Costing &

Ratio Analysis
Bishwajit Pal
29.04.2021

Sensitivity: LNT Construction Internal Use

 Contents
01. Broad category 02. Cost statement
of Cost

03. Cost Vs Ledger 04. Earned Value 05. Ratios

Management

Sensitivity: LNT Construction Internal Use

 What is Cost?

Cost is a resource sacrificed

or fore-gone to achieve a
specific objective or
something given up in
exchange. It’s a monetary
valuation of material,
resources, time , efforts and
utilities.

Sensitivity: LNT Construction Internal Use

 Broad Categories of Cost

•SCM •WOM

Material Labour
Cost Cost

Overheads
Plant
Cost
•FAS •AMS
Sensitivity: LNT Construction Internal Use
 Cost Statement

Cost Statement reflects the activity wise cost incurred

in Material, labour, Plant and overheads.

Must for preparation of JCR. Input for Cost to Date

Decision making tool for cost control and cost savings.

Sensitivity: LNT Construction Internal Use

 Sources of Cost

• Indents / Issue- Material issue book

• Amortization – 1 Series items

• Subcontractor Journals/ Authorised Bills

• Subcontractor Provisions / Measurement
created

• Log sheet entry/ CP Processing

• External Hire for approved bills/
Measurement for bill created

• Site overhead payments

• LRA/EBC/ SSC payroll
• HQ/RO payments
Sensitivity: LNT Construction Internal Use
 Processing of CS

Transfer to
respective Recon

Identification of
unallocated cost

Data Extraction

Sensitivity: LNT Construction Internal Use

 Cost Vs Ledger

•Cost reflects in account codes

•Used for Sales valuation and financial

Ledger
reporting
•Provisional JVs are part of Ledger cost
•JV can be posted in Material code
•Measurement are captured only if JV is
passed.

•Cost reflects activity code

Cost •Source of JCR & ETC calculations.

•Provisional JVs are not captured.

Statement
•Material cost is sourced only though MIB, JV
are not considered.
•SC measurement are auto captured as cost
Sensitivity: LNT Construction Internal Use
 Earned Value Management

EVM is a project Management

technique for measuring project
Time
performance and progress in an
objective manner.
Cost It has the ability to combine
measurements of project
Scope
management triangle: Scope, Time
and Cost.

Sensitivity: LNT Construction Internal Use

 Why EVM?

EVM can focus management attention on critical issues and

risk during the project life cycle.

Time
How you are doing? How do you know how you are
Cost doing? - Early problem identification

Scope
Completion estimates
How far are you? ( 64%, 50%, >40%)
What is your productivity? What is the work remaining?

Sensitivity: LNT Construction Internal Use

 Earned Value terms
•Budgeted cost of work schedule/ Planned Value
BCWS (Original Baseline)

•Budgeted cost of work performed/Earned Value

BCWP
Time
•Actual Cost of work performed/ Actual Cost
ACWP
Cost
•Budget at Completion/Total Budget
BAC
Scope
•Estimate at Completion/ Current Forecast
EAC

Sensitivity: LNT Construction Internal Use

 Earned Value formulae
Earned
• Planned Value to date* % complete
Value
Cost
• Earned Value – Actual Cost
Variance
Schedule
• Earned Value- Planned Value
Variance
Cost
Performance • Earned Value/Actual Cost
Index
Schedule
Performance • Earned Value/Planned Value
Index

Sensitivity: LNT Construction Internal Use

 Rule of Thumb of EVM

• Negative numbers for cost and schedule variance

indicate problems in those areas. The project is
costing more than planned or taking longer than
planned
• CPI and SPI less than 100% indicate problems

Sensitivity: LNT Construction Internal Use

 Case Study
Activity Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 PV POC% Earned Value
D&E 4000 4000 8000 100 8000
Concreting 6000 6000 12000 60 7200
Excavation 5000 5000 10000 50 5000
Shuttering 3000 3000 6000
Equipment Erection 4000 4000 8000
Commissioning 2000 2000 4000
Monthly Planned Value 4000 10000 11000 8000 7000 6000 2000 48000 20200
Cumulative Planned Value 4000 14000 25000 33000 40000 46000 48000
Actual Cost 4000 12000 13000
Cumulative Actual Cost 4000 16000 29000
Monthwise EV 4000 10000 6200
Cumulative Earned Value 4000 14000 20200
EV as on 31/3/21 20200 Indicates
PV as on 31/3/21 25000
CV= EV- AC -8800
cost overrun
SV= EV- PV -4800 or behind
CPI= EV/AC 69.7% schedule
SPI= EV/PV 80.8%
Estimate at Completion 68911 (Original Plan divided by CPI of 69.7%)
Estimate Time to
Complete 8.66 (Original Plan of 7 M divided by SPI of 80.8%)

Sensitivity: LNT Construction Internal Use

 Earned Value Chart
80000
EAC Point above
70000 Estimate at completion (EAC) and right of PV
Indicate Project
60000 is projected to
Cost more and
50000 take longer time
than Planned
40000

30000
Cost Variance
Schedule Variance
20000 Earned Value

Earned Value
10000
Earned Value
0
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21
Planned Value Actual Cost Earned Value EAC
Sensitivity: LNT Construction Internal Use
 Ratio Analysis
Ratio analysis is a quantitative method of gaining insight
into a company's liquidity, operational efficiency, and
profitability by studying its financial statements such as
the balance sheet and income statement.

Sensitivity: LNT Construction Internal Use

 Classification
Liquidity
Ability of Firm to pay its debts.
Gearing
Information on the
relationship between
the exposure of the
business to loans as
opposed to share
capital
Sensitivity: LNT Construction Internal Use
Investment/Shareholders
Information to enable decisions to be made
on the extent of the risk and the earning
potential of a business investment.
Profitability Financial
How effective the firm is at generating The rate at which the
profits on sales and or its capital company sells its
assets stock and the
efficiency with which
it uses its assets
 Liquidity Ratio
Measures the ability of a business to meet short-term
obligations.

Current Ratio = Current Assets : Current Liabilities

Ideal level? – 1.5 : 1

Acid Test = (Current Asset- Stock) : Current Liabilities

Ideal level?- 1 : 1

Too high: Asset blockage e.g. Stock

Too Low: Risk of not being able to repay short term
Sensitivity: LNT Construction Internal Use debts
 Shareholder/Investment Ratio
Dividend yield ratio= Dividend per share
Market price per share

This ratio is of great importance to the present Return on Equity= Net Profit after Tax
shareholder and prospective shareholder as Equity share capital
well as the management of the company.
These ratios reveals how well the resources of ROCE= Net Profit
the organization are utilized. Higher the ratio, Total Assets
better are the results.

EPS= Net Profit after tax

No. of ordinary shares

Price earning= Market price per share

Earning per share

Sensitivity: LNT Construction Internal Use

 Gearing Ratio

Gearing ratio or solvency ratio conveys firm’s ability

to meet interest cost and repayment schedule of its
long term obligation.
The gearing ratio is a measure of financial leverage
that demonstrates the degree to which a firm's
operations are funded by equity capital versus debt
financing

Gearing Ratio= Total Debt

Total Equity

Sensitivity: LNT Construction Internal Use

 Profitability Ratio
Profits are an index of economic progress and
profitability ratio measures the overall efficiency of the
business.

Gross Profit ratio= Gross profit/Net sales * 100

Net Profit ratio= Net Profit after tax/ Net Sales * 100

Higher the ratio, better is the profitability

Sensitivity: LNT Construction Internal Use

 Financial Ratio
Financial ratio represent how best the funds are invested
in various asset of the business to make sales and earn
profits. These ratio are also called turnover ratio because
they indicate the speed with which assets are converted
into sales .

Sensitivity: LNT Construction Internal Use

 Financial ratio
Asset Turnover ratio
▪ Indicator of the efficiency with
which company is deploying its
asset to produce revenue.
▪ The higher the asset turnover
ratio is, the more efficient a
company is. Conversely, a low
asset turnover ratio indicates that
a company is failing to efficiently
employ its assets to generate
sales.
▪ Net sales/Average Asset
Sensitivity: LNT Construction Internal Use
Stock Turnover ratio
▪ Stock turnover indicates
the rate at which a company
sells and replaces its stock of
goods during a particular
period.
▪ Sales/Average inventory
Debtor days/Debtors collection
▪ Represents the average number
of days for which a firm has to
wait before its receivables are
converted into Cash.
▪ No of working days (365)
Debtors Turnover
(Sales/Average debtors)
 Benefits

Helps in Decision Making Utility to shareholders/Investors

Help managers or business analysts make effective Investor can assess the financial position of the
decisions about the firm's credit worthiness concern before investing.

Utility to Creditors Utility to Employees

Suppliers can assess whether the financial position Employees are also interested in the financial
warrants their payments in specified time or not. position of the company especially profitability.

Utility to Government
Government can assess the overall strength of the
industry based on which future plan and policies can
be determined.

Sensitivity: LNT Construction Internal Use

 Limitations

Historical Information Inflationary effects

Information used in the analysis is based on real past
results that are released by the company. Therefore,
ratio analysis metrics do not necessarily represent
future company performance.
Changes in accounting policies
Changes in accounting policies and procedures, may
significantly affect financial reporting and the ratios
are not comparable.
Impact of inflation is not properly reflected, as many
figures are taken at historical numbers and not
adjusted for inflation.
Operational changes
The comparison of financial metrics before and after
the operational change may lead to misleading
conclusions about the company’s performance and
future prospects.

Window Dressing
The ratios are only as good or bad as the underlying
information used to calculate them – “window
dressing” may be used by management to manipulate
the financial results
Sensitivity: LNT Construction Internal Use
 Thank you

Sensitivity: LNT Construction Internal Use