Inter-Firm and Intra-Firm Comparisons, Ratio And Trend Analysis - Auditing & Secretarial Practice | Auditing and Secretarial Practice - B Com PDF Download

Inter-Firm Comparison

It is technique of evaluating the performance, efficiency, costs and profits of firms in an industry. It consists of voluntary exchange of information/data concerning costs, prices, profits, productivity and overall efficiency among firms engaged in similar type of operations for the purpose of bringing improvement in efficiency and indicating the weaknesses. Such a comparison will be possible where uniform costing is in operation.

An inter-firm comparison indicates the efficiency of production and selling, adequacy of profits, weak spots in the organisation, etc. and thus demands from the firm’s management an immediate suitable action. Inter-firm comparison may enable the management to challenge the standards which it has set for itself and to improve upon them in the light of the current information gathered from more efficient units. Such a comparison may be carried out in electrical industry, printing firms, cotton spinning firms, pharmaceuticals, cycle manufacturing, etc 

Advantages of Inter-firm comparison: The main advantages of inter-firm comparison are:–

1. Such a comparison gives an overall view of the industry as a whole to its members– the present position of the industry, progress made during the past and the future of the industry.
2. It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial measures may be taken.
3. It ensures an unbiased specialized reporting on particular problems of the concern.
4. It develops cost consciousness among members of the industry.
5. It helps Government in effecting price regulation.
6. It helps to improve the quality of products manufactured and to reduce the cost of production. It is thus advantageous to the industry as well as to the society.

Limitations of inter-firm comparison

The following are the limitations in the implementation of a scheme of inter-firm comparison :

1. Top management feels that secrecy will be lost.

2. Middle management is usually not convinced with the utility of such a comparison.

3. In the absence of a suitable Cost Accounting System, the figures supplied may not be reliable for the purpose of comparison.

Intra-Firm Comparison

Intra-firm comparison means comparison among different units/products/strategic business unit (SBU) of a firm. This comparison is possible only when uniform costing methods and practices are being adopted by all units and SBUs.

Intra firm comparison helps the management in identifying the units/Strategic SBUs which have not been performing as per the internal benchmark or standards achieved by other units SBUs. This comparison is difficult sometime when the firm is dealing in different product/sectors and their working conditions are significantly different.

Advantages of Intra-firm comparison: The main advantages of intra-firm comparison are:–

1. Such a comparison gives an overall view of the firm as a whole to the owner or stakeholders and gives a comparative view of different product/different business of the firm.
2. It helps a SBU in knowing its strengths or weaknesses in relation to others SBUs.
3. It develops cost consciousness among units of the firm.

Ratio /Trend Analysis as a Tool of Inter-Firm and Intra- Firm Comparison

Ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of the performance and financial position of an enterprise. Ratio analysis is an accounting tool to present accounting variables in a simple, concise, intelligible and understandable form.

A firm would like to compare its performance with that of other firms and of industry in general. The comparison is called inter-firm comparison. If the performance of different units belonging to the same firm is to be compared, it is called intra-firm comparison. Such comparison is almost impossible without accounting ratios. Even the progress of a firm from year to year cannot be measured without the help of financial ratios. The accounting language simplified through ratios is the best tool to compare the firms and divisions of the firm.

Audit in Depth

Audit in depth as the name implies means checking a transaction extensively from origin to end. It is an audit technique which is used to evaluate the effectiveness of internal control system in an organisation. It is used in investigation exercises whereby the objective is to thorough examination of transactions or records. In this technique all aspects relating to the transaction are checked such as sanctity of transaction, validity of transaction, adherences of prescribed procedures, arithmetical accuracy of transaction, accounting treatment of transaction etc. It is also called vertical vouching as against horizontal vouching.

For example, a purchase of goods may commence when a predetermined re-order level has been reached. The ensuing stages may be summarized as given below:-

1. Authorization of Purchase requisition: Check whether the requisitions are pre-printed, pre-numbered and authorized. See whether the purchase requisition have been authorized by competent official.
2. Issue of Request for quotation: Check whether request for quotatio0n have been issued or not. If not find the reasons of not issuing request for quotation. Check whether the requests for quotation have been issued to approved vendors.
3. Issue of Purchase order: Check whether purchase order have been issued or not. If purchase order have been issued check whether it has been issued from the competent authority. Check whether the purchase order have been issued to the approved vendor who has given lowest quote. If not check the reasons. Check whether the reasons of issuing the purchase order to a vendor other than the lowest bidder have been approved by the competent authority.
4. Receipt of goods and entry of goods in store ledger: check whether the goods receipt is as per specification given in the purchase order. If not check whether the deviations have been recorded and the communication has been made to the supplier or not. Check whether the goods receipt have been properly recorded in store ledger or not.
5. Approval of payment of Supplier Invoice: Check whether the amount has been approved by the competent authority.
6. Payment of supplier invoice: Check whether the supplier bill have ben paid correctly. Check whether all deduction for short receipt of goods, late delivery of goods, inferior quality of goods, advance payment for the goods have been done or not.
7. Accounting of Transaction: Check whether accounting made is correct or not. Check whether correct expenses code have been debited or not. Check whether the applicable accounting standard have been complied with or not.