modern fin management

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MODERN FINANCIAL MANAGEMENT GOPAL CHANDRA MONDAL [M.COM, M.Phil, ACS,AICWAI, AICS(UK), LLB] IDFC ( FOUNDATION ) DIRECTOR-F&A and COMPANY SECRETARY

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Meaning: Management Accounting It refers to presentation of accounting information to management in such a way as to assist them in their managerial functions of decision making , planning and control. It is a tools to the management To achieve the objective of the Firm/Company i.e profit maximization or minimization of losses Accounting information may be Financial and / or cost accounting Information may be useful for Forecasting, Planning, Organising, Motivating, Co-ordinating, Controlling and Communicating etc.

Objectives ::

Objectives : Providing Management with accounting, costing other statistical data To select the best alternative courses of action. Translating the plans of management covering all the activities of business in financial terms. Measuring the actual performance against standards and interpret the results of operations Measuring and reporting on the effecting of the organization and method used in attaining the objectives of the business.

Management Accounting Techniques :

Management Accounting Techniques Traditional Techniques Advance Techniques Financial Statement Analysis Fund Flow Analysis Cash Flow Analysis Marginal Costing Absorption Costing Differencial Costing Standard Costing Oppurtunity Costing Budgetary Control Inter-Firm Comparison Cost Volume Profit Analysis Activity –Based Costing Target Costing Just –in Time (JIT) Total Quality Management (TQM) Process Reengineering The theory of Constraints

Activity Based Costing::

Activity Based Costing: In 1988, Cooper and Kaplan: Developed a refined approach for assigning overheads to products, known as Activity Based Costing (ABC). Meaning: Cost attribution to cost units on the basis of benefit received from indirect activities : CIMA Costs are not initially traced to department. Instead, costs are first traced to activities and then to products : Dansby and Lawrence. Design of ABC : The design of ABC system involves following stages: Identifying activities Assigning costs to activity cost centres Selecting appropriate cost drivers Assigning the cost of activities to products

Benefits of ABC:

Benefits of ABC To reduce costs To provide importance to non-manufacturing cost which constitute a substantial portion of total cost. To provide the accurate and reliable cost information for making the right decision. Formulating an effective pricing policy while fixing price. Cost of each activity is determined. Accuracy of indirect cost allocation to products. To help in make or buy decisions and transfer pricing

ABC Vs. Traditional costing:

ABC Vs. Traditional costing ABC Traditonal product cost Cost are assigned to cost centres. Separate cost centres are created for each major activities such as machine related activities, set-up activities and purchasing activities overheads tend to be pooled by cost centres Apportionment of service deptt. cost is avoided. Overhead are traced to P (production) and S (service) and then overhead of S are reallocated to P. Overheads tend to be pooled by Department. Apportionment of service deptt.cost is not avoided.

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Problem : A company produces three products A,B and C. Their per unit cost-data are as below : Description A B C Total Units produced 10,000 20,000 30,000 D/Material.(Rs.) 50 40 30 D/ Labour (Rs.) 30 40 50 Labour Hours 3 4 4 Machine Hours 4 4 7 No of pur.Requ. 1200 1800 2000 5000 No.of Set-ups 240 260 300 800

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Production overheads Rs. 26,00,000/- split in two department. Deptt. 1 : Rs. 11,00,000/- Deptt. 2 : Rs. 15,00,000/- Deptt.1 is labour intensive and Deptt.2 is machine intensive. Total Labour Hours in Deptt.1 : 183,333/- Total Machine Hours in Deptt.2 : 5,00,000/- Production overheads Rs.26,00,000 split by activity- Receiving and inspection Rs.14,00,000/- Production schedule and machine setup Rs. 12,00,000/- You are required to prepare product cost statement under (i) Traditional Absorption costing and (2) Activity Based Costing

Traditional Absorption Costing :

Traditional Absorption Costing Absorption rate : Deptt. 1 : Rs.11,00,000/1,83,333 LH = Rs.6 per LH Deptt.2 : Rs. 15,00,000/5,00,000 MH = Rs.3 per MH Statement of Cost Description A B C Rs. Rs. Rs. D/ Material 50 40 30 D/ Labour 30 40 50 Overheads Deptt. 1 (LH*Rate) 18 24 30 Deptt.2 (MH*Rate) 12 12 21 TOTAL 110 116 131

Activity Based Costing ::

Activity Based Costing : Cost Drivers Rate : Receiving and Inspecting = Rs.14,00,000/5000 No. = Rs.280 per requisition Scheduling and set up = Rs.12,00,000/800 No. = Rs.1500 per set up Product Cost Statement Description A B C Rs. Rs. Rs. D/ Material 50 40 30 D/Labour 30 40 50 Overheads Rec.& Ins (280*1200)/10000 34 25 19 Prod.& Setup(1500*240)/10000 36 20 15 TOTAL 150 125 114

Target Costing:

Target costing was invented by Toyota in 1965 O ther Japanese companies uses it : Isuzu Motors Sony Sharp Nissan What is Target costing ? There is no clear definition to target costing. It is a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design . Target Costing

Target –Costing Principles :

Target –Costing Principles Price-led costing. Market Driven selling Price – Desired Profit = Target cost Focus on customers what do they want? How much will they pay for it? What do competitors offer? Focus on design. 70-90% of costs are committed at the design and developemnt stage. Cross-functional involvement. Marketing, Design/engineering, Manufacturing, Purchasing, Distribution, Service/Support, Accounting, Finance and Legal Value-chain involvement. Product, manufacturing, delivery process designed simultaneously. A life-cycle orientation . Cost control at all phases of the product life cycle such as Design, production, setup/delivery, service and repair and disposal and recycling etc.

Traditional Costing vs. Target costing :

Traditional Costing vs. Target costing Traditional Costing Target Costing Cost driven price Accountant worked with historical information Costs determine price Cost accountant are responsible for cost reduction Market driven price achieving it during the development and design phase Accountant worked with current market competitive information Price determine costs Uses cross-functional teams to manage costs

Traditional Cost Management Approach :

Traditional Cost Management Approach

Flow Chart: Target Cost Concept:

Flow Chart: Target Cost Concept

Stages in Target Costing Process:

Stages in Target Costing Process

Benefit of Target Costing :

Benefit of Target Costing Product are better matched to their customer’s need Customer’s willingness to pay for the product Reduction of development of the product Reduction of costs of products substantially with better quality Better team-sprit More effectively integrate the entire supply chain Adding value to the production process by eliminating non-value added activities. Open sharing of information Better process understanding

Negative Aspect of Target Costing :

Negative Aspect of Target Costing Too much customer focus Potential organizational conflict Too much pressure to attain targets Longer development time Example 1: Bajaj Auto Ltd Product name : Diesel Auto Example 2 : Tata Nano Car

Kaizen Costing :

Kaizen Costing Kai Change Zen Better Change for Better

Concept of Kaizen Costing :

Concept of Kaizen Costing Yashuhiro Monden developed the Kaizen Costing It is applied to a product that is already under production The time prior to kaizen costing is called target costing Kaizen costing means “improvements in small steps" (i.e., continuous improvement List your own Problems Grade problems as to minor, difficult and major Start with the smallest minor problem Move on to next graded problem and so on Remember improvement is part of daily routine Never accept status quo Never reject any idea before trying Eliminate tried but failed experiments Highlight problems rather than hiding

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Kaizen Costing Cost Reduction in Design of the Product Development of the Product Production Of the Product

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Kaizen Costing-definition Kaizen costing is the maintenance of present levels for products Currently being manufactured via systematic efforts to achieve the desired cost level KC is applied to product that is already under Production Time prior to KC is Target Costing

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Product Specification Price Targets Profit Targets Cost Targets Major Product/Process Changes Does Design Meet Target Costs? Estimated Life Cycle Cost Are Life Cycle Costs Acceptable ? Start Production Minor Product/Process Changes Product Scrapping Product Planning Phase Life Cycle Costing Production Phase Scrapping Phase

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Cost Reduction by 5%

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Kaizen Costing Calls Establishment of cost reduction target amount and its accomplishment through Kaizen activities--- continuous improvement

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Kaizen Philosophy Approach to Traditional Organisation Kaizen Environment Attitude Let it go Continuous Improvement Employees Cost Assets Information Restricted Shared Interpersonal Commercial Human Relationship 5 Managerial Belief Routine Change 6 Management Culture Bureacratic Participative 7 Management Function Control Supportive 8 Management Stress Functional Cross Functional

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Procedure for Implementation Form small groups from 6-10 persons Give them numbers-Kaizen 1,Kaizen-2… Appoint an evaluator of the group Arrange weekly meetings of group (6-12 months) Submit progress of improvement in writing Allow each member to express No disturbance when others are speaking However Clarifications can be sought instantantly

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Evaluation 0 Marks for no improvement made 0 to 30 Marks depends upon improvement tried but failed 30 to 50 Marks for small to moderate improvement 50 to 75 Marks for good improvement > 75 Marks for extraordinary improvement

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Benefits of Kaizen Tangible Benefits Reduction in Production Time Reduction in Rejection Energy Saving Improved Quality Intangible Benefits Motivation Team Building Sense of belongingness Environment conservation Change in attitude