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
ct
sp
vc
Contribtio
n
c/s
Ratio %
ranking
A
20
10
10
10/2
0
50%
1
B
30
20
10
10/3
0
33% 2
C
40
30
10
10/4
0
25%
3
DECISION when limiting factors
SP
Rs.14
Rs.11
VC
8
7
Contribution
Per unit
Labour hr. pu
6
4
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
0
1
2
3
4
Cash flow
(100000)
30000
40000
50000
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
(NPV)
Pay back period
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
@12%
PV
1
2
3
4
5
6
7
8
1000
2000
2000
3000
3000
4000
4000
5000
0.893
0.799
0.712
0.636
0.567
0.507
0.452
0.404
893
1594
1424
1908
1701
2028
1808
2020
13376
Present value of cash flow stream(cash outlay Rs.15000 )@10%
Year
Cash flow
PV factor
@10%
PV
1
2
3
4
5
6
7
8
2000
2000
2000
3000
3000
4000
4000
5000
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.466
1818
1652
1502
2049
1863
2256
2052
2330
15522
CALCULATION NPV/IRR
Outlay
15000
15000
Difference
PV @10%
15522
-
PV @ 12% NPV
13376
-
522
(1624)
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.102 lakh
Year 0
Rs.51 Lakh
Rs.51 Lakh
Rs.61 Lakh
Year 1
Year 2
Year 3
Net Present Value
Year Cash Flow Dis. Factor Present
@10%
Value
0
1
2
3
NPV
-102
51
51
61
1
0.91
0.83
0.75
-102
46.36
42.15
45.83
32.34
@27%
0
1
2
3
NPV
-102
51
51
61
1
0.78740
0.62000
0.48818
Value
-102
40
32
30
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
management objective
Budgets and standards
Budgetary control
Cash budget
of
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
management objective
Budgets and standards
Budgetary control
Cash budget
of
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
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THANK YOU
WISH YOU BEST OF LUCK
sudaaba@iibf.org.in
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