2. Financial Understanding
BY:-FINANCE DEPT.
MRATTUNJAY

3. 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)

4. 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

5. 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.

6. 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.

7. 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.

8. 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

9. 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

10. 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

11. 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 ______

12. 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 ______