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# Cost accounting

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### Cost accounting

1. 1. TOPICCost-Volume-Profit Analysis 4-1
2. 2. COST VOLUME PROFIT ANALYSIS• CVP analysis shows the relationship between costs (both variable and fixed), volume (the number of units produced and sold), and profit or loss.• CVP is a useful management tool; it allows managers to understand and predict how changes in sales prices, sales volumes, and expenses will affect an organization’s profitability. • CVP analysis is an examination of the relationships of prices, costs, volume, and mix of products. It involves the separation of costs into their variable and fixed categories at the outset of the analysis. 4-2
3. 3. Assumptions of CVP:• Revenues and costs are linear throughout the relevant range.• Costs can be identified as either fixed or variable.• Changes in activity levels are the only factors affecting costs.• The number of units produced and sold is the same.• In companies with more than one product, the sales mix is constant. 4-3
4. 4. COST VOLUME PROFIT ANALYSISThere are three main tools offered by CVP analysis:• breakeven analysis, which tells us the sales volume our need to break even, under different price or cost scenarios• contribution margin analysis, which compares the profitability of different products, lines, or services we offer• operating leverage, which examines the degree to which our business uses fixed costs, which magnifies our profits as sales increase, but also magnifies our losses as sales drop. 4-4
5. 5. Contribution Margins• contribution margin is simply the percentage of each sales dollar that remains after the variable costs are subtracted.• CM = Selling price - Variable cost• CM may be shown as a per unit amount or a total amount at a specific level of sales.• The contribution margin is the amount available to cover fixed costs (below the break even point) and the amount to add to profit (above the break even point).• The contribution margin may be expressed as a per unit amount or as a total amount. 4-5
6. 6. Contribution margin ratio• CMR = Contribution margin / selling price• The contribution margin ratio is the percent of each sales dollar that is available to cover fixed costs (below the break even point) and the amount to add to profit (above the break even point).• The contribution margin ratio is usually expressed as a percentage. 4-6
7. 7. Contribution margin = CM Ratio SalesFixed expense Break-even point = CM Ratio (in sales dollars) 4-7
8. 8. Contribution Margin Ratio Total Per Unit PercentSales (400 surf boards) \$200,000 \$ 500 100%Less: variable expenses 120,000 300 60%Contribution margin \$ 80,000 \$ 200 40%Less: fixed expenses 80,000Net income \$ - \$80,000 = \$200,000 sales 40% 4-8
9. 9. Breakeven Analysis• A second tool for management decision making• breakeven point can be determined by using the following formulas:• Sales Price per Unit — Variable Costs per Unit = Contribution Margin per Unit.• Contribution Margin per Unit divided by Sales Price per Unit = Contribution Margin Ratio.• Breakeven Sales Volume = Fixed Costs divided by Contribution Margin Ratio. 4-9
10. 10. Breakeven Analysis 4 - 10
11. 11. The Accounting Cycle Prepare Record in Post to Documents Journals LedgersTransactionsOccur Prepare Unadjusted Prepare Trial Balance Closing Entries Prepare Prepare and Financial Post Adjusting Prepare Statements Entries Adjusted Trial Balance 4 - 11
12. 12. IDENTIFICATION & MEASURMENT ACCOUNTIG OF TRANSACTION CYCLEIn order to be a transaction, a dealing must satisfy the following characteristics:- It involves at least two parties or two aspects technically termed as accounts. It results in transfer of or exchange of goods or services. It can be measured in terms of money value. In shorts, if there is a change in the variables of the fundamental accounting equation, which is, Assets = Liabilities + Capital, it may be regarded as a transaction. For example : Tk. 2000 deposited in bank. 4 - 12
13. 13. ACCOUNTIG CYCLEJournalize transactions in the journal 4 - 13
14. 14. ACCOUNTIGRecord (journalize) transactions CYCLE What is the general ledger? • It is the book of final entry. • The information from the journal is transferred to the ledger in the posting process. • Debits and credits in the journal remain exactly the same when posted to the accounts in the ledger. 4 - 14
15. 15. ACCOUNTIGEXAMPLE OF JOURNAL CYCLE 2003 Transaction Tk.January1 Started business with cash as capital 1,00,000 Journal L.FDate Particulars Dr.Tk. Cr.Tk. . Cash A/C Dr. 1,00,000 1,00,000 2003 To Capital A/C Cr.Janu. 1 (Being cash brought in as initial capital) 4 - 15
16. 16. Journalizing ACCOUNTIG CYCLE• Debits are always recorded first.• Indent, then record the credit below the debit.• A short explanation is included on the second line.• Leave a space between journal entries. 4 - 16
17. 17. Journalizing ACCOUNTIG CYCLE• Debits must always equal credits.• Amounts incurred for items that benefit future accounting periods are recorded as assets.• What are some examples?– prepaid rent– prepaid insurance 4 - 17
18. 18. ACCOUNTIG CYCLEPosting: transferring information from a journal to a ledger. 4 - 18
19. 19. Posting ACCOUNTIG CYCLE• All transactions are recorded in the journal, then amounts are copied to the ledger accounts named on the journal line.• Once the amounts are entered into the accounts, a posting reference (PR) must be entered in the journal.• New balances are computed in the running ledger accounts. 4 - 19
20. 20. ACCOUNTIG CYCLEPreparing a trial balance. 4 - 20
21. 21. Preparing the Trial Balance ACCOUNTIG CYCLE• The trial balance lists the accounts that have balances in the same order as they appear in the chart of accounts.• The trial balance will show if debits/credits have been interchanged, or if amounts have been transposed, or if a debit/credit was omitted or recorded twice. 4 - 21
22. 22. Preparing the Trial Balance ACCOUNTIG CYCLE• Some errors do not show, such as omissions or recording to the wrong account.• Corrections before posting are made in the journal.• An audit trail must be left.• Do not erase – cross out errors and enter corrections. 4 - 22
23. 23. ACCOUNTIG CYCLEADJUSTING ENTRIES 4 - 23
24. 24. ACCOUNTIG ADJUSTING ENTRIES CYCLE• Adjustments or adjusting entries are necessary for transactions that extend over more than one period. The five main types of adjustments are Prepaid Expenses, Unearned Revenues, Depreciation, Accrued Expenses and Accrued Revenues.• Adjusting entries are necessary for each of these so that revenues, assets and liabilities are correctly reported. 4 - 24
25. 25. ACCOUNTIG ADJUSTING ENTRIES CYCLEThere are two general classes of adjustments:• Accruals - revenues or expenses that have accrued but have not yet been recorded. An example of an accrual is interest revenue that has been earned in one period even though the actual cash payment will not be received until early in the next period. An adjusting entry is made to recognize the revenue in the period in which it was earned.• Deferrals - revenues or expenses that have been recorded but need to be deferred to a later date. An example of a deferral is an insurance premium that was paid at the end of one accounting period for insurance coverage in the next period. A deferred entry is made to show the insurance expense in the period in which the insurance coverage is in effect. 4 - 25
26. 26. ACCOUNTIGADJUSTING ENTRIES CYCLE• Pass necessary adjustment entries for the following : -• 1.Salary TK.1,000 is outstanding.• 2.Interest accrued on investment TK.200.• 3.Rent received in advanceTK.400.• 4.Insurance prepaid TK.300.• 5.Depreciate furniture by TK.800. 4 - 26
27. 27. ACCOUNTIGADJUSTING ENTRIES CYCLE Debit CreditDate Particulars L.F Tk Tk. . Salary A/C 1,000 1,000 1 Outstanding Salary A/C (Being outstanding salary adjusted) Accrued Interest A/C 200 200 2 Interest A/C (Being accrued int. on investment adjusted) Rent A/C 400 400 3 Rent Received in advance A/C Prepaid Insurance A/C 300 300 4 Insurance A/C Depreciation A/C 800 800 5 Furniture A/C 4 - 27
28. 28. PREPARATION OF ACCOUNTIG CYCLEFINANCIAL STATEMENTS• In order to ascertain the profit or loss of the business concern, it has to prepare final accounts such as Trading A/c, Profit and Loss A/C and Balance Sheet or financial statements such as the Income Statement.• The Four Financial Statements :  Balance Sheet  Income Statement  Statement of Owners Equity  Statement of Cash Flows 4 - 28
29. 29. Different Formats of ACCOUNTIG CYCLE the Balance Sheet• The report format lists assets first, then liabilities and then owners’ equity.• The account format reports assets on the left side and liabilities and owners’ equity on the right side. 4 - 29
30. 30. The Classified Balance ACCOUNTIG CYCLE Sheet• The debit side– Current assets– Long-term assets• Assets are listed in order of decreasing liquidity. 4 - 30
31. 31. ACCOUNTIGThe Classified Balance Sheet CYCLE• The credit side– Current liabilities– Long-term liabilities• Liabilities are listed in the order of how soon they must be paid. 4 - 31
32. 32. Balance Sheet ACCOUNTIG CYCLE At 31st December, 2003. Assets LiabilitiesCurrent Assets Current Liabilities Cash 12,100 Accounts Payable 1,200 Accounts Receivable 3,050 Salary Payable 1,100 Supplies 150 Unearned Revenue 1,500 Total Current Assets 15,300 Total Liabilities 3,800Plant Assets Owners’ Equity Equipment 15,500 Capital 19,300 Less Accum Deprec 7,700 7,800 Total Liabilities and Total Assets 23,100 Equity 23,100 4 - 32
33. 33. ACCOUNTIG Income Statement CYCLE• The income statement presents the results of the entitys operations during a period of time, such as one year. The simplest equation to describe income is: Net Income = Revenue - Expenses• The income can be described by:Net Income = Revenue - Expenses + Gains -Losses 4 - 33
34. 34. Statement of ACCOUNTIG CYCLE Owners Equity• The equity statement explains the changes in retained earnings. Retained earnings appear on the balance sheet and most commonly are influenced by income and dividends.• The following equation describes the equity statement for a sole proprietorship: Ending Equity = Beginning Equity + Investments - Withdrawals + Income 4 - 34
35. 35. ACCOUNTIGCash Flow Statement CYCLE• The statement of cash flows is useful in evaluating a companys ability to pay its bills. For a given period, the cash flow statement provides the following information: = Sources of cash = Uses of cash = Change in cash balance 4 - 35
36. 36. ACCOUNTIG Cash Flow Statement CYCLE• The cash flow statement represents an analysis of all of the transactions of the business, reporting where the firm obtained its cash and what it did with it. It breaks the sources and uses of cash into the following categories: = Operating activities = Investing activities = Financing activities 4 - 36
37. 37. Accounting Work Sheet• A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements.• It is an internal document. 4 - 37
38. 38. The Accounting Work Sheet Adjusted Trial Balance TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100ACCTS RECEIVABLE 1,350SUPPLIES 250EQUIPMENT 15,500ACCUM DEPRECIATION 7,500ACCOUNTS PAYABLE 1,200SALARY PAYABLE 1,100UNEARNED REVENUE 1,500CAPITAL 7,200WITHDRAWALS 1,000REVENUE 23,700SALARY EXPENSE 12,000 TOTALS 42,200 42,200 4 - 38
39. 39. The Accounting Work Sheet Adjusted Trial Balance ADJ. TRIAL BAL. INC. STATEMENT BALANCE SHEET ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 3,050 3,050SUPPLIES 150 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,700 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 25,400SALARY EXPENSE 12,000SUPPLIES EXPENSE 100DEPRECIATION EXP 200 TOTALS 44,100 44,100 31,800 18,700 4 - 39
40. 40. The Accounting Work Sheet Adjusted Trial Balance ADJ. TRIAL BAL. INC. STATEMENT BALANCE SHEET ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 3,050 3,050SUPPLIES 150 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,700 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 25,400 25,400SALARY EXPENSE 12,000 12,000SUPPLIES EXPENSE 100 100DEPRECIATION EXP 200 200 TOTALS 44,100 44,100 12,300 25,400 31,800 18,700 4 - 40
41. 41. The Accounting Work Sheet Adjusted Trial Balance ADJ. TRIAL BAL. INC. STATEMENT BALANCE SHEET ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 3,050 3,050SUPPLIES 150 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,700 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 25,400 25,400SALARY EXPENSE 12,000 12,000SUPPLIES EXPENSE 100 100DEPRECIATION EXP 200 200 TOTALS 44,100 44,100 12,300 25,400 31,800 18,700 NET INCOME 13,100 13,100 25,400 25,400 31,800 31,800 4 - 41
42. 42. ACCOUNTING CYCLECLOSINGENTRIES 4 - 42
43. 43. Closing Entries• Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period. 4 - 43
44. 44. CLOSING ENTRIES• It prepares accounts for recording the transactions of the next period.• Recording and posting closing entries is to transfer the end-of-period balances in revenue, expense and withdrawal accounts to the owner’s capital account.• Closing entries are necessary at the end of a period after financial statements are prepared because Revenue, expense, and withdrawal accounts must begin the next period with zero balances. 4 - 44
45. 45. Closing Entries• What accounts are closed at the end of the period?• Revenue, Expenses and Withdrawals.• These relate to a specific period and are called temporary accounts. 4 - 45
46. 46. Closing Entries• The Income Summary account is used to close the temporary accounts.• This is the ―most temporary‖ account.• It is used only to facilitate the closing process. 4 - 46
47. 47. Closing Entries• Revenues and Expense accounts are closed to Income Summary.• Income Summary is closed to Capital.• Withdrawals are closed to Capital. 4 - 47
48. 48. Closing Entries• Net income will be represented by a credit balance in the Income Summary.• Net loss by a debit balance. 4 - 48
49. 49. Flowchart of Closing Process (Close Revenue Account) Income Revenue Summary28,500 12,000 (Close Expense 7,500 4,450 28,500 Accounts) 9,000 24,050 Salary Exp (Close Income Summary)1,500 3,3001,800 Capital Account Rent Exp 2,500 24,050 800 800 (Close Withdrawals WithdrawalsSupplies Exp Account) 2,500 2,500 350 350 4 - 49
50. 50. ACCOUNTING CYCLEPOST – CLOSING TRIAL BALANCE 4 - 50
51. 51. Post closing Trial Balance• The accounting cycle ends with the post closing trial balance.• The post closing trial balance is dated as of the end of the period for which the statements have been prepared. 4 - 51
52. 52. Post closing Trial Balance• The aim of post-closing trial balances is to verify that(1) total debit equal total credits for permanent accounts ;&(2) all temporary a/cs have zero balances. This is the last step in the accounting process. 4 - 52
53. 53. Use the current and debtratios to evaluate a business. 4 - 53
54. 54. Comparative Financial Statements...– are statements that show two or more consecutive periods.• They enhance the user’s ability to analyze a company’s past performance. 4 - 54
55. 55. Trend Analysis• Decision makers compare various ratios over a period of time, looking for improving trends. 4 - 55
56. 56. PREPARED BY• MD. HASNAIN CHOWDHURY• ROLL NO # 06• 2ND SEMESTER• BBA PROGRAM 4 - 56