6 What are the advantage and disadvantage of level production schedules in firms with cyclical sales?

Features of budgetary control?

Budgetary control methodsa) Budget:· A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.· It helps to co-ordinate the activities of the organisation.An example would be an advertising budget or sales force budget.b) Budgetary control:· A control technique whereby actual results are compared with budgets.· Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.Budgetary control and responsibility centres;These enable managers to monitor organisational functions.A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.There are four types of responsibility centres:a) Revenue centresOrganisational units in which outputs are measured in monetary terms but are not directly compared to input costs.b) Expense centresUnits where inputs are measured in monetary terms but outputs are not.c) Profit centresWhere performance is measured by the difference between revenues (outputs) and expenditure (inputs). Inter-departmental sales are often made using "transfer prices".d) Investment centresWhere outputs are compared with the assets employed in producing them, i.e. ROI.Advantages of budgeting and budgetary controlThere are a number of advantages to budgeting and budgetary control:· Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.· Promotes coordination and communication.· Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.· Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.· Enables remedial action to be taken as variances emerge.· Motivates employees by participating in the setting of budgets.· Improves the allocation of scarce resources.· Economises management time by using the management by exception principle.Problems in budgetingWhilst budgets may be an essential part of any marketing activity they do have a number of disadvantages, particularly in perception terms.· Budgets can be seen as pressure devices imposed by management, thus resulting in: a) bad labour relationsb) inaccurate record-keeping.· Departmental conflict arises due to:a) disputes over resource allocationb) departments blaming each other if targets are not attained.· It is difficult to reconcile personal/individual and corporate goals.· Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the prestige of a department.Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs.· Managers may overestimate costs so that they will not be blamed in the future should they overspend.Characteristics of a budgetA good budget is characterised by the following:· Participation: involve as many people as possible in drawing up a budget.· Comprehensiveness: embrace the whole organisation.· Standards: base it on established standards of performance.· Flexibility: allow for changing circumstances.· Feedback: constantly monitor performance.· Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres.Budget organisation and administration:In organising and administering a budget system the following characteristics may apply:a) Budget centres: Units responsible for the preparation of budgets. A budget centre may encompass several cost centres.b) Budget committee: This may consist of senior members of the organisation, e.g. departmental heads and executives (with the managing director as chairman). Every part of the organisation should be represented on the committee, so there should be a representative from sales, production, marketing and so on. Functions of the budget committee include:· Coordination of the preparation of budgets, including the issue of a manual· Issuing of timetables for preparation of budgets· Provision of information to assist budget preparations· Comparison of actual results with budget and investigation of variances.c) Budget Officer: Controls the budget administration The job involves:· liaising between the budget committee and managers responsible for budget preparation· dealing with budgetary control problems· ensuring that deadlines are met· educating people about budgetary control.d) Budget manual:This document:· charts the organisation· details the budget procedures· contains account codes for items of expenditure and revenue· timetables the process· clearly defines the responsibility of persons involved in the budgeting system.Budget preparationFirstly, determine the principal budget factor. This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour.a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product and also in sales value. Methods of sales forecasting include:· sales force opinions· market research· statistical methods (correlation analysis and examination of trends)· mathematical models.In using these techniques consider:· company's pricing policy· general economic and political conditions· changes in the population· competition· consumers' income and tastes· advertising and other sales promotion techniques· after sales service· credit terms offered.b) Production budget: expressed in quantitative terms only and is geared to the sales budget. The production manager's duties include:· analysis of plant utilisation· work-in-progress budgets.If requirements exceed capacity he may:· subcontract· plan for overtime· introduce shift work· hire or buy additional machinery· The materials purchases budget's both quantitative and financial.c) Raw materials and purchasing budget:· The materials usage budget is in quantities.· The materials purchases budget is both quantitative and financial.Factors influencing a) and b) include:· production requirements· planning stock levels· storage space· trends of material prices.d) Labour budget: is both quantitative and financial. This is influenced by:· production requirements· man-hours available· grades of labour required· wage rates (union agreements)· the need for incentives.e) Cash budget: a cash plan for a defined period of time. It summarises monthly receipts and payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are:· to maintain control over a firm's cash requirements, e.g. stock and debtors· to enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises· to show the feasibility of management's plans in cash terms· to illustrate the financial impact of changes in management policy, e.g. change of credit terms offered to customers.Receipts of cash may come from one of the following:· cash sales· payments by debtors· the sale of fixed assets· the issue of new shares· the receipt of interest and dividends from investments.Payments of cash may be for one or more of the following:· purchase of stocks· payments of wages or other expenses· purchase of capital items· payment of interest, dividends or taxation.Steps in preparing a cash budgeti) Step 1: set out a pro forma cash budget month by month. Below is a suggested layout.Month 1Month 2Month 3$$$Cash receiptsReceipts from debtorsSales of capital itemsLoans receivedProceeds from share issuesAny other cash receiptsCash paymentsPayments to creditorsWages and salariesLoan repaymentsCapital expenditureTaxationDividendsAny other cash expenditureReceipts less paymentsOpening cash balance b/fWXYClosing cash balance c/fXYZii) Step 2: sort out cash receipts from debtorsiii) Step 3: other incomeiv) Step 4: sort out cash payments to suppliersv) Step 5: establish other cash payments in the monthFigure 4.1 shows the composition of a master budget analysis.Figure 4.1 Composition of a master budgetOPERATING BUDGETFINANCIAL BUDGETconsists of:-consists ofBudget P/L acc: get:Cash budgetProduction budgetBalance sheetMaterials budgetFunds statementLabour budgetAdmin. budgetStocks budgetf) Other budgets:These include budgets for:· administration· research and development· selling and distribution expenses· capital expenditures· working capital (debtors and creditors).The master budget (figure 4.1) illustrates this. Now attempt exercise 4.1.Exercise 4.1 Budgeting IDraw up a cash budget for D. Sithole showing the balance at the end of each month, from the following information provided by her for the six months ended 31 December 19X2.a) Opening Cash $ 1,200.19X219X3Sales at $20 per unitMARAPRMAYJUNJULAUGSEPOCTNOVDECJANFEB260200320290400300350400390400260250Cash is received for sales after 3 months following the sales.c) Production in units: 240270300320350370380340310260250d) Raw materials cost $5/unit. Of this 80% is paid in the month of production and 20% after production.e) Direct labour costs of $8/unit are payable in the month of production.f) Variable expenses are $2/unit. Of this 50% is paid in the same month as production and 50% in the month following production.g) Fixed expenses are $400/month payable each month.h) Machinery costing $2,000 to be paid for in October 19X2.i) Will receive a legacy of $ 2,500 in December 19X2.j) Drawings to be $300/month.An exampleA sugar cane farm in the Lowveld district may devise an operating budget as follows:· Cultivation· Irrigation· Field maintenance· Harvesting· Transportation.With each operation, there will be costs for labour, materials and machinery usage. Therefore, for e.g. harvesting, these may include four resources, namely:· Labour: -cutting-sundry· Tractors· Cane trailers· Implements and sundries.Having identified cost centres, the next step will be to make a quantitative calculation of the resources to be used, and to further break this down to shorter periods, say, one month or three months. The length of period chosen is important in that the shorter it is, the greater the control that can be exercised by the budget but the greater the expense in preparation of the budget and reporting of any variances.The quantitative budget for harvesting may be calculated as shown in figure 4.2.Figure 4.2 Quantitative harvesting budgetHarvesting1st quarter2nd quarter3rd quarter4th quarterLabourCuttingnil9,000 tonnes16,000 tonnes10,000 tonnesSundrynil300 man days450 man days450 man daysTractorsnil630 hours1,100 hours700 hoursCane trailersnil9,000 tonnes16,000 tonnes10,000 tonnesImp, & sundriesnil9,000 tonnes16,000 tonnes10,000 tonnesEach item is measured in different quantitative units - tonnes of cane, man days etc.-and depends on individual judgement of which is the best unit to use.Once the budget in quantitative terms has been prepared, unit costs can then be allocated to the individual items to arrive at a budget for harvesting in financial terms as shown in table 4.2.Charge out costsIn table 4.2 tractors have a unit cost of $7.50 per hour - machines like tractors have a whole range of costs like fuel and oil, repairs and maintenance, driver, licence, road tax and insurance and depreciation. Some of the costs are fixed, e.g. depreciation and insurance, whereas some vary directly with use of the tractor, e.g. fuel and oil. Other costs such as repairs are unpredictable and may be very high or low - an estimated figure based on past experience.Figure 4.3 Harvesting cost budgetItem harvestingUnit cost1st quarter2nd quarter3rd quarter4th quarterTotalLabourCutting$0.75 per tonne-6,75012,0007,50026,250Sundry$2.50 per day-7501,1251,1253,000Tractors$7.50 per hour-4,7258,2505,25018,225Cane Trailers$0.15 per tonne-1,3502,4001,5005,250Imp. & sundries$0.25 per tonne-2,2504,0002,5008,750-$15,825$27,775$17,875$61,475So, overall operating cost of the tractor for the year may be budgeted as shown in figure 4.4.If the tractor is used for more than 1,000 hours then there will be an over-recovery on its operational costs and if used for less than 1,000 hours there will be under-recovery, i.e. in the first instance making an internal 'profit' and in the second a 'loss'.Figure 4.4 Tractor costsUnit rateCost per annum (1,000 hours)($)($)Fixed costsDepreciation2,000.002,000.00Licence and insurance200.00200.00Driver100.00 per month1,200.00Repairs600.00 per annum600.00Variable costsFuel and oil2.00 per hour2,000.00Maintenance3.00 per 200 hours1,500.007,500.00No. of hours used1,000.00Cost per hour7.50Master budgetThe master budget for the sugar cane farm may be as shown in figure 4.5. The budget represents an overall objective for the farm for the whole year ahead, expressed in financial terms.Table 4.5 Operating budget for sugar cane farm 19X41st quarter2nd quarter3rd quarter4th quarterTotal $Revenue from cane130,000250,000120,000500,000Less: CostsCultivation37,26148,26842,36855,416183,313Irrigation7,27815,29718,47311,32952,377Field maintenance4,82612,92315,9917,26241,002Harvesting-15,82527,77517,87561,475Transportation-14,10024,75015,75054,60049,365106,413129,357107,632392,767Add: Opening valuation85,800135,165112,24094,26085,800135,165241,578241,597201,892478,567Less: Closing valuation135,165112,24094,26090,29090,290Net crop cost-129,338147,337111,602388,277Gross surplus-66,200102,6638,398111,723Less: Overheads5,8767,3617,4865,32126,044Net profitless)(5,876)(6,699)95,1773,07785,679Once the operating budget has been prepared, two further budgets can be done, namely:i. Balance sheet at the end of the year.ii. Cash flow budget which shows the amount of cash necessary to support the operating budget. It is of great importance that the business has sufficient funds to support the planned operational budget.Reporting backDuring the year the management accountant will prepare statements, as quickly as possible after each operating period, in our example, each quarter, setting out the actual operating costs against the budgeted costs. This statement will calculate the difference between the 'budgeted' and the 'actual' cost, which is called the 'variance'.There are many ways in which management accounts can be prepared. To continue with our example of harvesting on the sugar cane farm, management accounts at the end of the third quarter can be presented as shown in figure 4.6.Figure 4.6 Management accounts - actual costs against budget costs Management accounts for sugar cane farm 3rd quarter 19X4Item Harvesting3rd quarterYear to dateActualBudgetVarianceActualBudgetVarianceLabour- Cutting12,20012,000(200)19,06018,750(310)- Sundry7421,1253831,5841,875291Tractors9,3758,250(1,125)13,50012,975(525)Cane trailers1,6782,4007222,5053,7501,245Imp & sundries4,2704,000(270)6,5136,250(263)28,26527,775(490)43,16243,600438Here, actual harvesting costs for the 3rd quarter are $28,265 against a budget of $27,775 indicating an increase of $490 whilst the cumulative figure for the year to date shows an overall saving of $438. It appears that actual costs are less than budgeted costs, so the harvesting operations are proceeding within the budget set and satisfactory. However, a further look may reveal that this may not be the case. The budget was based on a cane tonnage cut of 16,000 tonnes in the 3rd quarter and a cumulative tonnage of 25,000. If these tonnages have been achieved then the statement will be satisfactory. If the actual production was much higher than budgeted then these costs represent a very considerable saving, even though only a marginal saving is shown by the variance. Similarly, if the actual tonnage was significantly less than budgeted, then what is indicated as a marginal saving in the variance may, in fact, be a considerable overspending.Price and quantity variancesJust to state that there is a variance on a particular item of expenditure does not really mean a lot. Most costs are composed of two elements - the quantity used and the price per unit. A variance between the actual cost of an item and its budgeted cost may be due to one or both of these factors. Apparent similarity between budgeted and actual costs may hide significant compensating variances between price and usage.For example, say it is budgeted to take 300 man days at $3.00 per man day - giving a total budgeted cost of $900.00. The actual cost on completion was $875.00, showing a saving of $25.00. Further investigations may reveal that the job took 250 man days at a daily rate of $3.50 - a favourable usage variance but a very unfavourable price variance. Management may therefore need to investigate some significant variances revealed by further analysis, which a comparison of the total costs would not have revealed. Price and usage variances for major items of expense are discussed below.LabourThe difference between actual labour costs and budgeted or standard labour costs is known as direct wages variance. This variance may arise due to a difference in the amount of labour used or the price per unit of labour, i.e. the wage rate. The direct wages variance can be split into:i) Wage rate variance: the wage rate was higher or lower than budgeted, e.g. using more unskilled labour, or working overtime at a higher rate.ii) Labour efficiency variance: arises when the actual time spent on a particular job is higher or lower than the standard labour hours specified, e.g. breakdown of a machine.MaterialsThe variance for materials cost could also be split into price and usage elements:i) Material price variance: arises when the actual unit price is greater or lower than budgeted. Could be due to inflation, discounts, alternative suppliers etc.ii) Material quantity variance: arises when the actual amount of material used is greater or lower than the amount specified in the budget, e.g. a budgeted fertiliser at 350 kg per hectare may be increased or decreased when the actual fertiliser is applied, giving rise to a usage variance.OverheadsAgain, overhead variance can be split into:i) Overhead volume variance: where overheads are taken into the cost centres, a production higher or lower than budgeted will cause an over-or under-absorption of overheads.ii) Overhead expenditure variance: where the actual overhead expenditure is higher or lower than that budgeted for the level of output actually produced.Calculation of price and usage variancesThe price and usage variance are calculated as follows:Price variance = (budgeted price - actual price) X actual quantityUsage variance = (budgeted quantity - actual quantity) X budgeted priceNow attempt exercise 4.2.Exercise 4.2 Computation of labour variancesIt was budgeted that it would take 200 man days at $10.00 per day to complete the task costing $2,000.00 when the actual cost was $1,875.00, being 150 man days at $12.50 per day. Calculate:i) Price varianceii) Usage varianceComment briefly on the results of your calculation.Management action and cost controlProducing information in management accounting form is expensive in terms of the time and effort involved. It will be very wasteful if the information once produced is not put into effective use. There are five parts to an effective cost control system. These are:a) preparation of budgetsb) communicating and agreeing budgets with all concernedc) having an accounting system that will record all actual costsd) preparing statements that will compare actual costs with budgets, showing any variances and disclosing the reasons for them, ande) taking any appropriate action based on the analysis of the variances in d) above.Action(s) that can be taken when a significant variance has been revealed will depend on the nature of the variance itself. Some variances can be identified to a specific department and it is within that department's control to take corrective action. Other variances might prove to be much more difficult, and sometimes impossible, to control.Variances revealed are historic. They show what happened last month or last quarter and no amount of analysis and discussion can alter that. However, they can be used to influence managerial action in future periods.Zero base budgeting (ZBB)After a budgeting system has been in operation for some time, there is a tendency for next year's budget to be justified by reference to the actual levels being achieved at present. In fact this is part of the financial analysis discussed so far, but the proper analysis process takes into account all the changes which should affect the future activities of the company. Even using such an analytical base, some businesses find that historical comparisons, and particularly the current level of constraints on resources, can inhibit really innovative changes in budgets. This can cause a severe handicap for the business because the budget should be the first year of the long range plan. Thus, if changes are not started in the budget period, it will be difficult for the business to make the progress necessary to achieve longer term objectives. One way of breaking out of this cyclical budgeting problem is to go back to basics and develop the budget from an assumption of no existing resources (that is, a zero base). This means all resources will have to be justified and the chosen way of achieving any specified objectives will have to be compared with the alternatives. For example, in the sales area, the current existing field sales force will be ignored, and the optimum way of achieving the sales objectives in that particular market for the particular goods or services should be developed. This might not include any field sales force, or a different-sized team, and the company then has to plan how to implement this new strategy.The obvious problem of this zero-base budgeting process is the massive amount of managerial time needed to carry out the exercise. Hence, some companies carry out the full process every five years, but in that year the business can almost grind to a halt. Thus, an alternative way is to look in depth at one area of the business each year on a rolling basis, so that each sector does a zero base budget every five years or so.Key termsBudgeting Budgetary controlBudget preparationManagement action and cost controlMaster budgetPrice and quantity varianceResponsibility centresZero based budgeting

What are the differences between payment voucher, journal and cheque?

paying cheques drawn by customers in the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machines (ATMs). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account. Banks can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending, and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was an increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy as measured by M4 in the UK went from £750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank lending. If all the banks increase their lending together, then they can expect new deposits to return to them and the amount of money in the economy will increase. Excessive or risky lending can cause borrowers to default, the banks then become more cautious, so there is less lending and therefore less money so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007. Activities undertaken by banks include personal banking, corporate banking, investment banking, private banking, transaction banking, insurance, consumer finance, trade finance and other related. Banks offer many different channels to access their banking and other services: Branch, in-person banking in a retail location Automated teller machine banking adjacent to or remote from the bank Bank by mail: Most banks accept cheque deposits via mail and use mail to communicate to their customers Online banking over the Internet to perform multiple types of transactions Mobile banking is using one's mobile phone to conduct banking transactions Telephone banking allows customers to conduct transactions over the telephone with an automated attendant, or when requested, with a telephone operator Video banking performs banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine) or via a video conference enabled bank branch clarification Relationship manager, mostly for private banking or business banking, who visits customers at their homes or businesses Direct Selling Agent, who works for the bank based on a contract, whose main job is to increase the customer base for the bank A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. In the past 20 years, American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm–Leach–Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability). Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home).However, with the convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest charges and fees charged to cardholders, and transaction fees to retailers who accept the bank's credit and/or debit cards for payments.This helps in making a profit and facilitates economic development as a whole.Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetization of data, white-labeling of banking and payment applications, or the cross-selling of complementary products. Retail Savings account Recurring deposit account Fixed deposit account Money market account Certificate of deposit (CD) Individual retirement account (IRA) Credit card Debit card Mortgage Mutual fund Personal loan Time deposits ATM card Current accounts Cheque books Automated Teller Machine (ATM) National Electronic Fund Transfer (NEFT) Real Time Gross Settlement (RTGS) Business (or commercial/investment) banking Business loan Capital raising (equity / debt / hybrids) Revolving credit Risk management (foreign exchange (FX)), interest rates, commodities, derivatives Term loan Cash management services (lock box, remote deposit capture, merchant processing) Credit services Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital consists principally of equity, retained earnings and subordinated debt. After the 2007-2009 financial crisis, regulators force banks to issue Contingent convertible bonds (CoCos).These are hybrid capital securities that absorb losses in accordance with their contractual terms when the capital of the issuing bank falls below a certain level. Then debt is reduced and bank capitalization gets a boost. Owing to their capacity to absorb losses, CoCos have the potential to satisfy regulatory capital requirement.Some of the main risks faced by banks include: Credit risk: risk of loss arising from a borrower who does not make payments as promised. Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. Operational risk: risk arising from execution of a company's business functions. Reputational risk: a type of risk related to the trustworthiness of business. Macroeconomic risk: risks related to the aggregate economy the bank is operating in.The capital requirement is a bank regulation, which sets a framework within which a bank or depository institution must manage its balance sheet. The categorization of assets and capital is highly standardized so that it can be risk weighted. The economic functions of banks include: Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes

6 What are the advantage and disadvantage of level production schedules in firms with cyclical sales?

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How to Budget on a Cyclical Basis?

Features of budgetary control?

What are the differences between payment voucher, journal and cheque?

What are the advantages and disadvantages of level production schedules in firms with cyclical sales?

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The production and use of what is tyically cyclical?

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