Student Name: Ashutosh Goel

Student ID: 100091

Course Title: ACF213 Principle of Management Accounting

Course Teacher: Sunil Arora

Title of the Company: Megha Trade Corporation

Page Count: 6

Date of Submission: 17/10/2011

Introduction

Megha Trade Corporation (MTC) is importing products of various brands from different regions. MTC imports false ceiling, LG flooring, laminate flooring and all types of floor mat floorings. MTC’s main office is based in Chennai. MTC has acquired a distributorship of these products and has been supplying to various southern states of India (Kerala, Karnataka, Tamil Nadu and Andhra Pradesh). MTC has been transacting from year 2008. I have arranged a virtual meeting with the accounts manager of MTC, Mr Anil Goel, who will provide all the information required to complete this project. The project was started on 13/10/2011.

Contact Details:

Mr Rajesh Goel (proprietor),

Megha Trade Corporation,

C-16, Nelson Chamber, Nelson Manikam Road,

Amanjikarai, Chennai – 600 029

Ph: 044-42186628

Mobile: +91-9884058856

Email: meghaimpax@gmail.com

Issues

1. What are various kinds of revenue expenses in the company? Which of them are fixed and which ones are variable? What types of costs are included in overhead? How large is overhead compared to direct material and direct labour costs?

a. Revenue Expenses of MTC:i. Printing & Stationary - Variable

ii. Rates and taxes – Variable ( VAT and Service Tax )iii. Power and fuel - Variableiv. Freight outwards / inwards - Variablev. Salary & Bonus – Semi Variable

vi. Conveyance - variablevii. Selling Expenses (Advt.) – Semi Variable

viii. Rent – Fixed ix. Municipality Taxes – Fixed ( Water and property Tax )x. Insurance – Fixed

xi. Audit Fees – Fixedb. This company imports from various countries (outside India) and supplies to

various states (within India). MTC has had a few chances of using the overheads facility by the banking institutes. Under overheads, the advertising costs, freight costs and the rents costs are recorded by the company, if any.

c. Comparison between the size of direct material cost and the direct labour cost under overheads, the direct material costs are greater in MTC.

2. How is the working capital management done in the company?

a. Working capital management makes sure that MTC acquires enough cash flow in order to meet their short-term goals of debt and operating expenses. Implementing an efficient working capital management system is the perfect way to improve expected returns.

b. The two major aspects of working capital management are ratio analysis and management of individual portions of working capital. Areas under working capital management that are important to the business are inventory management, cash management, accounts receivable and payable management.

c. Commonly used measure of cash flow is the net operating cycle, which represents the time period between cash payment of raw materials and cash collection for sales in MTC.

d. The cash conversion cycle shows the company's ability to convert their resources into liquid cash; in other terms, it helps to calculate the liquidity of the company.

3. How do they decide upon the credit period to be allowed to their customers?

a. Financial statements are used in assigning Credit Limits to customers. Mainly ratios or factors like net worth and working capital are taken and trended or compared to Industry norms or standards. If a customer shows liquidity and efficiency as per industry norms then a more confident approach can be taken in setting the credit limits.

b. Past payments made by the customers are analysed as:i. On time (plus or minus 2 days)

ii. before time (at least within 20 days)iii. Late payment (after 30 days)

c. Based on the analysis, probability of the customer making the payment on/before due date is calculated and compared with the benefit that may arise on making the credit sale.

d. Frequency of Purchase and payment is also considered to identify the regularity of purchase by the customer. More frequency would indicate higher credit worthiness

e. Risk of bad debts as per company norms is used and accordingly the credit period is determined.

f. For example, risk of bad debts in the company by customers who avail credit period of more than 30 days is very high. The company would restrict the credit period to nearly 20 days.

4. What are the factors they consider while decided upon the credit period they would enjoy while making the payments to their creditors/suppliers?

a. There is a strategy followed by MTC to maintain relationships with their suppliers:

i. Setting a target of minimum yearly order quantity for the supplier. The supplier should be satisfied all times and that is done by this method.

ii. MTC believes in marketing the products to the wholesalers and other dealers, to keep the sales high and meet with the target set to the supplier of MTC.

iii. When the suppliers look at their payment on time or before time, they are highly motivated to work in the future. 40% of the payment is issued to the supplier before the order is received by MTC, another 30% of the payment is issued at the time of delivery and the last 30% of the payment is issued after one month from the delivery.

b. MTC has never crossed the period of one month to pay 100% their suppliers/creditors. The reason being, MTC is nearly 15 years old company and has a reputation to maintain in the market and has enough cash flow to make the payments on time.

c. The reason why MTC takes maximum one month’s time to make the payment is:i. The maximum time allotted to receive their payments from the reliable

customers is one month.ii. The customers are wholesalers and big dealers, so, the payments received

are large in amount. Sufficient amount is gathered to pay the suppliers in one month’s credit period.

5. What is the cash management process used in the company? As in -what amount of cash-in-hand is maintained at any point of time? What are the factors that affecting this figure? Where does the company usually invest their excess funds? Any other details?

a. Cash management process:i. The receivable and the payable are recorded as balance sheet in a program

called tally.ii. The recorded balance sheet in tally is verified by the seniors and kept

untouched and safe.iii. The employees are properly designated to manage the cash flow in the

company.iv. There is no idle cash in the company (other than the cash in hand). Most

of the idle cash is deposited in the banks. The remaining cash is invested in stock markets and sometimes donated as charity.

v. The stock inventory is usually maintained low to keep the less burden of spoiled goods and losing the market value.

vi. During urgency, the customers are requested to make the payments as early as possible to keep the cash flow smooth.

b. The cash in hand:i. MTC maintains ₨70,000 to ₨80,000 of cash in hand.

ii. The season affects the required cash in hand. The transportation and delivery charges are high during certain seasons.

iii. When the frequency of transactions increase, the cash in hand is also increased to avoid any delay of payments.

iv. The required cash in hand is high when the paymentsc. Excess fund are:

i. Stored in banks, in case of urgent requirement of liquid cash.ii. A small portion of excess funds are invested in stock markets through

experienced and trusted agents.iii. When the excess funds are really high then a few donations are made in

charity to various foundations.iv. Used in increasing the marketing of the products by publishing

advertisements in the local newspapers and gaining more customers.v. Excess funds are also used to test new products in the market.

Reflection

The experience with Anil Goel was interesting. Mr Anil Goel had answered all my questions generously and openly. There was a problem during the process. The next day, he had to visit his home town as someone had had fallen ill in his family.

There were certain limitation to my project, such as the company’s office is situated in Chennai and I am in Delhi. I had searched for a company in Delhi, but their company’s staffs is not as cooperative as MTC’s staffs are. If there was more time, I could have gone to Chennai and received more number of answers. The staffs of MTC are more cooperative as my father (Mr Rajesh Goel) is the proprietor of MTC.