SCR Banking MAths.docx

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1. Right triangle PQR is to be

constructed in the xy-plane so

that the right angle is at P and PR

is parallel to the x-axis. The x and

y coordinates of P, Q and R are

to be integers that satisfy the

inequalities -4 <= x <= 5 and 6 <=y <= 16. How many different

triangles with these properties

could be constructed?

(A) 110

(B) 1,100

(C) 9,900

(D) 10,000

(E) 12,100

Solution:

No. of possible value for x=10

and y=11

1) information given is right angle

at P, PR(ll) to x axis

information inferred y coordinates

of p and r is same.

2) PQ (llel) y therefore x

coordinates of P and Q is same.

For P x can be selected in 10

ways and y in 11 ways = 10*11

For R x in 9 ways and y in 1 way

(as same of P) =9*1

For q x in 1 way and y in 10 ways

(one already selected for P)=10*1

Total ways=10*11*9*10=9900

2. A password of a computer used

five digits where they are from 0

and 9. What is the probability that

the password solely consists of

prime numbers and zero?

A 1/32

B 1/16

C 1/8

D 2/5

E ½

Solution:

There are 10 possible options

(0,1,2,3,4,5,6,7,8,9) for each

digit.

5 of the options (0,2,3,5,7) are

zero or prime.

So, P(a given digit is zero or

prime) = 5/10 = 1/2

A quick way is to look at this as

an AND probability.P(all five digits are zero or prime)

INTANGIBALE ASSSETS

CAN BE TREATED IN THE

SAME WAY AS FIXEDASSETS.

THEY ARE NEEDED FOR

OPERATION AND ARE

ACQUIRED WITH

ENTERPRISE FUNDS.

EXAMPLE:

PATENTS CAPITALIZED

& MAY BE

EXPENSED

OVER A

PERIOD OF

TIME



= P(1st digit is zero or prime AND

2nd digit is zero or prime AND

3rd digit is zero or prime AND 4th

digit is zero or prime AND 5th

digit is zero or prime)

This is equal to P(1st digit is zeroor prime) x P(2nd digit is zero or

prime) x P(3rd digit is zero or

prime) x P(4th digit is zero or

prime) x P(5th digit is zero or

prime)

So, we get 1/2 x 1/2 x 1/2 x 1/2 x

1/2 = 1/32

Contrary to popular belief, credit

cards are a form of money eventhough people often refer to

them as "plastic money. " Credit

card users are actually taking out a

loan and sooner or later, they will

have to pay the bill for all those

things they have charged. They

are buying something now and

agreeing to pay for it at a later date

with money, usually a check.

Many banks issue credit cards,

even to people who aren't regular

customers. Before issuing you a

credit card, a bank will require you

to complete an application form

and will examine your credit record

to see if you have a history of

paying back your debts on time.

Many people run up credit card

bills that are too big to pay off

every month. When that happens

customers must pay a monthly

finance charge that can run

anywhere from 10 percent to 24

percent a year. In addition, many

banks and other companies that

issue credit cards charge their

cardholders an annual fee

usually $20 to $50 a year. Evencustomers who pay off their entire



credit card bill every month still

have to pay the annual fee. Banks

and credit card companies also

charge merchants a fee for making

the credit card service available.

Finance charges, annual fees, andmerchant fees have become an

important source of profit for

banks.

Finally there's another plastic card

that resembles a credit card in

appearance but is actually very

different in function the debit

card. A debit card is much more

like an ATM card than a credit

card. When someone uses a debit

card at the gas pump or at a store,

the amount of the purchase is

electronically deducted from the

user's bank balance. There's no

monthly bill because the amount of

cash purchase is deducted almost

immediately from the user’s

account.

What Happens to

Your Money

After You

Deposit it inYour Bank

Account?

The bank begins by adding the

amount you're depositing to the

amount that's already in your

account (your existing balance).Your deposit and new balance are



entered into your "passbook" and

into the bank's computer system.

The money you deposited is mixed

in with all the other cash the bank

received that day.

When you and other customers

deposit money in a bank, the bank

puts most of it to work. Part of the

money is set aside and held in

reserve, but much of the rest is

loaned to people who need to

borrow money in order to buy

houses and cars, start or expand

businesses, buy farm equipment

or to plant crops, or do any of the

other things that require people to

borrow money.

Interest - Compounding

When you keep your savings in a

bank, the bank pays you extra

money, which is called interest.

The interest is added to your

account on a regular

basis usually once a month or

once every three months

(quarterly). Compounded interest

means that interest is added to

your balance (usually quarterly),

then the next quarter the interest is

computed on your money

deposited plus the last quarter

interest.

Example: New Balance = $500.

00 Interest rate = 5% Annual =

$25. 00

New Balance = $500. 00

Interest rate = 5% Compounded



quarterly = $25. 72

You would earn $. 72 more with

the interest compounded quarterly

and the annual yield rate would be

5. 14%. Banks must disclose to

you if the savings account is

compounded and how often it is

compounded and give you the

annual yield rate as a result of the

compounding. Some banks may

compound interest as often as

daily. The shorter the compound

period, the higher the yield rate

would be.

There is another side to interest.

When someone borrows money

from a bank, the bank charges

them interest and it charges

borrowers a higher rate than it

pays savers. For example, it might

pay savers 5% and charge

borrowers 8% on up to as high as

25% imposed on some bank credit

cards.

A bank is a business and like other

businesses, banks sometimes fail.

But why should banks go out of

business? Sometimes banks fail

because the people who run them

make poor business decisions

such as expanding too quickly,pushing too much money into one

type of loan, or using bad

judgment making loans.

Sometimes banks fail because of

fraud. Maybe the president makes

questionable loans to friends or

hires unqualified people and pay

them huge salaries.

Things like that happen The bank



begins by adding the amount

you're depositing to the amount

that's already in your

account (your existing balance).

Your deposit and new balance areentered into your "passbook" and

into the bank's computer system.

The money you deposited is mixed

in with all the other cash the bank

received that day.

When you and other customers

deposit money in a bank, the bank

puts most of it to work. Part of themoney is set aside and held in

reserve, but much of the rest is

loaned to people who need to

borrow money in order to buy

houses and cars, start or expand

businesses, buy farm equipment

or to plant crops, or do any of the

other things that require people to

borrow money.

Interest - Compounding

When you keep your savings in a

bank, the bank pays you extra

money, which is called interest.

The interest is added to your

account on a regular basis usually once a month or

once every three months

(quarterly). Compounded interest

means that interest is added to

your balance (usually quarterly),

then the next quarter the interest is

computed on your money

deposited plus the last quarter

interest.



Example: New When you fill in the

blank spaces on one of your

checks, you are telling your bank

how much of your money you want

to transfer and to whom you want

it transferred. You authorize thetransfer by signing y our check.

One reason why checks are so

popular is that people can use a

cancelled check to prove they paid

a bill. In most cases a cancelled

check is as good as a receipt

because it bears the

endorsements of all the persons,

banks, companies, or other

organizations that have handled it.For example if the landlord claims

you didn't pay your rent, all you

need to do is find your cancelled

check and point out that it was

endorsed by your landlord and

your landlord's bank.

Tracing a CheckThrough the

Federal

Reserve's Check

Collection

Network

1. Your Aunt sent you a $20Check for your birthday.

2. You deposit the check in

your savings account at your

bank.

3. Your bank endorses the

check and sends it to its Federal



Reserve Bank.

4. The Federal Reserve Bank

gives your bank credit for the

check by adding the amount of the check to your bank’s

reserve account or clearing

balance.

5. The Federal Reserve

Transportation system flies the

check to your Aunt's Bank Federal

Reserve Bank.

6. That Federal Reserve Bank

forwards the check to your Aunt's

bank and deducts the

appropriate amount from

that bank's reserve account.

7. Your Aunt's bank deducts

the $20 from your Aunt's checking

account.

Check 21 is a sweeping new

federal law effective October 28,

2004 that takes away your ability

to get back your original paper

checks. Under this law,

consumers could be more likely to

bounce checks and may find

themselves paying higher bankfees. The complicated new law

gives you some rights, but those

rights depend on a variety of

factors, including how the

merchant and the bank decide to

process your check. Visit the

FRB's web site on the new law:

http://www. federalreserve.

gov/paymentsystems/truncation/.

http://www.federalreserve.gov/paymentsystems/truncation/







What is

Electronic

Banking? Electronics and computers have

made banking an around-the-clock

business. You can now do much

of your banking even when your

bank is closed. You no longer

need to plan your schedule around

your banks business hours.

Automated Teller Machines

(ATMs) are computers that are

much like limited-service bank

branches. You can use them to

make a withdrawal, make a

deposit, make a payment, transfer

money from one account to

another, or check your account

balance. In some cases, ATMs of

different banks are linked together

so you can use them when you

travel to a different part of town or

even to another state. All you

need to use an ATM is a plastic

card from your bank and your own

personal password called a PIN

number.

You can also have your employer

electronically deposit your pay

directly to your bank account each

payday. Direct deposit is also

popular among people who

receive Social Security checks or

pension checks because it saves

them the bother of standing in line

at the bank, battling bad weather,

or worrying about being robbed on

the way home from the bank



Another electronic banking

service is called electronic

funds transfer or EFT. By

using EFT, a bank can transfer large amounts of money to

another bank by wiring an

electronic message. There is

no need to write a check or

load up an armored car with

cash and there's no long wait

for the money to be moved.

Electronic transfers take only

an instant. An electronic

message instructs a computer to deduct a certain amount 2.

You deposit the check in your

savings account at your bank.

3. Your bank endorses the

check and sends it to its Federal

Reserve Bank.

4. The Federal Reserve Bankgives your bank credit for the

check by adding the amount of

the check to your bank’s

reserve account or clearing

balance.

5. The Federal Reserve

Transportation system flies the

check to your Aunt's Bank Federal

Reserve Bank.

6. That Federal Reserve Bank

forwards the check to your Aunt's

bank and deducts the

appropriate amount from

that bank's reserve account.

7. Your Aunt's bank deducts

the $20 from your Aunt's checking



account.

Check 21 is a sweeping new

federal law effective October 28,

2004 that takes away your ability

to get back your original paper

minimum balance) in your NOW

account in order to keep earning

interest. Only non-business

customers may open NOW

accounts, businesses must use

regular checking accounts.

Money market deposit accounts

usually pay a higher rate of

interest and require a higher

minimum balance (usually $2,500).

Certificates of deposit (CDs) are

savings deposits that require a

customer to keep a certain amount

of money in the bank for a fixed

period of time (example: $1,000 for

two years). As a rule the rate if

interest your money earns is

higher if you agree to keep your

money on deposit for a longer

period of time. (That's because

banks can plan on using your

money for a longer period of time.)

Banks do not offer check-writing

privileges on certificates of

deposit.

Finally, banks don't always call

their accounts by the same names.

Often they choose distinctive

names in hopes of attracting

customer. But sometimes there

can be a real difference between

one bank's accounts and



another's, so shop around.

homebuyers. Most of the loans

went to people who didn't make

enough money to be welcome at

traditional banks.

Credit unions began as a 19th-

century solution to the emergency

needs of people who were unable

to borrow money from traditional

lenders. Before the opening of

credit unions, ordinary citizens hadno place to turn when they faced

unexpected home repairs, medical

expenses, or other emergencies.

Credit unions were started by

people who shared a common

bond such as working at the same

factory, belonging to the same

house of worship, or farming in the

same community. Members

pooled their savings and used the

money to make small loans to one

another.

Although there are still differences

between banks and thrifts, they

now offer many of the same

banking services to their

customers. Most commercial

banks now compete to make car loans, many thrifts have begun to

make commercial loans, and some

credit unions make loans to

homebuyers.

used to be. For starters you

should shop around to find out

which banks offer the most



competitive services. Some banks

charge a monthly fee if your

account falls below a certain level

and sometimes that fee can be

higher than the interest your

account may earn.

Some states prohibit banks from

charging fees on savings accounts

held by people under 18 or 65 and

over. Find out if your state has

such a law.

Other things you might want to

consider:

Does your bank pay itsdepositors a competitiveinterest rate?

Is the bank in a convenientlocation and are its

business hours convenientto you?

Is your deposit fully insuredby the federal government?

Is the bank a goodcorporate citizen? Does itinvest in your neighborhood?

Last, but certainly not least, doesyour bank provide courteous and

efficient service? Before you open

an account, ask a few people if

they are happy with their bank. All

banks are not the same. It's up to

you to do some comparison

shopping before you open an

account.

loans, business loans, checking

accounts, savings accounts,certificates of deposit, and credit



card services. Some people go to

the bank in search of a safe place

to keep their money. Others go to

the bank seeking money for loans

to buy houses or cars, start

businesses, expand farms, or doany of the other things that require

borrowing money.

Where do banks get the money to

lend? They get it from all the

people who open savings and

other types of accounts. Banks

act as a go between the people

who save and people who need to

borrow. If savers didn't put their

money in banks, the banks would

have little or no money to lend.

Your savings are combined with

everyone else's savings to form a

big pool of money. The bank uses

that pool of money to make loans.

The money doesn't belong to the

bank's president, board of

directors, or stockholders. It

belongs to the depositors. That's

why banks have a special

obligation not to take big risks

when they make loans.

How did Banking

Begin? No one knows who started the

world's first bank, but it's safe to

say that banking has it roots in the

early trading civilizations of the

Mediterranean ocean. Without

trade there would have been littleneed to establish banks. Without



banks there would have been less

money to finance trading ventures.

Imagine for a moment that you are

a merchant in ancient Greece or

Phoenicia. You make your living

by selling to distant ports with

boatloads of olive oil and spices.

You don't grow the olive oil and

spices yourself; you buy them from

growers or other merchants. If all

goes well, you will be paid for your

cargo when you reach your

destination, but before you can

sail, you must have money to outfit

your ship.

You find it by seeking out people

who have money sitting idle. They

agree to put up the money for your

cargo and supplies in exchange for

a share of your profits when you

return from your voyage. . if you

return. The people with the idle

money are among the world's first

lenders and you are among the

world's first borrowers. You

complain that they're demanding

too large a share of your profits.

They reply that your voyage is

perilous and they run a risk of

losing their entire investment.

Lenders and borrowers have

carried on this debate ever since.

Today, most people who want to

borrow money go to banks rather

than to wealthy individuals. But

the basic concepts of borrowing

and lending haven't really

changed. People don't let you

have their money for nothing. It's

risky to lend money. There's no



guarantee that a lender will get the

money back, even if the borrower

is an old friend. So why lend

money? Why take the risk?

Because lending presents an

opportunity to make even moremoney. People will often take a

financial risk if they believe there is

a good chance of making more

money.

If a bank lends $50,000 to a

borrower, the bank isn't satisfied to

just get its $50,000 back. In order

to make a profit, the bank charges

interest on the loan. Interest is the

price borrowers pay for using

someone else's money. If a loan

seems risky, the lender will charge

more interest to offset the risk. (If

you take a bigger risk, you want a

bigger return). Of course, the

opportunity to earn lots of interest

won't mean much if a borrower

fails to repay a loan. That's whybanks often refuse to make loans

that seem too risky.

Banks also use interest to attract

savers. After all, people who have

extra money don't have to put it in

the bank. They have lots of

choices. But in addition to all of

the different types of accountsbanks offer depositors, the added

advantage is being able to get to

their money quickly.

How is a Bank

Started?



The process varies from state to

state, but here's a simple version

of what it takes to start a bank.

1. Individuals get together anddecide to start a bank.

2. They file an application withthe federal and state bankingauthorities. In Indiana, it's theIndiana Department of Financial Institutions.

3. People at the state bankingauthority review theapplication. They look closelyat the financial condition andthe character of the applicants.

4. After reviewing the application,

the federal and state banking

authorities will either approve

or deny it.

\living by selling to distant ports

with boatloads of olive oil and

spices. You don't grow the olive

oil and spices yourself; you buy

them from growers or other

merchants. If all goes well, you

will be paid for your cargo when

you reach your destination, but

before you can sail, you must havemoney to outfit your ship.

You find it by seeking out people

who have money sitting idle. They

agree to put up the money for your

cargo and supplies in exchange for

a share of your profits when you

return from your voyage. . if you

return. The people with the idlemoney are among the world's first



lenders and you are among the

world's first borrowers. You

complain that they're demanding

too large a share of your profits.

They reply that your voyage is

perilous and they run a risk of losing their entire investment.

Lenders and borrowers have

carried on this debate ever since.

Today, most people who want to

borrow money go to banks rather

than to wealthy individuals. But

the basic concepts of borrowing

and lending haven't really

changed. People don't let you

have their money for nothing. It's

risky to lend money. There's no

guarantee that a lender will get the

money back, even if the borrower

is an old friend. So why lend

money? Why take the risk?

Because lending presents an

opportunity to make even more

money. People will often take afinancial risk if they believe there is

a good chance of making more

money.

If a bank lends $50,000 to a

borrower, the bank isn't satisfied to

just get its $50,000 back. In order

to make a profit, the bank charges

interest on the loan. Interest is theprice borrowers pay for using

someone else's money. If a loan

seems risky, the lender will charge

more interest to offset the risk. (If

you take a bigger risk, you want a

bigger return). Of course, the

opportunity to earn lots of interest

won't mean much if a borrower

fails to repay a loan. That's why

banks often refuse to make loans



that seem too risky.

SOURCES

PROPRIETOR’S CAPITAL ORIGINAL

AMOUNT

INVESTED IN

ENTERPRISE

Profit before Taxes

Depreciation STOCK-COMMON/

PREFERRED

AMOUNT

INVESTED BY

SHAREHOLDERS

Increase in A/C Payable COST OF PROTOTYPE

DEVELOPMENT &

STUDIES FOR IMPROVED

PRODUCTIO, EFFICIENCY

& PROCESS

DEVELOPMENT (COULD

ALSO BE EXPENSED)

Increase in Bank Loan RETAINED EARNINGS EARNINGS

RETAINED

AFTER

DISTRIBUTION

OF DIVIDENDS



ACCURED EXPENSES PORTION OF

SALARIES DUE

BUT NOT YET

PAID

Total Sources

ACCRUED TAXES PORTION OF

TAXES DUE

BUT NOT YET

PAID

APPLICATIONS SHORT-TERM LOANS LOANS TO BE

REPAID IN

LESS THAN

ONE YEAR

Expenditures for plant/equipment

Repayment of Long-term

Debt

LONG-TERM LOAN

(current portion)

PORTION OF

LOAN TERM

DEBT DUE FOR

PAYMENT

WITHIN ONEYEAR

Increase in A/C

Receivable

Increase in Inventories

Taxes



Dividends

Total Applications

Increase (decrease) in

Cash

RESEARCH AND

DEVELOPMENT

(DEFERRED REVENUE EXPENDITURE)

GOODWILL

PATENTS, CPOYRIGHTS

PRE-OPERATING EXPENSES



BUSINESS LOSS

* NONPHYSICAL POOSESSIONS OF AN ENTERPRISE EXPECTED TO YIELOVER A PERIOD OF YEARS

PETTY CASH

MONEY IN BANK

RAW MATERAIL

SPARE PARTS & CONSUMABLES

WORK-IN-PROCESS FINISHED PRODUCT (UNSOLD)

GOODS & SERVICES SOLD BUT NOT YET PAID FOR

NOTES & DEPOSITS DRAWING INTEREST, ETC



INSURANCE PREMIUMS LICENSE FEES

RENT

INTEREST ACCRUED

BUT NOT DUE

Current Assets

Cash/ Bank Balance

Accounts Receivable

Inventories

Total Current Assets

Current Liabilities

Short-term Loans

Accounts Payable

Total Current Liabilities

Net Current Assets

Total Assets

Long-term Liabilities

Long-term Loan

Debenture



Deposits

EQUITY & LIABILITIES

Equity

Equity Share Capital

Preference Share Capital

Retained Earning

Total Equity

LIABILITIES

Equity

Capital Stock

Retained Earnings

Total Equity

Long-term Liabilities

Long-term Debt

Current Liabilities

Short-term Loans



Accounts Payable

Total Current Liabilities

TOTAL LIABILITIES & EQUIY

CONSISTENCY

ONCE A METHOD OR POLICY IS ADOPTED, SUBSEQUENTTRANSACTIONS WILL BE TREATED IN THE SAME WAY;

OTHERWISE, CHANGES SHOULD BE EXPLAINED

8) COSERVATISM

TO AVOID OVERSTATEMENT, WHENEVER THERE ISCHOICE IN VALUING ASSETS OR LIABILITIES THE MORE

CONSERVATIVE VALUE WILL BE USED

9) MATERIALITY

TRIVIALITIES ARE IGNORED. PERSONAL JUDGEMENT ANDCOMMON SENSE DETERMINE WHETHER AN ITEM IS TRVIAL OR

NOT

The Going Concern Concept



ACCOUNTING IS BASED ON ASSUMPTION THAT THE

ENTERPRISE WILL OPERATE INDEFINITELY

4) The Cost Concept

FIXED ASSETS ARE ACCOUNTED FOR AT ACQUISITION COST

RATHER THAN VALUE THEY COULD BE SOLD FOR

5) The Dual Aspect Concept

EVERY (EVENT) TRANSACTION RECORDED AFFECTS AT LEAST

TWO ITEMS IN A FINANCIAL STATEMENT

6) The Accrual Concept

INCOME AND EXPENSES ARISING FROM TRANSACTIONS ARE

RECORDED IN THE PERIOD IN WHICH THEY OCCUR RATHER

THAN THE PERIOD IN WHICH PAYMENT IS MADE. SEEKS TO

MATCH COSTS WITH REVENUES

The raw material has to be cut to size. This is done with a variety of tools.

The most common way to cut material is by Shearing (metalworking);

Special band saws designed for cutting metal have hardened blades and a feed

mechanism for even cutting. Abrasive cut-off saws, also known as chop saws, are similar to

miter saws but with a steel cutting abrasive disk. Cutting torches can cut very large sections

of steel with little effort .



Burn tables are CNC cutting torches, usually natural gas powered. Plasma and laser

cutting tables, and Water jet cutters, are also common. Plate steel is loaded on a table and the

parts are cut out as programmed. The support table is made of a grid of bars that can be

replaced. Some very expensive burn tables also include CNC punch capability, with a

carousel of different punches and taps. Fabrication of structural steel by plasma and laser

cutting introduces robots to move the cutting head in three dimensions around the material to

be cut.

the maximum output rate a process can achieve under ideal conditions” (Krajewski and Ritzman,

2003). The company believes that the CSI effectively communicates how well a process meets

customer specifications, and it provides more useful feedback to the production system. For

instance, a 65% of CSI in cutter operation was measured over a two-month period, which indicates

that only 65% of peak capacity was utilized to meet customer needs. In other words, 35% of

machine capacity was either wasted (due to setup, wait for material, maintenance, or breakdown) or

produced items that failed to meet customer specifications. The 65% of CSI was then used as a

baseline to measure the level of improvement made by this project. The goal (performance

outcome) established for this process was 80 percent of CSI, which was considered to be the

standard for world-class practice.

Once the measure and process capability for cutting operations was defined, the project

team proceeded to analyze the root cause of poor CSI performance. A Pareto analysis was nextperformed, and the team discovered that the cutter grinder accounted for 40% of machine

downtime on the cutting machines (Figure 3). The project team interviewed the operators and

found that, due to lack of proper lubrication of the blades, many cutting heads did not attain their

maximum life. Moreover, as the dull blades were removed for re-sharpening, cutter grinders

became idle and thus failed to keep up with the production schedule. Apparently, the dullness of the

blades caused substantial downtime at the cutters. Furthermore, a dull blade also resulted in many

defect-prone items including rough finish along the cutter lines and machine crash. In summary, the

root cause of poor CSI was found to be blade inefficiency, since it caused machine downtime and

defective cutter bodies.

Specifically, neither traditional unit cost reduction nor local operations productivity increase

was used to determine the improvement effort. Instead, the impact of the improvement on overall

quality of axle and system throughput was used to select the improvement project.

Figure 2 displays a simplified process flow of the Axle manufacturing. Following the TOC

approach, the project team first searched for the bottleneck by identifying operations associated

with large piles of inventory. Gear cutting operation was suspected to be the bottleneck. The

project team further interviewed the operators of the downstream operation, lapping, and

confirmed that lapping was constantly starving for competed ring set from the cutting operation.



Accordingly, cutting operation was determined to be the bottleneck and was chosen as the target

for improvement. Incorporating TOC concept into improvement process enabled the project team

to select a project that could increase the plant throughput and bottom-line performance.

(take in Figure 2)

Value analysis was first performed to determine the various activities in the cutter operation

that add both customer and operational value to the process (Table 1). The purpose of value

analysis is to streamline the value chain to reduce all non-value added waste in the system and to

look for ways to enhance high value-added activities. The machine cycle that includes the cutting

operation is both a customer and operational value-added activity. Improving the yield of a high-

value added activity such as blade cutting would increase the overall capacity of the plant.

Increasing the gear cutting capacity would have a positive impact on manufacturing system

throughput. This could be achieved through a reduction of hours required per gear set, which wouldin turn increase the capacity and remove the need for new capacity investments.

(take in Table 1)

After confirming gear cutters as the bottleneck, the project team initially discussed purchasing

additional cutting capacity. The company was using a solvent-cutting device, where the cutting head

was lubricated to increase the shelf life of the cutting blades. Newer technology in this process had

advanced to dry cutting, a significant increase in the life of the blade, thereby increasing the

capacity. However, with the capital constraints facing the plant, it was not feasible to upgrade to thedry cutting process. As suggested by the TOC concept, the team decided to “exploit” or maximize

the utilization of the current technology rather than make new capital investment in additional

cutting capacity. In other words, the team would proceed to investigate the current performance of

the solvent-based cutting machines and identifying ways to increase quality and throughput without

additional capital expenditures.

The business case for this project was initiated because of the eroding sales revenue, which

went down by 23% in 2000, while fixed expenses went up by as much as 22% within the same year.Management was faced with either shutting down the plant or eliminating the non-value added

processes to increase capacity without incurring new capital expenditures. The Axle facility had

some experience in successfully applying Six Sigma to its process improvement. After receiving

training on TOC, managers decided to combine TOC and Six Sigma to guide their improvement

effort. They felt that the concept of TOC could provide them with a focus on global system

improvement. With careful study and planning, an eight-member project team was formed. The

project team was composed of the plant manager, the controller, two six-sigma certified employees,

and four operators from the plant. One of the authors of this paper and a student team served as

external resources for the project. The team was charged with the responsibility of seeking process

improvement that would result in a minimum of $175,000 savings per year. This was the minimum

standard established by the plant for any major process improvement project. The team started by



reviewing the process map to determine possible bottlenecks in the process. Extensive interviews

were conducted, and an in-depth observation of the processes was undertaken to identify probable

causes of inefficiencies in the system. After the extensive investigation, the cutting process was

singled out as the likely bottleneck operation. The proposed integrated framework was adopted to

make the improvement. The various stages of the process implementation are discussed below.

Phase 1 of this integrated framework is identical to both strategies, and its purpose is to

identify current constraint(s) that block the improvement of global performance, such as meeting

customer needs or improving system throughput. Accordingly, a specific process is selected for

improvement. Phases 2 and 3 follow the spirit of TOC by exploring the capacity of the selected

process. Phase 2 measures the current performance of the process and identifies the root causes

needed to be corrected for improvement. The two phases of Six Sigma, measure and analyze, are

involved in this step. Once the root causes are confirmed, Phase 3 of the integrated approach

applies conventional Six Sigma strategy by using the key manufacturing, engineering, and statistical

techniques to remove root causes of the problem for making necessary process improvement. The

purpose is to best utilize the current capacity of the process without incurring additional capital

expenditures.

Phase 4 ensures the changes made in previous steps are properly supported by the rest of the

system. For example, managers may need to change policies and obtain buy-in from employees to

implement the changes. Training is often required for a revised process. Phases 5 and 6 are taken

from the TOC process. If the improvement of the selected process is insufficient to satisfy customer

needs or goals, managers have to consider various options (e.g., outsourcing and additional

investment) to raise the capacity of the process. Finally, managers must stay alert to the dynamic

nature of the manufacturing system and constantly monitor occurrence of new constraints.

Overall, when the integrated framework is applied to improve a specific process, these two

techniques seem to complement each other. The integration is made by combining the

management aspect of TOC and the engineering aspect of Six Sigma. Specifically, for firms that

apply Six Sigma, TOC provides a global perspective in identifying the constraints and examining

necessary changes to the rest of the systems. On the other hand, Six Sigma brings in the

perspectives of customer needs, performance measures, and engineering and statistical tools duringthe stages Theory of Constraints (TOC) was developed by Eliyahu M. Goldratt during the 1980s

(McMullen, 1998). The core idea of TOC is that every organization has at least one constraint that

prevents management from achieving the goal of the organization to a larger degree. Constraints

can be physical resources or policies. TOC develops a set of procedures and methodologies to

identify and optimize such constraints. For the purpose of continuous improvement, TOC uses a

systematic approach which consists of five focusing steps (Goldratt and Cox, 1992).

1. Identify the system’s constraint(s).

2. Decide how to exploit the system’s constraint(s).



3. Subordinate everything else to the above decision.

4. Elevate the system’s constraint(s).

5. If a constraint has been broken, go back to Step 1. Do not allow inertia to cause a

system’s constraint.

The implementation of Six Sigma strategy involves a series of steps specifically designed to

facilitate a process of continuous improvement. The strategy takes the key manufacturing,

engineering, and transactional processes of entire process through the five transformational phases

(Plotkin, 1999).

1. Define: Identify customer needs and a project suitable for Six-Sigma effort.

2. Measure: Determine what and how to measure the performance of the selected process.

3. Analyze: Understand and determine the variables that create quality variations.

4. Improve: Identify means to remove causes of defects and modify the process.

5. Control: Maintain the improvement.

The primary objective of the five-step process is to recognize critical customer requirements,

identify and validate the improvement opportunity, and upgrade the business processes. A

large number of companies have boosted their profitability, increased market share, and

improved customer satisfaction through the implementation of Six-Sigma. Companies such

as Allied Signal, General Electric, Sony, Texas Instruments, Bombadier, Crane Co.,

Lockheed Martin, and Caterpillar are beginning to dir

The swot anlysis of the Perpetual Inventory System is as under:

STREGTHS:

Accurate Reporti ng

Companies often experience more accurate financial reporting with a perpetualinventory system. Accountants update the general ledger after each inventorytransaction. This results in a general ledger account that closely mirrors the actual

physical inventory on hand. Owners and managers can then make quality decisions based on the accuracy of reporting inventory values. Multiple inventory types also



benefit from this method, as accountants accurately track each one through thegeneral ledger.

Electronic Management

Perpetual inventory systems often use electronic methods to record transactions. Anexample is the barcode system a clothing retailer uses when selling goods. Each scanrecords data that updates the company's inventory value. Accountants use thisinformation to balance the general ledger. Companies also use the data to order goodsusing a just-in-time system. Electronic ordering helps to prevent stock outs and lostsales.

WEAKNESSES:

Cost

Many perpetual inventory systems are expensive. The cost for these systems istwofold. The technology necessary to make the system work can be a major capitalexpense. Updating the system for new changes to the technology is also costly.Training employees to properly use the system is yet another expense. On theadministrative side, companies must find accountants who can work the system andmanage frequent changes to the general ledger.

Process

Perpetual inventory systems are often time-consuming. Electronic updates to acompany's general ledger may result in a need for account reconciliations.Accountants will often spend copious hours each week or month to reconcileinventory. Persistent errors can also cause further complications. Accountants need tocorrect errors and balance the inventory account prior to closing the company's books.Reporting inaccurate inventory figures can trigger an audit, resulting in potential

problems for the company.

Additional record-keeping Increase workload, increase in staff. Additional costs Staff

costs, costs of computer package to maintain inventory records.

First-In, First-Out (FIFO) is one of the methods commonly used to calculate the value of

inventory on hand at the end of a period and the cost of goods sold during the period. This

method assumes that inventory purchased or manufactured first is sold first and newer

inventory remains unsold. Thus cost of older inventory is assigned to cost of goods sold and

that of newer inventory is assigned to ending inventory. The actual flow of inventory may not

exactly match the first-in, first-out pattern.

First-In, First-Out method can be applied in both the periodic inventory system and the

perpetual inventory system.

http://accountingexplained.com/financial/inventories/

http://accountingexplained.com/financial/inventories/periodic-journal-entries

http://accountingexplained.com/financial/inventories/perpetual-journal-entries

http://accountingexplained.com/financial/inventories/perpetual-journal-entries

http://accountingexplained.com/financial/inventories/periodic-journal-entries

http://accountingexplained.com/financial/inventories/



Example

Use the following information to calculate the value of inventory on hand on Mar 31 and cost

of goods sold during March in FIFO periodic inventory system and under FIFO perpetual

inventory system.

Mar 1 Beginning Inventory 60 units @ $15.00 per unit

5 Purchase 140 units @ $15.50 per unit

14 Sale 190 units @ $19.00 per unit

27 Purchase 70 units @ $16.00 per unit

29 Sale 30 units @ $19.50 per unit

Solution

FIFO Periodic

Units Available for Sale = 60 + 140 + 70 = 270

Units Sold = 190 + 30 = 220

Units in Ending Inventory = 270 − 220 = 50

Cost of Goods Sold Units Unit Cost Total

Sales From Mar 1 Inventory 60 $15.00 $900

Sales From Mar 5 Purchase 140 $15.50 $2,170



Sales From Mar 27 Purchase 20 $16.00 $320

220 $3390

Ending Inventory Units Unit Cost Total

Inventory From Mar 27 Purchase 50 $16.00 $800

FIFO Perpetual

Date

Purchases Sales Balance

Units Unit Cost Total Units Unit Cost Total Units Unit Cost Total

Mar 1 60 $15.00 $900

5 140 $15.50 $2,170 60 $15.00 $900

140 $15.50 $2,170

14 60 $15.00 $900 10 $15.50 $155

130 $15.50 $2,015

Under the perpetual inventory system, an entity continually updates its inventory records to

account for additions to and subtractions from inventory for such activities as received

inventory items, goods sold from stock, and items picked from inventory for use in the

production process. Thus, a perpetual inventory system has the advantages of both providing



up-to-date inventory balance information and requiring a reduced level of physical inventory

counts. However, the calculated inventory levels derived by a perpetual inventory system

may gradually diverge from actual inventory levels, due to unrecorded transactions or theft,

so you should periodically compare book balances to actual on-hand quantities.

Perpetual inventory is by far the preferred method for tracking inventory, since it can yield

reasonably accurate results on an ongoing basis, if properly managed. The system works best

when coupled with a computer database of inventory quantities and bin locations, which is

updated in real time by the warehouse staff using wireless bar code scanners, or by sales

clerks using point of sale terminals. It is least effective when changes are recorded on

inventory cards, since there is a significant chance that entries will not be made, or will be

made incorrectly.

Balance sheets complete the sequence of accounts, showing the ultimate result of the entriesin the production, distribution and use of income, and accumulation accounts.Balance sheets and accumulation accounts form a group of accounts that are concerned withthe value of assets owned by institutional units or sectors, and their liabilities at particular

points in time and with the evolution of those values over time. Balance sheets measure thevalues of stocks and are compiled at the beginning and end of the accounting period. On theother hand, the accumulation accounts record the changes in the values of assets and

liabilities during the accounting period. They are flow accounts, whose entries depend on theamounts of economic or other activities that take place within a given period of time.In the balance sheets three categories of assets are distinguished:a) non-financial produced assets

b) non-financial non-produced assetsc) financial assets

(i) Periodic stock verification

(ii) Continuous stock verification

(i) Periodic stock verification: It refers to a system where physical stock verification isnormally done periodically, i.e., once or twice in a year. Under this method, value of stock isdetermined by physical counting of the stock on a particular date, usually at the end of theyear.

It is a simple and economical method of stock-taking and is adopted in small concerns. Thistype of verification is good only for the items which do not find place in the perpetualinventory records, e.g., works-in-progress, components and consumable stores at site etc. Butthere are many limitations of this method. Stores may' be closed down for a few days tofacilitate stock-taking. There is possibility of fraud] discrepancy, etc.

(ii) Continuous stock verification: This system comprises of counting and verifying i number

of items at random daily throughout the year so that all items of stores are verified several



times during the year. Notice of the particular stock to be verified each clay is given to thestore-keeper only on the date of actual verification.

As there is an element of surprise check in this system of stock-taking, effective control over the items of stores can be exercised. The system does not necessitate the closing down of the

stores to facilitate stock-taking. There is also less possibility of fraud and discrepancy, but themethod is expensive and is adopted by big concerns only.

The actual stock of material should not differ from the recorded stock under normalcircumstances. But-sometimes differences arise due to the following reasons:

(i) Breakage and wastage of materials due to improper handling.

(ii) Shrinkage and evaporation.

In earlier periods, non-continuous, or periodic inventory systems were more prevalent.Starting in the 1970s digital computers made possible the ability to implement a perpetualinventory system. This has been facilitated by bar coding and lately radio frequencyidentification (RFID) labeling which allows computer systems to quickly read and processinventory information as part of transaction processing.

Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantominventory) or understatements (missing inventory) that can occur as a result of theft, breakage,scanning errors or untracked inventory movements, leading to systematic errors inreplenishment.

The ESA95 recommends the Perpetual Inventory Method (PIM) for the calculation of thestock of Fixed assets whenever direct information is missing (par. 6.04). The calculation of consumption of Fixed capital can be based on these stocks of assets. Besides net capital stock which appears in the Balance sheets can be derived within a PIM approach. In this paragraphthe basic principles of the PIM will be discussed. Using the PIM, gross capital stock iscalculated as the sum of gross fixed capital formation in Previous years, of which the servicelive is not yet expired. In the simplest case it is assumed that the total investment of a

particular asset does not deteriorate during the expected service life of that asset and isdiscarded as a whole after that period of time.

Becoming a preferred employer involves more than learning the characteristics of such an

organization, however—it also requires that you understand what top performers want and

value in a relationship with an employer. Interestingly, the answers to both questions are the

same.

To begin with, top-tier employers offer more than competitive pay and benefits. In fact, the

word "competitive" implies that you're simply matching what many other businesses are

providing. Even important additional elements, such as a good environment and open

http://en.wikipedia.org/wiki/Periodic_inventory

http://en.wikipedia.org/wiki/RFID

http://en.wikipedia.org/wiki/Phantom_inventory


http://en.wikipedia.org/w/index.php?title=Missing_inventory&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Missing_inventory&action=edit&redlink=1



http://en.wikipedia.org/wiki/RFID

http://en.wikipedia.org/wiki/Periodic_inventory



communication, won't necessarily make the difference.

Studies show that the most important factor is how people feel about their role in the

business. Employees perform at different levels based on how they're engaged in the

lifeblood activities of the company. When an employer brings in people who are talented,

aligned with the company's values and focused on its goals, the results can be tremendous.

Want to set your company apart from your competitors? Here are some steps that can help

you draw the best people to your business:

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