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 decisionmaking 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 contractors 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.

CLASSIFICATI
ON 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

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,

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

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
Costs/Revenue

TR

TR

TC

VC

TheAs
Break-even
point
output
is
Total
revenue
is
Thewhere
totaltotal
costs
The
lower
the
occurs
generated,
the
Initially a by
firm
determined
the
therefore
revenue
equals
total
price,
the
less
firm
will
incur
willcharged
incur fixed
price
and
(assuming
costs
the
firm,
in
variable
costs
steep
the
total
costs,
thesesold
do
the
quantity
this accurate
example
would
these
vary
directly
not depend
on
revenue
curve.
again
this
will
be
haveforecasts!)
to
sell
Q1
to
is
the
with
the
amount
output or sales.
determined
by
generate
sufficient
produced
sum
of FC+VC
expected
forecast
revenue to cover
its
sales
initially.
costs.

FC

Q1

Output/Sales

Break-Even Analysis
Costs/Revenue

TR (p = 3)

TR (p = 2)

TC

VC

If the firm
chose to set
price higher
than 2 (say
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
Costs/Revenue

TR (p = 1)

TR (p = 2)

TC

VC

If the firm
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
Costs/Revenue

TR (p = 3)

TR (p = 2)

Margin of
A
higher
price
safety
shows
how far sales
can
would
lower
fall before
the
breaklosses
Assume
made. If Q1 =
even
point
current
sales
1000
and
Q2
=
and
the
1800,
sales could
at Q2
fall by 800
margin
ofunits
before awould
loss
safety
would be made

TC
VC

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
organizations 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.