Financial Management
CAIIB -MODULE D
Presentation by
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, pricing decision, control,
prevent wastages, basis for tenders,
effective use of resources, 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
30
18
=
12
28
18
=
10
26
18
=
8
24
18
=
6
20
18
=
2
18
18
=
0
17
18
=
(1)
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
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
Marginal costing problems




Sales Rs.150000
Fixed Cost Rs.30000
B.E.Point Rs.60000
What is profit ?
Management decisions- assessing profitability
CONTRIBUTION/SALES=C.S.RATIO
Produ
ct
sp
vc
Contrib C/S
ution
Ratio %
ranking
A
20
10
10
10/20
50%
1
B
30
20
10
10/30
33% 2
C
40
30
10
10/40
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
Problem
Year
Cash flow
PV factor
@15%
PV
0
1
2
3
4
5
6
7
(50000)
10000
10000
20000
20000
30000
20000
10000
1
(50000)
Solution to Problem
Year
Cash flow
PV factor
@15%
0
1
2
3
4
5
6
7
(50000)
10000
20000
30000
30000
30000
20000
10000
1
0.870
0.756
0.658
0.572
0.497
0.432
0.376
PV
(50000)
8696
15123
19725
17153
14915
8647
3759
38018
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
Year Cash Flow Dis. Factor Present
@20%
Value
0
1
2
3
NPV
-102
51
51
61
1
0.833
0.694
0.578
-102
42.48
35.39
35.26
11.14
@27%
0
1
2
3
NPV
-102
51
51
61
1
0.78740
0.62000
0.48818
Value
-102
40
32
30
0
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.
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.
Problems
 We will see more problems
immediately after discussion of
other topics
PRICING DECISIONS
 Full cost pricing
 Conversion cost pricing
 Marginal cost pricing
 Market based pricing
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
Conversion cost pricing
 Direct Labour and Direct Overhead
cost is considered ignoring material
cost
 Selling price higher for product
having greater conversion cost
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
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
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
Working Capital
 Definition- Excess of CA over CL
 Existing company- new capital outlayaddl. W.C requirement
 Sources of W.C.
 Long term
 Short term- OD, Trade credit
 Components of WC
 Permanent
 Variable ( seasonal)
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
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
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-
construction company
 Turnover Method- SSI
Seasonal
industry/
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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