CHAPTER - I 1.1 INTRODUCTION ABOUT THE STUDY ON BUDGET AND BUDGETARY CONTROL INTRODUCTION A budget is the pre-determined the future events. The word budget is derived from a French term “Bougetfe” which denoted a Leather pouch in which finds are appropriates for meeting anticipates Expanses. The same meaning applies to the business management. A budget is a numerical statement expressing the plans. Polices and goals of the enterprise for a definite period in the future. It is a plan laying down the target to be achieved with in specified period. It is a final and approved share of a forecast when forecasts are approved by the management as a tentative plan for the future they become budget. DEFINITION “Budget us an estimate of future needs arranged according to an orderly basis, covering, some or 1
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CHAPTER - I
1.1 INTRODUCTION ABOUT THE STUDY ON BUDGET AND BUDGETARY CONTROL
INTRODUCTION
A budget is the pre-determined the future events. The word budget is derived
from a French term “Bougetfe” which denoted a Leather pouch in which finds are
appropriates for meeting anticipates Expanses.
The same meaning applies to the business management. A budget is a
numerical statement expressing the plans. Polices and goals of the enterprise for a
definite period in the future. It is a plan laying down the target to be achieved with in
specified period. It is a final and approved share of a forecast when forecasts are
approved by the management as a tentative plan for the future they become budget.
DEFINITION
“Budget us an estimate of future needs arranged according to an orderly basis,
covering, some or all of the activities of an enterprise for definite period of time”
- George R.Terry.
“A Budget is a comprehensive and Co-iodinated plan, Expressed in financial
terms, for the Operations and resources of an enterprise for some specific period in the
future”
A Budget is a predetermined statement of management policy during a given
period of which provides a standard for comparison with the results actually archived.
- Brown and Howard
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BASIC ELEMENTS OF A BUDGET
Budget is a comprehensive plan of what the enter pries endeavors to achieve.
It is a statement in terms or quantity or both.
It is a prepared for a definite future period.
It is prepared period to the defined period.
It Provides yardsticks and measures for the purpose of comparison
It is prepared in Advance and refers to the future course of action.
PURPOSE OF A BUDGET
It directs the attention of all concerned to the afffainment of a common goal
It leads to the disclosure of organizational weakness. The budgets are
Compare with actual performance, and variances. It any investigations this
Step helps in taking corrective and remedial measures
It aims at careful control over the performance and cost of every function.
It co ordinates efforts of all department in order to achieve an integrated order to
Achieve an integrated goal. Budget grows from bottom and are controlled from
Top level
CHARACTERISTICS
ESTABLISHMENT
Budget is prepared for each department and then the plans and objectives are
presented before the management.
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CONTINUOUS COMPARISON
The essential feature of budgetary control is conduct continuous comparison of
Actual performance with budgeted figure, revealing the variations.
Revision budgets are revised. It necessary according to changed conditions.
ESSENTIALS OF A SUCCESSFUL BUDGETARY CONTROL
The budgetary control system should have full support of top management
There should be well – planned organizational set – up, with responsibility and
Authority clearly demarked.
The accounting system should provide accurate and timely information.
Budgets have no meaning unless they lead to control action as a consequence of
Feedback provided.
Staff should be strongly and properly motivated towards the system.
The budget should lay down the target, which are realistic and attainable.
Budget should actually aim as a co-coordinating device rather than control device.
CLASSIFICATION OF BUDGETS
BUDGET
On the Basis of time On the basis of flexibility On the basis of function Long term * Fixed * Sales Short term * Flexible * Production Current * Material
* Labor* Overheads
* plant utilization
* Cash
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* Capital* Expenditure
1.2 INDUSTRY PROFILE A mainstream cooperative comprises a legal entity owned and
democratically controlled by its members, with no passive shareholders, unless they hold
non-voting shares. It thus combines the equal control characteristic of many partnerships
with the legal personality conferred on corporations.
In the United States most cooperatives are organized as limited liability
companies (LLCs) but other legal entities may also be used. Co operative may or may not
pay dividends. For Co-operatives failing in the latter category, any surplus may be
returned to members by way of a rebate or bonus on their activity width the cooperative
or a dividend on their shareholding in the cooperative.
In the United Kingdom the traditional corporate form taken by
cooperatives is the bonafide co-operative’ under the Industrial and Provident Societies
Acts. Since the 1980’s,however, many have incorporated under the Companies acts,
limited either by shares or ‘common ownership’ and have a zero or nominal share capital,
along with a clause stipulating altruistic dissolution. This means that the cooperative
cannot be wound up and its assets distributed for personal profit (see: asset stripping).
The facility to legally lock a cooperative’s assets in this way was brought into force in
2004.
In the European Union, the European Co-operative Statute provides a corporate
form for cooperatives with individual or corporate members in at least two of the EU
member’s states.
In the European Union and in large regions of America, cooperatives, with
associations, foundations and mutual funds, are considered parts of the Social economy
or Third Sector.
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A Co-operative (also cooperative or co-operative or co-op) has been defined in
the international Co-operative Alliance (ICA) Statement on the Co-operative Identity as
“an autonomous association of persons united voluntarily to meet their common
economic, social, and cultural needs and aspirations through a jointly-owned and
Democratically-controlled enterprise.” They “are based on the values of self-help, self-
responsibility, democracy, equality, equity and solidarity.
In the tradition of their founders, co-operative members believe in the
ethical values of honesty, openness, social responsibility and caring for others. Such
enterprises are the focus of study in the field of Co-operative.
CO-OPERATIVE IDENTITY
Main article: Statement on the Co-operative Identity
Such legal entities have a range of unique social characteristics.
Membership is open, meaning that anyone who satisfies certain non-discriminatory
conditions may join, Unlike a union, in some jurisdictions a cooperative may assign
different numbers of votes to different members. However most cooperatives are
governed on a strict “one member, one vote”basis, to avoid the concentration of control
in an elite. Economic benefits are distributed proportionally according to each member’s
level of economic interest in the cooperative, for instance by a dividend on sales or
purchases. Co-operative may be generally classified as either consumer or producer
cooperatives, depending largely on the mutual interest (see mutual organizations) that
there membership shares.
POPULARITY AND PHILOSOPHY
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Worldwide, some 800 million people are members of cooperatives, and it is
estimated that cooperatives employ some 100 million people.
Co-operatives have been presented as an ideal organizational form for proponents of a
number of socio-political philosophies, including Co-operative Individualism and co-
operative Federalism; such literature often cities the achievement of a Co-operative
Commonwealth as an ultimate objective. The cooperative movement often has links and
association with Green politics or Socialist Politics, with socially responsible investing,
and with the social enterprise movement.
Alternatively, the term may be used loosely to signify its members ‘ideology.
HISTORY OF THE CO-OPERATIVE MOVEMENT
Main article: History of the co-operative movement
Robert Owen (1771-1858) fathered the cooperative movement. A Welshmen
who made his fortune in the cotton trade, Owen believed in putting his workers in a good
environment with access to education for themselves and their children.
These ideas were put into effect successfully in the cotton mills of New Lanark,
Scotland. It was here that the first co-operative store was opened. Spurred on by the
success of this, he had the idea of forming “Villages of co-operation” where workers
would drag themselves out of poverty by growing their own food, making their own
clothes and ultimately becoming self-governing. He tried to form such communities in
Orbiston in Scotland and in New Harmony, Indiana in the United States of America, but
both communities failed.
Although Owen inspired the co-operative movement, other-such as Dr William
King (1786 – 1865) took his ideas and made them more workable and practical. Kint
believed in starting small, and relized that the working classes would need to set up co-
operatives for themselves, so he saw his role as one of instruction. He founded a monthly
periodical called the cooperator, the first edition of which appeared on May 1,1828. This
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gave a mixture of co-operative principles. King advised people not to cut themselves off
from society, but rather to form a society within a society, and to start which a shop
because, “We must go to a shop every day to buy food and necessaries-why should we
not go to our own shop?” He proposed sensible rules, such as having a weekly account
Audit, having 3 trustees, and not having meetings in pubs (to avoid the temptation of
drinking profits). A few poor weavers joined together to form the Rockdale Equitable
Pioneers Society at the end of 1834. The Rockdale pioneers, as they became known, set
out the Rockdale Principles in 1844, which have highly influential through the
cooperative movement.
Co-operative communities are now widespred, with one of the largest and most
successful examples being at Modaragon in the Basque country of Spain (See link
technically not cooperatives, were also successful in Yugoslavia under Tito where
worker’s councils gained a significant role in the management.
In many European countries, cooperative institutions have a predominant
market share in the retail banking and insurance businesses. An annual general of retail
co-operative in England, 2005.
In the UK, Co-operatives formed the Co-operative party in the early 20 th
century to represent members of co-ops in parliament who were elected at the 2005
General Election as Layout and Co-operative’ MPs. UK Co-operatives retain a significant
market share in food retail, insurance, banking, funeral services, and the travel industry in
many parts of the country.
TYPES OF CO-OPERATIVES
Housing Co-operative
Main article: Housing Co-operative
A housing Co-operative is a legal mechanism for ownership of housing
where residents either own shares (share capital co-op) reflecting their equity in the co-
operative’s real estate, or have membership and occupancy rights in a not-for-profit co-
operative (non-share capital co-op), and they underwrite their housing through paying
subscriptions or rent.
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Housing cooperatives come in three basic equity structures. In market- rate
Housing co-ops, members can sell their in the co-op whenever they like for whatever
price the market will bear, much like any ither residential property. Market-rate Co-ops
Is very common New York City limited equity co-ops. Which are often used by
affordable housing developers, allow members to own some equity in their home, but
limit the sale price of their membership share affordable to future members. In the third
structure, called zero-equity or “Group Equity” by the North American Students of
Cooperation (NASCO), one of the proponents of this model, individual members do not
build up equity in the co-op the co-op is not owned by its members, but by itself.
Housing cooperatives may occupy various types of physical structure. Co-ops
can be structured as individual housing units grouped together, such as in an apartment
building, or they can be groups of people living together in one housing unit, as an
alternative to the traditional family structure.
BUILDING CO- OPERATIVE
Main article: Building Co-operative Members of a building cooperative in Britain known as a self-build housing
co-operative pool resources to build housing, normally using a high a proportion of their
homestead, and the co-operative may be dissolved.
This collective effort was at the origin of many of Britain’s building societies,
which persisted in some of their names (such as the former Leeds permanent). Nowadays
such self-building may be financed using a step-by-step mortgage which is released in
stages as the building is completed. The term also refers to worker’s co-operatives in the
building trade.
RETAILER CO-OPERATIVE
Main article: Retailer’s Co-operative
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A retailer’s Co-operative (often known as a secondary or marketing co –
operative in the UK) is an organization, which employs economics of scale on behalf of
its members to get discounts from manufactures and to pool marketing. It is common for
locally owned co-operative are businesses rather than individuals.
The well-known Best Western hotel chain is actually a giant co-operative,
although it now prefers to call itself a nonprofit membership association” It gave up on
the “Co-operative” label after the courts kept insisting on calling it a franchiser despite its
nonprofit status.
UTILITY CO-OPERATIVE
Main article: Utility Co-operative
A utility co-operative is a public utility that is owned by its customers. It is a
type of customer co-operative, in the US many such co-operatives were formed to
provide rural electrical and telephone service as part of the New Deal. See Rural Utilities
Service.
WORKER CO-OPERATIVE
Main article: Worker Co-operative
A worker Co-operative or producer co-operative is a cooperative that is
wholly owned and democratically controlled by its “worker-owners”. There are no
outside, or consumer owners, in a workers’ cooperative-only the workers own shares of
the business. Membership is not compulsory for employees, and employees can become
members.
SOCIAL CO-OPERATIVE
Main article: Social Co-operative
A Particularly successful form of multi-stakeholder co-operative is the Italian
“Social Co-operative”, of which some 7,000 exist. “Type A social cooperative bring
together providers and beneficiaries of a social service as members. “Type B” social
cooperatives bring together permanent workers and previously unemployed people who
wish to integrate into the lab our market.
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SOCIAL CO-OPERATIVES ARE LEGALLY DEFINED AS FOLLOWS:
o The objective is the general benefit of the community and the social
integration of citizens.
o Type A cooperatives provide health, social or educational services
o Those of Type B integrate disadvantage people into the labor market. The
categories of disadvantage they target may include physical and mental
disability, drug and alcohol addiction, developmental disorders and
problems with the law. They do not include other factors of disadvantage
such as race, sexual orientation or abuse.
o Various categories of stakeholder may become members, including paid
employees, beneficiaries, Volunteers (up to 50% of members), financial
investors and public institutions. In Type B Co-operative at least 30% of
the members must be form the disadvantaged target groups.
A good estimate of the current size of the social co-operative sector in Italy is
given by updating the official ISATAT figures from the end of 2001 by an annual growth
rate of 10%(assumed by the Direzione Generate per gli Ente Cooperative). This gives
totals of 7,100 social co-operatives, with 267,000 members, 223,000 paid employees,
31,000 volunteers and 24,000 disadvantaged people undergoing integration. Combined
turnover is around 5 billion euro. The co-operatives break into three types: 59% type A
(social and health services), 33% type B (Work integration) and 8% Mixed. The average
size is 30 workers.
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CONSUMER’S CO-OPERATIVE
Main article: Consumer’s Co-operative
The term co-operative also applies to business owned by their customers: a
consumer’s co-operative. Employees can also generally become members. Members vote
on major decisions, and elect the board of directors from amongst their own number. A
well-known example in the US is the REI (Recreational Equipment Incorporated) Co-
operative and in Canada: MEC (Mountain Equipment Co-op).
The world’s largest consumer co-operative is the co-operative Group in the
United Kingdom, which has a variety of retail and financial services. There are also a
number of other, independent consumer co-operative societies in the UK, such as the East
of England Co-operative society and Miscounted Co-operative. In fact the Co-operative
Group is actually something of a hybried, having both corporate (other consumer co-
operatives) and individual members.
Japan has a very large and well developed consumer co-operative movement
with over 14 million members; retail co-ops alone had a combined turnover of 2.519
trillion yen (21.184 billion US Dollars (market exchange rates as of 11/15/2005) in
2003/4.(Japanese Consumer’s Co-operative Union., 2003) As well as retail co-ops there
are medical,housing,insurance co-ops alongside institutional(workplace based) co-ops for
school teachers and university based co-ops.
Around 1 in 5 of all Japanese households belong to a local retail co-op and
90% of all co-op members are women. (Takamura, 1995). Nearly 6 million households
belong to one the 1,788,000 Han groups (Japanese Consumer’s cooperative Union.,
2003).These consist of a group of five to ten members in a neighborhood who place a
combined weekly order which is then delivered by truck the following week. A
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particular strength to Japanese’s consumer co-ops is recent years has been the growth of
community supported agriculture where fresh produce is sent direct to consumers from
producers without going through the market.
AGRICULTURAL CO-OPERATIVE
Main article: Agricultural Co-operatives
Agricultural Co-operatives are widespread in rural areas.
In the United States, there are both marketing and supply co-operatives.
Agricultural marketing co-operatives, some of which are government sponsored, promote
and may actually distribute specific commodities. There are also agricultural; supply co-
operatives, which provide inputs into the agricultural process.
In Europe, there are strong agricultural/agribusiness co-operatives, and
agricultural co-operative banks. Most emerging countries are developing agricultural co-
operatives. Where it is legal, medical, marijuana is generally produced by co-operatives.
CO-OPERATIVE BANKING (Credit unions and Co-operative Savings Banks)
Main articles: Co-operative banking and credit union.
The Co-operative Bank’s head office, I Ballon Street, Manchester. The statue
in front is of Robert Owen, a pioneer in the Co-operative banking.
In North America, the caisse popularize movement started by Alphonse
Discarding in Quebec, Canada pioneered credit unions. Discarding wanted to bring
desperately needed financial protection to working people. In 1990. From his home in
levis, Quebec, he opened north America’s first credit union, marking the beginning of the
movement Discarding.
While they have not taken root so deeply as in Ireland or the USA, credit
unions are also established in the UK. The largest are work – based, but many are now
offering services in the wider community. The Association of British Credit unions Ltd
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(ABCUL) represents the majority of British Credit Unions. British Building Societies
developed into general purpose savings & banking institutions with “one member. one
vote” ownership and can be seen as a form of financial cooperative(although many’de-
mutualised’ into conventionally-owned banks in the 1980’s & 1990). The UK Co-
Operative Group includes both an insurance provider CIS and the Co-operative Bank,
both noted for promoting ethical investment.
Other important European banking co-operative include the Credit Agricole in
France, Migros and Coops bank in Swizerland and the Raiffeisen system in many Central
and Eastern European countries. The Netherlands, Spain, Italy and various European
countries also have strong cooperative banks. They play an important part in mortgage
credit and professional (i.e. farming) credit.
Co-operative banking networks, which were nationalized in Eastern Europe,
work now as real cooperative institutions. A remarkable development has taken place in
Poland, where the SKOK (Spoldzielcze Kasy Oszczednosciowo – Kredytowe) network
has grown to serve over 1 million members via 13,000 branches, and is larger than the
country’s largest conventional. Bank.
In Scandinavia, there is a clear distinction between mutual savings banks(Spar
bank) and true credit unions(Andelsbank).
CAR SHARING
Main article: Car sharing
Car sharing is an arrangement by which individuals and groups share
vehicles, which are stored in convenient common locations. It may be thought of as a
very short term, locally based care hire, run on a member’s only basis. It is most
prevalent in Swizerland (Where the Mobility Car Sharing cooperative has more than
50,000 clients), but is also common in Germany, Austria, and the Netherlands, and is fast
growing in popularity in other European countries, Asia and North America. Car sharing
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operations may be for profit or non – profit organizations. Zipper and Flex car are
examples.
In Britain, where the term ‘car sharing’ has also been used for carpools or
ride sharing, some people prefer the term ‘car clubs’.
FEDERAL OF SECONDARY CO-OPERATIVES
Main article: Co – operative Federation
In some cases, Co-operative societies find it advantages to form Federal or
Secondary Co-operatives in which all members are themselves Co-operatives.
Historically, these have predominantly come in the form of Co-operative Wholesale
Societies, and co-operative unions. Co-operative Federations are a means through which
co-operative Societies can fulfill the sixth Rockdale principle, co-operation amongst co-
operatives, with the ICA nothing that “Co-operatives serve their members most
effectively and strengthen the co-operative movement by working together through local,
national, regional and international structures.
See Also: List of Co-operative Federations
CO-OPERATIVE WHOLESALE SOCIETY
Main article: Co-operative wholesale society
According to Co-operative economist Charles Gide, the aim of a Co-operative
wholesale society is to arrange “bulk purchases, and if possible, organize production.”
The best historical examples of this were the English EWS and the Scottish CWS, which
were the forerunners to the modern co-operative Group.
CO-OPERATIVE UNION
Main article: Co-operative Union
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A Second common form of Co-operative Federation is a Co-operative union,
whose objective (according to Gide) is “to develop the spirit of solidarity among societies
and in a word, to exercise the functions of a government whose authority, it is needless to
say, is purely moral. “Co-operatives UK and the International Co-operative Alliance are
examples of such arrangements.
CO-OPERATIVE PARTY
Main article: Co-operative Party
In some coutries with a strong Co-operative sector, such as the UK,
Cooperatives may in some countries with a strong cooperative away find it advantages to
form a parliamentary political party to represent their interests. The British Co-operative
Party is a prime example of such an arrangement.
1.3 PROFILE OF THE COMPANY
Arrival of the Tamil Nadu dairy development Corporation team. In the
year of October 2nd 1974 and it is the starting of the first set of societies November 10th
1974. The Registration of Salem district Co-operative milk producer’s union ltd., on July
10th 1978 and it starts from October 7th 1978.
The scope (or) the co-operative societies are covered only two districts. i.e.
Salem at Namakal districts and it includes the societies 1101 of affiliated. The Salem
district Co-operative milk producers union ltd., are start with authorized share capital of
Rs.50 Laksh and paid-up Share capital of Rs.36, 41,100/-
VISION OF THE COMPANY
o To give Quality milk to the customers
o To give Quality of milk product like butter, Ghee
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o Remuneration prices to milk producers through out the years
o Giving loans/ Dividend to members
o Loan arrangement for purchase of cattle’s by members through banks
Members
o Can repay the loan by installments.
o Excess milk recited from the various places, stored and processed for skin
Milk Powder.
o Co-operative development programme started by National Dairy
Development
o Board to implement in unions to milk procurement.
o Supply of quality cattle to members in the societal at reasonable price.
o Manage the (or) maintain the standard price
o To meet the competitions with private sections.
o To Covered in all area customer.
QUALITY POLICTY(OBJECTIVE)
To improve the quality of raw (Material) milk being received by union.
To ensure that all batches of packed milk, and milk product to be sent to the
Market, conforms to the stipulated under BIS, PEA Act and agmark
To maintain a high standard of house keeping and adopting GMP
To improve consumer satisfactions.
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ACTIVITIES
i. No of the functional societies 1015 for the year 2006-2007 upto December
2006.
ii. Total No of the former member=3,21,652
(a) Women members – 408,672
(b) Scheduled Caste at trebles –48,532
(c) Pouring members –47,910
iii. No of Milk collection Routes: 56
iv. AV Quality of milk
COW BUFFALO FAT %4.4 7.0
SNF%8.2 8.8
v. Procurement Price Paid to producers Buffalo milk per kg price: 178.57-12.50
vi. Milk payment schedule=every once in 10 days.
vii. Daily Average procurement in liters in 3,71,877 litters
viii. No of mobile veterinary unit –8
ix. No of cases treated 47,020
x. No of emergency veterinary unit 12.sxi. No of emergency cases treated 2,877.xii. Processing capacity in VPD
(a) Salem Dairy - 3,00,000
(b) Chilling center Attur - 1,30,000
Namakkal - 50,000 P.Velur - 50,000
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Xiii Handling at present
(a) Salem Dairy - 1,70,000
(b) Chill ting center - Attur - 1,30,000
Namakkal - 50,000 P.Velur - 50,000
Xiv Production Capacity per day
AUTTER - 9MT
GHEE - 6MT
SMP - 10 MT
XV. Milk sent to Chennai in LPD: 2,14,279 per days.
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SALEM DISTRICT CO-OPERATIVE MILK PRODUCER’S UNION LTD
-------------- --------------- A total savings 8,93,500 10,69,000
-------------- ---------------
A BNet Cash inflow Rs.8,31,500 Rs.10,69,500
Original InvestmentPay Back Period = -------------------------------------(5.2)
Annual Average Cash inflow
A B 32,70,000 30,00,000-------------------- =3.93 ------------------ =3.74 8,31,500 8,00,000
InferenceMachine B is better than the Machine A because B is 3.74
ADVANTAGES
It saves in costs as if requires lesser times and labors as compared to other methods
This method is useful to a concern which is short so cash and is eager to bet back the cash invested in a capital expenditure project
As the method considers the cash flows during the pay back period of the project the estimates would be reliable and the result may be comparatively more accurate.
LIMITATIONS
It does not take into account cash inflows earned after the pay back period and hence the true profitability of the project cannot be correctly assessed.
This method does not consider the amount of profit earned on investment after the recovery of cost of investment
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II IMPROVEMENT IN TRADITIONAL APPROACH THE PAYBACK PERIOD
One of the most commonly used techniques for evaluating capital investment proposal is
the cash pay – back method. Some authorities on accountancy, in order to make up the
deficiencies of the pay back period, evolved new concepts. It is discussed.
(A) POST PAY – BACK PROFITABILITY
One of the limitations of the pay – back period method is that neglects the profitability of
investments beyond the pay – back period. According to this period. The project which
gives the greatest post pay back period profiles may be accepted. It has been explaned in
the following ways.
FORMULAS
Post pay back probitability = Annual cash inflow(Estimated life pay back period)
POST PAY BACK PROFITABILITY
The Salem Co-operative Milk producer’s ltd., are considering two project X and Y(power plant)
A B
Cost of Project Rs.32,70,00 Rs.30,00,000
Life of time 3 years 3 years
Estimated Scrap Rs.75,000 Rs.90,000
Estimated Savings Rs.15,00,000 Rs.18,00,000
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Pay Back Period
32,70,000 30,00,000A= ------------------=2.18 years B=-------------------- = 1.67 years
15,00,000 18,00,000
Surplus Life A=(3-2.18) * 15,00,000B=(3-1.67) * 18,00,000
Post pay back = A 0.82 * 15,00,000 = 12,30,000 = B 1.23 * 18,00,000 =23,94,000
Index of post back profit
12,30,000 23,94,000A = ------------------*100 =37.61% B = ---------------*100 =79.8%
30,00,000 32,70,000
Inference
Machine is B is best because the return period is 1.67 years and of the profit rate is 79.8% so the machine is selected.
(B) PAY BACK RECIPROCAL
Sometome Pay back reciprocal method is employed to estimate the internal rate of return generated by a project.
Annual Cash inflowPay back Reciprocal : =------------------------------------(5.3)
Total Investment
However this method of ranking Investment proposals should be used only when
* Annual savings are even for the entire period
* The economic life of the project is at least twice of the pay back period.
III RATE OF RETURN METHOD
This method is also known as Accounting Rate of Return. Accounting to this method various projects are ranised inorder of the rate of earnings. Projects which yield the highest earning are selected and others are ruled out/. The return on Investment can be expressed in several ways.
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(A) AVERAGE RATE OF RETURN METHOD
Here average profit, after tax are depreciation, is calculated and there it is divided by total capital in the project. This method establishes the ratio between the average annual profits to total outlay.
The project giving a higher rate of return will be preferred over those giving lower rate of return. In this way following formula.
Average Annual Profits = Average Rate of Return = ---------------------------------- * 100(5.4)
Outlay of the project
(B) RETURN PER UNIT OF INVESTMENT METHOD
In this method the total profit after tax and depreciation is divided by the total investment this gives us the average ratre of return per unit of amount invested in the project.
Total Profit = Project per unit of investment = ----------------------------- * 100(5.5)
Net Investment
(C) RETURN ON AVERAGE INVESTMENT METHOD
Under this method, the percentage return on average amount of investment is calculated to the average investment the outlay of the project is divided by two
Total Profit depreciation and taxesReturn on average Investment = -------------------------------------------- * 100 (5.6) Total Net Investment
(D) AVERAGE RETURN ON AVERAGE INVESTMENT METHOD
Under this method, average profit after depreciation and taxes in divided by the average amount of investment. This is an appropriate method of rate of return on investment
Average Annual Profit
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= Average Return on Average Investment = ---------------------------- * 100 (5.7) Net Investment
Average rate of return = ------------------------------* 100Out lay of the project
1,97,200 =------------- * 100
32,70,000
=6.03%
1,84,000=------------------- * 100
30,00,000
= 6.13%
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(B) RETURN PER UNIT OF INVESTMENT METHOD
Total Profit
Return per unit of investment method = ------------------ * 100 Net Investment
9,86,000= ----------- * 100
32,70,000
= 30.15%
9,20,000=-------------- * 100
30,00,000
=30.66%
(C) RETURN ON AVERAGE INVESTMENT
Total Profit after depre taxesreturn on average investment = -------------------------------------- * 100
Total Investment
9,86,000= ------------- *100 32,70,000/2
= 60.30%
9,20,000 =--------------- * 100 30,00,000/2
=61.33%
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(D) AVERAGE RETURN ON AVERAGE INVESTMENT
Average Annual Profitaverage return on average investment = ------------------------------- * 100
Net investment
1,97,200= ---------- * 100
32,70,000
=12.06%
1,84,000= --------- * 100
30,00,000
=12.26%
58
MERITS OF RATE RETURN
It takes into consideration the total earnings from the project during its life time. Thus this method gives a better view of profitability as compared to pay back period method.
It is based upon accountancy concept of profit. It can be calculated form the Financial data.
LIMITATIONS
It ignores the time of money profits earned in different periods are valued equally.
This method may not reveal true and fair view in the case of long term
It does not take into consideration the cash flows which is more important than the accounting profits.
It ignores the fact that profits can be reinvested
There are different methods for calculating the accounting Rate of return. Each method gives different results. This Reduces the reliability of the method.
TIME ADJUSTED METHOD NET PRESENT VALUE METHOD
This method is also known as excess present value or not Gain method. Under
this method, cash inflows and cash outflows associated with each project are first worked
out. The present values of these cash inflows and outflows are there calculated at the rate
acceptable to the management. This rate of return is considered as the Cut –off rate and is
generally determinated on the basis of cost of capital suitably adjusted to allow for the
risk element involved in the project.
The present values of total cash inflows should be compared with present
values of cash outflows. It the present values of cash inflows are greater this or equal to
the outflows the project would be accepted. It will be rejected.
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THE SALEM CO-OP MILK PRODUCER’S UNION LTD., IS CONSIDERING THE PURCHASE OF THE TWO POWER PLANT MACHINES WITH THE FOLLOWING DETAILS
MACHINE – I MACHINE - II
Estimated life time 3 YEARS 3 YEARS
Capital Cost Rs.3,27,000 Rs.30,00,000
Net Earning
I Rs.12,50,000 Rs.11,00,000
II Rs.1,50,000 Rs.12,55,000
III Rs.13,50,000 Rs.10,00,000
The interest rate is 10% P.A which machine should be preferable suggest to the organization.
Dr.S.P.GUPTA : Financial Management Sultan Chand & Sons Publication, New Delhi 2002
Annual Report provided by the Salem District Co- op milk producer’s union lt from 2006 – 2007.
70
Annexure
71
THE SALEM DISTRICT CO OPERATIVE MILK PRODUCERS UNION LTD Abstract of capital budget 2006 – 2007S.NO Particulars Amount1 Civil Section 13450002 Quality Control 3080003 Dairy milk sweets 1865004 Training center 21910005 Attur CC 2500006 P-Velur 5990007 Namakkal cc 8200008 Transport Section 32000009 Stores 2000010 APS 1715200011 Powder Plant 627000012 Dairy 108000013 Maintenance Section 4508200014 Pre Pack 130000015 Procurement and input 3331000016 Marketing 3562000
Grand Total 128780500
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STAFF SALARY AND ALLOWANCES FOR THE YEAR 2006 –2007