Friday, October 3, 2008
Cash Breakeven Point
Cash Breakeven Point = (fixed costs - depreciation) / contribution margin per unit.
The cash breakeven point indicates the minimum amount of sales required to contribute to a positive cash flow.
The cash breakeven point indicates the minimum amount of sales required to contribute to a positive cash flow.
Activity Based Costing
Activity-Based Costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to products and services according to the actual consumption by each in order to generate the actual cost of products and services for the purpose of elimination of unprofitable and lowering prices of overpriced ones. In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.
Methodology
Cost center
Cost allocation
Fixed cost
Variable cost
Cost driver
Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The measure of the use of a shared activity by each of the products is known as the cost driver. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions takes at the counter and then by measuring the number of each type of transaction.
Limitations
Even in activity-based costing, some overhead costs are difficult to assign to products and customers, for example the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
Methodology
Cost center
Cost allocation
Fixed cost
Variable cost
Cost driver
Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The measure of the use of a shared activity by each of the products is known as the cost driver. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions takes at the counter and then by measuring the number of each type of transaction.
Limitations
Even in activity-based costing, some overhead costs are difficult to assign to products and customers, for example the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
Cash-Credit Hypothecation
CASH CREDIT FACILITY: a major part of working capital requirement of any unit would consist of maintenance of inventory of raw materials, semi finished goods, finished goods, stores and spares etc. In trading concern the requirement of funds will be to maintain adequate stocks in trade. Finance against such inventories by banks is generally granted in the shape of cash credit facility where drawings will be permitted against stocks of goods. It is a running account facility where deposits and withdrawals are permitted. Cash credit facility is of two types (depending upon the type of charge on goods taken as security by bank.)
(i) Cash credit - pledge: when the possession of the goods is with the bank and drawings in the account are linked with actual movement of goods from/to the possession of the bank. The physical control of the goods is exercised by the bank.
(ii) cash credit- hypothecation: when the possession of the goods remains with the borrower and a floating charge over the stocks is created in favour of the bank. The borrower has complete control over the goods and the drawings in the account are permitted on the basis of stock statements submitted by the borrower.
Source: http://www.indiainbusiness.nic.in/investment/funding_option.htm
(i) Cash credit - pledge: when the possession of the goods is with the bank and drawings in the account are linked with actual movement of goods from/to the possession of the bank. The physical control of the goods is exercised by the bank.
(ii) cash credit- hypothecation: when the possession of the goods remains with the borrower and a floating charge over the stocks is created in favour of the bank. The borrower has complete control over the goods and the drawings in the account are permitted on the basis of stock statements submitted by the borrower.
Source: http://www.indiainbusiness.nic.in/investment/funding_option.htm
Capital Adequency Ratio
A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as "Capital to Risk Weighted Assets Ratio (CRAR)
This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.
Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Minimum requirements of capital fund in India:
* Existing Banks 09 % * New Private Sector Banks 10 %
* Banks undertaking Insurance business 10 %
* Local Area Banks 15%
Capital Fund has two tiers - Tier I capital include
*paid-up capital
*statutory reserves
*other disclosed free reserves
*capital reserves representing surplus arising out of sale proceeds of assets.
Minus
*equity investments in subsidiaries,
*intangible assets, and
*losses in the current period and those brought forward from previous periods
to work out the Tier I capital.
Tier II capital consists of:
*Un-disclosed reserves and cumulative perpetual preference shares:
*Revaluation Reserves (at a discount of 55 percent while determining their value for inclusion in Tier II capital)
*General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets:
*Investment fluctuation reserve not subject to 1.25% restriction
*Hybrid debt capital Instruments (say bonds):
*Subordinated debt (long term unsecured loans:
*paid-up capital
*statutory reserves
*other disclosed free reserves
*capital reserves representing surplus arising out of sale proceeds of assets.
Minus
*equity investments in subsidiaries,
*intangible assets, and
*losses in the current period and those brought forward from previous periods
to work out the Tier I capital.
Tier II capital consists of:
*Un-disclosed reserves and cumulative perpetual preference shares:
*Revaluation Reserves (at a discount of 55 percent while determining their value for inclusion in Tier II capital)
*General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets:
*Investment fluctuation reserve not subject to 1.25% restriction
*Hybrid debt capital Instruments (say bonds):
*Subordinated debt (long term unsecured loans:
Subscribe to:
Comments (Atom)