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Management Accounting
 

Management Accounting

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  • Income tax, separate legal entity, amount withdrawn from bank for personal use, Income tax sec.2(1B)
  • Human resource accounting,
  • Made for each other, I love you so much, Dil mande more, olla udugi,
  • Do people dance when they go for music program?Hard rock/Hindustony music/ carnatic music
  • Indians risk taking ability increased. People invest in share market is an indicator of riskVenture capital funds.
  • Fixed assets-valuation and current assets valuation, AS-06, AS-10
  • Rev. Fr. Gnanapragasam
  • 28*40=1120; 18*40=720; 4*40=160; Total=2000;1800*(32:12:6)/50
  • 28*40=1120; 18*40=720; 4*40=160; Total=2000;1800*(32:12:6)/50
  • 28*40=1120; 18*40=720; 4*40=160; Total=2000;1800*(32:12:6)/50

Management Accounting Management Accounting Presentation Transcript

  • Management Accounting SCDL By Irfal irwant.SE
  • 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
  • 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
  • Final Accounts Adjustments
    • 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
  • 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.
  • Chapter-6 Cost Accountancy-terms
    • Cost centre
    • Impersonal and personal cost centre
    • production and service cost centre
    • Concept of cost
  • 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.
  • 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.
  • 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
    • 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.
  • 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?
    Continuing . . . Learning Objectives C6
    • 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
    • 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?
    Continuing . . . Learning Objectives C6
    • 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)
    Continuing . . . Learning Objectives C6
  • 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
  • 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 Budget-Sample-2 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 Budget-Sample-3 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
  • 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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