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1
ManagementManagement Accounting Accounting
SCDLSCDLBy By Irfal irwant.SEIrfal irwant.SE
2
1.Production
Prime Cost
1.Godown
1.canteen
2
Cost of sales
6.sales5.profit
1.Factory administration
4.Sales and distribution3.General administration
Total cost
Bin card
Stores ledger
Cost calculations/operating activity
++ =
+
+
Danger
Facility department
Factory cost/works cost
3
FLOW OF CASH/SHORT TERM FLOW OF CASH/SHORT TERM AND LONG TERMAND LONG TERM
information
Accounts payable
RAW mATERIAL
ADRLong term loansPreference
Shares
Bad debts
Accounts receivable
DebtorsWork in progress
information
OverheadsLabour
Equity shares
CASH
GDR
informationIn
form
ati
on
4
FLOW OF CASH - LONG FLOW OF CASH - LONG TERMTERM
ADRLong term loansPreference
SharesEquity shares
CASHShort term
GDR
land
furniture
investments
goodwill
building
Patent rightsKnow how
Copy right
5
FLOW OF CASH-SHORT FLOW OF CASH-SHORT TERMTERM
information
Accounts payable
RAW mATERIAL
Bad debts
Accounts receivable
DebtorsWork in progress
information
OverheadsLabour
informationIn
form
ati
on
Discounting billscreditorsCash creditBank overdraft Sale of investments
Bad debts
Bad debts
Issue of long term fundsSale of fixed assets
Bank overdraft
cash cash
6
Accou
nting
Labou
r la
ws
mark
eti
ng
Costing
technical technology
political
prod
uction
statisticalShar
e m
arke
t
MANAGEMENT ACCOUNTS
INFORMATIONINFORMATION
INFORMATIONINFORMATION
INFORMATION
7
Techniques in management Techniques in management accountingaccounting
Management Accounting
Cost accounting
Mathematics
operation research
statisticsRatios
Financial accounts
Budgetary control
Cash flow statementFFS Trend percentages
Marginal costing
Variance analysis
Comparitive statement Common size statements
8
Structure of the Structure of the syllubusChapter-1syllubusChapter-1
Financial accounting
1. Introduction
2. BasicAccounting
3. Process ofaccounting
4. BRS
5. Rectification ofErrors
Final accounts
9
Cost AccountingCost Accounting
6. CONCEPTS
7. ELEMENTS OF COST
8. MATERIAL
9. LABOUR
10. OVER HEADS
11. MARGINAL COSTINGtechniques
12. BUDGETARYCONTROL
13.STANDARD COSTINGTECHNIQUES
14. UNIFORM COSTING
CO
NTR
OL
10
Anything incurred during the production of Anything incurred during the production of the goods or service to get the output into the goods or service to get the output into the hands of the customerthe hands of the customer
The customer could be the public (the final The customer could be the public (the final consumer) or another businessconsumer) or another business
Controlling costs is essential to business Controlling costs is essential to business successsuccess
Not always easy to pin down Not always easy to pin down where costs are arising!where costs are arising!
CostsCosts
11
12
Differences between cost accounting/Management Differences between cost accounting/Management Accounting/financial accountingAccounting/financial accounting
Financial AccountsFinancial Accounts Cost AccountsCost Accounts Management Management AccountsAccounts
1.Recording1.Recording
2.Outsiders2.Outsiders
3.Past3.Past
4.Statutory4.Statutory
5.Preparation of 5.Preparation of profit/loss A/cprofit/loss A/c
And balance sheetAnd balance sheet
6.Audit& reporting6.Audit& reporting
1.Estimation and 1.Estimation and controlcontrol
2.Internal2.Internal
3. Future3. Future
4. Not all 4. Not all organisationsorganisations
5.Costing records5.Costing records
6.Cost audit once in 6.Cost audit once in two yearstwo years
1.Collection Analysis 1.Collection Analysis and decision makingand decision making
2.Management2.Management
3.Future3.Future
4.Non-statutory4.Non-statutory
5.Using various 5.Using various techniquestechniques
6.Supply the 6.Supply the required informationrequired information
To correct persons To correct persons on timeon time
13
Users of informationUsers of information
organisation
shareholders
public
Benefactors
governmentbanks
Debenture holders
Loan vendor
Preference shareholderscreditors debtors
customers
dividend
liquidity
Dividend/value in the share market
Interest/return of capital
Interest/return of capital
Timely payment Timely supply
Good product
Less pollution
Good name
tax
14
Techniques in management Techniques in management accountingaccounting
Management Accounting
Cost accounting
Mathematics
operation research
statisticsRatios
Financial accounts
Budgetary control
Cash flow statementFFS Trend percentages
Marginal costing
Variance analysis
Comparitive statement Common size statements
15
See you in the next chapterSee you in the next chapterBRSBRS
Life educationLife education
God and Poor manGod and Poor man
16
Chapter-2: Basics of Chapter-2: Basics of financial accountingfinancial accounting
1.Concepts1.Concepts 2.system of accounting2.system of accounting 3.Types of Expenditure3.Types of Expenditure 4.Terms used in financial accounts4.Terms used in financial accounts 5.Double entry / Single entry5.Double entry / Single entry 6. Depreciation methods6. Depreciation methods 7. Practical consideration relating to 7. Practical consideration relating to
depreciationdepreciation
17
1.concepts& conventions1.concepts& conventions Meaning: Basic assumptions upon which the Meaning: Basic assumptions upon which the
basic process of accounting based.basic process of accounting based. a] Business entity concept-a] Business entity concept- b] Dual aspect conceptb] Dual aspect concept c] Going concern conceptc] Going concern concept d] Accounting period conceptd] Accounting period concept e] Cost concepte] Cost concept f] Money measurement conceptf] Money measurement concept g] Matching Conceptg] Matching Concept
ConventionsConventionsCoservativismCoservativismMaterialityMaterialityConsistencyConsistency
18
a] Business entity concept-a] Business entity concept-
Business is different from the ownerBusiness is different from the owner We pass Journal entry when owner We pass Journal entry when owner
contributes towards capital.contributes towards capital. When amount / goods withdrawn for When amount / goods withdrawn for
personal use we make an entry in the personal use we make an entry in the businessbusiness
When Income tax paid by the owner out of When Income tax paid by the owner out of business money we make an entry In the business money we make an entry In the books of accounts.books of accounts.
19
b] Dual aspect conceptb] Dual aspect concept
Every debit has equal amount of Every debit has equal amount of creditcredit
Asset =LiabilityAsset =Liability Liability creates assetLiability creates asset If asset>Liability= profitIf asset>Liability= profit If Liability> Assets= lossIf Liability> Assets= loss
20
c] Going concern conceptc] Going concern concept
Business will go for at least for a Business will go for at least for a reasonable period.reasonable period.
Depreciation is provided based on Depreciation is provided based on this assumption.this assumption.
If this assumption is not made all If this assumption is not made all Fixed assets will be valued at Fixed assets will be valued at realised value like current assets.realised value like current assets.
21
d] Accounting period conceptd] Accounting period concept
Fixing time limit for accountsFixing time limit for accounts Profit for the periodProfit for the period It can be one week or two weekor 6 It can be one week or two weekor 6
months/one year or 5 yearsmonths/one year or 5 years But to find profit we normally consider 12 But to find profit we normally consider 12
months periodmonths period Financial year for income tax point of Financial year for income tax point of
view 1view 1stst April-31 April-31stst March of the following March of the following yearyear
Calendar year –January to DecemberCalendar year –January to December Divali to DivaliDivali to Divali
22
e] Cost concepte] Cost concept
The cost to the organisation The cost to the organisation (Actual) is recorded in the books(Actual) is recorded in the books
Assets are not recorded according Assets are not recorded according to the market price every year.to the market price every year.
Depreciation is calculated on cost Depreciation is calculated on cost not based on market pricenot based on market price
Accounting records may not show Accounting records may not show the real worth of the businessthe real worth of the business
Market price may be disclosed with Market price may be disclosed with in bracket in the balance sheetin bracket in the balance sheet
23
f] Money measurement f] Money measurement conceptconcept
Every thing which can be expressed Every thing which can be expressed in terms of Money is recorded in the in terms of Money is recorded in the booksbooks
Beautiful women are working Beautiful women are working /Handsome boys working in IBM /Handsome boys working in IBM /Efficient engineers worth 5000 /Efficient engineers worth 5000 crores –How do you record?.crores –How do you record?.
Good working environment?Good working environment? Highly motivated employees?Highly motivated employees?
24
g] Matching Conceptg] Matching Concept
Matching Cost with revenueMatching Cost with revenue It is used to estimate correct profitsIt is used to estimate correct profits Accrual/ cash basis of accountingAccrual/ cash basis of accounting
– Even cash paid /received if it belongs to Even cash paid /received if it belongs to accounting period we consider them as accounting period we consider them as expenditure /incomeexpenditure /income
– Salary outstanding for the last month?Salary outstanding for the last month?– Income from Investments yet to be Income from Investments yet to be
received?received?– Rent received in advance for next year?Rent received in advance for next year?
25
ConventionsConventions Customs and traditions that are Customs and traditions that are
followed by the accountants while followed by the accountants while preparing the financial statements.preparing the financial statements.
Why do we respect elders?Why do we respect elders? Why do we shake hands?Why do we shake hands? Why do Young Indians hate receiving Why do Young Indians hate receiving
dowry?dowry?
26
CoservativismCoservativism
To be on the safer sideTo be on the safer side Expect future losses as current year Expect future losses as current year
lossloss not future income is treated as not future income is treated as
current year income.current year income. Stock is valued cost price / market Stock is valued cost price / market
price which ever is lowerprice which ever is lower Making provision for bad debts is Making provision for bad debts is
based on this assumptions.based on this assumptions.
27
MaterialityMateriality
Material impact on profitability are Material impact on profitability are consideredconsidered
Insignificant transactions ignored Insignificant transactions ignored from recordingfrom recording
Pen purchased, pencil purchased?Pen purchased, pencil purchased? Wine purchased regularly?Wine purchased regularly?
28
ConsistencyConsistency
Accounting policies and proceedures Accounting policies and proceedures should be followed consistentlyshould be followed consistently
Method of depreciation should be Method of depreciation should be followed consistently.followed consistently.
Stock valuation- cost/market price Stock valuation- cost/market price whichever is lower is consistently whichever is lower is consistently followedfollowed
If not followed it amount to change in If not followed it amount to change in the policy of the companythe policy of the company
29
2.system of accounting 2.system of accounting (26)(26)
1.Cash system: 1.Cash system: unless cash received /paid unless cash received /paid
in the accounting year in the accounting year can not be considered as can not be considered as income/expenses income/expenses respectivelyrespectively
30
2.Mercantile2.Mercantile
Mercantile/Accrual/due concept:Mercantile/Accrual/due concept: Even cash received/paid but due for Even cash received/paid but due for
payment/due for receipt (yet to be payment/due for receipt (yet to be received/payable) if they belong to current received/payable) if they belong to current accounting year are considered.accounting year are considered.
If last year expenditure paid this year?If last year expenditure paid this year? If you receive/paid in advance ?If you receive/paid in advance ?
31
Mercantile love!!!!???Mercantile love!!!!???
Last year I loved her? Last year I loved her? Next year I shall love Next year I shall love him depends on type of him depends on type of bike model!!!!bike model!!!!
32
Life EducationLife Education
If I do not get married to him If I do not get married to him I will not be happy- Girl saidI will not be happy- Girl said
If I do not get married to her If I do not get married to her I will not be happy- Boy saidI will not be happy- Boy said
If both get married what will If both get married what will happen!!!!happen!!!!
33
3.Types of 3.Types of Expenditure(30)Expenditure(30)
A) Capital expenditureA) Capital expenditureB) Revenue expenditureB) Revenue expenditureC) Deferred Revenue C) Deferred Revenue expenditureexpenditure
34
A) Capital expenditure(30)A) Capital expenditure(30)
Expenditure incurred which will :Expenditure incurred which will :a)a) Increase Production capacityIncrease Production capacityb)b) Increase earning capacityIncrease earning capacityc)c) Reduction in the cost of operation.Reduction in the cost of operation.Example: purchase of fixed assetsExample: purchase of fixed assets
Purchase of MachineryPurchase of Machinerypurchase of investmentpurchase of investment
If such expenditure is not to do with the basic If such expenditure is not to do with the basic functions of the business such expenditure functions of the business such expenditure is capital expenditure.is capital expenditure.
How do you consider if you buy goodwill, copy How do you consider if you buy goodwill, copy right or patent right?right or patent right?
35
Capital expenditure-Capital expenditure-continue(page-30)continue(page-30)
Both tangible and intangible assets includedBoth tangible and intangible assets included
Intangible assets such as patent right, copy Intangible assets such as patent right, copy right, technical know-how, francises, right, technical know-how, francises, goodwill etc.,goodwill etc.,
Depreciation is provided on fixed assets which Depreciation is provided on fixed assets which will appear in the profit and loss accountwill appear in the profit and loss account
They appear in the Balance sheetThey appear in the Balance sheet
The life is more than one yearThe life is more than one year
They should not appear in the profit and loss They should not appear in the profit and loss accountaccount
36
Revenue Expenditure(page-Revenue Expenditure(page-30)30)
Expenditure incurred which will :Expenditure incurred which will :a)a) Not Increase Production capacityNot Increase Production capacityb)b) Not Increase earning capacityNot Increase earning capacityc)c) maintain the capacitymaintain the capacity No Depreciation is provided on fixed assets No Depreciation is provided on fixed assets
which will appear in the profit and loss which will appear in the profit and loss accountaccount
They appear in the profit and loss accountThey appear in the profit and loss accountThe life is not more than one yearThe life is not more than one year
They should not appear in the balance sheetThey should not appear in the balance sheet
37
Deferred revenue Deferred revenue expenditure(page-30)expenditure(page-30)
Deferred means- postponedDeferred means- postponed Heavy revenue expenditureHeavy revenue expenditure Vodafone incurred 200 crores for advertisement Vodafone incurred 200 crores for advertisement
after merger with Hutchafter merger with Hutch It can not be written off within a yearIt can not be written off within a year It appears in the balance sheet as last itemIt appears in the balance sheet as last item Every year some portion is written off in the profit Every year some portion is written off in the profit
and loss account.and loss account. Research and deveopment expenditure, initial Research and deveopment expenditure, initial
advertisement expenditure, preliminary advertisement expenditure, preliminary expenditure are exampleexpenditure are example
38
Terms(page-27)Terms(page-27)
AccountAccount
DebitDebit
CreditCredit
JournalJournal
LedgerLedger
NarrationNarration
castingcasting
PolioPolio
Brought Brought forward(B/f)forward(B/f)
Trail balanceTrail balance
AssetsAssets
LiabilitiesLiabilities
CapitalCapital
DrawingsDrawings
DebtorsDebtors
depreciationdepreciation
CreditorsCreditors
Balance sheetBalance sheet
Accounts Accounts receivablereceivable
Accounts Accounts payablepayable
Debit noteDebit note
Credit noteCredit noteTrade discountTrade discount
Cash discountCash discountDebenturesDebentures
Equity sharesEquity shares
Preference Preference sharesshares
39
Terms used in costing(unit 7)Terms used in costing(unit 7)
Direct materialDirect material
Direct labourDirect labour
Direct expensesDirect expenses
Prime costPrime cost
Raw material; cost per unit can Raw material; cost per unit can be identified, in the individual be identified, in the individual cost centre;cost centre;
Engaged in manufacturing Engaged in manufacturing processprocess
Hire charges of machinery-Hire charges of machinery-direct expensesdirect expenses
FactorFactoryy
Indirect materialIndirect material
Indirect labourIndirect labour
Indirect expenses Indirect expenses ++
Works costWorks cost
Consumable stores, cotton Consumable stores, cotton waste ,oilwaste ,oil
Wages to storekeeper, foremen, Wages to storekeeper, foremen, works manager’s salary, repairs works manager’s salary, repairs to factory building, insurance to to factory building, insurance to machinery factory lightingmachinery factory lighting
FactoryFactory
Indirect materialIndirect material
Indirect labourIndirect labour
Indirect expenses Indirect expenses ++
Total costTotal cost
Stationary, salaries to accounts Stationary, salaries to accounts staff, postage, internet, bank staff, postage, internet, bank charges, audit, administration charges, audit, administration expenses, depreciationexpenses, depreciation
AdministAdministration ration sectionsection
Factory over headsFactory over heads
Office and administration overheads
40
Indirect materialIndirect material
Indirect labourIndirect labour
Indirect Indirect overheadsoverheads
Cost of Cost of sales+sales+
ProfitProfit
SalesSales
Packing material, Packing material, samples,salaries samples,salaries to sales to sales personnel,commipersonnel,commission to sales ssion to sales manager, manager, warehouse warehouse charges,advertischarges,advertisement,repairs to ement,repairs to distribution van, distribution van, discount to discount to customerscustomers
Sales departmentSales departmentSelling and distribution
41
Life educationLife education
Lady in a seashoreLady in a seashore
42
5.Double entry / Single entry5.Double entry / Single entry
Is Accounting based on business Is Accounting based on business concept or religious concept?concept or religious concept?
Giving first and receiving later.Giving first and receiving later. Giving cash receiving machineryGiving cash receiving machinery We consider both aspects such as We consider both aspects such as
debit and creditdebit and credit
43
Rules of acccountingRules of acccounting
Personal rule/Account-supplier debtors, Personal rule/Account-supplier debtors, owner, banker, outstanding wagesowner, banker, outstanding wages
Real rule/Account- cash, bank, building, Real rule/Account- cash, bank, building, furniture, goodwill, patent rightsfurniture, goodwill, patent rights
Nominal rule/account: income and Nominal rule/account: income and expenditure: salary, rent , insurance, expenditure: salary, rent , insurance, commission, internet expenses, cell commission, internet expenses, cell phone expenses.phone expenses.
44
Personal rulePersonal rule
Debit the receiver Debit the receiver credit the givercredit the giver Example: Computer chips purchased on Example: Computer chips purchased on
credit from wiprocredit from wipro Here credit Wipro as Wipro is the giver of Here credit Wipro as Wipro is the giver of
computer.computer. Sold goods to MeenaSold goods to Meena Meena is the receiver-debitMeena is the receiver-debit
45
ExcerciseExcercise
Amount collected from debtors?Amount collected from debtors? Amount deposited to bank?Amount deposited to bank?
46
Real ruleReal rule These are the accounts of assets and These are the accounts of assets and
liabilitiesliabilities
Rule: Rule: debit what comes debit what comes in in
Credit what goes Credit what goes outout
47
ExcerciseExcercise
Goods supplied for cashGoods supplied for cash Cash withdrawn from bank Cash withdrawn from bank Cash withdrawn from bank for Cash withdrawn from bank for
personal usepersonal use Land purchased by giving a chequeLand purchased by giving a cheque Building sold on creditBuilding sold on credit
48
Nominal ruleNominal rule
Related to Expenses and incomeRelated to Expenses and income
Rule: Rule: Debit all expenses and Debit all expenses and losseslosses
Credit all incomes Credit all incomes and gainsand gains
49
ExcerciseExcercise
Rent paid Rs 50,000Rent paid Rs 50,000 Wages paid Rs.1,00,000Wages paid Rs.1,00,000 Wages outstanding-Rs.60,000Wages outstanding-Rs.60,000 Commission received-25,000Commission received-25,000 Discount allowed to customer – Rs.1,000Discount allowed to customer – Rs.1,000 Telephone bills paid-Rs.2500Telephone bills paid-Rs.2500 Shares issued at premium-Rs.2,00,000Shares issued at premium-Rs.2,00,000
50
Suitable questions to pass Suitable questions to pass journal entryjournal entry
If cash transaction, person is not If cash transaction, person is not importantimportant
Every birth of an account there is a Every birth of an account there is a death of the accountdeath of the account
Ask what comes in?Ask what comes in? Or what goes out?Or what goes out?
51
Depreciation Depreciation Accounting(34)Accounting(34)
Reduction in the value of assetsReduction in the value of assets Use factors, time factor,obsolescence Use factors, time factor,obsolescence
are the factorsare the factors Statutory requirementStatutory requirement AS(6)AS(6) Fixed assets are depreciatedFixed assets are depreciated Current assets are not depreciatedCurrent assets are not depreciated Land and cattle are not depreciated.Land and cattle are not depreciated.
52
Depreciation Depreciation methodsmethods
Straight line methodStraight line method Written down value methodWritten down value method Sinking fund methodSinking fund method Machine Hour rate methodMachine Hour rate method Unit cost methodUnit cost method Depletion asset methodDepletion asset method Depreciation Fund methodDepreciation Fund method Sum of digits methodSum of digits method Accelerated depreciation methodAccelerated depreciation method
53
Impact on Impact on booksbooks
Depreciation ExpenseDepreciation Expense Net incomeNet income AssetAsset EquityEquity Return on assetsReturn on assets Return on EquityReturn on Equity Turnover RatiosTurnover Ratios Cash flowCash flow NPVNPV IRRIRR Pay back Pay back
54
Impact of Impact of TaxTax
Block asset methodBlock asset method Purchase of AssetPurchase of Asset Sale of AssetSale of Asset Short term/Long-term Capital assetShort term/Long-term Capital asset Asset used less than 180 days during the Asset used less than 180 days during the
previous yearprevious year Asset purchased preceding previous year Asset purchased preceding previous year
but put into use less than 180 days during but put into use less than 180 days during the current previous yearthe current previous year
55
Divisible profit and Divisible profit and depreciation(Page:39-41)depreciation(Page:39-41)
Profit after adequate Profit after adequate depreciation[Sec.205(2)]depreciation[Sec.205(2)]
Profit after interest-depreciation of Profit after interest-depreciation of the current year- Depreciation of the the current year- Depreciation of the previous year- loss of the previous previous year- loss of the previous yearyear
Depreciation as per Schedule XIV of Depreciation as per Schedule XIV of the Companies Actthe Companies Act
Section 350 –calculated on WDVSection 350 –calculated on WDV
56
Methods(35)Methods(35)
1. straight line method:1. straight line method: Cost (- )estimated scrap valueCost (- )estimated scrap value
Estimated life in yearsEstimated life in years 2. written down value or diminishing balance 2. written down value or diminishing balance
method.method. cost of the asset=1,00,000; rate of depreciation cost of the asset=1,00,000; rate of depreciation
=10%=10% #Depreciation for the 1#Depreciation for the 1stst
year=1,00,000*10%=10,000year=1,00,000*10%=10,000 Value at the end of first year= 1,00,000-10,000= Value at the end of first year= 1,00,000-10,000=
90,00090,000 ##Second year depreciation=90,000*10%=9000##Second year depreciation=90,000*10%=9000
57
Methods(37)Methods(37)
3. production unit method:3. production unit method: Depreciation= (cost-scrap)(units produced during the year)Depreciation= (cost-scrap)(units produced during the year)
no of units the no of units the machine machine
can produce during its lifecan produce during its life
Suppose cost=1,00,000; scrap=5000; total life in Suppose cost=1,00,000; scrap=5000; total life in units=10000 units. No. of units produced units=10000 units. No. of units produced during the year=3000during the year=3000
Depreciation=(1,00,000-5000)(3000)/10,000Depreciation=(1,00,000-5000)(3000)/10,000
=Rs 28,500=Rs 28,500
58
Production hour methodProduction hour method
It depends on number of hours It depends on number of hours produced instead of units produced produced instead of units produced
We calculate production hour rateWe calculate production hour rate Multiply the no.of hours used during Multiply the no.of hours used during
the year with the rate gives the year with the rate gives depreciationdepreciation
59
Joint factor rate method(38)Joint factor rate method(38)
Both fixed element and variable Both fixed element and variable elements are consideredelements are considered
Cost is divided into fixed and variableCost is divided into fixed and variable Fixed part is divided based on timeFixed part is divided based on time Variable elements are divided by Variable elements are divided by
total units which gives rate per unittotal units which gives rate per unit
60
Annuity Annuity methodmethod
C*rC*r Depreciation= Depreciation= nn 1- 1/(1+r) - 11- 1/(1+r) - 1 Depreciation is constantDepreciation is constant It depends on future cash inflowsIt depends on future cash inflows It assumes that the capital invested would It assumes that the capital invested would
have earned interest had been invested have earned interest had been invested otherwiseotherwise
61
Sinking fund methodSinking fund method
Amount available would be Amount available would be equivalent to the original costequivalent to the original cost
C*rC*r
Depreciation= Depreciation= nn (1+r) – 1(1+r) – 1Calculation of 26380 is wrong. I should be 16380.Calculation of 26380 is wrong. I should be 16380.
62
Endowment policy Endowment policy methodmethod
Insurance policy is taken to replace Insurance policy is taken to replace the asset.the asset.
The depreciation is equal to the The depreciation is equal to the insurance premium paidinsurance premium paid
63
Renewal method(39)Renewal method(39)
When asset is renewed full amount is When asset is renewed full amount is written off.written off.
64
Bye-bye to Bye-bye to chapter-2chapter-2
Chineese tree
Life education
65
Chapter-3Chapter-3
JournalisingJournalising Ledger (subsidiary books)Ledger (subsidiary books) PostingPosting Trial balanceTrial balance Trading and profit and loss accountTrading and profit and loss account Balance sheetBalance sheet
66
Final Accounts Final Accounts AdjustmentsAdjustments
Direct expensesDirect expenses Indirect expensesIndirect expenses Opening stock given in adjustmentOpening stock given in adjustment Closing stock given in the adjustmentClosing stock given in the adjustment Wages outstanding in trail balanceWages outstanding in trail balance Income from investment due given in trail balanceIncome from investment due given in trail balance Meaning of adjustmentMeaning of adjustment Income taxIncome tax Life insurance premiumLife insurance premium Goods drawn by the ownerGoods drawn by the owner
67
Final Accounts AdjustmentsFinal Accounts Adjustments
Domestic house hold ExpensesDomestic house hold Expenses Income tax refundIncome tax refund Income from house propertyIncome from house property Accrual basis of AccountingAccrual basis of Accounting Un expired insuranceUn expired insurance Income received in AdvanceIncome received in Advance Interest on CapitalInterest on Capital Provision on Doubtful debtsProvision on Doubtful debts provision for Discount on debtorprovision for Discount on debtor Deffered revenue expenditureDeffered revenue expenditure
68
Final Accounts AdjustmentsFinal Accounts Adjustments
Reserve FundReserve Fund Goods Distributed as free sampleGoods Distributed as free sample Manager’s CommissionManager’s Commission Goods on sale or approval basisGoods on sale or approval basis Hidden adjustmentsHidden adjustments
69
Terms used in final Terms used in final accountsaccounts
Trading accountTrading account Profit and loss accountProfit and loss account Profit and loss appropriation accountProfit and loss appropriation account Balance sheetBalance sheet CapitalCapital Long term liabilitiesLong term liabilities Current liabilitiesCurrent liabilities Fixed assetsFixed assets
70
TermsTerms
InvestmentsInvestments Current assetsCurrent assets AdjustmentsAdjustments Closing stockClosing stock DepreciationDepreciation Outstanding expensesOutstanding expenses Prepaid expensesPrepaid expenses
71
TermsTerms
Accrued incomeAccrued income Income received In advanceIncome received In advance Bad debtsBad debts Provision for doubtful debtsProvision for doubtful debts Interest on capitalInterest on capital DrawingsDrawings Deferred revenue expensesDeferred revenue expenses
72
TermsTerms
Abnormal expensesAbnormal expenses Goods distributed as free sampleGoods distributed as free sample Goods sent on approvalGoods sent on approval Commission payable to managerCommission payable to manager
73
Important adjustments In Important adjustments In various problemsvarious problems
Illus:2 page-77 i) repairs tp plant Illus:2 page-77 i) repairs tp plant ii)Income tax of Xii)Income tax of X
Iii) Provision for bad debtsIii) Provision for bad debts Iv) adjustment no.b,e and fIv) adjustment no.b,e and f V) calculation of works manager’s V) calculation of works manager’s
commission and general manager’s commission and general manager’s commissioncommission
74
Important adjustments In Important adjustments In various problemsvarious problems
Illustration 3: i) adju.e and I and trading account purchases Illustration 3: i) adju.e and I and trading account purchases and salesand sales
Illustration 4: bank loan, adj. a,d and g.Illustration 4: bank loan, adj. a,d and g. Illustration 5: loan, adj.b and c.Illustration 5: loan, adj.b and c. Illustration 6: adj: b,f and hIllustration 6: adj: b,f and h Illustration 7: adj:b and dIllustration 7: adj:b and d Illustration 8: adj.fIllustration 8: adj.f Illustration 9: adj. d and eIllustration 9: adj. d and e Illustration 10: loan, adj.aIllustration 10: loan, adj.a
75
Bank reconciliation Bank reconciliation statementstatement
Cash book Cash book Pass bookPass book Cheques issued but not debitedCheques issued but not debited Cheques deposited but not clearedCheques deposited but not cleared Bank charges entered in the pass bookBank charges entered in the pass book Income from investments entered in the Income from investments entered in the
pass bookpass book Electricity, water, telephone , internet bills Electricity, water, telephone , internet bills
paid directly by bank entered in the pass paid directly by bank entered in the pass bookbook
Clerical errors in the pass book or cash bookClerical errors in the pass book or cash book
76
Exercise:-11 page121Exercise:-11 page121
Q.2 –page-116 and questions no.6 Q.2 –page-116 and questions no.6 page-119 .page-119 .
77
Life educationLife education
Child likes to hug in the Child likes to hug in the eveningevening
78
Chapter 5: Rectification of Chapter 5: Rectification of Errors(page-126)Errors(page-126)
Reasons for errors in accounting:Reasons for errors in accounting: 1.error of omission1.error of omission 2.error of commission2.error of commission 3.Error of principle3.Error of principle 4. Compensating error4. Compensating error
79
Errors not affecting trial Errors not affecting trial balancebalance
1.error of omission1.error of omission 2.Error of principle2.Error of principle 3.compensating error3.compensating error 4. complete omission4. complete omission 5.error of commission5.error of commission
80
Suspense AccountSuspense Account
If trial Balance does not tally ie debit If trial Balance does not tally ie debit is not equal to credit then is not equal to credit then temporarily to close down we open a temporarily to close down we open a suspense Account on the deficit side suspense Account on the deficit side known as suspense account.known as suspense account.
81
Rectification: StepsRectification: Steps
Rectify only the account in which error Rectify only the account in which error is committed.is committed.
Book means complete set of accountsBook means complete set of accounts Accounts means mistake only in the Accounts means mistake only in the
accountaccount If suspense account is given and if one If suspense account is given and if one
side error suspense account has to be side error suspense account has to be either debited or credited accordingly.either debited or credited accordingly.
82
Problems in errors Problem:7 Problems in errors Problem:7 page-139page-139
1.1. Drawings A/c debitDrawings A/c debit
to General expenses a/c to General expenses a/c creditcredit
2. Sales Account debit2. Sales Account debit
to Machinery A/c creditto Machinery A/c credit
3. Rent a/c debit3. Rent a/c debit
To land lord a/cTo land lord a/c
4. Repairs a/c4. Repairs a/c
To BuildingTo Building
5. Suspense a/c debit5. Suspense a/c debit
To Harish a/cTo Harish a/c
To Cash A/cTo Cash A/c
25002500
13001300
160160
245245
500500
25002500
13001300
160160
245245
250250
250250
83
Problem:6 page-138Problem:6 page-138particularsparticulars amountamount amountamount
a.Machinery Dr.a.Machinery Dr.
To Purchases a/cTo Purchases a/c
To Wages a/cTo Wages a/c
b.Suspese a/c Dr.b.Suspese a/c Dr.
to Mohan a/cto Mohan a/c
Cash a/cDr.Cash a/cDr.
To MohanTo Mohan
11001100
27002700
400400
700700
400400
27002700
400400
84
particularsparticulars
Mohan a/c Dr.Mohan a/c Dr.
To sales susp.To sales susp.
c. Suspensea/cc. Suspensea/c
ToYogesh a/cToYogesh a/c
d.Furniture a/cdrd.Furniture a/cdr
To P/L a/cTo P/L a/c
e.Machi.a/cdr.e.Machi.a/cdr.
To PurchasesTo Purchases
To trade exp.To trade exp.
700700
900900
600600
1820018200
700700
900900
600600
1700017000
12001200
85
Life educationLife education
Thomas Thomas Cooper –Cooper –DictionaryDictionary
86
Chapter-6 Cost Chapter-6 Cost Accountancy-termsAccountancy-terms
Cost centreCost centre
Impersonal and personal cost Impersonal and personal cost centrecentre
production and service cost production and service cost centrecentre
Concept of costConcept of cost
87
Chapter-6 Cost Chapter-6 Cost Accountancy-termsAccountancy-terms
Cost centreCost centre
Impersonal and personal cost Impersonal and personal cost centrecentre
production and service cost production and service cost centrecentre
Concept of costConcept of cost
88
The bottom line is that the organization
is out "hard" or "real" money.[1 Examples:
· Hardware and software purchases · Professional services
· Maintenance · Labor
· Medical benefits · Insurance
· Internet Service Provider fees · Wide area network fees
89
Economic Costs Economic Costs
Economic costs are "opportunity costs." Economic costs are "opportunity costs." Instead of doing X, you had to do Y. Instead of doing X, you had to do Y.
These are not hard-currency costs and These are not hard-currency costs and it is dangerous to lump them into the it is dangerous to lump them into the cost-savings category with accounting cost-savings category with accounting
costs because their effects will not costs because their effects will not necessarily show up on the bottom necessarily show up on the bottom
line. line.
90
Chapter-6 Cost Chapter-6 Cost Accountancy-termsAccountancy-terms
Cost centreCost centre
Impersonal and personal cost Impersonal and personal cost centrecentre
production and service cost production and service cost centrecentre
Concept of costConcept of cost
91
Economic Costs Economic Costs
Economic costs are "opportunity costs." Economic costs are "opportunity costs." Instead of doing X, you had to do Y. Instead of doing X, you had to do Y.
These are not hard-currency costs and These are not hard-currency costs and it is dangerous to lump them into the it is dangerous to lump them into the cost-savings category with accounting cost-savings category with accounting
costs because their effects will not costs because their effects will not necessarily show up on the bottom necessarily show up on the bottom
line. line.
92
Chapter-6 Cost Chapter-6 Cost Accountancy-termsAccountancy-terms
Cost centreCost centre
Impersonal and personal cost Impersonal and personal cost centrecentre
production and service cost production and service cost centrecentre
Concept of costConcept of cost
93
The bottom line is that the organization
is out "hard" or "real" money.[1 Examples:
· Hardware and software purchases · Professional services
· Maintenance · Labor
· Medical benefits · Insurance
· Internet Service Provider fees · Wide area network fees
94
Economic Costs Economic Costs
Economic costs are "opportunity costs." Economic costs are "opportunity costs." Instead of doing X, you had to do Y. Instead of doing X, you had to do Y.
These are not hard-currency costs and These are not hard-currency costs and it is dangerous to lump them into the it is dangerous to lump them into the cost-savings category with accounting cost-savings category with accounting
costs because their effects will not costs because their effects will not necessarily show up on the bottom necessarily show up on the bottom
line. line.
95
Terms in costingTerms in costing
Accounting CostsAccounting Costs : : These are costs that impact an organization’s general ledger. For example, buying a product results in a chain of events wherein a purchase order is processed, a product/service is received, then an invoice arrives from the vendor
96
Economic Costs Economic Costs
Economic costs are "opportunity costs." Economic costs are "opportunity costs." Instead of doing X, you had to do Y. Instead of doing X, you had to do Y.
These are not hard-currency costs and These are not hard-currency costs and it is dangerous to lump them into the it is dangerous to lump them into the cost-savings category with accounting cost-savings category with accounting
costs because their effects will not costs because their effects will not necessarily show up on the bottom necessarily show up on the bottom
line. line.
97
ExampleExample : : · Reducing firefighting on incidents related · Reducing firefighting on incidents related
to problematic changes is robbing to problematic changes is robbing resources from planned work (projects) resources from planned work (projects) and applying them to unplanned, reactive and applying them to unplanned, reactive work (incidents).work (incidents).
If you say that better change management If you say that better change management reduced unplanned work by 20 percent, reduced unplanned work by 20 percent, that is not an accounting cost savings, but that is not an accounting cost savings, but it did free up resources to work on projects.it did free up resources to work on projects.
It would be wise to identify what project It would be wise to identify what project progress was enabled through the action. progress was enabled through the action.
98
Example-2Example-2
· By training users, incidents · By training users, incidents handled by the service desk handled by the service desk decreased 5 percent. Again, this is decreased 5 percent. Again, this is not an accounting cost savings not an accounting cost savings unless a resource is dismissed, thus unless a resource is dismissed, thus impacting labor, benefits and so on. impacting labor, benefits and so on.
99
mixing accounting and mixing accounting and economic costeconomic cost
mixing accounting and economic mixing accounting and economic cost savings together and instead cost savings together and instead wrap both types of costs with a wrap both types of costs with a business case explaining the benefits business case explaining the benefits of the proposal. of the proposal.
100
OverheaOverhead d
These are indirect costs that are These are indirect costs that are absorbed by IT. For example, a absorbed by IT. For example, a portion of building rent is often portion of building rent is often allocated to IT based on some cost allocated to IT based on some cost driver such as percent of floor space driver such as percent of floor space allocated. allocated.
101
illustratioillustrationn
If IT occupies 10 percent of a If IT occupies 10 percent of a building, then accounting will likely building, then accounting will likely allocate 10 percent of the rent to IT. allocate 10 percent of the rent to IT. This overhead cost must then be This overhead cost must then be factored into the services that IT factored into the services that IT offers in order for proper charge offers in order for proper charge backs, pricing and so on backs, pricing and so on
102
Sunk Sunk Costs Costs
These are costs that, once spent, cannot These are costs that, once spent, cannot be Recovered. If something is purchased be Recovered. If something is purchased that cannot be returned or sold off, then that cannot be returned or sold off, then that item should be considered a sunk that item should be considered a sunk costcost..
Most of the times they are irrelevant to Most of the times they are irrelevant to take future decision. take future decision.
103
Cost Cost DriversDrivers
When determining costs, it is worthwhile to When determining costs, it is worthwhile to understand what drives the costs. In other understand what drives the costs. In other words, if you do X, then you see a words, if you do X, then you see a corresponding increase in cost Y. To corresponding increase in cost Y. To illustrate, if you must buy a PC and illustrate, if you must buy a PC and software licenses for each new person software licenses for each new person hired, then the addition of new users is one hired, then the addition of new users is one of the cost drivers for the associated PC of the cost drivers for the associated PC and software expense accounts. and software expense accounts.
104
Salvage Salvage Value/Salvage Value/Salvage
CostsCosts
If you can sell an asset for more than its If you can sell an asset for more than its book value, then you are actually booking book value, then you are actually booking another form of income. On the other hand, another form of income. On the other hand, if the salvage value is lower than the book if the salvage value is lower than the book value, then accounting will need to write the value, then accounting will need to write the asset off.asset off.
If you have to pay someone to take things If you have to pay someone to take things away due to hazardous materials laws, then away due to hazardous materials laws, then you may even incur expenses relating to the you may even incur expenses relating to the disposal of the asset. disposal of the asset.
105
Differential Differential costcost
Increased or decreased cost due to Increased or decreased cost due to the increased or decreased volume the increased or decreased volume of operations.of operations.
Additional cost due to operation.Additional cost due to operation.
106
Normal cost and Normal cost and abnormal cost(150)abnormal cost(150)
Normal costs incurred at a certain Normal costs incurred at a certain level of outputlevel of output
Abnormality in cost due to Abnormality in cost due to unforeseen situationsunforeseen situations
107
Relevant cost and relevant Relevant cost and relevant benefitbenefit
Required for decision makingRequired for decision making Costs that are affected by by the decisionCosts that are affected by by the decision Costs and benefits that are independent of a Costs and benefits that are independent of a
decision are not relevant and need not be decision are not relevant and need not be considered.considered.
Future cash inflows and future outflows are relevant.Future cash inflows and future outflows are relevant. Sunk costs are irrelevantSunk costs are irrelevant Allocated common costs are irrelevantAllocated common costs are irrelevant Opportunity costs are relevant (shadow price)Opportunity costs are relevant (shadow price) Incremental costs are relevant incremental benefits Incremental costs are relevant incremental benefits
are relevant.are relevant. Avoidable costs are relevant and unavoidable costs Avoidable costs are relevant and unavoidable costs
are irrelevant for decision making.are irrelevant for decision making.
108
Relevant and irrelevantRelevant and irrelevant
Five engineers already employed on Five engineers already employed on monthly salary but will not be sent monthly salary but will not be sent out if not employed in an another out if not employed in an another project. The salary paid to those project. The salary paid to those engineers are relevant or irrelevant engineers are relevant or irrelevant to estimate the price for the project?to estimate the price for the project?
Two more engineers are selected Two more engineers are selected exclusive to the new project-are the exclusive to the new project-are the costs relevant to take decision for costs relevant to take decision for new project?new project?
109
Direct and indirect costsDirect and indirect costs
Direct Costs are costs that can be Direct Costs are costs that can be specifically and exclusively identified with specifically and exclusively identified with the particular object (product)the particular object (product)
Salary of processing associateSalary of processing associate Indirect Costs are costs that can not be Indirect Costs are costs that can not be
specifically and exclusively identified with specifically and exclusively identified with the particular object (product)the particular object (product)
Salary of team leaderSalary of team leader Direct costs are allocated. Indirect costs Direct costs are allocated. Indirect costs
are apportioned.are apportioned.
110
product costs Period costsproduct costs Period costs
Product cost are those costs that are Product cost are those costs that are identified with goods purchased or identified with goods purchased or produced for resale.produced for resale.
Period costs are those costs that are not Period costs are those costs that are not included in the inventory valuation and included in the inventory valuation and as a result are treated as expense in as a result are treated as expense in the period in which they are incurred.the period in which they are incurred.
Product costs will generate income.but Product costs will generate income.but period costs do not generate income.period costs do not generate income.
111
Treatment of period and Treatment of period and product costsproduct costs
Product code
Period code
Manufacturing cost
Non manufacturing costs
Recorded as an assetIn the balance sheet
And becomes an Expense in the P/L
A/C When the product
Is sold
Recorded as anExpense in the P/L A/c
In the current Accounting year
sold
unsold
112
Variable, fixed, semi variable Variable, fixed, semi variable and semi fixedand semi fixed
Cost (Rs.) Variable costCost (Rs.) Variable cost
cost(Rs.)cost(Rs.)
Out put(units)Out put(units) fixed cost fixed cost
Activity level(units)
113
Step fixed costStep fixed cost
TotalTotal
Fixed costFixed cost
Activity level(Units)Activity level(Units)
114
Variable, fixed, semi variable Variable, fixed, semi variable and semi fixed.and semi fixed.
Fixed costFixed cost Supervisors’ salary, leasing Supervisors’ salary, leasing charges for cars, depreciation charges for cars, depreciation on buildingon building
In the long run all costs are In the long run all costs are variable.variable.
Variable Variable costscosts
Semi Semi variable variable costcost
direct material, direct labour direct material, direct labour and direct expenses. and direct expenses.
Both fixed and variable Both fixed and variable elements in the costs.elements in the costs.
115
Incremental costs and Marginal Incremental costs and Marginal costcost
Differential costs and revenues are Differential costs and revenues are the difference between costs and the difference between costs and revenues for the corresponding item revenues for the corresponding item under each alternative being under each alternative being considered.considered.
Marginal cost/revenue - one extra Marginal cost/revenue - one extra unit of output cost/revenue.unit of output cost/revenue.
116
117
Red Car, Inc. Cost of Goods Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Manufactured Schedule For the Year
Ended March, 20xxEnded March, 20xx
Direct materials used Direct materials used
Beginning raw materials Beginning raw materials inventory inventory
Add: Cost of raw materials Add: Cost of raw materials purchased purchased
Total raw materials availableTotal raw materials available
Less: Ending raw materials Less: Ending raw materials inventory inventory
Total raw materials usedTotal raw materials used
direct labordirect labor
Manufacturing overhead Manufacturing overhead
Indirect materialsIndirect materials
Indirect labor Indirect labor
118
ContinuationContinuation
Depreciation—factory building Depreciation—factory building Depreciation-factory equipmentDepreciation-factory equipment Insurance-factory Insurance-factory Property taxes—factory Property taxes—factory Total manufacturing overheadTotal manufacturing overheadTotal manufacturing costsTotal manufacturing costsAdd: Beginning work-in-process inventoryAdd: Beginning work-in-process inventoryLess: Ending work-in-process inventory Less: Ending work-in-process inventory
Cost of goods manufacturedCost of goods manufactured
119
ADVANTAGES OF COST ADVANTAGES OF COST ACCOUNTINGACCOUNTING
It reveals profitable and unprofitable It reveals profitable and unprofitable activities. activities.
It helps in controlling costs with special It helps in controlling costs with special techniques like standard costing and techniques like standard costing and budgetary control budgetary control
It supplies suitable cost data and other It supplies suitable cost data and other related information for managerial decision related information for managerial decision making such as introduction of a new making such as introduction of a new product, replacement of machinery with an product, replacement of machinery with an automatic plant etc automatic plant etc
120
ADVANTAGES OF COST ADVANTAGES OF COST ACCOUNTINGACCOUNTING
It helps in deciding the selling prices, particularly It helps in deciding the selling prices, particularly during depression period when prices may have during depression period when prices may have to be fixed below cost to be fixed below cost
It helps in inventory control It helps in inventory control It helps in the introduction of a cost reduction It helps in the introduction of a cost reduction
programme and finding out new and improved programme and finding out new and improved ways to reduce costs ways to reduce costs
Cost audit system which is a part of cost Cost audit system which is a part of cost accountancy helps in preventing manipulation accountancy helps in preventing manipulation and frauds and thus reliable cost can be furnished and frauds and thus reliable cost can be furnished to management to management
121
ESSENTIALS OF A GOOD COST ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEMACCOUNTING SYSTEM
The method of costing adopted. It should be The method of costing adopted. It should be
suitable to the industry suitable to the industry It should be tailor made according to the It should be tailor made according to the
requirements of a business. A ready made system requirements of a business. A ready made system can not be suitable can not be suitable
It must be fully supported by executives of various It must be fully supported by executives of various departments and every one should participate in it departments and every one should participate in it
In order to derive maximum benefits from a In order to derive maximum benefits from a costing system, well defined cost centres and costing system, well defined cost centres and responsibility centres should be built within the responsibility centres should be built within the organisation organisation
122
ESSENTIALS OF A GOOD COST ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEMACCOUNTING SYSTEM
controllable and uncontrollable costs of each controllable and uncontrollable costs of each responsibility centre should be separately shown responsibility centre should be separately shown
cost and financial accounts may be integrated in cost and financial accounts may be integrated in order to avoid duplication of accounts order to avoid duplication of accounts
well trained and educated staff should be well trained and educated staff should be employed to operate the system employed to operate the system
It should prepare an accurate reports and It should prepare an accurate reports and promptly submit the same to appropriate level of promptly submit the same to appropriate level of management so that action may be taken without management so that action may be taken without delay delay
resources should not be wasted on collecting and resources should not be wasted on collecting and compiling cost data not required. Only useful cost compiling cost data not required. Only useful cost information should be compiled and used information should be compiled and used whenever required. whenever required.
123
ESSENTIALS OF A GOOD COST ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM-continuesACCOUNTING SYSTEM-continues
It helps in deciding the selling prices, particularly It helps in deciding the selling prices, particularly during depression period when prices may have to be during depression period when prices may have to be fixed below cost fixed below cost
It helps in inventory control It helps in inventory control
It helps in the introduction of a cost reduction It helps in the introduction of a cost reduction programme and finding out new and improved ways programme and finding out new and improved ways to reduce costs to reduce costs
Cost audit system which is a part of cost accountancy Cost audit system which is a part of cost accountancy helps in preventing manipulation and frauds and thus helps in preventing manipulation and frauds and thus reliable cost can be furnished to management reliable cost can be furnished to management
124
Life educationLife education
Threat is an opportunityThreat is an opportunity Strength is your weaknessStrength is your weakness Strengthen your weaknessStrengthen your weakness
125
Unit-7 Elements of costsUnit-7 Elements of costs
Learning:Learning: Cost sheetCost sheet Elements of costElements of cost Operating costOperating cost Operating profitOperating profit Non operating profitNon operating profit
126
Terms used in Terms used in costing(unit 7)costing(unit 7)
Direct materialDirect material
Direct labourDirect labour
Direct expensesDirect expenses
Prime costPrime cost
Raw material; cost per unit can be identified, Raw material; cost per unit can be identified, in the individual cost centre;in the individual cost centre;
Engaged in manufacturing processEngaged in manufacturing process
Hire charges of machinery-direct expensesHire charges of machinery-direct expenses
FactoryFactory
Indirect materialIndirect material
Indirect labourIndirect labour
Indirect expenses +Indirect expenses +
Works costWorks cost
Consumable stores, cotton waste ,oilConsumable stores, cotton waste ,oil
Wages to storekeeper, foremen, works Wages to storekeeper, foremen, works manager’s salary, repairs to factory building, manager’s salary, repairs to factory building, insurance to machinery factory lightinginsurance to machinery factory lighting
FactoryFactory
Indirect Indirect Office and Office and administration administration overheadsoverheadsmaterialmaterial
Indirect labourIndirect labour
Indirect expenses +Indirect expenses +
Total costTotal cost
Stationary, salaries to accounts staff, Stationary, salaries to accounts staff, postage, internet, bank charges, audit, postage, internet, bank charges, audit, administration expenses, depreciationadministration expenses, depreciation
AdministratiAdministration sectionon section
Factory over headsFactory over heads
127
Indirect materialIndirect material
Indirect labourIndirect labour
Indirect Indirect overheadsoverheads
Cost of Cost of sales+sales+
ProfitProfit
SalesSales
Packing material, Packing material, samples,salaries samples,salaries to sales to sales personnel,commipersonnel,commission to sales ssion to sales manager, manager, warehouse warehouse charges,advertischarges,advertisement,repairs to ement,repairs to distribution van, distribution van, discount to discount to customerscustomers
Sales departmentSales departmentSelling and distribution
128
Marginal costing cost sheetMarginal costing cost sheet ££Sales Revenue xxxxx££Sales Revenue xxxxx
LessLess Marginal Cost of Sales Marginal Cost of Sales Opening Stock (Valued @ marginal cost) xxxxOpening Stock (Valued @ marginal cost) xxxx AddAdd Production Cost (Valued @ marginal cost) xxxx Production Cost (Valued @ marginal cost) xxxx Total Production Cost xxxx Total Production Cost xxxx LessLess Closing Stock (Valued @ marginal cost) xxx) Closing Stock (Valued @ marginal cost) xxx) Marginal Cost of Production xxxxMarginal Cost of Production xxxx
AddAdd Selling, Admin & Distribution Cost xxx Selling, Admin & Distribution Cost xxx Marginal Cost of Sales (xxxx)Marginal Cost of Sales (xxxx)
Contribution xxxxxContribution xxxxx LessLess Fixed Cost (xxxx) Fixed Cost (xxxx) Marginal Costing Profit xxxxxMarginal Costing Profit xxxxx
129
ABSORPTION COSTING PRO-ABSORPTION COSTING PRO-FORMAFORMA
££Sales Revenue xxxxxLess Absorption Cost of Sales Opening Stock (Valued @ absorption cost) xxxx Add Production Cost (Valued @ absorption cost) xxxx Total Production Cost xxxx Less Closing Stock (Valued @ absorption cost) (xxx) Absorption Cost of Production xxxxAdd Selling, Admin & Distribution Cost xxxxAbsorption Cost of Sales (xxxx)Un-Adjusted Profit xxxxxFixed Production O/H absorbed xxxx Fixed Production O/H incurred (xxxx) (Under)/Over Absorption xxxxxAdjusted Profit xxxxx
130
Reconciliation Statement for Marginal Reconciliation Statement for Marginal
Costing and Absorption Costing ProfitCosting and Absorption Costing Profit $ Marginal Costing Profit $ Marginal Costing Profit
xx xx ADDADD
(Closing stock – opening Stock) x (Closing stock – opening Stock) x OAR xxOAR xx
= Absorption Costing Profit = Absorption Costing Profit xx xx
Where OAR( overhead absorption rate) =Budgeted fixed production overheadBudgeted levels of activities
131
Cost sheetCost sheet
Prime cost+Prime cost+ Factory over headsFactory over heads Factory cost/works cost+Factory cost/works cost+ Administration over headsAdministration over heads Office cost+Office cost+ Selling overheadsSelling overheads Total costTotal cost ProfitProfit salessales
132
Factory cost/Factory cost/
works costworks cost
1.Production
Prime Cost
1.Godown
1.canteen
Cost of sales
5.sales4.profit
1.Factory administration
3.Sales and distribution2.General administration
Total cost
Bin card
Stores ledger
Cost calculations/operating activity
++ =
+
+
133
Operating activity Non- operating activity
Dealers in furniture
Dealers in housesMy house is for sale
My furniture is for sale
?
?
Pro
fits
are
oper
atin
g pr
ofits
Non
ope
ratin
g pr
ofit
134
Operating/ Non Operating/ Non operatingoperating
Operating (OP)Operating (OP) Non operating (NOP)Non operating (NOP)
1.Profits derived by 1.Profits derived by doing basic functionsdoing basic functions
2.Efficiency depends 2.Efficiency depends on operating profiton operating profit
3.Gross Profit- Office 3.Gross Profit- Office and administration and administration overheads- selling overheads- selling and distribution and distribution overheads=OPoverheads=OP
1.Profits derived 1.Profits derived other than basic other than basic functionsfunctions
2.We should not 2.We should not consider NOP to consider NOP to study efficiency study efficiency except on sale of except on sale of company/firm.company/firm.
3. Sale of asset-cost 3. Sale of asset-cost of such asset=NOPof such asset=NOP
135
BPOsBPOs
Self-less service canteen
Self help roomWhat activity?
136
Exercise Number: 3 page-175 unit Exercise Number: 3 page-175 unit 7.7.
Exercise Number: 6 page-177 unit 7Exercise Number: 6 page-177 unit 7
137
Factory cost/Factory cost/
works costworks cost
Prime Cost=R.material=40,000D. labour=12,000
Components=50,000Primary packing=50001.Godown
1.canteen
Cost of sales=1,76,338
5.sales4.Profit44084
1.Factory administration
3.Sales and distribution2.General administration
Total cost=1,60 307
Bin card
Stores ledger
Cost calculations/operating activity
+
+=
+
+
p.3
Consumable =4000Royalty=8000FOH=16050
5000+20,257 16031
2,20,422
138
Exercise:6/17Exercise:6/1777
particularsparticulars Units 500 Units 500 @ old @ old priceprice
Units500Units500@curren@current price)t price)
Units 600Units 600
Direct Direct Material[(40,000*600/500)*120/100]Material[(40,000*600/500)*120/100]
Direct Direct labour[(60,000*600/500)*105/100]labour[(60,000*600/500)*105/100]
Prime CostPrime Cost
Manufacturing Cost[25% on prime Manufacturing Cost[25% on prime cost]cost]
Factory costFactory cost
Administration cost:Administration cost:Management expensesManagement expenses
RentRent
General ExpensesGeneral Expenses
TOTAL COSTTOTAL COSTSelling expensesSelling expenses
Cost of salesCost of salesProfit Profit [20%[20% on sales=25% on cost]on sales=25% on cost]
salessales
40,00040,000
60,00060,000
1,00,0001,00,000
25,00025,000
1,25,001,25,0000
30,00030,000
5,0005,000
10,00010,000
1,70,001,70,0000
15,00015,000
1,85,001,85,0000
15,00015,000
2,00,002,00,0000
48,00048,000
63,00063,000
1,11,0001,11,000
27,75027,750
1,38,71,38,75050
30,00030,000
5,0005,000
10,00010,000
1,83,71,83,75050
15,00015,000
1,98,71,98,75050
49,68849,688
2,48,42,48,43838
57,60057,600
75,60075,600
1,33,2001,33,200
33,30033,300
1,66,5001,66,500
30,00030,000
5,0005,000
10,00010,000
2,11,5002,11,50015,00015,000
2,26,5002,26,500
56,62556,625
2,83,1252,83,125
139
Material cost-Material cost-stages in the movement of materialstages in the movement of material
1.Purchase requisition
3.Purchase order
4.Receipts and inspection
5.Cheking invoice
6.Accounting for purchase
7.Receipt of material
8.Issue of material
9.Return of material
10.Transfer of material
2.Selection of source of supply
140
Valuation of material Valuation of material movementsmovements
Basic costBasic cost Less: Trade discountLess: Trade discount Add: Container costAdd: Container cost Add: Sales tax-on basic cost after trade Add: Sales tax-on basic cost after trade
discountdiscount - on container- on container Add: insuranceAdd: insurance freightfreight Less: Credit for drumsLess: Credit for drums
Total costTotal cost Add: Stores overhead on total costAdd: Stores overhead on total cost Unit cost = Overall cost /No. of Units-normal loss Unit cost = Overall cost /No. of Units-normal loss
unitsunits
141
Normal loss and abnormal Normal loss and abnormal lossloss
Effective cost per unit=Effective cost per unit=
Costs incurred before abnormal loss period-recovery from normal loss units
Number of units-normal loss units
Abnormal loss units * Effective cost per unit=Abnormal loss
142
exampleexample Units purchased= 10,000Units purchased= 10,000 Costs of purchases=1,00,000Costs of purchases=1,00,000 Due to leakages number of units lost=50Due to leakages number of units lost=50 Loss of units due to breakages=2000; insurance Loss of units due to breakages=2000; insurance
claim initiated.claim initiated. Effective cost per unit=1,00,000-0/10,000-Effective cost per unit=1,00,000-0/10,000- 5050 =Rs.10.05025=Rs.10.05025 Abnormal loss=2000*10.05025=20100.50Abnormal loss=2000*10.05025=20100.50 How do you calculate normal loss?How do you calculate normal loss?
Page 200 unit-1
143
Calculate normal loss?Calculate normal loss?
We do not calculate normal loss but We do not calculate normal loss but to calculate effective rate per unit we to calculate effective rate per unit we consider normal loss units and consider normal loss units and recovery from normal loss.recovery from normal loss.
144
Valuation of issuesValuation of issues
FIFOFIFO LIFOLIFO Average price methodAverage price method Weighted Average methodWeighted Average method Highest In First methodHighest In First method Specific priceSpecific price Standard PriceStandard Price
145
Points to remembered for stock Points to remembered for stock valuation under various valuation under various
methodsmethods 1.All the methods used for the 1.All the methods used for the
calculation of issues to calculation of issues to productionproduction
The costs of purchase and other related The costs of purchase and other related costs should be passed on to customerscosts should be passed on to customers
Any deficit in stock taking to be Any deficit in stock taking to be considered as issueconsidered as issue
Any excess will be considered as Any excess will be considered as purchase at the latest pricepurchase at the latest price
Goods returned from production to be Goods returned from production to be valued at the price of issue.valued at the price of issue.
146
ExampleExample
DateDate ParticularsParticulars ReceiptsReceipts IssuesIssues BalanceBalance
Qty. Rate Qty. Rate Rs.Rs.
Qty Rate Rs.Qty Rate Rs. Qty Rate Rs.Qty Rate Rs.
11stst Jan Jan 0808
55thth
66thth
8th8th
Op. balanceOp. balance
PurchasePurchase
PurchasesPurchases
IssueIssue
100100 7.00 7.00 700700
200200 8.00 8.00 16001600 250 ?250 ?
500500 6.00 6.00 3,0003,000
Stores ledgerMaximum levelMinimum levelRe-order level
DescriptionUnit
Location
FIFO
147
ExampleExample
DateDate ParticularsParticulars ReceiptsReceipts IssuesIssues BalanceBalance
Qty. Rate Qty. Rate Rs.Rs.
Qty Rate Rs.Qty Rate Rs. Qty Rate Rs.Qty Rate Rs.
11stst Jan Jan 0808
55thth
6th6th
Op. balanceOp. balance
PurchasePurchase
IssueIssue
100100 7.00 7.00 700700
500500 6.00 6.00 3,0003,000
Stores ledgerMaximum levelMinimum levelRe-order level
DescriptionUnit
Location
LIFO
148
DateDate ParticularsParticulars ReceiptsReceipts IssuesIssues BalanceBalance
Qty. Rate Qty. Rate Rs.Rs.
Qty Rate Rs.Qty Rate Rs. Qty Rate Rs.Qty Rate Rs.
11stst Jan Jan 0808
55thth
6th6th
Op. balanceOp. balance
PurchasePurchase
IssueIssue
100100 7.00 7.00 700700
500500 6.00 6.00 3,0003,000
Stores ledger Maximum levelMinimum levelRe-order level
DescriptionUnit
Location
Average price method
149
DateDate ParticularsParticulars ReceiptsReceipts IssuesIssues BalanceBalance
Qty. Rate Qty. Rate Rs.Rs.
Qty Rate Rs.Qty Rate Rs. Qty Rate Rs.Qty Rate Rs.
11stst Jan Jan 0808
55thth
6th6th
Op. balanceOp. balance
PurchasePurchase
IssueIssue
100100 7.00 7.00 700700
500500 6.00 6.00 3,0003,000
Stores ledgerMaximum levelMinimum levelRe-order level
DescriptionUnit
Location
Weighted Average method
150
Techniques of Inventory Techniques of Inventory control (Unit 8-page 211)control (Unit 8-page 211)
1. Economic Ordering Quantity1. Economic Ordering Quantity 2. Fixation of inventory levels2. Fixation of inventory levels 3. Inventory Turnover3. Inventory Turnover 4. ABC Analysis4. ABC Analysis 5. Bill of Materials5. Bill of Materials 6. Perpetual Inventory system6. Perpetual Inventory system
151
1.Economic ordering 1.Economic ordering Quantity(212)Quantity(212)
EOQ=Root of (2AO/C)EOQ=Root of (2AO/C) Where A=annual demand in unitsWhere A=annual demand in units O= Cost of placing order (cost from O= Cost of placing order (cost from
the time we order till we receive goods)the time we order till we receive goods) C= Carrying cost per unit per year C= Carrying cost per unit per year
(measured in terms of percentage on cost (measured in terms of percentage on cost per unit) per unit)
Assumptions: normally on an average ½ of Assumptions: normally on an average ½ of the units are in the store all the time.the units are in the store all the time.
152
Exercise:14 page 248Exercise:14 page 248
EOQ=Root of (2AO/C)EOQ=Root of (2AO/C) = Root of(2*600*400/(40%*15)= Root of(2*600*400/(40%*15) = Root of 80000= Root of 80000 =282.845 units=282.845 units Total cost of inventory Total cost of inventory
annually=(600*15)+(3*400)+(1/2*28annually=(600*15)+(3*400)+(1/2*282*40%*15)=9000+1200+8462*40%*15)=9000+1200+846
=Rs.11,046.=Rs.11,046.
153
If 10% discount is given cost per unit=15-If 10% discount is given cost per unit=15-(10%of 15)=13.5(10%of 15)=13.5
Total Total costcost=(600*13.5)+(2*400)+(1/2*500*40%*13.=(600*13.5)+(2*400)+(1/2*500*40%*13.5)5)
= 8100+800+1350= 8100+800+1350 = Rs.10,250= Rs.10,250 AdviseAdvise: Purchase 500 units as annual cost : Purchase 500 units as annual cost
of inventory is cheaper.of inventory is cheaper.
If safety stock is required at any point of If safety stock is required at any point of time in order to calculate holding cost we time in order to calculate holding cost we add the safety stock with the ½ of EOQ add the safety stock with the ½ of EOQ stock.stock.
Holding cost includes storage and interest Holding cost includes storage and interest on locked up capitalon locked up capital
154
If 10% discount is givenIf 10% discount is given
If 10% discount is given cost per unit=15-If 10% discount is given cost per unit=15-(10%of 15)=13.5(10%of 15)=13.5
Total Total cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5)cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5)
= 8100+800+1350= 8100+800+1350 = Rs.10,250= Rs.10,250 Advise: Purchase 500 units as annual cost of Advise: Purchase 500 units as annual cost of
inventory is cheaper.inventory is cheaper. If safety stock is required at any point of time If safety stock is required at any point of time
in order to calculate holding cost we add the in order to calculate holding cost we add the safety stock with the ½ of EOQ stock.safety stock with the ½ of EOQ stock.
Holding cost includes storage and interest on Holding cost includes storage and interest on locked up capital, handling, insurance of locked up capital, handling, insurance of godowngodown
155
2. Fixation of inventory 2. Fixation of inventory level(218)level(218)
Re-order level=Maximum leadtime Re-order level=Maximum leadtime *Maximum usage*Maximum usage
Minimum level= Reorder level-(Normal Minimum level= Reorder level-(Normal usage*Normal lead time)usage*Normal lead time)
Maximum level=Re-order level+ Re-Maximum level=Re-order level+ Re-order qty-(Minimum usage*Minimum order qty-(Minimum usage*Minimum Lead timeLead time
Average level=(Maximum level+ Average level=(Maximum level+ Minimum level)/2Minimum level)/2
Danger level=Normal usage*Lead time Danger level=Normal usage*Lead time for emergency purchasesfor emergency purchases
Note: Re-order quantity=EOQ
156
See page-220 and 223 See page-220 and 223 illustrationsillustrations
EOQ is calculated inorder to find Re- EOQ is calculated inorder to find Re- order quantityorder quantity
Re-order quantity is Re-order quantity is different fromdifferent from Re-order levelRe-order level
Sometimes minimum stock=safety Sometimes minimum stock=safety stockstock
See page 222See page 222
157
3. Inventory (Stock) turnover 3. Inventory (Stock) turnover ratioratio
It explains operating efficiency of the It explains operating efficiency of the organisation.organisation.
How quickly raw material are How quickly raw material are converted into finished goods and converted into finished goods and also gives number of days of also gives number of days of conversion.conversion.
It explains number of times in a year It explains number of times in a year raw material are converted into raw material are converted into finished goodsfinished goods
158
3.Stock turnover ratio=3.Stock turnover ratio=
Value of materials consumed in a yearValue of materials consumed in a year
Average stockAverage stock
Average stock= (Opening stock+ Closing Average stock= (Opening stock+ Closing Stock)/2Stock)/2
Page-225
159
ABC analysisABC analysis
Classify the various inventories according Classify the various inventories according to their importance(70% of the value)to their importance(70% of the value)
A-High cost per unit but less quantity (70% A-High cost per unit but less quantity (70% of the value)-large investment-effective of the value)-large investment-effective control on supplycontrol on supply
B- Moderate price per unit but moderate B- Moderate price per unit but moderate quantity (20% in value)quantity (20% in value)
C-less cost per unit but large quantity(10% C-less cost per unit but large quantity(10% in value)-control on availability of materialin value)-control on availability of material
Always Better Control
BetterControl Always
Control Always Better
160
5. Bill of materials5. Bill of materials
Bill of materials is a Bill of materials is a list of materials list of materials required for a job.. It required for a job.. It also indicates quantity also indicates quantity required for each required for each item.item.
It helps in cost It helps in cost computation, material computation, material to be purchased by to be purchased by purchase department, purchase department, that the order to be that the order to be executed indicator. executed indicator.
161
6.Perpetual inventory control 6.Perpetual inventory control system(page-229)(Unit number system(page-229)(Unit number
8)8) Stocks are recorded as soon as placed Stocks are recorded as soon as placed
in the godown and also recorded in the godown and also recorded immediately as soon as stock is taken immediately as soon as stock is taken out.out.
They are recorded in Bin card and They are recorded in Bin card and stores ledger.stores ledger.
It helps if insurance claim initiated It helps if insurance claim initiated and also fixing various level of and also fixing various level of stock,adjusted for discrepancies and stock,adjusted for discrepancies and periodical profits are estimated.periodical profits are estimated.
162
Problems-clarificationProblems-clarification
Problem number-02,10,16 from Problem number-02,10,16 from exerciseexercise
Page-243,246 and248 respectively in Page-243,246 and248 respectively in unit-1unit-1
163
Labour costs-unit 9 page-Labour costs-unit 9 page-252252
Selection,training,wage Selection,training,wage sheet preparationsheet preparation
Recording, time keeping and time Recording, time keeping and time bookingbooking
Analyse wage sheet, reports to mgt.Analyse wage sheet, reports to mgt.
Selection,training,wage Selection,training,wage sheet preparationsheet preparation
Recording, time keeping and time Recording, time keeping and time bookingbooking
Analyse wage sheet, reports to mgt.Analyse wage sheet, reports to mgt.
Personnel department
Time keeping department
Costing department
164
Methods of remunerating Methods of remunerating workers (unit 9 page-258)workers (unit 9 page-258)
1.Time basis1.Time basis 2.Result basis2.Result basis 3. Bonus systems3. Bonus systems
4. Indirect monetary remuneration4. Indirect monetary remuneration
5. Non-monetary incentives5. Non-monetary incentives
1.Time basis1.Time basis 2.Result basis2.Result basis 3. Bonus systems3. Bonus systems
4. Indirect monetary remuneration4. Indirect monetary remuneration
5. Non-monetary incentives5. Non-monetary incentives
Group
Individual
Profit sharing Co-partnership
165
Payment by results(page-Payment by results(page-261)261)
Payment by results
a) Straight piece rateNo. units*units produced
b) Piece rate withguaranteed time rate
c) Differential piece rate
1.Taylor differential pieceRate(page262)
No guaranteed wageBelow standard-low piece rateAbove standard-high piece rate
2.Merrick differential rate planNo guaranteed wage
Efficiency Piece rateUpto 83% Normal
Upto 100% 110% of normal rate
Above 100% 130% of normal piece
3. Gantt task bonus Below standard
-time rateAt standard-time wage+
increase in rateAbove std
.-High piece rate
166
Individual Incentive Individual Incentive systemssystems
Halsey premium system
50-50AH* HR+ (Time saved/2)*
HRTime rate guaranteed
Halsey-weir system
1(W):2(ER)
AH* HR+ (Time saved/3)*HR
Time rate guaranteed
Rowan planThe more you save
The more the incentives
(AH*HR)+(SH-AH)/SH* (AH*HR)
W ER
AH-Actual hoursSH-Standard Hours
HR-Hourly rate
167
Other Wage Other Wage payment systempayment system
a.Bar
th p
rem
ium sy
stem
Wag
e=Hou
rly ra
te*
Root o
f SHR.*A
H
Emerson’s Efficiency
Bonus System
Guaranteed wages
Wage=(AH*HR)+
Bonus%*(AH*HR)
Below 66 2/3%-No bonus
66 2/3 to 100%- upto 20%
Above 100%-Bonus20%
+1% for
every1% increse
in efficiency
Bedaux Point system
Wage=AH*HR+
(75%Of BS*HR)/60
Every hour there are
Standard points=BS
Accelerated premium system 2Wage (Y)=.8*X
Where Y=EarningsX=Efficiency
168
Group Incentive schemeGroup Incentive schemeIndirect monetary Indirect monetary
benefits(271)benefits(271) Profit sharing-Bonus-8.33% of wages Profit sharing-Bonus-8.33% of wages
statutory bonus.Maximum-20%statutory bonus.Maximum-20% Copartnership-ESOPCopartnership-ESOP
169
ProblemsProblems
Page-292; prob-6 &9Page-292; prob-6 &9 Page-293; prob-11Page-293; prob-11
170
Overheads-unit 10 page-Overheads-unit 10 page-295295
Classification of over headsClassification of over heads Indirect material, indirect labour, indirect Indirect material, indirect labour, indirect
expensesexpenses Factory overheads, administration over Factory overheads, administration over
head, selling and distribution over headshead, selling and distribution over heads Fixed overheads, variable overheads, Fixed overheads, variable overheads,
semi variable overheadssemi variable overheads Controllable and uncontrollable Controllable and uncontrollable
overheadsoverheads Normal and abnormal overheads.Normal and abnormal overheads.
171
Classification(206)
Element wiseIndirect material, indirect labour,
indirect expenses
FunctionFactory
administration, selling and
distribution over heads
VariabilityFixed,
variable, semi variable
overheads
ControllabilityControllable and
Uncontrollableoverheads
NormalityNormal and
Abnormal overheads.
172
Primary apportionment(page-Primary apportionment(page-299)299)
Common over heads belong to Common over heads belong to production and service departments production and service departments are apportioned on the following are apportioned on the following basis or any other suitable basis:basis or any other suitable basis:
1.Canteen-no.of workers2.Rent-Area
3.Power-HP/KWH4.General lighting-light points
5.Depreciation-value of assets
1.Supervision-no.of employees
2.Telephone expenses-no.of calls made3.Fire insurance
-value of stock/asset
173
Secondary Secondary apportionmentapportionment
Apportionment of service department Apportionment of service department cost centre to production departmentcost centre to production department
Methods of Apportionment(Page303)
Simultaneous Equation method
RepeatedDistribution method
174
Overhead absorption Overhead absorption rate(page-307)rate(page-307)
Amount of overhead/direct Material cost or /Direct Wage cost or
/Prime Cost or /labour hours or
/Number of machine Hours
Prob.-pages 309,336
175
Unit-11Unit-11Marginal Cost-Volume-Marginal Cost-Volume-Profit Analysis and Profit Analysis and Relevant CostingRelevant Costing
176
Marginal cost, Budgeting and Marginal cost, Budgeting and standard costingstandard costing
Presented byPresented by
Prof. L. Augustin AmaladasM. Com., AICWA.,PGDFM.,B.ED.
6th January 2008
IBM
177
1. How is breakeven point computed and 1. How is breakeven point computed and
what does it represent?what does it represent?
2. How do costs, revenues, and 2. How do costs, revenues, and
contribution margin interact with contribution margin interact with
changes in an activity base (volume)? changes in an activity base (volume)?
Learning Objectives
C6
178
3. How does cost-volume-profit (CVP) 3. How does cost-volume-profit (CVP)
analysis in single-product and analysis in single-product and
multiproduct firms differ?multiproduct firms differ?
4. What are the underlying assumptions 4. What are the underlying assumptions
of CVP analysis and how do these of CVP analysis and how do these
assumptions create a short-run assumptions create a short-run
managerial perspective? managerial perspective?
C6
Continuing . . . Learning Objectives
179
5. How do quality decisions affect the 5. How do quality decisions affect the
components of CVP analysis?components of CVP analysis?
6. What constitutes relevance in a 6. What constitutes relevance in a
decision-making situation?decision-making situation?
C6
Continuing . . . Learning Objectives
180
7. How can management best utilize a 7. How can management best utilize a
scarce resource?scarce resource?
8. What is the relationship between sales 8. What is the relationship between sales
mix and relevant costing problems?mix and relevant costing problems?
Continuing . . . Learning Objectives
C6
181
9. 9. How can pricing decisions be How can pricing decisions be
used to maximize profit?used to maximize profit?
10. How can product margin be used to 10. How can product margin be used to
determine whether a product line determine whether a product line
should be retained or eliminated?should be retained or eliminated?
C6
Continuing . . . Learning Objectives
182
11.11. How are breakeven and profit-How are breakeven and profit-
volume graphs prepared? (Appendix volume graphs prepared? (Appendix
1) 1)
12. What are the differences between 12. What are the differences between
absorption and variable costing? absorption and variable costing?
( Appendix 2) ( Appendix 2)
13.13. Why is linear programming a Why is linear programming a
valuable tool for managers? valuable tool for managers?
(Appendix 3)(Appendix 3)C6
Continuing . . . Learning Objectives
183
The Breakeven Point (BEP)The Breakeven Point (BEP)
The level of activity, in units or dollars, at which
REVENUES = COSTS
184
Basic Assumption: Relevant Basic Assumption: Relevant RangeRange
Company is operating within the relevantCompany is operating within the relevant
range of activity specified in determining range of activity specified in determining the revenuethe revenue
and cost information used.and cost information used.
Total$
Activity Level
RelevantRange
185
Basic Assumption: RevenueBasic Assumption: Revenue
Total revenue fluctuates in direct proportion to level of activity or volume. On a per unit basis, the selling
price remains constant.
Total$
Activity Level
186
Basic Assumption: Variable Basic Assumption: Variable CostsCosts
Total variable costs fluctuate in direct proportion to level of activity or volume. On a per unit basis,
variable costs remain constant.
Total$
Activity Level
187
Basic Assumption: Fixed Basic Assumption: Fixed CostsCosts
Total fixed costs remain constant relative to activity level changes. Per-unit fixed costs decrease as
volume increases and increase as volume decreases.
Total$
Activity Level
188
Basic Assumption: Mixed Basic Assumption: Mixed CostsCosts
Mixed costs must be separated into variable and fixed elements.
Total$
Activity Level
189
Cost Behavior ExampleCost Behavior Example
Selling price per ice bucket $40
Variable production cost per ice bucket $20Variable selling cost per ice bucket 4Total variable cost per ice bucket $24
Fixed production costs $100,000Fixed selling and administrative costs 20,000
190
Contribution Margin Per Contribution Margin Per UnitUnit
Contribution margin per unitContribution margin per unit equals equals selling price per unit less variable selling price per unit less variable cost per unit. cost per unit.
sp -vc = cmsp -vc = cm
$40 - $24$40 - $24 = $16 = $16
191
Contribution Margin RatioContribution Margin Ratio
Contribution margin ratioContribution margin ratio is is per-unit contribution margin per-unit contribution margin divided by selling price, or divided by selling price, or total contribution margin total contribution margin divided by total sales dollars.divided by total sales dollars.
cm/sp=cm%cm/sp=cm%$16 / $40 = $16 / $40 = 40%40%
192
Breakeven PointBreakeven Point
Breakeven pointBreakeven point is the point at is the point at
which profits are zero because which profits are zero because
total revenues equal total costs, total revenues equal total costs,
oror
Total revenues = Total variable Total revenues = Total variable
costs + Total fixed costscosts + Total fixed costs
193
Continuing . . . Breakeven Continuing . . . Breakeven PointPoint
Total fixed costs Total fixed costs In unitsIn units == ------------------------------------------
CM per unit CM per unit
Total fixed costs Total fixed costs In sales dollarsIn sales dollars == ------------------------------------------
CM ratio CM ratio
194
Continuing . . . Breakeven Continuing . . . Breakeven PointPoint
$120,000 $120,000 In unitsIn units == ----------- = 7,500 ice ----------- = 7,500 ice buckets buckets
$16 $16
$120,000 $120,000 In sales dollarsIn sales dollars == ----------- = $300,000----------- = $300,000
.40 .40
195
CVP Analysis: Fixed CVP Analysis: Fixed
Amount ofAmount of Profit Before Profit Before
Taxes (PBT)Taxes (PBT)
Total fixed costs + PBTTotal fixed costs + PBTIn unitsIn units == ------------------------------------------------------------
CM per unit CM per unit
Total fixed costs + PBTTotal fixed costs + PBTIn sales dollarsIn sales dollars == ------------------------------------------------------------
CM ratio CM ratio
196
CVP Analysis: Fixed CVP Analysis: Fixed
Amount ofAmount of Profit Before Profit Before
Taxes (PBT)Taxes (PBT)
$120,000 + $64,000$120,000 + $64,000Break evenIn units=------------------------ = 11,500 Break evenIn units=------------------------ = 11,500 bucketsbuckets $16 $16
$120,000 + $64,000$120,000 + $64,000In sales dollarsIn sales dollars =------------------------ = $460,000=------------------------ = $460,000
.40 .40
197
CVP Analysis: Variable CVP Analysis: Variable
AmountAmount
of Profit Before Taxesof Profit Before TaxesAssume PAssume PUUBT desired is 25% on salesBT desired is 25% on sales
Therefore, PTherefore, PUUBT = .25 ($40) = $10BT = .25 ($40) = $10
Total fixed costsTotal fixed costsSales in units =---------------------------Sales in units =---------------------------
CM per unit - PCM per unit - PUUBT BT
$120,000$120,000Sales in units =---------------Sales in units =--------------- = 20,000 ice buckets = 20,000 ice buckets
$16 - $6$16 - $6
198
CVP Analysis: Variable CVP Analysis: Variable
AmountAmount
of Profit Before Taxesof Profit Before TaxesAssume PAssume PUUBT desired is 25% on salesBT desired is 25% on sales
Therefore, PTherefore, PUUBT = .25 ($40) = $10BT = .25 ($40) = $10
Total fixed costsTotal fixed costsSales in $ =Sales in $ = ------------------------------------------
CM% - PCM% - PUUBT% BT%
$120,000$120,000Sales in $ =---------------Sales in $ =--------------- = = $800,000$800,000 .40 - .25.40 - .25
199
Income StatementIncome Statement
DollarsDollars PercentagesPercentages
SalesSales $800,000$800,000 100% 100%
Variable costsVariable costs 480,000 480,000 6060%%
Contribution margin$320,000 40%Contribution margin$320,000 40%
Fixed costsFixed costs 120,000 120,000 15 15%%
IncomeIncome $200,000$200,000 25% 25%============== == ==
200
CVP Analysis - Multiple CVP Analysis - Multiple ProductsProducts
Ice ServingBuckets Sets
Selling price $40 $24Variable cost 24 12Contribution margin $16 $12
Contribution margin ratio 40.0% 50.0%Sales mix* 80.6% 19.4%
*5:2 ratio
201
Continuing . . .Continuing . . . CVP Analysis CVP Analysis
-- Multiple Products Multiple Products
Ice ServingBuckets Sets
Contribution margin ratio 40.0% 50.0%
Sales mix* 80.6% 19.4%
Weighted contribution margin 32.2% 9.7%
Contribution margin ratio per bag 41.9%
*5:2 ratio
202
Continuing . . . CVP Analysis Continuing . . . CVP Analysis
-- Multiple Products Multiple Products
Total fixed costs BEP in sales dollars = -----------------------
CM ratio per bag
($120,000 + $30,000*) BEP in sales dollars = ----------------------------
.419
= $357,995
*$30,000 of additional fixed cost is incurred to produce both units
203
Scarce Resource -- Machine Scarce Resource -- Machine HoursHours
Ice Juice Crushers Extractors
Selling price per unit $15 $12Variable production cost per unit: Direct materials $3 $3 Direct labor 4 2 Variable overhead 3 1Total variable cost 10 6Unit contribution margin $5 $6Units of output per machine hour 30 20Contribution margin per machine hour $150 $120
204
Sales Mix DecisionsSales Mix Decisions
How many of each product?
205
Relevant Costs inRelevant Costs in
Product Line DecisionsProduct Line Decisions Revenues associated with productRevenues associated with product Variable costs associated with Variable costs associated with
productproduct Avoidable fixed costs Avoidable fixed costs Consider product marginConsider product margin
Revenues - Variable costs - Avoidable fixed Revenues - Variable costs - Avoidable fixed costscosts
206
Exhibit 6-12: Partial Exhibit 6-12: Partial
Product LineProduct Line Income Income
StatementStatement
ElectricSkillet
Sales $75,000Total direct variable expenses 43,750Total contribution margin $31,250Total fixed expenses* 39,500Net loss ($8,250)
*Fixed expenses:Avoidable fixed expenses $25,000Unavoidable fixed expenses 4,500Allocated common costs 10,000 Total $39,500
207
Exhibit 6-13: Product Exhibit 6-13: Product
Margin forMargin for
the Electric Skillet Product the Electric Skillet Product
LineLine Electric
Skillet
Sales $75,000
Total direct variable expenses 43,750
Total contribution margin $31,250
Avoidable fixed expenses 25,000
Product margin $6,250
208
CVP GraphCVP Graph
Total$
Volume
Total Costs
Total RevenuesBEP
209
Profit-Volume GraphProfit-Volume Graph
BEP
Fixed Costs
Volume
Profit or Loss
Total$
210
Absorption CostingAbsorption Costing Also known as full costingAlso known as full costing Treats costs of all manufacturing components as Treats costs of all manufacturing components as
inventoriable, or product, costsinventoriable, or product, costs– Direct materialsDirect materials– Direct laborDirect labor– Variable factory overheadVariable factory overhead– Fixed factory overheadFixed factory overhead
Presents expenses on income statement Presents expenses on income statement according to functional classificationsaccording to functional classifications– Cost of goods soldCost of goods sold– Selling expensesSelling expenses– Administrative expensesAdministrative expenses
211
Variable CostingVariable Costing Also known as direct costingAlso known as direct costing Includes only variable production costs as Includes only variable production costs as
inventoriable, or product, costsinventoriable, or product, costs– Direct materialsDirect materials– Direct laborDirect labor– Variable factory overheadVariable factory overhead
Fixed factory overhead costs treated as Fixed factory overhead costs treated as period expensesperiod expenses
Income statement separates costs by cost Income statement separates costs by cost behaviorbehavior– May also present expenses by functional May also present expenses by functional
classifications within behavioral categoriesclassifications within behavioral categories
212
Absorption CostingAbsorption Costing
Income StatementIncome Statement
Sales XXXCost of Goods Sold:
Beginning inventory XXXCost of goods manufactured XXX Cost of goods available XXXEnding inventory XXX
Cost of goods sold XXXGross Margin XXXOperating Expenses:
Selling XXXAdministrative XXX XXX
Income before Taxes XXX
213
Variable CostingVariable Costing
Income StatementIncome StatementSales XXXCost of Goods Sold:
Beginning inventory XXXCost of goods manufactured XXX Cost of goods available XXXEnding inventory XXX
Variable cost of goods sold XXXProduct Contribution Margin XXXVariable Selling Expense XXXTotal Contribution Margin XXXFixed Expenses:
Factory XXXSelling XXXAdministrative XXX XXX
Income before Taxes XXX
214
Absorption Costing vs. Absorption Costing vs.
Variable Variable Costing Income Costing Income
StatementsStatements
Absorption Costing Variable Costing:
Sales $60,000 Sales $60,000
Cost of sales 30,000 Variable costs:
Gross profit $30,000 Cost of sales 30,000
Operating expenses: Operating expenses 6,000
Variable $6,000 Total variable costs $36,000
Fixed 20,000 Contribution margin: $24,000
Total operating expenses $26,000 Fixed costs 20,000
Income $4,000 Income $4,000
215
Costs and BudgetingCosts and Budgeting
216
CostsCosts
217
CostsCosts
Anything incurred during the Anything incurred during the production of the good or service to production of the good or service to get the output into the hands of the get the output into the hands of the customercustomer
The customer could be the public (the The customer could be the public (the final consumer) or another businessfinal consumer) or another business
Controlling costs is essential to Controlling costs is essential to business successbusiness success
Not always easy to pin down Not always easy to pin down where costs are arising!where costs are arising!
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Cost CentresCost Centres
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Cost CentresCost Centres
Parts of the business to which particular Parts of the business to which particular costs can be attributed costs can be attributed
In large businesses this can be In large businesses this can be a particular location, section a particular location, section of the business, capital asset of the business, capital asset or human resource/sor human resource/s
Enable a business to identify where costs Enable a business to identify where costs are arising and to manage those costs are arising and to manage those costs more effectivelymore effectively
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Full CostingFull Costing
A method of allocating indirect costs to A method of allocating indirect costs to a range of products produced by the a range of products produced by the firm.firm.– e.g. if a firm produces three products - e.g. if a firm produces three products - aa, , bb, ,
and and cc - and has indirect costs of £1 million, - and has indirect costs of £1 million, assume proportion of direct costs of 20% for assume proportion of direct costs of 20% for aa, 55% for , 55% for bb and 25% for and 25% for cc
– Indirect costs allocated as 20% of 1 million Indirect costs allocated as 20% of 1 million to to aa, 55% of £1 million to , 55% of £1 million to bb and 25% of £1 and 25% of £1 million to million to cc
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Absorption CostingAbsorption Costing
All costs incurred are allocated All costs incurred are allocated to particular cost centres – direct to particular cost centres – direct costs, indirect costs, semi variable costs, indirect costs, semi variable costs and selling costscosts and selling costs
Allocates indirect costs more Allocates indirect costs more accurately to the point where accurately to the point where the cost occurredthe cost occurred
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Marginal CostingMarginal Costing
The cost of producing one extra The cost of producing one extra unit of output (the variable costs)unit of output (the variable costs)
Selling price – MC = ContributionSelling price – MC = Contribution Contribution is the amount which Contribution is the amount which
can contribute to the overheads can contribute to the overheads (fixed costs)(fixed costs)
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Standard CostingStandard Costing
The expected level of costs The expected level of costs associated with the production associated with the production of a goods/servicesof a goods/services
– Actual costs – Standard costs = Actual costs – Standard costs = VarianceVariance
Monitoring variances can help Monitoring variances can help the business to identify the business to identify where inefficiencies or efficiencies where inefficiencies or efficiencies might liemight lie
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Total RevenueTotal Revenue
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Terms and formulae in Terms and formulae in Marginal costingMarginal costing
1. Contribution=S-Vc1. Contribution=S-Vc 2.P/V ratio=C*100/sales2.P/V ratio=C*100/sales BEP(units)=FC/Contribution per unitBEP(units)=FC/Contribution per unit BEP (Volume)= FC/PV ratioBEP (Volume)= FC/PV ratio Or Or BEP units*SP per unitBEP units*SP per unit Margin of safety (Units)=Profit/Contribution per Margin of safety (Units)=Profit/Contribution per
unitunit Margin of safety(Volume)=MS units*SP per unit.Margin of safety(Volume)=MS units*SP per unit. Break-even at the required profit=(FC+Required Break-even at the required profit=(FC+Required
profit)/Contribution per unit or PV ratioprofit)/Contribution per unit or PV ratio
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Total RevenueTotal Revenue
Total Revenue = Price x Quantity SoldTotal Revenue = Price x Quantity Sold PricePrice can be raised or lowered can be raised or lowered
to change revenue – price elasticity to change revenue – price elasticity of demand important hereof demand important here– Different pricing strategies can be used – Different pricing strategies can be used –
penetration, psychological, etc.penetration, psychological, etc. Quantity SoldQuantity Sold can be influenced can be influenced
by amending the elements by amending the elements of the marketing mix – 7 Psof the marketing mix – 7 Ps
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Break EvenBreak Even
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Break Even AnalysisBreak Even AnalysisCosts/Revenue
Output/Sales
Initially a firm will incur fixed costs, these do not depend on output or sales.
FC
As output is generated, the firm will incur variable costs – these vary directly with the amount produced.
VC The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC
TC Total revenue is determined by the price charged and the quantity sold – again this will be determined by expected forecast sales initially.
TR The lower the price, the less steep the total revenue curve.
TR
Q1
The break even point occurs where total revenue equals total costs – the firm, in this example, would have to sell Q1 to generate sufficient revenue to cover its costs.
229
Break Even AnalysisCosts/Revenue
Output/Sales
FC
VCTCTR (p = £2)
Q1
If the firm chose to set price higher than £2 (say £3) the TR curve would be steeper – they would not have to sell as many units to break even
TR (p = £3)
Q2
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Break Even AnalysisCosts/Revenue
Output/Sales
FC
VCTC
TR (p = £2)
Q1
If the firm chose to set prices lower (say £1) it would need to sell more units before covering its costs.
TR (p = £1)
Q3
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Break Even AnalysisCosts/Revenue
Output/Sales
FC
VC
TCTR (p = £2)
Q1
Loss
Profit
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Break Even AnalysisCosts/Revenue
Output/Sales
FC
VC
TCTR (p = £2)
Q1 Q2
Assume current sales at Q2.
Margin of Safety
Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made.
TR (p = £3)
Q3
A higher price would lower the break even point and the margin of safety would widen.
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Costs/Revenue
Output/Sales
FC
VC
TR
Eurotunnel’s problemHigh initial FC. Interest on debt rises each year – FC rise therefore.
FC 1
Losses get bigger!
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Break Even AnalysisBreak Even Analysis
Remember:Remember: A higher price or lower price A higher price or lower price does notdoes not
mean that break even will mean that break even will nevernever be be reached! reached!
The break even point depends on the The break even point depends on the number of sales needednumber of sales needed to generate to generate revenue to cover costs – the break even revenue to cover costs – the break even chart is NOT time related!chart is NOT time related!
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Break Even AnalysisBreak Even Analysis
•Importance of Price Elasticity of Demand:
•Higher prices might mean fewer sales to break even but those sales may take a longer time to achieve
•Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break even
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Break Even AnalysisBreak Even Analysis
Links of break even to pricing Links of break even to pricing strategies and elasticitystrategies and elasticity
Penetration pricingPenetration pricing – ‘high’ volume, – ‘high’ volume, ‘low’ price – more sales to break even‘low’ price – more sales to break even
Market SkimmingMarket Skimming – ‘high’ price ‘low’ – ‘high’ price ‘low’ volumes – fewer sales to break evenvolumes – fewer sales to break even
ElasticityElasticity – what is likely to happen – what is likely to happen to sales when prices are increased to sales when prices are increased or decreased?or decreased?
237
BudgetsBudgets
238
BudgetsBudgets
Estimates of the income and Estimates of the income and expenditure of a business or a part expenditure of a business or a part of a business over a time periodof a business over a time period
Used extensively in planningUsed extensively in planning Helps establish efficient use Helps establish efficient use
of resourcesof resources Help monitor cash flow and identify Help monitor cash flow and identify
departures from plansdepartures from plans Maintains a focus and discipline Maintains a focus and discipline
for those involved for those involved
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BudgetsBudgets
Flexible BudgetsFlexible Budgets – budgets that take – budgets that take account of changing business conditionsaccount of changing business conditions
Operating BudgetsOperating Budgets – based on – based on the daily operations of a businessthe daily operations of a business
Objectives Based BudgetsObjectives Based Budgets - Budgets - Budgets driven by objectives set by the firmdriven by objectives set by the firm
Capital BudgetsCapital Budgets – Plans of the – Plans of the relationship between capital spending relationship between capital spending and liquidity (cash) in the businessand liquidity (cash) in the business
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BudgetsBudgets
VarianceVariance – the difference between – the difference between planned values and actual valuesplanned values and actual values– Positive variancePositive variance – actual figures less – actual figures less
than plannedthan planned– Negative varianceNegative variance – actual figures – actual figures
above plannedabove planned
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Preparation of BudgetPreparation of Budget
Sales budget quaterly-Estimated Sales budget quaterly-Estimated based on market surveybased on market survey
Production budget(Finished Production budget(Finished goods:Anticipated Desired Sales+ goods:Anticipated Desired Sales+ closing stock- Opening stockclosing stock- Opening stock
Material Purchase Budget(Raw Material Purchase Budget(Raw material)=Production budget+Desired material)=Production budget+Desired Closing stock-Opening stockClosing stock-Opening stock
242
Production budgetProduction budget
For Finished goodsFor Finished goods
Anticipated Desired Sales+ closing stock- Opening stock
243
Material Purchase BudgetMaterial Purchase Budget
For Raw MaterialFor Raw Material
Production budget+Desired Closing stock-
Opening stock
244
Cash Budget-Sample-1Cash Budget-Sample-1ParticularsParticulars JanJan FebFeb MarMar Apr.Apr. MayMay Jun.Jun.A.A. Cash InflowCash Inflow
Issue of sharesIssue of shares
Issue of DebentureIssue of Debenture
Collection from Collection from DebtorsDebtors
B. Cash OutflowB. Cash Outflow
Fixed Assets Fixed Assets purchasepurchase
Stock purchase paidStock purchase paid
Preliminary expensesPreliminary expenses
Sundry creditors paidSundry creditors paid
Other expenses paidOther expenses paid
c. Net Cash inflow(A-c. Net Cash inflow(A-B)B)
Opening cash Opening cash balancebalance
Closing BalanceClosing Balance
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Cash Budget-Sample-2Cash Budget-Sample-2ParticularsParticulars JanJan FebFeb MarMar Apr.Apr. MayMay Jun.Jun.A.A. Cash InflowCash Inflow
Issue of sharesIssue of shares
Issue of DebentureIssue of Debenture
Collection from Collection from DebtorsDebtors
B. B. Cash OutflowCash Outflow
Fixed Assets Fixed Assets purchasepurchase
Stock purchase paidStock purchase paid
Preliminary expensesPreliminary expenses
Sundry creditors paidSundry creditors paid
Other expenses paidOther expenses paid
c. c. Net Cash inflow(A-Net Cash inflow(A-B)B)
Opening cash Opening cash balancebalance
Closing BalanceClosing Balance
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Cash Budget-Sample-3Cash Budget-Sample-3ParticularsParticulars JanJan FebFeb MarMar Apr.Apr. MayMay Jun.Jun.A.A. Cash InflowCash Inflow
Issue of sharesIssue of shares
Issue of DebentureIssue of Debenture
Collection from Collection from DebtorsDebtors
B. Cash OutflowB. Cash Outflow
Fixed Assets Fixed Assets purchasepurchase
Stock purchase paidStock purchase paid
Preliminary Preliminary expensesexpenses
Sundry creditors Sundry creditors paidpaid
Other expenses paidOther expenses paid
c. Net Cash inflow(A-c. Net Cash inflow(A-B)B)
Opening cash Opening cash balancebalance
Closing BalanceClosing Balance
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ProblemProblemss
Page-130and132 unit-2 Page-130and132 unit-2 Problem-11 and 13 Problem-11 and 13 respectively.respectively.
248
Flexible Budget-Sample-1Flexible Budget-Sample-1
ParticularsParticulars 50%50%
CapacityCapacity60%60%
CapacityCapacity80%80%
CapacityCapacityA)Number of units soldA)Number of units sold
Selling Price per unitSelling Price per unit
SalesSales
B) CostB) Cost
1) Material cost1) Material cost
2) Direct wages2) Direct wages
3) Variable Overheads3) Variable Overheads
a) Factorya) Factory
b) Selling and Distributionb) Selling and Distribution
4) Fixed Overheads4) Fixed Overheads
a)Factorya)Factory
b) Selling and distributionb) Selling and distribution
C) Profit ie A-BC) Profit ie A-B
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Flexible Budget-sample-2Flexible Budget-sample-2
ParticularsParticulars 50%50%
CapacityCapacity60%60%
CapacityCapacity80%80%
CapacityCapacityA)Number of units soldA)Number of units sold
Selling Price per unitSelling Price per unit
SalesSales
B) CostB) Cost
1) Material cost1) Material cost
2) Direct wages2) Direct wages
3) Variable Overheads3) Variable Overheads
a) Factorya) Factory
b) Selling and Distributionb) Selling and Distribution
4) Fixed Overheads4) Fixed Overheads
a)Factorya)Factory
b) Selling and distributionb) Selling and distribution
C) Profit ie A-BC) Profit ie A-B
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Problems in flexible Problems in flexible budgetbudget
Pages-127,128,129 Pages-127,128,129 respectively inrespectively in
Unit-2 Problems 4, Unit-2 Problems 4, 5,7 and 85,7 and 8
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Standard CostingStandard CostingSystemSystem
Unit-13Unit-13
Managerial AccountingManagerial Accounting
252
Standard CostingStandard Costing
It is also known as variance It is also known as variance costing.costing.
Standard cost- Predetermined Standard cost- Predetermined costcost
Standard Costing- is a Standard Costing- is a management accounting management accounting tecnique to analyse variancestecnique to analyse variances
253
Steps in Standard Steps in Standard costingcosting
Set standard costSet standard cost Study the actual costStudy the actual cost Compare the actual with the Compare the actual with the
standard coststandard costWhich gives variancesWhich gives variancesAnalyse the variancesAnalyse the variancesFix responsibilitiesFix responsibilitiesTake suitable action and create Take suitable action and create
effective control system .effective control system .
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Management Management Accounting-Accounting-
Module-IIModule-IIMarginal costing, Marginal costing, Budgeting, standard Budgeting, standard costing and Uniform costing and Uniform costingcosting
255
Similarities and Difference between Similarities and Difference between Budgetary control and standard costingBudgetary control and standard costing
Similarities:Similarities: 1.Both the tools available to the 1.Both the tools available to the
management for the purpose of controlling management for the purpose of controlling the coststhe costs
2.Both based on setting standard, 2.Both based on setting standard, comparison with actual and study the comparison with actual and study the variance variance
3. If standard costing prevails in the 3. If standard costing prevails in the company then budgetary control is company then budgetary control is effective.effective.
256
DifferencesDifferences 1.Budgetory control can be operated 1.Budgetory control can be operated
without standard costingwithout standard costing 2.Budgets gives the limits on 2.Budgets gives the limits on
expenses but standard costs are expenses but standard costs are minimum targets to be attained.minimum targets to be attained.
3.Budget can be prepared for various 3.Budget can be prepared for various areas of activities but standard is areas of activities but standard is used for production and used for production and manufacturing costmanufacturing cost
257
DifferenceDifferencess
4.Budgetary variances may point out 4.Budgetary variances may point out efficiency or inefficiency. But standard efficiency or inefficiency. But standard costing goes beyondcosting goes beyond
The efficiency or inefficiency and find The efficiency or inefficiency and find out the root cause for the variance.out the root cause for the variance.
5.Standard is always for improvement.5.Standard is always for improvement. Budgets are based upon the future or Budgets are based upon the future or
estimated costs. But standard costs are ideal estimated costs. But standard costs are ideal costs under ideal situation.costs under ideal situation.
258
Types of standardsTypes of standards
1.current standard1.current standard2.ideal standard2.ideal standard3.Expected standard3.Expected standard4. Normal standard4. Normal standard
259
Analysis of Analysis of variancesvariances
Material Labour Overheads
price
Mix
yield
usage
cost
+
=
yield
Mix
Rate
efficiency
cost VariableOverheadvariances
Fixed Overheadvariances
+
=
Price+ Mix+ Yield=Cost Rate+ Mix+ Yield=Cost
260
Material VarianceMaterial Variance
Actual Quantity*Actual cost per unit
Actual Quantity*Std. cost per unit
Revised std. QuantityFor input*
Std. cost per unit
Revised std QuantityFor output*
Std. cost per unit
1 2 3 4
Price(2-1) Mix(3-2) Yield(3-2)
Usage(4-2)Cost(5-1)
261
Exercise: Exercise: Material Material VariancesVariances
Actual Quantity*Actual cost per unit
400*6=2400500*3.6=1800400*2.8=1120 5320
Actual Quantity*Std. cost per unit
400*6=2400500*3.75=1875
400*3=12001300 5475
1300(5:4:3)/12Revised std. Quantity
For input*Std. cost per unit 541.66*6=3250433.33*3.75=1625 325*3=975 5850
Revised std QuantityFor output*
Std. cost per unit 500*6=3000400*3.75=1500 300*3=900 5400
1 23
4
Price(2-1) Mix(3-2) Yield(3-2)
Usage(4-2)Cost(5-1)
+155 +375 (450)
(75)
+80
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Explanations for Explanations for 33
Actual input(1300) is shared in the Actual input(1300) is shared in the standard ratio of 500:400:300 ie standard ratio of 500:400:300 ie 5;4:35;4:3
Then multiply by standard priceThen multiply by standard price Do not bother about how each Do not bother about how each
material is measured ie. One may be material is measured ie. One may be in Kg.,another in litre etc. in Kg.,another in litre etc.
263
Explanations for Explanations for 44
We move from output to inputWe move from output to input The output is 1080. We find normal input if The output is 1080. We find normal input if
normal loss is 10% (given in the problem)normal loss is 10% (given in the problem) If Input is 100 and normal loss is 10% then If Input is 100 and normal loss is 10% then
output=90output=90
1080*100/90=12001080*100/90=1200 Share 1200 in the standard ratio of 5:4:3Share 1200 in the standard ratio of 5:4:3 500, 400,300. 500, 400,300.
Output Input 90 100 1080 ?
264
Labour Labour Variances(Page-191 Variances(Page-191
prob.8prob.8
Actual Hours*Actual cost per Hour
28*40*4=448018*40*3=21604*40*2= 320
6960
Actual Hours*Std. cost per Hour
28*40*3=336018*40*2=14404*40*1= 160
2000 4960
2000*(30:10:10)/50Revised std. Hours
For input*Std. cost per Hour
1200*3=3600 400*2= 800 400*1= 400 4800
Revised std HoursFor output*
Std. cost per Hour 1152*3=3456 432*2= 864 216*1= 216 4536
1 2 3 4
Rate(2-1) Mix or gang(3-2)
Yield(3-2)
Efficiency(4-2)
Cost(5-1)
-2000 -160 -264
-424
-2424
265
Explanations for Explanations for 44
Going from Output hours Going from Output hours to input hoursto input hours
There are 1800 hours are There are 1800 hours are shared in the ratio of shared in the ratio of 32:12:632:12:6
266
Variable overhead Variable overhead Variances(Page-Variances(Page-
156)156)
Actual Hours*Actual Rate per Hour
Actual Hours*Std. Rate per Hour
Revised std HoursFor output*
Std. cost per Hour
1 2 3 4
Expenditure(2-1)
Efficiency(4-2)
Cost(5-1)
EmptyEGG
267
Fixed overhead Variances(Page-Fixed overhead Variances(Page-157)157)
Actual Over heads
Budgetedoverheads
Revised std. HoursFor actual input*
Std. cost per Hour
Revised Std HoursFor output*
Std. cost per Hour
1 2 3 4
Expenditure
Efficiency(4-2)
Cost(5-1)
Std. Hours*Std.fixedOH Rate
per hour
268
“Learning gives creativityCreativity leads to thinkingThinking provides knowledgeKnowledge makes you great”
- A.P.J.Abdul Kalam
269
Thank You Thank You allall