Financial Management CAIIB MODULE D Presentation by Prof. 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+pricingdecision+control+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 lessVC= Contribution 106=4 96=3 86=2 76=1 66=0 56=(1) 46=(2)
Marginal costing problems SP = Rs.10, VC =Rs.6 Fixed Cost Rs Find -Break even point (in Rs. & in units) -C/S ratio -Sales to get profit of Rs.20000
Marginal costing problems Sales Rs Fixed Cost Rs B.E.Point Rs What is profit ?
Management decisions- assessing profitability CONTRIBUTION/SALES=C.S.RATIO Produ ct spvc Contribtio n c/sRatio %ranking A /2 0 50%1 B /3 0 33% 2 C /4 0 25%3
DECISION when limiting factors SPRs.14Rs.11 VC87 Contribution Per unit 64 Labour hr. pu21 Contri.per hr34
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 YearCash flow 0(100000)
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 DISCOUNTINGNON-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 12% YearCash flow PV PV
Present value of cash flow stream- (cash outlay Rs YearCash flow PV PV
CALCULATION NPV/IRR 12% NPV (1624) Difference--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%
PRICING DECISIONS Full cost pricing Conversion cost pricing Marginal cost pricing Market based pricing
BUDGET Quantitative expression of management objective Budgets and standards Budgetary control Cash budget
PROFIT PLANNING Budget & budgetary control Marginal costing CVP and break even point Comparative cost analysis ROCE
PRICING DECISIONS Full cost pricing Conversion cost pricing Marginal cost pricing Market based pricing
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)
BUDGET Quantitative expression of management objective Budgets and standards Budgetary control Cash budget
PROFIT PLANNING Budget & budgetary control Marginal costing CVP and break even point Comparative cost analysis ROCE
PRICING DECISIONS Full cost pricing Conversion cost pricing Marginal cost pricing Market based pricing
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)
Working capital Current assets less current liabilities = net working capital or net current assets Permanent working capital vs. variable working capital
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
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
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