IMT 2412

INDUSTRIAL MANAGEMENT

“INTRODUCTION TO BUSINESS FINANCE’’

MR REKAJON BIN NGADIMUN

ABDUL HALIM BIN KALYUBI

ABDUL AZIZ BIN JAAFAR
MUHAMMAD IZZAT BIN ZAINAL
 INTRODUCTION TO BUSINESS FINANCE

Financial Accounting
Management Accounting
Project Accounting
Cash-Flow Statement
FINANCIAL ACCOUNTING

 Keeps a record of all the financial

transactions,payments in and payments out.
 Information gives the financial status of a company
using the generally accepted accounting principles.
 Three main reports are:
a)the balance sheet.
b)the income statement.
c)the cash-flow statement.
MANAGEMENT ACCOUNTING

 Also called cost accounting,uses the above

financial information.
 This analysis will assist management decision-
making with respect to
estimating,planning,budgeting,implementation and
control.
PROJECT ACCOUNTING

 Uses a combination of booth financial accounting

and management accounting.
 Some special project management tools(WBS,CPM
and earned value)to integrate the project account.
CASH-FLOW STATEMENT
 Document which models the flow of money in and
out of the project.
 The time frame is usually monthly,to coincide with
the normal business accounting cycle.
 Based on the same information used in a typical
bank statement,except that here the income(cash
inflow)and expenditure(cash outflow).
 The contractor’s income would come from the
monthly progress payments,and the expenses
would be wages,materials,overheads,interest and
bought in services.
DIFFERENCE BETWEEN COST &
PRICE

Cost :
is the expense that a business incurs in
bringing a product or service to market.
Price :
is the amount a customer pays for that
product or service.
CLASSIFICATIO
N OF COSTS
INTRODUCTION TO COST
ACCOUNTING:
Cost accounting is a quantitative
method that accumulates, classifies,
summarizes and interprets financial
and non-financial information for 3
major purposes, they are,
1.Ascertainment of cost of a product or
service
2.Operational planning and control
3.Decision making
Classification of costs:

Cost classification is the process of grouping

costs according to their common features or
characteristics. Classification of costs is
necessary for detailed recording and accurate
cost ascertainment. Cost can be classified
according to,
1.Elements
2.Functions
3.Behaviour
Classification on the basis of element of cost:

On the basis of element of cost can be classified

into following types,
1.Direct materials- Direct materials are those
materials which enter into part of the product, the
cost of which from part of the prime cost. Direct
materials are also called process materials or prime
cost materials . It includes all materials specially
purchased for a particular process, job or
production order.
Ex-The clay in bricks, the wood in furniture, the
leather in shoes etc.
2.Indirect materials - Indirect materials are
those which can not be traced as a part of
the product. But they are necessary for the
production process. Indirect materials are
also known as on cost materials or expense
materials.
Ex- Fuel, lubricating oil etc required for
operating and maintaining plant and
machinery Small tools for general use
3.Direct wages -Direct wages are the cost of
remuneration, such as wages, salaries,
commissions, bonus etc
Direct wages refers to the cost of wages
paid to operatives who help in altering the
construction, composition, conformation or
condition of the product manufactured by a
concern.
Ex- wages paid to drivers It is also called as
direct labor or productive labor or process
labor.
4.Indirect wages - Indirect wages represent
the cost of labor employed in the works or
factory which is ancillary to production. In
short, wages which can not be directly
identified with a job, process or operation are
generally treated as indirect wages.
Ex-a. General indirect labour such as
inspectors, supervisors etc
b.Micsellaneous allowances to labour.
5.Direct Expenses -Direct expenses are
those which are neither direct material cost
nor direct wages but directly identifiable
with a job process or operation. Direct
expenses are also known as chargeable
expenses, prime cost expenses, productive
expenses etc
Ex-a. Hire charge of a special concrete
mixer required for civil engineering job.
b. Cost of special pattern, drawing or
layout.
6. Indirect expenses -Indirect expenses which
can not be charged to a product directly and
which are neither indirect material cost nor
indirect wages are regarded as indirect
expenses.
Ex-a. Rent, rates and taxes
b. Insurance
c. Canteen expenses
 Classification on the basis of Functions:

On the basis of functions of manufacturing concerns the

costs can be classified to the following types

1.Product cost -This is the cost of sequence of operations

which begins with supplying materials, labour and
services and ends with primary packing of the product.
Therefore
production represents
prime cost + absorbed production over
head
1.Variable cost- It is the cost which tends to
follow (in the short term) the level of
activity , this cost will tend to vary directly
with output. Variable costs are also known as
direct costs.
Ex- a. Direct materials
b. Direct labor
c. Direct expenses
2.Administration cost-It refers to the cost of management
and of secretarial accounting and administrative service,
which can not be directly related to production, marketing,
research or development functions of the enterprise.
In short administration expenses are in the nature of
indirect expenses and include the following,
Ex-a. Salaries of office staff, accountants directors etc
b. Maintainance of factory estate etc

3.Marketing cost- The cost incurred in researching the

potential markets and promoting products in suitable
attractive forms and at acceptable prices. It includes the
selling cost, publicity cost, distribution cost etc
 Classification on the basis of
Behviourwise:
With the increase or decrease in production , some
costs will increase or decrease directly, some costs
will remain unaffected while others will change but
not in direct proportion to the change in volume ,
thus costs can be grouped according to their
behaviour as,
2.Fixed cost -It is defined as the cost which accures in
relation to the passage of time and which within
certain output and turnover limits, tends to be
unaffected by fluctuations in the levels of activity
( output or turnover). Other terms used include
period cost and policy cost.
Ex-a. Rent and rates of the factory building
b. Depreciation of building
c. Insurance
3.Mixed cost- These contains both fixed and
variable characteristics over various relevant
ranges of operation. These are 2 types,
1.Semi-variable cost-The fixed part of a
semi-variable cost usually represents a
minimum fee for making a particular
item/service available. The variable portion is
the cost charges for actually using the service.
Ex-Truck rentals, equipment rentals and
utilities
Step cost -The fixed part of step costs
changes abruptly at various levels of activity
because these costs are acquired in
indivisible portions. A step cost is similar to a
fixed cost within a very small relevant range.
Ex-a. salary to supervisor
b. Inspection cost
BREAK EVEN CALCULATER
Fixed Cost:
The sum of all costs required to produce
the first unit of a product. This amount
does not vary as production increases or
decreases, until new capital
expenditures are needed.
Variable Unit Cost:
Costs that vary directly with the production
of one additional unit.

Expected Unit Sales:

Number of units of the product projected to
be sold over a specific period of time.

Unit Price:
The amount of money charged to the
customer for each unit of a product or
service.
Total Variable Cost:
The product of expected unit sales
and variable unit cost.
(Expected Unit Sales * Variable
Unit Cost )

Total Cost:
The sum of the fixed cost and total
variable cost for any given level of
production.
(Fixed Cost + Total Variable Cost )
Total Revenue:
The product of expected unit sales
and unit price.
(Expected Unit Sales * Unit Price )

Profit (or Loss):

The monetary gain (or loss) resulting
from revenues after subtracting all
associated costs. (Total Revenue -
Total Costs)
BREAK EVEN POINT:
Number of units that must be sold in
order to produce a profit of zero (but
will recover all associated costs).

Break Even Point (IN UNIT)= Fixed

Cost /S. Price- Variable Unit Cost

Break Even Point (in Rs)=Fixed

Cost/ S. Price-Variable unit
Cost*Units
For example, suppose that your fixed costs
for producing 100,000 product were 30,000
RM a year.
Your variable costs are RM2.20 materials,
RM4.00 labour, and RM0.80 overhead, for
a total of RM7.00 per unit.
If you choose a selling price of RM12.00
for each product, then:
30,000 divided by (12.00 - 7.00) equals
6000 units.
This is the number of products that have to
be sold at a selling price of RM12.00
before your business will start to make a
profit.
 Break-Even Analysis
TheAs Break-even
output is point
Costs/Revenue Total
The revenue
Thewhere
totaltotal
lower is
costs
the
TR TR TC occurs
generated,
Initially a by
determined
therefore
the
firmthe
VC price,
revenue
firm the
equals
will
willcharged
less
total
incur
incur fixed
price
costs(assuming
– the firm, and
in
steep
thecosts,the
variable total
costs
thesesold
quantity do– –
this accurate
example
these vary would
revenue
not depend
again this
haveforecasts!)
to sell curve.
Q1will on
to be
directly with
output or sales.
determined byis
thethe
generate
sum
amount sufficient
of produced
FC+VC
expected
revenue to coverforecastits
sales
costs. initially.

FC

Q1 Output/Sales
 Break-Even Analysis If the firm
chose to set
price higher
Costs/Revenue than £2 (say
TR (p = £3) TR (p = £2) TC
VC £3) the TR
curve would
be steeper –
they would
not have to
sell as many
units to
break even

FC

Q2 Q1 Output/Sales
 Break-Even Analysis
TR (p = £1)
Costs/Revenue If the firm
TR (p = £2)
TC VC chose to set
prices lower
(say £1) it
would need
to sell more
units before
covering its
costs

FC

Q1 Q3 Output/Sales
 Break-Even Analysis Margin of
TR (p = £3) TR (p = £2)
TC A higher
safety showsprice
Costs/Revenue
would lower
how far sales can
VC fall before
the breaklosses
Assume
made. If Q1 =
even
current
1000 point
and sales
Q2 =
and
1800,
at Q2the
sales could
margin
fall by 800 ofunits
before awould
safety loss
would be made
widen

Margin of Safety
FC

Q3 Q1 Q2 Output/Sales
USES OF BREAK EVEVN POINT
Helpful in deciding the minimum quantity of
sales
Helpful in the determination of tender price
Helpful in examining effects upon
organization’s profitability
Helpful in deciding about the substitution of
new plants
Helpful in sales price and quantity
Helpful in determining marginal cost
 LIMITATIONS
Break-even analysis is only a supply side (costs
only) analysis, as it tells you nothing about what
sales are actually likely to be for the product at
these various prices.
It assumes that fixed costs (FC) are constant
It assumes average variable costs are constant
per unit of output, at least in the range of likely
quantities of sales.
It assumes that the quantity of goods produced is
equal to the quantity of goods sold (i.e., there is no
change in the quantity of goods held in inventory
at the beginning of the period and the quantity of
goods held in inventory at the end of the period.
In multi-product companies, it assumes that the
relative proportions of each product sold and
produced are constant.