Study Material : Course On Finance Appreciation

Chapter 4 : Costing Concepts

Topic : Concept Of Costing & Bifurcation

CONCEPT OF COST & BIFURCATION OF COST INTO FIXED & VARIABLE-

Costs are grouped together depending on where they have been incurred and if by incurring such
costs the level of activity increases or decreases.Direct costs are variable in nature and vary with
the level of activity.Indirect costs are fixed in nature and do not vary with the level of activity.

A service company incurs costs like network development cost,office set-up expense,cost for
starting up the business,satellite link charges,salaries and incentives of employees,office set-up
expense and advertising expense.

Chapter 4 : Costing Concepts

Topic : Major Cost Components In A Service Unit

MAJOR COST COMPONENTS IN A SERVICE UNIT-

Project Execution Costs-

It would be the amount spent on machines, consumables,maintenance,electricity,printing and
stationary costs,communication costs,traveling etc.

Repairs and Maintenance Charges-

Costs incurred due to repairs and other maintenance to be carried out in the company.

Administrative Expenses-
It includes general and administrative expenses including training expenses.The other expenses
include communication and travel expenses,printing and stationary expenses related to projects
and consultancy charges.

The costs associated with a service industry differ from a manufacturing unit.Most of the costs in
a service industry comprise recruitment cost,hiring cost ,training cost ect because it deals with
humans and not materials like in manufacturing company.

Topic : Behaviour Of Costs

BEHAVIOUR OF COSTS-
There are certain costs which are independent of the level of activity of business eg:salaries of
employees do not get affected if the level of activity of business increases or decreases.Some
costs are affected by the level of activity of business like the scale of the project,number of
projects executed,hours spent on development of a product.

The difference between selling price and variable costs is called contribution.Initially the
contribution goes to the fixed costs and at breakeven contribution and fixed assets become
equal.After this profits are made.

Topic : Cost Reduction Measures For Problems

COST REDUCTION MEASURES FOR TYPICAL PROBLEMS-

Problem-Electricity and bills

Solution-Educating the workers,labourers and employees to not waste electricity.

Problem-General and Administrative Expenses

Solution-To increase accountability of heads of the various departments

Problem-Divisional and Regional Offices

Solution-To make the head for that unit in charge of the sales, performance of it.

Problem-High Maintenance Costs

Solution-To use high quality assets so that maintenance and repairs would be less.

Problem-Communication,Stationary and Printing Costs:

Solution-Educating the employees to not waste paper.Normal paper should be used for al
purposes and high quality paper should be used only for important printouts and documents.

BIFURCATION OF OPERATING EXPENSES INTO FIXED & VARIABLE EXPENSES-

NATURE OF EXPENSE VARIABLE FIXED

Consumables Yes
Repairs & Maintenance Major Part Minor Part
Power Major Part Minor Part
Insurance Charges for Fixed
Assets
Depreciation on Fixed By & Large Fixed
Assets
Rent Rates and Taxes Fixed
Salaries Minor as Incentives Major Part
Divisional & Regional By & Large Fixed
Expenses
General & Administrative Fixed

Expenses

Topic : Format Of Cash Flow Statement

FORMAT OF CASH FLOW STATEMENT-

Cash Receipts-
Revenue Receipt- Revenue received in a month+dividend income received+rent income+interest
income received+miscellaneous receipt.

Capital Receipts- Sale of fixed assets+reciepts of new loan+introduction of capital by the

government+reciepts of deposits from public.

Non-Revenue Receipts- Sale of investment in fixed deposit with bank,shares of other companies

Cash Expenses-
Revenue Expenses- Cash purchases in the month+payment to creditors in the month+cash
outflow towards operating expenses in the month+dividend transfered to government.

Capital Expenses- Purchase of fixed assets+repayment of deposits

Cash Receipts-Cash Expense = Cash Surplus-If there is a deficit cash on hand it is used for
meeting the deficit.If Deficit cash is not enough to meet the deficit then external borrowing is
used.

Chapter 5 : Indian Financial System-Money Markets And Capital Markets

Topic : Money Markets

MONEY MARKETS-

The basis of financial systems is as follows-Some sectors in a country have excess funds which
they are ready to invest elsewhere.On the other hand there are these sectors which require
funds.So they get their funds from those sectors where there are excess funds.

Topic : Instruments Traded In The Money Markets

The Financial Markets-

Financial assets are created and transferred in this market.These financial assets are claims to
payment of an amount of money on a periodic basis like in the form of dividend and interest or
in the future.Financial markets are classified as primary and secondary markets or as money and
capital markets.

Primary Markets-Its a market where funds flow directly from households and saving units into
the market and are made available to the users who are business organisations or government
organisations in the form of limited companies.Funds are raised through share capital and
debentures.

Secondary Markets- This is the market where the shares and debentures of investors are sold to
other investors without giving the claim directly to the principal users of the funds.Such a market
or enables selling off investment in the business organisation by the public through the business
enterprise or directly to there investors.

Topic : Capital Markets

CAPITAL MARKETS-

It consist of the primary market,secondary market.It has the share capital and debt capital
instruments.The primary and secondary markets are linked to each other.When there are many
public issues in the primary market it increases growth of the secondary market.This is because
easy liquidity is provided to the existing investors by off-loading their investment in capital or in
debt instruments.

Topic : Instruments Traded In The Money Market

INSTRUMENTS TRADED IN THE MONEY MARKET-

Treasury Bills-
A short-term instrument issued by the Government through the Reserve Bank of India.It is used
to solve the budget deficit.They can be enacted anytime and are highly reliable.The face value of
a treasury bill is realised on maturity only.If the market rate decreases for short-term,the RBI will
offer a low yield then the amount they will collect will be more.The investors are financial
institutions,commercial banks,mutual funds,insurance companies.When the investors are not
banks or financial institutions then in such cases actual certificates are issued..Commercial banks
and financial istitutions maintain subsidary general ledger accounts with the RbI so they don't
need certificates to be issued for them.Treasury bills yield is calculated on a one year basis.The
RBI conductsan aution of treasury bills after due public notices and bids by intending
investors.Internationally the treasury bonds can be for as long as 30 years and the treasury notes
can be for a period of 5 to 7 years but in India its just for one year period.

Certificate Of Deposits-
Its an investment instrument for investing surplus.They are raised by banks.Commercial banks
are permitted to issue certificates of deposit for short-term i.e a period of 1year by giving a high
rate of intrest as compared to regular deposits.A certificate of deposit is a negotiable instrument
whose maturity period varies from 1 month to 12 months.They can be issued upto 5% of their
total deposit.The rate of intrest is decided upon by individual banks.High net worth
individuals,limited companies,trusts and provident funds invest in such deposits.A minimum of
10lakhs is issued and the amount is issued is generally in multiples of 5lakhs.45days after the
date of issue they can be freely transferable by endorsement and delivery.

The RBI changes the rules often so be updated on the latest by keeping track of it.

Call Money Market-

The day to day excess money of banks is traded.They are for very short durations and their
maturity period is from 1-15 days.If the maturity period is one day its called call money and is
maturity period is more than one day its called notice money.The purpose is to fill the temporary
gaps in deposit maturitiesin case of over lending,overdues or premature payment of deposits of
large amounts.Banks have to borrow in such cases to avoid a penalty from the RBI.The lenders
are commercial banks,financial institutions,mutual funds,and insurance companies.The
borrowers are commercial banks.