Management Accounting

Management Accounting SCDL By Prof. AUGUSTIN AMALADAS M.COM ., AICWA.,PGDFM.,B.Ed.

1.Production Prime Cost 1.Godown 1.canteen 2 Cost of sales 6.sales 5.profit 1.Factory administration 4.Sales and distribution 3.General administration Total cost Bin card Stores ledger Cost calculations/operating activity + + = + + Danger Facility department Factory cost/ works cost

FLOW OF CASH/SHORT TERM AND LONG TERM information Accounts payable RAW mATERIAL ADR Long term loans Preference Shares Bad debts Accounts receivable Debtors Work in progress information Overheads Labour Equity shares CASH GDR information Information

FLOW OF CASH - LONG TERM ADR Long term loans Preference Shares Equity shares CASH Short term GDR land furniture investments goodwill building Patent rights Know how Copy right

FLOW OF CASH-SHORT TERM information Accounts payable RAW mATERIAL Bad debts Accounts receivable Debtors Work in progress information Overheads Labour information Information Discounting bills creditors Cash credit Bank overdraft Sale of investments Bad debts Bad debts Issue of long term funds Sale of fixed assets Bank overdraft cash cash

Accounting Labour laws marketing Costing technical technology political production statistical Share market MANAGEMENT ACCOUNTS INFORMATION INFORMATION INFORMATION INFORMATION INFORMATION

Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios Financial accounts Budgetary control Cash flow statement FFS Trend percentages Marginal costing Variance analysis Comparitive statement Common size statements

Structure of the syllubusChapter-1 Financial accounting 1. Introduction 2. Basic Accounting 3. Process of accounting 4. BRS 5. Rectification of Errors Final accounts

Cost Accounting 6. CONCEPTS 7. ELEMENTS OF COST 8. MATERIAL 9. LABOUR 10. OVER HEADS 11. MARGINAL COSTING techniques 12. BUDGETARY CONTROL 13.STANDARD COSTING TECHNIQUES 14. UNIFORM COSTING CONTROL

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

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

Users of information organisation shareholders public Benefactors government banks Debenture holders Loan vendor Preference shareholders creditors 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

Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios Financial accounts Budgetary control Cash flow statement FFS Trend percentages Marginal costing Variance analysis Comparitive statement Common size statements

See you in the next chapter BRS
Life education
God and Poor man

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

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
Conventions
Coservativism
Materiality
Consistency

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.

b] Dual aspect concept
Every debit has equal amount of credit
Asset =Liability
Liability creates asset
If asset>Liability= profit
If Liability> Assets= loss

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.

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 1 st April-31 st March of the following year
Calendar year –January to December
Divali to Divali

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

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?

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?

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?

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.

Materiality
Material impact on profitability are considered
Insignificant transactions ignored from recording
Pen purchased, pencil purchased?
Wine purchased regularly?

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

2.system of accounting (26)
1.Cash system:
unless cash received /paid in the accounting year can not be considered as income/expenses respectively

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 ?

Mercantile love!!!!???
Last year I loved her? Next year I shall love him depends on type of bike model!!!!

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!!!!

3.Types of Expenditure(30)
A) Capital expenditure
B) Revenue expenditure
C) Deferred Revenue expenditure

A) Capital expenditure(30)
Expenditure incurred which will :
Increase Production capacity
Increase earning capacity
Reduction in the cost of operation.
Example: purchase of fixed assets
Purchase of Machinery
purchase 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?

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

Revenue Expenditure(page-30)
Expenditure incurred which will :
Not Increase Production capacity
Not Increase earning capacity
maintain the capacity
No Depreciation is provided on fixed assets which will appear in the profit and loss account
They appear in the profit and loss account
The life is not more than one year
They should not appear in the balance sheet

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

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

Terms used in costing(unit 7) Factory over heads Office and administration overheads 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

Selling and distribution 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 department

Life education
Lady in a seashore

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

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.

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

Excercise
Amount collected from debtors?
Amount deposited to bank?

Real rule
These are the accounts of assets and liabilities
Rule: debit what comes in
Credit what goes out

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

Nominal rule
Related to Expenses and income
Rule: Debit all expenses and losses
Credit all incomes and gains

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

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?

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.

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

Impact on books
Depreciation Expense
Net income
Asset
Equity
Return on assets
Return on Equity
Turnover Ratios
Cash flow
NPV
IRR
Pay back

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

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

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 1 st 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

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

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

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

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

Sinking fund method
Amount available would be equivalent to the original cost
C*r
Depreciation= n
(1+r) – 1
Calculation of 26380 is wrong. I should be 16380.

Endowment policy method
Insurance policy is taken to replace the asset.
The depreciation is equal to the insurance premium paid

Renewal method(39)
When asset is renewed full amount is written off.

Bye-bye to chapter-2
Chineese tree
Life education

Chapter-3
Journalising
Ledger (subsidiary books)
Posting
Trial balance
Trading and profit and loss account
Balance sheet

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

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

Reserve Fund
Goods Distributed as free sample
Manager’s Commission
Goods on sale or approval basis
Hidden adjustments

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

Terms
Investments
Current assets
Adjustments
Closing stock
Depreciation
Outstanding expenses
Prepaid expenses

Terms
Accrued income
Income received In advance
Bad debts
Provision for doubtful debts
Interest on capital
Drawings
Deferred revenue expenses

Terms
Abnormal expenses
Goods distributed as free sample
Goods sent on approval
Commission payable to manager

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

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

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

Exercise:-11 page121
Q.2 –page-116 and questions no.6 page-119 .

Life education
Child likes to hug in the evening

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

Errors not affecting trial balance
1.error of omission
2.Error of principle
3.compensating error
4. complete omission
5.error of commission

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.

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.

Problems in errors Problem:7 page-139
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

Problem:6 page-138 particulars 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

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

Life education Thomas Cooper –Dictionary

Chapter-6 Cost Accountancy-terms
Cost centre
Impersonal and personal cost centre
production and service cost centre
Concept of cost

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

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.

Cost centre
Concept of cost

Economic Costs

Cost centre
Concept of cost

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

Economic Costs

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

Economic Costs

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.

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.

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.

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.

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

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.

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.

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.

Differential cost
Increased or decreased cost due to the increased or decreased volume of operations.
Additional cost due to operation.

Normal cost and abnormal cost(150)
Normal costs incurred at a certain level of output
Abnormality in cost due to unforeseen situations

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.

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?

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.

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.

Treatment of period and product costs Product code Period code Manufacturing cost Non manufacturing costs Recorded as an asset In the balance sheet And becomes an Expense in the P/L A/C When the product Is sold Recorded as an Expense in the P/L A/c In the current Accounting year sold unsold

Variable, fixed, semi variable and semi fixed
Cost (Rs.) Variable cost
cost(Rs.)
Out put(units)
fixed cost
Activity level(units)

Step fixed cost
Total
Fixed cost
Activity level(Units)

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.

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.

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

Continuation
Depreciation—factory building
Depreciation-factory equipment
Insurance-factory
Property taxes—factory
Total manufacturing overhead
Total manufacturing costs
Add: Beginning work-in-process inventory
Less: Ending work-in-process inventory Cost of goods manufactured

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

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

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

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.

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

Life education
Threat is an opportunity
Strength is your weakness
Strengthen your weakness

Unit-7 Elements of costs
Learning:
Cost sheet
Elements of cost
Operating cost
Operating profit
Non operating profit

Terms used in costing(unit 7) Factory over heads 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 overheads material Indirect labour Indirect expenses + Total cost Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation Administration section

Selling and distribution 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 department

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

ABSORPTION COSTING PRO-FORMA ££Sales Revenue xxxxx Less 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 xxxx Add Selling, Admin & Distribution Cost xxxx Absorption Cost of Sales (xxxx) Un-Adjusted Profit xxxxx Fixed Production O/H absorbed xxxx Fixed Production O/H incurred (xxxx) (Under)/Over Absorption xxxxx Adjusted Profit xxxxx

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 overhead Budgeted levels of activities

Cost sheet
Prime cost+
Factory over heads
Factory cost/works cost+
Administration over heads
Office cost+
Selling overheads
Total cost
Profit
sales

Factory cost/
works cost
1.Production Prime Cost 1.Godown 1.canteen Cost of sales 5.sales 4.profit 1.Factory administration 3.Sales and distribution 2.General administration Total cost Bin card Stores ledger Cost calculations/operating activity + + = + +

Operating activity Non- operating activity Dealers in furniture Dealers in houses My house is for sale My furniture is for sale ? ? Profits are operating profits Non operating profit

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

BPOs Self-less service canteen Self help room What activity?

Exercise Number: 3 page-175 unit 7.
Exercise Number: 6 page-177 unit 7

Factory cost/
works cost
Prime Cost= R.material=40,000 D. labour=12,000 Components=50,000 Primary packing=5000 1.Godown 1.canteen Cost of sales=1,76,338 5.sales 4.Profit 44084 1.Factory administration 3.Sales and distribution 2.General administration Total cost=1,60 307 Bin card Stores ledger Cost calculations/operating activity + + = + + p.3 Consumable =4000 Royalty=8000 FOH=16050 5000+20,257 16031 2,20,422

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 COST Selling expenses Cost of sales Profit [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 1,70,000 15,000 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 1,83,750 15,000 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 2,11,500 15,000 2,26,500 56,625 2,83,125

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

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

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

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

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.

Valuation of issues
FIFO
LIFO
Average price method
Weighted Average method
Highest In First method
Specific price
Standard Price

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.

Example Stores ledger Maximum level Minimum level Re-order level Description Unit Location FIFO Date Particulars Receipts Issues Balance Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs. 1 st Jan 08 5 th 6 th 8th Op. balance Purchase Purchases Issue
7.00 700
8.00 1600
250 ?
6.00 3,000

Example Stores ledger Maximum level Minimum level Re-order level Description Unit Location LIFO Date Particulars Receipts Issues Balance Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs. 1 st Jan 08 5 th 6th Op. balance Purchase Issue
7.00 700
6.00 3,000

Stores ledger Maximum level Minimum level Re-order level Description Unit Location Average price method Date Particulars Receipts Issues Balance Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs. 1 st Jan 08 5 th 6th Op. balance Purchase Issue
7.00 700
6.00 3,000

Stores ledger Maximum level Minimum level Re-order level Description Unit Location Weighted Average method Date Particulars Receipts Issues Balance Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs. 1 st Jan 08 5 th 6th Op. balance Purchase Issue
7.00 700
6.00 3,000

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

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.

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.

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

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

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

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

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

3.Stock turnover ratio=
Value of materials consumed in a year
Average stock
Average stock= (Opening stock+ Closing Stock)/2
Page-225

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 Better Control Always Control Always Better

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.

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.

Problems-clarification
Problem number-02,10,16 from exercise
Page-243,246 and248 respectively in unit-1

Labour costs-unit 9 page-252
Selection,training,wage sheet preparation
Recording, time keeping and time booking
Analyse wage sheet, reports to mgt.
Personnel department Time keeping department Costing department

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
Group Individual Profit sharing Co-partnership

Payment by results(page-261) Payment by results a) Straight piece rate No. units*units produced b) Piece rate with guaranteed time rate c) Differential piece rate 1.Taylor differential piece Rate(page262 ) No guaranteed wage Below standard-low piece rate Above standard-high piece rate 2.Merrick differential rate plan No guaranteed wage Efficiency Piece rate Upto 83% Normal Upto 100% 110% of normal rate Above 100% 130% of normal piece 3. Gantt task bonus Below standard -time rate At standard- time wage+ increase in rate Above std .-High piece rate

Individual Incentive systems Halsey premium system 50-50 AH* HR+ (Time saved/2)* HR Time rate guaranteed Halsey-weir system 1(W):2(ER) AH* HR+ (Time saved/3)* HR Time rate guaranteed Rowan plan The more you save The more the incentives (AH*HR)+(SH-AH)/SH* (AH*HR) W ER AH-Actual hours SH-Standard Hours HR-Hourly rate

Other Wage payment system a.Barth premium system Wage=Hourly rate* Root of SHR.*AH 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 2 Wage (Y)=.8*X Where Y=Earnings X=Efficiency

Group Incentive scheme Indirect monetary benefits(271)
Profit sharing-Bonus-8.33% of wages statutory bonus.Maximum-20%
Copartnership-ESOP

Problems
Page-292; prob-6 &9
Page-293; prob-11

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.

Classification(206) Element wise Indirect material, indirect labour, indirect expenses
Function
Factory
administration,
selling and
distribution over heads
Variability Fixed, variable, semi variable overheads
Controllability
Controllable and
Uncontrollable
overheads
Normality
Normal and
Abnormal
overheads.

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 workers 2.Rent-Area 3.Power-HP/KWH 4.General lighting-light points 5.Depreciation-value of assets 1.Supervision -no.of employees 2.Telephone expenses -no.of calls made 3.Fire insurance -value of stock/asset

Secondary apportionment
Apportionment of service department cost centre to production department
Methods of Apportionment(Page303) Simultaneous Equation method Repeated Distribution method

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

Unit-11 Marginal Cost-Volume-Profit Analysis and Relevant Costing

Marginal cost, Budgeting and standard costing
Presented by
Prof. L. Augustin Amaladas M. Com., AICWA.,PGDFM.,B.ED. 6 th January 2008 IBM

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

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?
Continuing . . . Learning Objectives C6

5. How do quality decisions affect the components of CVP analysis?
6. What constitutes relevance in a decision-making situation?

7. How can management best utilize a scarce resource?
8. What is the relationship between sales mix and relevant costing problems?

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?

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)

The Breakeven Point (BEP) The level of activity, in units or dollars, at which REVENUES = COSTS

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 Relevant Range

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

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

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

Basic Assumption: Mixed Costs Mixed costs must be separated into variable and fixed elements. Total $ Activity Level

Cost Behavior Example

Contribution Margin Per Unit
Contribution margin per unit equals selling price per unit less variable cost per unit.
sp -vc = cm
$40 - $24 = $16

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%

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

Continuing . . . Breakeven Point
Total fixed costs In units = --------------------- CM per unit
Total fixed costs In sales dollars = --------------------- CM ratio

Continuing . . . Breakeven Point
$120,000 In units = ----------- = 7,500 ice buckets $16
$120,000 In sales dollars = ----------- = $300,000 .40

CVP Analysis: Fixed Amount of Profit Before Taxes (PBT)
Total fixed costs + PBT In units = ------------------------------ CM per unit
Total fixed costs + PBT In sales dollars = ------------------------------ CM ratio

CVP Analysis: Fixed Amount of Profit Before Taxes (PBT)
$120,000 + $64,000 Break evenIn units=------------------------ = 11,500 buckets $16
$120,000 + $64,000 In sales dollars =------------------------ = $460,000 .40

CVP Analysis: Variable Amount of Profit Before Taxes
Assume P U BT desired is 25% on sales
Therefore, P U BT = .25 ($40) = $10
Total fixed costs Sales in units =--------------------------- CM per unit - P U BT
$120,000 Sales in units =--------------- = 20,000 ice buckets $16 - $6

CVP Analysis: Variable Amount of Profit Before Taxes
Assume P U BT desired is 25% on sales
Therefore, P U BT = .25 ($40) = $10
Total fixed costs Sales in $ = --------------------- CM% - P U BT%
$120,000 Sales in $ =--------------- = $800,000 .40 - .25

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%
======= ==

CVP Analysis - Multiple Products

Continuing . . . CVP Analysis - Multiple Products

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

Scarce Resource -- Machine Hours

Sales Mix Decisions How many of each product?

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

Exhibit 6-12: Partial Product Line Income Statement

Exhibit 6-13: Product Margin for the Electric Skillet Product Line

CVP Graph Total $ Volume Total Costs Total Revenues BEP

Profit-Volume Graph BEP Fixed Costs Volume Profit or Loss Total $

Absorption Costing
Also known as full costing
Treats costs of all manufacturing components as inventoriable, or product, costs
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Presents expenses on income statement according to functional classifications
Cost of goods sold
Selling expenses
Administrative expenses

Variable Costing
Also known as direct costing
Includes only variable production costs as inventoriable, or product, costs
Direct materials
Direct labor
Variable 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

Absorption Costing Income Statement Sales XXX Cost of Goods Sold: Beginning inventory XXX Cost of goods manufactured XXX Cost of goods available XXX Ending inventory XXX Cost of goods sold XXX Gross Margin XXX Operating Expenses: Selling XXX Administrative XXX XXX Income before Taxes XXX

Variable Costing Income Statement Sales XXX Cost of Goods Sold: Beginning inventory XXX Cost of goods manufactured XXX Cost of goods available XXX Ending inventory XXX Variable cost of goods sold XXX Product Contribution Margin XXX Variable Selling Expense XXX Total Contribution Margin XXX Fixed Expenses: Factory XXX Selling XXX Administrative XXX XXX Income before Taxes XXX

Absorption Costing vs. Variable Costing Income Statements

Costs and Budgeting

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!

Cost Centres

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

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

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

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)

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

Total Revenue

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

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

Break Even

Break Even Analysis Costs/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.

Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (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

Break Even Analysis Costs/Revenue Output/Sales FC VC TC 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

Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = £2) Q1 Loss Profit

Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (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.

Costs/Revenue Output/Sales FC VC TR Eurotunnel’s problem High initial FC. Interest on debt rises each year – FC rise therefore. FC 1 Losses get bigger!

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!

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

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?

Budgets

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

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

Budgets
Variance – the difference between planned values and actual values
Positive variance – actual figures less than planned
Negative variance – actual figures above planned

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

Production budget
For Finished goods
Anticipated Desired Sales+ closing stock- Opening stock

Material Purchase Budget
For Raw Material
Production budget+ Desired Closing stock- Opening stock

Cash Budget-Sample-1 Particulars Jan Feb Mar Apr. May Jun.
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

Cash Inflow
Issue of shares
Issue of Debenture
B. Cash Outflow
Stock purchase paid
Other expenses paid
Closing Balance

Problems
Page-130and132 unit-2 Problem-11 and 13 respectively.

Flexible Budget-Sample-1 Particulars 50% Capacity 60% Capacity 80% Capacity A)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

Flexible Budget-sample-2 Particulars 50% Capacity 60% Capacity 80% Capacity A)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

Problems in flexible budget
Pages-127,128,129 respectively in
Unit-2 Problems 4, 5,7 and 8

Standard Costing System Unit-13 Managerial Accounting

Standard Costing
It is also known as variance costing.
Standard cost- Predetermined cost
Standard Costing- is a management accounting tecnique to analyse variances

Steps in Standard costing
Set standard cost
Study the actual cost
Compare the actual with the standard cost
Which gives variances
Analyse the variances
Fix responsibilities
Take suitable action and create effective control system .

Management Accounting-Module-II Marginal costing, Budgeting, standard costing and Uniform costing

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.

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

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.

Types of standards
1.current standard
2.ideal standard
3.Expected standard
4. Normal standard

Analysis of variances Material Labour Overheads price Mix yield usage cost + = yield Mix Rate efficiency cost Variable Overhead variances Fixed Overhead variances + = Price+ Mix+ Yield=Cost Rate+ Mix+ Yield=Cost

Material Variance Actual Quantity* Actual cost per unit Actual Quantity* Std. cost per unit Revised std. Quantity For input* Std. cost per unit Revised std Quantity For output* Std. cost per unit 1 2 3 4 Price(2-1) Mix(3-2) Yield(3-2) Usage(4-2) Cost(5-1)

Exercise: Material Variances Actual Quantity* Actual cost per unit 400*6=2400 500*3.6=1800 400*2.8= 1120 5320 Actual Quantity* Std. cost per unit 400*6=2400 500*3.75=1875 400 *3= 1200 1300 5475 1300(5:4:3)/12 Revised std. Quantity For input* Std. cost per unit 541.66*6=3250 433.33*3.75=1625 325*3= 975 5850 Revised std Quantity For output* Std. cost per unit 500*6=3000 400*3.75=1500 300*3= 900 5400 1 2 3 4 Price(2-1) Mix(3-2) Yield(3-2) Usage(4-2) Cost(5-1) +155 +375 (450) (75) +80

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.

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 ?

Labour Variances(Page-191 prob.8 Actual Hours* Actual cost per Hour 28*40*4=4480 18*40*3=2160 4*40*2= 320 6960 Actual Hours* Std. cost per Hour 28*40*3=3360 18*40*2=1440 4*40*1= 160 2000 4960 2000*(30:10:10)/50 Revised std. Hours For input* Std. cost per Hour 1200*3=3600 400*2= 800 400*1= 4 00 4800 Revised std Hours For 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

Explanations for 4
Going from Output hours to input hours
There are 1800 hours are shared in the ratio of 32:12:6

Variable overhead Variances(Page-156) Actual Hours* Actual Rate per Hour Actual Hours* Std. Rate per Hour Revised std Hours For output* Std. cost per Hour 1 2 3 4 Expenditure(2-1) Efficiency(4-2) Cost(5-1) Empty EGG

Fixed overhead Variances(Page-157) Actual Over heads Budgeted overheads Revised std. Hours For actual input* Std. cost per Hour Revised Std Hours For 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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Management Accounting

by Augustin Amaldas on Aug 29, 2008

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Management Accounting Presentation Transcript