Principles of Management

Unit I

Evolution of Management Science

The concept of management has acquired special significance in the present competitive and complex
business world. Efficient and purposeful management is absolutely essential for the survival of a
business unit. Management concept is comprehensive and covers all aspects of business. In simple
words, management means utilising available resources in the best possible manner and also for
achieving well defined objectives. It is a distinct and dynamic process involving use of different resources
for achieving well defined objectives. The resources are: men, money, materials, machines, methods
and markets. These are the six basic inputs in management process (six M's of management) and the
output is in the form of achievement of objectives. It is the end result of inputs and is available through
efficient management process.

Management is the act of getting people together to accomplish desired goals and objectives using
available resources efficiently and effectively. Management comprises planning, organizing, staffing,
leading, coordinating and controlling an organization (a group of one or more people or entities) or
effort for the purpose of accomplishing a goal. Resourcing encompasses the development and
manipulation of human resources, financial resources, technological resources and natural resources.
Management is essential for the conduct of business activity in an orderly manner. It is a vital function
concerned with all aspects of working of an enterprise.

Definition

According to Harold Koontz, "Management is the art of getting things done through and with people in
formally organized groups".

According to Henry Fayol, "To manage is to forecast and to plan, to organise, to command, to coordinate
and to control".

According to Peter Drucker, "Management is a multi-purpose organ that manages business and
manages managers and manages workers and work".

Management is needed for planning business activities, for guiding employees in the right direction and
finally for coordinating their efforts for achieving best/most favorable results. Efficient management is
needed in order to achieve the objectives of business activity in an orderly and quick manner. Planning,
Organising, Coordinating and Controlling are the basic functions of management. Management is
needed as these functions are performed through the management process. Management is needed
for effective communication within and outside the Organisation. Management is needed for
motivating employees and also for coordinating their efforts so as to achieve business objectives quickly.

Efficient management is needed for success, stability and prosperity of a business enterprise. Modem
business is highly competitive and needs efficient and capable management for survival and growth.
Management is needed as it occupies a unique position in the smooth functioning of a business unit.
This suggests the need of efficient management of business enterprises. Profitable/successful business
may not be possible without efficient management. Survival of a business unit in the present
competitive world is possible only through efficient and competent management.

Management as both Science and Art

Management is both an art and a science. The above mentioned points clearly reveals that management
combines features of both science as well as art. It is considered as a science because it has an organized
body of knowledge which contains certain universal truth. It is called an art because managing requires
certain skills which are personal possessions of managers. Science provides the knowledge & art deals
with the application of knowledge and skills.

Features of Management
 Management is Goal-Oriented
 Management integrates Human, Physical and Financial Resources
 Management is Continuous
 Management is all Pervasive
 Management is a Group Activity

Management Functions

According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to control”.
Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for Planning, O for Organizing,
S for Staffing, D for Directing, Co for Co-ordination, R for reporting & B for Budgeting. But the most
widely accepted are functions of management given by KOONTZ and O’DONNEL
i.e. Planning, Organizing, Staffing, Directing and Controlling.

Planning
It is the basic function of management. Planning is determination of courses of action to achieve
desired goals. Thus, planning is a systematic thinking about ways & means for accomplishment of pre-
determined goals. Planning is necessary to ensure proper utilization of human & non-human resources.
It is all pervasive, it is an intellectual activity and it also helps in avoiding confusion, uncertainties, risks,
wastages etc.

Organising
It is the process of bringing together physical, financial and human resources and developing productive
relationship amongst them for achievement of organizational goals. According to Henry Fayol, “To
organize a business is to provide it with everything useful or its functioning i.e. raw material, tools,
capital and personnel’s”. To organize a business involves determining & providing human and non-
human resources to the organizational structure. Organizing as a process involves:

 Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.

Staffing

The main purpose of staffing is to put right man on right job. According to Kootz & O’Donell,
“Managerial function of staffing involves manning the organization structure through proper and
effective selection, appraisal & development of personnel to fill the roles designed un the
structure”. Staffing involves:

 Manpower Planning (estimating man power in terms of searching, choose the person and giving
the right place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.

Directing

It is that part of managerial function which actuates the organizational methods to work efficiently for
achievement of organizational purposes. Direction is that inert-personnel aspect of management which
deals directly with influencing, guiding, supervising, motivating sub-ordinate for the achievement of
organizational goals. Direction has following elements:

 Supervision
 Motivation
 Leadership
 Communication

Controlling
It implies measurement of accomplishment against the standards and correction of deviation if any to
ensure achievement of organizational goals. The purpose of controlling is to ensure that everything
occurs in conformities with the standards. An efficient system of control helps to predict deviations
before they actually occur. According to Koontz & O’Donell “Controlling is the measurement &
correction of performance activities of subordinates in order to make sure that the enterprise objectives
and plans desired to obtain them as being accomplished”. Therefore controlling has following steps:

a. Establishment of standard performance.

 b. Measurement of actual performance.
c. Comparison of actual performance with the standards and finding out deviation if any.
d. Corrective action.

Levels of Management
The term Levels of Management refers to a line of demarcation between various managerial positions in
an organization. The number of levels in management increases when the size of the business and work
force increases and vice versa. The level of management determines a chain of command, the amount
of authority & status enjoyed by any managerial position. The levels of management can be classified in
three broad categories:

1. Top level / Administrative level

2. Middle level / Executory
3. Low level / Supervisory / Operative / First-line managers

1. Top Level of Management

It consists of board of directors, chief executive or managing director. The top management is the
ultimate source of authority and it manages goals and policies for an enterprise. It devotes more time on
planning and coordinating functions.
The role of the top management can be summarized as follows -
a. Top management lays down the objectives and broad policies of the enterprise.
b. It issues necessary instructions for preparation of department budgets, procedures, schedules etc.
c. It prepares strategic plans & policies for the enterprise.
d. It appoints the executive for middle level i.e. departmental managers.
e. It controls & coordinates the activities of all the departments.
f. It is also responsible for maintaining a contact with the outside world.
g. It provides guidance and direction.
h. The top management is also responsible towards the shareholders for the performance of the
enterprise.

2. Middle Level of Management

The branch managers and departmental managers constitute middle level. They are responsible to the
top management for the functioning of their department. They devote more time to organizational and
directional functions. In small organization, there is only one layer of middle level of management but in
big enterprises, there may be senior and junior middle level management. Their role can be emphasized
as -
a. They execute the plans of the organization in accordance with the policies and directives of the top
management.
b. They make plans for the sub-units of the organization.
c. They participate in employment & training of lower level management.
d. They interpret and explain policies from top level management to lower level.
e. They are responsible for coordinating the activities within the division or department.
f. It also sends important reports and other important data to top level management.
g. They evaluate performance of junior managers.
h. They are also responsible for inspiring lower level managers towards better performance.

3. Lower Level of Management

Lower level is also known as supervisory / operative level of management. It consists of supervisors,
foreman, section officers, superintendent etc. According to R.C. Davis, “Supervisory management refers
to those executives whose work has to be largely with personal oversight and direction of operative
employees”. In other words, they are concerned with direction and controlling function of management.
Their activities include -
a. Assigning of jobs and tasks to various workers.
b. They guide and instruct workers for day to day activities.
c. They are responsible for the quality as well as quantity of production.
d. They are also entrusted with the responsibility of maintaining good relation in the organization.
e. They communicate workers problems, suggestions, and recommendatory appeals etc to the higher
level and higher level goals and objectives to the workers.
f. They help to solve the grievances of the workers.
g. They supervise & guide the sub-ordinates.
h. They are responsible for providing training to the workers.
i. They arrange necessary materials, machines, tools etc for getting the things done.
j. They prepare periodical reports about the performance of the workers.
k. They ensure discipline in the enterprise.
l. They motivate workers.
m. They are the image builders of the enterprise because they are in direct contact with the workers.

ROLES OF MANAGER
Henry Mintzberg identified ten different roles, separated into three categories. The categories he
defined are as follows
a) Interpersonal Roles
The ones that, like the name suggests, involve people and other ceremonial duties. It can be further
classified as follows
 Leader – Responsible for staffing, training, and associated duties.
 Figurehead – The symbolic head of the organization.
 Liaison – Maintains the communication between all contacts and informers that compose the
organizational network.
b) Informational Roles
Related to collecting, receiving, and disseminating information.
 Monitor – Personally seek and receive information, to be able to understand the organization.
 Disseminator – Transmits all import information received from outsiders to the members of the
organization.
 Spokesperson – On the contrary to the above role, here the manager transmits the organization’s
plans, policies and actions to outsiders.
c) Decisional Roles
Roles that revolve around making choices.
 Entrepreneur – Seeks opportunities. Basically they search for change, respond to it, and exploit it.
 Negotiator – Represents the organization at major negotiations.
 Resource Allocator – Makes or approves all significant decisions related to the allocation of
resources.
 Disturbance Handler – Responsible for corrective action when the organization faces disturbances.

Managerial Skills:
There are four skills of managers are expected to have ability of:
 Technical skills:
Technical skills that reflect both an understanding of and a proficiency in a specialized field. For
example, a manager may have technical skills in accounting, finance, engineering, manufacturing, or
computer science.
 Human Skills:
Human skills are skills associated with manager’s ability to work well with others, both as a member of a
group and as a leader who gets things done through other.
 Concept Skills:
Conceptual skills related to the ability to visualize the organization as a whole, discern interrelationships
among organizational parts, and understand how the organization fits into the wider context of the
industry, community, and world. Conceptual skills, coupled with technical skills, human skills and
knowledge base, are important ingredients in organizational performance.
 Design Skills:
It is the ability to solve the problems in ways that will benefit the enterprise. Managers must be able to
solve the problems.

The Skills vary at different levels:

Top management Concept and design Skills.
Middle Human Skills.
Supervisor’s Technical skills.
Skills of management at different levels.

Management and Administration

The difference between Management and Administration can be summarized under 2 categories: -
1. Functions
2. Usage / Applicability
On the Basis of Functions: -

Basis Management Administration

Meaning Management is an art of getting things done It is concerned with formulation of

through others by directing their efforts towards broad objectives, plans & policies.
achievement of pre-determined goals.

Nature Management is an executing function. Administration is a decision-making

function.

Process Management decides who should it & how should Administration decides what is to be
he do it. done & when it is to be done.

Function Management is a doing function because Administration is a thinking function

managers get work done under their supervision. because plans & policies are
determined under it.

Skills Technical and Human skills Conceptual and Human skills

Level Middle & lower level function Top level function

On the Basis of Usage: -

Basis Management Administration

Applicability It is applicable to business concerns i.e. It is applicable to non-business concerns i.e.

profit-making organization. clubs, schools, hospitals etc.

Influence The management decisions are The administration is influenced by public

influenced by the values, opinions, opinion, govt. policies, religious
beliefs & decisions of the managers. organizations, customs etc.

Status Management constitutes the employees Administration represents owners of the

of the organization who are paid enterprise who earn return on their capital
remuneration (in the form of salaries & invested & profits in the form of dividend.
wages).

Management theories
Management theories are the set of general rules that guide the managers to manage an organization.
Management theories (also known as "Transactional theories") focus on the role of supervision,
organization, and group performance. Theories are an explanation to assist employees to effectively
relate to the business goals and implement effective means to achieve the same. Early management
theories base leadership on a system of reward and punishment. Managerial theories are often used in
business; when employees are successful, they are rewarded; when they fail, they are reprimanded or
punished.
1.The Classical theory of management
a) Scientific Management
b) Bureaucratic Management
c) Administrative Management
2.Neo-Classical Theory
a) Behavioral Science Approach
3.The Modern Management Theories
a) Quantitative Approach
b) System Approach
c) Contingency Approach
Difference between Classical and Neoclassical Theory

The Classical theory of management

Contribution of F.W.Taylor to Management thought

• Considered as “The Father of Scientific Management”.
• Wrote “The Principles of Scientific Management” in 1911.
• Raised from labourer to chief engineer within 6 years.
• Faced soldiering problem – practice of employees deliberately working at pace slower than their
capabilities.
Scientific management propounded by Taylor emphasizes:
• Need for developing a scientific way of performing each job.
• Training & preparing workers to perform that particular job.
• Establishing harmonious relations between management & workers so that the job is performed in
the desired way.
Two managerial practices from Taylor’s approach are:
• Piece-Rate Incentive System – maximum pieces produced incentives received accordingly.
• Time-and-Motion study – jobs are broken down into various small tasks or motions & unnecessary
motions are removed to find out the best way of doing a job.

Contributions of Frank & Lillian Gilbreth

• Frank Gilbreth (1868-1924) is considered as the “Father of Motion Study”.
• Motion study involves finding out the best sequence & minimum number of motions needed to
complete a task.
• Both were mainly involved in exploring new ways for eliminating unnecessary motions & reducing
work fatigue.
• Gilbreths devised classification scheme to label 17 basic hand motions of workers such as “search,
select, position & hold” called as “therbligs”.
• Frank Gilbreth is best known for his experiment in reducing the number of motions in bricklaying.
• By analyzing brick layers job, he reduced the number of motions in bricklaying from 18.5 to 4.
• Workers increased the number of bricks laid per day from 1000 to 2700 (per hr from 120 to 350
bricks).

Contributions of Henry Laurence Gantt

• He was a close associate of Taylor.
• Remembered for his work on the task-and-bonus system & the Gantt Chart.
• Under this, if worker completed the work fast in less than standard time, he received bonus.
• Introduced incentive plan for foremen, who would be paid bonus for every worker who reached daily
standard & would receive extra bonus if all workers reached daily standard.
• Chart compares actual & planned performance.
• Indicates the production in terms of time rather than quantity.
• Horizontal axis – time, work scheduled & work completed.
• Vertical axis – individuals & machines assigned.

Limitations of Scientific Management

• Focuses problems at the operational level but not on the management of the organization from
manager’s point of view.
• Taylor & his followers overlooked the social needs of workers & overemphasized their economic &
physical needs.
• It ignored the human desire for job satisfaction.

Bureaucratic Management
Weber believed that bureaucracy was the most efficient way to set up and manage an organization, and
absolutely necessary for larger companies to achieve maximum productivity with many employees and
tasks. Overall, Weber's ideal bureaucracy favors efficiency, uniformity and a clear distribution of power.
He argued that bureaucracy constitutes the most efficient and rational way in which human
activity can be organized and that systematic processes and organized hierarchies are necessary to
maintain order, to maximize efficiency, and to eliminate favoritism. Major characteristics of Weber’s
Ideal Bureaucracy
• Work specialization & division of labour
• Abstract rules & regulations
• Impersonality of managers
• Hierarchy of organization structure

Administrative Management
This theory focuses on principles that could be used by managers to coordinate the internal activities of
organizations. Henry Fayol, also known as the ‘father of modern management theory’ gave a new
perception of the concept of management. He introduced a general theory that can be applied to all
levels of management and every department. The Fayol theory is practised by the managers to organize
and regulate the internal activities of an organization. He concentrated on accomplishing managerial
efficiency.
• Henri Fayol developed theory of management. According to him, the business operations of an
organization could be divided into 6 activities.
• Technical – producing & manufacturing products.
• Commercial – buying, selling & exchange.
• Financial – search for & optimal use of capital.
• Security – protecting employees & property.
• Accounting – recording & taking stack of costs, profits & liabilities, maintaining balance sheets &
compiling statistics.
• Managerial – planning, organizing, commanding, coordinating & controlling.

Fourteen Principles of Management By Henri Fayol

1. Division of Work-
Henri believed that segregating work in the workforce amongst the worker will enhance the quality of
the product. Similarly, he also concluded that the division of work improves the productivity, efficiency,
accuracy and speed of the workers. This principle is appropriate for both the managerial as well as a
technical work level.
2. Authority and Responsibility-
These are the two key aspects of management. Authority facilitates the management to work efficiently,
and responsibility makes them responsible for the work done under their guidance or leadership.
3. Discipline-
Without discipline, nothing can be accomplished. It is the core value for any project or any management.
Good performance and sensible interrelation make the management job easy and comprehensive.
Employees good behaviour also helps them smoothly build and progress in their professional careers.
4. Unity of Command-
This means an employee should have only one boss and follow his command. If an employee has to
follow more than one boss, there begins a conflict of interest and can create confusion.
5. Unity of Direction-
Whoever is engaged in the same activity should have a unified goal. This means all the person working in
a company should have one goal and motive which will make the work easier and achieve the set goal
easily.
6. Subordination of Individual Interest-
This indicates a company should work unitedly towards the interest of a company rather than personal
interest. Be subordinate to the purposes of an organization. This refers to the whole chain of command
in a company.
7. Remuneration-
This plays an important role in motivating the workers of a company. Remuneration can be monetary or
non-monetary. However, it should be according to an individual’s efforts they have made.
8. Centralization-
In any company, the management or any authority responsible for the decision-making process should
be neutral. However, this depends on the size of an organization. Henri Fayol stressed on the point that
there should be a balance between the hierarchy and division of power.
9. Scalar Chain-
Fayol on this principle highlights that the hierarchy steps should be from the top to the lowest. This is
necessary so that every employee knows their immediate senior also they should be able to contact any,
if needed.
10. Order-
A company should maintain a well-defined work order to have a favourable work culture. The positive
atmosphere in the workplace will boost more positive productivity.
11. Equity-
All employees should be treated equally and respectfully. It’s the responsibility of a manager that no
employees face discrimination.
12. Stability-
An employee delivers the best if they feel secure in their job. It is the duty of the management to offer
job security to their employees.
13. Initiative-
The management should support and encourage the employees to take initiatives in an organization. It
will help them to increase their interest and make then worth.
14. Esprit de Corps-
It is the responsibility of the management to motivate their employees and be supportive of each other
regularly. Developing trust and mutual understanding will lead to a positive outcome and work
environment.

Limitations of Bureaucratic & Administrative Management

• Weber’s theory destroyed individual creativity & flexibility to respond to complex changes in the
global environment.
• Classical theory ignored important aspects of organizational behaviour.
• Does not deal with problems of leadership, motivation, power or informal relations.
• Failed to consider impact of external & internal environment upon employee behaviour in
organizations.

Contribution of Neo-Classical Theory

Neoclassical theory has made significant contribution to an understanding of human behavior at work
and in organization. It has generated awareness of the overwhelming role of human factor in industry.
This approach has given new ideas and techniques for better understanding of human behavior.
The basic features of neoclassical approach are:
(i) The business organisation is a social system.
(ii) Human factor is the most important element in the social system.
(iii) It revealed the importance of social and psychological factors in determining worker productivity
and satisfaction.

Contribution of Elton Mayo to the Development of Management Thought

Elton Mayo (1880-1949) is recommended as the Father of Human Relations School. He introduced
human relations approach to management thought. His contribution to the development of
management thought is unique and is also treated as human relations approach to management. It was
Mayo who led the team for conducting the study at Western Electric's Hawthorne Plant (1927-1932) to
evaluate the attributes and psychological reactions of workers in on-the-job situations. His associates
included John Dewery, Kurt Lewin and others.
Mayo and his associates came to the following conclusions from their famous Hawthorne experiments:
1. The amount of work to be done by a worker is not determined by his physical capacity but by the
social norms.
2. Non-economic rewards play a significant role in influencing the behavior of the workers.
3. Generally the workers de not reacts as individuals, but as members of group.
4. Informal leaders play an important part in setting and enforcing the group norms

Mayo’s studies at the Western Electricity Company, Chicago is popularly known as Hawthorne Studies. It
was a research programme of National Research Council of the National Academy of Science at the
Hawthorne Plant of Western Electricity Company. In the early 20th century, it was realized that –
 There was a clear-cut cause and effect relationship between the physical work, environment, the
well-being and productivity of the worker.
 Also, there was relationship between production and given condition of ventilation, temperature,
lighting and other physical working conditions and wage incentives.
 It had been believed that – improper job design, fatigue and other conditions of work mainly block
efficiency.
So to establish the relationship between man and the structure of formal organization, Hawthorne
Studies conducted. The studies were conducted in the following four phases.
1. Illumination Experiment (1924-27)
2. Relay Assembly Test Room Experiment (1927)
3. Mass Interviewing Programme (1928-31)
4. Bank Wiring Experiment (1931-32)

ILLUMINATION EXPERIMENT (1924-27)

It was done to determine the effect of different levels of illumination on workers’ productivity.
In this experiment, two group of female workers were located in separate rooms, each group
performing the same task. The rooms were equally illuminated with stabilized room temperature,
humidity, etc. Slowly the conditions of work were changed to mark change in production. After a period
of one-and-a half year, it was concluded that – illumination doesn’t affect productivity of workers.

RELAY ASSEMBLY TEST ROOM EXPERIMENT (1927)

This experiment was conducted to observe the effects of various changes in working conditions on the
workers’ output and morale.

MASS INTERVIEWING PROGRAMME (1928-31)

It was launched to explore the employees’ feelings (i.e., human attitudes and sentiments) by the
worker’s social group (informal organization). The workers were asked to express freely and frankly
their likes and dislike on the programmes and policies of the management, working conditions, and
behaviour of their boss with workers, etc. After a few days there was a change in the attitude of the
workers, however no reforms were introduced. That change was seen because of the following
reasons:-
 The workers thought that the working conditions were changed because of their complaints.
 They also felt that the wages were better although the wage scale remained at the same level.
After interviewing 21, 126 workers, and analysing their complaints, it was found that – there was no
correlation between the nature of complaints and the facts.
It was concluded that – the experiment succeeded in identifying the following three aspects:-
1. Workers feel elated if they were allowed to express freely. They develop a feeling that the conditions
in the environment were changed to the better although no such change took place.
2. Subordinates should be allowed to comment freely about their supervisor.
3. It is difficult to understand the real problems, personal feelings and sentiments of the workers
derived from both an employee’s personal history and his social situations at work, without appreciating
their feelings and sentiments.

BANK WIRING EXPERIMENT (1931-32)

This experiment was done to observe and analyse the group behaviour, workers performing a task in a
natural setting. For the experiment, a number of employees consisting of three groups of workmen
whose work was inter-related were chosen. Their job was to solder, fix the terminals and finish the
wiring. It was known as ‘The Bank Wiring Experiment’.
Wages were paid on the basis of a group incentive plan and each member got his share on the basis of
the total output of the group. It was found that workers had a fixed clear-cut standard of output, which
was lower than management target, however they were capable of increasing their output.
It was also found that the group did not allow its members to increase or decrease the output. They
were highly integrated with their social structure, and informal pressure was used to set right the erring
members. The following code of conduct was maintained for group solidarity:
 One should not turn out too much work. If one does, he is a ‘rat buster’.
 One should not turn out too little work. If one does, he is a ‘chesler’.
 One should not tell a supervisor anything detrimental to an associate. If one does, he is a ‘squealer’.
 One should not attempt to maintain social distance or act officious. If one is an inspector, for
example, he should not act like one.

Conclusions:-
Mayo and the researchers concluded that:-
1. The behaviour of the team had nothing to do with management of general economic conditions of
the plant.
2. The workers viewed interference of extra department personnel as disturbance.

 The workers considered supervisors as representative authority to discipline the workers.

1. The logic of efficiency did not go well with the logic of sentiments.
2. One should not miss the human aspects of organization while emphasising technical and economic
aspects.
3. In addition to the technical skills, the management should handle human situations, motivate, lead
and communicate with the workers.

 The concept of authority should be based on social skills in securing cooperation rather than
expertise.

CONCLUSIONS FROM HAWTHORNE STUDIES BRIEFLY

1. The social and psychological factors at the workplace, not the physical conditions of the workplace
determine the employees’ morale and output.
2. The organization is a social system.
3. Non-economic rewards and sanctions significantly affect the workers’ behaviour, morale and output.
4. Workers are not inert or isolated, unrelated individual; they are social animals.
5. Division of labour strictly on specialization is not necessarily the most efficient approach.
6. The workers have a tendency to form small groups (informal organizations). The production norms
and behavioural patterns are set by such groups.
7. Leadership, style of supervision, communication and participation play a central role in workers’
behaviour, satisfaction and productivity.

Thus, the findings of Hawthorne studies revolutionised the organizational thought, and gave rise to a
new theory called Human Relations Theory.

CRITICISMS OF MAYO’S HUMAN RELATION THEORY

1. This theory lacks scientific base.
2. This theory is not based on actual behaviour of workers as they were influenced by their feelings of
importance, attention and publicity they received in the research setting. Workers react positively and
give their best when they know that they are being observed.
3. It is anti-union and pro-management. Mayo underestimated the role of Unions in a free society as
well as never tried to integrate unions into his thinking.
4. This theory neglected the nature of work and instead focused on interpersonal relations.
5. It ignored the environmental factors of workers’ attitudes and behaviour.
6. Evidence obtained from the experiments does not support any of the conclusions derived by Mayo
and the researchers.
7. It lacks economic dimension.
8. It does not consider effects of ‘conflicts’ and ‘tension’ on the workers.
9. This theory give much attention to informal relations among workers and between workers and
supervisors, but little to the formal relationships with informal ones.

Contributions of Mary Parker Follett

Mary Parker Follett, writer, social worker, political theorist and organizational consultant, has been
called "the woman who invented management." Her early influence on modern management theory
has, in fact, been so pervasive that management theorist Warren Bennis has been quoted as saying of
her, "Just about everything written today about leadership and organizations comes from Mary Parker
Follett's writings and lectures."
Follett never managed a for-profit enterprise herself, yet her keen insight into the dynamics of
organizations and groups gave her theories widespread appeal. She advocated a "pull" rather than
"push" approach to employee motivation, differentiated between "power over" and "power with," and
postulated insightful ideas on negotiation, conflict resolution and power sharing which helped shape
modern management theory. The Mary Parker Follett Theory of Management is marked by such
principles as the following:
1. Conflict resolution through Integration (i.e., identifying and meeting each party's underlying and often
compatible need, as opposed to attempting to meet the frequently-incompatible expressed desire of
each) often results in a win-win situation.
2. In Mary Parker Follett leadership theory, genuine power is not "coercive" ("power over") but
"coactive" ("power with").
3. True leaders, according to Follett's theory, "create group power, rather than expressing personal
power."
 COST CONCEPT

Introduction: A firm carries out business to earn maximum profits. Profits are the
revenues collected by a business firm after production and sale of their goods and
services. But to gain something, the producer has to lose something. That means, to
earn revenues the producer has to incur costs.

Cost: A cost is an expenditure incurred by a firm to produce goods and services for
sale in the market. In other words, a cost is the outflow of money from the business
to gain inflow of money after sale of the commodity. A producer has to incur various
costs in order to produce goods and services. These costs are of various types.

Types of cost: The following are the various types of costs:-

1. Direct costs or explicit costs
2. Indirect costs or implicit costs
3. Fixed costs
4. Variable costs
5. Accounting costs
6. Economic costs
7. Total costs
8. Average costs
9. Marginal costs
10. Opportunity costs

Direct cost or explicit cost: Explicit costs are those costs which are met by
cash payments for employing various factors of production. The producer
actually pays money to produce his goods and services. A direct or explicit cost is
the material, labor, expenses, overheads, selling and distribution, administrative
cost related to production of a commodity. It is accurate in nature. An explicit
cost can be easily traceable. An explicit cost is defined as follows:

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 “An explicit cost is a direct expense that is paid in money to others or creditors
during the production of goods.”

Uses of explicit costs:

1. It shows the expenditure incurred on production of the commodity which is
considered for pricing strategy;
2. It also helps in calculating profits;
3. It helps in decision – making;

Indirect cost or implied cost: Implicit costs are those costs which the firm
lets go or sacrifices in order to hire an alternative factor of production. These
costs are opportunity costs of the factors of production. Implicit cost is also
called as imputed cost. Here cash outflow does not happen. An implicit cost is
defined as under:
“An implicit cost is the factor of production sacrificed by the producer for an
alternative factor production. The opportunity foregone is the implicit cost.”

Uses of implicit cost:

1. It helps in decision making
2. It helps to ascertain opportunity costs
3. They directly impact profitability of the firm

Difference between explicit cost and implicit cost:

Explicit cost Implicit cost
1. Meaning:
Explicit costs are those costs that Implicit costs are those costs that are
are met by cash payments. not met by cash payments.
2. Nature:
It is a direct cost. It is an indirect cost.
3. Record keeping:

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 There is a proper record keeping of There is no record for these costs as
these costs as there is money there is no money outflow involved.
outflow in this.
4. Type:
It is an expenditure incurred for It is an opportunity sacrificed to
production. employ other factor of production.
5. Money outflow:
There is outflow of money. There is no outflow of money.
6. Other names:
Output pocket cost. Implied cost or notional cost.
7. Profit calculation:
Accounting profit and economic Only economic profit is calculated.
profit is calculated.
8. Expenditure incurred:
There is expenditure incurred. There is no expenditure incurred.
9. Examples:
Salaries and wages, rent paid, Salary to proprietor, interest on owned
purchase of Raw Materials, etc. capital, etc.
10. Occurrence:
Actual and real in nature. Notional in nature.

Fixed costs: Fixed costs are those costs that do not change in the short run
period of time. Fixed costs remain the same regardless of the amount of
production and sale of commodities. These costs are incurred by the company
irrespective of its production, i.e. even at zero production, the firm incurs fixed
cost. A fixed cost can be defined as follows:
“A fixed cost is the cost that remains the same and fixed irrespective of the
production of goods.”

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 Uses of fixed cost:
1. Useful in evaluating break – even analysis;
2. Helps in pricing strategy;
3. Helps in decision – making;
4. Helps in controlling variable costs;

Variable Cost: A variable cost is that cost which changes in short – run and
long – run time period. It always keeps on changing. These costs are incurred
during production process and thus are the costs incurred for employing various
factors of production. A fixed cost becomes a variable cost in the long – run. A
variable cost is defined as follows:-
“A variable cost is the expenditure incurred on the production of goods and
therefore is ever changing.”

Uses of variable cost:

1. Helps to set prices for the commodity;
2. Helps to plan profits;
3. Helps in decision making;
4. Helps in cost control;

Distinction between fixed cost and variable cost:

Fixed cost Variable cost
1. Meaning:
Fixed costs are costs that are fixed Variable costs are costs that are not
and have to be incurred irrespective fixed and keep on changing as per the
of production of goods. production of goods.
2. Nature:
These costs are fixed. These costs are not fixed.
3. Occurrence:
These costs occur even when the These costs occur only when there is
there is no production of goods. production of goods.

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 4. Changes:
Fixed cost only in the long run. Variable cost changes in short run as
well as long run.
5. Other names:
Other names for fixed costs are Other names for variable costs are
Overhead costs or supplementary Prime costs.
costs.
6. Examples:
Depreciation charges, maintenance Electricity charges, raw material
costs, property taxes, interest, rent, purchases, conveyance, salaries and
etc. wages, etc.

Accounting Costs: Accounting costs are those costs that a firm actually incurs.
These costs are explicit costs. There is an actual expenditure which is kept in
records for future reference. An accounting cost is defined as follows:-
“An accounting cost is the actual expenditure incurred by the producer in the
course of business. These expenses also have a written record.”

Uses of accounting cost:

1. It shows the expenditure incurred on production of the commodity which is
considered for pricing strategy;
2. It also helps in calculating profits;
3. It helps in decision – making;

Economic Costs: Economic costs are those costs that an entrepreneur incurs
while conducting economic activities. For an entrepreneur an economic activity
is his business. Therefore, economic costs include all the direct and indirect that
the entrepreneur incurs while conducting business. An economic cost is the
summation of explicit cost and implicit cost. An economic cost is defined as
follows:

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 “An economic cost is the combination of direct and indirect costs that are
incurred by the firm to produce commodities.”

Uses of economic cost:

1. It shows the expenditure incurred on production of the commodity which is
considered for pricing strategy;
2. It also helps in calculating profits;
3. It helps in decision – making;
4. It helps in decision making
5. It helps to ascertain opportunity costs
6. They directly impact profitability of the firm

Difference between accounting cost and economic cost:

Accounting cost Economic cost
1. Meaning:
An Accounting cost is the actual cost An economic cost is the direct and
incurred. indirect cost.
2. Nature:
It is direct or explicit cost. It is direct as well as indirect cost, i.e.
explicit cost and implicit cost.
3. Importance:
Useful for financial reporting and Useful for managerial decision making
tax purposes. purposes.
4. Evaluation:
Accounting cost = explicit cost Economic cost = explicit cost + implicit
cost
5. Profit evaluation:
Accounting cost evaluation helps to Economic cost evaluation helps to find
find accounting profit. economic profit.
Accounting profit = total revenue - Economic profit = total revenue – total
explicit cost cost

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 Where,
Total cost = explicit cost + implicit cost
6. Users:
Accounting cost is used by an Economic cost is used by an economist.
accountant.

Total cost: Total cost is the total expenditure incurred by the producer to
produce his goods. Total cost is also the summation of total fixed costs and total
variable costs. Total cost is evaluated as follows:-
1. Total Cost = Cost per unit x Quantity Produced
2. Total Cost = Total Fixed Cost (TFC) + Total Variable Cost (TVC)

Total cost is defined as follows:

“Total cost is the cost which is incurred by the producer to produce a particular
quantity of the commodity.”

Uses of total cost:

 Helps in economies of scale as a producer needs large amount of raw materials
for large production;
 Helps in pricing policy;
 Helps in decision – making;

Average Cost: An average cost is the expenditure incurred by the producer, for
producing each unit of the products. An average cost is the per unit expenditure
of the producer. Average cost is also the summation of average fixed cost and
average variable cost. Average cost is evaluated as follows:-
Total Cost
1. Average cost =
Quantity produced
2. Average cost = Average fixed cost (AFC) + Average variable cost (AVC)

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 Average cost is defined as follows:-
“Average cost is the expense incurred by the producer to produce one unit of the
total production.”

Uses of average cost:

 Helps to cut down excess expenditure, as per unit cost is calculated;
 Helps in optimum utilization of resources;
 Helps in pricing strategy.

Marginal cost: Marginal cost is the expenditure incurred by the producer to

produce an additional or an extra unit of the commodity. Marginal cost is the
additional cost incurred for producing one extra unit after producing certain
amount of units.
MCn = TCn – TCn-1

Marginal cost is defined as follows:

“Marginal cost is the cost or expense incurred for producing an additional or an
extra unit of a commodity.”

Uses of marginal cost:

 Helps in decision making
 Helps to determine costs for each commodity
 Helps in planning profits.

Distinguish between total cost, average cost and marginal cost:

Total cost Average cost Marginal cost
1. Meaning:
Total cost is Average cost is the Marginal cost is
expenditure incurred expenditure incurred to expenditure incurred to
to produce a bulk produce one unit of the produce an extra or

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 quantity of the commodity. additional unit of the
commodity. commodity.
2. Definition:
Total cost is the cost Average cost is the Marginal cost is the cost
which is incurred by expense incurred by the or expense incurred for
the producer to producer to produce one producing an additional
produce a particular unit of the total or an extra unit of a
quantity of the production. commodity.
commodity
3. Includes:
It includes total fixed It includes average fixed It includes only the cost
costs and total costs and average variable for producing an extra
variable costs. costs. unit.
4. Calculation:
It is calculated in two It is calculated in two It is calculated in one
ways. ways. way.
5. Formulae:
TC = TFC + TVC AC = AFC + AVC MCn = TCn – TCn-1
6. Graphs:

7. Uses:
 Helps in economies of  Helps to cut down  Helps in decision
scale as a producer excess expenditure, as making
needs large amount of per unit cost is  Helps to determine
raw materials for large calculated; costs for each
production;  Helps in optimum commodity

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  Helps in pricing utilization of  Helps in planning
policy; resources; profits.
 Helps in decision –  Helps in pricing
making; strategy.

Opportunity Cost: An opportunity cost is the opportunity or choice that is let

go off or sacrificed for an alternative choice. In economics, opportunity cost is
the foregone production factor in business for an alternative production factor.
An opportunity cost is defined as follows:-
“An opportunity cost in business is the sacrificed option or factor of production
for an alternative option or factor of production.”

Uses of opportunity cost:

1. Helps in optimum utilization of business resources;
2. Helps in decision – making;
3. Helps in cost control.

Distinction between marginal cost and variable cost:

Marginal cost Variable cost
1. Meaning:
Marginal cost is expenditure Variable costs are costs that are not
incurred to produce an extra or fixed and keep on changing as per the
additional unit of the commodity. production of goods.
2. Definition:
Marginal cost is the cost or expense A variable cost is the expenditure
incurred for producing an incurred on the production of goods
additional or an extra unit of a and therefore is ever changing.
commodity.

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 3. Graph:

4. Uses:
 Helps in decision making.  Helps to set prices for the
 Helps to determine costs for each commodity.
commodity.  Helps to plan profits.
 Helps in planning profits.  Helps in decision making.
 Helps in cost control.

Conclusion: Thus are the various cost concepts.

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pg. 12 JMPCOC/BAFsem I/ECONOMICS/2016-1/SMESHRAM
 BREAK EVEN ANALYSIS

Introduction: A producer goods for sale in the market with a motive to earn
profits. He has to undergo a production process in order to produce goods to sell
them in the market. For this, he has to incur expenses, purchase raw materials and
employ various factors of production i.e. land, labor, capital and enterprise. A lot of
money is spent by the producer to conduct production of his commodities. This
attributes to cost.

Price or cost: A cost price is the amount spent by the producer to produce goods
for sale in the market. A cost price influences a selling price. A selling price is the
amount spent by the ultimate consumer to buy goods or services in the market for
the final consumption. The price factor is affected by forces of demand and supply in
the market. Every seller tries to reach at the maximum profits level and every
consumer bargains to reach at the most affordable price for the commodity. Thus,
enters equilibrium price where both the market demand and supply equalize each
other. This equilibrium price is acceptable to both the seller as well as the buyer.

Production process: A seller has to undertake an extensive production process to

produce his goods for sale in the market. Here the seller or the producer has to
control the costs. He has to attain maximum output at minimum costs. This is called
optimal production of goods and services. The producers always try to minimize
their costs by monitoring the factors employed in the production process. They do
this in order to increase the efficiency of the production process. The benefit of cost
control by the producer is ultimately passed on to the consumer as the seller or
producer doesn’t charge very high price for this product unless the he is a
monopolist.

Break – Even Analysis: The above mentioned cost control is possible due to
Break – Even Analysis. Break – Even Analysis is also called as the cost – volume –
profit analysis. It is used to study the relationship between total cost, total revenue,
total profits and total losses. It helps to determine level of scales required to pay

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 operating costs. It also helps to compute profitability of sales before and after break
– even points. Thus break – even analysis is a method through which a producer
tends to obtain higher profits at minimum costs.

Break – Even Point: Break – even point is a condition in a business firm, where
there is no profit – no loss situation in a business firm. The break – even point
depicts the quantity of sales at which the firms break – even with total revenues
equalizing total costs. Here, price = average cost. The firm makes zero profits at this
point and just covers the costs incurred for production, by the producer.

Shut – down point: A shut – Down point is a point of operations where a

company experiences no benefit for continuing operations or from shutting down
temporarily; it is the combinations of output and price where the company earns just
enough revenue to cover its total variable costs. Here the company stops its
production on a temporary basis so that it can pay off all its debts and start its
production afresh.

Difference between Shut – down point and Break – Even point:

Shut – Down point Break – Even point

1. Shut – Down point is the lowest Break – even point is not the lowest
phase of production process. phase in production process.
2. It implies that a firm is incurring It implies that a firm is in the no profit –
heavy losses and is in the last no loss stage.
stage of closure of business.
3. The firm earns less than normal There is zero normal profits as there is
profits. no profit – no loss situation.
4. No use of conducting business as Business can be further conducted as
losses exceed 50% of capital there is a chance of earning profits.
invested.
5. The cost exceeds the revenue in The cost equals revenue in break – even
shut down point. point.

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 Method of Break – Even Analysis: The break – even analysis can be performed
in two ways –
1. Algebraic Method;
2. Graphical Method.

I. ALGEBRAIC METHOD: In Algebraic method of Break – Even Analysis, we

take the help of mathematics to find out Break – Even Points.
a. Break – Even Point: A break – even point needs a fixed cost and a
contribution for its computation. A profit can be obtained using the
following formula:
Sales XXX
Less: Variable Cost XXX
Contribution XXX
Less: Fixed Cost XXX
Profit or Income or Revenue XXX

A break –even point refers to a no profit – no loss situation. We have fixed

costs incurred by a firm and contribution that just covers fixed cost. We
can find out break – even analysis as follows:

Fixed Cost
Break – even point in units =
Contribution Per Unit

Fixed Cost
Break – even point in units =
Sales−Variable Cost

Fixed Cost
Break – even point in Rupees = x Sales
Contribution

Fixed Cost
Break – even point in Rupees =
P/V Ratio

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 Example: A company produces Product A. It incurs the following
expenses for the production of Product A:-
 Variable Cost = Rs. 500/- per unit
 Fixed Cost = Rs. 1,00,000/-
 Selling Price = Rs. 750/-
 Units produced = 1,000 units
Calculate the break – even point in units and rupees.

Solution: Statement of Profit/Loss incurred:

Particulars Per unit (1,000 units) Amount
Sales 750 7,50,000
Less: Variable Cost 500 5,00,000
Contribution 250 2,50,000
Less: Fixed Cost 100 1,00,000
Profit 150 1,50,000

Fixed Cost
Break – even point in units =
Contribution Per Unit

1,00,000
=
250

Break – even point in units = 400 units

Contribution
P/V Ratio = X 100
Sales

2,50,000
= x 100
7,50,000

P/V Ratio = 33.33%

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 Fixed Cost
Break – even point in Rupees = x Sales
Contribution

Fixed Cost
Break – even point in Rupees =
P/V Ratio

1,00,000
Break – even point in Rupees =
33.33%

Break – even point in Rupees = Rs. 3,00,000/-

b. Cash Break – Even Point: When a Break – Even point is to be calculated

using only those fixed costs whose value is to be paid in cash, such a break
– even point is called as Cash Break – Even Point. It is denoted as follows:

Cash Fixed Cost

Cash Break – even point =
Contribution per unit

II. GRAPHICAL METHOD: The break – even point can be graphically depicted
as follows:

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