Acc depreciation
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Acc depreciation Document Transcript

  • 1. Deprecation Definition:-According to R.N carter, “Depreciation is gradual decrease in value of assets due to wearand tear or from any other cause”. According to Pickles, “Depreciation may be defined asthe permanent and continues damnation in quality, quantity or value of an asset.”Characteristics of depreciation:1-It is reduction in book value of fixed assets.2It reducesbook value of assets and not its market value.3The reduction in book value of an asset ispermanent gradual and continuing nature.4It is a continuous process because book valueis reduced either with use of assets or over a passes of time.Causes of Depreciations:-1Constant use: - The value of an assets decrease because of its constant use. This is moreapplicable on machinery.2With the passage of time: - The value of assets also decreases with passage of time.3Accident:- Accident loss may be permanent but it is not continuing and gradual.4Absolve scène: - If a better machine comes on a market the old machine may have to bescrapped even though they are capable of being run physically.5Fall in market price: - Market conditions may charge the market price of current assetsbut not book value of fixed assets.Objective:-1 To find out net profit:-.2To find out correct financial position:-3 For replacement of assets:4To spread over a number of years the burden of writing off assets5To give correct information to creditors6Proper ace ant of cost of production:-.7Writing off of capital as profitAdvantages:-1This method is very easy.2The value of assets can be reduced to zero.3Value of depreciation can be easily known.Disadvantage1In beginning the asset depreciation less and in last years it depreciates more quickly. Butunder this method amount of depreciation remain same every year.2No provision for interest is mode on value of asset.3When machine is old enough its repairing charge increase. But no attention is paid onthis fact under this method.
  • 2. Fixed budget Acc. To I.C.MA, London,” Fixed budget is , “a budget designed to remainunchanged irrespective of level of activity actually attained.”Thus a budget proposed fora fixed level of activity is known as a fixed budget. It is a fixed budget is one, which isdesigned for a specific planned output level and is not adjusted to the level of activityattained at the time of comparison between budget and actual cost. Flexible budget:-Acc.To ICMA, London, “ a flexible budget is a budget which by recognizing the differencebetween fixed, semi-variable and variable cost is designed to change in relation to thelevel of activity attained.”Flexible budget is one which is prepared in such a manner as tofacilitate determination of budgeted cost for any level of activity.In order to prepareflexible budgets, the expenses are disulfide according to their variability in to fixed,variable and semi-variable costs.Feature of flexible budget:-1They are prepared for arange of activity instead of single level.2They provide a very dynamic basis forcomparison because they are automatically geared to change in volumes.3They provide atailor-made budget for a particular volume.4These are based upon adequate knowledge ofcost behavior pattern. Imp-1Where the demand for the product changes a according tochange in taste and fashion.2Seasonal flue bat ions in sales and/ or production forexample soft drinks industry, woolen industries, raincoats etc.3Where level of activityfluctuate due to frequent introduction of new product.4Where customer’s reactiontowards a new product is almost impossible to foresee and to product5When productionis aimed out only after receiving customer’s order.5Where business depends heavily onexport markets.6Where sales are unpredictable due to typical nature of business andinfluents of external factors.7Jobs or contracts are under taken which very in size andspecification flow statement.-Where it is derived to explain to management the source of cash andits uses during period of time a statement known as cash flow statement is prepared. Astatement of cash flow report inflows (receipts) and outflows (payment) of cash and itsequivalents of an organization during a particular period. A statement of cash flow reportcash receipts and payment classified according to major activates-operations, investingand financial during the period:1Predicate future cash flows:-2Determine the ability to pay dividends and othercommitments:-3Show the relationship of net income to changes in the businesscash.4Efficiency in cash management:-.5Discloses the movement cash.(Different)-1Funds flow statement is consonant with the accrual basis of accountingwhile in case flow statement; data obtained on accrual basis are converted into cashbasis.2Funds flow analysis is more relevant and useful in assessing the long rangefinancial strategy, while cash flow analysis is useful in understanding the short termphenomena affecting liquidity of the business.3Funds flow statement tallies the fundsgenerated from various sauces with various uses to which they are put. Cash-flowstatements show the cash flows form operating, financing and investment is adjusted tothe opening balance of cash and cash equivalent to arrive at the closing balance.4Fundsflow analyses is based on a broader concept that is working capital, while cash-flowanalysis proceeds on the narrow concept that is cash, which is one element of workingcapital. Thus, cash flow statement provides details of cash movements where as the funds
  • 3. flow statement provides the details of funds movement.5Funds flow statement does notcontain any opening and closing balance whereas in cash flow statement opening as wellas closing balance of cash and cash equivalents is given,Funds flow statementThe following general rules should be considered to know whether a transaction causesincrease or decrease in the working capital:1) Working capital in the excess of the currentassets over the current liabilities.2)Increase in the current assets means increase in theworking capital.3)Decrease in the current assets causes decrease in the workingcapital.4)Increase in the current liabilities causes decrease in the workingcapital.5)Decrease in current liabilities increase in the working capital.6Increase in thecurrent assets and the simultaneous increase in the current liabilities does not effect theworking capital.7)Decrease in the current assets and the simultaneous decrease in thecurrent liabilities does not effect the working capital.Objectives or significance of fundflow statements :The main objectives of funds flow statements is to explain the changes in the workingcapital over a fixed period of time. Following some other objectives of funds flowstatement:1)To provide information about the activities of raising finance and theinvestments.2)To ascertain the amount of available fund from the operation of businessand other sources.3)To understand the use of financial resources of business.4)To knowthe reason for changes in the financial position of business. Funds flow statement notonly helps the internal management of a business to take the various financial decisionsbut it also provides a number of useful information to various outside parties like thebanks ,financial institutions, shareholders, debentures holders etc. the significance offunds flow statements can be underlined as under:2)Helpful in financialanalysis:3)Helpful in determining dividend policy: 4)Helpful in deciding the financialpolicies:5)Helpful in working capital management:6)Helpful in planning for future.7)Helpful in raising the funds:8)Useful in other firms: 9)Useful to shareholders :. Marginal costingMeaning: According to CIMA terminology Marginal costing is ascertainment of marginalcost and of the effect on the profit of changes in volume or the type of output bydifferentiating between the fixed and the variable cost. In this technique only variablecost are changed to operation, processes or products ,leaving all the indirect cost to bewritten off against profits in period in which they arise. It is clear from above that onlyvariable cost form part of product in the technique of marginal costing because onlyvariable cost are changed if output is increased or decreased and fixed cost remain thesame.Features of Marginal costing:1)It is a technique of costing which is used toascertain marginal cost and to know the impact of variable cost on the volume ofoutput.2)All cost are classified into fixed and variable cost on the basis of variability.Even semi-fixed cost are segregated into fixed and variable cost.3)Variable cost aloneare changed to production .fixed cost are recovered from contribution.4)Valuation ofstock of work in progress and finished goods is done on the basis of marginalcost.5)Selling price is based on the marginal cost plus contribution.6)Profit is calculated
  • 4. by deducting the marginal cost and fixed cost from the sales.7)Cost volume profit (breakeven)analysis is one of the integral part of the marginal costing.8)The profitability ofproduct is based on the contribution made available by each product.Advantages ofMarginal costing:With the help of marginal costing technique managerial decisions canbe taken regarding the several matters are discussed as under:1)How much to produce:The level of output which is most profitable for a running concern can be determined.Therefore production capacity can be utilized to the maximum possible extent.2)What toproduce: The manufacture of which product should be undertaken can be decided uponafter comparing profitability results of different products. Certain products or activitiesmay turn to be unprofitable with the passage of time.3)Whether to produce: The decisionwhether a particular product should be manufactured in factory or bought from outsidesources can be taken at comparing prices at which it can from outside and marginal costof producing that article in the factory.5)When to produce: In periods of trade recessionwhether the production on the plant is to be suspended temporarily or permanently closeddown can be decided upon after carefully examining marginal cost structure.e)Inventoryvaluation: Becomes the more realistic when it is based on the marginal cost. Fruitfulresults can be derived by combining this technique with the standard costing andbudgetary control technique . Thus we can see technique of marginal costing is ofimmense value for managerial decisions.Limitations :1)Classifications into fixed intovariable elements a difficult task It is tough job to analysis cost under the fixed andvariable elements since the nature of the cost is not certain in some cases. Certain costmay be partly fixed and partly variable and the division of such cost into fixed andvariable parts separately is based in the assumptions and not facts..2)Faulty decisions :Ifthe fixed overheads are not taken into consideration management decision regarding theprice fixing manufacturing the product etc. may prove to be faulty and deceptive.productsmay be same 3)Difficultapplication: The application of marginal costing technique isdifficult in most concerns. It cannot be easily applied in the job costing.4)Under or overrecovery of overheads: As variable overheads are estimated and not based on the actual,there under and over recovery of overheads may results.5)Better technique available: Thesystem of budgetary control and the standard costing serve the purpose better than themarginal costing system. Through variance analysis impact on the profitability due tochanges in the volume and the efficiency can be studied and hence this technique is notrequired.