Financial Management

CAIIB -MODULE D
Presentation by
S.D.Bargir
Joint Director, IIBF

Module D topics

Marginal Costing
Capital Budgeting
Cash Budget
Working Capital

COSTING

Cost accounting system provides

information about cost
Aim : best use of resources and
maximization of returns
cost
=
amount
of
expenditure
incurred( actual+ notional)
Purposes =profit from each job/product,
division, segment, pricing decision, control,
prevent wastages, basis for tenders,
effective use of resources, profit planning
+inter firm comparison

Marginal costing

Marginal
costing
distinguishes
between fixed cost and variable cost
Marginal cost is nothing bust variable
cost of additional unit
Marginal cost= variable cost
MC= Direct Material + Direct Labour
+Direct expenses

Marginal costing problems

Sales (-) variable cost (=)

contribution
Contribution(/ divided by) sales
(=) C.S. Ratio
Contribution=Fixed cost (=)Break
even point
Fixed Cost (/ divided by)
contribution per unit = break even units

Basic formula

Sales price (-) variable cost= contribution

SP less

VC

Contribution

30

18

12

28

18

10

26

18

24

18

20

18

18

18

17

18

(1)

Marginal costing problems

SP = Rs.30, VC =Rs.18 Fixed Cost
Rs.102000
Find
- Break even point (in Rs. & in units)
- C/S ratio
- Sales to get profit of Rs.66000

Solution to problem

SP = Rs.30, VC =Rs.18 Fixed Cost

Rs.102000

Find Break even point (in Rs. & in units) C/S Ratio,
Sales to get profit of Rs.66000

Contribution per unit = Rs. 30 less Rs.18 =Rs.12

C/S Ratio = 12/30 =0.40 =40%

BEP units = 102000/ 12=8500

BEP sales (in Rs.) =8500 X 30 =255000

contribution= FC+ target profit= 102000+66000=168000

Unit to get profit of Rs.66000= 168000/12 =14000

Sales to get profit of Rs.66000=14000 x 30 =420000

Marginal costing problems

Sales Rs.150000
Fixed Cost Rs.30000
B.E.Point Rs.60000
What is profit ?

Management decisions- assessing profitability

CONTRIBUTION/SALES=C.S.RATIO
Produ
ct

sp

vc

Contrib
ution

C/S

Ratio %

ranking

20

10

10

10/20

50%

30

20

10

10/30

33% 2

40

30

10

10/40

25%

DECISION when limiting factors

SP

Rs.14

Rs.11

VC

Contribution
Per unit
Labour hr. pu

Contri.per hr

DECISIONS

Make or buy decisions

Close department
Accept or reject order
Conversion cost pricing

CAPITAL BUDGETING

It involves current outlay of funds in

the expectation of a stream of
benefits extending far into the future
Year
0
1
2
3
4

Cash flow
(100000)
30000
40000
50000
50000

Types of capital investments

New unit
Expansion
Diversification
Replacement
Research & Development

Significance of capital budgeting

Huge outlay
Long term effects
Irreversibility
Problems in measuring future cash
flows

Facets of project analysis

Market 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

Methods of capital investment

appraisal
DISCOUNTING

NON-DISCOUNTING

Net present value

(NPV)

Pay back period

Internal rate of return

(IRR)

Accounting rate of
return

Profitability Index or
Benefit cost ratio

Present value of cash flow stream(cash outlay Rs.15000)@ 12%

Year

Cash flow

PV factor
@12%

PV

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
13376

Problem
Year

Cash flow

PV factor
@15%

PV

0
1
2
3
4
5
6
7

(50000)
10000
10000
20000
20000
30000
20000
10000

(50000)

Solution to Problem
Year

Cash flow

PV factor
@15%

0
1
2
3
4
5
6
7

(50000)
10000
20000
30000
30000
30000
20000
10000

1
0.870
0.756
0.658
0.572
0.497
0.432
0.376

PV
(50000)
8696
15123
19725
17153
14915
8647
3759
38018

Present value of cash flow stream(cash outlay Rs.15000)@ 12%

Year

Cash flow

PV factor
@12%

PV

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
13376

Present value of cash flow stream(cash outlay Rs.15000 )@10%

Year

Cash flow

PV factor
@10%

PV

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
15522

CALCULATION NPV/IRR
Outlay
15000
15000
Difference

PV @10%
15522
-

PV @ 12% NPV

13376
-

522
(1624)
2146

IRR continued
IRR= LR +( NPV by LR/ difference between
NPV) x (HR-LR)
LR= 10%
NPV by LR= 522
Difference between NPV= 2146
HR less LR= 12 (-) 10 = 2
IRR= 10%+ (522/2146)X2
IRR=10%+0.49
IRR=10.49%

The timing of the cash flows is critical for

determining the Project's value.
below the line for cash investments or
above the line for returns.

Rs.102 lakh

Year 0

Rs.51 Lakh

Rs.51 Lakh

Rs.61 Lakh

Year 1

Year 2

Year 3

@27%
0
1
2
3
NPV

-102
51
51
61

1
0.78740
0.62000
0.48818

Value
-102
40
32
30
0

Internal Rate of Return

(IRR)
IRR is the rate at which
the discounted cash flows
in the future equal the
value of the investment
today. To find the IRR one
must try different rates
until the NPV equals zero.

IRR

The evaluation of any project depends

on the magnitude of the cash flows,
the timing and the discount rate.
The
discount
rate
is
highly
subjective. The higher the rate , the
less a rupee in the future would be
worth today.
The risk of the project should
determine the discount rate.

Problems

We will see more problems

immediately after discussion of
other topics

PRICING DECISIONS

Full cost pricing

Conversion cost pricing
Marginal cost pricing
Market based pricing

Full cost pricing

It is cost plus profit e.g. if variable plus

fixed cost is Rs.30 per unit and if the profit
expected is 25% ,then the selling price
would be Rs.37.50 (30+7.50)
Suitable when product is differentiated and
product is not subject to competition.
It cannot be applied when no of products
are more than one as % of profit differs
with the product

Conversion cost pricing

Direct Labour and Direct Overhead

cost is considered ignoring material
cost
Selling price higher for product
having greater conversion cost

Marginal cost pricing

SP=VC = contribution
Short term pricing decisions
Pricing decision in export market
Pricing decision in different market
Pricing to tide over surplus capacity
Accepting additional order at lower
price

Market based pricing

Works on variable principle which

means that price is based on value to
the customer It is a premium price
for specialized goods and services
It can be based on the price charged
by the competitors

BUDGET

Quantitative expression
management objective
Budgets and standards
Budgetary control
Cash budget

of

PROFIT PLANNING

Budget & budgetary control

Marginal costing
CVP and break even point
Comparative cost analysis
ROCE

Working Capital

Definition- Excess of CA over CL

Existing company- new capital outlayaddl. W.C requirement
Sources of W.C.

Long term
Short term- OD, Trade credit

Components of WC

Permanent
Variable ( seasonal)

Working capital cycle

cash> Raw material > Work in

progress > finished goods > Sales >
Debtors > Cash>
Operating cycle it is a length of
time between outlay on RM /wages
/others AND inflow of cash from the
sale of the goods

OPERATING CYCLE

The longer the operating cycle the

more fin. Resources
How to keep the cycle shorter

Debtors- quick collection

Finished goods- turnover rapidly
Raw Material reduce stock level
Work in progress- shorten the period

Working Capital
Assessment

Projected Balance Sheet Method

Cash

Forms I, III, IV, VI

Financial follow up Report (FFR-I- quarterly)
Financial follow up Report (FFR-II- half yearly)

Budget

Method-

construction company

Turnover Method- SSI

Seasonal

industry/

Examples from book

P-369
P-375
P-377
P-379
P-380
P-385
P-387
P-393

Examples from book

P-413
P-414
p-415
P-417

***

THANK YOU
WISH YOU BEST OF LUCK
sudaaba@iibf.org.in
***