Management Accounting

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ManagementManagement Accounting Accounting

SCDLSCDLBy By Irfal irwant.SEIrfal irwant.SE

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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See you in the next chapterSee you in the next chapterBRSBRS

Life educationLife education

God and Poor manGod and Poor man

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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

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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

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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.

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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

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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.

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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

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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

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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?

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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?

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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?

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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.

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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?

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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

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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

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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 ?

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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!!!!

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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!!!!

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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

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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?

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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

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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

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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

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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

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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 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

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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

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Lady in a seashoreLady in a seashore

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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

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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.

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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

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ExcerciseExcercise

Amount collected from debtors?Amount collected from debtors? Amount deposited to bank?Amount deposited to bank?

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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

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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

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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

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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

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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?

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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Renewal method(39)Renewal method(39)

When asset is renewed full amount is When asset is renewed full amount is written off.written off.

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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

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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

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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

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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

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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

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TermsTerms

InvestmentsInvestments Current assetsCurrent assets AdjustmentsAdjustments Closing stockClosing stock DepreciationDepreciation Outstanding expensesOutstanding expenses Prepaid expensesPrepaid expenses

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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

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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

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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

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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 .

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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


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






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






91





line. line.

92






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





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





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


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 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 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 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



Total cost

Bin card

Stores ledger


++ =

+

+

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 overheadsselling overheadsselling 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



Total cost=1,60 307

Bin card

Stores ledger


+

+=

+

+

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




11stst Jan Jan 0808

55thth

6th6th


PurchasePurchase

IssueIssue

100100 7.00 7.00 700700

500500 6.00 6.00 3,0003,000


DescriptionUnit

Location

LIFO

148




11stst Jan Jan 0808

55thth

6th6th


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




11stst Jan Jan 0808

55thth

6th6th


PurchasePurchase

IssueIssue

100100 7.00 7.00 700700

500500 6.00 6.00 3,0003,000


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


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?


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


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


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!

218

Cost CentresCost Centres

219

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

220

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

221

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

222

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)

223

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

224

Total RevenueTotal Revenue

225

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

226

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

227

Break EvenBreak Even

228

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

230


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

231


Output/Sales

FC

VC

TCTR (p = £2)

Q1

Loss

Profit

232


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.

233

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!

234

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!

235


•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

236


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

239

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

240

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

241

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

245





B. B. Cash OutflowCash Outflow



Preliminary expensesPreliminary expenses

Sundry creditors paidSundry creditors paid


c. c. Net Cash inflow(A-Net Cash inflow(A-B)B)



246





B. Cash OutflowB. Cash Outflow



Preliminary Preliminary expensesexpenses

Sundry creditors Sundry creditors paidpaid


c. Net Cash inflow(A-c. Net Cash inflow(A-B)B)



247

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%


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

249

Flexible Budget-sample-2Flexible Budget-sample-2

ParticularsParticulars 50%50%



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

250

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

251

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 .

254

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

262

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


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


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

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