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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
Basic formula
SP less 10 9 VC 6 6
4 3
8
7 6
6
6 6
=
= =
2
1 0
5
4
6
6
=
=
(1)
(2)
c/s
Ratio %
ranking
A B
20 30
10 20
10 10
10/2 0 10/3 0
50%
33% 2
25% 3
40
30
10
10/4 0
6
2 3
4
1 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
Financial analysis
Cost of project Means of finance Cost of capital Projected profitability Cash flows of the projects Project appraisal
CALCULATION NPV/IRR
Outlay 15000 15000 Difference PV @10% 15522 PV @ 12% NPV
13376 -
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.
Year 0
Net Present Value Year Cash Flow Dis. Factor Present @10% Value
0 1 2 3
NPV
-102 51 51 61
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
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
Working capital
Current assets less current liabilities = net working capital or net current assets Permanent working capital vs. variable working capital
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