Modigliani and Miller initially developed their capital structure approach in 1958 without considering taxes. They argued that a firm's value and cost of capital are independent of its capital structure. In 1963, they revised their approach to include taxes. When taxes are considered, firm value increases with leverage as interest expenses are tax deductible, creating a tax shield. The value of a levered firm exceeds an unlevered firm by the amount of debt multiplied by the tax rate.
Standard costing is a technique that uses predetermined standards for costs and revenues to control performance through variance analysis. Standards are established for inputs and outputs and are used to assess performance, control costs, motivate staff, and provide guidance to improve performance. Variances measure the difference between actual and standard costs and revenues and are classified into material, labor, overhead, and sales categories to identify reasons for non-standard performance. Material variances include price, usage, mix, and yield components.
This document discusses the valuation and accounting of inventory. It defines inventory as assets held for sale, in production, or as supplies. Inventory should be valued at the lower of cost or net realizable value. Cost includes all purchase costs, conversion costs like direct labor and allocated overheads, and other costs to bring inventory to its present condition. Common costing methods are specific identification, FIFO, and weighted average. Disclosures include accounting policies and total inventory carrying amounts.
Standard costing is a technique that involves setting predetermined standards for costs and comparing them to actual costs. Standards are set for materials, labor, overhead and sales prices/margins. Variances between standards and actuals are analyzed to identify reasons for differences and take corrective actions. It helps management evaluate performance, control costs, set budgets and motivate staff. Some key advantages include cost control, delegation, efficiency improvements, and anticipating future costs and profits. Limitations include requiring technical skills and difficulty separating controllable vs. uncontrollable variances.
This document discusses different modes that companies can use to enter international business, including exporting, licensing, franchising, foreign direct investment, and strategic alliances. It describes the key features and differences between indirect exporting, direct exporting, intra-corporate transfers, licensing, franchising, contract manufacturing, management contracts, turnkey projects, greenfield investment, mergers and acquisitions, and joint ventures. It also provides the advantages and disadvantages of each entry mode.
This document provides an overview of accounting and its branches. It defines accounting as a specialized information system that records transactions and provides economic information. The main branches are financial accounting, cost accounting, and management accounting. Financial accounting records money transactions between an entity and third parties. Cost accounting determines costs of products, processes, and projects. Management accounting assists management in formulating policies and planning operations. The document also discusses the history and evolution of cost accounting and its contributions to functions like planning, controlling, decision making, inventory management, and financial analysis.
1. The document discusses capital structure, which refers to the mix of long-term financing sources like equity, debt, and retained earnings.
2. It provides definitions of capital structure and discusses factors that determine an optimal or appropriate capital structure, including profitability, risk, flexibility, and control.
3. An optimal capital structure maximizes firm value and minimizes average cost of capital, but this is difficult to achieve due to various conflicting considerations. The document examines various capital structure theories.
Modigliani and Miller initially developed their capital structure approach in 1958 without considering taxes. They argued that a firm's value and cost of capital are independent of its capital structure. In 1963, they revised their approach to include taxes. When taxes are considered, firm value increases with leverage as interest expenses are tax deductible, creating a tax shield. The value of a levered firm exceeds an unlevered firm by the amount of debt multiplied by the tax rate.
Standard costing is a technique that uses predetermined standards for costs and revenues to control performance through variance analysis. Standards are established for inputs and outputs and are used to assess performance, control costs, motivate staff, and provide guidance to improve performance. Variances measure the difference between actual and standard costs and revenues and are classified into material, labor, overhead, and sales categories to identify reasons for non-standard performance. Material variances include price, usage, mix, and yield components.
This document discusses the valuation and accounting of inventory. It defines inventory as assets held for sale, in production, or as supplies. Inventory should be valued at the lower of cost or net realizable value. Cost includes all purchase costs, conversion costs like direct labor and allocated overheads, and other costs to bring inventory to its present condition. Common costing methods are specific identification, FIFO, and weighted average. Disclosures include accounting policies and total inventory carrying amounts.
Standard costing is a technique that involves setting predetermined standards for costs and comparing them to actual costs. Standards are set for materials, labor, overhead and sales prices/margins. Variances between standards and actuals are analyzed to identify reasons for differences and take corrective actions. It helps management evaluate performance, control costs, set budgets and motivate staff. Some key advantages include cost control, delegation, efficiency improvements, and anticipating future costs and profits. Limitations include requiring technical skills and difficulty separating controllable vs. uncontrollable variances.
This document discusses different modes that companies can use to enter international business, including exporting, licensing, franchising, foreign direct investment, and strategic alliances. It describes the key features and differences between indirect exporting, direct exporting, intra-corporate transfers, licensing, franchising, contract manufacturing, management contracts, turnkey projects, greenfield investment, mergers and acquisitions, and joint ventures. It also provides the advantages and disadvantages of each entry mode.
This document provides an overview of accounting and its branches. It defines accounting as a specialized information system that records transactions and provides economic information. The main branches are financial accounting, cost accounting, and management accounting. Financial accounting records money transactions between an entity and third parties. Cost accounting determines costs of products, processes, and projects. Management accounting assists management in formulating policies and planning operations. The document also discusses the history and evolution of cost accounting and its contributions to functions like planning, controlling, decision making, inventory management, and financial analysis.
1. The document discusses capital structure, which refers to the mix of long-term financing sources like equity, debt, and retained earnings.
2. It provides definitions of capital structure and discusses factors that determine an optimal or appropriate capital structure, including profitability, risk, flexibility, and control.
3. An optimal capital structure maximizes firm value and minimizes average cost of capital, but this is difficult to achieve due to various conflicting considerations. The document examines various capital structure theories.
This document discusses absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed and variable costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs and regards fixed costs as period costs. Breakeven analysis determines the level of sales or production at which total revenue equals total costs. It can be used to calculate the breakeven point, target profit, margin of safety, and the impact of changes in costs, revenues, and profits.
The document defines various types of variances that can occur in cost accounting, including material, labor, and overhead variances. It provides formulas to calculate variance amounts and examples showing how to compute variances based on standard and actual costs. Variances are classified into price, usage/efficiency, and mix categories and can be favorable or unfavorable depending on whether actual costs are lower or higher than standards.
Leverage refers to using fixed costs to increase returns for owners. In finance, leverage allows firms to use fixed-cost funds like debt and preferred shares to increase earnings for equity shareholders. There are three types of leverage: operating, financial, and combined. Operating leverage measures how fixed costs affect operating income with sales changes. Financial leverage measures how interest expenses affect EPS. Combined leverage multiplies operating and financial leverage to measure total leverage.
This chapter describes methods for allocating joint costs between joint products. Joint products are two or more products produced from the same raw materials, like petrol and diesel from crude oil. By-products have lower value. Methods for allocating joint costs include sale value at split-off point, reverse cost method, net realizable value method, physical unit method, and contribution margin method. The net realizable value method is often most suitable.
The document presents a slideshow on marginal costing and absorption costing. It defines marginal cost as the change in total cost from producing one additional unit. Marginal costing focuses on variable costs, treating fixed costs as period costs. Absorption costing treats all costs as product costs. The presentation calculates profit under both methods using an example and highlights the key differences between the two approaches. It concludes that while absorption costing is a total cost technique, marginal costing is useful for management decision making, cost control and profit planning.
Corporation tax is an income tax levied on corporate bodies like limited companies and trusts in Kenya at rates of 30% for resident companies and 37.5% for non-resident companies. The tax is paid in advance in 4 installments throughout the year based on the previous year's tax due. The balance is due by the 4th month after the accounting period ends. Various tax incentives aim to promote investment and exports, including capital allowances, investment deductions up to 100% of costs, and tax holidays for companies in export processing zones and special economic zones.
This document provides an introduction to basic cost accounting terminology and concepts. It defines key terms like direct and indirect costs, fixed and variable costs, cost objects and behaviors. It also discusses how costs flow through a manufacturing company, including inventory accounts. Finally, it notes that costs are defined differently depending on the context, like financial reporting versus government contracting.
This document summarizes absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including both fixed and variable costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs, regarding fixed costs as period costs. Absorption costing follows generally accepted accounting principles but may distort profits, while marginal costing is more relevant for decision making but can manipulate profits. Breakeven analysis uses cost-volume concepts to determine sales needed to cover total costs and achieve a target profit level.
The Net Income (NI) approach proposes that a firm's value increases as it takes on more debt financing due to debt generally being a cheaper source of capital than equity. According to the NI approach, the costs of debt and equity remain constant regardless of capital structure, so the overall cost of capital declines as debt levels rise. However, the NI approach assumes unrealistic conditions like taxes being ignored and that more debt does not affect investor risk perceptions. It implies the maximum firm value occurs with 100% debt financing.
The Term “Oligopoly” has been derived from two Greek words.
Sources of Oligopoly
Huge capital investment
Economies of scale.
Patent rights
Control over certain raw materials
Merger and takeover.
Characteristics Of Oligopoly
Various forms of oligopoly
Oligopoly models
This document discusses different methods for valuing goodwill of a business. Goodwill represents the excess of purchase price over the fair value of identifiable net assets of an acquired company. It is an intangible asset that arises in acquisitions. The document outlines the future maintainable profits method, super profits method, and number of years purchase method to calculate the value of goodwill. It also discusses concepts like capital employed, normal rate of return, weighted and simple average profits that are relevant for goodwill valuation.
Under this technique all costs are classified into fixed costs and variable costs. Only variable costs are considered product costs and are allocated to products manufactured. These costs include direct materials, direct labor, direct expenses and variable overhead. Fixed costs are not considered for computing the cost of products or valuation of inventory.
Managerial Accounting & the Business EnvironmentShadat Hossion
This document provides an overview of managerial accounting and the business environment. It discusses the key differences between managerial accounting and financial accounting. Managerial accounting provides internal information for managers, while financial accounting provides external information. The document also outlines some changing tools for managers, including just-in-time systems, total quality management, process reengineering, and the theory of constraints. It discusses the plan-do-check-act cycle and introduces concepts like codes of conduct, standards of ethical conduct, and objectives of management accounting.
Standard costing is a system that uses predetermined costs to evaluate actual costs and operational performance. It sets standards for direct materials, direct labor, and factory overheads and calculates variances between actual and standard costs. Variance analysis identifies reasons for differences from standards and helps improve operations, reduce costs through error corrections, and deploy resources effectively. Standard costing provides rules and guidelines for production, allows performance comparisons, and assists with budgeting, financial reporting, and cost management to increase efficiency and productivity. However, setting accurate standards is technical and not easy, and meeting standards should not be the only target.
This document discusses foreign investment in India, including foreign direct investment (FDI) and foreign institutional investment (FII). It provides background on the Indian economy and types of foreign capital. FDI occurs when an investor in one country acquires assets in India to manage them. India is an attractive destination for FDI due to factors like its large market, skilled labor force, and tax incentives. FII involves foreign companies purchasing equity on Indian stock markets for short-term gains. The document compares the differences between FDI and FII and concludes that most developing countries now view foreign investment positively due to changes in their political and economic systems over the last few decades.
The Net Operating Income approach suggests that the value of a firm does not depend on its overall cost of capital. It values the firm based solely on its earnings before interest and taxes (EBIT) divided by the overall capital rate. The approach assumes no corporate taxes, debt-equity mix does not affect overall cost of capital, and the overall cost of capital is constant. An example shows that as the amount of debt changes, affecting the equity and cost of equity, the overall value of the firm remains the same at different debt levels under this approach.
The document discusses several capital structure theories:
- The Modigliani-Miller model establishes that firm value is independent of capital structure under certain restrictive assumptions.
- The trade-off theory recognizes that while debt provides tax benefits, it also increases financial distress costs at higher leverage levels.
- Agency theory suggests that debt can help reduce equity agency costs by limiting free cash flow.
- Signaling theory posits that capital structure decisions signal private information to investors.
- Overall, the optimal capital structure balances these factors and depends on firm-specific characteristics.
Unit -2 lecture-6 (international investment theory)Dr.B.B. Tiwari
The document discusses several theories of international investment:
1. The theory of capital movements explains international investment as the transfer of capital between countries to obtain profits through interest, dividends, or share of profits. It can involve physical or financial capital.
2. Market imperfections theory explains international investment flows that arise due to markets not meeting the standards of perfect competition.
3. Internalization theory explains why firms choose foreign direct investment over licensing to retain control of proprietary knowledge and avoid transaction costs of contracting.
4. Location-specific advantage theory considers location factors like resources, labor costs, or infrastructure that make one location more profitable for investment than others.
5. Dunning's eclectic theory
This document provides an overview of marginal costing and absorption costing.
1. Marginal costing treats variable costs as product costs and fixed costs as period costs, while absorption costing treats both variable and fixed production costs as product costs.
2. Profits reported under the two methods will differ if inventory levels change during the period, as absorption costing includes a portion of fixed costs in inventory valuation.
3. The difference in reported profits equals the change in inventory units multiplied by the fixed production cost per unit absorbed. In the long run, total reported profits will be the same under both methods.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
This document discusses absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed and variable costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs and regards fixed costs as period costs. Breakeven analysis determines the level of sales or production at which total revenue equals total costs. It can be used to calculate the breakeven point, target profit, margin of safety, and the impact of changes in costs, revenues, and profits.
The document defines various types of variances that can occur in cost accounting, including material, labor, and overhead variances. It provides formulas to calculate variance amounts and examples showing how to compute variances based on standard and actual costs. Variances are classified into price, usage/efficiency, and mix categories and can be favorable or unfavorable depending on whether actual costs are lower or higher than standards.
Leverage refers to using fixed costs to increase returns for owners. In finance, leverage allows firms to use fixed-cost funds like debt and preferred shares to increase earnings for equity shareholders. There are three types of leverage: operating, financial, and combined. Operating leverage measures how fixed costs affect operating income with sales changes. Financial leverage measures how interest expenses affect EPS. Combined leverage multiplies operating and financial leverage to measure total leverage.
This chapter describes methods for allocating joint costs between joint products. Joint products are two or more products produced from the same raw materials, like petrol and diesel from crude oil. By-products have lower value. Methods for allocating joint costs include sale value at split-off point, reverse cost method, net realizable value method, physical unit method, and contribution margin method. The net realizable value method is often most suitable.
The document presents a slideshow on marginal costing and absorption costing. It defines marginal cost as the change in total cost from producing one additional unit. Marginal costing focuses on variable costs, treating fixed costs as period costs. Absorption costing treats all costs as product costs. The presentation calculates profit under both methods using an example and highlights the key differences between the two approaches. It concludes that while absorption costing is a total cost technique, marginal costing is useful for management decision making, cost control and profit planning.
Corporation tax is an income tax levied on corporate bodies like limited companies and trusts in Kenya at rates of 30% for resident companies and 37.5% for non-resident companies. The tax is paid in advance in 4 installments throughout the year based on the previous year's tax due. The balance is due by the 4th month after the accounting period ends. Various tax incentives aim to promote investment and exports, including capital allowances, investment deductions up to 100% of costs, and tax holidays for companies in export processing zones and special economic zones.
This document provides an introduction to basic cost accounting terminology and concepts. It defines key terms like direct and indirect costs, fixed and variable costs, cost objects and behaviors. It also discusses how costs flow through a manufacturing company, including inventory accounts. Finally, it notes that costs are defined differently depending on the context, like financial reporting versus government contracting.
This document summarizes absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including both fixed and variable costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs, regarding fixed costs as period costs. Absorption costing follows generally accepted accounting principles but may distort profits, while marginal costing is more relevant for decision making but can manipulate profits. Breakeven analysis uses cost-volume concepts to determine sales needed to cover total costs and achieve a target profit level.
The Net Income (NI) approach proposes that a firm's value increases as it takes on more debt financing due to debt generally being a cheaper source of capital than equity. According to the NI approach, the costs of debt and equity remain constant regardless of capital structure, so the overall cost of capital declines as debt levels rise. However, the NI approach assumes unrealistic conditions like taxes being ignored and that more debt does not affect investor risk perceptions. It implies the maximum firm value occurs with 100% debt financing.
The Term “Oligopoly” has been derived from two Greek words.
Sources of Oligopoly
Huge capital investment
Economies of scale.
Patent rights
Control over certain raw materials
Merger and takeover.
Characteristics Of Oligopoly
Various forms of oligopoly
Oligopoly models
This document discusses different methods for valuing goodwill of a business. Goodwill represents the excess of purchase price over the fair value of identifiable net assets of an acquired company. It is an intangible asset that arises in acquisitions. The document outlines the future maintainable profits method, super profits method, and number of years purchase method to calculate the value of goodwill. It also discusses concepts like capital employed, normal rate of return, weighted and simple average profits that are relevant for goodwill valuation.
Under this technique all costs are classified into fixed costs and variable costs. Only variable costs are considered product costs and are allocated to products manufactured. These costs include direct materials, direct labor, direct expenses and variable overhead. Fixed costs are not considered for computing the cost of products or valuation of inventory.
Managerial Accounting & the Business EnvironmentShadat Hossion
This document provides an overview of managerial accounting and the business environment. It discusses the key differences between managerial accounting and financial accounting. Managerial accounting provides internal information for managers, while financial accounting provides external information. The document also outlines some changing tools for managers, including just-in-time systems, total quality management, process reengineering, and the theory of constraints. It discusses the plan-do-check-act cycle and introduces concepts like codes of conduct, standards of ethical conduct, and objectives of management accounting.
Standard costing is a system that uses predetermined costs to evaluate actual costs and operational performance. It sets standards for direct materials, direct labor, and factory overheads and calculates variances between actual and standard costs. Variance analysis identifies reasons for differences from standards and helps improve operations, reduce costs through error corrections, and deploy resources effectively. Standard costing provides rules and guidelines for production, allows performance comparisons, and assists with budgeting, financial reporting, and cost management to increase efficiency and productivity. However, setting accurate standards is technical and not easy, and meeting standards should not be the only target.
This document discusses foreign investment in India, including foreign direct investment (FDI) and foreign institutional investment (FII). It provides background on the Indian economy and types of foreign capital. FDI occurs when an investor in one country acquires assets in India to manage them. India is an attractive destination for FDI due to factors like its large market, skilled labor force, and tax incentives. FII involves foreign companies purchasing equity on Indian stock markets for short-term gains. The document compares the differences between FDI and FII and concludes that most developing countries now view foreign investment positively due to changes in their political and economic systems over the last few decades.
The Net Operating Income approach suggests that the value of a firm does not depend on its overall cost of capital. It values the firm based solely on its earnings before interest and taxes (EBIT) divided by the overall capital rate. The approach assumes no corporate taxes, debt-equity mix does not affect overall cost of capital, and the overall cost of capital is constant. An example shows that as the amount of debt changes, affecting the equity and cost of equity, the overall value of the firm remains the same at different debt levels under this approach.
The document discusses several capital structure theories:
- The Modigliani-Miller model establishes that firm value is independent of capital structure under certain restrictive assumptions.
- The trade-off theory recognizes that while debt provides tax benefits, it also increases financial distress costs at higher leverage levels.
- Agency theory suggests that debt can help reduce equity agency costs by limiting free cash flow.
- Signaling theory posits that capital structure decisions signal private information to investors.
- Overall, the optimal capital structure balances these factors and depends on firm-specific characteristics.
Unit -2 lecture-6 (international investment theory)Dr.B.B. Tiwari
The document discusses several theories of international investment:
1. The theory of capital movements explains international investment as the transfer of capital between countries to obtain profits through interest, dividends, or share of profits. It can involve physical or financial capital.
2. Market imperfections theory explains international investment flows that arise due to markets not meeting the standards of perfect competition.
3. Internalization theory explains why firms choose foreign direct investment over licensing to retain control of proprietary knowledge and avoid transaction costs of contracting.
4. Location-specific advantage theory considers location factors like resources, labor costs, or infrastructure that make one location more profitable for investment than others.
5. Dunning's eclectic theory
This document provides an overview of marginal costing and absorption costing.
1. Marginal costing treats variable costs as product costs and fixed costs as period costs, while absorption costing treats both variable and fixed production costs as product costs.
2. Profits reported under the two methods will differ if inventory levels change during the period, as absorption costing includes a portion of fixed costs in inventory valuation.
3. The difference in reported profits equals the change in inventory units multiplied by the fixed production cost per unit absorbed. In the long run, total reported profits will be the same under both methods.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
- Marginal costing focuses on variable costs and treats fixed costs as period costs. It is used for short-term decision making.
- Absorption costing assigns both variable and fixed production costs to inventory and cost of goods sold. It is used for external financial reporting.
- Under marginal costing, contribution is calculated as sales revenue minus variable costs. Fixed costs are deducted from contribution to determine profit. This allows managers to focus on the impact of decisions on contribution.
Marginal costing is an alternative to absorption costing. Under marginal costing, only variable costs are charged as cost of sales and contribution is calculated. Fixed costs are treated as period costs. Contribution is the difference between sales revenue and variable costs, and it goes towards recovering fixed costs and generating profit. The key principles of marginal costing are that fixed costs do not change with volume, so increasing or decreasing sales only impacts profits by the amount of the variable cost per unit. Inventory is valued at marginal/variable cost under marginal costing.
This document discusses absorption costing and variable costing. Absorption costing includes both variable and fixed production costs in inventory and cost of goods sold, while variable costing includes only variable costs. Variable costing is more consistent with contribution margin analysis and decision making. Absorption costing is required for external financial reporting and tax purposes, but variable costing provides more useful information to management for decision making.
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and sales volume affect a company's profits. It requires identifying all costs as either variable or fixed. CVP analysis explores the relationship between costs, revenues, and activity level to measure how costs and profits vary with sales volume. It is used for forecasting profits, budget planning, pricing decisions, determining sales mix, and more. The three elements of CVP are costs, volume, and profit. The break-even point is the sales volume where total revenue equals total costs. Relevant costs must differ between alternatives and affect the decision. Sunk costs do not affect decisions as they cannot be changed.
This PowerPoint presentation on variable costing and segment reporting provides a comprehensive overview of these important concepts in managerial accounting. It covers the principles of variable costing, including its advantages and disadvantages, and delves into how variable costing differs from absorption costing. Additionally, the presentation explains the importance of segment reporting in evaluating the financial performance of different business segments within an organization. It includes examples, case studies, and visual aids to enhance understanding and engagement.
Marginal costing and breakeven analysis are used to provide cost information for planning short-term decisions when activity levels fluctuate. Costs are classified as either variable or fixed, with variable costs changing based on activity level and fixed costs remaining constant. A marginal cost statement calculates contribution per unit as the difference between selling price and variable costs. Breakeven analysis determines the level of activity needed for neither profit nor loss by calculating the break-even point where total contribution equals total fixed costs. The margin of safety is the difference between a selected activity level and the break-even point.
Here are the steps to identify the fixed and variable costs:
1) Calculate the total cost differences between output levels. This gives the variable cost per unit.
2) The y-intercept of the total cost line is the fixed cost.
3) Plot the total cost against output on a graph and draw the total cost line. The slope is the variable cost per unit and the y-intercept is the fixed cost.
The variable cost per unit is £254 (average of differences between total costs).
The fixed cost is £95,000 (y-intercept of total cost line).
Therefore, the variable cost is £254 per unit and the fixed cost is £95,000.
Marginal costing is a method used to determine the cost of increasing or decreasing production. It includes both fixed and variable costs, with fixed costs only included if production is being increased. The marginal cost is calculated as the change in total cost from a one unit change in production. Absorption costing is an accounting method that allocates all production costs, including fixed costs, to inventory. This increases the reported value of inventory and costs per unit. Key steps include developing cost pools, determining usage, and calculating allocation rates to distribute costs to each unit produced.
This document discusses various methods for accounting for overhead costs in management accounting. It covers budgeting overhead rates, applying overhead to products using a budgeted rate, and accounting for under- or over-applied overhead. It also compares variable costing and absorption costing methods, including calculating income statements and production volume variances under each method. The key difference between the methods is how fixed manufacturing costs are treated in determining cost of goods sold and gross profit.
Muhammad Furqan gives a lecture on cost-volume-profit (CVP) analysis. He discusses key CVP concepts like contribution margin, break-even point, and CVP graph. He provides examples using a hypothetical company, Racing Bicycle Company, to demonstrate how to calculate contribution margin, contribution margin ratio, and break-even point using both the equation method and contribution margin method.
This document compares and contrasts absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs and regards fixed costs as period costs. Under absorption costing, closing stock value and reported profits can be higher when production exceeds sales. Marginal costing is considered more relevant for decision making, while absorption costing complies with accounting principles. Both approaches have merits depending on the situation.
This document provides an overview of absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs, regarding fixed costs as period costs. Absorption costing results in higher inventory valuations and can result in different profit amounts than marginal costing depending on production and sales levels. The document also discusses breakeven analysis and how it can be used to determine sales volumes needed to reach the breakeven point or a target profit level.
This document discusses cost-volume-profit (CVP) analysis and the concept of contribution margin (CM). It defines CM as sales revenue minus variable costs and explains that CM is used to cover fixed costs and contribute to profit. The document also discusses assumptions of CVP analysis and applications such as break-even analysis, calculating profit at different sales levels, and measuring operating leverage.
- Costs can be classified as either variable or fixed based on how they react to changes in business activity
- Variable costs change in proportion to changes in activity, while fixed costs remain unchanged with activity levels
- Understanding cost behavior and classifications is important for cost-volume-profit (CVP) analysis, which analyzes the relationship between costs, sales volume, and profits
This document discusses cost measurement and different costing methods, including absorption costing and variable/direct costing. It provides examples to illustrate the calculation of product costs under absorption costing and variable costing. Absorption costing includes both variable and fixed manufacturing costs in product costs, while variable costing treats fixed costs as period costs not included in product costs. The document compares the two methods and discusses their treatment of inventory costs and reported profit.
Marginal costing and breakeven analysis are techniques used to provide cost information for planning short-term decisions. Marginal costing classifies costs as either variable or fixed based on their behavior when activity levels change. A marginal cost statement calculates contribution per unit which is used to determine the breakeven point, or level of activity where total revenue equals total costs. Breakeven analysis can then be used to set minimum selling prices, activity levels to achieve profits, and calculate the margin of safety.
This document presents a cost analysis for the production of the SkyyRider electric vehicle. It discusses the original total cost of ₹115,603 for producing 120 units. Through cost cutting measures like cheaper materials, the total cost was reduced to ₹88,529 per unit, saving over ₹3 million. This saving could be invested in promotion and advertising to increase electric vehicle sales in India, which currently account for only 1.66% of total automobile sales but are rising as pressure grows to cut emissions.
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2. Electrolysis is the passage of an electric current through an ionic substance to cause a non-spontaneous redox reaction. Oxidation occurs at the anode and reduction at the cathode.
3. Aluminum is extracted from bauxite via electrolysis. Bauxite is dissolved in molten cryolite to lower its melting point, then electrolysis separates aluminum ions at the cathode.
The document discusses the physical and chemical properties of Group IV elements and their compounds. It covers:
1) The variation in properties like melting point, electrical conductivity down the group due to changes in bonding and structure.
2) The tetrachlorides of Group IV elements which are volatile liquids that hydrolyze in water, with reactivity increasing down the group.
3) The two types of oxides formed - monoxides and dioxides. Their structures, acid-base properties and thermal stability are explained.
4) The relative stability of the +2 and +4 oxidation states decreases and increases down the group respectively. This affects the redox behavior of the elements.
Zimsec chemistry chapter 9 rate of reactionalproelearning
This document discusses factors that affect the rate of chemical reactions, including concentration, temperature, surface area, pressure, and catalysis. It defines rate of reaction, activation energy, and catalysts. It explains qualitatively how increasing concentration, temperature, and surface area increases the rate of reaction by increasing collision frequency and effective collisions. It describes how catalysts lower the activation energy of reactions, and enzymes act as biological catalysts with high specificity.
Chemistry zimsec chapter 2 atoms, molecules and stoichiometryalproelearning
This document provides an overview of Chapter 2 in a chemistry textbook, which covers topics including:
- The mass of atoms and molecules, including relative atomic mass and molecular mass
- Using a mass spectrometer to determine relative isotopic masses and abundances
- The mole concept and amount of substance in relation to mass, volume of gases, and concentration of solutions
- Calculating empirical formulas from combustion data or elemental composition by mass and deducing molecular formulas
- Stoichiometry, including writing balanced chemical equations and ionic equations
This document summarizes key information about halogenoalkanes:
- Halogenoalkanes undergo nucleophilic substitution reactions like hydrolysis and reactions with cyanide ions or ammonia via SN1 or SN2 mechanisms. Tertiary halogenoalkanes favor SN1 while primary favor SN2.
- Chlorofluorocarbons (CFCs) were widely used but deplete the ozone layer. Their alternatives like HCFCs are less damaging but still pose issues.
- Other uses of halogenoalkanes include their inertness making fluoroalkanes useful as refrigerants and propellants, though concerns about ozone depletion drove a search for replacements like propane
This document provides an overview of transition elements and their properties including:
1) Transition elements have variable oxidation states due to their similar energy 4s and 3d electron levels. They can gain or lose electrons to form stable ions.
2) Transition elements form colored complexes when surrounded by ligands via coordinate bonding. Ligand exchange reactions can replace one ligand for another.
3) The shapes and colors of transition metal complexes are determined by the ligands present and the splitting of d orbitals. Different ligands cause different color changes through electron movement between d orbitals.
This document discusses reaction kinetics including:
1) Rate equations relate the rate of reaction to reactant concentrations and can be determined experimentally. The orders of reaction indicate how changing concentrations affect rate.
2) Reaction mechanisms involve multiple steps, with the rate determined by the slowest step. Molecularity refers to the number of species involved in a step.
3) Catalysts increase reaction rates by providing alternative reaction pathways. Heterogeneous catalysts involve different phases while homogeneous catalysts are the same phase as reactants. Common examples are discussed.
This document provides an overview of Chapter 22 from a chemistry textbook, which covers topics related to ionic equilibria including:
- pH, Ka, pKa and Kw values and their use in calculations involving strong and weak acids and bases.
- Acid-base titration curves and how they differ for strong-strong, strong-weak, weak-strong, and weak-weak acid-base titrations.
- How acid-base indicators work and their use in determining the endpoint of a titration.
It also lists learning outcomes for understanding these concepts and performing related calculations.
LAND USE LAND COVER AND NDVI OF MIRZAPUR DISTRICT, UPRAHUL
This Dissertation explores the particular circumstances of Mirzapur, a region located in the
core of India. Mirzapur, with its varied terrains and abundant biodiversity, offers an optimal
environment for investigating the changes in vegetation cover dynamics. Our study utilizes
advanced technologies such as GIS (Geographic Information Systems) and Remote sensing to
analyze the transformations that have taken place over the course of a decade.
The complex relationship between human activities and the environment has been the focus
of extensive research and worry. As the global community grapples with swift urbanization,
population expansion, and economic progress, the effects on natural ecosystems are becoming
more evident. A crucial element of this impact is the alteration of vegetation cover, which plays a
significant role in maintaining the ecological equilibrium of our planet.Land serves as the foundation for all human activities and provides the necessary materials for
these activities. As the most crucial natural resource, its utilization by humans results in different
'Land uses,' which are determined by both human activities and the physical characteristics of the
land.
The utilization of land is impacted by human needs and environmental factors. In countries
like India, rapid population growth and the emphasis on extensive resource exploitation can lead
to significant land degradation, adversely affecting the region's land cover.
Therefore, human intervention has significantly influenced land use patterns over many
centuries, evolving its structure over time and space. In the present era, these changes have
accelerated due to factors such as agriculture and urbanization. Information regarding land use and
cover is essential for various planning and management tasks related to the Earth's surface,
providing crucial environmental data for scientific, resource management, policy purposes, and
diverse human activities.
Accurate understanding of land use and cover is imperative for the development planning
of any area. Consequently, a wide range of professionals, including earth system scientists, land
and water managers, and urban planners, are interested in obtaining data on land use and cover
changes, conversion trends, and other related patterns. The spatial dimensions of land use and
cover support policymakers and scientists in making well-informed decisions, as alterations in
these patterns indicate shifts in economic and social conditions. Monitoring such changes with the
help of Advanced technologies like Remote Sensing and Geographic Information Systems is
crucial for coordinated efforts across different administrative levels. Advanced technologies like
Remote Sensing and Geographic Information Systems
9
Changes in vegetation cover refer to variations in the distribution, composition, and overall
structure of plant communities across different temporal and spatial scales. These changes can
occur natural.
How to Make a Field Mandatory in Odoo 17Celine George
In Odoo, making a field required can be done through both Python code and XML views. When you set the required attribute to True in Python code, it makes the field required across all views where it's used. Conversely, when you set the required attribute in XML views, it makes the field required only in the context of that particular view.
Philippine Edukasyong Pantahanan at Pangkabuhayan (EPP) CurriculumMJDuyan
(𝐓𝐋𝐄 𝟏𝟎𝟎) (𝐋𝐞𝐬𝐬𝐨𝐧 𝟏)-𝐏𝐫𝐞𝐥𝐢𝐦𝐬
𝐃𝐢𝐬𝐜𝐮𝐬𝐬 𝐭𝐡𝐞 𝐄𝐏𝐏 𝐂𝐮𝐫𝐫𝐢𝐜𝐮𝐥𝐮𝐦 𝐢𝐧 𝐭𝐡𝐞 𝐏𝐡𝐢𝐥𝐢𝐩𝐩𝐢𝐧𝐞𝐬:
- Understand the goals and objectives of the Edukasyong Pantahanan at Pangkabuhayan (EPP) curriculum, recognizing its importance in fostering practical life skills and values among students. Students will also be able to identify the key components and subjects covered, such as agriculture, home economics, industrial arts, and information and communication technology.
𝐄𝐱𝐩𝐥𝐚𝐢𝐧 𝐭𝐡𝐞 𝐍𝐚𝐭𝐮𝐫𝐞 𝐚𝐧𝐝 𝐒𝐜𝐨𝐩𝐞 𝐨𝐟 𝐚𝐧 𝐄𝐧𝐭𝐫𝐞𝐩𝐫𝐞𝐧𝐞𝐮𝐫:
-Define entrepreneurship, distinguishing it from general business activities by emphasizing its focus on innovation, risk-taking, and value creation. Students will describe the characteristics and traits of successful entrepreneurs, including their roles and responsibilities, and discuss the broader economic and social impacts of entrepreneurial activities on both local and global scales.
Chapter wise All Notes of First year Basic Civil Engineering.pptxDenish Jangid
Chapter wise All Notes of First year Basic Civil Engineering
Syllabus
Chapter-1
Introduction to objective, scope and outcome the subject
Chapter 2
Introduction: Scope and Specialization of Civil Engineering, Role of civil Engineer in Society, Impact of infrastructural development on economy of country.
Chapter 3
Surveying: Object Principles & Types of Surveying; Site Plans, Plans & Maps; Scales & Unit of different Measurements.
Linear Measurements: Instruments used. Linear Measurement by Tape, Ranging out Survey Lines and overcoming Obstructions; Measurements on sloping ground; Tape corrections, conventional symbols. Angular Measurements: Instruments used; Introduction to Compass Surveying, Bearings and Longitude & Latitude of a Line, Introduction to total station.
Levelling: Instrument used Object of levelling, Methods of levelling in brief, and Contour maps.
Chapter 4
Buildings: Selection of site for Buildings, Layout of Building Plan, Types of buildings, Plinth area, carpet area, floor space index, Introduction to building byelaws, concept of sun light & ventilation. Components of Buildings & their functions, Basic concept of R.C.C., Introduction to types of foundation
Chapter 5
Transportation: Introduction to Transportation Engineering; Traffic and Road Safety: Types and Characteristics of Various Modes of Transportation; Various Road Traffic Signs, Causes of Accidents and Road Safety Measures.
Chapter 6
Environmental Engineering: Environmental Pollution, Environmental Acts and Regulations, Functional Concepts of Ecology, Basics of Species, Biodiversity, Ecosystem, Hydrological Cycle; Chemical Cycles: Carbon, Nitrogen & Phosphorus; Energy Flow in Ecosystems.
Water Pollution: Water Quality standards, Introduction to Treatment & Disposal of Waste Water. Reuse and Saving of Water, Rain Water Harvesting. Solid Waste Management: Classification of Solid Waste, Collection, Transportation and Disposal of Solid. Recycling of Solid Waste: Energy Recovery, Sanitary Landfill, On-Site Sanitation. Air & Noise Pollution: Primary and Secondary air pollutants, Harmful effects of Air Pollution, Control of Air Pollution. . Noise Pollution Harmful Effects of noise pollution, control of noise pollution, Global warming & Climate Change, Ozone depletion, Greenhouse effect
Text Books:
1. Palancharmy, Basic Civil Engineering, McGraw Hill publishers.
2. Satheesh Gopi, Basic Civil Engineering, Pearson Publishers.
3. Ketki Rangwala Dalal, Essentials of Civil Engineering, Charotar Publishing House.
4. BCP, Surveying volume 1
Strategies for Effective Upskilling is a presentation by Chinwendu Peace in a Your Skill Boost Masterclass organisation by the Excellence Foundation for South Sudan on 08th and 09th June 2024 from 1 PM to 3 PM on each day.
বাংলাদেশের অর্থনৈতিক সমীক্ষা ২০২৪ [Bangladesh Economic Review 2024 Bangla.pdf] কম্পিউটার , ট্যাব ও স্মার্ট ফোন ভার্সন সহ সম্পূর্ণ বাংলা ই-বুক বা pdf বই " সুচিপত্র ...বুকমার্ক মেনু 🔖 ও হাইপার লিংক মেনু 📝👆 যুক্ত ..
আমাদের সবার জন্য খুব খুব গুরুত্বপূর্ণ একটি বই ..বিসিএস, ব্যাংক, ইউনিভার্সিটি ভর্তি ও যে কোন প্রতিযোগিতা মূলক পরীক্ষার জন্য এর খুব ইম্পরট্যান্ট একটি বিষয় ...তাছাড়া বাংলাদেশের সাম্প্রতিক যে কোন ডাটা বা তথ্য এই বইতে পাবেন ...
তাই একজন নাগরিক হিসাবে এই তথ্য গুলো আপনার জানা প্রয়োজন ...।
বিসিএস ও ব্যাংক এর লিখিত পরীক্ষা ...+এছাড়া মাধ্যমিক ও উচ্চমাধ্যমিকের স্টুডেন্টদের জন্য অনেক কাজে আসবে ...
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
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Marginal and absorption costing zimsec zimbabwe cambridge
1. This chapter focuses on the costing methods of marginal and absorption costing and
compares the profit made by a business under each method. The chapter concludes
with the layout of a manufacturing account and statement of profit or loss (income
statement) and where the different types of inventory – raw materials, work-in-progress,
finished goods – are shown in the financial statements.
This chapter explains:
n the different treatment of product costs and period costs in marginal costing and
absorption costing
n how marginal costing works, including the calculation of contribution, and its role in
short-term decision-making
n how absorption costing works, including the valuation of closing inventory
n a comparison of profits when marginal costing and absorption costing are used
n the layout of
– a manufacturing account to show production cost
– a statement of profit or loss to show profit for the year
Marginal and
absorption costing
7
this chapter covers...
2. marginal and absorption costing 201
marginal and absorption costing systems
These two costing systems are often used in cost accounting, but for different
purposes:
n marginal costing – helps with short-term decision-making
n absorption costing – is used to calculate inventory valuations and profit
calculations in financial statements
The use of each system is dependent on the information needs of the business
or organisation:
– ‘can we afford to sell 1,000 units of our product each month to
Megastores Limited at a discount of 20 per cent?’ (use marginal
costing)
– ‘what profit have we made this year?’ (use absorption costing)
These costing systems use the same costs, but they are treated differently
according to their behaviour. We will now look at each of these costing
systems in turn and then make a comparison between them.
marginal costing
Marginal cost is the cost of producing one extra unit of output
To help with short-term decision-making, costs are classified by their
behaviour as either variable costs or fixed costs (with semi-variable costs
being split between their fixed and variable parts). Such a classification of
costs is used in marginal costing to work out how much it costs to produce
each extra unit of output.
Marginal cost is often – but not always – the total of the variable costs of
producing a unit of output. For most purposes, marginal costing is not
concerned with fixed period costs (such as the rent of a factory); instead it is
concerned with variable product costs – direct materials, direct labour, direct
expenses, and variable production overheads – which increase as output
increases. For most decision-making, the marginal cost of a unit of output is,
therefore, the variable cost of producing one more unit.
Knowing the marginal cost of a unit of output enables the managers of a
business to focus on the contribution provided by each unit. The contribution
is the sales revenue after marginal/variable product costs have been paid. The
contribution formula is:
selling price less variable cost = contribution
3. 202 analysing costs and revenues tutorial
Contribution can be calculated on a per unit basis (as here), or for a batch of
output (eg 1,000 units), or for a whole business.
It follows that the difference between the sales revenue and the variable costs
of the units sold in a period is the total contribution that the sales of all the
units in the period make towards the fixed period costs of the business. Once
these are covered, the remainder of the contribution is profit.
Thus a business can work out its profit, using a marginal costing statement,
for any given period from the total contribution and fixed costs figures:
total contribution less total fixed costs = profit
A marginal costing statement can be prepared in the following format:
£
Sales revenue x
less Variable costs x
equals Contribution x
less Fixed costs x
equals PROFIT x
Note from the marginal costing statement how the contribution goes firstly
towards the fixed costs and, when they have been covered, secondly
contributes to profit.
The relationship between marginal costing, contribution and profit is shown
in the Case Study which follows.
WYVERN BIKE COMPANY: MARGINAL COSTING
s i t u a t i o n
The Wyvern Bike Company makes 100 bikes each week and its costs are as follows:
Direct materials £4,000
Direct labour £5,000
Production overheads £5,000
Investigations into the behaviour of costs has revealed the following information:
• direct materials are variable costs
• direct labour is a variable cost
• of the production overheads, £2,000 is a fixed cost, and the remainder is a variable
cost
The selling price of each bike is £200.
Case
Study
4. marginal and absorption costing 203
As an accounts assistant at the Wyvern Bike Company, you are asked to:
• calculate the marginal cost of producing each bike
• show the expected contribution per bike
• prepare a marginal costing statement to show clearly the total contribution and the
total profit each week
s o l u t i o n
Marginal cost per bike
Variable costs per unit: £
Direct materials (£4,000 ÷ 100) 40
Direct labour (£5,000 ÷ 100) 50
Production overheads (£3,000* ÷ 100) 30
Marginal cost per bike 120
* £5,000 – £2,000 fixed costs
Contribution per bike
Selling price per bike 200
less Variable cost per bike 120
equals Contribution per bike 80
Marginal costing statement
£ £
Sales £200 x 100 bikes 20,000
less Variable costs:
Direct materials 4,000
Direct labour 5,000
Production overheads 3,000
12,000
equals Total contribution 8,000
less Fixed costs (production overheads) 2,000
equals Profit for the week 6,000
5. a d v a n t a g e s o f a m a r g i n a l c o s t i n g s t a t e m e n t
A marginal costing statement is of benefit to the managers of a business
because:
n contribution, ie selling price less variable cost, is clearly identified
n with the marginal cost of output identified, the managers can focus on the
contribution provided by the output
n the effect on costs of changes in sales revenue can be calculated
n it helps with short-term decision-making in the forms of
– break-even analysis
– margin of safety
– target profit
– contribution sales ratio
– limiting factors
– ‘special order’ pricing
We will look at the role of marginal costing in short-term decision-making in
Chapter 9.
absorption costing
Absorption costing absorbs the costs of the business amongst the cost
units.
Absorption costing answers the question, ‘What does it cost to make one unit
of output?’
The absorption cost of a unit of output is made up of the following costs:
£
Direct materials x
add Direct labour x
add Direct expenses x
add Production overheads (fixed and variable) x
equals ABSORPTION COST x
Note that the production overheads comprise the factory costs of indirect
materials, indirect labour, and indirect expenses.
204 analysing costs and revenues tutorial
6. marginal and absorption costing 205
WYVERN BIKE COMPANY: ABSORPTION COSTING
s i t u a t i o n
The Wyvern Bike Company makes 100 bikes each week and its costs are as follows:
Direct materials £4,000
Direct labour £5,000
Production overheads £5,000
The selling price of each bike is £200.
As an accounts assistant at the Wyvern Bike Company, you are asked to:
• calculate the absorption cost of producing each bike
• calculate the total profit each week
s o l u t i o n
Absorption cost per bike
Total costs per week: £
Direct materials 4,000
Direct labour 5,000
Production overheads 5,000
Total cost 14,000
The absorption cost of producing one bike is:
Total cost = £14,000 = £140 per bike
Units of output 100 bikes
Profit each week
Selling price (100 bikes x £200) 20,000
less Total cost 14,000
equals Profit for the week 6,000
Conclusion
Profit for the week of £6,000 is the same as with the marginal costing method, so we
could say ‘Does it matter whether we use marginal or absorption costing?’ The answer
to this is that it does:
– marginal costing, with its focus on variable costs and contribution, is useful for short-
term decision-making
– absorption costing is a simple method of calculating the cost of output and is used
in financial statements for inventory valuation
Case
Study
7. As the Case Study shows, each cost unit bears an equal proportion of the
costs of the production overheads of the business. Because of its simplicity,
absorption costing is a widely used system which tells us how much it costs
to make one unit of output. It works well where the cost units are identical,
eg 100 identical bikes, but is less appropriate where some of the cost units
differ in quality, eg 100 bikes, of which 75 are standard models and 25 are
handbuilt to the customers’ specifications. It also ignores the effect of
changes in the level of output on the cost structure. For example, if the bike
manufacturer reduces output to 50 bikes a week:
n will direct materials remain at £40 per bike? (buying materials in smaller
quantities might mean higher prices)
n will direct labour still be £50 per bike? (with lower production, the
workforce may not be able to specialise in certain jobs, and may be less
efficient)
n will the production overheads remain at £5,000? (perhaps smaller
premises can be used and the factory rent reduced)
marginal and absorption costing compared
Marginal costing tells the managers of a business or organisation the cost of
producing one extra unit of output. Nevertheless, we must always remember
that one of the objectives of the costing system is to ensure that all the costs
of a business or organisation are recovered by being charged to production.
This is achieved by means of overhead absorption (see Chapter 5). We will
now make a comparison between marginal and absorption costing:
n marginal costing
Marginal costing recognises that fixed period costs vary with time rather
than activity, and identifies the variable production cost of one extra unit.
For example, the rent of a factory relates to a certain time period, eg one
month, and remains unchanged whether 100 units of output are made or
whether 500 units are made (always assuming that the capacity of the
factory is at least 500 units); by contrast, the production of one extra unit
will incur an increase in variable costs, ie direct materials, direct labour,
direct expenses (if any), and variable overheads – this increase is the
marginal cost.
n absorption costing
This technique absorbs all production costs into each unit of output
through the use of an overhead absorption rate (see Chapter 5). Therefore
the more units that are produced, the cheaper will be the cost per unit –
because the overheads are spread over a greater number of units.
206 analysing costs and revenues tutorial
8. The diagram below demonstrates how the terms in marginal costing relate to
the same production costs as those categorised under absorption costing
terms. As noted above, when using marginal costing it is the behaviour of the
cost – fixed or variable – that is important, not the origin of the cost.
The table on the next page gives a comparison between marginal costing and
absorption costing, including a note on the usefulness and the limitations of
each.
m a r g i n a l a n d a b s o r p t i o n c o s t i n g : p r o f i t c o m p a r i s o n s
Because of the different ways in which marginal costing and absorption
costing treat fixed period costs, the two techniques produce different levels
of profit when there is a closing inventory figure. This is because, under
marginal costing, the closing inventory is valued at variable production cost;
by contrast, absorption cost includes a share of fixed production costs in the
closing inventory valuation. This is illustrated in the Case Study which
follows, looking at the effect of using marginal costing and absorption
costing on the statement of profit or loss of a manufacturing business.
Note that the marginal cost approach is used to help with short-term
decision-making (see Chapter 9). However, for financial statements,
absorption costing must be used for inventory valuation purposes in order to
comply with IAS 2 (see page 44). Under IAS 2, Inventories, the closing
inventory valuation is based on the costs of direct materials, direct labour,
direct expenses (if any), and production overheads. Note that non-production
overheads are not included, as they are charged in full to the statement of
profit or loss in the year to which they relate.
marginal and absorption costing 207
absorption costing marginal costing
direct costs
direct materials
direct labour
direct expenses
variable costs
variable direct materials
variable direct labour
variable direct expenses
variable overheads
indirect costs
variable overheads
fixed overheads
fixed costs
fixed direct expenses
fixed overheads
9. 208 analysing costs and revenues tutorial
main use
how does
it work?
main focus
usefulness
limitations
marginal costing
• to help with short-term
decision-making (see
Chapter 9) in the forms of
– break-even analysis
– margin of safety
– target profit
– contribution sales ratio
– limiting factors
– ‘special order’ pricing
• costs are classified as either
fixed or variable
• contribution to fixed costs is
calculated as selling price
less variable costs
• marginal cost
• contribution
• concept of contribution is
easy to understand
• useful for short-term
decision-making, but no
consideration of overheads
• costs have to be identified as
either fixed or variable
• all overheads have to be
recovered, otherwise a loss
will be made
• not acceptable under IAS 2,
Inventories
• calculation of selling prices
may be less accurate than
other costing methods
absorption costing
• to calculate profit
• to calculate inventory
valuation for financial
statements
• overheads are charged to
output through an overhead
absorption rate, often on the
basis of direct labour hours
or machine hours
• all overheads charged to
output
• calculating profit
• calculating inventory values
• acceptable under IAS 2,
Inventories
• appropriate for traditional
industries where overheads
are charged to output on the
basis of direct labour hours
or machine hours
• not as useful in short-term
decision-making as marginal
costing
• may provide less accurate
basis for calculation of
selling prices where
overheads are high and
complex in nature
COMPARISON OF MARGINAL AND ABSORPTION COSTING
10. Case
Study
marginal and absorption costing 209
ChAIRS LIMITED:
MARGINAL AND ABSORPTION COSTING
s i t u a t i o n
Chairs Limited commenced business on 1 January 20-7. It manufactures a special
type of chair designed to alleviate back pain. Information on the first year’s trading is
as follows:
number of chairs manufactured 5,000
number of chairs sold 4,500
selling price £110 per chair
direct materials £30 per chair
direct labour £40 per chair
fixed production overheads £100,000
The directors ask for your help in producing profit statements using the marginal
costing and absorption costing methods. They say that they will use ‘the one that
shows the higher profit’ to the company’s bank manager.
s o l u t i o n
cHairs limited
statement of profit or loss for the year ended 31 december 20-7
marginal costing absorption costing
£ £ £ £
sales revenue at £110 each 495,000 495,000
Variable costs
Direct materials at £30 each 150,000 150,000
Direct labour at £40 each 200,000 200,000
350,000
Less Closing inventory (marginal cost)
500 chairs at £70 each 35,000
315,000
Fixed production overheads 100,000 100,000
450,000
Less Closing inventory (absorption cost)
500 chairs at £90 each 45,000
Less Cost of sales 415,000 405,000
proFit 80,000 90,000
11. 210 analysing costs and revenues tutorial
Tutorial notes:
• Closing inventory is always calculated on the basis of this year’s costs:
marginal costing, variable costs only, ie £30 + £40 = £70 per chair
absorption costing, variable and fixed costs, ie £450,000 ÷ 5,000 chairs = £90 per
chair
• The difference in the profit figures is caused only by the closing inventory figures:
£35,000 under marginal costing and £45,000 under absorption costing – the same
costs have been used, but fixed production overheads have been treated differently.
• Only fixed production overheads are dealt with differently using the techniques of
marginal and absorption costing – both methods charge non-production overheads
in full to the statement of profit or loss in the year to which they relate.
With marginal costing, the full amount of the fixed production overheads has been
charged in this year’s statement of profit or loss; by contrast, with absorption costing,
part of the fixed production overheads (here, £10,000) has been carried forward in the
inventory valuation.
With regard to the directors’ statement that they will use ‘the one that shows the higher
profit’, the following points should be borne in mind:
• A higher profit does not mean more money in the bank.
• The two methods simply treat fixed production overheads differently and, in a year
when there is no closing inventory, total profits to date are exactly the same – but
they occur differently over the years. Over time, profits are identical under both
methods.
• For financial statements, Chairs Limited must use the absorption cost inventory
valuation of £45,000 in order to comply with IAS 2, Inventories.
tHe use oF a manuFacturing account
Now that we have seen how a manufacturing business uses absorption
costing to value its closing inventory, we can turn our attention to the year-
end financial statements and, in particular, the use of a manufacturing
account.
For preparing financial statements a business needs to have an accounting
system that records the costs and revenues for its output, and then shows the
profit or loss that has been made for the accounting period. For a business
such as a retailer that buys and sells goods, without carrying out any
production processes, the accounting system is relatively simple – the figure
for revenue is deducted from the amount of purchases (after allowing for
changes in the value of opening and closing inventories) and the amount of
overheads; a profit is made when revenue exceeds the total costs. For a
12. manufacturer, though, the costs are more complex as they comprise the direct
and indirect costs of materials, labour and expenses; also, a manufacturer
will invariably have opening and closing inventory in three different forms –
direct materials, work-in-progress and finished goods.
In its year-end financial statements a manufacturer prepares:
n a manufacturing account, which shows production (factory) cost
n a statement of profit or loss, which shows profit for the period
The financial statements, which are part of the double-entry system, use the
following outline:
n o t e s
n Adjustments have to be made to allow for changes in the value of
inventory at the start of the accounting period (opening inventory) and at
the end of the accounting period (closing inventory) for:
– direct materials, in the manufacturing account
– work-in-progress (or partly manufactured goods), in the
manufacturing account
– finished goods, in the statement of profit or loss
marginal and absorption costing 211
MANUFACTURING
ACCOUNT
STATEMENT OF
PROFIT OR LOSS
Direct materials
add Direct labour
add Direct expenses
equals PRIME COST
add Production overheads
equals PRODUCTION (FACTORY) COST
Sales revenue
less Production (factory) cost
equals GROSS PROFIT
less Non-production overheads, eg
• selling and distribution expenses
• administration expenses
• finance expenses
equals PROFIT FOR ThE PERIOD
13. 212 analysing costs and revenues tutorial
n The statement of profit or loss shows two levels of profit:
– gross profit, the difference between selling price and production cost
(after allowing for changes in the value of opening and closing
inventory)
– profit for the year, the profit after all costs have been deducted and
which belongs to the owner(s) of the business
n Certain expenses might be apportioned on an appropriate basis between
the manufacturing account and the statement of profit or loss – for
example, rent and rates might be apportioned 75 per cent to the factory
(production overheads) and 25 per cent to the office (non-production
overheads)
An example of a manufacturing account and statement of profit or loss is
shown on the next page.
n Marginal costing classifies costs by their behaviour – variable product costs
or fixed period costs. Such a classification is used to cost units of output on
the basis of their variable (or marginal) costs.
n Marginal costing helps with short-term decision-making.
n Absorption costing absorbs the costs of the business amongst the cost units
by means of overhead absorption rates. It is used to cost units of output to
calculate inventory valuations for financial statements and to calculate profit.
n A manufacturing account is a financial statement which shows prime cost and
production (factory) cost.
n A statement of profit or loss shows non-production overheads and profit for
the year of the business.
marginal cost the cost of producing one extra unit of
output
contribution selling price – variable cost
absorption cost the costs of the business are absorbed
amongst the cost units through the use of
an overhead absorption rate
manufacturing account an account – part of the double-entry
system – which brings together the
elements of cost that make up production
(factory) cost
Chapter
Summary
Key
Terms
14. marginal and absorption costing 213
ALPHA MANUFACTURING COMPANY
MANUFACTURING ACCOUNT AND STATEMENT OF PROFIT OR LOSS
for the year ended 31 December 20-4
£ £
Opening inventory of direct materials 5,000
Add Purchases of direct materials 50,000
55,000
Less Closing inventory of direct materials 6,000
DIRECT MATERIALS USED 49,000
Direct labour 26,000
Direct expenses 2,500
PRIME COST 77,500
Add Production (factory) overheads:
Indirect materials 2,000
Indirect labour 16,000
Indirect expenses:
Rent of factory 5,000
Depreciation of factory machinery 10,000
Factory light and heat 4,000
37,000
114,500
Add Opening inventory of work-in-progress 4,000
118,500
Less Closing inventory of work-in-progress 3,000
PRODUCTION (FACTORY) COST OF GOODS MANUFACTURED 115,500
Sales revenue 195,500
Opening inventory of finished goods 6,500
Production (factory) cost of goods manufactured 115,500
122,000
Less Closing inventory of finished goods 7,500
COST OF SALES 114,500
Gross profit 81,000
Less Non-production overheads:
Selling and distribution expenses 38,500
Administration expenses 32,000
Finance expenses 3,500
74,000
Profit for the year 7,000
Note: a layout for a manufacturing account and statement of profit or loss is given in the
Appendix.
15. 214 analysing costs and revenues tutorial
7.1 Coffeeworks Limited manufactures coffee machines for domestic use. The management of the
company is considering next year’s production and has asked you to help with certain financial
decisions.
The following information is available:
Selling price (per machine) £80
Direct materials (per machine) £25
Direct labour (per machine) £20
Fixed production overheads £270,000 per year
The company is planning to manufacture 15,000 coffee machines next year.
(a) calculate the marginal cost per coffee machine
(b) calculate the absorption cost per coffee machine
(c) prepare a statement of profit or loss to show the profit or loss if 15,000 coffee machines are
sold
7.2 Cook-It Limited makes garden barbecues. The management of the company is considering the
production for next year and has asked for help with certain financial decisions.
The following information is available:
Selling price (per barbecue) £90
Direct materials (per barbecue) £30
Direct labour (per barbecue) £25
Fixed production overheads £150,000 per year
The company is planning to manufacture 10,000 barbecues next year.
required
You are to calculate:
• the marginal cost per barbecue
• the absorption cost per barbecue
• the profit or loss if 10,000 barbecues are sold
Activities
16. marginal and absorption costing 215
7.3 Maxxa Limited manufactures one product, the Maxx. For the month of January 20-7 the following
information is available:
Number of units manufactured 4,000
Number of units sold 3,000
Selling price £8 per unit
Direct materials for month £5,000
Direct labour for month £9,000
Fixed production overheads for month £6,000
There was no finished goods inventory at the start of the month. Both direct materials and direct
labour are variable costs.
required:
You are to produce statements of profit or loss using marginal costing and absorption costing
methods.
7.4 Activtoys Limited commenced business on 1 January 20-1. It manufactures the ‘Activ’, an outdoor
climbing frame. Information on the first year’s trading is as follows:
Number of climbing frames manufactured 1,500
Number of climbing frames sold 1,300
Selling price £125 per frame
Direct materials £25 per frame
Direct labour £30 per frame
Fixed production overheads £82,500
required
(a) The directors ask for your help in producing statements of profit or loss using the marginal
costing and absorption costing methods. They say that they will use “the one that gives the
higher profit” to show to the company’s bank manager.
(b) Write a note to the directors explaining the reason for the different profit figures and
commenting on their statement.
17. 216 analysing costs and revenues tutorial
7.5 Durning Limited manufactures one product, the Durn. For the month of April 20-4 the following
information is available:
Number of units manufactured 10,000
Number of units sold 8,000
Selling price £4 per unit
Direct materials for month £8,000
Direct labour for month £16,000
Fixed production overheads for month £10,000
There was no finished goods inventory at the start of the month. Both direct materials and direct
labour are variable costs.
required
(a) produce statements of profit or loss for April 20-4, using:
• marginal costing
• absorption costing
(b) explain briefly the reason for the difference between recorded profits under the alternative
costing methods
7.6 Which one of the following does not appear in a manufacturing account?
(a) depreciation of factory machinery
(b) indirect labour
(c) depreciation of office equipment
(d) factory light and heat
Answer (a) or (b) or (c) or (d)
7.7 For a manufacturing business, which type of inventory is recorded in the statement of profit or loss?
(a) raw materials
(b) work-in-progress
(c) partly manufactured goods
(d) finished goods
Answer (a) or (b) or (c) or (d)
18. marginal and absorption costing 217
7.8 Allocate the following costs to either the manufacturing account or the statement of profit or loss by
ticking the appropriate column in the table below:
manufacturing statement of
account profit or loss
(a) factory rent
(b) production supervisors' wages
(c) insurance of factory buildings
(d) depreciation of office equipment
(e) sales commission
(f) direct materials purchased
(g) advertising
7.9 The following figures relate to the accounts of Crown heath Manufacturing Company for the year
ended 31 December 20-6:
£
Inventories at 1 January 20-6:
Direct materials 10,500
Finished goods 4,300
Inventories at 31 December 20-6:
Direct materials 10,200
Finished goods 3,200
Expenditure during year:
Purchases of direct materials 27,200
Factory wages – direct 12,600
Factory wages – indirect 3,900
Factory rent and rates 1,200
Factory power 2,000
Depreciation of factory machinery 900
Repairs to factory buildings 300
Sundry factory expenses 900
Non-production overheads 6,500
Revenue for the year 60,400
you are to prepare the year end:
• manufacturing account
• statement of profit or loss
Note: a layout for a manufacturing account and statement of profit or loss is given in the Appendix.
19. 218 analysing costs and revenues tutorial
7.10 The following figures relate to the accounts of Barbara Francis, who runs a furniture manufacturing
business, for the year ended 31 December 20-7:
£
Inventory of direct materials at 1 January 20-7 31,860
Inventory of direct materials at 31 December 20-7 44,790
Inventory of finished goods at 1 January 20-7 42,640
Inventory of finished goods at 31 December 20-7 96,510
Purchases of direct materials 237,660
Revenue for the year 796,950
Rent and rates 32,920
Manufacturing wages 234,630
Manufacturing power 7,650
Manufacturing heat and light 2,370
Manufacturing expenses and maintenance 8,190
Salaries 138,700
Advertising 22,170
Office expenses 7,860
Depreciation of plant and machinery 7,450
Rent and rates are to be apportioned 75 per cent to manufacturing and 25 per cent to
administration.
you are to prepare the year end:
• manufacturing account
• statement of profit or loss
Note: a layout for a manufacturing account and statement of profit or loss is given in the Appendix.
20. 7.11 The following figures relate to the accounts of Ryedale Limited, a manufacturing business, for the
year ended 31 October 20-4:
£
Inventory of direct materials at 1 November 20-3 41,210
Inventory of direct materials at 31 October 20-4 46,380
Inventory of work-in-progress at 1 November 20-3 7,200
Inventory of work-in-progress at 31 October 20-4 8,450
Inventory of finished goods at 1 November 20-3 29,470
Inventory of finished goods at 31 October 20-4 38,290
Purchases of direct materials 311,050
Revenue for the year 874,360
Rent and rates 35,640
Factory wages – direct 180,860
Factory wages – indirect 45,170
Factory power 12,040
Factory heat and light 5,030
Factory sundry expenses and maintenance 10,390
Administration salaries 154,610
Advertising 30,780
Office expenses 10,390
Depreciation of factory plant and machinery 12,500
Depreciation of office equipment 2,500
Additional information:
• factory power is to be treated as a production overhead
• rent and rates are to be allocated 75% to manufacturing and 25% to administration
you are to prepare the year end:
• manufacturing account
• statement of profit or loss
Note: a layout for a manufacturing account and statement of profit or loss is given in the Appendix.
marginal and absorption costing 219