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 less VC = Contribution

10 6 = 4
9 6 = 3
8 6 = 2
7 6 = 1
6 6 = 0
5 6 = (1)
4 6 = (2)
Marginal costing problems
 SP = Rs.10, VC =Rs.6 Fixed Cost
Rs.60000
Find
- Break even point (in Rs. & in units)
- C/S ratio
- Sales to get profit of Rs.20000
Marginal costing problems
 Sales Rs.100000
 Fixed Cost Rs.20000
 B.E.Point Rs.80000
 What is profit ?
Management decisions- assessing profitability
CONTRIBUTION/SALES=C.S.RATIO

Produ sp vc Contribtio c/s Ratio % ranking

n
ct

A 20 10 10 10/2 50% 1
0

B 30 20 10 10/3 33% 2
0

C 40 30 10 10/4 25% 3
0
DECISION when limiting factors
SP Rs.14 Rs.11

VC 8 7

Contribution 6 4
Per unit
Labour hr. pu 2 1

Contri.per hr 3 4
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
Year Cash flow
0 (100000)
1 30000
2 40000
3 50000
4 50000
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
DISCOUNTING NON-DISCOUNTING

Net present value Pay back period

(NPV)
Internal rate of return Accounting rate of
(IRR) return
Profitability Index or
Benefit cost ratio
Present value of cash flow stream-
(cash outlay Rs.15000)@ 12%
Year Cash flow PV factor PV
@12%

1 1000 0.893 893

2 2000 0.799 1594
3 2000 0.712 1424
4 3000 0.636 1908
5 3000 0.567 1701
6 4000 0.507 2028
7 4000 0.452 1808
8 5000 0.404 2020
13376
Present value of cash flow stream-
(cash outlay Rs.15000 )@10%
Year Cash flow PV factor PV
@10%

1 2000 0.909 1818

2 2000 0.826 1652
3 2000 0.751 1502
4 3000 0.683 2049
5 3000 0.621 1863
6 4000 0.564 2256
7 4000 0.513 2052
8 5000 0.466 2330
15522
CALCULATION NPV/IRR
Outlay PV @10% PV @ 12% NPV
15000 15522 - 522
15000 - 13376 (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%
The timing of the cash flows is critical for
determining the Project's value.
below the line for cash investments or
above the line for returns.

Rs.51 Lakh Rs.51 Lakh Rs.61 Lakh

Year 1 Year 2 Year 3

Rs.102 lakh

Year 0
Net Present Value
Year Cash Flow Dis. Factor Present
@10% Value
0 -102 1 -102
1 51 0.91 46.36
2 51 0.83 42.15
3 61 0.75 45.83
NPV 32.34
 @27% Value
0 -102 1 -102
1 51 0.78740 40
2 51 0.62000 32
3 61 0.48818 30
NPV 0
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.
Internal Rate of Return
(IRR)
IRR is the rate at which
the discounted cash flows
in the future equal the
value of the investment
today. To find the IRR one
must try different rates
until the NPV equals zero.
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
***

THANK YOU
WISH YOU BEST OF LUCK

sudaaba@iibf.org.in
***