Management
Accounting
SCDL
By
Prof. AUGUSTIN AMALADAS
M.COM., AICWA.,PGDFM.,B.Ed.
1
6.sales
3.General administration 4.Sales and distribution
5.profit
Cost of sales
Total cost
+
Factory cost/
works +
cost
=
+
1.canteen
2
1.Factory administration +
Facility
department
Stores ledger
1.Production
Prime Cost
1.Godown
Bin card
Danger
Cost calculations/operating activity
2
information
information
FLOW OF CASH/SHORT TERM
AND LONG TERM
Work in progress
Information
Debtors
information
Accounts receivable
Labour
Overheads
Accounts payable
Bad debts
RAW mATERIAL
CASH
Equity
shares
Preference
Shares
Long term loans
ADR
GDR
3
FLOW OF CASH - LONG
TERM
Know how
Patent rights
goodwill
Copy right
building
investments
land
furniture
CASH
Short term
Equity
shares
Preference
Shares
Long term loans
ADR
GDR
4
information
information
FLOW OF CASH-SHORT
TERM
Work in progress
Information
Debtors
information
Accounts receivable
Labour
Bad debts
Overheads
Accounts payable
Bad debts
RAW mATERIAL
Bad debts
Sale of fixed assets
Bank overdraft
Bank overdraft
Cash credit
cash
cash
Issue of long term funds
creditors
Discounting bills Sale of investments
5
INFORMATION
INFORMATION
marketing
technical
INFORMATION
MANAGEMENT ACCOUNTS
INFORMATION
Costing
INFORMATION
6
Techniques in management
accounting
Ratios
Variance analysis
statistics
Cost accounting
operation research
Financial accounts
Management Accounting
Mathematics
Budgetary control
Marginal costing
Cash flow statement
FFS
Trend percentages
Common size statements
Comparitive statement
7
Structure of the
syllubusChapter-1
Financial accounting
2. Basic
Accounting
Final accounts
3. Process of
accounting
5. Rectification of
Errors
1. Introduction
8
Cost Accounting
14. UNIFORM COSTING
13.STANDARD COSTING
TECHNIQUES
CONTROL
6. CONCEPTS
12. BUDGETARY
CONTROL
7. ELEMENTS OF COST
11. MARGINAL COSTING
techniques
8. MATERIAL
10. OVER HEADS
9. LABOUR
9
Costs

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
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Anything incurred during the production of the
goods or service to get the output into the hands
of the customer
The customer could be the public (the final
consumer) or another business
Controlling costs is essential to business
success
Not always easy to pin down
where costs are arising!
10
11
Differences between cost accounting/Management
Accounting/financial accounting
Financial Accounts
Cost Accounts
Management Accounts
1.Recording
2.Outsiders
3.Past
4.Statutory
5.Preparation of
profit/loss A/c
And balance sheet
6.Audit& reporting
1.Estimation and control
2.Internal
3. Future
4. Not all organisations
5.Costing records
6.Cost audit once in two
years
1.Collection Analysis
and decision making
2.Management
3.Future
4.Non-statutory
5.Using various
techniques
6.Supply the required
information
To correct persons on
time
12
Users of information
liquidity
banks
tax
government
Dividend/value in the share market
Good name
Benefactors
shareholders
Debenture holders
Interest/return of capital
organisation
Less pollution
public
Loan vendor
Interest/return of capital
customers
Preference shareholders
dividend
Good product
creditors
Timely payment
debtors
Timely supply
13
Techniques in management
accounting
Ratios
Variance analysis
statistics
Cost accounting
operation research
Financial accounts
Management Accounting
Mathematics
Budgetary control
Marginal costing
Cash flow statement
FFS
Trend percentages
Common size statements
Comparitive statement
14
See you in the next chapter
BRS
Life
education
God and Poor man
15
Chapter-2: Basics of financial
accounting
1.Concepts
 2.system of accounting
 3.Types of Expenditure
 4.Terms used in financial accounts
 5.Double entry / Single entry
 6. Depreciation methods
 7. Practical consideration relating to
depreciation
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16
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1.concepts& conventions
Meaning: Basic assumptions upon which the basic
process of accounting based.
a] Business entity conceptb] Dual aspect concept
c] Going concern concept
d] Accounting period concept
e] Cost concept
f] Money measurement concept
g] Matching Concept
 Conventions
Coservativism
Materiality
Consistency
17
a] Business entity concept



Business is different from the owner
We pass Journal entry when owner contributes
towards capital.
When amount / goods withdrawn for personal
use we make an entry in the business
When Income tax paid by the owner out of
business money we make an entry In the books
of accounts.

18
b] Dual aspect concept
Every debit has equal amount of credit
 Asset =Liability
 Liability creates asset
 If asset>Liability= profit
 If Liability> Assets= loss

19
c] Going concern concept
Business will go for at least for a
reasonable period.
 Depreciation is provided based on this
assumption.
 If this assumption is not made all Fixed
assets will be valued at realised value like
current assets.

20
d] Accounting period concept

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Fixing time limit for accounts
Profit for the period
It can be one week or two weekor 6
months/one year or 5 years
But to find profit we normally consider 12
months period
Financial year for income tax point of view 1st
April-31st March of the following year
Calendar year –January to December
Divali to Divali
21
e] Cost concept
The cost to the organisation (Actual) is
recorded in the books
 Assets are not recorded according to the
market price every year.
 Depreciation is calculated on cost not
based on market price
 Accounting records may not show the
real worth of the business
 Market price may be disclosed with in
bracket in the balance sheet

22
f] Money measurement concept
Every thing which can be expressed in
terms of Money is recorded in the books
 Beautiful women are working /Handsome
boys working in IBM /Efficient engineers
worth 5000 crores –How do you record?.
 Good working environment?
 Highly motivated employees?

23
g] Matching Concept



Matching Cost with revenue
It is used to estimate correct profits
Accrual/ cash basis of accounting
 Even
cash paid /received if it belongs to accounting
period we consider them as expenditure /income
 Salary outstanding for the last month?
 Income from Investments yet to be received?
 Rent received in advance for next year?
24
Conventions
Customs and traditions that are followed
by the accountants while preparing the
financial statements.
 Why do we respect elders?
 Why do we shake hands?
 Why do Young Indians hate receiving
dowry?

25
Coservativism
To be on the safer side
 Expect future losses as current year loss
 not future income is treated as current
year income.
 Stock is valued cost price / market price
which ever is lower
 Making provision for bad debts is based
on this assumptions.

26
Materiality
Material impact on profitability are
considered
 Insignificant transactions ignored from
recording
 Pen purchased, pencil purchased?
 Wine purchased regularly?

27
Consistency
Accounting policies and proceedures
should be followed consistently
 Method of depreciation should be followed
consistently.
 Stock valuation- cost/market price
whichever is lower is consistently followed
 If not followed it amount to change in the
policy of the company

28
2.system of accounting
(26)
 1.Cash
system:
 unless cash received /paid in
the accounting year can not
be considered as
income/expenses respectively
29
2.Mercantile
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Mercantile/Accrual/due concept:
Even cash received/paid but due for
payment/due for receipt (yet to be
received/payable) if they belong to current
accounting year are considered.
If last year expenditure paid this year?
If you receive/paid in advance ?
30
Mercantile love!!!!???
Last
year I loved her? Next
year I shall love him
depends on type of bike
model!!!!
31
Life Education
 If
I do not get married to him I will
not be happy- Girl said
 If I do not get married to her I will
not be happy- Boy said

If both get married what will happen!!!!
32
3.Types of Expenditure(30)
A)
Capital expenditure
B) Revenue expenditure
C) Deferred Revenue
expenditure
33
A) Capital expenditure(30)
Expenditure incurred which will :
a) Increase Production capacity
b) Increase earning capacity
c) Reduction in the cost of operation.
Example: purchase of fixed assets
Purchase of Machinery
purchase of investment
If such expenditure is not to do with the basic
functions of the business such expenditure is
capital expenditure.
How do you consider if you buy goodwill, copy right
or patent right?

34
Capital expenditure-continue(page-30)
Both tangible and intangible assets included
Intangible assets such as patent right, copy right,
technical know-how, francises, goodwill etc.,
Depreciation is provided on fixed assets which
will appear in the profit and loss account
They appear in the Balance sheet
The life is more than one year
They should not appear in the profit and loss
account
35
Revenue Expenditure(page-30)
Expenditure incurred which will :
a) Not Increase Production capacity
b) Not Increase earning capacity
c) maintain the capacity
No Depreciation is provided on fixed assets which
will appear in the profit and loss account
They appear in the profit and loss account
The life is not more than one year

They should not appear in the balance sheet
36
Deferred revenue
expenditure(page-30)
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Deferred means- postponed
Heavy revenue expenditure
Vodafone incurred 200 crores for advertisement after
merger with Hutch
It can not be written off within a year
It appears in the balance sheet as last item
Every year some portion is written off in the profit and
loss account.
Research and deveopment expenditure, initial
advertisement expenditure, preliminary expenditure are
example
37
Terms(page-27)
Account
Debit
Credit
Journal
Ledger
Narration
casting
Polio
Brought
forward(B/f)
Trail balance
Assets
Liabilities
Capital
Drawings
Debtors
depreciation
Debit note
Credit note
Trade discount
Cash discount
Debentures
Equity shares
Preference
shares
Creditors
Balance sheet
Accounts
receivable
Accounts
payable
38
Terms used in costing(unit 7)
Direct material
Direct labour
Direct expenses
Prime cost
Factory over heads
Indirect material
Indirect labour
Indirect expenses +
Works cost
Office and administration overheads
Indirect material
Indirect labour
Raw material; cost per unit can be
identified, in the individual cost
centre;
Engaged in manufacturing process
Hire charges of machinery-direct
expenses
Factory
Consumable stores, cotton waste ,oil
Wages to storekeeper, foremen,
Factory
works manager’s salary, repairs to
factory building, insurance to
machinery factory lighting
Stationary, salaries to accounts staff,
postage, internet, bank charges,
Administr
audit, administration expenses,
ation 39
depreciation
section
Selling and distribution
Indirect material
Indirect labour
Indirect overheads
Cost of sales+
Profit
Sales
Packing material,
Sales department
samples,salaries to
sales
personnel,commissi
on to sales
manager,
warehouse
charges,advertisem
ent,repairs to
distribution van,
discount to
customers
40
Life education

Lady in a seashore
41
5.Double entry / Single entry
Is Accounting based on business concept
or religious concept?
 Giving first and receiving later.
 Giving cash receiving machinery
 We consider both aspects such as debit
and credit

42
Rules of acccounting
Personal rule/Account-supplier debtors,
owner, banker, outstanding wages
 Real rule/Account- cash, bank, building,
furniture, goodwill, patent rights
 Nominal rule/account: income and
expenditure: salary, rent , insurance,
commission, internet expenses, cell phone
expenses.

43
Personal rule
 Debit
the receiver
 credit the giver




Example: Computer chips purchased on credit
from wipro
Here credit Wipro as Wipro is the giver of
computer.
Sold goods to Meena
Meena is the receiver-debit
44
Excercise
Amount collected from debtors?
 Amount deposited to bank?

45
Real rule

These are the accounts of assets and liabilities

Rule:
debit what comes in
 Credit what goes
out
46
Excercise
Goods supplied for cash
 Cash withdrawn from bank
 Cash withdrawn from bank for personal
use
 Land purchased by giving a cheque
 Building sold on credit

47
Nominal rule

Related to Expenses and income

Rule: Debit
all expenses and
losses

Credit all incomes and
gains
48
Excercise
Rent paid Rs 50,000
 Wages paid Rs.1,00,000
 Wages outstanding-Rs.60,000
 Commission received-25,000
 Discount allowed to customer – Rs.1,000
 Telephone bills paid-Rs.2500
 Shares issued at premium-Rs.2,00,000

49
Suitable questions to pass
journal entry
If cash transaction, person is not important
 Every birth of an account there is a death
of the account
 Ask what comes in?
 Or what goes out?

50
Depreciation Accounting(34)
Reduction in the value of assets
 Use factors, time factor,obsolescence are
the factors
 Statutory requirement
 AS(6)
 Fixed assets are depreciated
 Current assets are not depreciated
 Land and cattle are not depreciated.

51
Depreciation methods
Straight line method
 Written down value method
 Sinking fund method
 Machine Hour rate method
 Unit cost method
 Depletion asset method
 Depreciation Fund method
 Sum of digits method
 Accelerated depreciation method
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52
Impact on books
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Depreciation Expense
Net income
Asset
Equity
Return on assets
Return on Equity
Turnover Ratios
Cash flow
NPV
IRR
Pay back
53
Impact of Tax

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Block asset method
Purchase of Asset
Sale of Asset
Short term/Long-term Capital asset
Asset used less than 180 days during the
previous year
Asset purchased preceding previous year but put
into use less than 180 days during the current
previous year
54
Divisible profit and
depreciation(Page:39-41)
Profit after adequate
depreciation[Sec.205(2)]
 Profit after interest-depreciation of the
current year- Depreciation of the previous
year- loss of the previous year
 Depreciation as per Schedule XIV of the
Companies Act
 Section 350 –calculated on WDV

55
Methods(35)
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1. straight line method:
Cost (- )estimated scrap value
Estimated life in years
2. written down value or diminishing balance method.
cost of the asset=1,00,000; rate of depreciation =10%
#Depreciation for the 1st year=1,00,000*10%=10,000
Value at the end of first year= 1,00,000-10,000= 90,000
##Second year depreciation=90,000*10%=9000
56
Methods(37)

3. production unit method:

Depreciation= (cost-scrap)(units produced during the year)
no of units the machine
can produce during its life
Suppose cost=1,00,000; scrap=5000; total life in
units=10000 units. No. of units produced during the
year=3000
Depreciation=(1,00,000-5000)(3000)/10,000
=Rs 28,500
57
Production hour method
It depends on number of hours produced
instead of units produced
 We calculate production hour rate
 Multiply the no.of hours used during the
year with the rate gives depreciation

58
Joint factor rate method(38)
Both fixed element and variable elements
are considered
 Cost is divided into fixed and variable
 Fixed part is divided based on time
 Variable elements are divided by total
units which gives rate per unit

59
Annuity method
C*r


Depreciation=

n
1- 1/(1+r) - 1
Depreciation is constant
It depends on future cash inflows
It assumes that the capital invested would have
earned interest had been invested otherwise




60
Sinking fund method

Amount available would be equivalent to
the original cost
C*r

Depreciation=
n
(1+r) – 1
Calculation of 26380 is wrong. I should be 16380.
61
Endowment policy method
Insurance policy is taken to replace the
asset.
 The depreciation is equal to the insurance
premium paid

62
Renewal method(39)

When asset is renewed full amount is
written off.
63
Bye-bye to chapter-2
Life education
Chineese tree
64
Chapter-3
Journalising
 Ledger (subsidiary books)
 Posting
 Trial balance
 Trading and profit and loss account
 Balance sheet

65
Final Accounts Adjustments
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Direct expenses
Indirect expenses
Opening stock given in adjustment
Closing stock given in the adjustment
Wages outstanding in trail balance
Income from investment due given in trail balance
Meaning of adjustment
Income tax
Life insurance premium
Goods drawn by the owner
66
Final Accounts Adjustments
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Domestic house hold Expenses
Income tax refund
Income from house property
Accrual basis of Accounting
Un expired insurance
Income received in Advance
Interest on Capital
Provision on Doubtful debts
provision for Discount on debtor
Deffered revenue expenditure
67
Final Accounts Adjustments
Reserve Fund
 Goods Distributed as free sample
 Manager’s Commission
 Goods on sale or approval basis
 Hidden adjustments

68
Terms used in final accounts

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Trading account
Profit and loss account
Profit and loss appropriation account
Balance sheet
Capital
Long term liabilities
Current liabilities
Fixed assets
69
Terms
Investments
 Current assets
 Adjustments
 Closing stock
 Depreciation
 Outstanding expenses
 Prepaid expenses

70
Terms
Accrued income
 Income received In advance
 Bad debts
 Provision for doubtful debts
 Interest on capital
 Drawings
 Deferred revenue expenses

71
Terms
Abnormal expenses
 Goods distributed as free sample
 Goods sent on approval
 Commission payable to manager

72
Important adjustments In
various problems
Illus:2 page-77 i) repairs tp plant ii)Income
tax of X
 Iii) Provision for bad debts
 Iv) adjustment no.b,e and f
 V) calculation of works manager’s
commission and general manager’s
commission

73
Important adjustments In
various problems








Illustration 3: i) adju.e and I and trading account purchases and
sales
Illustration 4: bank loan, adj. a,d and g.
Illustration 5: loan, adj.b and c.
Illustration 6: adj: b,f and h
Illustration 7: adj:b and d
Illustration 8: adj.f
Illustration 9: adj. d and e
Illustration 10: loan, adj.a
74
Bank reconciliation statement

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
Cash book
Pass book
Cheques issued but not debited
Cheques deposited but not cleared
Bank charges entered in the pass book
Income from investments entered in the pass
book
Electricity, water, telephone , internet bills paid
directly by bank entered in the pass book
Clerical errors in the pass book or cash book
75
Exercise:-11 page121

Q.2 –page-116 and questions no.6 page119 .
76
Life education
Child
likes to hug in the
evening
77
Chapter 5: Rectification of
Errors(page-126)
Reasons for errors in accounting:
 1.error of omission
 2.error of commission
 3.Error of principle
 4. Compensating error

78
Errors not affecting trial balance
1.error of omission
 2.Error of principle
 3.compensating error
 4. complete omission
 5.error of commission

79
Suspense Account

If trial Balance does not tally ie debit is not
equal to credit then temporarily to close
down we open a suspense Account on the
deficit side known as suspense account.
80
Rectification: Steps
Rectify only the account in which error is
committed.
 Book means complete set of accounts
 Accounts means mistake only in the
account
 If suspense account is given and if one
side error suspense account has to be
either debited or credited accordingly.

81
Problems in errors Problem:7
page-139
Drawings A/c debit
to General expenses a/c
credit
2. Sales Account debit
to Machinery A/c credit
3. Rent a/c debit
To land lord a/c
4. Repairs a/c
To Building
5. Suspense a/c debit
To Harish a/c
To Cash A/c
1.
2500
2500
1300
1300
160
160
245
245
500
250
250
82
Problem:6 page-138
particulars
amount
a.Machinery Dr.
To Purchases a/c
To Wages a/c
1100
b.Suspese a/c Dr.
to Mohan a/c
Cash a/cDr.
To Mohan
2700
amount
700
400
2700
400
400
83
particulars
Mohan a/c Dr.
To sales susp.
700
c. Suspensea/c
ToYogesh a/c
900
d.Furniture a/cdr
To P/L a/c
600
e.Machi.a/cdr.
To Purchases
To trade exp.
18200
700
900
600
17000
1200
84
Life education
85
Chapter-6 Cost Accountancyterms
Cost centre
Impersonal and personal cost centre
production and service cost centre
 Concept of cost

86
Chapter-6 Cost Accountancyterms
Cost centre
Impersonal and personal cost centre
production and service cost centre
 Concept of cost

87
The bottom line is that the
organization
is out "hard" or "real" money.[1
Examples:
· Hardware and software purchases
· Professional services
· Maintenance
· Labor
· Medical benefits
· Insurance
· Internet Service Provider fees
· Wide area network fees
88
Economic Costs
Economic costs are "opportunity costs."
Instead of doing X, you had to do Y. These
are not hard-currency costs and it is
dangerous to lump them into the costsavings category with accounting costs
because their effects will not necessarily
show up on the bottom line.
89
Chapter-6 Cost Accountancyterms
Cost centre
Impersonal and personal cost centre
production and service cost centre
 Concept of cost

90
Economic Costs
Economic costs are "opportunity costs."
Instead of doing X, you had to do Y. These
are not hard-currency costs and it is
dangerous to lump them into the costsavings category with accounting costs
because their effects will not necessarily
show up on the bottom line.
91
Chapter-6 Cost Accountancyterms
Cost centre
Impersonal and personal cost centre
production and service cost centre
 Concept of cost

92
The bottom line is that the
organization
is out "hard" or "real" money.[1
Examples:
· Hardware and software purchases
· Professional services
· Maintenance
· Labor
· Medical benefits
· Insurance
· Internet Service Provider fees
· Wide area network fees
93
Economic Costs
Economic costs are "opportunity costs."
Instead of doing X, you had to do Y. These
are not hard-currency costs and it is
dangerous to lump them into the costsavings category with accounting costs
because their effects will not necessarily
show up on the bottom line.
94
Terms in costing

Accounting Costs : These are costs
that impact an organization’s
general ledger.
For example, buying a product results in
a chain of events wherein a purchase
order is processed,
a product/service is received, then an
invoice arrives from the vendor
95
Economic Costs
Economic costs are "opportunity costs."
Instead of doing X, you had to do Y. These
are not hard-currency costs and it is
dangerous to lump them into the costsavings category with accounting costs
because their effects will not necessarily
show up on the bottom line.
96
Example




:
· Reducing firefighting on incidents related to
problematic changes is robbing resources from
planned work (projects) and applying them to
unplanned, reactive work (incidents).
If you say that better change management
reduced unplanned work by 20 percent, that is
not an accounting cost savings, but it did free
up resources to work on projects.
It would be wise to identify what project
progress was enabled through the action.
97
Example-2

· By training users, incidents handled by
the service desk decreased 5 percent.
Again, this is not an accounting cost
savings unless a resource is dismissed,
thus impacting labor, benefits and so on.
98
mixing accounting and
economic cost

mixing accounting and economic cost
savings together and instead wrap both
types of costs with a business case
explaining the benefits of the proposal.
99
Overhead

These are indirect costs that are absorbed
by IT. For example, a portion of building
rent is often allocated to IT based on some
cost driver such as percent of floor space
allocated.
100
illustration

If IT occupies 10 percent of a building,
then accounting will likely allocate 10
percent of the rent to IT. This overhead
cost must then be factored into the
services that IT offers in order for proper
charge backs, pricing and so on
101
Sunk Costs
These are costs that, once spent, cannot
be Recovered. If something is purchased
that cannot be returned or sold off, then
that item should be considered a sunk
cost.
 Most of the times they are irrelevant to
take future decision.

102
Cost Drivers

When determining costs, it is worthwhile to
understand what drives the costs. In other words,
if you do X, then you see a corresponding
increase in cost Y. To illustrate, if you must buy a
PC and software licenses for each new person
hired, then the addition of new users is one of
the cost drivers for the associated PC and
software expense accounts.
103
Salvage Value/Salvage
Costs


If you can sell an asset for more than its book
value, then you are actually booking another form
of income. On the other hand, if the salvage
value is lower than the book value, then
accounting will need to write the asset off.
If you have to pay someone to take things away
due to hazardous materials laws, then you may
even incur expenses relating to the disposal of
the asset.
104
Differential cost
Increased or decreased cost due to the
increased or decreased volume of
operations.
 Additional cost due to operation.

105
Normal cost and abnormal
cost(150)
Normal costs incurred at a certain level of
output
 Abnormality in cost due to unforeseen
situations

106
Relevant cost and relevant benefit









Required for decision making
Costs that are affected by by the decision
Costs and benefits that are independent of a decision are
not relevant and need not be considered.
Future cash inflows and future outflows are relevant.
Sunk costs are irrelevant
Allocated common costs are irrelevant
Opportunity costs are relevant (shadow price)
Incremental costs are relevant incremental benefits are
relevant.
Avoidable costs are relevant and unavoidable costs are
irrelevant for decision making.
107
Relevant and irrelevant


Five engineers already employed on monthly
salary but will not be sent out if not employed in
an another project. The salary paid to those
engineers are relevant or irrelevant to estimate
the price for the project?
Two more engineers are selected exclusive to
the new project-are the costs relevant to take
decision for new project?
108
Direct and indirect costs





Direct Costs are costs that can be specifically
and exclusively identified with the particular
object (product)
Salary of processing associate
Indirect Costs are costs that can not be
specifically and exclusively identified with the
particular object (product)
Salary of team leader
Direct costs are allocated. Indirect costs are
apportioned.
109
product costs Period costs



Product cost are those costs that are identified
with goods purchased or produced for resale.
Period costs are those costs that are not
included in the inventory valuation and as a
result are treated as expense in the period in
which they are incurred.
Product costs will generate income.but period
costs do not generate income.
110
Treatment of period and
product costs
Manufacturing cost
Non manufacturing costs
Product code
Period code
Recorded as an asset
In the balance sheet
And becomes an
Expense in the P/L
A/C
unsold When the product
Is sold
Recorded as an
Expense in the P/L A/c
In the current
Accounting year
111
Variable, fixed, semi variable and
semi fixed
Cost (Rs.)
Variable cost
cost(Rs.)
Out put(units)
fixed cost
Activity
level(units)
112
Step fixed cost
Total
Fixed cost
Activity level(Units)
113
Variable, fixed, semi variable and
semi fixed.
Fixed cost
Supervisors’ salary, leasing
charges for cars, depreciation on
building
In the long run all costs are
variable.
Variable
costs
Semi
variable
cost
direct material, direct labour and
direct expenses.
Both fixed and variable elements in
the costs.
114
Incremental costs and Marginal
cost
Differential costs and revenues are the
difference between costs and revenues for
the corresponding item under each
alternative being considered.
 Marginal cost/revenue - one extra unit of
output cost/revenue.

115
116
Red Car, Inc. Cost of Goods Manufactured
Schedule For the Year Ended March, 20xx
Direct materials used
Beginning raw materials inventory
Add: Cost of raw materials purchased
Total raw materials available
Less: Ending raw materials
inventory
Total raw materials used
direct labor
Manufacturing overhead
Indirect materials
Indirect labor
117
Continuation
Depreciation—factory building
Depreciation-factory equipment
Insurance-factory
Property taxes—factory
Total manufacturing overhead
Total manufacturing costs
Add: Beginning work-in-process inventory
Less: Ending work-in-process inventory Cost of goods
manufactured
118
ADVANTAGES OF COST
ACCOUNTING



It reveals profitable and unprofitable activities.
It helps in controlling costs with special
techniques like standard costing and budgetary
control
It supplies suitable cost data and other related
information for managerial decision making such
as introduction of a new product, replacement of
machinery with an automatic plant etc
119
ADVANTAGES OF COST
ACCOUNTING




It helps in deciding the selling prices, particularly during
depression period when prices may have to be fixed
below cost
It helps in inventory control
It helps in the introduction of a cost reduction
programme and finding out new and improved ways to
reduce costs
Cost audit system which is a part of cost accountancy
helps in preventing manipulation and frauds and thus
reliable cost can be furnished to management

120
ESSENTIALS OF A GOOD COST
ACCOUNTING SYSTEM




The method of costing adopted. It should be suitable to
the industry
It should be tailor made according to the requirements of
a business. A ready made system can not be suitable
It must be fully supported by executives of various
departments and every one should participate in it
In order to derive maximum benefits from a costing
system, well defined cost centres and responsibility
centres should be built within the organisation
121
ESSENTIALS OF A GOOD COST
ACCOUNTING SYSTEM





controllable and uncontrollable costs of each
responsibility centre should be separately shown
cost and financial accounts may be integrated in order to
avoid duplication of accounts
well trained and educated staff should be employed to
operate the system
It should prepare an accurate reports and promptly
submit the same to appropriate level of management so
that action may be taken without delay
resources should not be wasted on collecting and
compiling cost data not required. Only useful cost
information should be compiled and used whenever
required.
122
ESSENTIALS OF A GOOD COST
ACCOUNTING SYSTEM-continues

It helps in deciding the selling prices, particularly during
depression period when prices may have to be fixed
below cost

It helps in inventory control

It helps in the introduction of a cost reduction
programme and finding out new and improved ways to
reduce costs

Cost audit system which is a part of cost accountancy
helps in preventing manipulation and frauds and thus
reliable cost can be furnished to management

123
Life education



Threat is an opportunity
Strength is your weakness
Strengthen your weakness
124
Unit-7 Elements of costs
Learning:
 Cost sheet
 Elements of cost
 Operating cost
 Operating profit
 Non operating profit

125
Terms used in costing(unit
7)
Direct material
Raw material; cost per unit can be identified, in the
Direct labour
Direct expenses
Prime cost
Indirect
Factorymaterial
over heads
Indirect labour
Indirect expenses +
Works cost
Indirect Office and
administration overheads
individual cost centre;
Engaged in manufacturing process
Hire charges of machinery-direct expenses
Consumable stores, cotton waste ,oil
Wages to storekeeper, foremen, works manager’s
salary, repairs to factory building, insurance to
machinery factory lighting
Stationary, salaries to accounts staff, postage,
internet, bank charges, audit, administration
expenses, depreciation
Factory
Factory
Administration
section
material
Indirect labour
Indirect expenses +
Total cost
126
Selling and distribution
Indirect material
Indirect labour
Indirect overheads
Cost of sales+
Profit
Sales
Packing material,
Sales department
samples,salaries to
sales
personnel,commissi
on to sales
manager,
warehouse
charges,advertisem
ent,repairs to
distribution van,
discount to
customers
127
Marginal costing cost sheet












££Sales Revenue
Less Marginal Cost of Sales
Opening Stock (Valued @ marginal cost)
Add Production Cost (Valued @ marginal cost)
Total Production Cost
Less Closing Stock (Valued @ marginal cost)
Marginal Cost of Production
xxxxx
xxxx
xxxx
xxxx
xxx)
xxxx
Add Selling, Admin & Distribution Cost
Marginal Cost of Sales
xxx
(xxxx)
Contribution
Less Fixed Cost
Marginal Costing Profit
xxxxx
(xxxx)
xxxxx
128
ABSORPTION COSTING PROFORMA
££Sales Revenue
Less Absorption Cost of Sales
Opening Stock (Valued @ absorption cost)
Add Production Cost (Valued @ absorption cost)
Total Production Cost
Less Closing Stock (Valued @ absorption cost)
Absorption Cost of Production
Add Selling, Admin & Distribution Cost
Absorption Cost of Sales
Un-Adjusted Profit
Fixed Production O/H absorbed
Fixed Production O/H incurred
(Under)/Over Absorption
Adjusted Profit
xxxxx
xxxx
xxxx
xxxx
(xxx)
xxxx
xxxx
(xxxx)
xxxxx
xxxx
(xxxx)
xxxxx
xxxxx
129
Reconciliation Statement for Marginal Costing
and Absorption Costing Profit
$ Marginal Costing Profit
xx
 ADD
(Closing stock – opening Stock) x OAR xx
 = Absorption Costing Profit
xx

Where OAR( overhead absorption rate) =Budgeted fixed production overhead
Budgeted levels of activities
130
Cost sheet









Prime cost+
Factory over heads
Factory cost/works cost+
Administration over heads
Office cost+
Selling overheads
Total cost
Profit
sales
131
Total cost
5.sales
2.General administration
3.Sales and distribution
Cost of sales
+
+
4.profit
=
Factory cost/
+
works cost

1.canteen
1.Factory administration +
Stores ledger
1.Production
Prime Cost
1.Godown
Bin card
Cost calculations/operating activity
132
Non- operating activity
Dealers in houses
Dealers in furniture
Non operating profit
Profits are operating profits
Operating activity
My house is for sale
My furniture is for sale
?
?
133
Operating/ Non operating
Operating (OP)
1.Profits derived by
doing basic functions
2.Efficiency depends on
operating profit
3.Gross Profit- Office
and administration
overheads- selling and
distribution
overheads=OP
Non operating (NOP)
1.Profits derived other
than basic functions
2.We should not
consider NOP to study
efficiency except on sale
of company/firm.
3. Sale of asset-cost of
such asset=NOP
134
BPOs
Self-less service canteen
What activity?
Self help room
135
Exercise Number: 3 page-175 unit 7.
 Exercise Number: 6 page-177 unit 7

136
3.Sales and distribution
+
16031
+Cost of sales=1,76,338
Factory cost/
+
works cost

p.3
4.Profit
44084
=
5.sales
2.General administration
5000+20,257
Total cost=1,60 307
2,20,422
Consumable
=4000
Royalty=8000
FOH=16050
1.Factory administration +
1.canteen
Stores ledger
1.Godown
Prime Cost=
R.material=40,000
D. labour=12,000
Components=50,000
Primary packing=5000
Bin card
Cost calculations/operating activity
137
Exercise:6/177
particulars
Direct Material[(40,000*600/500)*120/100]
Direct labour[(60,000*600/500)*105/100]
Prime Cost
Manufacturing Cost[25% on prime cost]
Factory cost
Administration cost:
Management expenses
Rent
General Expenses
TOTAL COST
Selling expenses
Cost of sales
Profit [20% on sales=25% on cost]
sales
Units 500 @
old price
40,000
60,000
1,00,000
25,000
Units500
@current
price)
Units 600
48,000
63,000
1,11,000
27,750
57,600
75,600
1,33,200
33,300
1,25,000 1,38,750
1,66,500
30,000
5,000
10,000
30,000
5,000
10,000
30,000
5,000
10,000
1,70,000 1,83,750
2,11,500
15,000
15,000
15,000
1,85,000 1,98,750
15,000
49,688
2,00,000 2,48,438
2,26,500
56,625
2,83,125
138
Material cost-stages in the movement of material
10.Transfer of material
1.Purchase requisition
9.Return of material
2.Selection of source of supply
8.Issue of material
3.Purchase order
6.Accounting for purchase
7.Receipt of material
4.Receipts and inspection
5.Cheking invoice
139
Valuation of material movements








Basic cost
Less: Trade discount
Add: Container cost
Add: Sales tax-on basic cost after trade
discount
- on container
Add: insurance
freight
Less: Credit for drums
 Total cost


Add: Stores overhead on total cost
Unit cost = Overall cost /No. of Units-normal loss units
140
Normal loss and abnormal loss
Costs incurred before abnormal
loss period-recovery from normal loss units
Effective cost per unit=
Number of units-normal loss units
Abnormal loss units * Effective cost per unit
=Abnormal loss
141
example
Page 200 unit-1
Units purchased= 10,000
 Costs of purchases=1,00,000
 Due to leakages number of units lost=50
 Loss of units due to breakages=2000;
insurance claim initiated.
 Effective cost per unit=1,00,000-0/10,000
50

=Rs.10.05025
 Abnormal loss=2000*10.05025=20100.50
 How do you calculate normal loss?

142
Calculate normal loss?

We do not calculate normal loss but to
calculate effective rate per unit we
consider normal loss units and recovery
from normal loss.
143
Valuation of issues
FIFO
 LIFO
 Average price method
 Weighted Average method
 Highest In First method
 Specific price
 Standard Price

144
Points to remembered for stock
valuation under various methods

1.All the methods used for the calculation of
issues to production

The costs of purchase and other related costs
should be passed on to customers

Any deficit in stock taking to be considered
as issue

Any excess will be considered as purchase at the
latest price
Goods returned from production to be valued at the
price of issue.

145
Example
Description
Unit
Location
Date
1st
Jan
08
5th
6th
8th
Particulars
FIFO
Stores ledger
Receipts
Issues
Qty. Rate Rs.
Qty Rate
Op. balance
Purchase
Purchases
Issue
Maximum level
Minimum level
Re-order level
100
7.00
200
8.00 1600
Balance
Rs.
Qty
Rate
Rs.
500
6.00
3,000
700
250 ?
146
Example
Description
Unit
Location
Date
Particulars
1st
Jan
08
5th
Op. balance
6th
Issue
Purchase
LIFO
Maximum level
Minimum level
Re-order level
Stores ledger
Receipts
Issues
Qty. Rate Rs.
Qty Rate
100
7.00
Balance
Rs.
Qty
Rate
Rs.
500
6.00
3,000
700
147
Average price method
Description
Unit
Location
Date
Particulars
1st
Jan
08
5th
Op. balance
6th
Issue
Purchase
Maximum level
Minimum level
Re-order level
Stores ledger
Receipts
Issues
Qty. Rate Rs.
Qty Rate
100
7.00
Balance
Rs.
Qty
Rate
Rs.
500
6.00
3,000
700
148
Weighted Average method
Description
Unit
Location
Date
Particulars
1st
Jan
08
5th
Op. balance
6th
Issue
Purchase
Maximum level
Minimum level
Re-order level
Stores ledger
Receipts
Issues
Qty. Rate Rs.
Qty Rate
100
7.00
Balance
Rs.
Qty
Rate
Rs.
500
6.00
3,000
700
149
Techniques of Inventory control
(Unit 8-page 211)
1. Economic Ordering Quantity
 2. Fixation of inventory levels
 3. Inventory Turnover
 4. ABC Analysis
 5. Bill of Materials
 6. Perpetual Inventory system

150
1.Economic ordering Quantity(212)
EOQ=Root of (2AO/C)
 Where A=annual demand in units

O= Cost of placing order (cost from
the time we order till we receive goods)

C= Carrying cost per unit per year
(measured in terms of percentage on cost
per unit)
 Assumptions: normally on an average ½ of
the units are in the store all the time.

151
Exercise:14 page 248






EOQ=Root of (2AO/C)
= Root of(2*600*400/(40%*15)
= Root of 80000
=282.845 units
Total cost of inventory
annually=(600*15)+(3*400)+(1/2*282*40%*15)=
9000+1200+846
=Rs.11,046.
152





If 10% discount is given cost per unit=15(10%of 15)=13.5
Total
cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5)
= 8100+800+1350
= Rs.10,250
Advise: Purchase 500 units as annual cost of
inventory is cheaper.

If safety stock is required at any point of time
in order to calculate holding cost we add the
safety stock with the ½ of EOQ stock.

Holding cost includes storage and interest
on locked up capital
153
If 10% discount is given







If 10% discount is given cost per unit=15-(10%of
15)=13.5
Total cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5)
= 8100+800+1350
= Rs.10,250
Advise: Purchase 500 units as annual cost of
inventory is cheaper.
If safety stock is required at any point of time in
order to calculate holding cost we add the safety
stock with the ½ of EOQ stock.
Holding cost includes storage and interest on locked
up capital, handling, insurance of godown
154
2. Fixation of inventory level(218)




Re-order level=Maximum leadtime
*Maximum usage
Minimum level= Reorder level-(Normal
usage*Normal lead time)
Maximum level=Re-order level+ Re-order qty(Minimum usage*Minimum Lead time
Average level=(Maximum level+ Minimum
level)/2
Danger level=Normal usage*Lead time for
emergency purchases
Note: Re-order quantity=EOQ

155
See page-220 and 223 illustrations
EOQ is calculated inorder to find Re- order
quantity
 Re-order quantity is different from Reorder level
 Sometimes minimum stock=safety stock
See page 222

156
3. Inventory (Stock) turnover ratio
It explains operating efficiency of the
organisation.
 How quickly raw material are converted
into finished goods and also gives number
of days of conversion.
 It explains number of times in a year raw
material are converted into finished goods

157
Page-225
3.Stock turnover ratio=
Value of materials consumed in a year
Average stock
Average stock= (Opening stock+ Closing Stock)/2
158
Always Better Control
Control Always Better
ABC analysis
Better
Control Always




Classify the various inventories according to
their importance(70% of the value)
A-High cost per unit but less quantity (70% of
the value)-large investment-effective control on
supply
B- Moderate price per unit but moderate quantity
(20% in value)
C-less cost per unit but large quantity(10% in
value)-control on availability of material
159
5. Bill of materials


Bill of materials is a list of
materials required for a
job.. It also indicates
quantity required for each
item.
It helps in cost
computation, material to
be purchased by
purchase department,
that the order to be
executed indicator.
160
6.Perpetual inventory control
system(page-229)(Unit number 8)



Stocks are recorded as soon as placed in the
godown and also recorded immediately as soon
as stock is taken out.
They are recorded in Bin card and stores ledger.
It helps if insurance claim initiated and also fixing
various level of stock,adjusted for discrepancies
and periodical profits are estimated.
161
Problems-clarification
Problem number-02,10,16 from exercise
 Page-243,246 and248 respectively in unit1

162



Labour costs-unit 9 page-252
Personnel department
Selection,training,wage
sheet preparation
Time keeping department
Recording, time keeping and time booking
Costing department
Analyse wage sheet, reports to mgt.
163
Methods of remunerating workers
(unit 9 page-258)



1.Time basis
2.Result basis
3. Bonus systems
Individual
Group

4. Indirect monetary remuneration
Profit sharing

Co-partnership
5. Non-monetary incentives
164
Payment by results(page-261)
a) Straight piece rate
No. units*units produced
Payment by results
b) Piece rate with
guaranteed time rate
c) Differential piece rate
2.Merrick differential rate plan
3. Gantt task bonus
No guaranteed wage
1.Taylor differential piece
Below standard
Efficiency
Piece rate
Rate(page262)
-time rate
Upto 83%
Normal
No guaranteed wage
At standardUpto 100% 110% of normal rate
Below standard-low piece rate
time wage+
Above standard-high piece rate
increase in rate
Above 100% 130% of normal piece
Above std
.-High piece
165rate
Individual Incentive systems
Halsey premium system Halsey-weir system
50-50
W
1(W):2(ER)
Rowan plan
The more you save
The more the incentives
ER
AH* HR+ (Time saved/2)*
HR
Time rate guaranteed
AH* HR+ (Time saved/3)*
HR
Time rate guaranteed
AH-Actual hours
SH-Standard Hours
HR-Hourly rate
(AH*HR)+(SH-AH)/SH*
(AH*HR)
166
Other Wage payment
system
Accelerated premium system
2
Wage (Y)=.8*X
Where Y=Earnings
X=Efficiency
167
Group Incentive scheme
Indirect monetary
benefits(271)
Profit sharing-Bonus-8.33% of wages
statutory bonus.Maximum-20%
 Copartnership-ESOP

168
Problems
Page-292; prob-6 &9
 Page-293; prob-11

169
Overheads-unit 10 page-295






Classification of over heads
Indirect material, indirect labour, indirect
expenses
Factory overheads, administration over head,
selling and distribution over heads
Fixed overheads, variable overheads, semi
variable overheads
Controllable and uncontrollable overheads
Normal and abnormal overheads.
170
Classification(206)
Normality
Normal and
Abnormal
overheads.
Element wise
Indirect material,
indirect labour,
indirect expenses
Function
Factory
administration,
 selling and
distribution over heads
Variability
Fixed,
variable,
semi variable
overheads
Controllability
Controllable and
Uncontrollable
overheads
171
Primary apportionment(page-299)

Common over heads belong to production
and service departments are apportioned
on the following basis or any other suitable
basis:
1.Supervision
1.Canteen-no.of workers
-no.of employees
2.Rent-Area
2.Telephone expenses
3.Power-HP/KWH
-no.of
calls
made
4.General lighting-light points
3.Fire insurance
5.Depreciation-value of
-value of stock/asset
assets
172
Secondary apportionment

Apportionment of service department cost
centre to production department
Methods of
Apportionment(Page303)
Simultaneous
Equation method
Repeated
Distribution method
173
Overhead absorption
rate(page-307)
Amount of overhead/direct Material cost or
/Direct Wage cost or
/Prime Cost or
/labour hours or
/Number of machine
Hours
Prob.-pages 309,336
174
Unit-11
Marginal Cost-Volume-Profit
Analysis and Relevant
Costing
175
Marginal cost, Budgeting and
standard costing

Presented by
Prof. L. Augustin Amaladas
M. Com., AICWA.,PGDFM.,B.ED.
6th January 2008
176IBM
Learning Objectives
1. How is breakeven point computed and what
does it represent?
2. How do costs, revenues, and contribution
margin interact with changes in an activity
base (volume)?
C6
177
Continuing . . . Learning
Objectives
3. How does cost-volume-profit (CVP) analysis
in single-product and multiproduct firms
differ?
4. What are the underlying assumptions of CVP
analysis and how do these assumptions
create a short-run managerial perspective?
C6
178
Continuing . . . Learning
Objectives
5. How do quality decisions affect the components
of CVP analysis?
6. What constitutes relevance in a decision-making
situation?
C6
179
Continuing . . . Learning
Objectives
7. How can management best utilize a scarce
resource?
8. What is the relationship between sales mix
and relevant costing problems?
C6
180
Continuing . . . Learning Objectives
9. How can pricing decisions be used to
maximize profit?
10. How can product margin be used to
determine whether a product line should be
retained or eliminated?
C6
181
Continuing . . . Learning
Objectives
11. How are breakeven and profit-volume
graphs prepared? (Appendix 1)
12. What are the differences between
absorption and variable costing? ( Appendix
2)
13. Why is linear programming a valuable tool
for managers? (Appendix 3)
C6
182
The Breakeven Point (BEP)
The level of activity, in units or dollars,
at which
REVENUES = COSTS
183
Basic Assumption: Relevant
Range
Company is operating within the relevant
range of activity specified in determining the
revenue
and cost information used.
Total
$
Relevant
Range
Activity Level
184
Basic Assumption: Revenue
Total revenue fluctuates in direct proportion to level
of activity or volume. On a per unit basis, the selling
price remains constant.
Total
$
Activity Level
185
Basic Assumption: Variable
Costs
Total variable costs fluctuate in direct proportion to
level of activity or volume. On a per unit basis,
variable costs remain constant.
Total
$
Activity Level
186
Basic Assumption: Fixed Costs
Total fixed costs remain constant relative to activity
level changes. Per-unit fixed costs decrease as
volume increases and increase as volume decreases.
Total
$
Activity Level
187
Basic Assumption: Mixed Costs
Mixed costs must be separated into variable and fixed
elements.
Total
$
Activity Level
188
Cost Behavior Example
Selling price per ice bucket
$40
Variable production cost per ice bucket
Variable selling cost per ice bucket
Total variable cost per ice bucket
$20
4
$24
Fixed production costs
Fixed selling and administrative costs
$100,000
20,000
189
Contribution Margin Per Unit
Contribution margin per unit equals
selling price per unit less variable cost
per unit.
sp -vc = cm
$40 - $24 = $16
190
Contribution Margin Ratio
Contribution margin ratio is per-unit
contribution margin divided by selling
price, or total contribution margin divided
by total sales dollars.
cm/sp=cm%
$16 / $40 = 40%
191
Breakeven Point
Breakeven point is the point at which
profits are zero because total revenues
equal total costs, or
Total revenues = Total variable costs + Total
fixed costs
192
Continuing . . . Breakeven Point
In units
In sales dollars
=
Total fixed costs
--------------------CM per unit
=
Total fixed costs
--------------------CM ratio
193
Continuing . . . Breakeven Point
In units
In sales dollars
$120,000
----------- = 7,500 ice buckets
$16
=
$120,000
----------- = $300,000
=
.40
194
CVP Analysis: Fixed Amount of
Profit Before Taxes (PBT)
In units
In sales dollars
=
Total fixed costs + PBT
-----------------------------CM per unit
=
Total fixed costs + PBT
-----------------------------CM ratio
195
CVP Analysis: Fixed Amount of
Profit Before Taxes (PBT)
$120,000 + $64,000
Break evenIn units=------------------------ = 11,500 buckets
$16
In sales dollars
$120,000 + $64,000
=------------------------ = $460,000
.40
196
CVP Analysis: Variable Amount
of Profit Before Taxes
Assume PUBT desired is 25% on sales
Therefore, PUBT = .25 ($40) = $10
Total fixed costs
Sales in units =--------------------------CM per unit - PUBT
$120,000
Sales in units =--------------- = 20,000 ice buckets
$16 - $6
197
CVP Analysis: Variable Amount
of Profit Before Taxes
Assume PUBT desired is 25% on sales
Therefore, PUBT = .25 ($40) = $10
Sales in $
Sales in $
=
Total fixed costs
--------------------CM% - PUBT%
$120,000
=--------------- = $800,000
.40 - .25
198
Income Statement
Sales
Variable costs
Dollars
Percentages
$800,000
100%
480,000
60%
Contribution margin$320,000
Fixed costs
Income
40%
120,000
15%
$200,000
=======
25%
==
199
CVP Analysis - Multiple Products
Selling price
Variable cost
Contribution margin
Contribution margin ratio
Sales mix*
Ice
Serving
Buckets
Sets
$40
$24
24
12
$16
$12
40.0%
80.6%
50.0%
19.4%
*5:2 ratio
200
Continuing . . . CVP Analysis Multiple Products
Ice
Buckets
40.0%
Serving
Sets
50.0%
Sales mix*
80.6%
19.4%
Weighted contribution margin
32.2%
9.7%
Contribution margin ratio
Contribution margin ratio per bag
41.9%
*5:2 ratio
201
Continuing . . . CVP Analysis Multiple Products
BEP in sales dollars =
Total fixed costs
----------------------CM ratio per bag
BEP in sales dollars =
($120,000 + $30,000*)
---------------------------.419
=
$357,995
*$30,000 of additional fixed cost is incurred to
produce both units
202
Scarce Resource -- Machine
Hours
Selling price per unit
Variable production cost per unit:
Direct materials
Direct labor
Variable overhead
Total variable cost
Unit contribution margin
Units of output per machine hour
Contribution margin per machine hour
Ice
Crushers
$15
$3
4
3
Juice
Extractors
$12
$3
2
1
10
$5
30
$150
6
$6
20
$120
203
Sales Mix Decisions
How many of each product?
204
Relevant Costs in
Product Line Decisions
Revenues associated with product
 Variable costs associated with product
 Avoidable fixed costs
 Consider product margin

Revenues - Variable costs - Avoidable fixed costs
205
Exhibit 6-12: Partial Product Line
Income Statement
Sales
Total direct variable expenses
Total contribution margin
Total fixed expenses*
Net loss
Electric
Skillet
$75,000
43,750
$31,250
39,500
($8,250)
*Fixed expenses:
Avoidable fixed expenses
Unavoidable fixed expenses
Allocated common costs
Total
$25,000
4,500
10,000
$39,500
206
Exhibit 6-13: Product Margin for
the Electric Skillet Product Line
Electric
Skillet
Sales
Total direct variable expenses
Total contribution margin
$75,000
43,750
$31,250
Avoidable fixed expenses
25,000
Product margin
$6,250
207
CVP Graph
BE
P
Total Revenues
Total Costs
Total
$
Volume
208
Profit-Volume Graph
BEP
Total
$
Profit or Loss
Volume
Fixed Costs
209
Absorption Costing


Also known as full costing
Treats costs of all manufacturing components as
inventoriable, or product, costs
 Direct
materials
 Direct labor
 Variable factory overhead
 Fixed factory overhead

Presents expenses on income statement according
to functional classifications
 Cost
of goods sold
 Selling expenses
 Administrative expenses
210
Variable Costing


Also known as direct costing
Includes only variable production costs as
inventoriable, or product, costs
 Direct
materials
 Direct labor
 Variable factory overhead


Fixed factory overhead costs treated as period
expenses
Income statement separates costs by cost behavior
 May
also present expenses by functional
classifications within behavioral categories
211
Absorption Costing
Income Statement
Sales
Cost of Goods Sold:
Beginning inventory
Cost of goods manufactured
Cost of goods available
Ending inventory
Cost of goods sold
Gross Margin
Operating Expenses:
Selling
Administrative
Income before Taxes
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
212
Variable Costing
Income Statement
Sales
Cost of Goods Sold:
Beginning inventory
Cost of goods manufactured
Cost of goods available
Ending inventory
Variable cost of goods sold
Product Contribution Margin
Variable Selling Expense
Total Contribution Margin
Fixed Expenses:
Factory
Selling
Administrative
Income before Taxes
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
213
Absorption Costing vs. Variable
Costing Income Statements
Absorption Costing
Sales
Variable Costing:
$60,000
Sales
Cost of sales
30,000
Variable costs:
Gross profit
$30,000
Cost of sales
Operating expenses:
Operating expenses
$60,000
30,000
6,000
Variable
$6,000
Total variable costs
$36,000
Fixed
20,000
Contribution margin:
$24,000
Total operating expenses
Income
$26,000
$4,000
Fixed costs
20,000
Income
$4,000
214
Costs and Budgeting
215
Costs
216
Costs




Anything incurred during the production of the
good or service to get the output into the hands
of the customer
The customer could be the public (the final
consumer) or another business
Controlling costs is essential to business
success
Not always easy to pin down
where costs are arising!
217
Cost Centres
218
Cost Centres



Parts of the business to which particular costs
can be attributed
In large businesses this can be
a particular location, section
of the business, capital asset
or human resource/s
Enable a business to identify where costs are
arising and to manage those costs more
effectively
219
Full Costing

A method of allocating indirect costs to a
range of products produced by the firm.
 e.g.
if a firm produces three products - a, b, and c
- and has indirect costs of £1 million, assume
proportion of direct costs of 20% for a, 55% for b
and 25% for c
 Indirect costs allocated as 20% of 1 million to a,
55% of £1 million to b and 25% of £1 million to c
220
Absorption Costing
All costs incurred are allocated
to particular cost centres – direct costs,
indirect costs, semi variable costs and
selling costs
 Allocates indirect costs more accurately to
the point where
the cost occurred

221
Marginal Costing
The cost of producing one extra unit of
output (the variable costs)
 Selling price – MC = Contribution
 Contribution is the amount which can
contribute to the overheads (fixed costs)

222
Standard Costing

The expected level of costs associated
with the production
of a goods/services
 Actual

costs – Standard costs = Variance
Monitoring variances can help
the business to identify
where inefficiencies or efficiencies might
lie
223
Total Revenue
224
Terms and formulae in Marginal
costing









1. Contribution=S-Vc
2.P/V ratio=C*100/sales
BEP(units)=FC/Contribution per unit
BEP (Volume)= FC/PV ratio
Or
BEP units*SP per unit
Margin of safety (Units)=Profit/Contribution per unit
Margin of safety(Volume)=MS units*SP per unit.
Break-even at the required profit=(FC+Required
profit)/Contribution per unit or PV ratio
225
Total Revenue

Total Revenue = Price x Quantity Sold

Price can be raised or lowered
to change revenue – price elasticity
of demand important here
pricing strategies can be used – penetration,
psychological, etc.
 Different

Quantity Sold can be influenced
by amending the elements
of the marketing mix – 7 Ps
226
Break Even
227
Break Even Analysis
Costs/Revenue
TR
TR
TC
VC
The
Total
Initially
break
revenue
even
a firm
is
The
lower
the
determined
point
occurs
incur
by
where
fixed
Aswill
output
is
price,
the
less
The
total
costs
the
total
costs,
price
revenue
these
generated,
the
steep
thecharged
total
therefore
and
equals
do
the
not
total
quantity
depend
costs
firm willcurve.
incur –
revenue
(assuming
sold
the
on
firm,
– output
again
incosts
this
this
or –
variable
accurate
will
example,
sales.
be vary
would
these
forecasts!)
is the
determined
have
to sell
by
Q1 to
directly
with
sum of FC+VC the
expected
generate
amount sufficient
forecast
revenue
sales
to cover its
produced.
initially.
costs.
FC
Q1
Output/Sales
228
Break
Even
Analysis
Costs/Revenue
TR (p = £3)
TR (p = £2)
TC
VC
If the firm
chose to set
price higher
than £2 (say
£3) the TR
curve would
be steeper –
they would not
have to sell as
many units to
break even
FC
Q2
Q1
Output/Sales
229
Break Even Analysis
Costs/Revenue
TR (p = £2)
TR (p = £1)
TC
VC
If the firm
chose to set
prices lower
(say £1) it
would need to
sell more units
before
covering its
costs.
FC
Q1
Q3
Output/Sales
230
Break Even Analysis
TR (p = £2)
Costs/Revenue
Profit
TC
VC
Loss
FC
Q1
Output/Sales
231
Break Even Analysis
Costs/Revenue
TR (p = £3)
TR (p = £2)
TC
VC
Margin of
safety shows
A higher price
how far sales
would
lower the
Assume
can fall before
break
even
current
sales
losses made. If
point
and
at Q2. the
Q1 = 1000 and
margin of safety
Q2 = 1800,
would widen.
sales could fall
by 800 units
before a loss
would be
made.
Margin of Safety
FC
Q3
Q1
Q2
Output/Sales
232
Costs/Revenue
Eurotunnel’s
problem
High initial FC.
FCon1debt
Interest
rises each year – FC
rise therefore.
FC
Losses get bigger!
TR
VC
Output/Sales
233
Break Even Analysis



Remember:
A higher price or lower price does not mean that
break even will never be reached!
The break even point depends on the number of
sales needed to generate revenue to cover
costs – the break even chart is NOT time
related!
234
Break Even Analysis
•Importance of Price Elasticity
of Demand:
•Higher prices might mean fewer sales
to break even but those sales may take
a longer time to achieve
•Lower prices might encourage more
customers but higher volume needed
before sufficient revenue generated
to break even
235
Break Even Analysis




Links of break even to pricing strategies and
elasticity
Penetration pricing – ‘high’ volume, ‘low’ price –
more sales to break even
Market Skimming – ‘high’ price ‘low’ volumes –
fewer sales to break even
Elasticity – what is likely to happen
to sales when prices are increased
or decreased?
236
Budgets
237
Budgets





Estimates of the income and expenditure
of a business or a part of a business over
a time period
Used extensively in planning
Helps establish efficient use
of resources
Help monitor cash flow and identify
departures from plans
Maintains a focus and discipline
for those involved
238
Budgets




Flexible Budgets – budgets that take account
of changing business conditions
Operating Budgets – based on
the daily operations of a business
Objectives Based Budgets - Budgets driven by
objectives set by the firm
Capital Budgets – Plans of the relationship
between capital spending and liquidity (cash) in
the business
239
Budgets

Variance – the difference between
planned values and actual values
 Positive
variance – actual figures less than
planned
 Negative variance – actual figures above
planned
240
Preparation of Budget
Sales budget quaterly-Estimated based on
market survey
 Production budget(Finished
goods:Anticipated Desired Sales+ closing
stock- Opening stock
 Material Purchase Budget(Raw
material)=Production budget+Desired
Closing stock-Opening stock

241
Production budget

For Finished goods
Anticipated Desired Sales+
closing stockOpening stock
242
Material Purchase Budget

For Raw Material
Production budget+
Desired Closing stockOpening stock
243
Cash Budget-Sample-1
Particulars
Jan
Feb
Mar
Apr.
May Jun.
Cash Inflow
Issue of shares
Issue of Debenture
Collection from Debtors
A.
B. Cash Outflow
Fixed Assets purchase
Stock purchase paid
Preliminary expenses
Sundry creditors paid
Other expenses paid
c. Net Cash inflow(A-B)
244
Cash Budget-Sample-2
Particulars
Jan
Feb
Mar
Apr.
May Jun.
Cash Inflow
Issue of shares
Issue of Debenture
Collection from Debtors
A.
B. Cash Outflow
Fixed Assets purchase
Stock purchase paid
Preliminary expenses
Sundry creditors paid
Other expenses paid
c. Net Cash inflow(A-B)
245
Cash Budget-Sample-3
Particulars
Cash Inflow
Issue of shares
Issue of Debenture
Collection from Debtors
B. Cash Outflow
Fixed Assets purchase
Stock purchase paid
Preliminary expenses
Sundry creditors paid
Other expenses paid
c. Net Cash inflow(A-B)
Opening cash balance
Closing Balance
Jan
Feb
Mar
Apr.
May Jun.
A.
246
Problems
 Page-130and132
unit-2
Problem-11 and 13
respectively.
247
Flexible Budget-Sample-1
Particulars
50%
Capacity
60%
Capacity
80%
Capacity
A)Number of units sold
Selling Price per unit
Sales
B) Cost
1) Material cost
2) Direct wages
3) Variable Overheads
a) Factory
b) Selling and Distribution
4) Fixed Overheads
a)Factory
b) Selling and distribution
C) Profit ie A-B
248
Flexible Budget-sample-2
Particulars
50%
Capacity
60%
Capacity
80%
Capacity
A)Number of units sold
Selling Price per unit
Sales
B) Cost
1) Material cost
2) Direct wages
3) Variable Overheads
a) Factory
b) Selling and Distribution
4) Fixed Overheads
a)Factory
b) Selling and distribution
C) Profit ie A-B
249
Problems in flexible budget
Pages-127,128,129
respectively in
Unit-2 Problems 4,
5,7 and 8
250
Standard Costing
System
Unit-13
Managerial Accounting
251
Standard Costing
 It
is also known as variance
costing.
 Standard cost- Predetermined
cost
 Standard Costing- is a
management accounting tecnique
to analyse variances
252
Steps in Standard costing
Set standard cost
 Study the actual cost
 Compare the actual with the standard cost
Which gives variances
Analyse the variances
Fix responsibilities
Take suitable action and create effective
control system .

253
Management
Accounting-ModuleII
Marginal costing, Budgeting,
standard costing and Uniform
costing
254
Similarities and Difference between Budgetary
control and standard costing




Similarities:
1.Both the tools available to the management for
the purpose of controlling the costs
2.Both based on setting standard, comparison
with actual and study the variance
3. If standard costing prevails in the company
then budgetary control is effective.
255
Differences
1.Budgetory control can be operated
without standard costing
 2.Budgets gives the limits on expenses but
standard costs are minimum targets to be
attained.
 3.Budget can be prepared for various
areas of activities but standard is used for
production and manufacturing cost

256
Differences




4.Budgetary variances may point out efficiency
or inefficiency. But standard costing goes
beyond
The efficiency or inefficiency and find out the
root cause for the variance.
5.Standard is always for improvement.
Budgets are based upon the future or estimated
costs. But standard costs are ideal costs under
ideal situation.
257
Types of standards
 1.current
standard
 2.ideal standard
 3.Expected standard
 4. Normal standard
258
Analysis of variances
Material
Labour
cost
Overheads
cost
Rate
price
Variable
Overhead
variances
Fixed
Overhead
variances
Mix
Mix
+
+
yield
yield
=
=
usage
Price+ Mix+ Yield=Cost
efficiency
Rate+ Mix+ Yield=Cost
259
Material Variance
1
2
Actual Quantity*
ctual cost per unit
Actual Quantity*
Std. cost per unit
Price(2-1)
4
3
Revised std. Quantity Revised std Quantity
For input*
For output*
Std. cost per unit
Std. cost per unit
Mix(3-2)
Yield(3-2)
Usage(4-2)
Cost(5-1)
260
Exercise: Material Variances
3
1
2
Actual Quantity*
Actual Quantity*
ctual cost per unit Std. cost per unit
400*6=2400
400*6=2400
500*3.6=1800
500*3.75=1875
400*2.8=1120
400*3=1200
5320
1300
5475
+155
Price(2-1)
+80
4
1300(5:4:3)/12
Revised std. Quantity Revised std Quantity
For input*
For output*
Std. cost per unit
Std. cost per unit
541.66*6=3250
500*6=3000
433.33*3.75=1625
400*3.75=1500
325*3=975
300*3=900
5850
5400
+375
Mix(3-2)
(450)
Yield(3-2)
Usage(4-2)
Cost(5-1)
(75)
261
Explanations for 3
Actual input(1300) is shared in the
standard ratio of 500:400:300 ie 5;4:3
 Then multiply by standard price
 Do not bother about how each material is
measured ie. One may be in Kg.,another
in litre etc.

262
Explanations for 4



We move from output to input
The output is 1080. We find normal input if normal
loss is 10% (given in the problem)
If Input is 100 and normal loss is 10% then
output=90
Output
90
1080



Input
100
?
1080*100/90=1200
Share 1200 in the standard ratio of 5:4:3
500, 400,300.
263
Labour Variances(Page191 prob.8
1
2
Actual Hours*
Actual Hours*
Std. cost per Hour
ctual cost per Hour
28*40*4=4480
18*40*3=2160
4*40*2= 320
6960
28*40*3=3360
18*40*2=1440
4*40*1= 160
2000
4960
-2000
Rate(2-1)
-2424
4
3
2000*(30:10:10)/50
Revised std. Hours
For input*
Std. cost per Hour
1200*3=3600
400*2= 800
400*1= 400
4800
-160
Mix or
gang(3-2)
Revised std Hours
For output*
Std. cost per Hour
1152*3=3456
432*2= 864
216*1= 216
4536
-264
Yield(3-2)
Efficiency(4-2)
Cost(5-1)
-424
264
Explanations for 4
 Going
from Output hours to
input hours
 There are 1800 hours are
shared in the ratio of 32:12:6
265
Variable overhead
Variances(Page-156)
1
2
3
Actual Hours*
Actual Hours*
Std. Rate per Hour
ctual Rate per Hour
Empty
EGG
4
Revised std Hours
For output*
Std. cost per Hour
Expenditure(2-1)
Efficiency(4-2)
Cost(5-1)
266
Fixed overhead Variances(Page-157)
1
2
Actual
Over heads
Budgeted
overheads
3
Revised std. Hours
For actual input*
Std. cost per Hour
Revised Std Hours
For output*
Std. cost per Hour
4
Std. Hours*
Std.fixedOH Rate
per hour
Expenditure
Efficiency(4-2)
Cost(5-1)
267
“Learning gives creativity
Creativity leads to thinking
Thinking provides knowledge
Knowledge makes you great”
- A.P.J.Abdul Kalam
268
Thank You all
269