Financial Understanding BY:-FINANCE DEPT. MRATTUNJAY

COSTING AND CONTRIBUTION Techniques and processes of ascertaining costs of various products and services. Costing techniques and processes differ from product to product and industry to industry. Analysis of expenses in relation to product & services. COMPONENTS OF COSTING : Variable cost = VC are the costs that change in direct proportion to the activity of a business. e. g. Raw material. Fixed cost = Costs whose total does not change in proportion to the activity of business. e. g. Salary NET SALES : Total sales – ( Sales return + Discounts & Rebates + ED & Taxes)

CONTRIBUTION Definition : Net Sales – Variable manufacturing standard cost. Variable manufacturing cost (in relation to Contitech India) Sum of following. Variable Material Cost Variable Labour Cost Variable Machine Cost Variable sales distribution cost as a % of variable production cost

SIGNIFICANCE This is the portion of total sales which is being contributed towards recovery of fixed cost of operations i e. why this portion is called contribution. Higher the contribution more recovery fixed cost resulting into higher profits.

BREAK EVEN This is stage where enterprise is neither making any profit or loss i e. no profit no loss situation. Net Sales = Total cost or Net Sales = V C + F C Net Sales - V C = F C Contribution = F C B/E in % = (Fixed cost/Total contribution)X100 B/E in Qty = Fixed Cost / contribution per unit. Any earning more that B/E point results into profits.

COSTING AND CONTRIBUTION Variance : Deviation of actual cost components from predefined standard cost components Periodical comparison of actual costs with the standard costs, working out the variances and tracing the variance to their root causes.

Kinds of Variances Material cost variance = Actual material cost – Standard material cost Labour cost variance = Actual labour cost – Standard labour cost Overheads cost variance = Actual overhead cost – Standard overhead cost All above variances are further divided into two categories based on change in prices / costs and change in quantity consumed / Hours utilized. The Variations related with the Quantity Consumed & Hour utilised called Manufacturing Variations like Energy consumption ,Rejection, Packing Material Consumption, Maintenance ,Excess Manpower

Working Capital Account Receivable (AR) Inventory: Raw Material (R.M.) :Valuation -FIFO Basis Work in Progress (W.I.P.) :Valuation- Stage of Completion Finished Goods (F.G.) : Valuation- Cost of Production Account Payable (AP) Calculation of Working Capital = AR + Inventory - AP

No. of Days & Overdues Overdues: Period Expenditure: Account Receivable/Gross Sales of Current month*No. of days in a Current month Overdues: Period beyond accepted credit term Period Expenditure: Costs whose total does not change in proportion to the activity of business. e. g. Salary, Depreciation, Office % of Period Expenditure is calculated on the basis of Net Sales

EBIT EBIT=Profit before Interest and Tax EBIT % is calculated on the basis of net sales Calculation of EBIT: Net Sales -------- Less: Variable Cost -------- Less/Add: Variations -------- Less: Period Expenditure -------- Less: Other Expenses -------- Add: Calculated Interest -------- Earning Before Interest & Tax ______

Actual Margin Computation Standard Margin to Actual Margin The Cost of Production calculated based on the standard costing as per budget assumption and valid for the full year is called the standard of Production The actual Expenditure incurred during the month for making the production it is called actual cost of production Net sales – Standard cost of production = Standard Margin After adjusting the Variations, Margin comes called the Actual margin In short: Standard Margin ------- Add: Favorable Variations ------- Less: Unfavorable Variations ------- Actual Margin ______