Contents. Cost Accounting and Financial Mnagement. Cost Accounting. Part One INTRODUCTION TO COST ACCOUNTING COST : CLASSIFICATION AND BEHAVIOUR

Transcription

1 Cost Accounting and Financial Mnagement Contents About the author C-5 Preface to seventh edition C-7 Part One Chapter 1 Cost Accounting INTRODUCTION TO COST ACCOUNTING Meaning and Terminology 4 Cost, Costing, Cost Accounting, Cost Accountancy, Cost Unit, Cost Object. Comparison with Other Subjects 6 Cost Accounting and Financial Accounting, Cost Accounting and Management Accounting. Cost Accounting System 8 Objectives of Cost Accounting, Necessity for Cost Accounting System, Reports provided by Cost Accounting Department, Essentials of Good Cost Accounting System, Essential Factors for Good Cost Accounting System, Practical Difficulties in Installation, Suggestions to Overcome Practical Difficulties, Limitations of Cost Accounting. Centres of Control 13 Cost Centre, Types of Cost Centres, Profit Centre, Investment Centre. Methods of Costing 15 Specific Order Costing, Continuous Operation Costing. Types of Costing Systems 17 Key Terms 17 Theoretical Examination Questions 18 Multiple Choice Questions 19 Practical Problems 20 Chapter 2 COST : CLASSIFICATION AND BEHAVIOUR Cost Management 22 Need for Cost Management, Strategic Cost Management. Classification of Costs 24 Cost Classification by Nature 24 Material Cost, Labour Cost, Expenses. Cost Classification in Relation to Cost Centre 25 Direct Costs, Indirect Costs. Cost Classification by Time 26 Historical Cost, Predetermined Cost, Standard Cost, Estimated Cost. Cost Classification for Decision Making 27 Marginal Cost, Differential Cost, Opportunity Cost, Relevant Cost, Sunk Cost, Replacement Cost, Normal Cost, Abnormal Cost, Avoidable Cost, Unavoidable Cost, Pre-production Cost, Product Cost, Period Cost, Traceable Cost, Common Cost, C-11

2 C-12 Cost Accounting and Financial Management Controllable Cost, Uncontrollable Cost, Short-run Cost, Long-run Cost, Past Cost, Future Cost, Explicit Cost, Implicit Cost, Book Cost, Shutdown Cost, Abandonment Cost, Urgent Cost, Postponable Cost, Conversion Cost. Cost Classification by Nature of Production Process 30 Batch Cost, Process Cost, Operation Cost, Operating Cost, Contract Cost, Joint Cost. Cost Classification by Behaviour 31 Variable Cost, Fixed Cost, Semi-variable or Semi-fixed Cost, Specific and Common Fixed Cost, Committed Fixed Cost, Discretionary Fixed Cost, Engineered Cost, Managed Cost, Capacity Cost, Programmed Cost, Importance of Behaviourwise Cost Classification, Diagrammatic Presentation of Cost Behaviour. Segregation of Semi-Variable Costs 34 Industrial Engineering Method, Account Inspection Method, Scatter Graph Method, High and Low Method, Simple Regression Analysis, Multiple Regression Analysis, Assumptions in Regression Analysis, Precautions in Using Regression Analysis Flexible Budgeting 41 Meaning and Importance, Disadvantages, Fixed Budget and Flexible Budget : Distinction. Coefficient of Correlation 44 Coefficient of Determination. Cost Codification 48 Objectives of Codification, Requirements of Efficient Coding System, Methods of Codification of Costs, Straight Numbering Method, Number Blocks, Memoric Method, Decimal Method, Field Method with Numerical Codes, Combination of Symbol and Numbers. Key Terms 50 Theoretical Examination Questions 52 Multiple Choice Questions 53 Practical Problems 55 Chapter 3 MATERIAL PROCUREMENT PROCEDURES Purchase and Stores Routine 59 Bill of Materials, Purchase Requisition, Purchase Order, Material Inspection Note, Goods Received Note (GRN), Stores Requisition Note, Material Transfer Note, Material Return Note, Bin Card, Stores Ledger. Pricing of Material Issues 65 Components in Direct Material Cost, Methods of Pricing Material Issues, Actual Cost Method, First-In First-Out (FIFO) Method, Last-In First-Out (LIFO) Method, Highest-In First-Out (HIFO) Method, Simple Average Cost Method, Weighted Average Cost Method, Periodic Average Cost Method, Standard Cost Method, Replacement Cost Method, Next-In First-Out (NIFO) Method, Base Stock Method, Factors Effecting Selection of Pricing Method, Suitability of Pricing Method in Rising Prices. Material Shortages 71 Reasons for Stock Discrepancies, Steps to Avoid Stock Discrepancies, Accounting Procedure for Material Shortages. Inventory Systems 75 Perpetual Inventory System, Continuous Stock Taking System, Periodic Stock Taking System, Two Bin System. Just in Time Inventory Management 77 Key Terms 77 Theoretical Examination Questions 78 Multiple Choice Questions 79 Practical Problems 79

3 Contents C-13 Chapter 4 INVENTORY CONTROL Importance of Inventory Control 86 Definition of Inventory, Features of Ideal Inventory Policy, Requirements of Stock Control. Inventory Control Ratios 88 Input-Output Ratio, Stock Turnover Ratio. Inventory Control Techniques 89 Economic Order Quantity, EOQ with Discounts, Fixation of Inventory Levels, VED Analysis, FNSD Analysis, ABC Analysis. Key Terms 97 Theoretical Examination Questions 98 Multiple Choice Questions 98 Practical Problems 100 Chapter 5 EMPLOYEE REMUNERATION SYSTEMS Items of Labour Cost 108 Direct Labour Cost, Indirect Labour Cost, Items of Labour Cost. Studies at Work Place and Job Appraisal 109 Time and Motion Study, Methods Study, Work Study, Activity Sampling, Work Simplification, Job Evaluation, Job Evaluation Methods, Job Ranking Method, Grade Description Method, Factor Comparison Method, Point Rating Method, Merit Rating. Time Rate Remuneration Plans 111 Flat Time Rate Plan, High Day Rate Plan, Plan with Different Time Rates, Halsey Premium Bonus Plan, Rowan Premium Bonus Plan, Comparison of Halsey and Rowan Plans, Halsey-Wair Plan, Accelerated Premium Bonus Plan, Emerson s Efficiency Bonus Plan, Barth Variable Bonus Plan, Bedaux Points Plan, Gnatt s Task Bonus Plan. Piece Rate Remuneration Plans 121 Straight Piece Rate Plan, Piece Rate with Guaranteed Time Rate Plan, Differential Piece Rate Plan, Taylor s Differential Piece Rate Plan, Merrick s Differential Piece Rate Plan. Group Bonus Plans 125 Applicability of Group Bonus Plans, Advantages and Disadvantages, Priestman s Production Bonus Plan, Cost Efficiency Bonus Plan, Rucker s Plan, Nunn-Bush Plan, Towne Gain Sharing Plan, Profit Sharing Plan, Co-partnership Plan. Requisites of Good Wage Incentive Plan 127 Key Terms 128 Theoretical Examination Questions 129 Multiple Choice Questions 129 Practical Problems 130 Chapter 6 EMPLOYEE COST ACCOUNTING Labour Cost Records 137 Clock Card, Daily or Weekly Time Sheet, Job Cards, Piece Work Cards. Accounting of Labour Cost 138 Payroll Accounting, Labour Cost Accounting, Time Keeping, Time Booking. Labour Turnover 140 Causes of Labour Turnover, Avoidable Causes, Unavoidable Causes, Measures to Reduce Labour Turnover, Measurement of Labour Turnover, Costs of Labour Turnover, Preventive Costs, Replacement Costs, Treatment of Cost of Labour Turnover.

4 C-14 Cost Accounting and Financial Management Idle Time 146 Causes of Idle Time, Causes of Normal Idle Time, Causes of Abnormal Idle Time, Accounting Treatment of Idle Time. Overtime Premium 148 Accounting Treatment, Control of Overtime Premium, Disadvantages of Overtime Working. Treatment of Special Labour Costs 149 Cost of Apprentice, Employee Welfare Costs, Fringe Benefits, Bonus, Gratuity, Incentive to Indirect Workers, Indirect Incentive to Direct Workers, Casual Worker and Out Worker. Key Terms 151 Theoretical Examination Questions 151 Multiple Choice Questions 152 Practical Problems 153 Chapter 7 OVERHEADS ACCOUNTING Accounting of Overheads 158 Definition of Overheads, Meaning of Chargeable Expenses, Steps in Accounting of Overheads, Classification and Codification of Overheads, Collection of Overheads. Cost Allocation 160 Criteria for Common Cost Allocation, Allocation and Apportionment of Overheads, Departmentalization, Allocation, Apportionment, Criteria for Apportionment of Overheads. Production Overhead 162 Reapportionment of Service Centre Costs 163 Direct Method, Step-down Method, Repeated Distribution Method, Simultaneous Equations Method. Absorption of Overheads 170 Methods of Overhead Absorption, Production Unit Method, Percentage of Direct Material Cost Method, Percentage of Direct Labour Cost Method, Percentage of Prime Cost Method, Direct Labour Hour Rate Method, Machine Hour Rate Method, Single & Departmental Overhead Absorption Rates, Predetermined Absorption Rates. Over and Under Absorption of Overheads 178 Reasons for Over or Under Recovery, Treatment of Under/Over Absorption of Overheads. Administration Overhead 180 Treatment of Administrative Overheads in Cost Accounting. Selling and Distribution Overheads 181 Selling Overhead, Distribution Overhead, Problems in Controlling S&D Overheads. Interest on Capital 184 Arguments in Favour of Inclusion, Arguments against Inclusion. Depreciation 185 Depreciation and Cashflow, Depreciation and Inflation, Methods of Providing Depreciation, Importance of Sound Depreciation Policy, Depreciation and Obsolescence : Distinction, Plant and Other Fixed Assets Registers, Using of Asset After Fully Depreciated. Treatment of Special Items of Overheads in Cost Accounts 188 Material Handling Expenses, Market Research Expenses, Subscriptions and Donations, After Sales Service Costs, Royalties and Patent Fees, Training Costs, Taxation, Financing Charges, Major Repairs to Equipment, Cost of Tools, Bad Debts, Notional Rent, Packing Expenses, Data Processing Cost, Stores Overhead, Erection and Dismantling of Plant and Machinery, Transport Cost, Insurance Cost.

5 Contents C-15 Research and Development Costs 191 Treatment of Research Cost, Treatment of Development Cost. Waste, Scrap, Spoilage and Defectives 192 Accounting and Control of Waste, Accounting and Control of Scrap, Accounting and Control of Spoilage, Accounting and Control of Defectives. Capacity Management 195 Levels of Activity, Idle Capacity Costs. Key Terms 196 Theoretical Examination Questions 198 Multiple Choice Questions 199 Practical Problems 200 Chapter 8 ACTIVITY BASED COSTING Inadequacies of Traditional Cost Systems 211 Meaning and Objectives of ABC 212 Definition and Meaning, Objectives of ABC Steps in ABC System 214 Different Categories of Cost Pools and its Cost Drivers, Levels of Activity in ABC Advantages and Limitations of ABC 221 Other Concepts in ABC 222 Activity Based Information and Decision Making, Activity Based Budgeting, Activity Based Management, Activity Based Accounting. Key Terms 223 Theoretical Examination Questions 224 Multiple Choice Questions 224 Practical Problems 225 Chapter 9 COST BOOK-KEEPING Non-Integrated Accounting 235 Inter-locking of Accounts, Principal Ledgers and Control Accounts. Integrated Accounting System 245 Benefits of Integrated Accounting System, Prerequisites for Integration of Accounts. Accounting Entries under both Methods 246 Key Terms 256 Theoretical Examination Questions 256 Practical Problems 257 Chapter 10 RECONCILIATION OF COST AND FINANCIAL ACCOUNTS Need for Reconciliation 267 Reasons for Disagreement Methods of Reconciliation 269 Memorandum Reconciliation Account, Reconciliation Statement. Key Terms 276 Theoretical Examination Questions 276 Practical Problems 276

6 C-16 Cost Accounting and Financial Management Chapter 11 OUTPUT COSTING, JOB COSTING AND BATCH COSTING Output Costing 281 Meaning of Output Costing, Ascertainment of Cost of Production and Profit, Production Account and Cost Sheet : Distinction. Job Costing 287 Definition and Meaning, Features, Procedures, Advantages. Batch Costing 290 Definition and Meaning, Economic Batch Production, Job Costing and Batch Costing : Distinction Multiple Costing 293 Key Terms 293 Theoretical Examination Questions 293 Multiple Choice Questions 293 Practical Problems 294 Chapter 12 CONTRACT COSTING Definition and Features 300 Definition of Contract Costing, Features of Contracts, Job Costing and Contract Costing : Distinction. Accounting Procedure 301 Accounting Treatment of Costs, Surveyor s Certificate and Retention Money, Work-in-Progress Costing of Running Contracts 302 Costing of Contracts Nearing Completion 304 Cost Plus Contracts 305 Principles Guiding Cost Plus Contracts, Bid Costing and Cost Plus Contract Costing, Fixed Price Contract with Escalation Clause. Key Terms 308 Theoretical Examination Questions 309 Multiple Choice Questions 309 Practical Problems 310 Chapter 13 SERVICE COSTING Meaning of Service Costing 319 Definition of Service Costing, Service Cost Unit, Application of Service Costing, Service Costing and Output Costing : Distinction. Forms of Service Costing 321 Transport Costing, Absolute and Commercial Ton-Kms., Hotel Costing, Canteen Costing, Power House Costing, Hospital Costing. Key Terms 332 Theoretical Examination Questions 332 Multiple Choice Questions 332 Practical Problems 334 Chapter 14 PROCESS COSTING Process Costing Methodology 343 Definition of Process Costing, Features, Job Costing and Process Costing : Distinction, Process Losses and Gains, Normal Loss, Abnormal Loss, Abnormal Gain, Value of Scrap.

7 Contents C-17 Valuation of Work-in-Progress 348 Equivalent Production, Valuation of WIP when only Closing WIP exists, Valuation of WIP when Opening and Closing WIP exists, FIFO Method, LIFO Method, Average Cost Method, Steps in Valuation of Equivalent Units. Operation Costing 356 Key Terms 357 Theoretical Examination Questions 357 Multiple Choice Questions 358 Practical Problems 359 Chapter 15 JOINT PRODUCTS AND BY-PRODUCTS Joint Products 371 Definition and Meaning of Joint Products, Co-products, Accounting for Joint Products, Physical Units Method, Market Value Method, Contribution Margin Method, Average Unit Cost Method, Survey Method, Standard Cost Method, Direct Allocation Method. By-Products 374 Definition and Meaning of By-Products, Scrap and By-Product, Waste, Accounting for By-Products, Cost Methods, Non- Cost or Sales Value Methods. Other Aspects of Joint and By-Products 376 Selection of Appropriate Method, Joint and By-Products : Distinction, Objectives for Allocation of Joint Costs. Key Terms 378 Theoretical Examination Questions 378 Multiple Choice Questions 378 Practical Problems 379 Chapter 16 UNIFORM COSTING AND INTERFIRM COMPARISONS Uniform Costing 388 Meaning and Definition, Requisites for Installation, Uniform Cost Manual, Benefits of Uniform Costing, Limitations of Uniform Costing. Interfirm Comparisons 392 Meaning, Prerequisites for Interfirm Comparisons, Problems in Interfirm Comparisons, Adequacy of Profit, Efficiency in Selling. Key Terms 394 Theoretical Examination Questions 394 Chapter 17 COST AUDIT AND MANAGEMENT AUDIT Cost Audit 396 Definition and Meaning, Objectives of Cost Audit, Important Legal Provisions as to Cost Audit, Cost Audit Report Rules 1996, Cost Audit and Financial Audit : Distinction, Cost Accounting Records. Management Audit 401 Definition and Meaning, Objective of Management Audit, Scope of Management Audit, Weaknesses Revealed by Management Audit. Efficiency and Propriety Audit 403 Efficiency Audit, Propriety Audit. Key Terms 404 Theoretical Examination Questions 404

8 C-18 Cost Accounting and Financial Management Chapter 18 MARGINAL COSTING Absorption Costing 406 Meaning of Absorption Costing, Growing Importance of Overheads, Criteria for Absorption of Overheads, Advantages and Limitations of Absorption Costing. Direct Costing 409 Marginal Costing 409 Marginal Cost, Marginal Costing, Contribution, Contribution and Profit : Distinction, Features of Marginal Costing, Arguments in Favour of Marginal Costing, Criticism Against Marginal Costing, Direct Costing and Absorption Costing : Distinction, Absorption Costing and Marginal Costing : Distinction, Absorption Costing and Marginal Costing : Impact on Profit. Practical Applications of Marginal Costing 417 Key or Limiting Factor Analysis, Profit Planning, Optimizing Product Mix, Contribution Analysis, Make or Buy Decisions, Discontinuance and Diversification of Product, Accept or Reject New Order and Subcontracting, Temporary Cessation or Close-down of Operations. Key Terms 422 Theoretical Examination Questions 423 Multiple Choice Questions 423 Practical Problems 424 Chapter 19 BREAK-EVEN AND COST-VOLUME-PROFIT ANALYSIS Break-even Analysis 439 Definition of Break-even Analysis, Steps in Construction of Break-even Chart, Formulae for Break-even Analysis, Assumptions and Limitations. Profit-Volume Ratio 442 How to improve P.V. Ratio?, Limitations. Margin of Safety 444 How to Improve Margin of Safety? Angle of Incidence 445 Relationship of BEP, Margin of Safety and Angle of Incidence, Impact of Selling Price, Fixed Cost and Variable Cost on BEP. Cost-Volume-Profit Analysis 446 Meaning of CVP Analysis, Procedure, Practical Applications, Assumptions, Profit-Volume Chart, CVP Analysis with Change in Selling Price, CVP Analysis in Multi-Product Situations. Key Terms 455 Theoretical Examination Questions 455 Multiple Choice Questions 455 Practical Problems 458 Chapter 20 STANDARD COSTING AND VARIANCE ANALYSIS Standard Costing 469 Definition and Meaning, Objectives of Standard Costing, Terminology on Standards, Types of Standards, Setting Standards, Standard Costing System During Inflation, Standard Costing and Activity Based Costing, Standard Cost Card, Responsibility for Setting Standards, Problems in Setting Standard Costs, Advantages on Standard Costing, Criticism on Standard Costing, Standard Costing and Budgetary Control, Standard Cost and Estimated Cost.

9 Contents C-19 Variance Analysis 477 Material Variances, Labour Variances, Variable Overhead Variances, Fixed Overhead Variances, Sales Variances, Sales Variances Based on Profit, Sales Variances Based on Turnover, Profit Variances. Revision of Standards 500 Revision Variance, Benefits and Problems of Variance Analysis. Interpretation of Variances 502 Causes of Variance, Reasons for Cost Variances, Interdependence between Variances. Key Terms 504 Theoretical Examination Questions 504 Multiple Choice Questions 504 Practical Problems 505 Part Two Chapter 21 Financial Management INTRODUCTION TO FINANCIAL MANAGEMENT Approaches to Financial Management 517 Traditional View, Modern View, Investment Decisions, Finance Decisions, Dividend Decisions, Interrelationship of Investment, Financing and Dividend Decisions, Liquidity and Profitability. Comparison with Accounting and Economics 523 Financial Management and Accounting, Financial Management and Economics, Financial Management - Science or Art. Importance of Financial Management in Business 524 Significance of Financial Management, Functions of Financial Controller, Finance Manager as a Facilitator, Organization Chart of Finance Function, Reasons for Centralizing Finance Function. Financial Objectives of Business Firm 527 Profit Maximization Objective, Wealth Maximization Objective, Value Maximization Objective, Other Maximization Objectives. Risk and Return in Financial Planning 531 Costing and Risk, Risk-Return Trade Off. Impact of Taxation and Inflation 532 Impact of Business Taxation, Personal Taxation, Corporate Taxation, Finance Manager Role as Tax Planner, Tax Shield, Tax Planning and Tax Avoidance, Impact of Inflation. Impact of Depreciation 535 Objectives of Depreciation Policy, Depreciation and Inflation, Depreciation and Capital Budgeting, Depreciation as a Source of Fund, Depreciation and Tax Liability. Techniques of Financial Management 536 Key Terms 537 Theoretical Examination Questions 538 Multiple Choice Questions 539 Chapter 22 TIME VALUE OF MONEY Calculation of Interest Rates and Discounting of Cashflows 540 Time Value of Money, Simple Interest, Compound Interest, Present Value, Annuity, Amortisation, Sinking Fund.

10 C-20 Cost Accounting and Financial Management Term Structure and Interest Rates 549 Interest Rates, Theories on Term Structure of Interest Rates, Expectations Theory, Liquidity Preference Theory, Market Segmentation Theory, Yield to Maturity, Factors Determining Yields, Yield of Stocks, Flat Yield, Redemption Yield. Key Terms 553 Theoretical Examination Questions 554 Multiple Choice Questions 554 Practical Problems 555 Chapter 23 RATIO ANALYSIS Liquidity Ratios 561 Current Ratio, Quick/Liquid/Acid Test Ratio, Absolute Liquid/Super Quick Ratio, Defensive-Interval Ratio. Leverage Ratios 562 Debt-Equity Ratio, Shareholders Equity Ratio, Long-term Debt to Shareholders Networth Ratio, Capital Gearing Ratio, Fixed Assets to Long-term Funds Ratio, Proprietary Ratio, Interest Cover, Debt Service Coverage Ratio (DSCR), Dividend Cover. Asset Management Ratios 565 Inventory Turnover Ratio, Inventory Ratio, Debtors Turnover Ratio, Debtors Collection Period, Bad Debts to Sales Ratio, Creditors Turnover Ratio, Creditors Payment Period, Fixed Assets Turnover Ratio, Total Assets Turnover Ratio, Working Capital Turnover Ratio, Sales to Capital Employed Ratio. Profitability Ratios 567 Gross Profit Margin, Net Profit Margin, Cash Profit Ratio, Return on Total Assets, Return on Shareholders Funds or Return on Net Worth, Return on Capital Employed (ROCE). Operating Ratios 570 Materials Cost Ratio, Labour Cost Ratio, Factory Overhead Ratio, Administrative Expenses Ratio, Selling and Distribution Expenses Ratio, Operating Ratio. Market Based Ratios 571 Earnings per Share (EPS), Cash Earnings Per Share, Dividend Payout Ratio, Dividend Yield, Book Value, Price Earning Ratio (P/E Ratio), Market Price to Book Value Ratio (P/BV Ratio). Du Pont Analysis 572 Other Aspects in Ratio Analysis 574 Importance of Ratio Analysis, Factors Affecting Efficacy of Ratios, Non-Financial Performance Measures Key Terms 577 Theoretical Examination Questions 578 Multiple Choice Questions 579 Practical Problems 581 Chapter 24 FUNDS FLOW AND ECONOMIC VALUE ADDED ANALYSIS Identification of Funds Flow 604 Definition of Funds Flow Statement, Meaning of Fund and Flow, Identification of Flow of Funds. Preparation of Funds Flow Statement 606 Sources and Application of Funds, Changes in Working Capital Position. Funds Flow Statement and Financial Statements 609 Funds Flow Statement vs. Balance Sheet, Funds Flow Statement vs. Income Statement, Benefits and Drawbacks of Funds Flow Analysis.

11 Contents C-21 Economic Value Added 613 Suggestions to Improve EVA, Steps in Implementing EVA, Superiority of EVA, Drawbacks of EVA. Market Value Added and Shareholders Value Analysis 616 Market Value Added, Shareholder Value Analysis. Key Terms 618 Theoretical Examination Questions 618 Multiple Choice Questions 618 Practical Problems 620 Chapter 25 CASH FLOW ANALYSIS AS-3 Revised Cash Flow Statement 639 Scope, Meaning of Certain Terms, Classification of Cash Flows, Cash Flows from Operating Activities, Cash Flows from Investing Activities, Cash Flows from Financing Activities, Foreign Currency Cash Flows, Extraordinary Items, Interest and Dividends, Taxes on Income, Investments in Subsidiaries, Associates and Joint Ventures, Acquisition and Disposal of Subsidiaries and Other Business Units, Non-Cash Transactions, Data Required in Preparation of Cash Flow Statement, Procedure in Preparation of Cash Flow Statement. Reporting of Cashflows From Operating Activities 643 Direct Method, Indirect Method. Other Aspects 645 Other Disclosure Requirements, Uses and Limitations of Cash Flow Statement, Funds Flow Statement vs. Cash Flow Statement, Cash Flow Statement vs. Cash Budget. Key Terms 648 Theoretical Examination Questions 648 Multiple Choice Questions 648 Practical Problems 650 Chapter 26 COST OF CAPITAL AND WACC Cost of Equity Capital (K e ) 672 Dividend Yield Method, Dividend Growth Model, Price Earning Method, Capital Asset Pricing Model. Cost of Retained Earnings (K r ) 676 Opportunity Cost Approach, Rights Offer Approach. Cost of Preferred Capital (K p ) 678 Cost of Irredeemable Preference Shares, Cost of Redeemable Preference Shares. Cost of Debt (K d ) 679 Cost of Perpetual Debt, Cost of Redeemable Debt, Cost of Deep Discount Bonds or ZCBs, Cost of Convertible Debentures, Cost of Floating Debt. Weighted Average Cost of Capital 683 Simple WACC, Market Value of Funds and WACC, WACC and Tax Shields. Opportunity and Marginal Cost of Capital 685 Opportunity Cost of Capital, Opportunity Cost of Equity Funds, Opportunity Cost of Debt Funds, Marginal Cost of Capital, Investment Appraisal and WACC, Marginal Cost of Capital and WACC. Key Terms 688 Multiple Choice Questions 689 Practical Problems 690

12 C-22 Cost Accounting and Financial Management Chapter 27 CAPITAL STRUCTURE AND VALUE OF FIRM Capital Structure : Meaning and Definition 704 Optimum Capital Structure, Factors Determining Capital Structure. Theories on Optimum Capital Structure 708 Debt-Equity Ratio Analysis, EBIT-EPS Analysis, Financial Break-even, Financial Indifference Point, Financial and NEDC Risks Trade-Off, Financial Risk, NEDC Risks, Net Income Approach, Net Operating Income Approach, Weighted Average Cost of Capital Approach (Traditional View), Modigliani and Miller Theory (Modern View), Assumptions, No Taxation, Proposition I, Proposition II, Proposition III, Arbitrage, Criticism, Corporate Taxation, Personal Taxation, Static Trade-Off Theory, Financial Distress and Agency Costs, Pecking Order Theory, Modified Pecking Order Theory. Key Terms 730 Theoretical Examination Questions 731 Multiple Choice Questions 731 Practical Problems 733 Chapter 28 ANALYSIS OF OPERATING AND FINANCIAL LEVERAGES Activity Leverage 743 Operating Leverage, Financial Leverage, Impact of Financial Leverage on ROE and ROA, Total Leverage. Structural Leverage 749 Debt-Equity Ratio, Total Debt to Equity Ratio, Debt to Networth Ratio. Interest Cover and Income Gearing 750 Impact of Debt and Equity in Capital Structure 752 Distinction Between Debt and Equity, Trading on Equity. Gearing in Relation to Financial Risk 754 Gearing and Cost of Capital, Gearing and EPS. Key Terms 756 Theoretical Examination Questions 757 Multiple Choice Questions 757 Practical Problems 758 Chapter 29 PROJECT PLANNING AND APPRAISAL Capital Investment Process and Kinds of Projects 772 Meaning of Capital Budgeting, Capital Investment Process, Kinds of Projects, Classification of Projects, Forward and Backward Integration, Rationale for Diversification, New Concepts in Financing and Execution of Projects. Detailed Project Report and its Contents 776 Information in Project Report Project Appraisal by Financial Institutions 779 Financial Feasibility, Technical Competence, Economic Feasibility, Managerial Competence, Project Appraisal under Inflationary Conditions, Restrictive Covenants in Long-term Loan Agreement. Cost of Project and Means of Finance 784 Cost of Project, Means of Finance, Margin Money, Promoters Contribution, Social Cost Benefit Analysis, Indicators of Social Desirability of a Project. Key Terms 788 Theoretical Examination Questions 790 Multiple Choice Questions 790

13 Contents C-23 Chapter 30 MEDIUM AND LONG TERM FINANCE Equity Market Instruments and Public Issues 792 Equity Shares, Preference Shares, Deferred/Founders Shares, Sweat Equity Shares, Kinds of Capital Issues, Green Shoe Option, Disadvantages of Floatation, Rights Issues, Book Building, Benefits of Book Building, Limitations of Book Building. Debt Instruments 798 Debentures, Debentures and Share Capital : Distinction, Convertible Debentures, Deep Discount Bond, Zero Coupon Bonds, Equity Warrants with NCDs, Secured Premium Notes, Zero Coupon Convertible Note, Debt for Equity Swap, Junk Bonds, Development Financial Institutions. Debt Securitization 802 Meaning of Securitization, Securitization Process. Listing of Securities 803 Meaning of Listing, Advantages of Listing. Venture Capital and Bridge Loans 804 Venture Capital, Bridge Loans. International Capital Market Instruments 805 Global Depository Receipts, Foreign Currency Convertible Bonds, American Depository Receipts, GDRs and ADRs : Comparison, External Commercial Borrowing. Key Terms 808 Theoretical Examination Questions 812 Multiple Choice Questions 812 Chapter 31 CAPITAL BUDGETING TECHNIQUES Investment Appraisal Techniques 814 Payback Period Method, Accounting Rate of Return Method, Net Present Value Method, Adjusted Present Value, Internal Rate of Return Method, Relative Ranking of Projects : IRR vs. NPV, Multiple Internal Rates of Return, Modified Internal Rate of Return (MIRR), Profitability Index Method, Discounted Payback Period Method, Terminal Value Method, Assumptions in Use of DCF Techniques. Capital Rationing 826 Factors Leading to Capital Rationing, Situations of Capital Rationing. Impact of Inflation in Capital Budgeting 830 Synchronized and Differential Inflation, Money Cash Flows and Real Cash Flows. Impact of Investment Incentives in Capital Budgeting 832 Non-Financial Factors in Capital Investment Decisions 832 Key Terms 833 Theoretical Examination Questions 835 Multiple Choice Questions 835 Practical Problems 836 Chapter 32 LEASE OR BUY DECISIONS Meaning and Types of Leases 860 Definition and Meaning of Lease, Types of Leases, Financial Lease, Operating Lease, Sale and Lease Back, Leveraged Lease, Sales Aid Leasing, Structure of Lease Rentals.

14 C-24 Cost Accounting and Financial Management Effects of Leasing in Financial Statements and Taxation 863 Effects of Leasing in Financial Statements, Tax Effects of Leasing, Advantages and Disadvantages of Leasing. Evaluation of Lease or Buy Decision 866 Present Value Method, Cost of Capital Method, Bower-Herringer-Williamson Method. Hire Purchase 867 Distinction between Hire Purchase and Leasing. Key Terms 868 Theoretical Examination Questions 869 Multiple Choice Questions 869 Practical Problems 870 Chapter 33 WORKING CAPITAL PLANNING Meaning and Objectives of Working Capital 882 Meaning of Working Capital, Components of Working Capital, Gross and Net Working Capital, Permanent and Temporary Working Capital, Positive and Negative Working Capital, Objectives of Working Capital Management. Operating Cycle Concept 887 Reasons for Prolonged Operating Cycle, How to Reduce Operating Cycle? Working Capital Requirement 891 Factors Determining Working Capital Requirement, Working Capital Requirement in Seasonal Industries, Working Capital Requirement During Period of Inflation, Working Capital Requirement in Industries with Shift Working. Effects of Overtrading, Under Capitalization on Working Capital 895 Impact of Overtrading on Working Capital, Impact of Under Capitalization on Working Capital, Impact of Over Capitalization on Working Capital, Poor Working Capital Management Symptoms. Working Capital Management Strategies 896 Conservative Approach, Aggressive Approach, Matching Approach, Zero Working Capital Approach, Working Capital Policies. Estimation of Working Capital 901 Working Capital Leverage Methods of Working Capital Estimation 902 Percentage of Sales Method, Regression Analysis Method, Operating Cycle Method, Steps in Determination of Working Capital, Approaches to Working Capital Estimation. Key Terms 910 Theoretical Examination Questions 911 Multiple Choice Questions 912 Practical Problems 912 Chapter 34 WORKING CAPITAL FINANCING Trade Credit and Bills Discounting 934 Terms in Trade Credit, Cost of Taking Credit, Management of Trade Credit, Bills Discounting. Factoring of Book Debts 937 Meaning of Factoring, Factoring Mechanism, Functions of Factor, Types of Factoring, Benefits of Factoring, Cost-Benefit Analysis of Factoring, Factoring and Financial Statements, Factoring vs. Bills Discounting, Factoring vs. Securitization.

15 Contents C-25 Working Capital Finance from Banks 945 Forms of Bank Credit, Maximum Permissible Bank Finance, Approaches to Bank Financing, Bank Guarantees. Other Sources of Working Capital Finance 949 Security for Short-term Financing 950 Pledge of Accounts Receivables, Charge on Inventory. Key Terms 951 Theoretical Examination Questions 952 Multiple Choice Questions 952 Practical Problems 952 Chapter 35 MANAGEMENT OF CASH AND MARKETABLE SECURITIES Cash Assets and Liquidity Management 962 Meaning of Cash Assets Management, Classification of Cashflows, Motives for Holding Cash, Cost-Benefit Analysis of Cash Management, Management of Liquidity, Reasons of Cash Surplus, Reasons for Cashflow Problems, Effects of Cash Deficits, Methods of Improving Liquidity. Cash Management Models 966 Baumol s EOQ Model of Cash Management, Miller-Orr Cash Management Model. Management of Cash Balance 971 Setting Cash Balance, Cash Cycle, Zero Balance Account, Money Market Banking, Petty Cash Imprest System, Principles of Investment in Marketable Securities. Sources and Types of Float 973 Meaning and Sources of Float, Types of Float, Management of Float, Accelerating Cash Collection, Lock Box System, Concentration Banking, Electronic Fund Transfer, Delaying Payments, Electronic Cash Management System, Virtual Banking. Treasury Management 978 Meaning of Treasury Management, Role and Functions of Treasurer, Advantages of Centralized Treasury Management, Advantages of Decentralized Treasury Management, Cash Management vs. Treasury Management. Cash Budgeting 981 Points to be Considered in Cash Budgeting, Methods of Cash Budgeting, Cash Budget vs. Profit and Loss Account, Cash Budget vs. Cash Flow Statement. Key Terms 984 Theoretical Examination Questions 985 Multiple Choice Questions 986 Practical Problems 986 Chapter 36 RECEIVABLES MANAGEMENT Trade Debt 998 Costs of Granting Credit, Costs of Denying Credit. Credit Terms and Cash Discount 1000 Payment Terms, Steps in Evaluation of Increase in Credit Term, Economics of Cash Discount, Steps in Evaluation of Increase in Cash Discount. Monitoring of Accounts Receivables 1003 Ratio Analysis for Control of Receivables, Ageing Schedule, ABC Analysis of Receivables, Discriminate Analysis and Credit Scoring, Credit Utilization Report, Cost-Benefit Analysis of Collection Expenses, Measuring Day s Sales in Terms of Debtors.

16 C-26 Cost Accounting and Financial Management Management of Trade Debts 1007 Credit Control Department, Establish Credit Policy, Establish Credit Standards, Assess Credit Risk, Establish Effective Administration of Debtors, Assess Customer Creditworthiness, Establish Policy on Bad Debts. Decision Tree Analysis in Credit Granting 1012 Key Terms 1015 Theoretical Examination Questions 1016 Multiple Choice Questions 1016 Practical Problems 1017 Latest Examination Problems in CA IPCC 1029 Mathematical Tables 1119 Syllabus of CA IPCC 1123

17 Problems and Solutions Chapter Heads About the author C-5 Page Nos. Preface to seventh edition C-7 Part One Cost Accounting 1 Introduction to Cost Accounting Cost : Classification and Behaviour Material Procurement Procedures Inventory Control Employee Remuneration Systems Employee Cost Accounting Overheads Accounting Activity Based Costing Cost Book-keeping and Reconciliation of Cost & Financial Accounts Output Costing, Job Costing and Batch Costing Contract Costing Service Costing Process Costing Joint Products and By-products Marginal Costing C-9

18 Page Nos. 16 Break-even and Cost-Volume-Profit Analysis Standard Costing and Variance Analysis Part Two Financial Management 18 Time Value of Money Ratio Analysis Funds Flow Analysis Cash Flow Analysis Cost of Capital and WACC Capital Structure and Value of Firm Operating and Financial Leverage Capital Budgeting Techniques Lease or Buy Decisions Working Capital Planning Working Capital Financing Cash Assets and Treasury Management Receivables Management Latest Examination Problems in CA IPCC Mathematical Tables Syllabus of CA IPCC C-10