management accounting unit 4 Inter Firm Comparison (IFC) A+ latest updated version
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Course
Management accounting
Institution
Management Accounting
management accounting unit 4 Inter Firm Comparison (IFC) A+ latest updated version .
Meaning
Inter-firm comparison means a comparison of two or more similar business units with the
objective of finding the competitive position to improve the profitability and productivity of
those business un...
Meaning
Inter-firm comparison means a comparison of two or more similar business units with the
objective of finding the competitive position to improve the profitability and productivity of
those business units. It is a tool used by the management of a company to compare its operating
performance and financial results with those of similar companies engaged in the same industry.
The method by which one firm is compared with other firms particularly when technology,
product characteristics, production method and general operating conditions are same in the
same industry, the same is known as inter-firm comparison. It would be more significant and
meaningful if the performances of the firms are compared with that of the others, belonging to
the same group, for a year or for a few years. It is a technique by which one can evaluate the
performances, efficiencies, profits and costs of a company with other companies in the industry.
Inter-firm comparison may be made not in the form of absolute figures but in the form of
various ratios, usually the figures relate to cost accounting liquidity and profitability as well.
According to Centre for Inter-firm Comparison, established by the British Institute of
Management, Inter firm Comparison is concerned with the industrial firm, its success and the
part played by the management in achieving it. The end product of a properly conducted inter
firm comparison is not a statistical survey but the flash of insight in the mind of meaning
director of the firm which has taken part in such an exercise. The results of this give him an
instant and vivid picture of how his firm‘s profitability, its costs, its stock turnover, and other
key factors affecting the success of a business compares with other firms in his industry.
Purpose:
The main purpose of inter-firm comparison is to compare the efficiency of one firm with that of
other belonging to the same group of industry and helps the management to locate the problems
or reasons for such inefficiency and to take the corrective measures for its improvement.
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,Types of Inter-Firm Comparison
The following are the three main types of Inter-Firm Comparison.
1. Management Ratios
2. Cost Ratios
3. Technical Data.
1. Management Ratios:
The management ratios are those which are linked to sales, profits and assets of a
business. These ratios are meant to provide management in a nutshell, a comparative
picture of its operating performance, financial result, growth, liquidity etc. compared
with those of other firms in the industry or trade. These ratios are worked out on the
basis of figures supplied by each member. In the pyramid of ratios the apex ratio is
profit related to the capital employed, which takes into account the various factors
affecting the business. The ratios worked out are useful to the management to the extent
that the comparison reflects the earning capacity, return on capital employed, earnings
on fixed assets, liquidity, growth etc. of the business. On the basis of this information, it
can act for future improvement.
2. Cost Ratios:
If the management may not be satisfied with the ratios calculated, they would like to go
a step further to make inter-firm comparison more meaningful and to find out how they
are doing in relation to others as regards the cost of production. As competition becomes
keener, cost ratios will assume greater importance for the simple reason that cost
reduction becomes a compelling necessity. The members of the Association will, under
this type of inter-firm comparison, have to disclose much more information than they
will be required to do in case of the advantages of cost ratios comparison will be more
marked in the areas where cost reduction is visualised.
3. Technical Data:
This type of comparison will be of special interest to industries working in highly
competitive economies. Such comparison will gradually lead to rationalisation of
industry. It is visualised that technical comparison will be in the realm of quality of
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, materials used, their utilisation, process involved, machinery used, and certain other
technical aspects of production
Objects of Inter Firm Comparison:
The meaning of IFC can be easily explained by considering the main object of the
system. The main purpose of IFC is improvement of efficiency by showing the
management of participating firm its present achievements and possible weaknesses.
These firms have to contribute their data to the central body which acts as a neutral
body. This central body ensures confidence and it gives report regarding comparisons
only to participants.
The following are important objectives of inter-firm comparison:
1. IFC analyses costs of different firms with a view to spot out relative efficiency.
2. IFC provides aid to management in enforcing and reviewing budgetary control and
standard costing. These techniques enforced in one firm are compared with those in
other firms making more efficient use of the same. Inadequacies of standard costing and
budgetary control are located by making inter-firm comparisons and remedial measures
are introduced.
3. IFC helps to prepare a comprehensive and detailed plan for firms or units to obtain
optimum use of human and material resources.
4. The main objection of IFC is the improvement of efficiency and identification of weak
points. IFC is a scheme consisting of exchange of information with regard to cost, profit,
productivity and efficiency between the participating firms through a central
organisation. IFC focuses the remedial measure of a number of problems related to
profit, sales and production.
Advantages of Inter-Firm Comparison:
The following are the advantages of inter-firm comparison:
1. Under IFC the weakness of participating firms are revealed and the management will be
guided to remedial actions.
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