Page 64 - DMGT302_FUNDAMENTALS_OF_PROJECT_MANAGEMENT

Unit 4: Project Budgeting

telephones, and office supplies (stationery, printing, etc.), (v) insurance and taxes on office Notes
property, and (vi) miscellaneous items.
3. Total Sales Expenses: The expenses included under this head are: (i) commission payable
to dealers, (ii) packing and forwarding charges, (iii) salary of sales staff (which may be
increased at 5 per cent per annum), (iv) sales promotion and advertising expenses, and
(v) other miscellaneous expenses.

4. The selling expenses: depend mainly on the nature of industry and the kind of competitive
conditions that prevail. Typically, selling expenses vary between 5 and 10 per cent of sales.
The experience of similar firms in the industry may be used as a basic guideline.
5. Royalty and Know how: Payable Royalty and know how payable annually may be shown
here. The royalty rate is usually 25 per cent of sales. Further, royalty is payable often for
a limited number of years, say 5 to 10 years.
6. Total Cost of Production: This is simply the sum of cost of production, total administrative
expenses, total sales expenses, and royalty and know-how payable.
7. Expected Sales: The figures of expected sales are drawn from the estimates of sales and
production prepared earlier in the financial analysis and projection exercise.
8. Gross Profit before Interest: This represents the difference between expected sales and
total cost of production.
9. Total Financial Expenses: Financial expenses consist of interest on term loans, interest on
bank borrowings, commitment charges on term loans, and commission for bank
guarantees. The principal financial expenses, of course, are interest on term loans and
interest on bank borrowings.
10. Depreciation: This is an important item, particularly for capital intensive projects. In
figuring out the depreciation charge, the following points should be borne in mind:

(a) Contingency margin and pre operative expenses provided in estimating the cost of
project should be added to the fixed assets proportionately to ascertain the value of
fixed assets for determining the depreciation charge.
(b) Preliminary expenses in excess of 2.5 per cent of the project cost (excluding working
capital margin) should be added to fixed assets proportionately to ascertain the
value of fixed assets for determining the depreciation charge.

(c) The Income Tax Act specifies that the written down value method should be used for
tax purposes. It further specifies the rate of depreciation applicable to different
kinds of assets.
(d) For company law (financial reporting) purposes, the method of depreciation may
be either the Written Down Value (WDV) method or the straight line (SL) method.
From 1988 onwards the depreciation rates under the Companies Act have been
delinked from those under the Income Tax Act.
11. Other Income: This represents income arising from transactions not part of the normal
operations of the firm. Examples of such transactions are: sale of machinery, disposal of
scrap, etc. Except disposal of scrap, which can be reasonably anticipated and estimated, the
effects of other non-operating transactions can hardly be estimated. Of course, when
non-operating transactions result in a deficit, other income would be negative–put
differently, there will, be a non-operating loss.

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