Activity Based Costing (ABC) Activity Based Costing was introduced as the answer for an improved full-cost product-cost calculation as the model grew into a more full-fledged costing system for hierarchies of activities and cost objects. Activity Based Costing is a two-stage procedure where cost of resources in the first stage are allocated to activities to construct Activity Cost Pools, which in second stage are allocated to cost objects based on these objects’ use of the different activities. It is also a tool for cost and performance measurement towards activities, resources and cost objects (for example products and services). Activity Based Costing is knows as a “horizontal” or cross-functional cost view and it can provide fact-based insight into the spending and profitability of products, services and customers. There are three guidelines to support cost allocation in Activity Based Costing. The first would be ‘Direct-cost tracing to product’. Trace the cost of Continue reading
Financial Concepts
What is Financial Leverage?
The use of fixed-charges sources of funds, such as debt and preference capital along with owner’s equity in the capital structure described as financial leverage gearing or trading on equity. The use of the term trading on equity is derived from the fact that is the owner’s equity that is used to raise debt; that is, the equity that is traded upon. Financial leverage is defined as the ability of a firm to use fixed financial charges to magnify the effect of change in E.B.I.T on the firm’s earning per share. The financial leverage occurs when a firm’s Capital Structure contain obligation of fixed financial charges. For instance, interest on debentures, dividend on preference share etc., along with owner’s equity to enhance earning of equity shareholder’s. The fixed financial charges do not vary with the operating profit. They are fixed and are to be paid irrespective of level of operating Continue reading
Basics of Cash Management – Cash Management Functions
Cash management is one of the key areas of working capital management. Cash is the most liquid current assets. Cash is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e. receivable and inventory get eventually converted into cash. This underlines the importance of cash management. Read More: The Concept of Cash Management The term “Cash” with reference to management of cash is used in two ways. In a narrow sense cash refers to coins, currency, cheques, drafts and deposits in banks. The broader view of cash includes near cash assets such as marketable securities and time deposits in banks. The reason why these near cash assets are included in cash is that they can readily be converted into cash. Usually, excess cash is invested in marketable securities as it contributes to profitability. Cash is one of the most important components of Continue reading
Purpose of Budgeting
Budgeting is a basic and essential process in a business which allows businesses to gain many goals in one course of action. The budgeting process may be carried out by individuals or by companies to estimate whether the person/company can continue to operate with its projected income and expenses. There are several purposes to create and implement a budget include control and evaluation, planning, communication, and motivation. Control and Evaluation This is most important matter after finalized a budget is providing sufficient control and evaluating its performance.If performance does not meet the budget, action can be taken immediately to adjust activities. Budgeting allows a company to have a certain range of control over costs, such as reducing many types of unnecessary expenses or assigning responsibility for these expenses. A budget also gives a company a benchmark by which to evaluate business units, departments, and even individual managers. Unfortunately this purpose Continue reading
Commercial Paper – Definition, Features and Advantages
What is a Commercial Paper? A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company. Features of Commercial Paper Commercial paper is a short-term money market instrument comprising usince promissory note with a fixed maturity. It is a certificate evidencing an unsecured corporate debt of short term maturity. Commercial paper is issued at a discount to face value basis but it can be issued in interest bearing form. The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his liquidity and established earning power, to guarantee that promise. Commercial paper can be issued directly by a company to investors or through banks/merchant banks. Advantages of Commercial Continue reading
Listing and Delisting of Securities at Stock Exchanges
Listing of Securities at Stock Exchanges Listing means formal admission of a security into a public trading system of a stock exchange. A security is said to be listed when they have been included in the official list of the stock exchange for the purpose of trading. The prime objective of admission to dealings cm the stock exchange is to provide liquidity and marketability to securities and also to provide a mechanism for effective management of trading. The securities listed in stock exchanges may be of any public limited company, central or state government, quasi-government and other corporations or financial institutions. To make a security eligible to be listed in a stock exchange, the company shall be obligatory to fulfill all the listing requirements specified in the Companies Act of 1956. Besides the company is also compulsorily to discharge the listing norms issued by SEBI from time to time and Continue reading