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~ by Ratnesh A DesaiFor Jai Hind E-Cell

Calculate how much your product/service will cost you?

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Introduction...My Company – SABKAVIKAS

It stands for Slums And Backward Area Villages Knowledge Association

What it does? It provides training & consultancy on:

¡ English Language

¡ Memory & Study Techniques

¡ Entrepreneurship

¡ Health & Hygiene

¡ Safety and Security

¡ Mind, Meditation & Leadership

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Introduction (contd)...Type of Venture – Social Entrepreneurship

Target Audience – Anyone deprived of knowledge

USP – Cost Plus Hundred Model

Minimum Fee – One Hundred/Person

Median Fee – Six Hundred and Fifty/Person

Maximum Fee – One Thousand/Person

Our Catchphrase – “Kindly Experience and Donate”

Current Project– “Make Indians to Make in India”

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Agenda for Workshop...Why is Costing Important?

Measuring Value

ROI – Return of Investment

Life Cycle Costs

Fixed Costs & Variable Costs

Computation of Costs

Break-even Point and Viability Test

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Why Is Costing So Important?

Helps make better decisions.

Provides key information for planning & controlling.

Helps determine costs & prices for goods or services.

Helps reduce & manage costs.

Helps measure & improve performance.

Quick Startup Process

Standardization

Tighter Controls

HigherProfit

MarginCost

Savings

Improved Reporting

More Flexibility&

Focus on Core

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Cash

Flow

Why Is Costing So Important?

It helps us prepare the three principal financial statements required from all firms. These are:

Balance Sheet

Income Statement or Profit & Loss Account (P&L A/c)

Statement of Cash Flow

Financial Statements

Balance Sheet

Profit

& Loss

A/c

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It is a statement of assets and liabilities of a company.

Assets are things of value that a company owns.

Liabilities are obligations of a company to pay back.

Balance Sheet

Liabilities Assets

Owner’s EquityCapital 5,00,000Balance from P&L A/c 6,64,800(retained earnings/Net Profit)

Creditors 2,50,000

Loans 5,00,000Interests on Loans 50,000Taxes 5,200

Land/Building 10,00,000Machineries/Equipments 6,50,000Stationaries 20,000Goodwill 1,00,000Debtors 20,000Investments 30,000Cash-in-hand/Bank 45,000Stock of Goods 5,000

Total 18,70,000 Total 18,70,000

Balance Sheet as on 31st March 2013ABC Company

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It is a statement of revenues and expenses of a company.

Revenues are inflow or money received by a company.

Expenses are outflow or money spent by a company.

P&L shows “profit-related” inflow & outflow.

Profit &

Loss

Revenue Expenses

Sales 11,80,000Payments Received 10,000Balance(Net Profit) 6,64,800

Indirect Income: Sale of Old Assets 1,40,000

Dividend on Investments 3,000Interest on loan given 2,200

Purchase (Raw Materials) 3,30,000Wages/Salaries 5,20,000Rent 30,000Advertising 12,000Accounting/Legal 5,000Depreciation 3,000Insurance 80,000 Cost of Production 10,00,000

Total 20,00,000 Total 20,00,000

P&L statement as on 31st March 2013ABC Company

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Cash

Flow

StartupMonth

Month1

Month2

Month3

Starting Cash 20,000 28,000 (3,000) 15,000

In – Cash Sales – New Loans – New Investment – Payments Received

TOTAL IN

3,50,0002,50,000

5,0004,000

6,33,000

2,75,000 - -7,0003,500

3,13,500

1,78,00050,0002,000

--2,70,000

3,77,0001,00,000

3,0002,500

4,95,000

Out – Bill Payments – Repay Loans – Purchase Assets

TOTAL OUT

1,50,000 50,000

4,20,0006,20,000

90,000

1,18,0001,00,0003,08,500

1,32,0001,27,000

--2,59,000

1,00,0002,05,000 77,0003,82,000

• Cash Balance* 13,000 8,000 11,000 13,000

* (“Starting Cash” plus “In” minus “Out”)

Cash Flow statement as on 31st March 2013ABC Company

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Cash

Flow

Usually inflows and outflows refer to sales revenue and cost of production.

But...

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Cash

Flow

But... cash flow also includes other inflows that generate any revenue and other outflows that incur any cost.

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Cash

Flow

Cash Flow shows “profit-related” as well as “non-profit-related” inflow & outflow.

A cash flow statement functions in conjunction with both the profit & loss statement (performance dimension) and the balance sheet (financial position).

The time of cash flows into and out of projects are used as inputs to measure value and determine rate-of-return and break-even point.

Profit Related P&L statement

Profit Related Cash flow Non-Profit Related

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“If you can measure it, you can improve it.”

Business valuation means what a business is worth. There are three fundamental approaches for valuation:

1.Asset Approach – Net Worth = Total Assets – Total Liabilities2.Market Approach – value of shares in stock market & assets3.Income Approach – discounting future cash flow projections

Measuring

Value

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“ROI helps estimate the attractiveness of

an investment opportunity.”

ROI

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“ROI helps estimate the attractiveness of

an investment opportunity.”

ROI

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Types of Costs...

Other Costs

Finance Costs

OperatingCosts

Capital Goods

LegalCompliance

Initial Costs

Development Costs

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Initial Costs...Capital Goods Legal Compliance

A high value, durable asset of life ≥ 3 year

•Computers (Desktops/Laptops)•Projector•Furniture•White Board•Software

•Machinery•Equipments•Tools•Buildings•Trucks

Any legal document required by law to operate a business

and any tax/duties to be paid as per the law

•Trademark (Rs. 4,000)•Domain + Hosting (Rs. 3000)•DIN (Rs. 1000)•Digital Signature (Rs. 6000)•Stamp Duty (Rs. 1300)•Company Forms (Rs. 2800)•Public Notice (Rs.10,000)•Company PAN (Rs. 105)•Professional Fees (Rs.15,000)•Taxes (Rs. 8,000)

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Operating Costs...

Variable Costs Fixed Costs

A variable cost changes in relation to variations in

an activity.

•Conveyance•Transportation•Stationaries

•Production Supplies•Labour Rate•Advertising•Income Tax•Custom/Excise Duties

A fixed cost does not change over short term.

•Rent•Salaries•Insurance•Interest Expense

•Depreciation•Property Tax

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Development Costs...

Upgrading Costs Expansion Costs

New Capital Goods purchased for existing

line of activities in same location

•Computers•Software

•Equipments•Machineries•Tools

New Capital Goods purchased for new line of

activities in same or different location

•Buildings•Land•Vehicles•Machineries etc.

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Finance Costs...Opportunity Costs Cost of Credit

The difference in return between a chosen investment and one that is

necessarily passed up.

•The opportunity cost of going to college is the money you would have earned if you worked instead.

•On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.

Cost of credit is the amount of interest charged apart from the

borrowed money one has to return.

•A higher interest rate means higher cost of credit.

•A lower interest rate means lower cost of credit.

•If you don't pay off your credit card balance every month, the interest is compounded which means you end up paying more than expected.

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Other Costs...

Contingency Costs Miscellaneous Costs

Contingent costs might or might not be incurred at some point in the future.

•Emergency•Accidents

Any other cost incurred apart from the “main” or “regular” cost of startup,

operations and financing.

• External Faculty•Cleaners hired

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Let’s Calculate...

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Let’s Calculate...

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Let’s Calculate...

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Let’s Calculate...

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Let’s Calculate...

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Let’s Calculate...

Costs

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Costing – all the smart kids are doing it...

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Thank You!