1. Financial Management CAIIB MODULE D Presentation by Prof. S.D.Bargir Joint Director,IIBF

2. Module D topics  Marginal Costing  Capital Budgeting  Cash Budget  Working Capital

3. 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+pricingdecision+control+profit planning +inter firm comparison

4. 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

5. 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

6. Basic formula Sales price (-) variable cost= contribution SP lessVC= Contribution 106=4 96=3 86=2 76=1 66=0 56=(1) 46=(2)

7. Marginal costing problems  SP = Rs.10, VC =Rs.6 Fixed Cost Rs.60000 Find -Break even point (in Rs. & in units) -C/S ratio -Sales to get profit of Rs.20000

8. Marginal costing problems  Sales Rs.100000  Fixed Cost Rs.20000  B.E.Point Rs.80000  What is profit ?

9. Management decisions- assessing profitability CONTRIBUTION/SALES=C.S.RATIO Produ ct spvc Contribtio n c/sRatio %ranking A2010 10/2 0 50%1 B30201010/3 0 33% 2 C40301010/4 0 25%3

10. DECISION when limiting factors SPRs.14Rs.11 VC87 Contribution Per unit 64 Labour hr. pu21 Contri.per hr34

11. DECISIONS  Make or buy decisions  Close department  Accept or reject order  Conversion cost pricing

12. CAPITAL BUDGETING  It involves current outlay of funds in the expectation of a stream of benefits extending far into the future YearCash flow 0(100000) 130000 240000 350000 4

13. Types of capital investments  New unit  Expansion  Diversification  Replacement  Research & Development

14. Significance of capital budgeting  Huge outlay  Long term effects  Irreversibility  Problems in measuring future cash flows

15. Facets of project analysis  Market analysis  Technical analysis  Financial analysis  Economic analysis  Managerial analysis  Ecological analysis

16. Financial analysis  Cost of project  Means of finance  Cost of capital  Projected profitability  Cash flows of the projects  Project appraisal

17. Methods of capital investment appraisal DISCOUNTINGNON-DISCOUNTING Net present value (NPV) Pay back period Internal rate of return (IRR) Accounting rate of return Profitability Index or Benefit cost ratio

18. Present value of cash flow stream- (cash outlay Rs.15000)@ 12% YearCash flow PV factor @12% PV 110000.893893 220000.7991594 320000.7121424 430000.6361908 530000.5671701 640000.5072028 740000.4521808 850000.4042020 13376

19. Present value of cash flow stream- (cash outlay Rs.15000 )@10% YearCash flow PV factor @10% PV 120000.9091818 220000.8261652 320000.7511502 430000.6832049 530000.6211863 640000.5642256 740000.5132052 850000.4662330 15522

20. CALCULATION NPV/IRR OutlayPV @10% PV @ 12% NPV 1500015522-522 15000-13376(1624) Difference--2146

21. 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%

27. PRICING DECISIONS  Full cost pricing  Conversion cost pricing  Marginal cost pricing  Market based pricing

28. BUDGET  Quantitative expression of management objective  Budgets and standards  Budgetary control  Cash budget

29. PROFIT PLANNING  Budget & budgetary control  Marginal costing  CVP and break even point  Comparative cost analysis  ROCE

30. PRICING DECISIONS  Full cost pricing  Conversion cost pricing  Marginal cost pricing  Market based pricing

31. Operating leverage Financial leverage  OL= amount of fixed cost in a cost structure. Relationship between sales and op. profit  FL= effect of financing decisions on return to owners. Relationship between operating profit and earning available to equity holders (owners)

32. BUDGET  Quantitative expression of management objective  Budgets and standards  Budgetary control  Cash budget

33. PROFIT PLANNING  Budget & budgetary control  Marginal costing  CVP and break even point  Comparative cost analysis  ROCE

34. PRICING DECISIONS  Full cost pricing  Conversion cost pricing  Marginal cost pricing  Market based pricing

35. Operating leverage Financial leverage  OL= amount of fixed cost in a cost structure. Relationship between sales and op. profit  FL= effect of financing decisions on return to owners. Relationship between operating profit and earning available to equity holders (owners)

36. Working capital  Current assets less current liabilities = net working capital or net current assets  Permanent working capital vs. variable working capital

37. 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

38. Examples from book  P-369  P-375  P-377  P-379  P-380  P-385  P-387  P-393

39. Examples from book  P-413  P-414  p-415  P-417

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