What is EOQ

EOQ (Economic Order Quantity) :– EOQ is that quantity of ordering materials for which the organization has to bear optimum amount of cost for ordering and carrying materials.

Formula for calculating EOQ:-

EOQ = √2AO/C

         

 Where,

A = Annual usage units

O = Ordering cost per unit

C = Annual carrying cost of one unit

 i.e. Carrying cast % * Carrying cost of  unit

 

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What is Flotation Cost

Flotation cost is the total cost of issuing and selling a security. It reduces the net proceeds from the sale. Flotation cost has two components

i) Underwriting costs
ii) Administrative costs

i) Underwriting costs :- Compensation earned by the investment bankers for selling security.


ii) Administrative costs :- Issuers expenses like - legal, Accounting, Printing and other expenses.

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'Is equity capital free of cost'

Because of the following reasons equity capital is not free of cost.

• Common stockholders can claim on the residual income of a company and have the right to interfere to the company's various internal matters.
• If all the profit is distributed to the shareholders then the company needs to issue additional shares for financing. 
• If the company decides to issue new shares then it will have to pay flotation cost.

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'Debt is the cheapest source of capital'

'Debt is the cheapest source of capital' - We can give comment on this statement from both lender and borrower point of view.

From Lender point of view :-

• Lenders feel secure because the obligation of bondholders meet before both preferred and common stockholders in case of company's liquidation.
• The interest against bonds must be paid to bondholders either the company makes profit or not.

From Borrower point of view :- 

• The main advantage of using debt instruments as a source of financing is the interest against debt instruments is tax deductible expenses. So the company can enjoy a tax reduction.
• The required rate of return of lenders is lower than other financing instruments. So the cost of debt or the cost of capital is lower for the company.
• Common stockholders can claim on the residual income of a company and have the right to interfere to the company's various internal matters but bondholders have not such right.

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What is Breakeven Point

Breakeven Point: - Breakeven point is a situation where a company neither making any profit nor making any loss. That means it earns only the cost of doing the business.

Formula for calculating Breakeven Point:-

 BEP = Fixed cost/ Contribution Margin

Where,

Contribution margin = Sales - Variable cost. 

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What is Prime Cost

Prime Cost :- When direct material is added with direct labor cost it is called prime cost.

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What is Depreciation and methods of depreciation

What is Depreciation:-

Depreciation is a Process of allocating costs of an asset over its useful life. 

Methods of Depreciation: - There are several methods of Depreciation

i)                    Straight Line Method (SLM)

ii)                  Reducing Balance Method

iii)                Double Declining Method(DDB)

iv)                Sum of the Year Digit Method (SYD)

v)                  Modified Accelerated Cost Recovery System (MACRS).

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