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Transcript of Management Accounting
1
Management Accounting SCDL
By Prof. AUGUSTIN AMALADASM.COM., AICWA.,PGDFM.,B.Ed.
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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
3
FLOW OF CASH/SHORT TERM AND LONG TERM
information
Accounts payable
RAW mATERIAL
ADRLong term loansPreference
Shares
Bad debts
Accounts receivable
DebtorsWork in progress
information
OverheadsLabour
Equity shares
CASH
GDR
informationIn
form
ati
on
4
FLOW OF CASH - LONG TERM
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 TERM
information
Accounts payable
RAW mATERIAL
Bad debts
Accounts receivable
DebtorsWork in progress
information
OverheadsLabour
informationIn
form
ati
on
Discounting billscreditorsCash creditBank overdraft Sale of investments
Bad debts
Bad debts
Issue of long term fundsSale of fixed assets
Bank overdraft
cash cash
6
Accou
nting
Labou
r la
ws
mark
eti
ng
Costing
technical technology
political
prod
uction
statisticalShar
e m
arke
t
MANAGEMENT ACCOUNTS
INFORMATIONINFORMATION
INFORMATIONINFORMATION
INFORMATION
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Techniques in management accounting
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 syllubusChapter-1
Financial accounting
1. Introduction
2. BasicAccounting
3. Process ofaccounting
4. BRS
5. Rectification ofErrors
Final accounts
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Cost Accounting
6. CONCEPTS
7. ELEMENTS OF COST
8. MATERIAL
9. LABOUR
10. OVER HEADS
11. MARGINAL COSTINGtechniques
12. BUDGETARYCONTROL
13.STANDARD COSTINGTECHNIQUES
14. UNIFORM COSTING
CO
NTR
OL
10
Anything incurred during the production of the goods or service to get the output into the hands of the customer
The customer could be the public (the final consumer) or another business
Controlling costs is essential to business success Not always easy to pin down
where costs are arising!
Costs
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12
Differences between cost accounting/Management Accounting/financial accounting
Financial Accounts Cost Accounts Management Accounts
1.Recording
2.Outsiders
3.Past
4.Statutory
5.Preparation of profit/loss A/c
And balance sheet
6.Audit& reporting
1.Estimation and control
2.Internal
3. Future
4. Not all organisations
5.Costing records
6.Cost audit once in two years
1.Collection Analysis and decision making
2.Management
3.Future
4.Non-statutory
5.Using various techniques
6.Supply the required information
To correct persons on time
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Users 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 accounting
Management Accounting
Cost accounting
Mathematics
operation research
statisticsRatios
Financial accounts
Budgetary control
Cash flow statementFFS Trend percentages
Marginal costing
Variance analysis
Comparitive statement Common size statements
15
See you in the next chapterBRS
Life education
God and Poor man
16
Chapter-2: Basics of financial accounting 1.Concepts 2.system of accounting 3.Types of Expenditure 4.Terms used in financial accounts 5.Double entry / Single entry 6. Depreciation methods 7. Practical consideration relating to
depreciation
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1.concepts& conventions Meaning: Basic assumptions upon which the basic
process of accounting based. a] Business entity concept- b] Dual aspect concept c] Going concern concept d] Accounting period concept e] Cost concept f] Money measurement concept g] Matching Concept
ConventionsCoservativismMaterialityConsistency
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a] Business entity concept-
Business is different from the owner We pass Journal entry when owner contributes
towards capital. When amount / goods withdrawn for personal
use we make an entry in the business When Income tax paid by the owner out of
business money we make an entry In the books of accounts.
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b] Dual aspect concept
Every debit has equal amount of credit Asset =Liability Liability creates asset If asset>Liability= profit If Liability> Assets= loss
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c] Going concern concept
Business will go for at least for a reasonable period.
Depreciation is provided based on this assumption.
If this assumption is not made all Fixed assets will be valued at realised value like current assets.
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d] Accounting period concept
Fixing time limit for accounts Profit for the period It can be one week or two weekor 6
months/one year or 5 years But to find profit we normally consider 12
months period Financial year for income tax point of view 1st
April-31st March of the following year Calendar year –January to December Divali to Divali
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e] Cost concept
The cost to the organisation (Actual) is recorded in the books
Assets are not recorded according to the market price every year.
Depreciation is calculated on cost not based on market price
Accounting records may not show the real worth of the business
Market price may be disclosed with in bracket in the balance sheet
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f] Money measurement concept
Every thing which can be expressed in terms of Money is recorded in the books
Beautiful women are working /Handsome boys working in IBM /Efficient engineers worth 5000 crores –How do you record?.
Good working environment? Highly motivated employees?
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g] Matching Concept
Matching Cost with revenue It is used to estimate correct profits Accrual/ cash basis of accounting
Even cash paid /received if it belongs to accounting period we consider them as expenditure /income
Salary outstanding for the last month? Income from Investments yet to be received? Rent received in advance for next year?
25
Conventions
Customs and traditions that are followed by the accountants while preparing the financial statements.
Why do we respect elders? Why do we shake hands? Why do Young Indians hate receiving
dowry?
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Coservativism
To be on the safer side Expect future losses as current year loss not future income is treated as current
year income. Stock is valued cost price / market price
which ever is lower Making provision for bad debts is based
on this assumptions.
27
Materiality
Material impact on profitability are considered
Insignificant transactions ignored from recording
Pen purchased, pencil purchased? Wine purchased regularly?
28
Consistency
Accounting policies and proceedures should be followed consistently
Method of depreciation should be followed consistently.
Stock valuation- cost/market price whichever is lower is consistently followed
If not followed it amount to change in the policy of the company
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2.system of accounting (26)
1.Cash system: unless cash received /paid in
the accounting year can not be considered as income/expenses respectively
30
2.Mercantile
Mercantile/Accrual/due concept: Even cash received/paid but due for
payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered.
If last year expenditure paid this year? If you receive/paid in advance ?
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Mercantile love!!!!???
Last year I loved her? Next year I shall love him depends on type of bike model!!!!
32
Life Education
If I do not get married to him I will not be happy- Girl said
If I do not get married to her I will not be happy- Boy said
If both get married what will happen!!!!
33
3.Types of Expenditure(30)
A) Capital expenditureB) Revenue expenditureC) Deferred Revenue
expenditure
34
A) Capital expenditure(30)
Expenditure incurred which will :a) Increase Production capacityb) Increase earning capacityc) Reduction in the cost of operation.Example: purchase of fixed assets
Purchase of Machinerypurchase of investment
If such expenditure is not to do with the basic functions of the business such expenditure is capital expenditure.
How do you consider if you buy goodwill, copy right or patent right?
35
Capital expenditure-continue(page-30)
Both tangible and intangible assets included
Intangible assets such as patent right, copy right, technical know-how, francises, goodwill etc.,
Depreciation is provided on fixed assets which will appear in the profit and loss account
They appear in the Balance sheet
The life is more than one year
They should not appear in the profit and loss account
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Revenue Expenditure(page-30)
Expenditure incurred which will :a) Not Increase Production capacityb) Not Increase earning capacityc) maintain the capacity No Depreciation is provided on fixed assets which
will appear in the profit and loss accountThey appear in the profit and loss accountThe life is not more than one year
They should not appear in the balance sheet
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Deferred revenue expenditure(page-30) Deferred means- postponed Heavy revenue expenditure Vodafone incurred 200 crores for advertisement after
merger with Hutch It can not be written off within a year It appears in the balance sheet as last item Every year some portion is written off in the profit and loss
account. Research and deveopment expenditure, initial
advertisement expenditure, preliminary expenditure are example
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Terms(page-27)
Account
Debit
Credit
Journal
Ledger
Narration
casting
Polio
Brought forward(B/f)
Trail balance
Assets
Liabilities
Capital
Drawings
Debtors
depreciation
Creditors
Balance sheet
Accounts receivable
Accounts payable
Debit note
Credit note
Trade discount
Cash discount
Debentures
Equity shares
Preference shares
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Terms used in costing(unit 7)Direct material
Direct labour
Direct expenses
Prime cost
Raw material; cost per unit can be identified, in the individual cost centre;
Engaged in manufacturing process
Hire charges of machinery-direct expenses
Factory
Indirect material
Indirect labour
Indirect expenses +
Works cost
Consumable stores, cotton waste ,oil
Wages to storekeeper, foremen, works manager’s salary, repairs to factory building, insurance to machinery factory lighting
Factory
Indirect material
Indirect labour
Indirect expenses +
Total cost
Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation
Administration section
Factory over headsFactory over heads
Office and administration overheads
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Indirect material
Indirect labour
Indirect overheads
Cost of sales+
Profit
Sales
Packing material, samples,salaries to sales personnel,commission to sales manager, warehouse charges,advertisement,repairs to distribution van, discount to customers
Sales departmentSelling and distribution
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Life education
Lady in a seashore
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5.Double entry / Single entry
Is Accounting based on business concept or religious concept?
Giving first and receiving later. Giving cash receiving machinery We consider both aspects such as debit
and credit
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Rules of acccounting
Personal rule/Account-supplier debtors, owner, banker, outstanding wages
Real rule/Account- cash, bank, building, furniture, goodwill, patent rights
Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.
44
Personal rule
Debit the receiver credit the giver Example: Computer chips purchased on credit
from wipro Here credit Wipro as Wipro is the giver of
computer. Sold goods to Meena Meena is the receiver-debit
45
Excercise Amount collected from debtors? Amount deposited to bank?
46
Real rule
These are the accounts of assets and liabilities
Rule: debit what comes in
Credit what goes out
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Excercise
Goods supplied for cash Cash withdrawn from bank Cash withdrawn from bank for personal
use Land purchased by giving a cheque Building sold on credit
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Nominal rule
Related to Expenses and income
Rule: Debit all expenses and losses
Credit all incomes and gains
49
Excercise
Rent paid Rs 50,000 Wages paid Rs.1,00,000 Wages outstanding-Rs.60,000 Commission received-25,000 Discount allowed to customer – Rs.1,000 Telephone bills paid-Rs.2500 Shares issued at premium-Rs.2,00,000
50
Suitable questions to pass journal entry If cash transaction, person is not important Every birth of an account there is a death
of the account Ask what comes in? Or what goes out?
51
Depreciation Accounting(34)
Reduction in the value of assets Use factors, time factor,obsolescence are
the factors Statutory requirement AS(6) Fixed assets are depreciated Current assets are not depreciated Land and cattle are not depreciated.
52
Depreciation methods
Straight line method Written down value method Sinking fund method Machine Hour rate method Unit cost method Depletion asset method Depreciation Fund method Sum of digits method Accelerated depreciation method
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Impact on books
Depreciation Expense Net income Asset Equity Return on assets Return on Equity Turnover Ratios Cash flow NPV IRR Pay back
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Impact of Tax
Block asset method Purchase of Asset Sale of Asset Short term/Long-term Capital asset Asset used less than 180 days during the
previous year Asset purchased preceding previous year but put
into use less than 180 days during the current previous year
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Divisible profit and depreciation(Page:39-41) Profit after adequate
depreciation[Sec.205(2)] Profit after interest-depreciation of the
current year- Depreciation of the previous year- loss of the previous year
Depreciation as per Schedule XIV of the Companies Act
Section 350 –calculated on WDV
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Methods(35) 1. straight line method: Cost (- )estimated scrap value
Estimated life in years 2. written down value or diminishing balance method. cost of the asset=1,00,000; rate of depreciation =10% #Depreciation for the 1st year=1,00,000*10%=10,000 Value at the end of first year= 1,00,000-10,000= 90,000 ##Second year depreciation=90,000*10%=9000
57
Methods(37)
3. production unit method: Depreciation= (cost-scrap)(units produced during the year)
no of units the machine
can produce during its life
Suppose cost=1,00,000; scrap=5000; total life in units=10000 units. No. of units produced during the year=3000
Depreciation=(1,00,000-5000)(3000)/10,000
=Rs 28,500
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Production hour method
It depends on number of hours produced instead of units produced
We calculate production hour rate Multiply the no.of hours used during the
year with the rate gives depreciation
59
Joint factor rate method(38)
Both fixed element and variable elements are considered
Cost is divided into fixed and variable Fixed part is divided based on time Variable elements are divided by total
units which gives rate per unit
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Annuity method
C*r Depreciation= n 1- 1/(1+r) - 1 Depreciation is constant It depends on future cash inflows It assumes that the capital invested would have
earned interest had been invested otherwise
61
Sinking fund method
Amount available would be equivalent to the original cost
C*r
Depreciation= n (1+r) – 1Calculation of 26380 is wrong. I should be 16380.
62
Endowment policy method
Insurance policy is taken to replace the asset.
The depreciation is equal to the insurance premium paid
63
Renewal method(39)
When asset is renewed full amount is written off.
64
Bye-bye to chapter-2
Chineese tree
Life education
65
Chapter-3
Journalising Ledger (subsidiary books) Posting Trial balance Trading and profit and loss account Balance sheet
66
Final Accounts Adjustments
Direct expenses Indirect expenses Opening stock given in adjustment Closing stock given in the adjustment Wages outstanding in trail balance Income from investment due given in trail balance Meaning of adjustment Income tax Life insurance premium Goods drawn by the owner
67
Final Accounts Adjustments
Domestic house hold Expenses Income tax refund Income from house property Accrual basis of Accounting Un expired insurance Income received in Advance Interest on Capital Provision on Doubtful debts provision for Discount on debtor Deffered revenue expenditure
68
Final Accounts Adjustments
Reserve Fund Goods Distributed as free sample Manager’s Commission Goods on sale or approval basis Hidden adjustments
69
Terms used in final accounts
Trading account Profit and loss account Profit and loss appropriation account Balance sheet Capital Long term liabilities Current liabilities Fixed assets
70
Terms
Investments Current assets Adjustments Closing stock Depreciation Outstanding expenses Prepaid expenses
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Terms
Accrued income Income received In advance Bad debts Provision for doubtful debts Interest on capital Drawings Deferred revenue expenses
72
Terms
Abnormal expenses Goods distributed as free sample Goods sent on approval Commission payable to manager
73
Important adjustments In various problems Illus:2 page-77 i) repairs tp plant ii)Income
tax of X Iii) Provision for bad debts Iv) adjustment no.b,e and f V) calculation of works manager’s
commission and general manager’s commission
74
Important adjustments In various problems Illustration 3: i) adju.e and I and trading account purchases and
sales Illustration 4: bank loan, adj. a,d and g. Illustration 5: loan, adj.b and c. Illustration 6: adj: b,f and h Illustration 7: adj:b and d Illustration 8: adj.f Illustration 9: adj. d and e Illustration 10: loan, adj.a
75
Bank reconciliation statement
Cash book Pass book Cheques issued but not debited Cheques deposited but not cleared Bank charges entered in the pass book Income from investments entered in the pass
book Electricity, water, telephone , internet bills paid
directly by bank entered in the pass book Clerical errors in the pass book or cash book
76
Exercise:-11 page121
Q.2 –page-116 and questions no.6 page-119 .
77
Life education
Child likes to hug in the evening
78
Chapter 5: Rectification of Errors(page-126) Reasons for errors in accounting: 1.error of omission 2.error of commission 3.Error of principle 4. Compensating error
79
Errors not affecting trial balance
1.error of omission 2.Error of principle 3.compensating error 4. complete omission 5.error of commission
80
Suspense Account
If trial Balance does not tally ie debit is not equal to credit then temporarily to close down we open a suspense Account on the deficit side known as suspense account.
81
Rectification: Steps
Rectify only the account in which error is committed.
Book means complete set of accounts Accounts means mistake only in the
account If suspense account is given and if one
side error suspense account has to be either debited or credited accordingly.
82
Problems in errors Problem:7 page-139
1. Drawings A/c debit
to General expenses a/c credit
2. Sales Account debit
to Machinery A/c credit
3. Rent a/c debit
To land lord a/c
4. Repairs a/c
To Building
5. Suspense a/c debit
To Harish a/c
To Cash A/c
2500
1300
160
245
500
2500
1300
160
245
250
250
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Problem:6 page-138particulars amount amount
a.Machinery Dr.
To Purchases a/c
To Wages a/c
b.Suspese a/c Dr.
to Mohan a/c
Cash a/cDr.
To Mohan
1100
2700
400
700
400
2700
400
84
particulars
Mohan a/c Dr.
To sales susp.
c. Suspensea/c
ToYogesh a/c
d.Furniture a/cdr
To P/L a/c
e.Machi.a/cdr.
To Purchases
To trade exp.
700
900
600
18200
700
900
600
17000
1200
85
Life education
Thomas Thomas Cooper –Cooper –DictionaryDictionary
86
Chapter-6 Cost Accountancy-terms Cost centre
Impersonal and personal cost centre
production and service cost centre Concept of cost
87
Chapter-6 Cost Accountancy-terms Cost centre
Impersonal and personal cost centre
production and service cost centre Concept of cost
88
The bottom line is that the organization
is out "hard" or "real" money.[1 Examples:
· Hardware and software purchases · Professional services
· Maintenance · Labor
· Medical benefits · Insurance
· Internet Service Provider fees · Wide area network fees
89
Economic Costs
Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These
are not hard-currency costs and it is dangerous to lump them into the cost-savings category with accounting costs because their effects will not necessarily
show up on the bottom line.
90
Chapter-6 Cost Accountancy-terms Cost centre
Impersonal and personal cost centre
production and service cost centre Concept of cost
91
Economic Costs
Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These
are not hard-currency costs and it is dangerous to lump them into the cost-savings category with accounting costs because their effects will not necessarily
show up on the bottom line.
92
Chapter-6 Cost Accountancy-terms Cost centre
Impersonal and personal cost centre
production and service cost centre Concept of cost
93
The bottom line is that the organization
is out "hard" or "real" money.[1 Examples:
· Hardware and software purchases · Professional services
· Maintenance · Labor
· Medical benefits · Insurance
· Internet Service Provider fees · Wide area network fees
94
Economic Costs
Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These
are not hard-currency costs and it is dangerous to lump them into the cost-savings category with accounting costs because their effects will not necessarily
show up on the bottom line.
95
Terms in costing
Accounting Costs : These are costs that impact an organization’s general ledger. For example, buying a product results in a chain of events wherein a purchase order is processed, a product/service is received, then an invoice arrives from the vendor
96
Economic Costs
Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These
are not hard-currency costs and it is dangerous to lump them into the cost-savings category with accounting costs because their effects will not necessarily
show up on the bottom line.
97
Example : · Reducing firefighting on incidents related to
problematic changes is robbing resources from planned work (projects) and applying them to unplanned, reactive work (incidents).
If you say that better change management reduced unplanned work by 20 percent, that is not an accounting cost savings, but it did free up resources to work on projects.
It would be wise to identify what project progress was enabled through the action.
98
Example-2
· By training users, incidents handled by the service desk decreased 5 percent. Again, this is not an accounting cost savings unless a resource is dismissed, thus impacting labor, benefits and so on.
99
mixing accounting and economic cost mixing accounting and economic cost
savings together and instead wrap both types of costs with a business case explaining the benefits of the proposal.
100
Overhead
These are indirect costs that are absorbed by IT. For example, a portion of building rent is often allocated to IT based on some cost driver such as percent of floor space allocated.
101
illustration
If IT occupies 10 percent of a building, then accounting will likely allocate 10 percent of the rent to IT. This overhead cost must then be factored into the services that IT offers in order for proper charge backs, pricing and so on
102
Sunk Costs
These are costs that, once spent, cannot be Recovered. If something is purchased that cannot be returned or sold off, then that item should be considered a sunk cost.
Most of the times they are irrelevant to take future decision.
103
Cost Drivers
When determining costs, it is worthwhile to understand what drives the costs. In other words, if you do X, then you see a corresponding increase in cost Y. To illustrate, if you must buy a PC and software licenses for each new person hired, then the addition of new users is one of the cost drivers for the associated PC and software expense accounts.
104
Salvage Value/Salvage Costs
If you can sell an asset for more than its book value, then you are actually booking another form of income. On the other hand, if the salvage value is lower than the book value, then accounting will need to write the asset off.
If you have to pay someone to take things away due to hazardous materials laws, then you may even incur expenses relating to the disposal of the asset.
105
Differential cost
Increased or decreased cost due to the increased or decreased volume of operations.
Additional cost due to operation.
106
Normal cost and abnormal cost(150)
Normal costs incurred at a certain level of output
Abnormality in cost due to unforeseen situations
107
Relevant cost and relevant benefit
Required for decision making Costs that are affected by by the decision Costs and benefits that are independent of a decision are
not relevant and need not be considered. Future cash inflows and future outflows are relevant. Sunk costs are irrelevant Allocated common costs are irrelevant Opportunity costs are relevant (shadow price) Incremental costs are relevant incremental benefits are
relevant. Avoidable costs are relevant and unavoidable costs are
irrelevant for decision making.
108
Relevant and irrelevant
Five engineers already employed on monthly salary but will not be sent out if not employed in an another project. The salary paid to those engineers are relevant or irrelevant to estimate the price for the project?
Two more engineers are selected exclusive to the new project-are the costs relevant to take decision for new project?
109
Direct and indirect costs
Direct Costs are costs that can be specifically and exclusively identified with the particular object (product)
Salary of processing associate Indirect Costs are costs that can not be specifically
and exclusively identified with the particular object (product)
Salary of team leader Direct costs are allocated. Indirect costs are
apportioned.
110
product costs Period costs
Product cost are those costs that are identified with goods purchased or produced for resale.
Period costs are those costs that are not included in the inventory valuation and as a result are treated as expense in the period in which they are incurred.
Product costs will generate income.but period costs do not generate income.
111
Treatment of period and product 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 and semi fixed
Cost (Rs.) Variable cost
cost(Rs.)
Out put(units) fixed cost
Activity level(units)
113
Step fixed cost
Total
Fixed cost
Activity level(Units)
114
Variable, fixed, semi variable and semi fixed.Fixed cost Supervisors’ salary, leasing
charges for cars, depreciation on building
In the long run all costs are variable.
Variable costs
Semi variable cost
direct material, direct labour and direct expenses.
Both fixed and variable elements in the costs.
115
Incremental costs and Marginal cost Differential costs and revenues are the
difference between costs and revenues for the corresponding item under each alternative being considered.
Marginal cost/revenue - one extra unit of output cost/revenue.
116
117
Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended March, 20xx
Direct materials used
Beginning raw materials inventory
Add: Cost of raw materials purchased
Total raw materials available
Less: Ending raw materials inventory
Total raw materials used
direct labor
Manufacturing overhead
Indirect materials
Indirect labor
118
Continuation
Depreciation—factory building Depreciation-factory equipment Insurance-factory Property taxes—factory Total manufacturing overheadTotal manufacturing costsAdd: Beginning work-in-process inventoryLess: Ending work-in-process inventory Cost of goods
manufactured
119
ADVANTAGES OF COST ACCOUNTING
It reveals profitable and unprofitable activities. It helps in controlling costs with special
techniques like standard costing and budgetary control
It supplies suitable cost data and other related information for managerial decision making such as introduction of a new product, replacement of machinery with an automatic plant etc
120
ADVANTAGES OF COST ACCOUNTING It helps in deciding the selling prices, particularly during
depression period when prices may have to be fixed below cost
It helps in inventory control It helps in the introduction of a cost reduction
programme and finding out new and improved ways to reduce costs
Cost audit system which is a part of cost accountancy helps in preventing manipulation and frauds and thus reliable cost can be furnished to management
121
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM
The method of costing adopted. It should be suitable to
the industry It should be tailor made according to the requirements of
a business. A ready made system can not be suitable It must be fully supported by executives of various
departments and every one should participate in it In order to derive maximum benefits from a costing
system, well defined cost centres and responsibility centres should be built within the organisation
122
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM controllable and uncontrollable costs of each responsibility
centre should be separately shown cost and financial accounts may be integrated in order to
avoid duplication of accounts well trained and educated staff should be employed to
operate the system It should prepare an accurate reports and promptly submit
the same to appropriate level of management so that action may be taken without delay
resources should not be wasted on collecting and compiling cost data not required. Only useful cost information should be compiled and used whenever required.
123
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM-continues It helps in deciding the selling prices, particularly during
depression period when prices may have to be fixed below cost
It helps in inventory control
It helps in the introduction of a cost reduction programme and finding out new and improved ways to reduce costs
Cost audit system which is a part of cost accountancy helps in preventing manipulation and frauds and thus reliable cost can be furnished to management
124
Life education
Threat is an opportunity Strength is your weakness Strengthen your weakness
125
Unit-7 Elements of costs
Learning: Cost sheet Elements of cost Operating cost Operating profit Non operating profit
126
Terms used in costing(unit 7)Direct material
Direct labour
Direct expenses
Prime cost
Raw material; cost per unit can be identified, in the individual cost centre;
Engaged in manufacturing process
Hire charges of machinery-direct expenses
Factory
Indirect material
Indirect labour
Indirect expenses +
Works cost
Consumable stores, cotton waste ,oil
Wages to storekeeper, foremen, works manager’s salary, repairs to factory building, insurance to machinery factory lighting
Factory
Indirect Office and administration overheadsmaterial
Indirect labour
Indirect expenses +
Total cost
Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation
Administration section
Factory over headsFactory over heads
127
Indirect material
Indirect labour
Indirect overheads
Cost of sales+
Profit
Sales
Packing material, samples,salaries to sales personnel,commission to sales manager, warehouse charges,advertisement,repairs to distribution van, discount to customers
Sales departmentSelling and distribution
128
Marginal costing cost sheet ££Sales Revenue xxxxx
Less Marginal Cost of Sales Opening Stock (Valued @ marginal cost) xxxx Add Production Cost (Valued @ marginal cost) xxxx Total Production Cost xxxx Less Closing Stock (Valued @ marginal cost) xxx) Marginal Cost of Production xxxx
Add Selling, Admin & Distribution Cost xxx Marginal Cost of Sales (xxxx)
Contribution xxxxx Less Fixed Cost (xxxx) Marginal Costing Profit xxxxx
129
ABSORPTION COSTING PRO-FORMA
££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 Costing
and Absorption Costing Profit $ Marginal Costing Profit xx ADD
(Closing stock – opening Stock) x OAR xx = Absorption Costing Profit xx
Where OAR( overhead absorption rate) =Budgeted fixed production overheadBudgeted levels of activities
131
Cost sheet
Prime cost+ Factory over heads Factory cost/works cost+ Administration over heads Office cost+ Selling overheads Total cost Profit sales
132
Factory cost/
works cost
1.Production
Prime Cost
1.Godown
1.canteen
Cost of sales
5.sales4.profit
1.Factory administration
3.Sales and distribution2.General administration
Total cost
Bin card
Stores ledger
Cost calculations/operating activity
++ =
+
+
133
Operating activity Non- operating activity
Dealers in furniture
Dealers in housesMy house is for sale
My furniture is for sale
?
?
Pro
fits
are
oper
atin
g pr
ofits
Non
ope
ratin
g pr
ofit
134
Operating/ Non operating
Operating (OP) Non operating (NOP)
1.Profits derived by doing basic functions
2.Efficiency depends on operating profit
3.Gross Profit- Office and administration overheads- selling and distribution overheads=OP
1.Profits derived other than basic functions
2.We should not consider NOP to study efficiency except on sale of company/firm.
3. Sale of asset-cost of such asset=NOP
135
BPOs
Self-less service canteen
Self help roomWhat activity?
136
Exercise Number: 3 page-175 unit 7. Exercise Number: 6 page-177 unit 7
137
Factory cost/
works cost
Prime Cost=R.material=40,000D. labour=12,000
Components=50,000Primary packing=50001.Godown
1.canteen
Cost of sales=1,76,338
5.sales4.Profit44084
1.Factory administration
3.Sales and distribution2.General administration
Total cost=1,60 307
Bin card
Stores ledger
Cost calculations/operating activity
+
+=
+
+
p.3
Consumable =4000Royalty=8000FOH=16050
5000+20,257 16031
2,20,422
138
Exercise:6/177
particulars Units 500 @ old price
Units500@current price)
Units 600
Direct Material[(40,000*600/500)*120/100]
Direct labour[(60,000*600/500)*105/100]
Prime Cost
Manufacturing Cost[25% on prime cost]
Factory cost
Administration cost:Management expenses
Rent
General Expenses
TOTAL COSTSelling expenses
Cost of salesProfit [20% on sales=25% on cost]
sales
40,000
60,000
1,00,000
25,000
1,25,000
30,000
5,000
10,000
1,70,00015,000
1,85,000
15,000
2,00,000
48,000
63,000
1,11,000
27,750
1,38,750
30,000
5,000
10,000
1,83,75015,000
1,98,750
49,688
2,48,438
57,600
75,600
1,33,200
33,300
1,66,500
30,000
5,000
10,000
2,11,50015,000
2,26,500
56,625
2,83,125
139
Material cost-stages 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 movements
Basic cost Less: Trade discount Add: Container cost Add: Sales tax-on basic cost after trade
discount - on container Add: insurance freight Less: Credit for drums
Total cost
Add: Stores overhead on total cost Unit cost = Overall cost /No. of Units-normal loss units
141
Normal loss and abnormal loss
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
example
Units purchased= 10,000 Costs of purchases=1,00,000 Due to leakages number of units lost=50 Loss of units due to breakages=2000; insurance claim initiated. Effective cost per unit=1,00,000-0/10,000- 50 =Rs.10.05025 Abnormal loss=2000*10.05025=20100.50 How do you calculate normal loss?
Page 200 unit-1
143
Calculate normal loss?
We do not calculate normal loss but to calculate effective rate per unit we consider normal loss units and recovery from normal loss.
144
Valuation of issues
FIFO LIFO Average price method Weighted Average method Highest In First method Specific price Standard Price
145
Points to remembered for stock valuation under various methods 1.All the methods used for the calculation of
issues to production The costs of purchase and other related costs
should be passed on to customers Any deficit in stock taking to be considered
as issue Any excess will be considered as purchase at the
latest price Goods returned from production to be valued at the
price of issue.
146
Example
Date Particulars Receipts Issues Balance
Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs.
1st Jan 08
5th
6th
8th
Op. balance
Purchase
Purchases
Issue
100 7.00 700
200 8.00 1600
250 ?
500 6.00 3,000
Stores ledgerMaximum levelMinimum levelRe-order level
DescriptionUnit
Location
FIFO
147
Example
Date Particulars Receipts Issues Balance
Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs.
1st Jan 08
5th
6th
Op. balance
Purchase
Issue
100 7.00 700
500 6.00 3,000
Stores ledgerMaximum levelMinimum levelRe-order level
DescriptionUnit
Location
LIFO
148
Date Particulars Receipts Issues Balance
Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs.
1st Jan 08
5th
6th
Op. balance
Purchase
Issue
100 7.00 700
500 6.00 3,000
Stores ledger Maximum levelMinimum levelRe-order level
DescriptionUnit
Location
Average price method
149
Date Particulars Receipts Issues Balance
Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs.
1st Jan 08
5th
6th
Op. balance
Purchase
Issue
100 7.00 700
500 6.00 3,000
Stores ledgerMaximum levelMinimum levelRe-order level
DescriptionUnit
Location
Weighted Average method
150
Techniques of Inventory control (Unit 8-page 211) 1. Economic Ordering Quantity 2. Fixation of inventory levels 3. Inventory Turnover 4. ABC Analysis 5. Bill of Materials 6. Perpetual Inventory system
151
1.Economic ordering Quantity(212)
EOQ=Root of (2AO/C) Where A=annual demand in units O= Cost of placing order (cost from
the time we order till we receive goods) C= Carrying cost per unit per year
(measured in terms of percentage on cost per unit)
Assumptions: normally on an average ½ of the units are in the store all the time.
152
Exercise:14 page 248
EOQ=Root of (2AO/C) = Root of(2*600*400/(40%*15) = Root of 80000 =282.845 units Total cost of inventory
annually=(600*15)+(3*400)+(1/2*282*40%*15)=9000+1200+846
=Rs.11,046.
153
If 10% discount is given cost per unit=15-(10%of 15)=13.5
Total cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5)
= 8100+800+1350 = Rs.10,250 Advise: Purchase 500 units as annual cost of
inventory is cheaper.
If safety stock is required at any point of time in order to calculate holding cost we add the safety stock with the ½ of EOQ stock.
Holding cost includes storage and interest on locked up capital
154
If 10% discount is given
If 10% discount is given cost per unit=15-(10%of 15)=13.5
Total cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5) = 8100+800+1350 = Rs.10,250 Advise: Purchase 500 units as annual cost of
inventory is cheaper. If safety stock is required at any point of time in order
to calculate holding cost we add the safety stock with the ½ of EOQ stock.
Holding cost includes storage and interest on locked up capital, handling, insurance of godown
155
2. Fixation of inventory level(218) Re-order level=Maximum leadtime
*Maximum usage Minimum level= Reorder level-(Normal
usage*Normal lead time) Maximum level=Re-order level+ Re-order qty-
(Minimum usage*Minimum Lead time Average level=(Maximum level+ Minimum
level)/2 Danger level=Normal usage*Lead time for
emergency purchases
Note: Re-order quantity=EOQ
156
See page-220 and 223 illustrations
EOQ is calculated inorder to find Re- order quantity
Re-order quantity is different from Re-order level
Sometimes minimum stock=safety stock
See page 222
157
3. Inventory (Stock) turnover ratio
It explains operating efficiency of the organisation.
How quickly raw material are converted into finished goods and also gives number of days of conversion.
It explains number of times in a year raw material are converted into finished goods
158
3.Stock turnover ratio=
Value of materials consumed in a year
Average stock
Average stock= (Opening stock+ Closing Stock)/2
Page-225
159
ABC analysis
Classify the various inventories according to their importance(70% of the value)
A-High cost per unit but less quantity (70% of the value)-large investment-effective control on supply
B- Moderate price per unit but moderate quantity (20% in value)
C-less cost per unit but large quantity(10% in value)-control on availability of material
Always Better Control
BetterControl Always
Control Always Better
160
5. Bill of materials
Bill of materials is a list of materials required for a job.. It also indicates quantity required for each item.
It helps in cost computation, material to be purchased by purchase department, that the order to be executed indicator.
161
6.Perpetual inventory control system(page-229)(Unit number 8) Stocks are recorded as soon as placed in the
godown and also recorded immediately as soon as stock is taken out.
They are recorded in Bin card and stores ledger. It helps if insurance claim initiated and also
fixing various level of stock,adjusted for discrepancies and periodical profits are estimated.
162
Problems-clarification
Problem number-02,10,16 from exercise Page-243,246 and248 respectively in unit-
1
163
Labour costs-unit 9 page-252
Selection,training,wage sheet preparation
Recording, time keeping and time booking
Analyse wage sheet, reports to mgt.
Selection,training,wage sheet preparation
Recording, time keeping and time booking
Analyse wage sheet, reports to mgt.
Personnel department
Time keeping department
Costing department
164
Methods of remunerating workers (unit 9 page-258) 1.Time basis 2.Result basis 3. Bonus systems
4. Indirect monetary remuneration
5. Non-monetary incentives
1.Time basis 2.Result basis 3. Bonus systems
4. Indirect monetary remuneration
5. Non-monetary incentives
Group
Individual
Profit sharing Co-partnership
165
Payment by results(page-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 systems
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 payment 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 schemeIndirect monetary benefits(271)
Profit sharing-Bonus-8.33% of wages statutory bonus.Maximum-20%
Copartnership-ESOP
169
Problems
Page-292; prob-6 &9 Page-293; prob-11
170
Overheads-unit 10 page-295
Classification of over heads Indirect material, indirect labour, indirect
expenses Factory overheads, administration over head,
selling and distribution over heads Fixed overheads, variable overheads, semi
variable overheads Controllable and uncontrollable 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-299) Common over heads belong to production
and service departments are apportioned on the following 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 apportionment Apportionment of service department cost
centre to production department
Methods of Apportionment(Page303)
Simultaneous Equation method
RepeatedDistribution method
174
Overhead absorption 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-11
Marginal Cost-Volume-Profit Analysis and Relevant Costing
176
Marginal cost, Budgeting and standard costing Presented by
Prof. L. Augustin AmaladasM. Com., AICWA.,PGDFM.,B.ED.
6th January 2008
IBM
177
1. How is breakeven point computed and what does it
represent?
2. How do costs, revenues, and contribution margin
interact with changes in an activity base (volume)?
Learning Objectives
C6
178
3. How does cost-volume-profit (CVP) analysis in
single-product and multiproduct firms differ?
4. What are the underlying assumptions of CVP
analysis and how do these assumptions create
a short-run managerial perspective?
C6
Continuing . . . Learning Objectives
179
5. How do quality decisions affect the components of
CVP analysis?
6. What constitutes relevance in a decision-making
situation?
C6
Continuing . . . Learning Objectives
180
7. How can management best utilize a scarce
resource?
8. What is the relationship between sales mix
and relevant costing problems?
Continuing . . . Learning Objectives
C6
181
9. How can pricing decisions be used to
maximize profit?
10. How can product margin be used to determine
whether a product line should be retained or
eliminated?
C6
Continuing . . . Learning Objectives
182
11.How are breakeven and profit-volume
graphs prepared? (Appendix 1)
12. What are the differences between
absorption and variable costing?
( Appendix 2)
13.Why is linear programming a valuable tool
for managers? (Appendix 3)
C6
Continuing . . . Learning Objectives
183
The Breakeven Point (BEP)
The level of activity, in units or dollars, at which
REVENUES = COSTS
184
Basic Assumption: Relevant Range
Company is operating within the relevant
range of activity specified in determining the revenue
and cost information used.
Total$
Activity Level
RelevantRange
185
Basic 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 Costs
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 Costs
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 Costs
Mixed costs must be separated into variable and fixed elements.
Total$
Activity Level
189
Cost 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 Unit
Contribution margin per unit equals selling price per unit less variable cost per unit.
sp -vc = cm
$40 - $24 = $16
191
Contribution Margin Ratio
Contribution margin ratio is per-unit contribution margin divided by selling price, or total contribution margin divided by total sales dollars.
cm/sp=cm%
$16 / $40 = 40%
192
Breakeven Point
Breakeven point is the point at which
profits are zero because total revenues
equal total costs, or
Total revenues = Total variable costs + Total
fixed costs
193
Continuing . . . Breakeven Point
Total fixed costs In units = ---------------------
CM per unit
Total fixed costs In sales dollars = ---------------------
CM ratio
194
Continuing . . . Breakeven Point
$120,000 In units = ----------- = 7,500 ice buckets
$16
$120,000 In sales dollars = ----------- = $300,000
.40
195
CVP Analysis: Fixed Amount of
Profit Before Taxes (PBT)
Total fixed costs + PBTIn units = ------------------------------
CM per unit
Total fixed costs + PBTIn sales dollars = ------------------------------
CM ratio
196
CVP Analysis: Fixed Amount of
Profit Before Taxes (PBT)
$120,000 + $64,000Break evenIn units=------------------------ = 11,500 buckets
$16
$120,000 + $64,000In sales dollars =------------------------ = $460,000
.40
197
CVP Analysis: Variable Amount
of Profit Before Taxes
Assume PUBT desired is 25% on sales
Therefore, PUBT = .25 ($40) = $10
Total fixed costsSales in units =---------------------------
CM per unit - PUBT
$120,000Sales in units =--------------- = 20,000 ice buckets
$16 - $6
198
CVP Analysis: Variable Amount
of Profit Before Taxes
Assume PUBT desired is 25% on sales
Therefore, PUBT = .25 ($40) = $10
Total fixed costsSales in $ = ---------------------
CM% - PUBT%
$120,000Sales in $ =--------------- = $800,000
.40 - .25
199
Income Statement
Dollars Percentages
Sales $800,000 100%
Variable costs 480,000 60%
Contribution margin$320,000 40%
Fixed costs 120,000 15%
Income $200,000 25%======= ==
200
CVP Analysis - Multiple Products
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 . . . CVP Analysis -
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 -
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 Hours
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 Decisions
How many of each product?
205
Relevant Costs in
Product Line Decisions
Revenues associated with product Variable costs associated with product Avoidable fixed costs Consider product margin
Revenues - Variable costs - Avoidable fixed costs
206
Exhibit 6-12: Partial Product Line
Income Statement
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 Margin for
the Electric Skillet Product Line
Electric
Skillet
Sales $75,000
Total direct variable expenses 43,750
Total contribution margin $31,250
Avoidable fixed expenses 25,000
Product margin $6,250
208
CVP Graph
Total$
Volume
Total Costs
Total RevenuesBEP
209
Profit-Volume Graph
BEP
Fixed Costs
Volume
Profit or Loss
Total$
210
Absorption Costing
Also known as full costing Treats costs of all manufacturing components as inventoriable, or
product, costsDirect materialsDirect laborVariable factory overheadFixed factory overhead
Presents expenses on income statement according to functional classifications
Cost of goods soldSelling expensesAdministrative expenses
211
Variable Costing
Also known as direct costing Includes only variable production costs as
inventoriable, or product, costsDirect materialsDirect laborVariable factory overhead
Fixed factory overhead costs treated as period expenses Income statement separates costs by cost behavior
May also present expenses by functional classifications within behavioral categories
212
Absorption Costing
Income 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 Costing
Income 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. Variable
Costing Income Statements
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 Budgeting
216
Costs
217
Costs
Anything incurred during the production of the good or service to get the output into the hands of the customer
The customer could be the public (the final consumer) or another business
Controlling costs is essential to business success
Not always easy to pin down where costs are arising!
218
Cost Centres
219
Cost Centres
Parts of the business to which particular costs can be attributed
In large businesses this can be a particular location, section of the business, capital asset or human resource/s
Enable a business to identify where costs are arising and to manage those costs more effectively
220
Full Costing
A method of allocating indirect costs to a range of products produced by the firm. e.g. if a firm produces three products - a, b, and c
- and has indirect costs of £1 million, assume proportion of direct costs of 20% for a, 55% for b and 25% for c
Indirect costs allocated as 20% of 1 million to a, 55% of £1 million to b and 25% of £1 million to c
221
Absorption Costing
All costs incurred are allocated to particular cost centres – direct costs, indirect costs, semi variable costs and selling costs
Allocates indirect costs more accurately to the point where the cost occurred
222
Marginal Costing
The cost of producing one extra unit of output (the variable costs)
Selling price – MC = Contribution Contribution is the amount which can
contribute to the overheads (fixed costs)
223
Standard Costing
The expected level of costs associated with the production of a goods/services
Actual costs – Standard costs = Variance Monitoring variances can help
the business to identify where inefficiencies or efficiencies might lie
224
Total Revenue
225
Terms and formulae in Marginal costing 1. Contribution=S-Vc 2.P/V ratio=C*100/sales BEP(units)=FC/Contribution per unit BEP (Volume)= FC/PV ratio Or BEP units*SP per unit Margin of safety (Units)=Profit/Contribution per unit Margin of safety(Volume)=MS units*SP per unit. Break-even at the required profit=(FC+Required
profit)/Contribution per unit or PV ratio
226
Total Revenue
Total Revenue = Price x Quantity Sold
Price can be raised or lowered to change revenue – price elasticity of demand important here Different pricing strategies can be used – penetration,
psychological, etc.
Quantity Sold can be influenced by amending the elements of the marketing mix – 7 Ps
227
Break Even
228
Break 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
Break Even AnalysisCosts/Revenue
Output/Sales
FC
VCTC
TR (p = £2)
Q1
If the firm chose to set prices lower (say £1) it would need to sell more units before covering its costs.
TR (p = £1)
Q3
231
Break Even AnalysisCosts/Revenue
Output/Sales
FC
VC
TCTR (p = £2)
Q1
Loss
Profit
232
Break Even AnalysisCosts/Revenue
Output/Sales
FC
VC
TCTR (p = £2)
Q1 Q2
Assume current sales at Q2.
Margin of Safety
Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made.
TR (p = £3)
Q3
A higher price would lower the break even point and the margin of safety would widen.
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 Analysis
Remember: A higher price or lower price does not mean that
break even will never be reached! The break even point depends on the number of
sales needed to generate revenue to cover costs – the break even chart is NOT time related!
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Break Even Analysis
•Importance of Price Elasticity of Demand:
•Higher prices might mean fewer sales to break even but those sales may take a longer time to achieve
•Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break even
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Break Even Analysis
Links of break even to pricing strategies and elasticity
Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even
Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even
Elasticity – what is likely to happen to sales when prices are increased or decreased?
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Budgets
238
Budgets
Estimates of the income and expenditure of a business or a part of a business over a time period
Used extensively in planning Helps establish efficient use
of resources Help monitor cash flow and identify departures from
plans Maintains a focus and discipline
for those involved
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Budgets
Flexible Budgets – budgets that take account of changing business conditions
Operating Budgets – based on the daily operations of a business
Objectives Based Budgets - Budgets driven by objectives set by the firm
Capital Budgets – Plans of the relationship between capital spending and liquidity (cash) in the business
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Budgets
Variance – the difference between planned values and actual valuesPositive variance – actual figures less than
plannedNegative variance – actual figures above
planned
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Preparation of Budget
Sales budget quaterly-Estimated based on market survey
Production budget(Finished goods:Anticipated Desired Sales+ closing stock- Opening stock
Material Purchase Budget(Raw material)=Production budget+Desired Closing stock-Opening stock
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Production budget
For Finished goods
Anticipated Desired Sales+
closing stock- Opening stock
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Material Purchase Budget
For Raw Material
Production budget+Desired Closing stock-
Opening stock
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Cash Budget-Sample-1Particulars Jan Feb Mar Apr. May Jun.
A. Cash Inflow
Issue of shares
Issue of Debenture
Collection from Debtors
B. Cash Outflow
Fixed Assets purchase
Stock purchase paid
Preliminary expenses
Sundry creditors paid
Other expenses paid
c. Net Cash inflow(A-B)
Opening cash balance
Closing Balance
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Cash Budget-Sample-2Particulars Jan Feb Mar Apr. May Jun.
A. Cash Inflow
Issue of shares
Issue of Debenture
Collection from Debtors
B. Cash Outflow
Fixed Assets purchase
Stock purchase paid
Preliminary expenses
Sundry creditors paid
Other expenses paid
c. Net Cash inflow(A-B)
Opening cash balance
Closing Balance
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Cash Budget-Sample-3Particulars Jan Feb Mar Apr. May Jun.A. Cash Inflow
Issue of shares
Issue of Debenture
Collection from Debtors
B. Cash Outflow
Fixed Assets purchase
Stock purchase paid
Preliminary expenses
Sundry creditors paid
Other expenses paid
c. Net Cash inflow(A-B)
Opening cash balance
Closing Balance
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Problems
Page-130and132 unit-2 Problem-11 and 13 respectively.
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Flexible Budget-Sample-1
Particulars 50%
Capacity
60%
Capacity
80%
CapacityA)Number of units sold
Selling Price per unit
Sales
B) Cost
1) Material cost
2) Direct wages
3) Variable Overheads
a) Factory
b) Selling and Distribution
4) Fixed Overheads
a)Factory
b) Selling and distribution
C) Profit ie A-B
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Flexible Budget-sample-2
Particulars 50%
Capacity
60%
Capacity
80%
CapacityA)Number of units sold
Selling Price per unit
Sales
B) Cost
1) Material cost
2) Direct wages
3) Variable Overheads
a) Factory
b) Selling and Distribution
4) Fixed Overheads
a)Factory
b) Selling and distribution
C) Profit ie A-B
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Problems in flexible budget
Pages-127,128,129 respectively in
Unit-2 Problems 4, 5,7 and 8
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Standard CostingSystem
Unit-13
Managerial Accounting
252
Standard Costing
It is also known as variance costing.
Standard cost- Predetermined cost
Standard Costing- is a management accounting tecnique to analyse variances
253
Steps in Standard costing
Set standard cost Study the actual cost Compare the actual with the standard costWhich gives variancesAnalyse the variancesFix responsibilitiesTake suitable action and create effective
control system .
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Management Accounting-Module-IIMarginal costing, Budgeting, standard costing and Uniform costing
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Similarities and Difference between Budgetary control and standard costing
Similarities: 1.Both the tools available to the management for
the purpose of controlling the costs 2.Both based on setting standard, comparison
with actual and study the variance 3. If standard costing prevails in the company
then budgetary control is effective.
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Differences
1.Budgetory control can be operated without standard costing
2.Budgets gives the limits on expenses but standard costs are minimum targets to be attained.
3.Budget can be prepared for various areas of activities but standard is used for production and manufacturing cost
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Differences
4.Budgetary variances may point out efficiency or inefficiency. But standard costing goes beyond
The efficiency or inefficiency and find out the root cause for the variance.
5.Standard is always for improvement. Budgets are based upon the future or estimated
costs. But standard costs are ideal costs under ideal situation.
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Types of standards
1.current standard2.ideal standard3.Expected standard4. Normal standard
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Analysis of variances
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 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)
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Exercise: Material Variances
Actual Quantity*Actual cost per unit
400*6=2400500*3.6=1800400*2.8=1120 5320
Actual Quantity*Std. cost per unit
400*6=2400500*3.75=1875
400*3=12001300 5475
1300(5:4:3)/12Revised std. Quantity
For input*Std. cost per unit 541.66*6=3250433.33*3.75=1625 325*3=975 5850
Revised std QuantityFor output*
Std. cost per unit 500*6=3000400*3.75=1500 300*3=900 5400
1 23
4
Price(2-1) Mix(3-2) Yield(3-2)
Usage(4-2)Cost(5-1)
+155 +375 (450)
(75)
+80
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Explanations for 3
Actual input(1300) is shared in the standard ratio of 500:400:300 ie 5;4:3
Then multiply by standard price Do not bother about how each material is
measured ie. One may be in Kg.,another in litre etc.
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Explanations for 4
We move from output to input The output is 1080. We find normal input if normal
loss is 10% (given in the problem) If Input is 100 and normal loss is 10% then
output=90
1080*100/90=1200 Share 1200 in the standard ratio of 5:4:3 500, 400,300.
Output Input 90 100 1080 ?
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Labour Variances(Page-191 prob.8
Actual Hours*Actual cost per Hour
28*40*4=448018*40*3=21604*40*2= 320
6960
Actual Hours*Std. cost per Hour
28*40*3=336018*40*2=14404*40*1= 160
2000 4960
2000*(30:10:10)/50Revised std. Hours
For input*Std. cost per Hour
1200*3=3600 400*2= 800 400*1= 400 4800
Revised std HoursFor output*
Std. cost per Hour 1152*3=3456 432*2= 864 216*1= 216 4536
1 2 3 4
Rate(2-1) Mix or gang(3-2)
Yield(3-2)
Efficiency(4-2)
Cost(5-1)
-2000 -160 -264
-424
-2424
265
Explanations for 4
Going from Output hours to input hours
There are 1800 hours are shared in the ratio of 32:12:6
266
Variable overhead Variances(Page-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-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
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“Learning gives creativityCreativity leads to thinkingThinking provides knowledgeKnowledge makes you great”
- A.P.J.Abdul Kalam
269
Thank You all