Financial management

Financial Management

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24th July , 2008 1 (i ) Incremental Cash Flow : when a company invests in a new project additional cash flows are expected .Such cash flows are usually referred to as incremental cash flows . For example , if Toyota invested in its supply chain project , it expected more profit from it which turns into more cash (Norton Melicher , 2008 (ii ) Sunk Cost : some costs incurred by the companies are irreversible (Goodman Downes , 2006 . Such incurred costs are referred

to as sunk costs (iii ) Opportunity cost : it is the cost of the alternative forgone (Goodman Downes , 2006 . For example a business might invest in one project (A ) and forgo the other project (B . All the benefits (tangible and intangible ) and profits that project B would have given becomes the opportunity cost for the business (iv )Externality : it is basically the affect faced by a third party usually due to an economic decision (Norton Melicher , 2008 . The third party is not directly involved in the decision . For example customers might face the extra cost or benefit from a price increased or decrease respectively of some commodity item

2 . Marginal cost is best suited for a decision where your fixed costs might affect your decision (Bulloch , 1968 . Sometimes fixed costs (which usually do not change per unit until the production is within a range affect your decision and thus it is a requirement that fixed costs are separately shown in the profit and loss account . Marginal costing approach allows fixed costs to be shown separately

Marginal costing approach can also be shown when it is easy to show or write-off the fixed costs (Bulloch , 1968 . Sometimes fixed costs are not easily predictable or measurable . In that case absorption costing approach can be used

Marginal cost is usually referred to the cost incurred on an extra unit produced . So stocks that have been produced are usually valued at marginal cost . But in absorption costing approach the is usually valued (Albright Ingram , 2007 . For example , in a cell phone manufacturing company , marginal costing will account for the cost incurred in the production of one piece but absorption costing might consider the end of a month

There maybe several reason when the absorption costing method and marginal costing will show a same profit when there is valuation of stock being done . Usually when you have no opening and closing stocks or when there are same opening and closing stock with the fixed cost of almost the same figure then you might expect the absorption and marginal costing approaches to produce the same profit in your profit and loss accounts

If a company faces a higher closing balance of stock then usually marginal costing results in a lower profit since more of the fixed costs are passed forward to the next year (Albright Ingram , 2007 . On the other hand , with higher opening balance the marginal costing produces a higher balance since the opening stock...