Professional Documents
Culture Documents
topics
Marginal
Costing
Capital Budgeting
Cash Budget
Working Capital
COSTING
Marginal costing
Marginal
costing
distinguishes
between fixed cost and variable cost
Marginal cost is nothing but variable
cost of additional unit
Marginal cost= variable cost
MC= Direct Material + Direct Labour
+Direct expenses
Basic formula
VC
Contributio
n
10
9
8
7
6
5
4
6
6
6
6
6
6
6
=
=
=
=
=
=
=
4
3
2
1
0
(1)
(2)
Rs.100000
Fixed Cost Rs.20000
B.E.Point Rs.80000
What is the profit ?
vc
Contribtio
n
c/s
Ratio %
ranking
20
10
10
10/2
0
50%
30
20
10
10/3
0
33% 2
40
30
10
10/4
0
25%
Rs.14
Rs.11
VC
Contribution 6
Per unit
Labour hr. pu 2
Contri.per hr
DECISIONS
Make
or buy decisions
Close department
Accept or reject order
Conversion cost pricing
Marginal costing
costvolumeprofit
Marginal costing
Marginal costing
LIMITATIONS OF COSTVOLUME-PROFIT
ANALYSIS
A major limitation of conventional CVP analysis that
we have already identified is the assumption and
use of linear relationships. Yet another limitation
relates to the difficulty of dividing fixed costs among
many products and/or services. Whilst variable costs
can usually be identified with production services,
most fixed cost usually can only be divided by
allocation and apportionment methods reliant upon
a good deal of judgement. However, perhaps the
major limitation of the technique relates to the
initial separation of fixed and variable costs.
Marginal costing
Marginal costing
Marginal costing
6.
Marginal costing
CAPITAL BUDGETING
It
(100000)
30000
40000
50000
50000
CAPITAL BUDGETING
1.
CAPITAL BUDGETING
2.
3.
4.
CAPITAL BUDGETING
1.
2.
3.
Difficulties
There are three basic reasons why capital
expenditure decisions pose difficulties for the
decision maker. These are:
Uncertainty: the future business success is todays
investment decision. The future in the real world is
never known with certainty.
Difficult to measure in quantitative terms: Even if
benefits are certain, some might be difficult to
measure in quantitative terms.
Time Element: the problem of phasing properly the
availability of capital assets in order to have them
come on stream at the correct time.
CAPITAL BUDGETING
Independent
Dependent
Mutually
exclusive
Economically independent and statistically
dependent
Investment
may fall into two basic
categories, profit-maintaining and profitadding when viewed from the perspective
of a business, or service maintaining and
service-adding when viewed from the
perspective of a government or agency.
CAPITAL BUDGETING
1.
2.
3.
4.
CAPITAL BUDGETING
unit
Expansion
Diversification
Replacement
Research & Development
outlay
Long term effects
Irreversibility
Problems in measuring future cash
flows
analysis
Technical analysis
Financial analysis
Economic analysis
Managerial analysis
Ecological analysis
Financial analysis
Cost
of project
Means of finance
Cost of capital
Projected profitability
Cash flows of the projects
Project appraisal
Decision process
INVESTMENT OPPORTUNITIES
PROPOSALS
Improvement in planning & Evaluation procedure
PLANNING PHASE
D IES
TE IT
EC UN
EJ RT
R O
PP
O
d
te ls
c
je osa
e
R op
Pr
d
te s
c
je ect
e
R roj
p
PROPOSALS
EVALUATION PHASE
PROJECTS
SELECTION PHASE
ACCEPTED PROJECTS
IMPLEMENTATION PHASE
ONLINE PROJECTS
CONTROL PHASE
PROJECT TERMINATION
AUDITING PHASE
NON-DISCOUNTING
1
2
3
4
5
6
7
8
1000
2000
2000
3000
3000
4000
4000
5000
0.893
0.799
0.712
0.636
0.567
0.507
0.452
0.404
893
1594
1424
1908
1701
2028
1808
2020
1
2
3
4
5
6
7
8
2000
2000
2000
3000
3000
4000
4000
5000
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.466
1818
1652
1502
2049
1863
2256
2052
2330
Solution IRR
NAV
Project A 20% 309
Project B 15%
1441
These project are mutually exclusive
The IRR ranks project A higher, whereas the NPV
ranks project B first.
The conflict arises because B is ten times the size
of A. This gives a higher NPV but in relative terms
it is less profitable with a lower percentage
return. Naturally, B is preferable because it gives
the greatest increase in shareholders wealth.
@27%
0
1
2
3
NPV
-102
51
51
61
1
0.78740
0.62000
0.48818
Value
-102
40
32
30
0
Future value
Assume
BUDGET
Quantitative
expression
management objective
Budgets and standards
Budgetary control
Cash budget
of
PROFIT PLANNING
Budget
PRICING DECISIONS
Full
cost pricing
Conversion cost pricing
Marginal cost pricing
Market based pricing
PRICING DECISIONS
PRICING DECISIONS
Full
The
cost pricing
PRICING DECISIONS
Conversion
Conversion
cost pricing
PRICING DECISIONS
Marginal
cost pricing
PRICING DECISIONS
Market
This
based pricing
Operating leverage
Financial leverage
OL=
Working capital
Current
Short-term
Debt
Fluctuating Current Assets
Fixed Assets
Time
Long-term
Debt +
Equity
Capital
Accounts Payable
Raw
Materials
Cash
Value Addition
WIP
Accounts
Receivable
SALES
Finished
Goods
Operating
cycle concept
A companys operating cycle typically consists
of three primary activities:
Purchasing resources,
Producing the product and
Distributing (selling) the product.
These activities create funds flows that are both
unsynchronizedWorking
and uncertain.
capital cycle
Unsynchronized because cash disbursements (for
example, payments for resource purchases) usually
take place before cash receipts (for example
collection of receivables).
They are uncertain because future sales and costs,
which generate the respective receipts and
disbursements, cannot be forecasted with complete
accuracy.
Working capital
Working capital
Credit control
Inflation or Price level changes
Profit planning and control
Repayment ability
Cash reserves
Operation efficiency
Change in Technology
Firms finance and dividend policy
Attitude towards Risk
BASIS OF
TIME
Permanent
/ Fixed
WC
Net
Working
Capital
Temporary
/ Variable
WC
Seasonal
WC
Regular
WC
Reserve
WC
Special
WC
Working capital
Working capital
Working capital
In
contrast, a manufacturing
company will require relatively high
levels of working capital with
investments in raw materials, workin-progress and finished goods
stocks, and with high levels of
debtors. The credit terms offered on
sales and taken on purchases will be
influenced by the normal contractual
arrangements in the industry.
Working capital
Debtors
planned output
actual output
sales
Payables
Volume of purchases
Length of credit allowed
Length of credit taken Discounts
Shortterm finance
All the above
Other payments/receipts
Availability of credit Interest rates
Working capital
Cash Levels
it is necessary to prepare a cash budget where
the minimum balances needed from month to
month will be defined.
business is seasonal, cash shortages may arise in
certain periods. Generally it is thought better to keep
only sufficient cash to satisfy shortterm needs, and to
borrow if longerterm requirements occur
The problem, of course, is to balance the cost of this
borrowing against any income that might be obtained
from investing the cash balances.
The size of the cash balance that a company might
need depends on the availability of other sources of
funds at short notice, the credit standing of the
company and the control of debtors and creditors
Working capital
Debtors
The
Working capital
1.
2.
3.
4.
5.
6.
Working capital
Costs &
Profitability
Optimum Level
Liquidity
Stringent
Liberal
Working capital-FACTORING
Factoring
Definition:
Factoring is defined as a continuing legal
relationship between a financial institution (the
factor) and a business concern (the client), selling
goods or providing services to trade customers
(the customers) on open account basis whereby
the Factor purchases the clients book debts
(accounts receivables) either with or without
recourse to the client and in relation thereto
controls the credit extended to customers and
administers the sales ledgers.
Working capital-FACTORING
It
Working capital-FACTORING
Debt administration:
The factor manages the sales ledger
of the client company. The client will
be saved of the administrative cost of
book keeping, invoicing, credit control
and debt collection. The factor uses
his computer system to render the
sales ledger administration services.
Working capital-FACTORING
Different
Working capital-FACTORING
Working capital-FACTORING
Client
Working capital-FACTORING
Benefits of factoring
The client will be relieved of the work relating to sales
ledger administration and debt collection
The client can therefore concentrate more on planning
production and sales.
The charges paid to a factor which will be marginally high
at 1 to 1.5% than the bank charges will be more than
compensated by reductions in administrative expenditure.
This will also improve the current ratio of the client and
consequently his credit rating.
The subsidiaries of the various banks have been rendering
the factoring services.
The factoring service is more comprehensive in nature than
the book debt or receivable financing by the bankers.
Managing
Excessive
Insufficient
INVENTORIES
INCLUDE
RAW MATERIALS, WIP & FINISHED
GOODS
Lead
Time
Cost of Holding Inventory
Material Costs
Ordering Costs
Carrying Costs
Cost of tying-up of Funds
Cost of Under stocking
Cost of Overstocking
Working capital
Working capital
Working capital
2
1/2
1 1/2
6
1
2.
3.
------------4
4.
0.33
Overheads 2
0.50
1.37
-------
2
Rs in crores
0.94
0.10
END
THANK