Shadow Banking – Meaning, Functions, Advantages & Disadvantages
Banking is perhaps the most regulated industry on the planet. The movement of funds in and out of the banking system is monitored by governments as well as regulators. However, competitive pressures force banks to undertake more risks and if possible earn a higher rate on their investments. This is what creates a parallel financial […]
Rigging the LIBOR
The British banking regulator FSA has prosecuted Barclays for rigging the interest rates in the market. The regulator termed it as being equivalent to stealing money from people who invest in derivatives and other stock market instruments that are sensitive to LIBOR. Barclays, one of the largest banks in the United Kingdom had to pay […]
Equivalent Annual Costs
In the previous articles we have seen how we can convert a possible future stream of cash flows to its present value today to make investment decisions. We choose amongst competing projects and the one with the highest NPV is usually selected. But sometimes this may not be the appropriate thing to do. Example: Consider […]
Calculating Free Cash Flow to Firm: Method #1 (Contd): Treatment of Fixed Capital Expenditure
In the previous article we learned that free cash flow to the firm is closely related to the concept of cash flow from operations. The major difference was in the way free cash flow to the firm (FCFF) treats long term capital expenditures versus how they get treated in the regular cash flow statement. The […]
Double Entry Bookkeeping System in Accounts
The double entry system of bookkeeping is said to have revolutionized growth in modern business. It is only because businesses are able to keep track of their growing scale of transactions efficiently that they grow further. This has been facilitated by a well designed, error preventing accounting system called the double entry system. Here are […]
Rework is that part of the final produce which has not been accepted by the client because it does not meet the required specifications. However, those specifications can be met by working on the item once again. Hence the name rework.
Spoilage is also that part of the final produce that does not adhere to the specifications given by the client and is therefore not accepted by them.
The difference between rework and spoilage is that, rework will be reworked on and sold at full price whereas spoilage is considered to be defective goods and is discarded at throw away prices in the market.
Rework and spoilage are closely linked concepts. If firms have a high percentage of rework, they will also have a lot of items in their spoilage.
Rework and spoilage are additional cost for the company. Since the company is in the business to make a profit, this gets passed on to the customer in the form of additional costs. This makes the company uncompetitive in comparison to its competitors.
The company with the lowest amount of rework and spoilage costs will have the least loss and hence they will be able to provide the best deal to the customer. Reducing rework and spoilage is therefore strategic in nature and must be paid careful attention to.
Job costing has created a system wherein rework and spoilage costs are allocated to the respective job where the loss is supposed to have occurred. This helps the company find out the types of jobs it is efficient and not efficient in and therefore work on reducing costs:
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