1. Financial Management CAIIB -MODULE D Presentation by 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, pricing decision, control, prevent wastages, basis for tenders, effective use of resources, 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 3018=12 2818=10 2618=8 2418=6 2018=2 =0 1718=(1)

7. Marginal costing problems  SP = Rs.30, VC =Rs.18 Fixed Cost Rs.102000 Find -Break even point (in Rs. & in units) -C/S ratio -Sales to get profit of Rs.66000

8. Solution to problem  SP = Rs.30, VC =Rs.18 Fixed Cost Rs.102000 Find Break even point (in Rs. & in units) C/S Ratio, Sales to get profit of Rs.66000  Contribution per unit = Rs. 30 less Rs.18 =Rs.12  C/S Ratio = 12/30 =0.40 =40%  BEP units = 102000/ 12=8500  BEP sales (in Rs.) =8500 X 30 =255000  contribution = FC+ target profit= 102000+66000=168000  Unit to get profit of Rs.66000= 168000/12 =14000  Sales to get profit of Rs.66000=14000 x 30 =420000

9. Marginal costing problems  Sales Rs.150000  Fixed Cost Rs.30000  B.E.Point Rs.60000  What is profit ?

10. Management decisions- assessing profitability CONTRIBUTION/SALES=C.S.RATIO Produ ct spvc Contrib ution C/S Ratio %ranking A2010 10/20 50%1 B302010 10/30 33% 2 C403010 10/40 25%3

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

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

13. 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

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

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

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

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

18. 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

19. 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

20. Problem YearCash flow PV factor @15% PV 0(50000)1 110000 2 320000 4 530000 620000 710000

21. Solution to Problem YearCash flow PV factor @15% PV 0(50000)1 1100000.8708696 2200000.75615123 3300000.65819725 4300000.57217153 5300000.49714915 6200000.4328647 7100000.3763759 38018

22. 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

23. 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

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

25. 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%

30. IRR  The evaluation of any project depends on the magnitude of the cash flows, the timing and the discount rate.  The discount rate is highly subjective. The higher the rate, the less a rupee in the future would be worth today.  The risk of the project should determine the discount rate.

31. Problems  We will see more problems immediately after discussion of other topics

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

33. Full cost pricing  It is cost plus profit e.g. if variable plus fixed cost is Rs.30 per unit and if the profit expected is 25%,then the selling price would be Rs.37.50 (30+7.50)  Suitable when product is differentiated and product is not subject to competition.  It cannot be applied when no of products are more than one as % of profit differs with the product

34. Conversion cost pricing  Direct Labour and Direct Overhead cost is considered ignoring material cost  Selling price higher for product having greater conversion cost

35. Marginal cost pricing  SP=VC = contribution  Short term pricing decisions  Pricing decision in export market  Pricing decision in different market  Pricing to tide over surplus capacity  Accepting additional order at lower price

36. Market based pricing  Works on variable principle which means that price is based on ‘value to the customer’ It is a premium price for specialized goods and services  It can be based on the price charged by the competitors

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

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

39. Working Capital  Definition- Excess of CA over CL  Existing company- new capital outlay- addl. W.C requirement  Sources of W.C. Long term Short term- OD, Trade credit  Components of WC  Permanent  Variable ( seasonal)

40. 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

41. OPERATING CYCLE  The longer the operating cycle – the more fin. Resources  How to keep the cycle shorter  Debtors- quick collection  Finished goods- turnover rapidly  Raw Material – reduce stock level  Work in progress- shorten the period

42. Working Capital Assessment  Projected Balance Sheet Method  Forms I, III, IV, VI  Financial follow up Report (FFR-I- quarterly)  Financial follow up Report (FFR-II- half yearly)  Cash Budget Method- Seasonal industry/ construction company  Turnover Method - SSI

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

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

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