FINANCE DEPARTMENT:A.

Detailed organizational structure of finance department:-

FINANCE DEPARTMENT Organizational Chart

B. COST SHEET:-

You are running a factory which manufactures electronic toys. You incur Expenses on raw material, labour and other expenses which can be directly attributed to cost and which cannot be directly attributed but are incurred up to their sales. You need to know the composition of cost at different stages. This will help you in the analysis of cost of a product so that same can be used for its proper management. In this lesson you will learn about Cost sheet and its various components.

COST SHEET: MEANING AND ITS IMPORTANCE:Cost sheet is a statement, which shows various components of total cost of a product. It classifies and analyses the components of cost of a product. Previous periods data is given in the cost sheet for comparative study. It is a statement which shows per unit cost in addition to Total Cost. Selling price is ascertained with the help of cost sheet. He details of total cost presented in the form of a statement are termed as Cost sheet. Cost sheet is prepared on the basis of

1. Historical Cost.
2. Estimated Cost.

1. Historical Cost:Historical Cost sheet is prepared on the basis of actual cost incurred. A statement of cost prepared after incurring the actual cost is called Historical Cost Sheet.

2. Estimated Cost:-

Estimated cost sheet is prepared on the basis of estimated cost. The statement prepared before the commencement of production is called estimated cost sheet. Such cost sheet is useful in quoting the tender price of a job or a contract.

Importance of Cost Sheet:The importance of cost sheet is as follows:-

o Cost ascertainment:The main objective of the cost sheet is to ascertain the cost of a product. Cost sheet helps in ascertainment of cost for the purpose of determining cost after they are incurred. It also helps to ascertain the actual cost or estimated cost of a Job.

o Fixation of selling price:To fix the selling price of a product or service, it is essential to prepare thecost sheet. It helps in fixing selling price of a product or service by providing detailed information of the cost. Help in cost control For controlling the cost of a product it is necessary for every manufacturing unit to prepare a cost sheet. Estimated cost sheet helps in the control of material cost, labour cost and overheads cost at every point of production. Facilitates managerial decisions It helps in taking important decisions by the management such as: whether to produce or buy a component, what prices of goods are to be quoted in the tender, whether to retain or replace an existing machine etc

COST SHEET FORMAT Particulars Opening Stock of Raw Material Add: Purchase of Raw materials Add: Purchase Expenses Less: Closing stock of Raw Materials Raw Materials Consumed Direct Wages (Labour) Direct Charges Prime cost (1) Add :- Factory Over Heads: Factory Rent Factory Power Indirect Material Indirect Wages Supervisor Salary Drawing Office Salary Factory Insurance Factory Asset Depreciation Works cost Incurred Add: Opening Stock of WIP Less: Closing Stock of WIP Works cost (2) Add:- Administration Over Heads:Office Rent Asset Depreciation General Charges Audit Fees Bank Charges Counting house Salary Other Office Expenses Cost of Production (3) Add: Opening stock of Finished Goods Less: Closing stock of Finished Goods Cost of Goods Sold Add:- Selling and Distribution OH:Amount Amount *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ***

Sales man Commission Sales man salary Traveling Expenses Advertisement Delivery man expenses Sales Tax Bad Debts Cost of Sales (5) Profit (balancing figure) Sales Notes:-

*** *** *** *** *** *** *** *** *** ***

1) Factory Over Heads are recovered as a percentage of direct wages 2) Administration Over Heads, Selling and Distribution Overheads are recovered as a percentage of works cost.

C. Fund Flow Statement / Cash Flow Statement(for previous year)

NANAVATI MOTORS LTD Cash flow Statement (Rs lacks)

Mar ' 10 Profit before tax Net cashflow-operating activity Net cash used in investing activity Net cash used in fin. activity Net inc/dec in cash and equivlnt Cash and equivalnt begin of year Cash and equivalnt end of year 292 97

Mar ' 09 260 690

Mar ' 08 223 620

D. Working Capital Management

1. Cash Management

Financial Ratios to be calculated:E1 Service Sector A) Revenue Statement Ratios:-

a. GP Ratio:Meaning:It is a ratio expressing relationship between Gross Profit earned to sales. It is a useful indication of the profitability of business.

Implementation: Gross profit is result of the relation between price, sales volume and costs. A

change in the gross margin can be brought about by changes in any of these factors. The gross profit ratio can also be used in determining the extent of loss caused by

theft, spoilage, damage and so on in the case of those firms which follow the policy of fixed gross profit margin in pricing their product. The gross margin represents the limit beyond which fall in sales

price are outside the tolerance limit.

Formula: = Gross profit *100 Sales

b. Net Profit Ratio:Meaning:Net profit ratio is valuable for the purpose of ascertaining the over-all profitability of business and shows the efficiency of operating the business.

Implementation:-

The net profit ratio is indicative of managements ability to operate the business

with sufficient success not only to recover from revenue of the period the cost of merchandise or services, the expenses of operating the business and the cost of the borrowed funds, but also to leave a margin of reasonable compensation to the owners for providing their capital at risk. The ratio of net profit ratio to sales essentially expresses the cost price

effectiveness of the operation. A high net profit margin would ensure adequate return to the owners as well as

enable a firm to withstand adverse economic conditions when selling price is declaiming, cost of production rising and a low net profit margin has the opposite implication.

Formula:= Net Profit *100 Sales

c. OPERATING RATIO:-

Meaning:Operating Ratio is computed by dividing expenses by sales. The term operating ratio includes (1) COGS (2) administrative expenses (3)selling expenses and (4) financial expenses but excludes taxes, dividends and extraordinary losses due to theft of goods, goods destroyed by fire and so on.

Implementation: Some accountants calculate expenses ratio in respected of raw material consumed, direct wages and factory expenses. It is closely related to the profit margin, gross as well as net.

Formula: =C O G S + Operating expenses* 100 Net sales

d. Expenses Ratio:Meaning:Dividing expenses compute expenses ratio by sales. The term expenses includes (1) administrative expenses (2) financial expenses (3) selling expenses

Implementation:-

Some accountants calculate expenses ratio in respected of raw material

consumed, direct wages and factory expenses. It is closely related to the profit margin, gross as well as net.

Formula:=Expenses* 100 Sales

e. Stock Turnover:Meaning:It is the no. of times the average stock is turned over during the year is known as stock turnover ratio. It measures the relationship between COGS and inventory level.

Implementation: This approach has the advantage of being free from bias as it smoothens out the fluctuations in the inventory level at different period. It is measures how quickly inventory is sold. it is a test of efficient inventory management. To judge whether the ratio of a firm is satisfactory or not.

Formula:=cost of good sold Average stock

B) Balance Sheet Ratios:a. Current Ratio:Meaning:The current ratio is the ratio of total current assets to total current liability. It is calculated by dividing current assets by current liability.

Implementation: The current ratio of a firm measures its short term solvency. That is a measure of

margin of safety to the creditors. The fact that a firm can rarely count on such an even flow requires that the size of the C.A. should be sufficiently larger than C.L. so that the firm would be assured of being able to pay its current maturing debts as and when it becomes due.

Formula:= current Assets Current liability

b. Liquid Ratio:Meaning:It is obtained by dividing the liquid assets by liquid liabilities. It liquid ratio is designed to show the amount of cash available to meet immediate payments. Implementation:-

The importance of adequate liquidity in the sense of the ability of a firm to meet

short term obligations when they become due for payment can hardly be overstressed. In fact liquidity is a prerequisite for the very survival of a firm. It measures ability of a firm to meet its short term obligations and reflect the short term finance strength of a firm.

Formula:= liquid assets Liquid liability

c. Acid-test Ratio:Meaning:The measure of absolute liquidity may be obtain by comparing only cash and bank balance as well as readily marketable securities with liquid liabilities. Implementation:-

 This ratio is the most rigorous and conservative test of a firms liquidity position. Further, it is suggested that it would be useful for the management.

Formula:= Quick assets Liquid liability

d. Proprietary Ratio:Meaning:The ratio shows the proportion of proprietors funds to the total assets employed in known in the proprietary ratio.

Implementation: Proprietary ratio helps to known how many proprietary funds to total assets.

Formula:= Proprietary fund Net asset

e. Debt-Equity Ratio (Based on long-term liabilities):Meaning:The relationship between borrowed funds and owners capital is a popular measure of the long term financial solvency of a firm. This relationship is shown by the debt equity ratio.

Implementation: This ratio reflects the relative claims of creditors and shareholders against the assets of the firm. Alternatively this ratio indicates the relative proportions of debts and equity in financing the assets of a firm. The D/E ratio is an important tool of financial analysis to appraise the financial structure of a firm. It has important implication from view point of the creditors, owners and the firm itself.

Formula:=long term liabilities Shareholders fund

e. Capital Gearing Ratio:Meaning:This ratio expresses the proportion of preference capital and ordinary capital the higher ratio, the greater propos ion of preference capital and debenture to ordinary capital.

Implementation: Capital gearing ratio is helps to preference share and dividend to equity share and helps to know about companys capital and overall growth.

Formula:=fixed investment barring capital Ordinary capital

g. Long-term funds to Fixed Assets:C) Composite Ratio:a. Return on capital employed:Meaning:-

The profitability ratio can be computed by relating the profits of a firm to its investment. Implementation: Return on investment indicates the profitability of business and is very much in use among financial analysis. The ratio is an indicator of the measure of the success of a business from the

owners point of view. The ultimate interest of any business is the rate of return on invested capital. It may be measured by the ratio of income to equality capital. It determines whether a certain goal has been achieved or whether an alternative

use of capital is justified.

Formula:=E B I T * 1 0 0 Capital employed

b. Return on shareholders Ratio:Meaning:It is carries the relationship of return to the sources of funds yetanother step further. Implication:-

It expresses the profitability of a firm in relation to the funds supplied by the

creditors and owners taken to gather, the return on shareholders equity measures exclusively the return on the owners funds.

Formula:=Net profit*100 Share holders fund

c. Debtors Ratio and Debtors Turnover:Debtors Ratio:Debtors Turnover:Meaning:-

It is allied and closely related to this is the average collection period. It is the test of the liquidity of the debtors of a firm. Implementation: This figure should be measured, as in the case of average inventory, on the basis of the monthly average. It suggests that number of times the amount of credit sale is collected during the year.

Formula:= credit sales Avg. Debtors

d. Creditors Velocity and Creditors turnover:Creditors Velocity:Meaning:It is the no. of days within which we make payment to our creditors for credit purchases it obtained from creditor ratio.

Implementation: The generally the longer credit period achieved means the operation of the payment being financial interest feels by supper funds.

Formula : = creditor + B / P*365 Credit Purchases

Creditors turnover:Meaning:It is the no. of days within which we make payment to our creditors for credit purchases it obtained from creditor ratio. Implementation:-

The generally the longer credit period achieved means the operation of the

payment being financial interest feels by supper funds.

Formula:=No. of days in a year Creditors ratio

e. Total Assets-Turnover:-