HOW TO ANALYSE ACCOUTS AND COST RECORDS ? by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE / CSE PARTICIPANTS [email_address] mobile : 91+9414430763
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Put these in proper order (more permanent first more liquid last) plant and machinery,furniture and fittings,vehicles,livestock, leaseholds, railway sidings,development of property, patents, trade marks and designs,
Answer (d) leaseholds, (e) railway sidings, (f) plant and machinery, (g) furniture and fittings, (h) development of property, (i) patents, trade marks and designs, (j) livestock, (i) vehicles,
In what order should these be shown in balance sheet ? Loans and Advances from Subsidiaries, Debentures, fixed deposits, Loans and Advance from Bank.
Solution ... These are secured loans : (in this order) 1. Debentures 2. Loans and Advance from Bank. 3. Loans and Advances from Subsidiaries. Fixed deposits are shown as a part of unsecured loans
What can be credited to Investor Education and Protection Fund? (a) Unpaid dividend (b) Unpaid application money received by the companies for allotment of securities and due for refund (c) Unpaid Matured Deposits (d) Unpaid Matured Debentures (e) Interest accrued on (a) to (d) above.
What are the contents of P & L appropriation account ? It is not a mandatory account. It should be prepared to differentiate those expenses which are appropriaations of profits. It shows appropriations for dividends, transfer to and from reserves and income and expenditure, if material, relating to previous years.
What should be the order in which we can show different items of current assets like inventory, cash etc. ? 1. Interest accrued on investments. 2. Stores and spare parts. 3. Loose tools. 4. Stock-in-trade. 5. Work-in-progress. 6. sundry debtors 7 cash and bank 8 loans and advances 9. bills 10 Advances recoverable 11. Balance with Customs, Port Trust, etc.
What is a holding company ? It acquires all or a majority (51%) of the equity shares of any other company called subsidiary company in order to have control over the subsidiary company. The acquisition of controlling interest by the holding company does not, in any way, affect the separate legal entity of the subsidiary company.
What is a subsidiary company ? Sec. 4 of companies act : where holding company controls the composition of its Board of directors or holding company controls more than 50% of its equity
Should contingent liability in respect of a transaction between holding and subsidiary companies be shown in consolidated balance sheet ? Contingent liabilities relate to the outsiders must be shown by way of a footnote in the consolidated balance sheet. But a contingent liability in respect of a transaction between holding and subsidiary companies will disappear from the foot note.
The holding company and the subsidiary company may have a number of inter-company transactions, how should these be shown in consolidated balance sheet ? These may be eliminated while preparing the consolidated balance sheet.
How to calculate fair value of shares? Fair Value of share = average of ( Value by net asset method + Value by yield method)
What are the methods for valuing shares on net asset value method ? break-up value method, appraised value method , book-value method.
What are the methods for valuation of shares using Yield method ? rate of dividend rate of earning.
Use rate of dividend method to value share. Dividend rate 40%, normal rate of dividend 20%? Formula : dividend rate / normal rate * 100 =40/20 * 100 = 200 answer
Use rate of earning method to value share. Earning rate 58%, normal rate of earning= 29%? Formula : rate of earning / normal rate * 100 =58/29 * 100 = 200 answer
From which date should we take the expenditure on intangible assets in valuation of intangible assets ? from the time when the intangible asset first meets the recognition criteria.
What are the 3 criteria that an intangible asset must have for valuation purpose? identifiability, control over a resource, expectation of future economic benefits flowing to the enterprise.
What are committed costs ? These costs are incurred to maintain certain facilities and cannot be quickly eliminated. There is little or no discretion in these cost, e.g., rent, insurance etc.
What are policy costs ? These are incurred for implementing particular management policy such as executive development, housing, etc
What are Managed costs ? These are incurred to ensure the operating existence of the company e.g., staff services.
What are step costs ? These costs are constant for a given level of output and then increase by a fixed amount at a higher level of output.
What is Opportunity cost ? It is the cost of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the amount that can be received if the asset is utilised in its next best alternative.
What is Sunk cost ? The cost which has already been incurred and cannot be avoided by decisions taken in the future
What is differential cost ? the difference in total cost between alternatives
What are Joint costs? The processing of a single raw material results in two or more different products simultaneously.
Give examples of imputed costs ? These are not incurred and but are still useful while taking decision examples : salary of partner (not paid) interest on internally generated funds etc.
What are the different methods of costing ? job costing (for each job) , contract costing (for contracts) , batch costing (for each batch), terminal costing, operation costing, process costing, unit costing, operating costing, multiple or composite costing, uniform costing, standard costing, marginal costing, departmental costing
What are the tools of management accounting ? financial planning, financial statement analysis, marginal costing, differential costing, capital budgeting, cash flow analysis, standard costing and budgetary control, techniques of linear programming, statistical quality control, investment chart, sales and earning chart
What are essential components of Perpetual inventory system ? 1. Bin Card (quantitative record of receipts, issues and closing balances for each item in store) 2. Stores Ledger (stock ledger of stores maintained by accounts department giving details of value of each item) 3. Continuous Stock-taking (regularly but randomly there is physical stock taking)s.
Who prepares bill of material ? It is prepared by the production planning department or engineering department. It is a method of documenting materials required for execution of the specified job or work.It is an authorisation to the stores department to procure the materials and then all materials listed on the bill are sent to the production department.
Who prepares material requisition note ? A material requisition note is a formal written demand or request usually from the production department to the stores for the supply of specified materials, stores etc. It authorises the stores keeper to issue the requisitioned materials. It is made in 3 copies. One copy is sent to the stores, one copy to the costing department and the third copy is retained by the department making the requisition
When is Inflated price used for raw material? It is used when there is lot of extra cost other than raw material cost. It includes carrying costs, losses due to evaporation etc. It aims to recover full costs of materials purchased.
What is difference between spoilage, scrap and waste ? Spoilage are those materials or components which are so damaged in the manufacturing process that they cannot be repaired or reconditioned. Some spoilage may be sold as seconds. Scrap is a residue which is measurable and has a minor value. It may arise due to production process. Example : cuts in garment industry Wastes are unsaleable portion of the collected loss like dust, smoke etc. They have no value. Their disposal will further require cost. .
How are defectives different from wastes ? Defectives are that portion of the process loss which can be converted into a finished product by incurring more material and labour expenses. But wastes have no value
Where can we control losses related to material ? Occurrence (use proper product, proper quality control, proper method of production, give proper training to worker etc.) Recovery, handling and storage (inventory should be handled and stored properly) Disposal (properly dispose, identify the best buyer, have proper loss controls)
What is Idle time ? It is the time lost by workers who are paid on time basis.
What are incentives and how are they different from time / piece rate plans ? Under time rate system of wage payment workers are paid according to time for which they work. Under piece rate system wages are paid according to quantity of work done. Incentive wage plans is a compromise between time rate and piece rate systems and incentives are provided to workers to work hard. The employer as well as the workers share the benefit of time saved and both labour and overhead costs are reduced.
Give examples of abnormal idle time loss in a machine ? scarcity, non-availability of raw materials, negligence of supervision, strikes or lockouts
Give examples of normal idle time loss in a machine ? time interval between one job and another, rest pauses, tea break, tool setting time, time taken to adjust machines etc.
What are the causes of overtime ? seasonal rush time lost due to unavoidable reasons for completing a job or order within a specified period as requested by the customer
How can we record earned leave / leave granted to worker with pay? They can be treated as overheads and charged to the output for the year. The direct labour cost can be inflated to cover this cost.
How can we record fringe benefit in costing ? Recover it as direct charge by using inflated or supplementary labour cost rate. If it can be identified with departments, treat it as departmental overhead. If identification is not possible, treat it as general overhead.
How can we record training cost in costing ? The total cost of the training section can be apportioned to various production departments on the basis of number of trainees from each department.
Solve it Item X is available in the market at Rs. 5.75 each, with all assurance of continued supply. We are making at the following costs : Materials Rs. 2.75 each Labour Rs. 1.75 each Variable overheads Rs. 0.50 each Depreciation and other fixed cost Rs. 1.25 each total=Rs. 6.25 each Should we make or buy the item X?
Answer We should only consider marginal cost. Marginal cost here is Rs. 5 but cost in market is Rs. 5.5 so we should make it
Solve it ... A company is producing 1,60,000 units (80% of capacity) & selling @ 10 per unit and making a profit of Rs. 80,000. its fixed cost is Rs. 4,80,000 Suppose the Rajasthan Government has given a tender notice for 10,000 units. It is expected that the units taken by the Government will not affect the existing sale and the company also wishes to submit the lowest possible quotation. What can it quote ?
Answer Profit per unit = .5 fixed cost per unit = 3 marginal cost = 10 - .5 -3 =6.5 the minimum quotation will be 65000 for 10000 units
Profitability based on key factor (limiting factor) Product X Product Y Selling price Rs. 42 Rs. 33 Direct material Rs. 15 Rs. 15 Labour hours (50 paise per hour) 18 hours 9 hours labour hours are key factor. Which product is better?
Solution Find profitability in terms of key factor formula = contribution / key factor contribution for X= 42-24 = 18 and for Y =33-19.5 = 13.5 profitability as per key factor : X =18/18 = 1, Y = 13.5 /9 =1.5 product Y is better. Answer
How can we improve margin of safety ? MS (margin of safety ) = sales – BEP sales it can be improved by : Lowering fixed costs. Lowering variable costs so as to improve marginal contribution. Increasing volume of sales, if there is unused capacity. Increasing the selling price, if market conditions permit, and Changing the product mix as to improve contribution.
Sales are Rs. 1,50,000, producing a profit of Rs. 4,000 in period I. Sales are Rs.1,90,000, producing a profit of Rs. 12,000 in period II. Determine the BEP. BEP = change in profit / change in sales *100 =8000/40000 * 100 = 20% answer
How can we calculate composite BEP ? We have two approaches : - Constant product mix approach - the ratio in which the products of the various establishments are mixed is constant. Variable product mix approach. - the product of that establishment would be preferred where the contribution ratio is higher
What is a Budget Centre? A budget centre is a section of the organisation of the undertaking defined for the purpose of budget control. Budget centre should be established for cost control and all the budgets should be related to cost centres. Budget centres will disclose the sections of the organisation where planned performance is not achieved.
What is a A budget manual? It is a document which sets outstanding instructions governing the responsibilities of persons and the procedures, forms and records relating to the preparation and use of budgets and it is a booklet containing standing instructions regarding the procedures to be followed and the time schedules to be observed.
What is a budget key factor / limiting factor ? It is a factor which will limit the activities of an undertaking and which is taken into account in preparing budgets
What is a budget report ? It shows the comparison between the actual and budgeted expenditure and it is presented periodically to top management to enable them to undertake budgetary controls
What is flexible budget and how is it different from fixed budget ? A flexible budget is a budget which changes as per the level of activity actually attained. It is adjusted to the level of activity attained at the time of comparison between the budgeted and actual costs But a fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained. A fixed budget is one which is designed for a specific planned output level and is not adjusted to the level of activity attained at the time of comparison between the budgeted and actual costs
What is zero base budgeting ? It is also called “De nova budgeting”. It is budgeting from the beginning without any reference to any base-past budgets and actual happening. It is a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch
What is performance budgeting ? It is the process of analysing identifying, simplifying and crystallising specific performance objectives of a job to be achieved over a period in the frame work of the organisational objectives, the purpose and objectives of the job.
What is Marginal costing ? It is a costing method in which only variable costs are accumulated and cost per unit is ascertained only on the basis of variable costs. Prime costs and variable factory overheads are used to value inventories.
What is activity based costing ? It is a method of assigning the organization's resource costs through activities to the products and services provided to its customers. It is a technique of cost attribution to cost units on the basis of benefits received from indirect activities, e.g. ordering, setting up, assuring quality. It involves identification of costs with each cost driving activity and making it as the basis of apportionment of costs over different products or jobs on the basis of the number of activities required for their completion. It is a method of apportionment of overheads.
What is the difference between financial accounting and cost accounting ? Financial accounting reveals profits and losses of the business as a whole during a particular period, while cost accounting shows, by analysis and localisation, the unit costs and profits and losses of different product lines.
What is the difference between cost accounting and management accounting ? Cost accounting is concerned more with the ascertainment, allocation, distribution and accounting aspects of costs. Management accounting is concerned more with decision making, analysis, study of impact and effect aspect of costs.
What is Cost centre? It means, a production or service location, function, activity or item of equipment whose costs may be attributed to cost units.
What are the techniques of inventory management ? Min-max plan The two-bin system Order cycling system The ABC analysis Fixation of various levels Use of perpetual inventory system and continuous verifications Use of control ratios FSN analysis ( Review of slow and non-moving items.
What is the formula for calculation of safety stock ? Safety stock level = Ordering level - (Average rate of consumption x Re-order period) OR (Maximum rate of consumption - Average rate of consumption) x Lead time
What is the formula for calculating ordering level ? Minimum level + Consumption during time lag period OR Maximum consumption x Maximum re-order period.
Maximum usage of raw material is 150 kg per day. Maximum delivery period is 6 days, what is ordering level ? Ordering level = Maximum usage x Maximum delivery period = 150 x 6 = 900 kg
In the previous question, the Normal usage & Normal delivery period are 100 kg & 5 respectively. Find minimum level ? Minimum level = Ordering level - (Normal usage x Normal delivery period) = 900 - (100 x 5) = 400 kg
In the previous question, what is the maximum level, if Minimum usage & Minimum delivery period are 50 & 4 respectively and ordering quantity is 600 kg? Maximum level = (Ordering level + Ordering quantity) - (Minimum usage x Minimum delivery period) = 900 + 600 - (50 x 4) = 1,500 - 200 = 1,300 kg
Our company uses 75 kg per week and maximum time for delivery of material is 6 weeks. What is re-order level ? Re-order level = Maximum Re-order period or Maximum delivery period x Maximum usage = 6 weeks x 75 = 450 kg
Calculate minimum level in the previous question if Normal usage & Average delivery period are 50 kg & 5 weeks respectively? Minimum level = Re-order level – (Normal usage x Average delivery period or Normal re-order period) = 450 units – (50 x 5 weeks) = 200
In the previous question, what is maximum level of stock if reorder quantity is 186 Minimum usage & Minimum delivery period are 25 kg & 4 weeks respectively ? Maximum level = (Re-order level + Re-order quantity) - (Minimum usage x Minimum delivery period or Minimum re-order period) = (450 units + 186 ) – (25 x 4 weeks) = 536
What is average stock level if Minimum level of stock & Reorder quantity are 200 kg & 186 kg respectively Average stock level = Minimum level + 1/2 Reorder quantity = 200 + 1/2 x 186 = 293
A company is already paying 11% of its net profit to its directors as managerial remuneration. Can it still pay fees for attending meeting ? Yes The above ceiling of 11% of the net profits does not include any fees payable to directors for attending the meetings of the Board or Committee of the Board [Section 198(2)]
What are the types of financial analysis ? Internal (by insiders) or external (by outsiders) horizontal (over a period) or vertical (on same day) long term v/s short term time framework
What are the tools of financial analysis ? Comparative Statements Common Size Statements Trend Ratios Ratio Analysis Cash Flow Statements.
In a common size income statement which figure is assumed to be equal to 100 and all other figures of costs or expenses are expressed as percentages of that? Sales
What is difference between primary and secondary ratio ? the ratio of profit to capital employed is termed as ‘Primary Ratio’. It is also known as “Return on Investment”. Secondary Ratios are ratios which help to analyse the factors affecting “Primary Ratio”. They are of two types : 1. explanatory ratio 2. supporting ratios
How is capital employed calculated ? Share Capital + Reserve and Surplus + Long-term Loans – Non-Operating Assets - Fictitious Assets if we are studying it from shareholders' perspective, then capital employed should be after deducting the long-term loans or use this formula : Share Capital + Reserve and Surplus – Non-Operating Assets - Fictitious Assets
What is the difference between current liabilities and liquid liabilities ? Liquid liabilities mean those liabilities which are payable with a short period. Bank overdraft and cash credit facilities, if they become a permanent mode of financing are to be excluded from current liabilities to arrive at liquid liabilities.
What is the difference between current assets and liquid assets ? Liquid assets means those assets which are immediately converted into cash without much loss. All current assets except inventories and prepaid expenses are categorised as liquid assets.
A worker is paid Rs. 400 per day. Standard output is 100 units a day. He produces 101 units. What will he get as per Taylor plan? What will be the difference, if he produces 99 units? As per Taylor plan : incentive schem : 125%+50% 500+200 = 700 if he produces 99units : 83% of 400 = 332 there is a difference of 388 for just 2 units.
A worker is paid Rs.4 per unit. Standard output is 100 units a day. He produces 101 units. What will he get as per Taylor plan? What will be the difference, if he produces 99 units? Incentive plan =125%+50% of base rate =5*101 + 2*101 = 707 if he produces 99 units : 83% of 4 3.32*99 = 329 difference is 378
A worker is paid Rs.4 per unit. Standard output is 100 units a day. He produces 101 units. What will he get as per Merrick plan? What will be the difference, if he produces 99 units or 80 units? On achieving target : 120% of 4 = 4.8 per unit = 484.8 on 99 units : 110% of 4 = 4.4 = 440 on 80 units : 4*80 = 320
A worker is paid Rs. 400 per day. Standard output is 100 units a day. He produces 101 units. What will he get as per Gantt plan? What will be the difference, if he produces 99 units? In Gantt plan day payment is guaranteed. Incentive of 20% is given for achieving target = 400 + 80 = 480 (worker may be given higher piece rate payments also) if production is 99 units : only 400 (no bonus)
A worker is paid Rs.4 per unit. Standard output is 100 units a day. He produces 101 units. What will he get as per Emerson plan (Empiric)? What will be the difference, if he produces 99 units or 80 or 140 units? For 101 units : 20% bonus + 1% (as it is 1% above standard) =404+80.8+4 = 488.8 if 99 units produced : 10% bonus =396 + 39.6 =435.6 if 80 units produced : 4 * 80 = 320 (only guaranteed rate payment)
contd.... If 140 units are produced : 20% bonus + 40% additional bonus =4*140 = 560 + 112+ 224 =896 answer
A worker is paid Rs. 400 per day. Standard output is 20 units per day (8hours) . He produces 20 units in 6 hours . Use Emerson incentive plan to find his payment Efficiency = 8/6 * 100 =133.33% he will get : 20% + 33.33% bonus = 400 + 80 + 133 =613.33 answer
A worker is paid Rs. 40 per hour. Standard output is 20 units per day (8hours) . He produces 20 units in 6 hours . Use Emerson incentive plan to find his payment Total wages = Time taken x Hourly rate + 1/2 (Time saved) x Hourly rate. =6*40 + ½ (2*40) = 240 + 40 = 280 answer
A worker is paid Rs. 40 per hour. Standard output is 20 units per day (8hours) . He produces 20 units in 6 hours . Use Rowan incentive plan to find his payment Formula = time rate (wage rate) * time taken + (time saved / standard time ) * time taken * hourly rate =40*6 + (2/8) 6 *40 =240+60 =300 answer
A worker is paid Rs. 40 per hour. Standard output is 20 units per day (8hours) . He produces 20 units in 6 hours . Use Barth incentive plan to find his payment Formula = hourly rate * sqrt ( standard time * actual time) =40 * sqrt(8 * 6) = 40*6.93 277.2 answer
When should we use differential cost to identify the differences of cost? producing and distributing a few more or few less of products; A change in the method of production/distribution; An addition or deletion of a product or a territory; and The selection of an additional sales channel.
What is replacement cost ? This is the cost of replacing an asset at current market values
What is uniform costing ? It is to common costing principles and procedures adopted by a number of firms. They are useful in inter-firm comparison.
total profit on a contract for Rs. 3,00,000, which is 60% complete and has been certified accordingly, amount of Rs. 60,000 and if the retention money is 20% of the certified value, the amount of profit that can be prudently credited is ?
How should profit from incomplete contracts be recorded ? Profit should be considered in respect of work certified only, work uncertified should always be valued at cost. No profit should be taken into consideration if the amount of work certified is less than 1/4th of the contract price because in such a case it is not possible to foresee the future clearly.
When is unit costing system appropriate ? Unit costing refers to the costing procedure, which is ideally used in case of concerns producing a single article on large scale by continuous manufacture. The cost units are identical with identical costs. The cost incurred during a period is divided by the total output for ascertaining the cost per unit.
What is overhead ? Overhead is the expenditure on labour, materials or services which can not be economically identified with a specific saleable cost unit.
What are the methods to prepare flexible budgets ? Range of activity method of setting flexible budget. Fixed plus variable rate method of setting flexible budget.
What is re-distribution (re-apportionment) of overheads ? At first expenses of all departments are compiled without making a distinction between production and service departments but, then, the expenses of the service departments are apportioned among the production departments on a suitable basis. It is also possible that expenses of one service department may also be apportioned in part to another service department to arrive at the total expenses incurred on the latter department, which will then be distributed among production department.
What is step method of re-apportionment of overheads ? : In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. The next service department is taken up and its cost is apportioned and this process is going on till the cost of last service department is apportioned. The cost of last service department is apportioned among production departments only.
What are the methods available for dealing with inter service department transfer of overheads ? Simultaneous equation method Trial and error method sRepeated distribution method
What is Repeated distribution method? According to this method service department costs are apportioned over other departments, production as well as service according to the agreed percentages and this process is repeated until the total costs of the service departments are exhausted or the figures become to small to be considered for further apportionment.
What is Simultaneous equation method of overhead apportionment ? Under this method, the true cost of service departments are ascertained first with the help of simultaneous equations. These are then distributed among the production departments on the basis of given percentages.
What is Trial and error method of overhead apportionment ? In this method the cost of one service department is apportioned to another service department. The cost of another service department plus the share received from the first service department is again apportioned to first service department and this process is continued until the balancing figure becomes nil
Why do we need to do apportionment ? Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department.
Use least square method to find fixed and variable cost ? Year production cost 2001 10 15 2002 20 20 2003 30 25 2004 40 30 average: 25 22.5
Solution ... We can know the variable cost by the following formula : covariance / variance of x = 500/250 = 2 average cost = fixed cost + (variable cost)*number of units produced 22.5=FC + (2)*25 FC = - 27.5
Give examples of direct cost ? Royalties if it is charged as a rate per unit. Hire charges of plant if used for a specific job. Sub-contract or outside work, if jobs are sent out for special processing. Salesman’s commission if it is based on the value of units sold. Frieght, if the goods are handled by an outside carrier whose charges can be related to individual units. Travelling, hotel and other incidental expenses incurred on a particular contract. Cost of making a design, pattern for a specific job.
How can we classify overheads ? Functions-wise classification Behaviour-wise classification Element-wise classification.
What is the system of standing orders used for classifying indirect cost ? It is a system under which a number is allotted to each item of expense for the purposes of identification, and the same is continued from year to year. Whenever the actual expenses are incurred, they are appropriately classified into one of these standing order numbers. Periodical summaries giving totals of each standing order are prepared for comparison with budgets as well as apportioning them among the various departments.
What do you understand from absorption of overheads? Absorption of overheads refers to allotment of overheads to cost units.
What do you understand from Apportionment of overheads? Apportionment of overheads refers to the allotment of proportions of items of cost to cost centers or cost units.
What are the different types of apportionments of overheads ? Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. This is also known as departmentalization of overheads. Secondary distribution of overheads is the process of apportionment of service department overheads among the production departments.
PV Ratio of a business is 30 per cent. BER is 40 per cent of the capacity. Capital turnover is 2.5 and profit is 15 per cent on capital employed. At what level (per cent of the capacity) the business is operating ? ( Turnover = sales / C.E) Let us suppose capital employed = 100 sales = 250, profit = 15, P.V. Ratio is 30% so 30% of 250 = 75 fixed cost = contribution – profit = 75-15 = 60 BEP = fixed cost / pv ratio= 60/30% = 200 this is 40% of capacity, so capaticy = 200/40% = 500 our sales now is 250, so capacity is 50% We are operating at 50% capacity. Answer
If M.S. Ratio is changed from 30 per cent to 60 per cent how will the profitability be affected taking 20 per cent PV Ratio? Suppose sales = 100 margin of safety sales (above BEP level) = 30, so profit is 20% of 30 = 6 new margin of safety sales = 60, so profit on 60 = 12. profit has increased from 6 to 12. answer
Find cost Break even points between each pair of plants whose cost functions are :a Plant A: Rs. 600,000 + Rs. 12 X; Plant; B: Rs. 900,000 + Rs. 10 x; Plant C: Rs. 1500,000 + Rs. 8 x; (Where X is the number of units sold)? Which plant should be purchased? Compare A and B Rs. 600,000 + Rs. 12 X = Rs. 900,000 + Rs. 10 x 2x=30000 or x= 1.5 lakhs compare A & C Rs. 600,000 + Rs. 12 X=Rs. 1500,000 + Rs. 8 x 4X = 900000 OR X = 2,25000 thus upto 1.5 lakhs, A is better, from 1.5 to 2.25 lakh, B is better above 2.25, C is better. Answer
Products A B Units 36,000 12,000 Selling Price Rs. 5 10 Variable cost Rs. 4 3 Fixed Costs Rs. 30,000 You are required to calculate the break-even point in units. Find the shift in the break-even point in units, if the company discontinues product A and substitutes products C in its place. The quantity of products C is 6000 units and its selling price and variable costs respectively are Rs. 12.00 and 6.00.
Solution We are getting contribution of (5-4) = 1 per unit from A and (10-3) = 7 per unit from B. The ratio of production of A and B is 3:1 taking total contribution : (3 + 7) = 10 total BEP units = 30000/10 = 3000 A = 3000*3 = 9000 units for B : 3000*1 = 3000 units.
Solution - contd.... New ratio : C : B = 1:2 6 from C and 7 from B total = 20 30000/20 = 1500 C = 1500 units, B = 3000 units. Total contribution at BEP : C = 9000 B = 21000 answer
Calculate BEP S. P. Rs. 245 per unit Production cost per unit Material 70 Labour (10 Hrs @ Rs. 8) 80 Variable production overhead 50 Fixed Production overhead 10 total Rs. 210 Installed capacity 20,000 units. Normal capacity 10,000 units. Selling overhead (fixed) Rs. 1,00,000. Under an agreement with union. Labour has to be paid for minimum 1,00,000 hours. For labour hours in excess of 1,50,000 hours, labour has to be paid at the rate of Rs. 12 per hour
Solution ... Here initially labour cost is a fixed cost, but later it will become variable cost (after 10000units of production) Fixed cost (initial) = 10,00,000 (total of fixed production overhead 100000, labour cost 800000, selling overhead 100000) 100000/ (245 – 120 ) = 8000 units
contd... If we produce more than 10000 but less than 15000, our fixed cost =5000*10 = 50000 contribution = 245 – (120+80) = 45 per unit 50000/45 =1111 units for production from 15000 to 20000 fixed cost = 50000 contribution 245- (120+ labour cost120) = 5 per unit. Bep = 50000/5 = 10000 (which is beyond the installed capacity)
A company has an opening stock of 600 units of output. The production planned for the current period is 2400 units and expected sales for the current period amount to 2800 units. The selling price per unit of output is Rs.10. Variable cost per unit is expected to be Rs. 6 per unit while it was only Rs. 5 per unit during the previous period. What is the Break Even volume for the current period if the total fixed costs for the current period is Rs. 8000?
Solution If there is no information about opening stock : BEP = fixed cost / (selling price – variable cost) = (8000) / (10-6) = 2000 units. But here we have opening stock if we use FIFO 600 * 5 = 3000 (contribution from first 600 units) remaining fixed cost =(8000-3000)= 5000 BEP = 5000/(10-6) = 1250 ANS.
Selling price per unit Rs. 16 Direct material cost per unit Rs. 8 Direct labour cost per unit Rs. 2 Variable overhead per unit Rs. 2 Fixed overhead (Total) Rs. 20,000 BEP = FIXED COST / (Sale price – variable cost) =20000 / (16-12) =5000 Margin of safety at sale of 9000 units = 9000 – 5000 = 4000 units PV RATIO = contribution / sales price * 100 = 4/16 * 100 = 25%
In the previous question, what should be the sales to earn profit of Rs. 4000? Formula of target sales in unit = (fixed cost + target profit) / (selling price – variable cost ) =(20000+4000) / (16-12) =6000 units answer or : (fixed cost + target profit) / pv ratio =24000/25% = 96000 rupees.
SOLVE IT First yeat Second year Sales (Rs.) 80,000 90,000 Profit (Rs.) 10,000 14,000 Calculate : (a) P/V ratio, (b) Break-even point . (c) Profit or loss at Sales of Rs 40000. (d) Sales required to earn a profit of Rs. 1000
SOLUTION ... PV RATIO = change in profit / change in sales * 100 = 4000/10000 * 100 = 40% in order to calculate BEP, first calculate fixed cost. 40% of 80000 = 32000 (contribution) fixed cost = contribution – profit = 32000 – 10000 = 22000
In the previous question, what will be the profit at sale of Rs. 40000? 40000 * 40% = 16000 but fixed cost is 22000 so there is loss of 6000 answer
What is the sales required to earn a profit of Rs. 1000 Formula (in units): (fixed cost + target profit) / (selling price – variable cost ) or (in amount) : (fixed cost + target profit) / pv ratio = (22000+1000)/(40%) =23000 * 2.5 = 57500 rupees
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What is a cash flow statement ? It is possible that the business may earn profit, yet threre is no cash. Cash flow statement shows the flow of cash in the organisation – how much cash has come in and how much has gone out.
Why do we need cash flow statement ? Business depends on liquidity. If there is no liquidity, there is no growth in business. We have to understand cash flow statements in order to grow our business
What are the methods to prepare cash flow statement ? There are 2 mthods : 1 direct 2. indirect method
What is direct method ? List down all the cash transactions - find out what is the net impact – whether cash has increased or decreased
What is indirect method ? We pick up profit and loss account to pick up net profit. Now we adjust net profit by removing non-cash items. For example, we add back depreciation (as there is no cash outflow in depreciation) and we subtract non-cash income
What are the types of cash flows ? There are 3 types of cash flows : 1. operating cash flow = for day to day business transactions 2. financing cash flow = non-operating cash flow = capital / long term funds transfers / loans / money borrowed etc 3. investment cash flows = purchase of assets / long term resources for company / sale of assets
What type of cash flows are these ? 1. sale of old machinary 2. purchase of raw material 3. cash sales 4. issue of preference share 5. redemption of debenture 6. investment in 10 year govt bond ans : operating = 2,3, finance = 4,5 investment= 1,6
What is impact of change in foreign currency on cash flow ? For fixed assets = no change if you have a building in the USA, there is no cash flow due to change in foreign currency. But the effect of exchange rate changes on cash and cash equivalents held or due in foreign currency is reported in the cash flow statement suppose you have $2000 in a bank in the USA, its value in Rs. Will change due to forex changes, so this must be reported
What is cash received from interest / dividend received from investments ? Cash flow from investment activities but, In the case of financial enterprises , cash flows arising from interest paid and interest and dividends received, should be classified as cash flows from operating activities.
Where should we show cash flow due to interest paid / dividend paid to investors ? cash flows arising from interest paid should be classified as cash flows from financing activities ; dividends paid should be classified as cash flows from financing activities. Exceptions = mutual funds etc = as it is operating activity for them
What are tax flows? Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities
What are takeovers / acquisitions ? cash flows arising from acquisitions and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities .
Give examples of non-cash transactions ? the acquisition of assets by assuming directly related liabilities example : took over an ailing hospital by taking over all its liability the acquisition of an enterprise by means of issue of shares. conversion of debt into equity acquisition of assets in exchange of assets
What will you add / subtract from net profit in indirect method ? (+) Depreciation on assets, ( + )interest paid (shown in financing activities ) (+) loss on sale of fixed assets ( - ) profit on sale of fixed assets ( - ) dividends / interest received ( - ) Increases in current assets (+) Decreases in current assets (+) Increases in current liabilities ( - ) Decreases in current liabilities ( - ) Income-tax paid
Example – prepare a cash flow statement Balance sheet : 2008-9 : assets : building 2000, furniture : 2400, debtors 3000 stock 4000, cash 2000, BR 2000 acrued income 600 total 14000 liabilities : capital 2000, loan 8000, bank od 3000, creditors 1000 total : 14000 Balance sheet : 2008-9 : assets : building 5000, furniture : 4000, debtors 6000 stock 6000, cash 3000, BR 1000 total 25000 liabilities : capital 2000, profit 10000 loan 6000, bank od 2000, creditors 4000 outstand. Exp 1000 total : 25000 sale = 1 lakh, expenses 40000, purchase 40000 (including depreciation 1000, interest 1000) income tax paid 10000
Direct method Adjust sales to know about cash sales total sale 1 lakh less closingbalance of debtors, BR, (7000) add opening balance of debtors & BR(3000+2000) = (5000) net cash sales = 98000 contd.....
contd... Adjust purchases to know about cash purchases : 40000 less closing creditors - 4000 add opening creditor 1000 add closing stock 6000 less opening stock -4000 cash purchase = - 39000
contd... Adjust expenses to know about cash operating expenses expenses Expenses 40000 less depreciation- 1000 less interest- 1000 (it will go in financing) less closing out. Exp- 1000 net cash exp : 37000
Net cash flow from operations Cash from sales = 98000 cash purchase - 39000 expenses - 37000 income tax - 10000 add acrued income of last year+ 600 net cash inflow = 12600
Cash flow from financing Capital = no change loan = - 2000 interest = -1000 net cash outflow = - 3000
Cash flow from investing Building = - 4000 (opening blanace 2000 less depreciation - 1000 closing balance -5000) furniture = - 1600 total cash flow = - 5600
Cash flow Opening balance (cash + bank od) -1000 +add cash flow from operating 12600 - less cash flow in financing -5600 - less cash flow in investing -3000 net closing balance 1000 (it should be 3000) try to find out the reason for this difference
Indirect method Net profit 10000 adjust for depreciation + 1000 difference in stock - 2000 difference in debtors - 2000 difference in creditors 3000 difference in outstanding exp. 1600 net cash profit = 11600
Indirect method inveting Building = - 4000 (opening blanace 2000 less depreciation - 1000 closing balance -5000) furniture = - 1600 total cash flow = - 5600
Indirect method – financing Capital = no change loan = - 2000 interest = -1000 net cash outflow = - 3000
Net cash flow Opening balance (cash + bank od) -1000 +add cash flow from operating 11600 - less cash flow in financing -5600 - less cash flow in investing -3000 net closing balance 1000 (it should be 2000) try to find out the reason for this difference
Prepare cash flow statement from the following : Balance sheet : 2008-9 : assets : building100 , furniture : 100, debtors 100 stock 100, cash 100, BR 100 total 600 liabilities : capital 200, loan 200, creditors 200 total : 600 Balance sheet : 2008-9 : assets : building 500, furniture : 400, debtors 600 stock 50, cash 50, BR 200 total 1800 liabilities : capital 300, profit 1000 loan 100, creditors 400 total : 1800 sale = 10000, expenses 4000, purchase 5000 No depreciation, no interest payments
Cash from operations - indirect method Net profit 1000 adjust for depreciation nil difference in stock + 50 difference in debtors -500 difference in BR -100 difference in creditors +200 net cash profit = 650
Cash from financing .... Capital =+100 loan = -100 interest = nil net cash flow = zero
Cash from investing Building = - 400 furniture = - 300 total cash flow = - 700
Cash flow statement Opening cash 100 add : cash from operations = 650 less cash from investing = -700 cash from financing = nil closing balance = 50
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