20240126financesem4 Lesson 1 No Explanation

Why do we want to know the costs?
1. In order to calculate the profit:

Turnover – Costs = Profit
2. In order to compare:
Do it ourselves or outsource it
3. In order to deal with the following:

Lower/compare costs and cost efficiency
4. Budgeting
5. In order to find out the cost price

05-04-2024 Necessary in order to determine© the sales price and the margin
HAN-Automotive
1
Classification of costs
1. Variability
Constant and variable costs
2. Attributability
Direct and indirect costs
3. Cost type
For example raw materials, labour and depreciations
4. Department
For example Purchasing, production, sales
05-04-2024 © HAN-Automotive
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Example 1: Variable and fixed costs
A car manufacturer Month Production Total costs
produces in the first 6 (cars) (1000€)
months according the
schedule in the table at
the right. January 4,500 185,000
What is the cost February 5,000 200,000

function C = F + v.Q? March 3,500 155,000
C=total costs per month April 2,000 110,000

F= fixed costs per month May 1,500 95,000
v = variable costs/product
q = number of products Jun 4,000 170,000
[1] p. 226
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Ad 2. Attributability
 Direct costs
Directly related to the product. Attribution is therefore not necessary. Example??
 Indirect costs (overheads)

An attribution must be performed here. Various methods are available for this attribution.
Examples for a car manufacturer:

– direct/variable: raw material
– Direct/constant: machine for just one product
– Indirect/variable: paper costs incurred by administration
– Indirect/constant: salary for administration employee
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Indirect costs
Examples:
 Costs of management
 Costs of administration
 Building and technical services, etc.
 Salaries and bonuses
 Insurance
 Marketing, PR and advertising
 Etc.
Remarks:
 The more the indirect costs exceed the direct costs, the more
accurate the allocation must be to be able to calculate a proper
costprice
 Risk of a top-heavy organisation

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Importance of allocating indirect costs
Incorrect cost allocation can lead to wrong management decisions, such as:
- whether or not to retain products or even departments
- whether or not to accept orders, and so on.
The aim is, where possible, to translate the costs to the products for which they were
incurred!
Complications:
 The distribution of indirect costs has a subjective element, but they must be
covered in order to make a profit
 For the short term, variable costs are more relevant than the fixed, often indirect,
costs
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Methods for allocating indirect costs
In ascending order of accuracy:
1. Equivalent Unit method
2. Overhead application rates:

- simple (or primitive)
- multiple
3. Cost centre method
05-04-2024 4. Activity-based costing (ABC)

© HAN-Automotive
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Simple overhead application rates
 Basic principle:
indirect costs are expressed as a percentage of one or more constituents of the direct costs
 Question:
With which of the following are the indirect costs most closely related:
- raw material costs?
- salary costs?
- the total direct costs?
This often greatly depends on the sector.
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The multiple overhead application rate
 sometimes KISS is not enough…
 Indirect costs are broken down into:

– indirect raw material costs
– indirect labour costs
– indirect general costs (or: other indirect costs)
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Advantages of the multiple method
 This method provides a more accurate picture of the

actual cost price
 Indirect costs can be monitored more accurately
 It is therefore easier to detect overruns and to intervene,

where necessary
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Academy Engineering and Automotive
BM: Financial
Management Semester 4Lecturer: H. van der Zee
Lesson 2 Costs and Costallocation
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Cost center method
Principle:
Indirect costs are allocated to business functions, they are charged to other cost centers based
on the benefit that these other costcenters have enjoyed from the performance of the cost centers
that charges the costs.
The cost center method is more advantageous over the

overhead application method under the following
conditions when:
• it is easier to allocate indirect costs through departments than directly to the products
• the indirect costs are higher than the direct costs
• there is a wide variety of indirect costs
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Basic terms Cost Centre method
Cost center types:
 Service departments:
– Business activities that are not immediately productive but
support the main business processes, e.g housing, management,
warehouse
 Mission cost centres:
are business activities that include the primary production and sales
proces
for example, sales and production
Products (= cost bearers):

– end products of the company
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Cost center method
[1] p. 281
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Cost allocation sheet (= result from bookkeeping
department Mission
Service
Cost centers Cost centers
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1. Accommodation
Total accommodation costs € 120.000, so the

cost allocation rate is: 120.000/1.500= € 80/m2
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2. General management
 Total allocated general management
costs:
€ 280.000 + € 20.000 reallocated costs
from accommodation = € 300.000
 Total indirect costs € 1.350.000, so

€ 1.050.00 has been allocated to the other
departments
 Chosen is for the following allocation rate

per department:
05-04-2024
300.00/1.050.00 = 28.6 %© HAN-Automotive
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3. Maintenance
Here is chosen to divide the costs on basis of

energy costs:
50/60 x € 114.000 = € 95.000  Manufacturing

10/60 x € 114.000 = € 19.000  Finishing
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Cost allocation sheet after reallocation
Mission Cost Centers
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Surcharge for sales costs
The estimated costprice of the turnover

(excl. sales costs) € 2,500,000!
Sales costs as surcharge % on costprice
of the turnover:
€ 184,000/2,500,000= 7.3%
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Rates calculation
Manufacturing Finishing
Normal production 8,000 hrs 10,000 hrs
Expected production 8,200 hrs 10,250 hrs
 Rates/hr = costprice per hour
Manufacturing:
€ 547,000/8,000 + € 101,000/8,200 = € 68.38 + € 12.32 =
€ 80.70/hr
Finishing:
€ 384,000/10,000 + € 134,000/10,250 = € 38.40 + € 13.07=
€ 51.47/hr
Sales:
surcharge of 7.3% on the cost price as reimbursement
for the sales costs
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Costprice Cost centre method
(Euro 1000/M3)
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Example man rate
Assumptions
Salary/month € 2,500
13th month Yes
Holiday bonus + 8%
Employer's contribution + 50% (= social and
pensioncosts
Number of net hours/year 1,500
What is the man rate per hour?
 Man rate =(((€ 2,500 x 12) x 1,08) + € 2,500)x 150% )/1,500

hours
= 52,300/1,500≈€ 35/hour
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Example of machine rate
Assumptions
Investment € 300,000
Depreciation period 10 years
Energy consumption (v) € 5,000/year
Maintenance (v) € 3,000/year
Normal capacity 1,500 hours/year
Expected capacity 1,600 hours/year
What is the machine rate per hour?
Machine rate (€ 300,000/10)/1,500 +

(€5,000+€3,000))/1,600 =
20 €/h (c) + 5 €/h (v) =25 €/h
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 Case 1:
The following data is available of an operator-machine combination:
 machine investment € 600.000
 depreciation period 4 years
 residual value € 200.000
 maintenance € 4.000 variable budgetted costs/yr.
 electricity + water € 2.000 variable budgetted costs/yr.
 operator € 20/hr, 1 man every 2 machines
 supervisor € 30/hr 1 supervisor every 5 operators
 normal production 4.000 hours
 budgetted production 4.000 hours
Calculate the combined man-machine rate in €/hr based on the data above.
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Exercise 1 Man/Machine rate
Fixed Cost Variable Cost

Machine 600000 euro maintenance 4000 euro
Residual Value 200000 euro electricity/water 2000 euro
depreciation period 4 years operator 10 euro
depreciation 100000 euro supervisor 3 euro
Normal Production 4000
Budgetted production 4000
Man/ machine rate = 25 + 14,5 = 39,5 euro/hour
100000/4000 (4000+2000)/4000 + 10 + 3
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 Case 2:
The cost allocation table (x € 1,000):
Mana- Main- Production Production

gement tenance A B
Labor costs 60 75 300 300
Materials 30 150 250 150
costs
Machine costs 90 350 100
Total 90 315 900 550
The Management costs are split up over the other departments proportional
to the labor costs of those departments.
Then the costs of the Maintenance department are divided over the 2
production departments proportional to the primary attributed machine costs
of the departments.
The normal production is 30000 products A en 15000 products B (labor and
material costs are also based on the normal production).
Calculate the cost prices of product A and product B.
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(* euro 1000 product product
management maintenance A B
labor 60 75 300 300
material costs 30 150 250 150
machine 90 350 100
90 315 900 550
allocation management -90 10,0 40,0 40,0

325,0 940,0 590,0
allocation maintenance -325 253 72
total costs 1193 662
costprice A and B in euro's 39,76 44,15
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Activity based costing [1] page 286
 The basic principle is that indirect costs are mainly determined by the
complexity and diversity of the production
 A relationship is drawn between the products and the requisite activities

and not primarily due to the quantity
 Requires accurate analysis of activities and the most important cost

drivers
 Activities are merged into a limited number of ‘cost pools’
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Conclusion
 Unambigousness for cost prices is in fact not possible
 Cost price depends on the choosen method
 It is important to apply a method consistently
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Assessment of investment projects
 General:
– what is an investment?
– transfer of capital into assets
– cash flow <-> profit
 Four assessment methods:

1. Accounting Rate of Return (ARR)
2. PaYout Time (POT)
3. Net Present Value (NPV)
4. Internal Rate of Return (IRR)
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Cash flow
 Cash Flow = Profit + Depreciation
 Considered over the lifetime of the Investment:
 Cash flow = Profit + Depreciations – Investments

(start of project) + Desinvestments/Residualvalue
(end of project)
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Accounting Rate of return (ARR)
average annual profit

ARR= --------------------------------------- x 100%
average invested capital *
* Average invested capital =

(initial investment + residual value )/2
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Payout time (POT) method (based on CF’s)
 The time needed to earn back an

investment, without taking the time factor
into account
 This actually involves determining the risk

period
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The time factor
Suppose you win € 5,000.

How much will this amount have grown after
ten years if you deposit it in a bank account
at 6% compound interest (interest on
interest)? Answer:
FV = PV(1 + i)t
where:
PV = present value in currency
FV = future value in currency
t = period (in years)
i = interest rate (as a fraction, i.e. percentage divided by 100)
 FV=€ 5,000 x (1.06)10= € 5,000 x 1.79085 = € 8,954.25
Source: Exercises Basisboek Economie, ex. 5.6, page 33, Student answers page 35
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Net present value (NPV) method
Here, the savings in time are calculated back

to the moment the investment was made and
then ‘turned into cash’.
 Interest rate to be determined, mostly the

WACC is taken = weigthed average cost of
capital
When the NPV is > 0 euro the investment is

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05-04-2024 economically interesting
© HAN-Automotive
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Internal rate of return (IRR)
 Here, we try to find the interest percentage

where NPV=0
 When choosing from different projects,
the project with the highest yield could be
chosen
 What is the internal rate of return in the
example above?
Based on the previous example, interest rate=14.51%
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Summary
[1] p. 110
* WACC=Weighted Average Capital Cost = average cost rate for which the company can
borrow money
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Example 1 Cash flow calculation
Investment of € 500,000 (fixed assets € 400,000 and liquid assets € 100,000),
linear depreciation over four years to residual value 0; project duration three
years, residual value of all assets after three years is € 200,000, which is sold;
tax rate 25%; all amounts x € 1,000
[1] p. 100
05-04-2024 © HAN-Automotive 40
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Example of ARR (based on profits)
[1] blz 102

Answer:
Proj. A
period-based profit year 1=€150,000-€100,000=€ 50,000
period-based profit year 2=€ 200,000-€ 100,000=€ 100,000
period-based profit year 3=€400,000-€100,000-€200,000=€
100,000
total profit € 250,000, average profit/year €250,000/3=€ 83,333,
average invested capital (€ 500,000+ € 200,000)/2=€ 350,000

Proj. B idem: profit/yr
total profit € 2000,000, av. € 50,000 (over 4 years),
av. inv. capital € 200,000
>ABRA, ABR B=25%
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Ex. of POT
Year Net revenue (€)

(after tax)
2010 - 500,000
2011 100,000
2012 150,000
2013 150,000
2014 300,000
When is the original investment in this

project earned back?
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Exercise
A company is considering 3 investment projects. The respective cash flows are as follows:
Year Project A Project B Project C

o -120 -200 -200
1 40 20 200
2 40 20 32,25
3 40 221,16
4 40
All amounts are paid or received at the end of the year

Calculate of each project:
1. The payback time
2. Average book rate of return
3. Net present value (7,5%)
What would be your advice?
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Answer (1)
Average annual profit
average invested capital
Average bookrate of return
Average annual profit
average invested capital
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Answer (2)
average bookrate of return
average annual profit
average capital invested
average bookrate of return
npv
npv
npv
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Exercise Side Skirts
 Calculate for the side skirts case

– ABR
– Pay Back Time
– NPV
– Internal rate of return
Tip: Do it in Excel!
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Homework for lesson 4
Read chapter 15, and 16 of book basics of Financial

management (budgeting and variance analysis)
Practice Exercise 2
And: study PP lesson 4 on OO The following cashflows are calculated of an investment project with a
duration of 4 years (amounts in € * 1000).
year Cashflow
s
Exercise 1 2019 -1.000
2020 200
A car manufacturer gets a production report of one of her module production units at 2021 500
the end of a given period. From this report it can be concluded that the allowed costs 2022 400
of materials were € 500,000. In the standard cost price of this product this material is 2023 600
included for a price of € 20/kg. The actual use of materials was a total of 25000 kg,
which costs € 625,000.
The project starts on January 1st 2019. The negative cashflow in 2019
Calculate the difference between the actual costs and the standard costs and divide is for 100% the initial investment of this project. Included in the
this difference into price and efficiency variances. cashflow in 2023 is the desinvesment of € 300.000.
Assume that the cashflow is spent or received at the end of every
year!!
The average weighted cost of capital in this company is 8%.
Calculate the following:
1. The Average Bookrate of Return.
2. The Pay Back Time
3. The Nett Present Value
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The following cashflows are calculated of an investment project with a duration of 4 years (amounts in € * 1000).
Cashflo
year
ws
2019 -1.000
2020 200
2021 500
2022 400
2023 600
The project starts on January 1st 2019. The negative cashflow in 2019 is for 100% the initial investment
of this project. Included in the cashflow in 2023 is the desinvesment of € 300.000.
Assume that the cashflow is spent or received at the end of every year!!
The average weighted cost of capital in this company is 8%.
Calculate the following:
1.The Average Bookrate of Return.
2.The Pay Back Time
3.The Nett Present Value
1. Average Bookrate of return Average annual profit: (-1000+200+500+400+600)/4 = 175
Average capital invested (1000+300)/2 = 650
ABR = 26,90%
2.The Pay Back Time 3 years
3.The Nett Present Value = -1.000 + 185 + 429 + 318 + 441 = 372 k euro
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Ad 3: Budgeting
Budget is the translation of the activities related to strategy of a business into short
term plans
Basis is the business plan and the structure of the company
Time frame mostly 1 year
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Functions of budgeting
Planning
Coordination
Communication
Targetsetting
Authorization
Control
Evaluation
Feedforward and feedback
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Prerequisites for budgeting
Strategy of the company

Clear organizational structure
Commitment from management
Clear responsibilities
Participation of budget responsible
Control by budget responsible
Measurability and instruments to measure
Good administrative system
Budgetting is the mean to reach the goals
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“Dangers of budgeting”
Reaching budgets can be suboptimal due to focus on subbudgets

Reaching shortterm goals can suboptimal to the longterm strategy
Hiding failures for a certain period of time
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Different types of Budgets
Costs budgets
Turnover budgets
Output budgets
Profit budgets
Investment budgets
Liquidity budgets
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Phases in Budgeting
Planning
Producing
Approval
Realization and registration
Report and analysis
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Masterbudget
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Production Budget
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Example Production Purchase Budget
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Different types of variancies
 Budget variancy
– (Qs * Ps) – (Qr * Pr) Q = Quantity
P = Price
S = Standard
 Prijs Variancy R = Real
– (Ps - Pr) * Qr
 Efficiency Variancy
– (Qs - Qr) * Ps
Sem 3 Finance 2019 - 2020
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Actuals
 The price difference is:
– (Ps - Pw) x raw materials consumed =
– (10 – 20) x 500 = - €5,000
 The efficiency difference is:

– (Normal consumption – actual consumption) x Ps =
– (1,000 – 500) x 10 = + €5,000
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Actions to be implemented
 Talk to the purchasing department regarding the price
difference
 Talk to the production department regarding the quantity

difference
 Adjust the standards if necessary. This is necessary if the

impression is that it will be better to work with the more
expensive raw material in future.
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Ad 1 Variance analysis, Case study
Standard cost price
Direct labour € 7.50 0.3 hrs x € 25/hr
Raw materials € 11.25 1.5 kg x € 7.50/kg
Fixed manufacturing € 30
costs
Standard cost price €48.75
Fixed manufacturing costs €150,000/quarter

Realisation past quarter
Number of products 4,600 items
Use of raw materials 7,380 kg
Direct hours 1,500 hours
Raw material costs € 49,466
Direct labour costs € 38,000 [1] p. 306
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Total result
Result
Actual costs € 237,446 €49,466+€38,000+
€150,000
Standard costs € 224,250 4,600 items x € 48.75 (SKP)
Budget variance -€ 13,196
How can this be broken down into:

• price variances?
• efficiency variances?
• volume variances?
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Variance analysis
Price variances
Raw material + € 5,904 7,380 kg x € 7.50 - € 49,446
Labour - € 500 1,500 hrs x € 25 - € 38,000
Efficiency variances
Raw material -€ (4,600 it. x 1.5 kg -7,380) x € 7.50/kg
3,600
Labour -€ (4,600 it. x 0.3 hrs -1,500 hus) x €
3,000 25/hr
Volume variances
-€ 12,000 (5,000 -4,600 it.) x € 30/it.
Budget variance - € 13,196
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Homework + Exercise
A car manufacturer gets a production report of one of her module production units at
the end of a given period. From this report it can be concluded that the allowed costs
of materials were € 500,000. In the standard cost price of this product this material is
included for a price of € 20/kg. The actual use of materials was a total of 25000 kg,
which costs € 625,000.
Calculate the difference between the actual costs and the standard costs and divide
this difference into price and efficiency variances.
Budget variance: (Qs * Ps) – (Qr * Pr) = (25000*20) – (25000*25) = -

125000 €
Price variance: (Ps - Pr) * Qr = (20 – 25) * 25000 = -125000 €
Efficiency variance: (Qs - Qr) * Ps = (25000 -25000) * 20 = 0 €
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Exercise lesson 1
productio
n numbers * 1000 dec jan feb mar apr may june
expected sales in
nrs. 24 30 36 28 32 39
demanded stock at the end of
month 0,75 18 22,5 27 21 24 29,25
starting level stock 18 22,5 27 21 24 29,25
production in numbers 28,5 34,5 30 31 37,25
Purchase numbers * 1000 kg
stocklevel Deconiel end of month 28,5 34,5 30 31

stocklevel effoliet 21,375 25,875 22,5 23,25
beginvoorraad Deconiel 28,5 34,5 30

beginvoorraad Effoliet 21,375 25,875 22,5
Needed for production

Deconiel 2 kg 57 69 60
Effoliet 1,5 kg 42,75 51,75 45
stocklevel end of month + productionstock - starting stocklevel beginning of the

Purchase levels raw materials month
Deconiel 63 64,5 61
Effoliet 47,25 48,375 45,75
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Exercise 2 June July aug sept oct
stock beginning of the month 150000 168000 176400

sales volume in numbers 200000 210000 220500 231525
stocklevel end of month 150000 168000 176400 185220
production levels bumpers 218000 218400 229320
plastics end of June in kg 800000
production level in nrs. in quarter 665720
=665720 *
use of plastics in quarter in kg: 2662880 4
plastics in stock end of quarter in

kg 665720 = 2662880 * 0,25
plastic to purchase in kg 2528600 =2662880+665720-800000

€
In Euro's 3.034.320 = 2528600 * eur 1,2
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Exercise 1:
Chemical Company NV Alpha produces a massproduct Defco for the tyre industry.
A salesbudget has been defined for the first 6 months as follows:
January 24000 pieces
February 30000 pieces
March 36000 pieces
April 28000 pieces
May 32000 pieces
June 39000 pieces
The production policy is set as follows: 75% of the expected sales in the next month should be
available at the beginning of that month. This was also the case in December.
Question 1: Prepare the production budget for the first quarter.
To produce 1 unit Defco 2 kg of Deconyl and 1,5 kg Effolite is required. The policy for these two
materials is that at the end of each month there should be a stocklevel of 50% of what is
needed for the production of the next month.
Question 2: prepare the purchase budget for the first quarter of these materials
05-04-2024 Lesson 4 Variance Analysis and budgeting

© HAN-Automotive 69
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exercise 2
The sales director of company Berlico expects for the month

July a sales volume of 200,000 pieces of bumpers and after
July a monthly increase of 5%. The demanded level of stock of
bumpers at the end of each month is 80%of the expected sales
of the next month. At the end of June there are 150,000
bumpers in stock.
Each bumper contains 4 kg plastics at € 1,20 per kg. At the end
of June 800,000 kg plastic is in stock.
1. Prepare the production budget of the bumpers for Quarter

3 (July – Sept)
2. Calculate the purchase costs in € of the plastics taking into
account that at the end of quarter 3 de level of stock of
plastics must equal 25% of the plastics used in Quarter 3.
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© HAN-Automotive
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© HAN-Automotive
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4. Financial Statements
 Different financial statements a company has to present

o Balance sheet
o Profit & Loss Statement
o CashFlow statement
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Balance sheet as per ….
... And this is
Everything how it was paid
you own for
ASSETS CREDIT
 Building  Equity Equity
Fixed assets
 Machines – Shares
 Plant and – Reserves
equipment – Personal
deposit
 Stock
– Raw materials
 Loan capital Liabilities
Current assets
– Finished
– Mortgage
products – Bank
 Accounts – Suppliers
receivable
05-04-2024
 Liquid assets Lesson 5 Financial Statements
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75
Why is extra capital required?
 Investment in new activities (for example PMCs)

 Extend capacity
 Reduce cost price by means of efficiency improvement
 Additional investments regarding
– Working conditions, environment and other legal obligations
– promoting the wellbeing of the employees
 …
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Where does the Financing come from?
Possibilities:
1. Owner’s shareholders Equity

2. Loans
3. Cash flow
4. Intensive financing
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1. Owner’s equity
 Entrepreneurship = taking risks

 Reward = profit, penalty = loss
 Owners equity serves to cover these risks
 Can be extended by issuing shares (emission).
Risk is then shared by shareholders!
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2. Loans
 Supplier and customer credit

 Bank loan
 Leasing (= renting assets)
– Operational (off balance)
– financial
 Sale and lease back (how to insert into balance sheet and profit
and loss account?)
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4. Intensive financing
= Intensification used equity
Review for instance the current policy regarding:

 Accounts receivable
 Stocks
 Liquid assets
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Profit & Loss example
source:
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Cash Flow Statement
The Cash Flow Statement, or Statement of Cash Flows, summarizes a company's inflow and
outflow of cash, meaning where a business's money came from (cash receipts) and where it
went (cash paid). By "cash" we mean both physical currency and money in a checking account.
The cash flow statement is a standard financial statement used along with the balance sheet
and income statement. The statement usually breaks down the cash flow into three categories
including Operating, Investing and Financing activities. A simplified and less formal statement
might only show cash in and cash out along with the beginning and ending cash for each
period
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example Cash Flow Statement
http://www.accounting-basics-for-students.com/cash-flow-statement-example.html
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Balance sheet as per December 31st 2017 (euro's)
building 380000 Owner's equity 310000

equipment 50000 profitcontribution to reserves 160000
accounts receivables 20000 5% loan 160000
cash and bank 180000
630000 630000
cash: Starting amount 10000 profit: 600000 turnover

received from sales 580000 -10000 interest
interest -10000 -360000 operating costs
reimbursement -40000 -70000 depreciation
operating costs -360000 160000 EBT
total 180000
account receivables 20000
05-04-2024 Lesson 6 Financial KPI's © HAN-Automotive 84

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Profitability
Revenues
Costs of primary proces
EBIT
Interestcosts Liabilities
EBT
Company tax
EAT
05-04-2024 Lesson 6 Financial KPI's © HAN-Automotive 85 85
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Profitability
- Allocation EBIT
Government
suppliers liabilities CompanyTax
Interestcosts
liabilities EAT
Owners/shareholders
of the company
05-04-2024 © HAN-Automotive 86 86
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Why relate Ebit to average ammount invested?
EBIT earned over the total period

concerned:
assets assets per
per 1-1 31-12
= balancemoment 1 = balancemoment2
Vermogen
Average per
invested moneyVermogen
over theper
balance
per 1-1 + 31-12
sheet total of the period concerned
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Lesson 6 Financial KPI's
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Profitability
Return Total Assets (RTA)
EBIT
x 100%
Average Total Assets
05-04-2024 © HAN-Automotive 88 88
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Return Own Equity (ROE)
EAT (nett profit)

100%
Average Equity
89
89
Profitability
Average costs Liabilities = (ACL)
Interest costs (finance costs)

x 100%
Average Liablities
90
90
Profitability:
Relation between ROE, RTA and ACL, Financial Leverage
Financial leverage is depended on:
The difference between RTA and ACL

Liabilities / Equity (= leveragefactor)
(RTA – ACL) * (Liab/Equity) = leverage effect
92
92
Example financial leverage
Two identical companies are financed in different ways.

– Company 1: mostly financed with liabilities
– Company 2: mostly financed with equity
EBIT = €50.000
Interest rate liabilities = 8%
Tax rate: 0%
93
Balancesheet I
Assets 500 Equity 100

liabilities 400
RTA=(50/500)*100=10%
interest = 32000
ROE = (18/100 )* 100 = 18%
Balance sheet II
liabilities 100
Interest = ???
ROE = (42/400) * 100 = 10.5%
94
05-04-2024 Lesson 6 Financial KPI's © HAN-Automotive
94
Example Financial Leverage
• Two identical companies are financed in different ways.

• Company 1: mostly liabilities
• Company 2: mostly with equity
• EBIT = € 35.000
• Interestrate liabilities = 8%
• Tax rate: 0%
95
Balancesheet I

liabilities 400
RTA=(35/500)*100=7%
ROE = (3/100 )* 100 = 3%

Balance sheet II
liabilities 100
Interest = ???
ROE = (27/400) * 100 = 6,75%
96
Financial Leverage effect: when the RTA is higher than the ACL and the company is financed with a
lot of liabilities then the effect on the ROE is higher than if the company is relatively financed with
relatively less liabilities. (18 > 10,5). If however, the profit drops below the level that the RTA is lower
than the ACL, there will be a strong lowering effect on the ROE in case the company is financed with
relatively high level of liabilities. (3 < 6.75)

97
Liquidity
 Nett Working Capital:
NWC = current assets – current liabilities

If the Nett working capital is positive, the company can sell (part of) the
currents assest to pay short term debts, the company is liquid.

99
Liquidity
KPI’s
Current Assets
Current Ratio =
Current Liabilities
Currents Assets - Stock

Quick Ratio =
Current liabilities

100
Liquidity Forecast
The main tool for

management in case the
company is in financial
trouble

101
Conclusion ….
Companies do not go bankrupt
because of lack of profit but because
of lack of cash.
remember the Tesla Video

102 AM/AS BE Hfdst 16 en 17 C01/102
102
Solvability
Indicates to what extend the

company is able to pay of all
the debts.

103
Solvability
Solvability KPI’s
Solvability ratio =
Equity
x 100%
Equity + Liabilities

104
Solvability
Solvability KPI’s
Liabilities
Debt Ratio = *100%
Total Liabilities + Equity

105

20240126financesem4 Lesson 1 No Explanation

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20240126financesem4 Lesson 1 No Explanation

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Why do we want to know the costs?

1. In order to calculate the profit:

3. In order to deal with the following:

5. In order to find out the cost price

What is the cost February 5,000 200,000

C=total costs per month April 2,000 110,000

 Indirect costs (overheads)

Examples for a car manufacturer:

 Risk of a top-heavy organisation

In ascending order of accuracy:

1. Equivalent Unit method

2. Overhead application rates:

3. Cost centre method

05-04-2024 4. Activity-based costing (ABC)

This often greatly depends on the sector.

 sometimes KISS is not enough…

 Indirect costs are broken down into:

 This method provides a more accurate picture of the

 Indirect costs can be monitored more accurately

 It is therefore easier to detect overruns and to intervene,

Lesson 2 Costs and Costallocation

The cost center method is more advantageous over the

Products (= cost bearers):

Total accommodation costs € 120.000, so the

 Total indirect costs € 1.350.000, so

 Chosen is for the following allocation rate

Here is chosen to divide the costs on basis of

50/60 x € 114.000 = € 95.000  Manufacturing

The estimated costprice of the turnover

 Rates/hr = costprice per hour

What is the man rate per hour?

 Man rate =(((€ 2,500 x 12) x 1,08) + € 2,500)x 150% )/1,500

What is the machine rate per hour?

Machine rate (€ 300,000/10)/1,500 +

Fixed Cost Variable Cost

Residual Value 200000 euro electricity/water 2000 euro

depreciation period 4 years operator 10 euro

depreciation 100000 euro supervisor 3 euro

Normal Production 4000

Budgetted production 4000

Man/ machine rate = 25 + 14,5 = 39,5 euro/hour

Mana- Main- Production Production

Calculate the cost prices of product A and product B.

allocation management -90 10,0 40,0 40,0

allocation maintenance -325 253 72

total costs 1193 662

costprice A and B in euro's 39,76 44,15

 A relationship is drawn between the products and the requisite activities

 Requires accurate analysis of activities and the most important cost

 Activities are merged into a limited number of ‘cost pools’

 Unambigousness for cost prices is in fact not possible

 Cost price depends on the choosen method

 It is important to apply a method consistently

– cash flow <-> profit

 Four assessment methods:

 Cash Flow = Profit + Depreciation

 Considered over the lifetime of the Investment:

 Cash flow = Profit + Depreciations – Investments

average annual profit

* Average invested capital =

 The time needed to earn back an

 This actually involves determining the risk

Suppose you win € 5,000.

Budget variance: (Qs * Ps) – (Qr * Pr) = (2500020) – (2500025) = -