Financial Management Concepts

Cost Audit – Definitions, Objectives, Advantages and Limitations

Cost audit is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilization of material or labor or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting.

As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”

The ICWAI defines cost audit as “system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries”

From above definition of cost audit, it is clear that cost audit is a systematic examination of cost accounts to verify correctness of cost accounting records.… Read the rest

Abey Francis

Financial Planning – Meaning, Objectives and Process

The financial planning refers to the projection of future financial course of action to be carried for efficient execution of operating plans and effective accomplishment of corporate objective. Financial planning begins with the preparation of strategic plans that in turn guides the formulation of operating plans and budgets. Financial planning provides road map for guiding, coordinating and controlling firm’s financial action in order to achieve the objectives. 

Therefore, a planning that spells out future course of action, budgets and capital expenditures required for execution of operating plans is known as financial planning.

Objectives of the Financial Planning

Most corporate organizations spend significant time and labor in preparing the financial plan as it enables a firm:

  • To identify significant actions to be taken in various aspects of firm’s finance functions.
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Effects of Price Level Changes on ROI and RI

The price level changes are a common phenomenon and will introduce entirely new distortions into ROI and RI measures. The principal distortions occur because revenues and cash costs are measured at current prices, while the investment cost and depreciation charge are measured at historical prices used to acquire the assets. Depreciation based on historical cost underestimates what the depreciation charge would be based on the current cost. This results in overstating the firm’s income. At the same time, the firm’s investment is understated, because most of firm’s   assets   were   acquired   in precious years at lower price levels than those currently prevailing.  … Read the rest

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Economic Value Added (EVA) Vs. Return on Investment (ROI)

Most of the companies employing investment centers evaluate business units on the basis of  Return on Investment (ROI) rather than Economic Value Added (EVA). There are three apparent benefits of an ROI measure.

  1. First, it is, a comprehensive measure in that anything that affects financial statements is reflected in this ratio.
  2. Second,  Return on Investment (ROI) is simple to calculate, easy to understand, and meaningful in an absolute sense. For example, an ROI of less than 5 percent is considered low on an absolute scale, and an ROI of over 25 percent is considered high.
  3. Finally, it is a common denominator that may be applied to any organizational unit responsible for profitability, regardless of size or type of business.
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Investment Center Performance Evaluation

Investment centers are decentralized divisions or sub-units for which   the manager has maximum discretion in determining not only short-term operating decision on product mix, pricing and production methods, but also level and type of investment. An investment center extends the profit center concept in that the measured profit is related to the center investment. It may be described as a special form of profit center since a profitability measure is being developed for the center. The concept relating profits to assets employed has an intuitive appeal for it for indicates whether the return for the capital invested in the division and it is important that an evaluation be made the overall company are earning on in elaborate systems for authorizing capital investment center performance can be the aggregation of past and present capital projects each project individually.… Read the rest

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Fixed and Flexible Budget

According to the flexibility factor, budgets are classified into:

Fixed Budget

This is budget in which targets are rigidly fixed. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the budget are used to measure actual performance. Many things may happen during this intervening period and they may make the figures go widely out of line with the actual figures. Though it is true that a fixed, or static budget as it is sometimes called, can be revised whenever the necessity arises, it smacks of rigidity and artificiality so far as control over costs and expenses are concerned.… Read the rest

Abey Francis