the deviations between actual and desired results. Steps are taken to find out the reasons for the deviations. There could be many reasons for the deviations like:

  • Setting of wrong standards : Like wrong estimates of cost of production, sales, Profits etc.
  • General Hurdles : Like short supply of raw materials, breaking of machines etc.
  • Change in circumstances : Like entry of new competitors in the market, change in demand, fashion etc.
  • Human Causes : Inefficiency in completing the work by different individuals or groups.

Here, managers should see that they concentrate only on major deviations because small deviation can be coincidental. Thus they need not be given much attention.

From the analytical viewpoint deviations can be divided into following two categories.
(i) Controllable Deviations : Ones which can be controlled, and
(ii) Uncontrollable Deviations : Ones which cannot be controlled but can be reduced with the help of good system of forecasting. For example entry of various competing firms in the market is an uncontrollable deviation. Corrective actions can rectify only the controllable deviations.

4. Taking Corrective Action
The final step in the control Process is taking corrective action. Actually corrective action is the soul of controll Process. Its main aim is to help in making actual process in accordance with the expected Progress. It includes two types in activities.

  • To remove deviations in actual Progress.
  • To Prevent reocurrence of the deviations.

The managers should consider four things while taking corrective actions.

  • Corrective actions should be undertaken immediately
  • Corrective actions should be based upon a careful inquiry into causes of deviations and not on any guesswork or hypothetical ideas.
  • Corrective actions should be compatible with the Psychology of the related employees.
  • Corrective actions should be initiated by the managers at the same level at which the deviations are recorded.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 2.
Explain the techniques of managerial control.
Answer:
Techniques of Managerial Control
The various techniques of managerial control may be classified in to two broad categories
(i) Traditional techniques and
(ii) Modern techniques.

(i) Traditional Techniques : Tradinational Techniques are those which have been used by the companies for a long time now. However, these techniques have not become obsolete and are still being used by companies. These include:
a. Personal observation
b. Statistical reports
c. Breakeven analysis
d. Budgetary control

(ii) Modern techniques : Modem Techniques of controlling are those which are of recent origin and are comparetively new in management literature. These techniques provides a refreshingly new thinking on the ways in which various aspects of an organisation can be controlled. These include

  • Return on investment
  • Ratio Analysis
  • Responsibility accounting
  • Management audit
  • PERT and CPM
  • Management information system.

Traditional Techniques

Personal Observation : This is the most traditional method of control. Personal observation enables the manager to collect first hand information. It also creates a Psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise and cannot effectively be used in all kinds of jobs.

Statistical Reports : Statistical Analysis in the form of averages, percentages, ratios, correlation, etc. Present useful information to the managers regarding performance of the Organisation in various areas. Such information when presented in the form of charts, graphs, tables, etc. enable in managers to read them more easily and allow a comparison to be made with performance’ in previous periods and also with the benchmarps.

Breakeven Analysis : Breakeven analysis is a technique used by managers to study the relationship between costs, volume and profits. It determines the probable profit and losses at different levels of activities. The sales volume at which there is no profit, no loss is known as breakeven point. It is a useful technique for the managers as it helps in estimating profits at different levels of activities.

Figure shows breakeven chart of a firm. Breakeven Point is determined by the intersection of Total Revenue and Total Cost curves. The figure show that the firm will break even at 50,000 units of output. At this point, there is no profit no loss. It is beyond this point that the firm will start earning profits.
NCERT Solutions for Class 11 Business Studies Chapter 8 Controlling 2

Breakeven Point can be calculated with the help of the following formula
Breakeven Point = \(\frac{\text { Fixed Costs }}{\text { Selling Price Per unit – Variable cost per unit }}\)
Breakeven analysis helps a firm in keeping a close check over its variable costs and determines the level of activity of at which the firm can earn its target Profit.

Budgetary Control
Budgetary control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards. This comparison reveals the necessary actions to be taken so that organisational objectives are accomplished.

NCERT Solutions for Class 11 Business Studies Chapter 8 Controlling

Budgeting offers the following advantages.
1. Budgeting focuses on specific and time-bound targets and thus, helps in attainment of organisational objectives.

2. Budgeting is a source of motivation to the employees who know the standards against which their performance will be appraised and thus, enables them to perform better.

3. Budgeting helps in optimum utilization of resources by allocating them according to the requirements of different departments.

4. Budgeting is also used for achieving coordination amount different departments of an organisation and highlights the interdependence between them. For instance, sales budget cannot be prepared without knowing prodution programmes and schedules.

5. It facilities management by exception by stressing on those, operations which deviate from budgeted, Standards in a significant way. However, the effectiveness of budgeting depends on how accurately estimates have been made about future. Flexible budget should be prepared which can be adopted it forecasts about future turn out to be different, especially in the fact of changing environmental “forces, managers must remember that budgeting should not be viewed as an estimate but a means to achieve organisational objectives.

Modern Techniques

Return on Investment : Return on Investment (ROI) is a useful technique which provides the basic yardstick for measuring whether or not invested capital has been used effectively for generating resonable amount of return. ROI 1 can be used to measure overal 1 Performance of the organisation or of its individual departments or divisions. It can be calculated as under.
\(\mathrm{ROI}=\frac{\text { Sales }}{\text { Total Investment }} \times \frac{\text { Net Income }}{\text { Sales }}\)
Net Income before or after tax may be used for making comparisons. Total investment includes both working as well as fixed capital invested in business. According to this techniques, ROI can be increased either by increasing sales volume proportionately more than total investment or by reducing total investment without having any reductions in Sales Volume.

ROI provides top management an effective means of control for measuring and comparing performance of different departments. It also permits departmental managers to find out the problem which affects ROI in ait advers manner.

Ratio Analysis :
Ratio Analysis refers to analysis of financial statements through computation of ratios. The most commonly used ratios used by organisations can be classified into the following categories.

1. Liquidity RatiosLiquidity ratios are calculated to determine short-term solvency of business. Analysis of current position of liquid funds determines the ability of the business to pay the amount due to its state holders.

2. Solvency Ratios : Ratios which are Calculated to determine the long term Solvency of business are known as solvency Ratios. Thus, these ratios determine the ability of a business to service its indebtedness.

3. Profitability Ratios These ratios are calculated to analyse the Profitability Position of a business. Such ratios involve analysis of Profits in relation to sales or funds or capital employed.

4. Turnover RatiosTurnover ratios are calculated to determine the efficiency of operations based on effective utilisation of resources higher turnover means better utilisation of resources.

Responsibility Accounting :

Responsibility Accounting is a system of accounting in which different Section, divisions and departments of an organisation are set up as ‘Responsibility Centers. The head of the center is responsible for achieving the target set for his center.

Responsibility centers may be of the following types.
1. Cost Center:- A cost or expense center is a segment of an organisation in which managers are held responsible for the cost incurred in the center but not for the revenues. For example, in a manufacturing organisation, production department is classified as cost center.

2. Revenue Center : A revenue center is a segment of an organisation which is primarily responsible for generating revenue. For example, marketing departments of an organisation may be classified as a revenue center.

3. Profit Center : A Profit center is a segment of an organisation whose manager is responsible for both revenues and costs. For example, repair and maintenance departments of an organisation may be treated as a profit center if it is a allowed to bill other production departments for the services provided to them.

4. Investment Center : An investment center is responsible not only for profits but also for investments made in the center in the form of assets. The investment made in each center is separately ascertained and return on investment is used as a basis for judging the performance of the center.

Management Audit : Management audit refers to systematic appraisal of the overall v Performance of the management of an organisation. The purpose is to review the efficiency and effectiveness of management and to improve its performance in. future periods. It is helpful in identifying the deficiencies in, the Performance of management functions. Thus, Management audit may be defined as functioning, performance and effectiveness of management of an organisation.
PERT and CPM

PERT (Programme Evaluation and Review Techniques) and CPM (critical Path method) are important Network techniques useful in Planning and Control. These techniques are especially useful for planning, scheduling and implementing time bound projects involving performance of a variety of complex, diverse and interrelated activities.

These techniques deal with time scheduling and resource allocation, for these activities aim at effective execution of Projects with in given time schedule and structure of costs.

The steps involved in using PERT/CPM are as follows.
1. The Project is divided into a number of clearly indentifiable activities which are then arranged in a logical sequence.

2. A Network diagram is prepared to show the sequence of activities, the starting point and the termination Point of the Projects.

3. Time estimates are prepared for each activitiy. PERT requires the preparation of three time estimates – optimistic (or shotest time), pressimistic (br longest time) and most likely time. In CPM only one time estimate is prepared. In addition, CPM also requires making cost estimates for completion of Project.

4. The longest path in the network is identified as the critical path. It represents the sequence of those activities which are important for timely completion of Project and where no delays can be allowed without delaying the entire Projects. If required, the Plan is modified so that execution and timely completion of project is under control. PERT and CPM are used extensively in areas like ship- building, construction projects, aircraft manufacturing etc.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 3.
Explain the importance of controlling in an Organisation. What are the problems faced by the organisation in implementing an effective control system?
Answer:
Importance of Controlling : Control is an indispensable function of Management. Without Control the best of Plans can go away. A good control system helps an organisation in the following ways.

1. Accomplishing Organisational goals : The controlling function measures progress towards the organistional goals and brings to light the deviations, if any, and indicates corrective action. It thus, guides the Organisation and keeps it on the right track so that organisation goals might be achieved.

2. Judging accuracy of standards : A good control system enables management to verify whether the standards set are accurate and environment and helps to review and revise the standards in the light of such changes.

3. Making efficient use of resources : By exercising control, a manager seeks to reduce wastage and spoilage of resources. Each activity is performed in accordance with predetermined standards and ndrms. Thus ensures that resources are used in the must effective and efficient manner.

4. Improving employee motivation : A good control system ensures that employees know well in advance what they are expected to and what are the standards of performance on the basis of which they will be appraised. It, thus, motivates them and helps them to give better performance.

5. Ensuring order and discipline : Controlling creates an atmosphere of order and discipline in the organisation. It helps to minimize dishonest behaviour on the part of the employees by keeping a close check on their activities. Exhibit – It explains how an important export company was able to track dishonest employees by using computer monitoring as a part of their control system.

6. Facilitating coordination in action : Controlling provides direction to all activities and efforts for achieving organisational goals. Each department and employee is governed by predetermined standards which are well coordinated with one another. This ensures that overall organisational objectives are accomplished.

Limitation of Controlling : Although controlling is an important function of management, it suffers from the following limitations.

1. Difficulty in setting quatitative standards : Control system loses its effectiveness when standards connot be defined in quantitative terms. This makes measurement of performance and th,eir comparison with standards a difficult task. Employee moral, job satisfaction and human behaviour are such areas where this Problem might arise.

2. No Control on external factors : An enterprise cannot control external factors such as government policies, technological changes, competition etc.

3. Resistance from employees : Control is often resisted by employees. They see it as a curb to their freedom. For instance employees might object when they are kept under a strict watch with the help of CCTVs.

4. Costly affair : Control is a costly affair as it involves a lot of expenditure, time and effort. A small enterprise cannot effort to install an expensive control system. It cannot justify the expenses involved. Managers must ensure that the costs of installing and operating a control system should not exceed the benefits derived from it.

Question 4.
Discuss the relationship between planning and controlling.
Answer:
Control is Aimless without planning : Control is impossible without planning. Planning helps to determine which department and which individuals have to achieve what objectives, within how much time and at what costs. Thus, control becomes more effective because the,manager become aware and able to compare the actual progress of. each related department and individual with the desired standards.

If the actual progress is less than the desired standard then the managers cannot only analyse the reasons for it but also determine the responsibility of it. In the absense of planning the managers do not have such scientific standards against which they can evaluate the progress of the employees. That is why planning is said to be the life blood of control.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

From the above mentioned discussion it is clear that the functions of control and planning are so must interlinked with each other that it is very difficult to seperate the two and one is incomplete without the other. Newman and Warren have rightly said, “Planning without corresponding control are apt to hollow hopes.”Planning without control is Meaningless exercise, Control is Aimless without Planning

Control and planning are closely related to each other. Planning is meaningless without control and control is aimless without. planning. Planning without control is merely a pipe dream or wishful thinking. The best .laid plans may go astray in the absense of an adquate control system. Planning is the basis of control. Control implies the existence of certain standards against which the actual results may be evaluated. These standards are.formed only on the . basis of planning.

(i) Planning without control is Meaningless Exercise : Through planning we decide as to what is to be done in the future. In it objectives are laid down for the desired future and necessary methods to achieve them are decided, It is a process through which the organisations bring about a harmony in their objectives and business oppurtunities with their available resources.

If plans are not executed properly then they shall remain a mere wishful thinking and will lead to misuse of the organisational resources and failure to achieve the organisational objectives. Thus planning becomes successful only when it is executed effectively. For this, control is essential.

If the activities are not performed according to plans than the reasons for the same are detected and corrective actions are taken immediately to remove then. Thus, planning becomes meaningless in the absence of control.

Application Type Questions Answers

Following are some behaviours that you and others might engage in on the job. For each item, choose the behaviour that management must keep a check to ensure an efficient control system.

Question 1.
Biased performance appraisals :
Answer:
The behaviour of immediate superior to subordinate is undesirable as the work of performance appraisal by immediate superior or boss should be made on merit and that must be free from any biasness.

Question 2.
Using company’s supplies for personal use :
Answer:
Using company’s supplies for personal use is an objectionable behaviour of personnel incharge of organizational supplies of materials etc. Such practices should be curbed immediately when comes to notice of the immediate senior. Manager should sack such erring official immediately or be transferred to other jobs where such type of check be maintained.

Question 3.
Asking a person to violate company’s rules :
Answer:
Asking a person to violate company’s rule is against the organizational norms and the behaviour of such employee is dangerous for organizational growth and progress. Management should ensure that strict observance of organization’s rules and policies by every employee. With the help of effective control, an atmosphere of order and discipline be created, which helps to minimise dishonest behaviour on the point of employee by keeping a close check on their activities.

Question 4.
Calling office to take a day off when one is sick :
Answer:
Calling office to take a day off when one is sick is a behaviour responsible to create an atmosphere pf restlessness in the minds of employee who worked sincerely and committedly. Controlling provides coordination among all employers and departments.

Question 5.
Overlooking boss’s error to prove loyalty :
Answer:
Overlooking boss’s error to prove loyality is a behaviour of flattering of the superior. Such type of personal or employee and their behaviour is a real danger to the organization and also create a stigma to the knowledge and capabilities of the superior. Management should make a rational judgement between wrong and write. Management should keep himself/herself of the above such things and make sure that such behaviour will not repeat in future.

Question 6.
Claiming credit for someone else’s work :
Answer:
Claiming credit for someone else’s work is a human distorted psychological behaviour. Management should take stern action against such employee. Management should also empower employees by giving them the responsibility and accountability for their performance, including the authority to halt production to correct the problems. He should also create work cells, that is within the company that manage their production with limited supervision.

Question 7.
Reporting a violation on noticing it:
Answer:
Reporting a violation on noticing it is also a positive behaviour and should not be avoided. Management must ensure that any violation of rules and, procedure in the organization not be tolerated and reported to the immediate superior.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

Question 8.
Falsifying quality reports :
Answer:
Falsifying Quality Reports hinder to achieve the desired results. In such situation, measurement of actual perforfnance with the standard performance will never be possible. Management should pinpoint such officials and take necessary action so that such, occurrences will not be repeated in future.

Question 9.
Taking longer than necessary to do the job .
Answer:
Taking longer than necessary to do the job will make the controlling a costly affair as it involves a lot of expenditure time and effort. A small organization cannot afford such control system. The management should ensure that goals should be achieved within a stipulated time and costs of installing a control system should not exceed the benefits derived from it.

Question 10.
Setting standards in consultation with workers. You are also required to suggest the management how the undesirable behaviour can be controlled.
Answer:
Setting standards in consultation with workers is a desirable behaviour for better performance and control. At the time of setting standards manager should try to set standard’s in preuse quantitative terms which makes comparison with actual performance easier.

Case Problem -1

A company ‘M’ limited is manufacturing mobile phones both for domestic Indian market as well as for export. It had enjoyed a substantial market share and also had a loyal customer following. But lately it has been experiencing problems because its targets have not been met with regard to sales and customer satisfaction. Also mobile market in India has grown tremendously and new players have come with better technology and pricing. This is causing problems for the company. It is planning to revamp its controlling .system and take other steps neccessary to rectify the problems it is facing.

Question 1.
Identify the benefits the company will drive from a good control system.
Answer:
It will help in accomplishing its goals and will help in judging accuracy of standards. It will ensure efficient utilization of resources etc.

Question 2.
How can the company relate its planning with control in this line of business to ensure that its plans are actually implemented and targets attained.
Answer:
A good control system ensures that employees knew well in advance what they expected to do. It will create an atmosphere of order and discipline. When its employees know about the plan well in advance they will achieve their goal successfully.

Question 3.
Give the steps in the control process that company should follow to remove the problems it is facing.
Answer:
There are five main steps that company should follow
1. Setting performance standards
2. Measurement of actual performance
3. Comparison of actual performance with standards
4. Analysis deviation
5. . Taking corrective actions
4. What techniques of control can the company use?
Answer:
Company should use Traditional Techniques because it involves.
1. Personal observation
2. Statistical reports
3. Breakeven analysis
4. Budgetary control.

NCERT Solutions for Class 12 Business Studies Chapter 8 Controlling

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NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 7 Directing Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Directing NCERT Solutions for Class 12 Business Studies Chapter 7

Directing Questions and Answers Class 12 Business Studies Chapter 7

Multiple Choice Questions

Question 1.
Which one of the following is not an element of direction?
(a) Motivation
(b) Communication
(c) Delegation
(d) Supervision.
Answer:
(c) Delegation.

Question 2.
The motivation theory which classifies needs in hierarchical order is developed by.
(a) Fred Luthans
(b) Scott
(c) Abraham Maslow
(d) F. Drucker
Answer:
(c) Abraham Maslow.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 3.
Which of the following is a financial incentive?
(a) Promotion
(b) Stock Incentive
(c) Job Security
(d) Employee Participation
Answer:
(b) Stock Incentive.

Question 4.
Which of the following is not an element of communication process?
(a) Decoding
(b) Communication
(c) Channel
(d) Receiver
Answer:
(b) Communication.

Question 5.
Grapevine is ………….
(a) Formal Communication
(b) Barrier of Communication
(c) La tern al Communication
(d) Informal Communication
Answer:
(d) Informal communication.

Question 6.
Status comes under the following type of barriers
(a) Semantic barrier
(b) Organisational barrier
(c) Non semantic barrier
(d) Psychological barrier
Answer:
(b) Organisation Barrier.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 7.
The software company promoted by Narayana Murthy is …..
(a) Wipro
(b) Infosys
(c) Satyam
(d) HCL
Answer:
(b) Infosys.

Question 8.
‘The highest level need in the need Hierarchy of Abraham Maslow.
(a) Safety Need
(b) Belongingness need
(c) Self actualisation need
(d) Prestige need
Answer:
(c) Self Actualisation Need.

Question 9.
The process of converting the message into communication symbols is known aS –
(a) Media
(b) Encoding
(c) Feed Back
(d) Decoding
Answer:
(b) Encoding.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 10.
The communication network in which all subordinates under a supervisor communicate through supervisor only is
(a) Single chain
(b) Inverted V
(c) Wheel
(d) Free flow
Answer:
(c) Wheel.

Short Answer Type Questions

Question 1.
Distinguish between leaders and managers.
Answer:
Sometimes leadership and management are used as synonymous terms. This is” not true. There are several differences between leadership and management.

1. Relationship : Management implies superior subordinate relationship. This relationship arises within organisational context.- On the other hand, ’leadership can occur anywhere within or without organisation content. For example, inform group have leader but no managers.

In other ‘ words, leadership is possible in both formally organised as well as ” unorganised groups. But management is possible only in formal and organised groups. The followers of a leader are not necessarily his juniors or subordinates. They may be leader’s peers, associates and even seniors.

2. Source of influence : A manager is appointed and he obtains authority from his position.He makes use of his formal authority to influence the behaviour of his subordinatprs. On the contrary, a leader is not always appointed and he drives his power from his followers who accept him their leader. A leader makes use of this power to influence the attitudes and behaviour of his followers.

3. Sanctions : A manager has command over the allocation and distribution of rewards (positive sanctions) e.g. promotion and punishments (negative sanction), e.g. demotion. On the other hand a leader has command over social satisfaction and related task rewards. Organisational sanctions exercised by a manager are geared to the physiological and security needs. But informal sanctions exercised by a leader are geared to social and ego need.

4. Basis of Following : Both managers and leaders have followers. But the people follow them for different reasons. People follow a manager because they are required to follow by their job description supported by a system of rewards and potenties. But a manager may be there even if there are no followers but only subordinates. A manager may continue in office so long as his performance is considered satisfactory. Whereas a leader can survive as long as followers accept him.

5. Accountability : A manager is accountable for his own behaviour as well as for the behaviour of his subordinates. His accountability of performance is clearly defined. But there is no clear-cut accountability relationship in leadership as a leader is accountable for his behaviour in the same way. A manager seeks to achieve organisational goals but a leader is ‘ more concerned with group goals and members satisfaction.

6. Functions : A manager performs all the functions of planning, organising, staffing, directing and controlling. On the other hand, the main job of a leader is to guide, inspite the efforts of his followers. Leadership in .one aspect or demand of directing function. Thus, management is a wider term then management. A manager is more than a leader. Managers are leaders but all leaders are not managers.

A leader does not require a managerial position. There can be leaders who are not appointed as managers of work groups. But by , virtue of their position, managers have to provide leadership to their subordinaties. Leadership of a manager depends on his personal qualities, attitudes of followers towards him and the situation in which they work. Non-managers can also be leaders of work group by influencing the behaviour of workers.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

A strong leader can be weak manager just as a strong manager may be a weak leader. A leader need not be a manager but a good – manager must have the qualities of an effective leader. A managercan get worn done from his subordinates, because he has the authority to distribute reused and penalties to subordinates. But the can make full use of their potential only by inducing confidence and zeal among them. For this purpose a manager must posses leadership qualities.

Difference between Leadership and Management

LeadershipManagement

Does not require Managerial position; A leader is not necessarily a manager

Requires Managerial position.
Mainly involves directionInvolves all the five functions
Based on acceptance of followers.Based on authority of position
Narrow termWider term.

Question 2 .
Define Motivation .
Answer:
Meaning of Motivation
The term ‘motivation’ has been derived from the word ‘motiv which means the urge to do or not to do sometings. Motive is ti.at force within an individual which compels him to act or not to act in certain way. Motives help and guide people to action. Motives, reflect need, wants, drive and impulses within people.

Motivation may, therefore, be defined as the process of stimulating or inducing people to take the desired of action. It is the act of inspiring employees to work hard to achieve the desired goals of the organisation. It involves arousing needs and desires in people so as to initiate and direct their behaviour in a purposive manner.

The aim of motivation is to influence the behaviour of subordinates for better performance and achieving the desired results. Some popular definitions of motivation are given below.

“Motivation means a process of stimulating people to accomplish desired goals.” – William Scott

“It refers to the way in which ways, drives, desires, aspirations, stirrings or needs direct, control or explain the behaviour of human beings.” – Daffon E. Mcfarland

“Motivation is an inspirational process which impels the members of the team to pull their weight effectively to give their loyalty to the group, to carry out properly the tasks that they have accepted and generally to play an effective part in the job that the group has under taken.” – E.F.L. Brech

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 3.
What is informal communication?
Answer:
Informal Communication : Communication that takes place without following the formal lines of communication is said to be informal communication. Informed system of communication is generally referred to as the ‘grapevine’ because it spreads throughout the organisation with its branches going Out in all directions in utter disregard to the levels of authority.

The informal communication arises out of needs of employees to exchange their views, which cannot be done through formal channels. Workers chit chatting in a canteen about the behaviour of the superior, discussing about rumour that some employees are likely to transferred are some examples of informal communications. The grapevine/ informal communication spreads rapidly and sometimes gets distorted.

It is very difficult to detect the source of such communication. It also leads to generate rumors which are not authentic. People’s behaviours is a fected by rumors and informal discussions and sometimes may hamper work environment. Some times, grapevine channels may be helpful as they carry information rapidly and therefore may be useful to manager at times, informal channels are used by managers to transmit information to know the reactions of his subordinates.

An intelligent manager should make use of positive aspects of informal channels and minimize negative aspects of this channel of communication.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 4.
What are semantic barriers of communication?
Answer:
Barriers to Communication
It is generally observed that managers face several problems due to communication breakdowns or barriers. These barriers may prevent a communication or jitter part of it or carry incorrect meaning due to which misunderstandings may be created. Therefore, it is important for a manager to identify such barriers and take measures to over come them. The barriers to communication in the organizations can be broadly. grouped as semantic barriers, psychological barriers, organizational barriers, and personal barriers. These are briefly discussed below.

Semantic barriers
Semantic is the branch of linguistics dealing with the meaning of words and sentences. Semantic barriers are concerned with problems and obstructions in the process of encoding and decoding of message into words or impressions. Normally such barriers result on account of use of wrong words, faulty translations, different interpretations  etc. These are discussed below

(i) Badly expressed message : Some times intended meaning may not be conveyed by a manager to his subordinates. These badly expressed messages may be an account of inadequate vocabulary usage of wrong words, commission of needed . words etc.

(ii) Symbols with difficult meanings : A work may have several meanings. Receiver has to perceive one such meanings for the word used by communicator. For example consider these three sentences where the work ‘value’ is used

  • What is the value of this ring?
  • I value of our friendship
  • What is the value of learning computer skills?

You will find that the ‘value’ gives different meaning in different v contexts. Wrong perception leads to communication problems.

(iii) Faulty translations : Sometimes the communications originally drafted in one language (e.g. : English) need to be translated to the language understandable to workers (e.g.; Hindi). If translator is not proficient with both the languages, mistakes may creep in causing different meanings to the communication.

(iv) Unclarified assumption : Some communications may have certain assumptions which are subject to different interperetations. For example, a boss may instruct his subordinate, “Take care of our guest”. Boss may mean that subordinate should take care of transport, food, accommodation of the guest until he leaves the place. The subordinate may interpret that guest should be taken to hotel with care. Actually the guest suffers due to these unclarified assumptions.

(v) Technical Jargon : It is usually found that specialists use technical Jargon while explaining to persons who are not specialists in the concerned field. Therefore, they may not understand the actual meaning of many such words.

(vi) Body language and gesture decoding : Every movement of body communicates some meaning. The body movement and gestures of communicator matter so much in conveying the message. If there is no match between what is said and what is expressed in body movements, communications may be wrongly perceived.

Question 5.
Who is a supervisor?
Answer:
The supervisor occupies an intermediate position between management and operative employees. As the connecting link between management and workers, the supervisor bridges the grap between what the management expects and what the workers want. He acts as the medium of communication between higher level managers and the operatives. The supervisor holds a key position in the organisation.

He turns plans and policies of the organisation into actual result through the efforts of operatives. As the leader of his group or section he is responsible for both the quantity and quality of production. Supervisors are online executives with command authority. They perform all the basic functions of management. Their main task is to secure desired results from rank and file in accordance with predetermined standards of performance.

The quantity and quality of work depends to a large extent on the competence and character of supervisors. They quality of supervision determines not only the efficiency of operations but also the cooperation, team spirit and discipline among the employees. The supervisor is expected to secure efficient performance from employees and at the same time keep them happy and satisfied.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Supervision is needed due to the following reasons
(a) Every worker must clearly understand the nature of work he is expected to do and the manner in which he is to do it. He must be given clear and precise instructions so that he understands his duties properly and his performance can be up to the required level. It is the job of supervisor to provide such orders and instructions to workers.

(b) Every worker should be assigned duties keeping in view his knowledge, skills and experience. Mismatch between what the worker is capable of doing and what he is asked to do will lead to poor performance and frustration among employees. Supervisors ensure proper assignment of tasks to workers.

(c) In the course of doing their work, operative face problems. They need advice and guidance in performing their duties. Supervisors provide counselling and assistance to them.

(d) Workers may lose interest in their jobs and there may be lack of a sense of.direction and purpose among them. Supervisors can remind them about the usefulness of their work and performance expected from them. They can inspire workers to perform with devott on and zeal.

(e) It is necessary to continuously monitor the performance of operatives. Such monitoring provides useful feed back as to in what respects the performance is not upto the desired level and what corrective actions are required. The supervisor monitor performance and discourages indifference and negligence on the part of workers.

Question 6.
What are the elements of directing ?
Answer:
Elements Of Directing
Directing function of management includes the following elements:
(a) Supervision
(b) Leadership
(c) Motivation
(d) Communication

NCERT Solutions for Class 11 Business Studies Chapter 7 Directing 1

(a) Supervision : It refers to overseeing the work of the subordinates by their superior. It primarily deals with instructing and guiding the employees towards better level of performance.

(b) Leadership : It is an attempt aimed at influencing people directly towards the attainment of some goal. It is the process of influencing people so that they will strive willingly towards the goal.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

(c) Motivation : Motivation may be defined as inspiring a person to intensify his willingness to work harder for the achievement of desired objectives.

(d) Communication : Communication is the process through which two or more persons exchange ideas and feelings among themselves. It involves a systematic and continuous process of under-standing. Thus we can say that all the four elements of directing are very important for an organisation and the organisation must adopt and work according to these elements.

Question 7.
Explain the process of motivation?
Answer:
Process of Motivation
Motivation is the result of interaction between human needs and incentives offered to satisfy them. The main steps in motivation process are given below.

1. Awareness of Need : The process of motivation beings with the awareness of a need. ‘ Feeling of a need creates anxiety or tension in the person.

2. Stimulas for Action : In order to satisfy the need and remove tension, a person takes some action. When a person feels hungry, for example, he takes steps to satisfy his hunger. He works to earn money with which he can buy food. If he gets no work he may beg for food or may even try to steal food.

3. Fulfilment of Need : In case the person is successful in satisfying his need he feels motivated. If the attempt is unsuccessful the need remains unsatisfied. In such a case the person may search for a different action.

4. Discovery of New Need :When one need is satisfied a new need arises and the process is repeated again.

Question 8.
Explain different networks of grapevine communications?
Answer:
Grapevine Network : Grapevine communication may follow different types of network. Some of those networks are shown below. Figure : Grapevine Communication Networks

In single strand network, each person communicates to the other in sequence. In gossip network, each person communicates with all non selective basis. In probability network, the individual communicates randomly w’ith other individual. In cluster, the individual communicates with only these people whom he trust of these four types of networks, cluster is the most popular in organizations.
NCERT Solutions for Class 11 Business Studies Chapter 7 Directing 5

Long Answer Type Questions

Question 1.
Explain the principles of Directing?
Answer:
Principles of Directing
Providing good and effective directing is a challenging task as it involves many complexities. A manager has to deal with people with diverse background, exactation. This implicates the directing process. Certain guiding principles of directing may help in directing process. These principles are briefly explained below

(i) Maximum individual contribution : This principle emphasizes that directing techniques must help every individual in the organization to contribute to his maximum potential for achievement of organizational objectives. It should bringout untappted energies of employees for the efficiency of organization, for example, a good motivation plan with suitable monetary and non-monetary rewards can motivate an employee to contribute his maximum efforts for the organisation as he or she may feel that their efforts will bring them suitable rewards.

(ii) Harmony of objectives : Very often, we find that individual objectives of employees and the organizational objectives understood as conflicting to each other. For example, an employee may expect attractive salary and monetary benefits to fulfil his personnel needs.

The organisation may expect employees to improve productivity to achieve expected profits. But good directing should provide harmony by convincing that employee rewards and work efficiency are complimentary to each other.

(iii) Unity of command : This principle insists that a person in the organization should receive instructions from one superior only. If instruction are received from more than one, it creates confusion, conflict and disorder in the
organization. Adherance to this principle ensures effective direction.

(v) Appropriateness of direction technique : According to this principle, appropriate .motivational and. leadership technique should be used while directing the people based on subordinate needs, capabilities, attitudes and other situational variables. For example, for some people money can act as powerful motivation while for others promotion may act as effective motivator.

(vi) Managerial communication : Effective managerial communication across all the levels in the organization makes direction effective. Directing should convey clear instructions to create total understanding to subordinates. Through proper feedback, the managers should ensure that subordinate understands his instructions clearly.

(vii) Use of informal Organization : A Manager should realize that informal group? or organization exist within every formal organization. He should spot and make use of such organizations for effective directing.

(viii) Leadership : While directing the subordinates, managers should exercise good leadership as it can influence, the subordinates positively without causing dissatisfaction among them.

(ix) Follow through : More giving of an order is not sufficient. Managers should follow . it up by reviewing continuously whether orders are being implemented accordingly or any problems are being encountered. If necessary, suitable modifications should be make in the directions.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 2.
Explain the qualities of a good leader? Do the qualities alone ensure leadership success?
Answer:
Qualities of A Good Leader
In order to be effective in securing the willing cooperation of the follows a leader must possess several qualities.
These qualities may be described as follow :

1. Sound Physic : A good leader must have good health and physical fitness. He requires tremendous stamina and vigour for hard work.

2. Intelligence : A leader should be intelligent enough to examine problems in the right perspective. He should have the ability to assess the pros and cons of his actions in a particular situation. He requires logical lent of mind and an mature outlook.

3. Empathy : Empathy means the ability to look at things from others’ point of view. A good leader must understand the needs, aspirations and feelings of his subordinates. ‘

4. Objectivity
A leader should have an objective outlook, free from bias and prejudice. He should form his opinion and judgement on the basis of facts alone. He needs an open mind, is willing to listen to others and adopt new ideas.

5. Emotional Stability : The leader should have a cool temperamehtancTemotional balance.
He should not be unduly moved by emotions and sentiments. He should not lose temper or show indecisiveness even in the face of heavy odds.

6. Self Confidence and Will Power : A good leader should have confidence, in his own ability to lead others. He also requires the will power to meet the needs of every situation. He can inspire others and win their trust only when he has full confidence is himself and a strong will to win.

7. Communication Skills : A good leader should be able to communicate clearly and precisely the goals and procedures to be followed. This is necessary for persuading and convincing people. The skills to listen potiently and understand is also necessary.

8. Knowledge of Work : A leader should have full knowledge of the work being performed “ by his subordinates. Only then can he guide and supervise his people and command their respect.

9. Vision and Foresight : A leader should be able to anticipate or visualise the future course of events. He needs a sound judgement and the ability to take right decisions at the right time.

10. Sense of Responsibility : A leader should be trustworthy so that subordinates can depends on him. He should’be willing assume responsibility for results. He needs a strong urge to accomplish the goals.

11. Human Relations Attitude : A good leader must be able to win the confidence and loyalty of people. He should have the capacity to create team spirity among his . followers. He should understand and respect the feelings and aspirations of his subordinates. A leader can develop friendly relations with his people only when he is conversant with human behaviour and maintains personal contact with them.

Question 3.
Discuss Maslow’s Need Hierarchy theory of motivation.
Answer:
Hierarchy Of Needs
Needs are the stating point in motivation. If the needs of the workers are identified and satisfied, they will feel happy and show higher productivity. The workers contribute their maximum to the organisational goals if their needs are satisfied. However, the needs of people are large in number as shown in fig. and some of the needs are more, complex than others. So it is not easy to satisfy all the management to satisfy the basic needs of workers such as food,clothing
and shelter. But the satisfaction of psychological needs of workers is a difficult job.

Maslow’s Hierarchy of Needs
Abraham Maslow, an eminent US psychologist, offered a general theory of motivation, called the ‘Need hierarchy theory.’ He felt that people have a wide range of needs which motivate them to strive for their fulfilment. As shown in fig., human needs can be categorised into five types : physiological needs, security needs, social needs, esteem needs and self actuaiisation needs.

Various types of human needs are discussed below :

1. Physiological Needs : These needs relate to the survival and maintenance of human life. They include such things as food, clothing, shelter, air, water and other necessities of life.

2. Security Needs : These needs are also important for most of the people. Everybody wants job security, protection against dangers, safety of property, etc.

3. Social of Affiliation Needs : Man is a social being. He is, therefore, interested in conversation, sociability, exchange of feelings, companionship, recognition, belongingness, etc.

4. Esteem or Status Needs : These needs embrance such things as self-confidence, independence, achievement,competence, knowledge, initiative and success. These needs are concerned with prestige and respect of the individuals.

5. Self-actualisation Needs : These are the needs of the highest order. They are generally found in persons whose first four needs have already been fulfilled.

They are concerned with achieving what a person consider to be his mission of life. For instance, getting India free from the British regine was the mission of Mahatma Gandhi. Sense of achievement may be concerned with making new discoveries and doing unique things.

Maslow felt that the above needs have a definite sequence of domination. Second need does not dominate until first need is reasonably satisfied and third need does not dominate until first two needs have been reasonably satisfied and so on. The other side of the need hierarchy is that man is wanting animal, he continues to want something or the other. He is never fully satisfied. If one need is satisfied, the ot,her need arises.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Thus, the management can get desired behaviour from the employees by satisfying their needs by offering incentives. Management can use two types of incentive, namely,

  • financial, and
  • non-financial.

Financial incentives like wages, commission, bonus, etc., can be used to satisfy the physiological, security and social needs of the workers. Monetary benefits can also satisfy a part of status needs Of the employees. But the needs of the biggest order, i.e., self-actualisation can be fulfilled by offering non-financial incentives such as job enrichment, job enlargement, challenging work, etc.

Question 4.
What are the common barriers to effective communication? Suggest measures to overcome them.
Answer:
Barriers to Effective Communication :Barriers or obstacles to communication cause break-downs, detriorate and inaccurate information. They plaque the daily life and depend upon the accurate transmission of the orders and information for efficient operations.

Whenever a communication is made, there is always a tendency on the part of the receiver to evaluate the message received and then decide to approve or disapprove the same. Another important barrier to communication lies in the layers and spans of management.

In large organisations, there are a number of obstacles which make transmission of message more difficult. In both upward and downward communication, it may happen that some of the persons in the intermediate layers withhold the whole or part of the information because they may feel that by withholding the information they will be better informed than those whom they lead.

It should be noted that although there is no such thing as perfect communication considerable . degree of perfection can be achieved in communication if the barriers to communication are overcome. The main barriers to communication . are discussed below :

1. Complex Organisation Structure : A The organisation structure has an important influence on the ability of the members of the organisation to communicate effectively. These days the organisation structure of most big enterprises is complex involving several layers of supervision and long communication lines Organisation structure creates problems because communication may break down at any level due to faulty transmission.

2. Status Differences : Status of an organisational member is determined by the position he holds in the organisation. This fact is quite apparent when the subordinate talks to his superior. Obstacle in communication occurs when the psychological distance between the two is created because’ of status symbols of the superior. Status symbols include high quality furniture, separate room facilities, etc. A sense of inferiority complex in the mind of the subordinate does not allow him to seek clarification from the superior.

3. Semantic Barriers : Semantic is the science of meaning, words seldom mean the same thing do two persons. Symbols or words usually have a variety of meanings. The sender and the receiver have to choose one meaning from among many. If both of them choose the same meaning, the communication will be perfect.

But this is not so always because of differences in formal education and social background of people and the type of situation faced. The same words may suggest quite different meanings to different people, e.g. ‘profits’ may mean to management efficiency and growth, whereas to employees, profits may suggest excess funds piled up through paying inadequate wages and benefits.

4. Screening or Filtering of Information : Sometimes, the sender screens the information for passing only
such information which will look favourable to the receiver; This is because of the simple reason that no one like to show his mistakes to someone else, especially to his boss. The boss, on the other hand, wants to obtain information about what is actually going on, especially those actions which need his attention.

5. Perceptual Errors : A person’s perception is determined by his needs, social environments, level of education, cultural factors, etc. Every persons tries to interpret the information he receives from his own angle or point of view. This may create complexities in the process of communication. Effective communication requires the willingness to see things through the eyes of others.

6. Predisposition or Closed Mind : Preconceived notions or opinions are a hurdle in communication. If the listener has closed mind, he will evaluate the things from his own point of view and will not be receptive to new ideas. Similarly, if a li stener is suffering from the mirage of too much knowledge, he will , be rigid and dogmatic in attitude.

7. Lack of Ability to Communicate : All persons do not have the skill to communicate. Skills to communicate may come naturally to some, but an average man may need some sort of training and practice by way of interviewing, public speaking, etc.

8. Poor Listening or inattention : Failure to read bulletins, notices, minutes and reports is common among many people. Similarly, verbal communication has no impact on those who are preoccupied or unwilling to listen. If people do not pay the required attention to listening and understanding messages they are supposed to receive, communication will lose its purpose.

Also, some people are too quick in reacting on information as it is being received from the sender, without waiting for full information. This may drive the sender to frustration and into a sense of futility. The sender may then learn to be different in transmitting messages to such premature evaluators.

9. Lack of Credibility of Source : If the receiver has trust and confidence in the words.and actions of the communicators, the message received will be considered credible. But if there is a gap between what the communicator says and what he does, the message from him will not create the desired response from the receiver. The receiver will not take the message seriously because of inconsistency of message and the incredibility of its source.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Overcoming Barriers to Communication :  An effective system is one that ensures smooth flow of information in the organisation and overcomes barriers to communication. Such a system has the following characteristics.

(i) Free Flow of Information : The system of communication should be so designed that it has short lines of information flows. There should be free movement of information both vertically and horizontally. The rigid organisation structure should not be allowed to come in the way of smooth and speedy flow of information. Moreover, delegation and decentralisation of authority should be encouraged to cut delays in decision-making and speed up communication.

(ii) Clarity of Message : The message must be as clear as possible. No ambiguity should creep into it. The message can be conveyed properly only if it is clearly formulated in the mind of the communicator. The message should’, be encoded in direct and simple language so that the receiver is able to understand it without much difficulty.

(iii) Positive Attitude : There should be change in the attitudes of superiors and subordinates so that there is open communication at all times various levels. They should overcome the; status barrier to create proper understanding. The superiors must keep the subordinates informed about the policies and programmes and also be in touch with subordinates regarding their problems, suggestions etc. This is necessary to achieve the organisational goals effectively.

(iv) Open Mind : The parties to communication must have open mind. They should not try to hold information just to serve their personal interests. They should attempt to interpret the information without any prejudice or bias. They should also be receptive to view ideas that may come across. They should not react before receiving and understanding the full message.

(v) Communication Skills : Every person should have the necessary skills to share information with superiors, peers and subordinates. This will improve human relations in the organisation and also help in ensuring greater productivity.

(vi) Effective Listening : The sender must listen to the receiver’s words attentively so that the receiver may also listen to the sender at the same time. It is also necessary for every-employee to update his knowledge by reading company notices, bulletins, reports, etc.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

(vii) Receptive to new Ideas : The employees should be prepared to accept new ideas and change themselves accordingly. They should be willing to receive information from internal and external sources which calls for change in the organisation.

(viii) Flexibility : A good system should be flexible enough to adjust to the changing requirements. It should be able to carry extra loads of information without much strains. It should absorb new techniques of communications with little resistance. Use of a wide .range of media such as oral and written message, fact-to-face contacts, telephonic calls, group meetings, etc. should be encouraged without any hesitation.

Question 5.
Explain different financial and non-financial incentives used to motivate employees of a company.
Answer:
Meaning And Types of Incentives
Meaning of Incentives : An incentive is something that stimulates a person towards some goal. It activates human needs and creates the desire to work. Thus, an incentive is a means to motivation. Incentives generally have a direct influence on the degree of motivation.

In organisations, increase in incentive leads to better performance and vice versa. Generally, incentives induce individuals to respond in a desired manner. Both financial and non-financial incentives may be used by the management to motivate the workers. Financial incentives of v motivators are those which are associated with money. They include wages and. salaries, fringe benefits, bonus, retirement benefits, etc. Non-financial motivators are those which are not associated with monetary rewards.

They include intangible incentives like ego satisfaction, self-actualisation and responsibility. Management makes use of financial and non-financial incentives to satisfy the needs of the employees. The satisfied workers are group goals in a better way.

2. Job Security : Generally, workers prefer security of job. They may not prefer jobs with higher wages or salaries which do not carry security job security is an important non-financial incentive for most of the workers.

3. Recognition : Praise or appreciation satisfies one’s egoistic needs. Sometimes, praise is more effective than any financial incentive. However, this incentive should be used with greater .degree of care because praising an incompetent employee “would create resentment among the competent employees. Of course, occasionally, a pat on back on an incompetent employee may act as an incentive to him for improvement.

4. Challenging Job : For some people, challenging work acts as a great non-financial incentive. It inspires them to work hard and provides them job satisfaction. The management can use ‘job enrichment’ to make the jobs more interesting and challenging.

5. Knowledge of Results
Knowledge-of results leads to employee satisfaction. A worker likes to know the result of his performance. He gets satisfaction when his superior appreciates the work he has done.

6. Opportunity for Growth and Achievement : Opportunity for growth is another kind of incentive. If the employees are provided the opportunity for their advancement and growth and to develop their personality, they feel very must satisfied and become more committed to the organisational goals.

7. Opportunity for Participation : For some employees, opportunity for participation in the process of decision-making serves as a non-financial incentive. Active involvement of the subordinates in decision-making may be achieved by delegation of authority, increasing efficiency of workers.

People in higher positions are not motivated by monetary benefits. They may be motivated by money only if the increase is large enough to increase their standard of living and status in the society. But in case of employees at the operative levels, money certainly plays a significant role in motivating them because their basic needs have not been fulfilled.

Non-Monetory Incentives
Incentives which are not measurable in terms of money are knows as non-monetary or non-financial incentives.
Financial incentives do not work for even to motivate the people at work. The employees do not always run after money as it can’t satisfy all their needs. They want status and recognition in the society.

They want to satisfy their egoistic’needs and to achieve something in their lives. Management can use non-financial incentives to satisfy such needs of workers. Non-monetary incentives such as praise, recognition and opportunity for growth can be strong motivators for employees whose psychological needs are stronger.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Role of Non-Financial Incentives
Non financial or non-monetory incentives motivate the employees in the following ways ‘
(i) Non-monetory incentives such as recognition, office with good furniture, etc. satisfy the psychological needs of individuals.
(ii) They motivate the employees by enhancing their status in the organisation.
(iii) They can satisfy the higher level needs.of individuals, e.g., need for self-fulfilment, advancement, etc.

Types of Non-Financial Incentives
1. Competition
Competition is a kind of non-financial incentive. If there is a healthy competitionnmong the individuals employees or better motivated. Then productivity is also higher. Thus, the existence of incentive system plays an important role in motivating the employees and in increasing their efficiency.

2. Types of Incentives
Two kinds of incentives may be provided to the employees, namely,
(i) financial or monetory incentives, and
(ii) non-financial incentives. These are discussed below.

Monetory or Financial Incentives
Monetory incentives are associated with monetary or financial benefits to the employees. These benefits can be expressed in terms of money. Financial incentives are very commonly used in modem organisations to motivate the employees to increase their productivity. These include bonus, profit sharing, commission, insurance, medical allowance, housing facilities and retirement benefits. These are paid in terms of money.

It is generally said that higher the monetory benefits, higher is the productivity of workers. But this is not always so, Monetary benefits have only limited utility in increasing the motivation of employees. After .the basic needs have been met, the role of money in motivating the employees is generally decreased. The management has to make use of non-financial incentives also to motivate the employees.

The popular monetary incentives offered to employees are briefly discussed below
(i) Profit-sharing : Under profit sharing scheme, the employees are given a share in the profits of the company if the profits exceed the level fixed by the management and increase company’s profits so that they may collectively get a share in the increased profits.

(ii) Co-partnership : Under profit sharing, the employees get a share of profits and not the ownership right or shares in the company. But under co-partnership, the employees are issued shares in lieu of profit sharing. Thus, the employees gain the status of co-partners of the company where they are working.

(iii) Bonus : It is customary to distribute bonus to employees every year. The law provides payment of minimum of 8.33% of annual pay as bonus and it does not prescribe any upper limit. Thus, the rate of bonus is paid to the employees around Diwali every year.

(iv) Commission : Commission is the incentive offered to sales persons to motivate them to increase their sales. In addition to their monthly salary, the sales persons become entitled to a percentage of sales revenues (vaiying from I per cent to 5 per cent). This is called commission on sales.

(v) Cash Rewards For suggestions : Many companies have started suggestion schemes under which handsome rewards are given to the employees whose suggestions are implemented by the management. The suggestions may relate to improvement in techn ique and procedure to reduce cost of production. The amount of reward may depend upon the expected-savings is costs during a particular year because of the implementation of the suggestions.

Role of Monetary or Financial Incentives : Money plays an important role in motivation. Managements generally make use of financial incentives to motivate the workers.

The financial incentives can help increase the motivation of workers in the following ways
(i) Financial incentives fulfil the basic physiological needs (food, clothing and shelter) of the workers. Money is the real motivating factor for the workers where basic needs are not fulfilled.

(ii) Money helps in satisfying the social needs of the workers to some extent because money is often recongnised as a basis of status, respect and power.

(iii) Money is regarded as a basic incentive for individuals when economic rewards are based on productivity. It helps in information sharing, receiving suggestions, etc. Participation would increase the commitment and loyality of the workers to the organisation.

Suggestion System

Suggestion system satisfies the psychological needs of the employees. The organisation which don’t pay cash rewards for useful suggestions publish the worker’s name with his photograph in the company’s magazine. This motivates the employees to be in search for something which may be of great use to the organisation.

Application Type Questions Answers

Question 1.
The workers always try to show their inability when any new work in given to them. They are always unwilling to take up any kind of work. Due to sudden rise in demand a firm wants to meet excess orders. The supervisor is finding it difficult to coped up with the situation. Suggest ways.for the supervisor to handle ‘ the problem.
Answer:
Supervisor in the above problem plays a key role for maintaining group unity among the workers and ensures performance of work according to the targets set. He takes responsibility for task achievement and motivates the workers effectively. A supervisor with good leadership qualities can build up high morale among workers.

A skilled and knowledgeable supervisor can build efficient team of workers. In the above situation, the supervisor may set an example by doing himself the work and make sure that the image of the organization will not let down in the eyes of workers and persuade them to follow his actions or deeds.

Question 2.
Workers of a factory often seek guidance of Production Managers, The production manager finds Himself overburdened. Advise the way to relieve production manager.
Answer:
The production manager of an organization may direct, instruct, guide and council the workers for the attainment of organizational objectives. Production manager may delegate his authorities to immediate supervisor or foreman who may look after the problems of workers. Production manager guides the workers to fully realise their potential and capabilities by motivating and providing effective leadership.

Question 3.
In an organisation employees always feel they are under stress. They take least initiative and fear to express their problems before the manager. What do you think is wrong with the manager?
Answer:
In the above problem, manager centralised all the powers and authorities by himself. People in an organization work with diverse background and expectations which caused stress in the minds of workers. Manager should convey clear instructions to create local understanding to subordinates. Manager should promote informal groups within the organization to relieve stress among the employees or workers.

Question 4.
In an organisation all the employees take things easy and are free to approach anyone for minor queries and problems. This has resulted in everyone taking to each other and thus resulting in inefficiency in the office. It has also resulted in loss of secrecy and confidential information being leaked out. What system do you think the manager should adopt to improve communication.
Answer:
In the above problem, the informal or grapevine type of communicate creates problem to the extent that confidential information and matters of utmost secrecy are leaked between the subordinates. Grapevine comniunication spreads rapidly and sometimes gets distorted. An intelligent manager should make use of positive aspects of informal channels and minimise negative aspects of this channel of communication.

Along with informal communication management should use formal communication flow through official channels designed in the organization chart.

Case Problem -1

Y limited is a bank functioning in India. It is planning to diversify into insurance business. Lately the government of India has allowed the private sector to gain entry in the insurance business. Previously it was the prerogative of LIC and GIC to do insurance business. But now with liberalisation of the economy and to make the field competitive other companies have been given licenses to start insurance business under the regulation of ‘Insurance Regulatory and Development Authority’. Y limited plans to recuit high quality employees and agents and exercise effective direction to capture a substantial part of life and non life insurance business.

Question 1.
Identify how the company can supervise its employees and agents effectively. What benefits will the company derive from effective supervision?
Answer:
Y limited can supervise its employees and agents with the help of good direction, as directing concerns the total manner in which a manager influences the subordinates. It involves good supervision and motivation. Motivation means inspiring the subordinates with a zeal to work. The manager should motivate them and in return they will work with enthusiasm and company will get more insurance policies.

Question 2.
What financial and non-financial insentives can the company use for employees and agents to motivate them? What benefits will company get from them?
Answer:
It should be a company that actively promote freedom to work, freedom to innovate and even freedom to fail. The company should under go a revolutionary changes in terms of its works (policies) Company should give more insentives and freedom in the market to its employees so that, it could get more profits and name.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

Question 3.
How can company ensure that higher order needs i.e. esteem and self-actualisation as specified by Abraham Maslow are met?
Answer:
As according to Abraham it is the highest level of need in the hierarchy. It refers to drive to become what one is capable of becoming. So company may assure with the help of following process.

Self Actualisation needs

Esteem needs

Affiliation/belongingness needs

safety/security needs

Basic phychoiogical needs

If the company will fulfill the above needs it will get success.

Question 4.
Identify the qualities of leadership in this line of business that the company managers must posses* to motivate employees and agents.
Answer:

  • They must have quality to inspire and influence them.
  • They must have the sense of responsibility and a desire to success.
  • They must have full knowledge of the subject.
  • They must be effective motivators.

Question 5.
Give a model of formal communication system that the company can follow. Identify the barriers in this model. How can they be removed?
Answer:
In the above problem, the business of banking and Insurance Sector due to entry of private players in the business, the effective system of communication between the various authorities or levels of management is essential. Various formal systems of communication like chain, wheel, circular, free flow and invested takes place in an organization. In the above case the communication channel of free low of information may be used in my opinion, which may be as unde
NCERT Solutions for Class 11 Business Studies Chapter 7 Directing 4

In this network, each person can communicate with others freely. The flow of communication is fast in this network.
Various Communication barriers like badly expressed messages, unclatified assumptions, Technical terms, loss by transmission and poor retention of information and messages and distrust between communicator and communicate acts as a barrier.

The barriers may be overcome and improve communication effectiveness by clarifying the ideas before communication ensure proper feedback, follow up communication and a feeling of trust and oneness in essential.

Question 6.
How can informal communication help to supplement formal communication model given by you in answer to questions 5?
Answer:
Information Communication system arises out of needs of employees to exchange their views. Sometimes, grapevine communication or informal communication may be helpful as it carry information rapidly and may be useful for managers.

An intelligent manager should make use of positive aspects of informal channels and minimise negative aspects of informal communication. Management should adopt the cluster type of grapevine communication because in such communication the individual communicates with only those people whom he trust. Cluster is the most popular system of communication in organization.

NCERT Solutions for Class 12 Business Studies Chapter 7 Directing

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