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Pocket Book 1 CA Ashish Kalra
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MATERIAL
COST
Material Cost 2 CA Ashish Kalra
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DETERMINATION OF STOCK LEVELS
4. Danger Normal Maximum delivery period Level Consumption for emergency purchases
2. Re-order Maximum Maximum
Level Consumption Re-Order Period
Or Safety Stock Normal Normal Re-order/
Level Consumption Average Period Or Minimum level + Consumption during time lag period
1.Minimum/ Re-order Normal Normal
Buffer/ level Consumption Re-order Period Safety
Level = Safety Stock Days x Annual Consumption
360 Days
3. Maximum Reorder Reorder Min. Min.
Level Level Quantity Consumption Period
5. Average Maximum Stock Minimum Stock Stock Level Level Level .
2
OR Minimum Stock Level + 1/2 Re-order Quantity
x
Pocket Book 3 CA Ashish Kalra
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ECONOMIC ORDER QUANTITY (EOQ)/
OPTIMAL REORDER QUANTITY (ROQ)/
MINIMUM COST ORDER UNIT:
WILSON/BAUMOL MODEL
Important Notes: 1) Consumption is also called Usage. 2) Reorder Period is also called Lead period
/Delivery Period.
3) In case Normal Consumption/Usage &/or Normal Delivery/Lead/Reorder Period are not known, take
Average Consumption/Usage &/or Average Delivery
/Lead/Reorder Period.
Economic Order Quantity (EOQ) = 2 x A x O
C
Where, A = Annual Quantity of Raw Material to be purchased/Annual Requirement/Demand of Material/Usage/
Consumption of materials in units
O = Cost of placing an order (Ordering Cost per order)
C = Cost of interest & storing one unit of material for one year (Carrying cost per unit per annum)
Material Cost 4 CA Ashish Kalra
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TOTAL ANNUAL RELEVANT COST
Annual Ordering & Carrying = 2 x A x O x C
Costs/Annual Relevant Cost of Ordering EOQ A x O EOQ x C EOQ 2
EOQ
Diagrammatically, EOQ can be represented as:
Size of Order
Costs Annual Carrying Costs
Annual Ordering
Costs
ANNUAL CARRYING COST
Annual = ROQ + SSL x Carrying Cost per unit Carrying Cost 2
OR Annual Holding = Average Inventory x % of Annual
Cost Investment Carrying Cost
Pocket Book 5 CA Ashish Kalra
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TOTAL COST OF INVENTORY
ANNUAL ORDERING COST
Annual Ordering Cost = No. of Orders x Ordering Cost per Order
TIME BETWEEN TWO ORDERS
Time between Two Orders = 360 Days/12 months No. of Orders p.a.
NUMBER OF ORDERS PER ANNUM
AVERAGE INVENTORY INVESTMENT
Average Inventory ROQ SSL Purchase
Investment 2 Price p.u.
Total Total Annual Total Annual
Cost Purchase Cost Relevant Cost
Number of Annual Demand of Raw Material in units
Orders p.a. Reorder Quantity (ROQ)/Economic Order
Quantity (EOQ)
Material Cost 6 CA Ashish Kalra
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INVENTORY CONVERSION PERIOD/
INVENTORY VELOCITY PERIOD/ NO. OF
DAYS FOR WHICH INVENTORY IS HELD
Inventory Conversion 365/360/12/52 .
Period Inventory Turnover Ratio
INPUT-OUTPUT RATIO
Input-Output Input units x 100
Ratio (I-O Ratio) Output units
INVENTORY TURNOVER RATIO (ITR)
Inventory Raw Materials consumed .
Turnover Ratio Average Inventory of Raw Material
Where,
Simple Average Opening Stock Closing Stock Inventory of = of Raw Materials + of Raw Material
Raw Materials 2
Raw Opening Stock Raw Closing Stock
Material = of Raw + Material - of Raw Consumed Materials Purchased Materials
Pocket Book 7 CA Ashish Kalra
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DETERMINATION OF INVENTORIABLE COST
Invoice Price/ List Price xxx Less: *Trade Discount (including Quantity Discount) Less: Govt.grants/Subsidy/Incentive given to Purchase Raw Materials
(xxx)
(xxx)
Net Invoice Price xxx
Add: Excise Duty (computed as a % of Net Invoice Price)
xxx
Net Invoice Price (Including Excise Duty) xxx
Add: Sales Tax/ VAT (computed as a % of Net Invoice Price including Excise Duty)
xxx
Add: Import Duty/ Customs Duty (computed as a % of Net Invoice Price converted in `)
xxx
Add: Packing Charges of Raw Material /Cost of Non-Returnable Containers of Raw Material
xxx
Add: Loading & Unloading Charges xxx Add: Transit Insurance Premium xxx Add: Carriage/ Freight Inwards of Raw Material Add: Commission/Brokerage Payable on Material Purchased
xxx
Add: Octroi/Entry Tax xxx Less: Realisable Value/Returnable Value of Packages
& Empties (xxx)
Inventoriable Cost of Material xxx
Note: *Cash discount will not be reduced.
Material Cost 8 CA Ashish Kalra
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Single Amount
of
Apportionment (In the ratio
of)
Sales Tax/VAT
given
Net Invoice price inclusive of
Excise Duty of Various materials
Custom Import
Duty given
Net Invoice Price of Various
Materials converted in `
Carriage
Inwards
Weight/Quantity of materials
loaded in vehicle
Octroi Weight/Quantity of Materials entering the State
Types Of Cost Treatment Penalty or
Demurrage
Not to be added to Purchase
Cost
Normal loss of
Material In Transit (evaporation etc.)
Units of Such Loss shall be
reduced & Cost of remaining Inventory will be inflated
Abnormal loss of
Material in Transit Charged to Costing P&L A/c
Duties on which
CENVAT Credit is
eligible
Not to be added
Pocket Book 9 CA Ashish Kalra
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ABC ANALYSIS OF INVENTORY CONTROL
FORMAT OF STORES LEDGER
Date Parti-
culars
Receipts Issues Balance
Units Rate `
Amt `
Units Rate `
Amt `
Units Rate `
Amt `
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Ideal Level
Category % Value % Quantity Control A 70% 10% Maximum
B 20% 20% Moderate C 10% 70% Minimum
Value o
f Inv
ent
ory h
eld in
Sto
rero
om
70
90
100
0 10 30 100 No. of Items held in Storeroom
B C
A
Material Cost 10 CA Ashish Kalra
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METHODS OF PRICING MATERIAL
ISSUES FROM STOREROOM
Name of the Method Basis of Pricing
1. Identifiable Cost
Method (Specific Price Method)
Actual Purchase Price
2. First in First out
(FIFO)
Price at which material is
arrived in store first (or items held in stock for longest time).
3. Last in First out (LIFO)
Price at which latest inventory purchased
4. Highest in First out
Method (HIFO)
1. Price at which Costliest inventory is priced/rated in
store room.
2. If Costliest lot exhausts
second costliest lot is taken.
5. Base Stock Method
Minimum quantity of inventory
carried at a price fixed year to year & units in excess of
minimum level valued at any one
of the methods.
Pocket Book 11 CA Ashish Kalra
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6. Periodic
Weighted Average
Price Method
Total Cost of Quantity held
during the accounting period .
Total Quantity held during
the Accounting period
7.Perpetual weighted Average/
Weighted Average
Price Method
Total Cost of Material held on the date of issue .
Quantity of Material held
prior to each issue
8. Moving/Running
Weighted Average
Price Method
Total of Weighted Average price
of current period & of preceding periods .
Number of Periods
9. Standard Price Method
Some Predetermined Standard
Price irrespective of the actual
purchase cost of Material
10. Periodic Simple
Average Method
Total of unit prices of Materials
in a Particular Accounting Period
Number of Prices used in the Period
11. *Perpetual Simple Average
/Simple Average
Price Method
Unit Latest Prices
Number of Prices
Material Cost 12 CA Ashish Kalra
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CHOICE OF SUBSTITUTE MATERIAL
If Regular material for Production not available, then
Substitute Material having Least Cost per unit of Finished
Output shall be used.
12. Moving /
Running Simple
Average Price Method
Total of Periodic Simple Average prices of given number of periods . Number of Periods
13. Inflated Price Price includes a charge designed to cover contingency & related costs.
14.Replacement/
Market Price
Issues are valued at the
replacement price/market price prevailing on the date of issue.
*The Lot which is exhausted (on the assumption that FIFO method is followed on physical movement of
materials) is excluded in computation of average price.
TOTAL ORDERING COSTS
PARTICULARS (`)
Procurement Cost xxx Add: Cost of receiving Material xxx
Pocket Book 13 CA Ashish Kalra
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Add: Cost of collecting Material xxx Add: Purchase Department Expenses xxx Add: Cost of bringing Inventory/Carriage Inward xxx Add: Loading/Unloading Charges xxx Add: Cost of Bill payments xxx Add: Inspection Cost of Incoming Materials xxx Add: Transit Insurance Premium xxx Add: Cost of Material Handling during
Transportation
xxx
Total Ordering Cost xxx
TOTAL ANNUAL CARRYING COSTS
PARTICULARS (` )
Annual Storage Cost xxx
Add: Annual Interest Cost on Average Inventory xxx
Add: Annual Insurance Cost of Materials kept in
Storeroom xxx
Add: Annual Spoilage, Wastage, Deterioration,
Leakage expected normally in regard to Material held in Storeroom
xxx
Add: Cost of Materials handling for storing
activities xxx
Total Annual Carrying Costs xxx
Labour Cost 14 CA Ashish Kalra
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-
LABOUR
COST
Pocket Book 15 CA Ashish Kalra
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COMPUTATION OF GROSS LABOUR COST
Basic Salary/Wages/Pay xxx Add: Dearness Allowance (DA) xxx
Add: Other Allowances xxx
Add: Bonus xxx
Add: Commission xxx
Add: Leave Salary xxx
Add: Employer’s Contribution to:
Provident Fund xxx
Pension Fund (PF) xxx
Gratuity Fund xxx
Employees State Insurance (ESI)
Employees Benevolent Fund
xxx
xxx
Add: Perquisites/ Fringe Benefits (Free
accommodation, Telephone, Transport, Gas,
Water, Education etc.)
xxx
Gross Wages for Normal Time Worked xxx Add: Overtime Wages xxx
Gross Labour Cost (including Overtime
Wages)
xxx
Labour Cost 16 CA Ashish Kalra
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Effective Hourly Gross Wages for normal time worked
Wage Rate *Effective Labour Hours *Effective Labour Total Labour Normal Idle
Hours Hours Hours
TREATMENT OF IDLE TIME IN
COST ACCOUNTS
1. Normal Idle Time:
It is treated as a part of the cost of production & thus,
on allowance for normal idle time is built into the labour
cost rates by computing Effective Hourly Wage Rate as follows:
2. Abnormal Idle Time:
Cost is not included as a part of production cost and is charged to Costing Profit & Loss Account.
Cost of Effective Abnormal
Abnormal Hourly Idle Idle Time Wage Rate Hours
Pocket Book 17 CA Ashish Kalra
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Workers will be paid wages which are higher of the following
two schemes:
I. Upto 48 hours a week: Normal Wage Rate per hour Beyond 48 hours a week: Double of Normal Wage Rate
per hour.
COMPUTATION OF OVERTIME & NORMAL
TIME WAGES AS PER FACTORIES ACT 1948
COMPUTATION OF NET CASH PAYABLE
TO WORKERS
Gross Labour Cost xxx
Less: Employer and Employee contribution to Employee Provident Fund.
(xxx)
Less: Employer and Employee contribution to
Employee State Insurance Scheme (ESI) (xxx)
Less: Employer & Employee Contribution to
Employees Benevolent fund (xxx)
Less: Installments for repayment of any loan taken
by the employee (xxx)
Less: Deductions against other Advances & Dues (xxx)
Less: Employer Contribution to Gratuity Fund (xxx)
Less: Non Cash Perks (xxx) Less: Tax Deduction at Source (TDS) (xxx)
Net Cash Payable to Workers xxx
Labour Cost 18 CA Ashish Kalra
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TREATMENT OF OVERTIME PREMIUM
IN COST ACCOUNTING
II. Upto 9 hours per day: Normal Wage Rate per Hour
Beyond 9 hours per day: Double of Normal Wage Rate
per hour.
Cause of Overtime Treatment of Overtime
Premium
1. Specific Request of
Customer
Charged to Job as Direct
Wages
2. General Pressure
of work to increase
output regularly as a normal feature
Charge labour cost to all jobs
at the following rate:-
= Normal time Wages for
total time worked (+) Overtime Premium .
Total Hours Worked
Where Total Hours Worked
= Normal + Overtime
Hours Hours
3. To meet the
requirements of
production irregularly
Charge as Factory overheads
Pocket Book 19 CA Ashish Kalra
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TIME RATE SYSTEM
Wages = Hours worked x Time Rate per hour
EFFICIENCY LEVEL OF WORKERS
Efficiency Time allowed for a job/work x 100
Level of Time taken for the job/work
Workers OR
= Actual output produced during actual hours worked x 100
Standard Output for actual hours worked
4. Abnormal reasons (e.g. Flood, Earthquake, etc).
Charge to Costing Profit & Loss A/c.
STRAIGHT PIECE RATE SYSTEM
Wages = No. of Units produced x Piece Rate per unit
TYPES OF TIME RATE SYSTEM
Types Particulars
(a) High
Wages Plan
A wage rate higher than the existing
wage rate is fixed.
Labour Cost 20 CA Ashish Kalra
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HALSEY SYSTEM
ROWAN SYSTEM
HALSEY-WEIR PREMIUM PLAN
Rowan Time Time Time Taken Time Time
System Taken Rate Time Allowed Saved Rate
Halsey Time Time 50% x Time Time
System Taken Rate Saved Rate
Halsey-Weir Time Time 30% x Time Time System Taken Rate Saved Rate
Types Particulars
(b) Different
Time rates
Different hourly rates are fixed for
different levels of efficiency
(c) Measured Day Work
Hourly rates are divided into variable and fixed parts. Fixed part depends
on the nature of job. Variable
element depends on the cost of living index and merit rating of the worker.
Pocket Book 21 CA Ashish Kalra
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PIECEWORK WITH GUARANTEED
MINIMUM DAILY WAGES
Earnings of the worker will be the higher of the two: (a) No. of Units Produced x Piece Rate per Unit
(b) Minimum Time Wages for Actual Hours Worked
Efficiency Piece Rate Applicable
Less than 100% 83% of Normal Piece rate
100% or more 125% of Normal Piece rate
TAYLOR’S DIFFERENTIAL PIECE
WORK SYSTEM
Efficiency Piece Rate Applicable
Upto 83% Normal Rate
Above 83% & upto 100% 10% above Normal Rate
Above 100% 20% or 30% above Normal
Rate
MERRICK DIFFERENTIAL PIECE
WORK SYSTEM
Labour Cost 22 CA Ashish Kalra
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Efficiency Payment
Upto 66.67% Normal Time Rate
Above 66.67%
& upto 100%
Normal Time Rate plus Bonus
varies between 0.01% and 20%
Above 100%
Normal time rate plus Bonus of
20% of basic wages plus 1% for
each 1% increase in efficiency
above 100%
EMERSON EFFICIENCY SYSTEM
BARTH SHARING PLAN
Wages Wage Rate Time Time
Payable per hour Allowed Taken
BEDAUX SYSTEM
Wages Time Time 75% of Bedaux Time Payable Taken Rate Points Saved Rate
60
Pocket Book 23 CA Ashish Kalra
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Efficiency Payment
Less than 100% Normal Time Wages
Equal to 100% 120% of Normal time wages
More than 100% *High piece rate on entire output produced.
* High Piece
Rate
120%x Time Allowed x Time Rate .
Standard Output in Time Allowed
GANTT TASK AND BONUS SYSTEM
PERCENTAGE EFFICIENCY PLAN
Wages % Efficiency Normal Time
Payable Level Wages
ACCELERATED PREMIUM SYSTEM
In this system individual employer makes his own formula.
The following formula may be used for a general idea of
the scheme: Y = 0.8 x Normal Time Wages x X2 Where, Y = Wages & X = Efficiency
Labour Cost 24 CA Ashish Kalra
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HAYNES MANIT SYSTEM
System similar to Bedaux Point system. Instead of
Bedaux points saved, ‘MANIT’ (Man-minutes) saved are
measured for payment of bonus. Distribution of Bonus:
Particulars Distribution Ratio
1. For
Repetitive work Workers & Supervisors 5:1
2. For Non-
Repetitive work
Workers : supervisors :
employers 5:1:4
GROUP SYSTEM OF WAGE PAYMENT
The methods usually used for distributing wages to each
worker are as follows: 1. Equally, if all the workers of the group are of the same
grade and skill, same rate of pay and has worked for same
duration.
2. Pro-rata to the wages for time spent by each worker. 3. On a specified percentage basis; the percentage
applicable to a worker is pre- determined on the basis
of the skill, rate of pay etc.
Pocket Book 25 CA Ashish Kalra
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GROUP BONUS PLANS
Particulars Meaning
Priestman
Production
Bonus Plan
If actual output is more than standard
output, bonus is paid accordingly.
Cost Premium
System
Bonus is paid for any cost savings done
in a factory as bonus is dependent on output.
Rucker’s Plan Based on relationship between the total
hourly earnings of the employees and value added by the employees. Used in
manufacturing industries.
Scanlon Plan Focusses on the cost of labour & ‘added
value’ . Used in service sector
Towne Gain Sharing Plan
Bonus is dependent on the reduction in labour cost.
Labour Cost 26 CA Ashish Kalra
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GROUP SYSTEM OF WAGE PAYMENT
MEASUREMENT OF LABOUR TURNOVER
DIFFERENTIAL TIME RATE
Different hourly rates are fixed for different levels of efficiency. Upto a certain level of efficiency the normal
time or day rate is paid. Based on efficiency level the
hourly rate increases gradually. The following table shows different differential rates:
Up to, say 75% efficiency Normal (say ` N per hr.)
From 76% to 80% efficiency 1.10 x N
From 81% to 90% efficiency 1.20 x N
From 91% to 100% efficiency 1.30 x N
From 101% to 120% efficiency
1.40 x N
DIFFERENTIAL TIME RATE SYSTEM
No. of Employees Replaced
Replacement during the period 100
Method *Avg. No. of Employees on Roll
during the period
*Avg. No. of Opening No. of Closing No. of
Employees = permanent employees + permanent employees
2
Pocket Book 27 CA Ashish Kalra
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COST OF LABOUR TURNOVER
1. Recruitment cost of New Workers (Advertisement etc.)
2. Selection cost of new workers (interview cost etc.)
3. Training cost of new workers 4. Settlement/Retrenchment Compensation of old/
existing employees
5. Loss of potential contribution on account of Loss of
potential production due to Labour turnover. .
No. of Employees Separated
Separation during the period 100
Method Avg. No. of Employees on Roll
during the period Where No. of Employees Separated
= (Voluntary + Compulsory) Separations
Flux No. of Separations + No. of Accessions x 100
Method Average Number of Employees on Roll during the period
Where No. of Accessions
= No. of replacements + New recruitments
Overheads 28 CA Ashish Kalra
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OVERHEADS
Pocket Book 29 CA Ashish Kalra
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–
EXAMPLES OF COMMON OVERHEADS
& BASIS OF THEIR APPORTIONMENT
Supervision No. of Employees/
No. of Machines/Area
Depreciation on Factory Building
Insurance Premium of Building
Municipal Tax of Factory Building
Air Conditioning & Centralised
Heating
Cleaning Expenses of Factory
Building
Floor Area/
Space Occupied
Rent, Rates & Taxes of Factory
Building Repairs & Maintenance of Factory
Building
Overheads 30 CA Ashish Kalra
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Depreciation/ Rent of Plant &
Machinery
Insurance Premium of Machine
Value of Plant
& Machinery
Maintenance hours/
Value of Plant & Machinery/ Machine
Hours
Repairs and Maintenance
of Plant & Machinery
Lighting
No. of Light points/Area/Cubic Content
Kilowatt Hrs/Horse Power Hrs/
Horse Power x Machine Hrs/ Horse Power
Motive
Power
Time Keeping Expenses
Canteen Expenses
Employee Welfare Expenses
Personnel/Human Resource
Department Expenses
Number of
Employees
Pocket Book 31 CA Ashish Kalra
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Information Technology
Leave with Pay/Leave Salary Wage Bill
Inspection Hours
Inspection
No. of Stores Requisition/
Value of Direct Material issued
Stores
Overheads
Weight of Material/
Value of Material
Material
Handling
Cost
Hours Devoted by Crane for each Department
Crane Expenses
Time Devoted by Manager for each Department
Manager’s
Salary
Wage Bill
Employer’s contribution to
- Provident Fund
- Employee’s State Insurance - Gratuity
- Pension fund
IT Hours Information Technology Expenses
Overheads 32 CA Ashish Kalra
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Hours Devoted by Vehicle for
each Department
As given Or
Direct Wages/ Machine Hours
/Labour Hours
Misc. Expenses/
Sundry Expenses/
General Expenses
Direct Material Cost
Indirect Material Cost
Direct Labour Cost
Cost
Indirect Labour Cost
Cost Internal
Transport
Cost
Pocket Book 33 CA Ashish Kalra
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CLASSIFICATION OF OVERHEADS
FUNCTION
-AL
ANALYSIS
MANUFACTURING/ FACTORY OVERHEADS
SELLING AND
DISTRIBUTION
OVERHEADS
OFFICE AND ADMINISTRATIVE
OVERHEADS
RESEARCH & DEVELOPMENT
OVERHEADS
BEHAVIOU
-RAL
ANALYSIS VARIABLE OVERHEADS
SEMI VARIABLE OVERHEADS
FIXED OVERHEADS
Overheads 34 CA Ashish Kalra
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Particulars Basis
Production
Department
Service
Department
P1 P2 P3 S1 S2
Primary
Distribution:
Direct Cost Allocated - - -
Allocated O/Hs Allocated
Common O/Hs Logical Basis
Total Cost of Service Deptts.
Secondary
Distribution:
S1 Ratio of Services Rendered
() -
S2 - ()
Factory O/Hs of Production Deptts.
Basis of O/H Absorption/ Recovery
Factory O/Hs
Absorption
Rate
OVERHEADS DISTRIBUTION SHEET
Pocket Book 35 CA Ashish Kalra
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CRITERIA FOR SECONDARY DISTRIBUTION
Particulars Meaning
Ability to pay Higher the revenue of a department, higher is the
charge for services.
Efficiency or
incentive method:
Production targets are set and
apportionment is made
accordingly.
Analysis or
survey:
It is an arbitrary method of
distribution. Apportionment of
overheads is made on the basis of analysis and survey method.
General use of
indices:
This method is used when data
of actual services cannot be obtained.
Service or use method:
Overheads are apportioned on the basis of services actually
received by various department
Overheads 36 CA Ashish Kalra
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METHODS OF SECONDARY
DISTRIBUTION
1. Direct Re-Distribution Method: Service
Departments’ costs are apportioned among the Production
Departments only, totally ignoring the services rendered
by Service Departments to one another.
2. Step Method or Ladder or Non-reciprocal Method: Service Department which provide services to other
departments but does not take services from other
departments ranks first for distribution. In case the department provide reciprocal services, but Step/
Ladder method is preferred to be used, then the
sequence begins with the department that renders maximum percentage of service to other service
departments & then distribution is made on non-
reciprocal basis.
3. Reciprocal Service Methods: Service departments, render services to each other and, therefore, are
mutually dependent. The methods available for dealing
with reciprocal services are: (i) Simultaneous Equation Method: Firstly, the costs of
service departments are ascertained by formulating
mathematical equations considering reciprocal services
Pocket Book 37 CA Ashish Kalra
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METHODS OF OVERHEAD
ABSORPTION/RECOVERY
1.Rate per unit of Output: Overhead Rate Budgeted Production Overheads per unit of of the Department
output Budgeted Output
by one department to another and vice-versa. These costs
are then re-distributed to production departments on the
basis of given percentages. (ii) Repeated Distribution Method: Service
departments’ costs are distributed to other service
and production departments on agreed percentages and this process continues to be repeated, till the figures
of service departments are either exhausted or reduced
to a negligible figure. (iii) Trial & Error Method: The cost of first service
department is apportioned to other service department
only at a given percentage. The cost of the second service
department is then apportioned to the first service department.
Overheads 38 CA Ashish Kalra
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5. Direct Labour Hour Rate: Direct Budgeted Production Overheads of the
Labour Department .
Hour Rate Budgeted Effective Direct Labour Hours
2. Percentage to Direct Material Cost: Direct Material Budgeted Production Overheads
Cost of the Department x 100
Percentage Rate Budgeted Direct Material Cost
3. Percentage to Direct Labour Cost: Direct Labour Budgeted Production Overheads Cost Percentage of the Department x 100
Rate Budgeted Direct Labour Cost
4. Percentage to Prime Cost: Prime Cost Budgeted Production Overheads Percentage of the Department x 100
Rate Budgeted Prime Cost
6. Machine Hour Rate: Machine Budgeted Production Overheads allotted Hour & apportioned to the machine .
Rate Budgeted Effective Machine Hours
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Particulars Amt in (` )
Fixed Costs Apportioned to Machine Rent Rates & Taxes xxx
Add: Insurance Premium of Machine xxx
Add: Supervision Charges xxx
Add: Depreciation & Repairs of Machine xxx (if charged on Time Basis)
Add: Lighting Charges xxx
STATEMENT SHOWING
COMPUTATION OF MACHINE HOUR
RATE
EFFECTIVE MACHINE HOURS
Effective Total Machine Normal Idle
Machine Hours Hours available Time of machines
7. Combined Machine Hour and Labour Hour rate: The overheads are divided into two categories: (i) The expenses directly attached to the machines are
allocated on the basis of machine hour.
(ii) Expenses other than (i) are allocated on the basis of
labour hours.
Overheads 40 CA Ashish Kalra
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Unless otherwise stated, it is assumed that: 1. Set up time is unproductive.
2. It does not require consumption of any power.
ASSUMPTIONS IN RELATION TO SET
UP TIME
Add: Operator Wages & Salaries(if
payable on monthly basis)
xxx
Total Fixed Charges of the Machine xxx
Effective Machine Hours (Total Machine
Hours – Normal Idle Time)
xxx
Fixed Charges per effective Machine
Hour
xxx
Variable Costs:
Power per effective Machine Hour xxx
Add: Depreciation, Consumable stores & Repairs of Machine
xxx
(if charged on usage basis)
Add: Operator’s Wages (if payable on
hourly basis)
xxx
Machine Hour Rate xxx
Pocket Book 41 CA Ashish Kalra
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BLANKET/ PLANT WIDE/ SINGLE
OVERHEAD ABSORPTION RATE
Blanket Budgeted Production Overhead Costs Overhead for the whole factory
Rate Total Units of the Selected Base
NORMAL IDLE TIME OF MACHINE
1. Time lost on account of normal repairs & maintenance.
2. Time lost on account of normal stoppage of machine.
3. Set up time (if unproductive).
USE OF BLANKET OVERHEAD ABSORPTION
RATE WHEN MORE THAN ONE PRODUCT
IS MANUFACTURED
1. When all products pass through all the departments. 2. All products spend equal time in all the departments.
3. Basis of absorption is Time (Machine hours/Labour Hours) & is logical to be used for all departments.
ACTUAL OVERHEAD RATE
Actual Overhead Actual Overhead for the period
Rate Actual Production for the period
Overheads 42 CA Ashish Kalra
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MULTIPLE OVERHEAD RATE
Multiple Overhead allocated /apportioned to each
Overhead Department or Cost Centre or Product . Rate Corresponding Basis of Absorption
Pre-determined Budgeted Overhead for the period
Overhead Rate Budgeted Base for the period
METHODS OF SEGREGATING SEMI
VARIABLE COSTS INTO FIXED & VARIABLE
COSTS
Method Meaning
Graphical
Method
A large number of observations regarding
the total costs at different levels of output are plotted on a graph with the output on the
X-axis & the total cost on the Y-axis.
High points &
low points
method:
The difference between the total cost at highest & lowest volume is divided by the
difference between the sales value at the
highest & lowest volume.
PREDETERMINED OVERHEAD RATE
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SEGREGATION OF FIXED & VARIABLE
OVERHEADS IN CASE OF SEMI VARIABLE
OVERHEADS
Variable Overhead = Change in Total Overheads Per Unit Change in Output
Variable Overhead = Change in Total Overheads
per Machine/Labour Change in Machine/Labour
Hour Hour Fixed Overheads = Total Semi Variable
Overheads
(-) Variable Overheads
Comparison
by period or level of
activity:
Variable element of Cost = Change in the amount of expenses Change in the quantity of output
Analytical
method:
Degree of variability is ascertained
for each item of semi-variable
expenses.
Least
squared
method:
It is a statistical method & is based on
finding out a line of best fit for a
number of observations.
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Particulars Dr. Cr.
Journal Entry For Under-absorbed Overheads: Cost of Sales A/c Dr. xxx
(Units sold x Supplementary Rate) Finished Goods Ledger Control A/c Dr. xxx
Units of Closing x Supplementary
Stock of Finished Goods Rate
WIP Ledger Control A/c Dr. xxx Equivalent Units x Supplementary
of Closing WIP Rate
To Factory Overheads Control A/c xxx
TREATMENT OF UNDER/OVER ABSORBED
OVERHEADS OCCURING DUE TO GENUINE
PRICE RISE/FALL
Underabsorbed Overheads = Absorbed Overhead <
Actual Overheads Over Absorbed Overheads = Absorbed Overhead >
Actual Overheads
Supplementary = Under/Over Absorbed Overheads Rate Equivalent Production Units
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Journal Entry for Under-absorbed Overheads: Costing Profit & Loss A/c Dr. xxx
To Overhead Control A/c xxx
Journal Entry of Over-absorbed Overheads: Overhead Control A/c Dr. xxx
To Costing Profit & Loss A/c xxx
TREATMENT OF UNDER/OVER ABSORBED
OVERHEADS DUE TO DEFECTIVE
PRODUCTION PLANNING
Journal Entry for Over-absorbed Overheads:
Factory Overheads Control A/c Dr. xxx To Cost of Sales A/c
(Units sold x Supplementary Rate) xxx
To Finished Goods Ledger Control A/c
Units of Closing Supplementary Finished Goods Rate
xxx
To Cost of Sales A/c
Units of Closing Supplementary
Equivalent WIP Rate
xxx
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Carry forward the under/over-absorbed Factory
Overheads in the next financial period.
No Journal Entry will be passed in this regard.
TREATMENT OF UNDER/OVER ABSORBED
OVERHEADS OCCURING IN CURRENT
FINANCIAL PERIOD & ARE EXPECTED TO
BE SET OFF AGAINST FUTURE
OVER/UNDER ABSORPTION
CONCEPTS RELATED TO CAPACITY
Types Meaning
1.Rated/Maximum/
Plant / Installed/ Theoritical Capacity
i) Capacity of Machine/Plant
indicated by its
manufacturer ii) Maximum possible
productive capacity of a plant
2. Practical / Net/
Available/Operating
Capacity
Takes into account loss of
time due to repairs, maintenance, idle time set up
time etc
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Types Meaning
3. Normal/Average
Capacity
i) Capacity expected to be utilised over a Long period
based on sales expectation
ii) Average utilisation of Capacity during one full
business cycle may extend
over 2 to 3 years
4. Actual Capacity
i) Capacity actually achieved
during a period
ii) It may lie between
Practical capacity & Capacity based on sales
expectancy
5. Capacity based
on Sales
Expectancy:
The capacity based on sales
expectancy is based on sales
for the year only.
6. Idle Capacity
It is the difference between
the practical capacity and
the capacity based on sales
expectancy.
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ABSORPTION OF ADMINISTRATIVE
OVERHEADS AND SELLING &
DISTRIBUTION OVERHEADS
Expense Basis
1. Administrative
Overheads
Mostly on % age of Net
Works Cost or Net Factory
Cost
2. Selling &
Distribution Overheads
Mostly as a % age of COGS
/Sales Value/Per Unit Sold
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Activity Based Costing 50 CA Ashish Kalra
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Production
Overheads
Activity
Cost
pool A
Activity
Cost
pool B
Activity
Cost
pool C
Activity
Cost
pool D
Products/Jobs/Processes/Batches
ACTIVITY BASED COSTING: CONCEPT
ACTIVITY BASED COSTING: CONCEPT
Types Meaning
Unit Level Occurs every time a unit is produced
Batch
level
Occurs every time a group (batch) of
units is produced/purchased.
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Types Meaning
Product Level Supports an entire product line but not necessarily each individual unit
Facility Level Not caused by products or customer service needs and cannot be traced
to individual units
STAGES OF ABC
Stages Particulars
Stage I Identify the major activities in the
organisation.
Stage II Determine Cost drivers i.e. the
underlying factor(s) which causes the incurrence of cost relating to
that activity
Stage III Create Cost Pools
Stage IV Calculate cost driver rate
= Activity centre cost Activity driver
Stage V Apply the activity cost driver rates to products (cost units) to arrive at
activity based overhead cost.
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COST SHEET
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ELEMENTS OF COST
Cost
Material Expenses
Labour
Direct Indirect Direct Indirect Direct Indirect
Prime Cost
Overheads
Factory/Works/
Production
Office & Administration
Selling & Distribution
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Direct
Material
Direct Labour
Direct Expenses
Prime
Cost
Factory Overheads
Factory
Cost
Administration Overheads
Cost of
Production
Selling & Distribution Overheads
Cost
of
Sales
Profit
Sales
Direct Material Cost xxx Add: Direct Labour Cost xxx
Add: Direct Expenses xxx
Prime Cost xxx
Add: Factory/Works/Manufacturing/Prod. O/H xxx
Factory Cost / Works Cost xxx
Add: Office & Administration Overheads xxx
Cost of Production xxx
Add: Selling and Distribution Overheads xxx
Cost of Sales xxx
Add: Profit xxx
Sales xxx
BASIC COST SHEET WITHOUT STOCKS
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COMPREHENSIVE COST SHEET
Opening Stock of Raw Materials xxx
Add: Purchases of Raw Materials (including
Carriage Inwards, Transit Insurance etc.)
xxx
Less: Closing Stock of Raw Materials (xxx)
Raw Materials Consumed xxx
Add: Direct/ Labour/Factory Wages xxx
Add: Direct/Chargeable Expenses xxx
Prime Cost xxx
Add: Factory/ Works/ Manufacturing/
Production Overheads
xxx
Gross Factory Cost / Gross Works Cost xxx
Add: Opening Stock of Work in Progress xxx
Less: Closing Stock of Work in Progress (xxx)
Net Factory Cost / Net Works Cost xxx
Add: Office & Administration Overheads xxx
Cost of Production xxx
Add: Opening Stock of Finished Goods xxx
Less: Closing Stock of Finished Goods (xxx)
Cost of Goods Sold xxx
Add: Selling and Distribution Overheads xxx
Cost of Sales xxx
Add: Profit xxx
Sales xxx
Reconciliation 56 CA Ashish Kalra
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Pocket Book 57 CA Ashish Kalra
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REASONS FOR DIFFERENCE IN PROFITS IN
COST ACCOUNTS & FINANCIAL ACCOUNTS
1. Items included in Financial Account only:
(a) Purely Financial Expenses:
(i) Interest on Loans, Bank Mortgages, debentures
(ii) Expenses, Discounts & losses on Issue of Shares,
Debentures etc., (iii) Losses on sale of Fixed Assets and Investments,
(iv) Fines and Penalties,
(v) Stamp Duty and Expenses on transfer of shares,
(vi) Goodwill written off, (vii) Preliminary Expenses written off,
(viii) Donations and Subscriptions etc.,
(ix) Income Tax,
(x) Underwriting Commission written off,
(xi) Cash Discount Allowed, (xii) Obsolescence Loss,
(xiii) Loss by fire/theft/other abnormal losses,
(xiv) Foreign Exchange Fluctuation Loss,
(xv) Lawsuit Compensation payable/paid
(b) Purely Financial Incomes: (i) Interest Income on Bank Deposits, Investment &
Loans given,
(ii) Dividends Income,
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(iii) Profit on sale of Fixed Assets and Investments,
(iv) Rental Income,
(v) Fees Charged on issue and transfer of Shares,
(vi) Profit on sale of stores, (vii) Insurance Compensation,
(viii) Cash Discount Received,
(ix) Lawsuit Compensation Receivable,
(x) Foreign Exchange Fluctuation Gain.
(c) Appropriations of Profits:
(i) Dividends (Interim/Proposed),
(ii) Transfer to Reserves.
2. Items included in Cost Accounts only: These are usually notional charges called as Imputed
Costs/Opportunity Costs:
(a) Interest on capital at notional figure though not
incurred,
(b) Salary of owner manager at notional figure though not incurred,
(c) Notional rent of own building,
(d) Notional Depreciation on the asset fully depreciated
for which book value is nil.
3. Under or Over-absorption of overheads, if transferred to next year’s Accounts.
4. Different basis of Stock Valuation.
5. Different methods of charging depreciation.
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RECONCILIATION STATEMENT
Net Profits as per Cost Accounts xx
Add: Profits taken in Financial A/c & not in Cost A/c xx
Add: Notional Expenses taken in Cost A/c & not in
Financial A/c
xx
Add: Over absorption of overheads in Cost A/c xx
Add: Over valuation of Opening Inventory in Cost A/c as compared to Financial A/c
xx
Add: Under valuation of Closing Inventory in Cost A/c
as compared to Financial A/c
xx
Add: Depreciation overcharged in Cost A/c xx Less: Expenses and Losses accounted for in Financial
A/c and not in Cost A/c
(xx)
Less: Appropriations in Financial A/c only (xx)
Less: Notional Income taken in Cost A/c and not in
Financial A/c
(xx)
Less: Under absorption of Overheads in Cost A/c (xx)
Less: Under valuation of Opening Inventory in Cost
A/c as compared to Financial A/c
(xx)
Less: Over valuation of Closing Inventory in Cost A/c
as compared to Financial A/c
(xx)
Less: Depreciation undercharged in Cost A/c (xx)
Retained Earnings as per Financial Accounts xx
Reconciliation 60 CA Ashish Kalra
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Particulars (`) Particulars (`)
To Purely Financial Expenses debited only in Financial A/c
xx By Net Profits as per
Cost A/c xx
To Under-valuation of Opening Stock in Cost A/c
xx By Purely Financial Income
xx
To Appropriation of profits debited only in P&L App A/c
xx By Purely Cost Expenses charged only in Cost A/c
xx
To Over-valuation of Closing Stock in Cost A/c
xx By Over-valuation of Opening
Stock in Cost A/c xx
To Under-absorption of Overheads in Cost A/c
xx By Over-absorption of Overheads in Cost A/c
xx
To Depreciation undercharged in Cost A/c
xx By Depreciation overcharged in Cost A/c
xx
To Notional Income taken in Cost A/c
xx By Under-valuation of Closing
Stock in Cost A/c xx
To Retained Earnings as per
Financial A/c xx
xx xx
MEMORANDUM RECONCILIATION A/C
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COST BOOK
KEEPING
Cost Book Keeping 62 CA Ashish Kalra
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NON-INTEGRATED ACCOUNTING
SYSTEM FLOWCHART
Materials/ Stores Ledger
Control A/c
Wages
Control A/c
Work in Progress Ledger
Control A/c
Finished Goods
Ledger Control A/c
Administration Overhead
Control A/c
Cost of Sales A/c
Production Overhead
Control A/c
Selling & Distribution
Overhead Control A/c
Costing P&L A/c
Pocket Book 63 CA Ashish Kalra
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NON-INTEGRATED ACCOUNTING
1.Materials Purchased on Credit /for Cash:
(a) For Stock: Stores Ledger Control A/c Dr. To General Ledger Adjustment A/c
xxx
xxx (b) For Special Jobs:
Work-in-Progress Ledger Control A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
2.Materials Issued: (a) Direct Material
Work-in-Progress Ledger Control A/c Dr. To Stores Ledger Control A/c
xxx
xxx
(b) Indirect Material
Respective Overhead A/c Dr. To Stores Ledger Control A/c
xxx
xxx
3. Materials Returned to Supplier:
General Ledger Adjustment A/c Dr. To Stores Ledger Control A/c
xxx
xxx 4. Materials Returned from Shop floor:
Stores Ledger Control A/c Dr. To Work-in-Progress Ledger Control A/c
xxx
xxx 5. Materials transferred from one job to
another job:
Work in Progress of Transferee Job A/c Dr. To Work in Progress of Transferor Job A/c
xxx
xxx
Cost Book Keeping 64 CA Ashish Kalra
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`
6. Sale of Material:
General Ledger Adjustment A/c Dr. To Stores Ledger Control A/c Note: Loss on sale will be debited & profit on sale will be credited to Costing profit & Loss A/c
xxx
xxx
7. Normal Loss of Materials kept in Storeroom:
Factory Overheads Control A/c Dr. Or Work-in-Progress Ledger Control A/c Dr. To Stores Ledger Control A/c
xxx
xxx
xxx
8.Abnormal Loss of Materials kept in Storeroom:
Costing P & L A/c Dr. To Stores Ledger Control A/c
xxx
xxx
9. Transportation of Incoming Material/ Carriage/ Freight Inwards
Production Overheads Control A/c OR Stores Ledger Control A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
10. Labour Cost:
(a) Total Wages & Salaries paid (including
Employer’s contribution to various funds)
Wages & Salaries Control A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
(b) Allocation of Direct & Indirect Labour Cost:
Work-in-Progress Ledger Control A/c (DL) Dr. Respective Overhead Control A/c (IL) Dr. To Wages & Salaries Control A/c
xxx
xxx
xxx
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11.Direct Expenses (Paid/Accrued):
Work in Progress Ledger Control A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
12.Overheads Incurred (Paid/Accrued):
Respective Overheads Control A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
13. Overheads Recovered:
Work-in-Progress Ledger Control A/c Dr. (For Works Overheads Recovered) Finished Goods Ledger Control A/c Dr.
(For Administration Overheads Recovered) Cost of Sales A/c Dr. (For Selling & Distribution Overheads Recovered) To Respective Overhead Control A/c
xxx
xxx
xxx
xxx
14. Administration Overheads allocated to
Production:
Work-in-Progress A/c Dr. To Administration Overheads Control A/c
xxx
xxx
15. Finished Goods Produced:
Finished Goods Ledger Control A/c Dr. To Work-in-Progress Ledger Control A/c
xxx
xxx
16.Administration Overheads allocated to Sales: Cost of Sales A/c Dr. To Administration Overheads Control A/c
xxx
xxx
17. Cost of Goods Sold:
Cost of Sales A/c Dr. To Finished Goods Ledger Control A/c
xxx
xxx
Cost Book Keeping 66 CA Ashish Kalra
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18. Cash/Credit Sales:
General Ledger Adjustment A/c Dr. To Sales/Costing Profit and Loss A/c
xxx
xxx
19. Cost of Goods Returned by Customers:
Finished Goods Ledger Control A/c Dr. To Cost of Sales A/c
xxx
xxx
20. Sales Return: Sales Return/Costing P&L A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
21. For transferring Cost of Sales to Costing P&L A/c
Costing P & L A/c Dr. To Cost of Sales A/c
xxx
xxx
22.Underabsorbed Overheads written off:
Costing P & L A/c Dr. To Respective Overheads A/c
xxx
xxx
23.Overabsorbed Overheads written off:
Respective Overheads A/c Dr. To Costing P & L A/c
xxx
xxx
24. For profit in Costing P&L A/c:
Costing P& L A/c Dr. To General Ledger Adjustment A/c
xxx
xxx
25. For Losses in Costing P&L A/c: General Ledger Adjustment A/c Dr.
To Costing P& L A/c
xxx
xxx
Pocket Book 67 CA Ashish Kalra
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1. Materials purchased on credit/for cash:
(a) For Stock:
Stores Ledger Control A/c Dr. To Sundry Creditors/Cash A/c
xxx
xxx (b) For Special Jobs:
Work-in-Progress Ledger Control A/c Dr. To Sundry Creditors/Cash A/c
xxx
xxx
2. Materials Issued:
(a) Direct Material: Work-in-Progress Ledger Control A/c Dr. To Stores Ledger Control A/c
xxx
xxx
(b) Indirect Material:
Relevant Overhead A/c Dr. To Stores Ledger Control A/c
xxx
xxx 3. Materials returned to supplier:
Creditors A/c Dr. To Stores Ledger Control A/c
xxx
xxx 4.Materials Returned from Shop Floor:
Stores Ledger Control A/c Dr. To Work-in-Progress Ledger Control A/c
xxx
xxx
5. Materials transferred from one job to another job:
Work in Progress of Transferee Job A/c Dr. To Work in Progress of Transferor Job A/c
xxx
xxx
INTEGRATED ACCOUNTING
Cost Book Keeping 68 CA Ashish Kalra
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6. Sale of Material:
Cash/Debtors A/c Dr. To Stores Ledger Control A/c Note: Loss on sale will be debited & profit on sale will be credited to Costing profit & Loss A/c
xxx
xxx
7. Normal Loss of Materials kept in Storeroom:
Factory Overheads Control A/c Dr. Or Work-in-Progress Ledger Control A/c Dr.
To Stores Ledger Control A/c
xxx xxx
xxx 8.Abnormal Loss of Materials kept in Storeroom:
Costing P & L A/c Dr. To Stores Ledger Control A/c
xxx
xxx
9. Transportation of Incoming Material/ Carriage/Freight Inwards:
Production Overheads Control A/c / Stores Ledger Control A/c Dr.
To Cash A/c
xxx
xxx 10. Labour Cost:
(a) Total Wages and Salaries paid (including
employer’s contribution to various funds)
Wages & Salaries Control A/c Dr. To Cash A/c / Accrued Wages & Salaries A/c
xxx
xxx (b) Allocation of Direct & Indirect Labour Cost:
Work in Progress Ledger Control A/c (DL) Dr. Respective Overheads Ledger Control (IL) Dr.
To Wages & Salaries Control A/c
xxx xxx
xxx
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11. Direct Expenses (Paid/Accrued):
Work-in-Progress Ledger Control A/c Dr. To Cash A/c/Accrued Expenses A/c
xxx
xxx
12. Overheads Incurred (Paid/Accrued):
Relevant Overheads Control A/c Dr. To Cash A/c
xxx
xxx
13. Overheads Recovered: Work-in-Progress Ledger Control A/c Dr. (For Works Overheads recovered) Finished Goods Ledger Control A/c Dr. (For Administration Overheads recovered) Cost of Sales A/c Dr. (For Selling & Distribution Overheads recovered) To Relevant Overheads Control A/c
xxx
xxx
xxx
xxx
14. Administration Overheads allocated to
Production
Work-in-Progress A/c Dr. To Administration Overheads Control A/c
xxx
xxx
15. Finished Goods produced:
Finished Goods Ledger Control A/c Dr. To Work-in-Progress Ledger Control A/c
xxx
xxx
16. Administration Overheads allocated to Sales Cost of Sales A/c Dr. To Administration Overheads Control A/c
xxx
xxx
17. Cost of Goods Sold:
Cost of Sales A/c Dr. To Finished Goods Ledger Control A/c
xxx
xxx
Cost Book Keeping 70 CA Ashish Kalra
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18. Cash/Credit Sales:
Cash/Debtors A/c Dr. To Sales A/c
xxx
xxx 19. Cost of Goods Returned by Customers:
Finished Goods Ledger Control A/c Dr. To Cost of Sales A/c
xxx
xxx
20. Sales Return:
Sales A/c Dr. To Debtors A/c/Cash A/c
xxx
xxx
21. Under absorbed overheads written off
Profit & Loss A/c Dr. To Relevant Overheads Control A/c
xxx
xxx 22.Overabsorbed overheads written off
Relevant Overheads Control A/c Dr. To P&L A/c
xxx
xxx 23. For transferring Cost of Sales to P & L
A/c
P & L A/c Dr. To Cost of Sales A/c
xxx
xxx
24. For Profits in P & L A/c P&L A/c Dr. To Net Profits A/c
xxx
xxx
25. For Losses in P & L A/c
Net Loss A/c Dr. To P & L A/c
xxx
xxx
Pocket Book 71 CA Ashish Kalra
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Process Costing 72 CA Ashish Kalra
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Particulars Units Rate Amt Particulars Units Rate Amt
To Opening Stock of Raw Materials
By Next Process A/c Or
To Opening Stock of WIP
By Finished Goods A/c
To Raw Material Purchases
By Closing Stock of Raw
To Previous Process A/c
Materials By Closing
To Direct Wages
Stock of WIP
To Direct Expenses
By Normal Loss:
To Factory Overheads
- W. Loss - Scrap
To Waste Disposal A/c (Normal Costs)
having Realisable Value By
To Abnormal Gain A/c
Abnormal Loss A/c
FORMAT OF PROCESS A/C
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TREATMENT OF ABNORMAL LOSS &
GAIN IN PROCESS ACCOUNT
TREATMENT OF ABNORMAL GAIN IN
COST ACCOUNTS
Abnormal Treatment in Process A/c
1. Loss Units & Value Credited to Process A/c 2. Gain Units & Value Debited to Process A/c
Note: Valuation of Abnormal gain & loss are computed on the basis of cost per unit of normal output computed as follows:-
Total Normal NRV Normal Disposal Cost
Value = Cost of Normal Loss Units of Normal Loss Units Units Input – Units of Normal Loss
x Units of Abnormal Loss/Gain
ABNORMAL GAIN/EFFECTIVES A/C
To Normal Loss A/c xxx By Process A/c xxx
To Costing P&L A/c xxx
xxx xxx
ABNORMAL LOSS A/C
To Process A/c xxx By Bank A/c xxx To Costing P&L A/c
xxx xxx
Process Costing 74 CA Ashish Kalra
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TREATMENT OF PART OF OUTPUT SOLD & PART OF OUTPUT TRANSFERRED TO NEXT PROCESS
Units & Value of Output
transferred to next
process
Credited in Process A/c
from which such
transfer is made
Units Sold or to be sold
Cost Of Units Sold
(Units Sold x Cost per
unit Of Normal
Output)
Credit in Process A/c
(By name of Warehouse
A/c if Inventory is not
yet sold OR Cost Of Sales A/c if Inventory
has been sold)
Add the Cost Column of all Closing Stocks
OR Add the Total column of all Closing Stocks and reduce
the Stock Reserve
COMPUTATION OF AMOUNT OF STOCK
TO BE SHOWN IN BALANCE SHEET IN
PROBLEMS INVOLVING INTER PROCESS
PROFITS
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INTER PROCESS PROFIT PROCESS A/C
Particulars Total Cost Profit Particulars Total Cost Profit
To Raw Materials
By Next Process
To Previous Process A/c
A/c/
Finished
To Direct Wages
Output
A/c
To Direct Expenses
TREATMENT OF NORMAL LOSS
Normal Loss
Weight Loss
Scrap having
Realisable Value
Scrap
Requiring Disposal Cost
Units of
Normal Loss be credited
to Process
A/c
Units & its
Normal Realisable value
be credited to
Process A/c
Units of Normal
Loss be credited & Normal disposal
cost be debited to
Process A/c
Process Costing 76 CA Ashish Kalra
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ACCOUNTING OF PROCESS INVENTORIES
Inventory Raw
Materials
(RM)
Work in
Progress
(WIP)
Finished
Goods (FG)
1. Opening
Stock
Units &
value
debited to
Process A/C
Units &
value
debited to
Process A/c
Units &
value
debited to
Process Stock A/c
2. Closing
Stock
Units &
value
Units &
value
Units &
value
To Works Overheads
Total Value of Output
Less: Closing Stock
()
()
()
Value of Stock Tfd/Sold
To Profit
Pocket Book 77 CA Ashish Kalra
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SOME SPECIAL POINTS FOR INVENTORY
VALUATION: 1. Raw Materials (RM)
If rate of opening stock not known, take current rate of RM.
2. Finished Goods (FG) a) Separate Process Finished Stock A/c is prepared. b) Output of each Process transferred to Process
Finished stock A/c & transfer to next process is made
from there.
3. Work in Progress (WIP) a) Statement of equivalent Production showing
equivalent units of Material, Labour, Overheads (with
regard to DOC) is prepared. b) Cost per equivalent unit = Cost of each element.
Equivalent Production units
c) Value of WIP = Cost per equivalent unit x
Equivalent units of WIP
credited
to Process
A/c
credited
to Process
A/c
credited to
Process
Stock A/c
3. Preferred Valuation
methods
FIFO or Weighted
Avg.
FIFO or Weighted
Avg.
FIFO or Weighted
Avg.
Process Costing 78 CA Ashish Kalra
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BASIC FORMAT OF STATEMENT OF
EQUIVALENT PRODUCTION
Input
Units Particulars
Output
Units
Material Conversion
Cost
% Units % Units
Opening WIP
Put &
Processed 100% 100%
Closing WIP
Normal Loss - - - -
Abnormal Loss
Abnormal Gain () () () () ()
Note 1: In case degree of completion (DOC) of Closing
W.I.P. units is not known, assume it to be RM = 100% & CC = 50%.
Note 2: If DOC of units lost is not known, then assume
DOC to be equal to 100% in all respects. Note 3: The DOC of Abnormal Gain units will be 100%.
Pocket Book 79 CA Ashish Kalra
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Opening WIP
Cost per
Equivalent
Units
Finished
Output
FIFO To be completed first & taken first to compute Value of Finished Output.
Take Current Cost & divide them with equivalent unit
Opening WIP will be taken first & then current units
Weigh
ted
Avg.
To be merged with current input (No regard to DOC)
Will take into account both Cost of Opening WIP & Current Costs.
Shall be computed as follows = Current Production X Cost per equivalent unit.
LIFO Opening WIP will be kept in Closing WIP as they will be used in the end.
Cost per equivalent units will be computed on the basis of Current/ Latest Cost.
Finished Output shall be produced from Current Input first and then from opening WIP.
METHODS OF PREPARING STATEMENT OF
EQUIVALENT PRODUCTION
Process Costing 80 CA Ashish Kalra
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Normal Loss (NL)
Abnormal Loss (AL)
Abnormal Gain (AG)
Show Normal
Loss units in output column
not in
equivalent production
units column
Units of
Abnormal Loss should be added
in both output
common & equivalent units
column
Units to be
reduced from Output Column
and Equivalent
Units Column.
TREATMENT OF NORMAL, ABNORMAL LOSS & ABNORMAL GAIN UNITS (STATEMENT OF
EQUIVALENT PRODUCTION)
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TREATMENT OF BY PRODUCTS IN
PROCESS ACCOUNT
By Products
Value
Treatment
1. Negligible
Value
Credit the sale proceeds to
costing P&L A/c as
Miscellaneous Income
2. Considerable
Total Value
Treated as Joint Products
instead of by products (Using
Reverse cost method)
Treatment of By Products in Process A/c
Credit the
Units &
Normal Net
Realisable Value of By
Products to
Process A/c
Credit the Units
in Process A/c & Net Realisable
Value of By
Products to
Costing P&L A/c as Miscellaneous
Income
Credit the Units
& share in Joint
Costs computed
with the help of Reverse Cost
Method in
Process A/c
Process Costing 82 CA Ashish Kalra
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3. Small/
Moderate
Total Value
Deduct the Net realisable value
from total cost by crediting the
normal NRV of by products to Process A/c
Cost Methods:
Methods Meaning
1. Opportunity or
replacement cost
method
Used when by products are
used as raw materials in
production. The basis of costing by product is
opportunity cost or
replacement cost.
2. Standard cost
Standard cost is a combination
on the basis of technical
analysis and assessment for each by product.
3. Apportionment
on suitable basis
Used where by products are of
significant value.
Pocket Book 83 CA Ashish Kalra
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COMPUTATION OF SHARE IN JOINT
COST OF EACH BY PRODUCT USING
REVERSE COST METHOD:
Particulars By-Product
X Y
Estimated Final Sales Value xxx xxx Less: Estimated Net Operating Profits (xxx) (xxx)
Estimated Cost of Sales xxx xxx Less: Estimated S&D Overheads (xxx) (xxx)
Estimated Cost of Production xxx xxx Less: Estimated Admn. Overheads Costs
(xxx) (xxx)
Estimated Works Cost xxx xxx Less: Estimated Further Processing
Costs
(xxx) (xxx)
Share in Joint Costs xxx xxx
Process Costing 84 CA Ashish Kalra
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METHODS OF DISTRIBUTING JOINT
COSTS AMONGST THE JOINT PRODUCTS:
Method Ratio of Distribution of
Joint Cost
1. Output /Weight /
Physical
Measurement
Output or Physical units,
such as kg, gallons, litres,
tonnes, tonnes, metres etc.
2. Sales/Market
Value of output at split off point
Output units x Selling Price
per unit at split off point
3. Final sales
/Market value of output
(Final output units x Final
selling price per unit)
4. Estimated Net
Realisable Value
Estimated NRV = Estimated Final sales value
of output (-) Estimated
Processing costs (-)
Estimated selling & Distribution costs
5. Survey/ Point value Method
Physical output x Point value assigned per unit
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6. Contribution Margin Method: Type of Cost Ratio of Distribution
1. Variable Joint Cost Physical units/output
2. Fixed Joint cost
Ratio of Contribution of
output produced computed as
follows:
Sales/Market Value of final output - Variable Joint cost -
Variable further processing
costs, if any
7. Reverse Cost Method: The ratio in which Joint Costs
are to be apportioned can be computed as follows:
Joint Products X Y
Estimated Sales Value of Output xx xx
Less: Estimated Net Operating Profits (xx) (xx)
Estimated Cost of Sales xx xx
Less: Estimated S & D Overheads (xx) (xx)
Estimated Cost of Production xx xx
Less: Estimated Office& Administration
Overheads (xx) (xx)
Estimated Works Cost xx xx
Less: Estimated Further Processing Cost (xx) (xx)
Ratio in which Joint costs are to be
apportioned
xx xx
Job & Batch Costing 86 CA Ashish Kalra
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Pocket Book 87 CA Ashish Kalra
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ECONOMIC BATCH QUANTITY (EBQ)
/BAUMOL MODEL
EBQ = 2 x A x S
C
Where,
A = Annual Demand or requirement of product in units S = Set up Costs per setup
C = Carrying Cost per unit per annum
ANNUAL SET UP COST
Annual Set up Cost = No. of Set ups x Cost per Set up
NUMBER OF SET UPS PER ANNUM
TOTAL ANNUAL RELEVANT COST
Number of Annual Demand of Product in units
Set ups p.a. EBQ
Annual Set up Costs & Carrying = 2 x A x S x C
Costs of producing EBQ
Job & Batch Costing 88 CA Ashish Kalra
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TIME BETWEEN TWO SET UPS
Time Between Two Set ups = 360 Days/12 months
No. of Set ups p.a.
ANNUAL CARRYING COST
COST PER UNIT IN BATCH
Annual EBQ x Carrying Cost per unit
Carrying Cost 2
Cost per Total Cost of a Batch
unit Number of Units produced in a Batch
Pocket Book 89 CA Ashish Kalra
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Operating Costing 90 CA Ashish Kalra
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ABSOLUTE (WEIGHTED AVERAGE) V/S
COMMERCIAL (SIMPLE AVERAGE) TONNES-KMS
DIFFERENT COST UNITS
Simple Cost Unit Composite Cost Unit
Taxi/Auto : Per
Effective Km
Taxi/Auto : Per Effective
Passenger Km
Entire Bus : Per Km Bus or a trip : Per Effective
Passenger Km
Entire Truck/ Lorry/
Tempo : Per Km Truck/Lorry on a route : Per Effective Tonne Km
Entire Airplane : Per
one way trip
Airplane on a route : Per
passenger per one way trip
Entire Hotel : Per day Rooms in hotel : Per room per
day
Entire Hospital : NA Beds/Rooms in Hospital : Per
Bed/Rooms per day
Entire Cinema : Per Show (Usually NA)
Seats in Cinema : Per seat per show
Absolute Commercial ∑(Actual Tonnes Carried
x Kilometers Travelled)
Avg. tonnes carried x
Total Kilometers travelled
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OPERATING COST SHEET-TRANSPORT
Fixed Charges:
Driver’s salary (if paid on monthly basis) xxx
Cleaner/Manager/Supervisor/Accountant/Office
staff/Rent of office etc. apportioned xxx
Insurance Premium of Vehicle xxx
Road Tax, License Fees, Permit Charges xxx
Garage Rent xxx
Depreciation (if charged on time basis eg- SLM,WDV, etc.) & Interest of Vehicle
xxx
Repairs & Maintenance of vehicle (if charged on
monthly/annual basis) xxx
Total Fixed Charges (A) xxx
Variable Charges:
Petrol/Diesel/Gas
Driver's Salary (if paid on daily basis) xxx
Repairs & Maintenance (if done on usage basis) xxx
Depreciation of vehicle (if charged on usage basis) xxx
Tyres/Oil/Filters xxx
Total Variable Charges (B) xxx
Total Operating Cost (C) = (A) + (B) xxx
Effective Km/ passenger Kms/Ton Kms (D) xxx
Operating Cost per Effective Km/ passenger
Kms/Ton Kms (C)/(D) xxx
Contract Costing 92 CA Ashish Kalra
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Pocket Book 93 CA Ashish Kalra
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Particulars Amt Particulars Amt
To Work In Progress b/d xx By Cost of Materials returned to Store
xx To Materials at site b/d xx To Plant at site b/d xx By Cost of Materials
returned to Supplier xx
To Cost of Material issued from Storeroom to site
xx By Contract No…… (Cost of Material transferred to Contract………)
xx To Cost of Materials specifically purchased
xx
To Contract No. …… (Cost of Materials transferred from Contract …………)
xx By Materials at site c/d
xx
To Direct Wages xx By WIP c/d To Direct Expenses xx -Work Certified xx To Cost of Plant & Machinery specifically purchased for a Contract
xx -Work Uncertified xx By WDV of Plant at site c/d
xx
To Depreciation of Plant not specifically purchased for Contract
xx By WDV of Plant sent to storeroom
xx
By Loss transferred to P&L A/c (B.F.)
xx To Works Overheads xx To Administration Overheads apportioned
xx
To Notional Profits c/d xx
To P&L A/c xx By Notional Profits b/d xx
By WIP reserve c/d xx
CONTRACT ACCOUNT
Contract Costing 94 CA Ashish Kalra
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TYPES VALUATION
1. Fixed Price
Contract
a) Fixed Price agreed upon
between contractor & contractee.
b) Deductions made for defectives & extra payment made for
additional work.
2. Cost Plus
Contracts
a) Adopted when probable contract cost cannot be ascertained with
reasonable accuracy.
b) When work to be done is not
definitely fixed at the time of
making estimate.
3. Contracts
with Escalation
Clause
a) Contract Price is fixed with a
provision that it will be increased
with increase in prices of materia ls
or labour etc beyond a certain limit.
b) Such escalation is according to mutually predetermined formula.
TYPES OF CONTRACTS
RESERVE ON W.I.P.
Reserve on = Notional - Profit transferable W.I.P Profits to P&L A/c
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NOTIONAL PROFITS
ESTIMATED PROFITS
Estimated Contract Total Estimated Profits Price Costs
Total Estimated Costs = Cost of work done to date
+ Estimated further costs
Notional Value of Work Cost of work Cost of work
Profit Certified to date uncertified
OR = Value of Work Certified + Cost of Work
Uncertified - Cost of work done to date
BROAD GUIDLEINES FOR RECOGNITION
OF PROFITS ON AN INCOMPLETE
CONTRACT
1. In case of Loss Entire amount of loss
debited to Profit & Loss A/c
Contract Costing 96 CA Ashish Kalra
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2. In Case of Notional
Profits (% of WC to CP)
Amount to be Credited to
Profit & Loss A/c
< 25% Nil
≥ 25% < 50% 1 x NP x CR 3 WC
≥ 50% < 90% 2 x NP x CR 3 WC
≥ 90% a) EP x WC x CR CP WC OR EP x CR CP b) EP x WC CP c) EP x COWTD ETC d) EP x COWTD x CR ETC WC e) NP x WC CP
NP = Notional Profits CP = Contract Price
CR = Cash Received WC = Work Certified
EP = Estimated Profits
COWTD = Cost Of Work Done To Date
ETC = Estimated Total Cost
Pocket Book 97 CA Ashish Kalra
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COST OF WORK TO DATE
Cost of Work to Date = Cost of Materials used on the
contract + Labour Cost + Direct Expenses + Works
Overheads + Depreciation on Plant + Administration
overheads apportioned + other expenses on contract
VALUE OF WORK CERTIFIED
PROGRESS PAYMENT DURING THE
REPORTING PERIOD
RETENTION MONEY KEPT BY CONTRACTEE
Retention Money = Value of Work Certified – Payment
actually made/ Cash paid to the contractor
Value of Contract Percentage of
Work Certified Price Work Certified
Progress Value of Work Retention Payment to
Payment Certified Money Date
Contract Costing 98 CA Ashish Kalra
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CASH RECIEVED TILL THE END OF
REPORTING PERIOD
COST OF WORK UNCERTIFIED
Cost of work done till end % age of work
of reporting period uncertified .
% of work done till the end of reporting period
OR = Cost of work done till end (-) Cost of work of reporting period certified
= Value of Work X Fixed % of Cash Payable by Certified Contractee as per the terms of Contract
OR = Value of Work Certified - Retention Money
PRESENTATION OF WIP IN BALANCE SHEET
Assets Amount Work in progress: (Value of work certified + Cost of work uncertified)
xxx
Less: Reserve for unrealised profit xxx Less: Amount received from the contractee xxx
xxx
Pocket Book 99 CA Ashish Kalra
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Budgetary Control 100 CA Ashish Kalra
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2
CLASSIFICATION OF BUDGETS
Classification of Budgets On the Basis of
Efficiency Conditions Period
Fixed Budget
Basic
budget
Flexible
Budget
Current
Budget
Long Period Budget
Short Period
Budget
Functional
Budget
Master
Budget
Scope
Pocket Book 101 CA Ashish Kalra
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. Functional Budgets
Sales Budget
Production Budget
Production
Cost Budget
Material Budget
Labour Budget
Factory Overhead Budget
Administrative Overhead Budget
Selling & Distribution
Overhead Budget
Research and Development Budget
Capital Expenditure
Budget
Cash Budget
Overheads
Budget
Financial
Budget
Budgetary Control 102 CA Ashish Kalra
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FORMAT OF SALES BUDGET
Area Products Units Rate Amount
North Product A xxx xxx xxx Product B xxx xxx xxx
Total xxx xxx
East Product A xxx xxx xxx Product B xxx xxx xxx
Total xxx xxx
West Product A xxx xxx xxx Product B xxx xxx xxx
Total xxx xxx
South Product A xxx xxx xxx Product B xxx xxx xxx
Total xxx xxx
PRODUCTION BUDGET (UNITS)
Particulars Product
A
Product
B
Sales Quantity xxx xxx
Add: Closing Stock of Finished Goods xxx xxx
Less: Opening Stock of Finished Goods (xxx) (xxx)
Net Production Quantity xxx xxx
Add: Units of Normal loss xxx xxx
Gross Production Quantity xxx xxx
Pocket Book 103 CA Ashish Kalra
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PRODUCTION COST BUDGET
Particulars Product A Product B Direct Material Cost xxx xxx
Add: Direct Labour Cost xxx xxx
Add: Direct Expenses xxx xxx
Prime Cost xxx xxx Add: Factory Overheads xxx xxx
Production Cost xxx xxx
DIRECT MATERIAL PURCHASE BUDGET
Particulars Product A Product B
Budgeted Production (in Units) xxx xxx
Direct Material Consumption p.u. xxx xxx
Direct Material Consumed (Units) xxx xxx Add: Closing Stock of Direct
Materials (Units)
xxx xxx
Less: Opening Stock of Direct
Materials (Units)
(xxx) (xxx)
Direct Material Purchases
(Units)
xxx xxx
Direct Materials Cost per unit xxx xxx
Direct Materials Purchase (`) xxx xxx
Budgetary Control 104 CA Ashish Kalra
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DIRECT LABOUR BUDGET
Particulars Hours Rate Amount
Skilled Labour: Product A xxx xxx xxx
Product B xxx xxx xxx
Total xxx xxx xxx
Semi Skilled Labour:
Product A xxx xxx xxx
Product B xxx xxx xxx
Total xxx xxx xxx
Unskilled Labour:
Product A xxx xxx xxx
Product B xxx xxx xxx
Total xxx xxx xxx
DIRECT EXPENSES BUDGET
Carriage Inwards xxx
Add: Royalty (on the basis of number of units produced)
xxx
Add: Octroi xxx
Total xxx
Pocket Book 105 CA Ashish Kalra
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FACTORY/MANUFACTURING/
PRODUCTION/WORK OVERHEADS
BUDGET
Variable Overheads such as : Motive Power xxx
Semi Variable Overheads such as : Repairs &
Maintenance Charges of Plant & Machinery
xxx
Fixed Overheads such as : Rent, Rates & Taxes Step Overheads
xxx xxx
Total xxx
OFFICE & ADMINISTRATION
OVERHEADS BUDGET
Variable Overheads xxx
Semi Variable Overheads xxx
Fixed Overheads
Step Overheads
xxx
xxx
Total xxx
Budgetary Control 106 CA Ashish Kalra
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RESEARCH AND DEVELOPMENT BUDGET
Research Staff Salaries xxx
Research Survey Expenses xxx
Research Material Expenses Research Equipment Cost
xxx xxx
Total xxx
CAPITAL EXPENDITURE BUDGET
Land & Building xxx
Plant & Machinery xxx
Furniture & Fittings xxx
Other Fixed Assets xxx
Total xxx
SELLING & DISTRIBUTION OVERHEADS
BUDGET
Variable Overheads such as Selling Commission xxx
Semi Variable Overheads such as Telephone Bill xxx
Fixed Overheads such as : Advertising
Step Overheads
xxx xxx
Total xxx
Pocket Book 107 CA Ashish Kalra
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CONTROL RATIOS
CASH BUDGET
a. Opening Balance of Cash xxx
b. Cash Inflows or Receipts: Cash Sales
Receipts from Debtors
Other Revenue Receipts Capital Receipts
xxx
xxx
xxx xxx
c. Cash Outflows or Payments: To Creditors for Goods & Services
Expenses
Other payments, which occur
periodically like debenture interest, advance tax, dividend, sales tax etc.
Capital Expenditures
Repayment of Loans
xxx
xxx
xxx
xxx
xxx
d. Closing Balance of Cash = a + b - c xxx
1. Activity Ratio: Activity = Standard Hours for Actual Output x 100
Ratio Budgeted Hours
= Efficiency Ratio x Capacity Ratio
Budgetary Control 108 CA Ashish Kalra
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3. Efficiency Ratio: Efficiency Standard Hours for Actual Output x 100
Ratio Actual Hours Worked
2. Capacity Ratio: Capacity Actual Hours Worked x 100
Ratio Budgeted Hours
4. Calendar Ratio: Actual Number of Days Worked
Calendar during the Budget Period x 100
Ratio Number of Working Days Budgeted for the Budget Period
Pocket Book 109 CA Ashish Kalra
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Standard Costing 110 CA Ashish Kalra
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3. Direct Materials Usage/Quantity/Volume
Variance (DMQV): DMQV = Standard Quantity Actual Standard for Actual Output Quantity Price
= DMMV + DMYV
1. Direct Material Cost Variance (DMCV): DMCV Standard Material Cost Actual Cost of
for Actual Output produced material used
OR Standard Quantity Standard Actual Actual
for Actual Output Price Quantity Price
= DMPV + DMQV
4. Direct Materials Mix Variance (DMMV): DMMV = Revised Standard Actual Standard
Quantity Quantity Price
Revised Standard Standard Quantity for
Quantity Total Actual Mix
2. Direct Materials Price Variance (DMPV):
DMPV = Standard - Actual Actual
Price Price Quantity
DIRECT MATERIAL VARIANCES
Pocket Book 111 CA Ashish Kalra
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5. Direct Materials Yield Variance/Revised Usage
Variance (DMYV): DMYV = Standard Revised Quantity for Standard
Actual Output Quantity
OR Actual Standard Output Standard Cost
Output for Total Actual Mix per unit of Output
Standard
Price
1. Direct Labour Cost Variance (DLCV): DLCV = Standard Labour Cost for Actual Cost of
Actual Output Produced Labour Paid for
OR Standard Hours Standard Actual Hours Actual
For Actual Output Rate paid for Rate
= DLRV + DLEV + ITV
2. Direct Labour Rate Variance (DLRV): DLRV = Standard Actual Actual Hours
Rate Rate Paid for
DIRECT LABOUR VARIANCES
Standard Costing 112 CA Ashish Kalra
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4. Idle Time Variance (ITV): ITV = (Abnormal Idle Time x Standard Rate)
OVERHEAD TOTAL COST VARIANCES
Overhead Total Cost Variance (OTCV): OTCV = Standard Overheads Actual Overheads
Cost for Actual Output Cost Incurred
3. Direct Labour Efficiency Variance (DLEV): DLEV = Standard Hours Actual Hours Standard
for Actual Output Worked Rate
DLEV = DLMV + DLYV
5. Direct Labour Mix Variance (DLMV)/Direct Labour
Gang Variance: DLMV = Revised Standard Actual
Hours for Actual Hours
Hours Worked Worked
Standard
Rate
6. Direct Labour Yield Variance (DLYV): DLYV = Actual Standard Output Standard Cost
Output for Actual Mix per unit of output
Standard Hours Revised Standard Standard
for Actual Output Hours Rate
Pocket Book 113 CA Ashish Kalra
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VARIABLE OVERHEADS VARIANCES
FIXED OVERHEADS VARIANCES
1. Variable Overheads Cost Variance (VOCV): VOCV = Standard Variable Overheads Actual Variable Cost for Actual Output Overheads
OR Standard Hours Standard Actual Actual for Actual Output Rate Hours Rate
2. Variable Overheads Expenditure/Spending/Budget Variance (VOBV): VOBV = Standard Overheads Actual Actual
Absorption Rate Rate Hours
3. Variable Overheads Efficiency Variance (VOEV): VOEV = Standard Hours Actual Standard Variable
for Actual Output Hours Overheads Rate
1. Fixed Overheads Expenditure/Budget Variance (FOBV): FOBV = Budgeted Fixed Actual Fixed
Overheads Overheads
Standard Costing 114 CA Ashish Kalra
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2. Fixed Overheads Cost Variance (FOCV): FOCV = Standard Fixed Overheads Actual Fixed
Cost for Actual Output Overheads Cost
OR Standard Hours Standard Actual Actual for Actual Output Rate Hours Rate
= FOEV + FOVV
3. Fixed Overheads Volume Variance (FOVV): FOVV = Standard Hours for Budgeted Standard
Actual Output Hours Rate
4. Fixed Overheads Efficiency Variance (FOEV): FOEV = Standard Hours for Actual Standard
Actual Output Hours Rate
5. Fixed Overheads Capacity Variance (FOCAPV): FOCAPV = Actual Budgeted Standard
Hours Hours Rate FOCAPV = FOCALV + FORCAPV
6. Fixed Overheads Calendar Variance (FOCALV):
FOCALV = Possible Budgeted Standard
Hours Hours Rate
Possible Standard Working Actual Number of
Hours Hours Per Day Working Days
Pocket Book 115 CA Ashish Kalra
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7. Fixed Overheads Revised Capacity Variance
(FORCAPV):
FORCAPV = Actual Possible Standard
Hours Hours Rate
Marginal Costing 116 CA Ashish Kalra
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Pocket Book 117 CA Ashish Kalra
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VARIABLE/MARGINAL COSTS
Variable Cost = Direct Labour + Direct Material + Direct Expenses + Variable Overheads
OR = Sales (100 - P/V Ratio)
OR = Sales x VC Ratio
FIXED COSTS
Fixed Costs (Period Cost) (such as Rent + Depreciation
+ Salaries+ Insurance) = Sales x P/V Ratio – Profit + Loss
OR = Sales - Variable Cost - Profit + Loss
Profit = Sales – VC - Fixed Cost
= (Sales x P/V Ratio) - Fixed Cost
= Contribution – Fixed Cost
= P/V Ratio (Sales – Break-even sales) = P/V Ratio x Margin of Safety
= P/V Ratio x M/S Ratio x Sales
PROFITS
Marginal Costing 118 CA Ashish Kalra
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PROFIT/VOLUME RATIO OR
CONTRIBUTION/SALES RATIO
P/V Ratio = Contribution x 100
Sales OR = Sales - Variable Cost x 100
Sales
OR = Change in Contribution x 100 Change in Sales
OR = Change in Profit/Loss x 100
Change in Sales
OR = 100 – Variable Cost Ratio
CONTRIBUTION
Contribution = Sales – Variable Cost
OR = Selling Price p.u. – Variable Cost p.u.
OR = Fixed Costs + Profit /(-Loss) OR = Sales x P/V Ratio
VARIABLE COST RATIO (V/C RATIO)
V/C Ratio = Variable Cost x 100
Sales
OR = 100 – P/V Ratio
OR = Change in Total Cost x 100 Change in Sales
Pocket Book 119 CA Ashish Kalra
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`
BREAK EVEN POINT (BEP)
Break-Even Point (BEP) = Fixed Cost . .
(in units) Contribution per unit
BEP (in Sales Value) = Fixed Cost P/V Ratio
COMPUTATION OF DIFFERENCE
BETWEEN PROFITS AS PER ABSORPTION
& MARGINAL COSTING
STOCK VALUATION
Inventory under absorption costing.
= Direct Material + Direct Labour + Variable Manufacturing Costs + Fixed Manufacturing Costs
absorbed
= Fixed Factory Overheads .x [Volume Produced
Denominator used for utilising (-) Volume Sold] OR
= (Fixed factory overheads per unit) x (Change in
inventory units)
Marginal Costing 120 CA Ashish Kalra
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Desired Sales (in `) = Fixed Cost + Desired Profit P/V Ratio
OR = Breakeven Point + Desired Margin of Safety
Desired Sales (in Units) = Fixed Cost + Desired Profit Contribution per unit
KEY FACTOR/ LIMITING FACTOR/ PRINCIPAL BUDGET FACTOR
SALES TO EARN DESIRED PROFITS
Material is in
Short Supply
Skilled Labour is in Short Supply
Machine Capacity
is in Short Supply
Sales Quantity is
in Short Supply
Sales Value is the
Limiting factor
Key
Factor
Contribution p.u
of Material
Contribution per Labour Hour
Contribution per
Machine Hour
Contribution Per
Unit
P/V Ratio
Pocket Book 121 CA Ashish Kalra
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Ranking = Contribution
Key Factor
BREAK EVEN CHART
Sales Line
0 Output (Units)
Margin of
Safety (Units)
Fixed Cost
Line
Variable Cost
Selected
Activity (Profit)
Total
Cost Line
Selected Activity Sales
Margin of Safety (`)
Angle of Incidence
Break-even Point
Sales
and
Cos
ts (`)
Profit Area
Marginal Costing 122 CA Ashish Kalra
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ES
Margin of Safety = Total Sales - Sales at BEP
(MOS) (`) = Profit . P/V Ratio MOS (in units) = Actual Sales units – B.E. Sales units
MOS Ratio = Total Sales - Sales at BEP x 100 or MOS x 100 Total Sales Sales
MARGIN OF SAFETY
Variable Cost p.u = Change in Semi-Variable Costs
Change in Output
Total Semi-Variable Costs xxx
Less: Total Variable Cost (Variable Cost p.u x Output)
(xxx)
Total Fixed Cost xxx
SEGREGATION OF SEMI-VARIABLE COSTS
INTO FIXED & VARIABLE COSTS
Pocket Book 123 CA Ashish Kalra
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INCOME STATEMENT
(ABSORPTION COSTING)
Particulars Amount in (`)
Sales (A) xxx
Direct Material Consumed xxx
Add: Direct labour cost
Add: Direct Expenses
Prime Cost
xxx
xxx
xxx
Add: Variable manufacturing overhead incurred xxx
Add: Fixed manufacturing overhead absorbed
Gross Factory Cost
xxx
xxx
Add: Variable administration overheads incurred xxx
Add: Fixed Administration overheads absorbed xxx
Cost of production xxx
Add: Opening stock of finished goods xxx
Less: Closing stock of finished goods (xxx)
Cost of Goods Sold xxx
Add: (or less) Under (or over) absorption of
Manufacturing & Administration Overheads
xxx
Add: Selling and Distribution Costs incurred (Fixed + Variable)
xxx
Total Cost (B) xxx
Profit (A) – (B) xxx
Marginal Costing 124 CA Ashish Kalra
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INCOME STATEMENT
(MARGINAL COSTING)
Particulars Amount in (`)
Sales (A) xxx
Variable Manufacturing Costs:
Direct material consumed/used xxx
Add: Direct labour
Add: Direct Expenses
Prime Cost
xxx
xxx
xxx
Add: Variable manufacturing overhead xxx
Add: Variable Administration overhead xxx
Variable Cost of Goods Produced xxx Add: Opening stock of finished goods xxx
Less: Closing stock of finished goods (xxx)
Variable Cost of Goods Sold xxx Add: Variable Selling and distribution costs xxx
Variable Cost of Sales (B) xxx
Contribution (A) – (B) xxx
Less: Fixed Costs (Production, administration,
Selling and distribution)
(xxx)
Net Profit xxx
Pocket Book 125 CA Ashish Kalra
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COMMON SIZE
STATEMENT & TREND
ANALYSIS
Common Size Statement & Trend Analysis 126 CA Ashish Kalra
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COMPARATIVE STATEMENTS
Types Meaning
1. Comparative Balance Sheet
It shows the balance of accounts of assets & liabilities on different dates
& the extent of their increase or
decrease between these dates
throwing light on the trends & direction of changes in position over
the periods
2. Comparative
Statement of profit & loss or
Income
Statement
It indicates the operating results for
a number of accounting periods & changes in data in absolute periods, in
absolute money terms & relative
percentage.
Basis Classification 1. Nature of the Analysis External Analysis
Internal Analysis
2. Modus Operandi of
analysis
Horizontal Analysis
Vertical Analysis
3. Objectives of the
analysis
Long Term Analysis
Short Term Analysis
TYPES OF FINANCIAL STATEMENT ANALYSIS
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COMPUTATION OF TREND
PERCENTAGES
Trend percentage can be calculated as follows:
= Absolute value of item in other statements x 100 Absolute value of same item in base statement
COMMON SIZE STATEMENTS
Types Meaning 1. Common
Size Income
Statement
The revenue from operations is
assumed to be equal to 100 and all
other figures of costs are
expressed as percentage of sales.
2. Common
Size Balance Sheet
The total of assets or equity &
liabilities is assumed to be equal to 100 and all figures are expressed
as percentage of the total.
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PROFITABILITY RATIOS BASED ON SALES
(INCOME STATEMENT PROFITABILITY
RATIOS)
1. Cost of Goods Sold (COGS) Ratio:
COGS Ratio = Cost of Goods Sold x 100
Net Sales
Where, COGS of a Trader = Opening Stock + Net
Purchases + Direct Expenses – Closing Stock COGS of a Manufacturer = Opening Stock of Finished
Goods + Factory Cost of Production – Closing Stock of
Finished Goods – Abnormal Loss of Finished Goods (if any)
Net Sales = Total Sales – Sales Return
2. Gross Profit Ratio or Gross Margin Percentage:
Gross Profit Ratio = Gross Profit x 100 Net Sales
Where, Gross Profit = Net Sales – COGS
Relationship between COGS Ratio & GP Ratio:
COGS Ratio = 100 – GP Ratio GP Ratio 100 – COGS Ratio
3. Expense Ratio:
(1) COGS Ratio has been discussed above
(2) Office & Admin Exp = Office & Admin Exp. x 100
Ratio Net Sales
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(3) S & D Expenses = Selling & Distribution Exp. x 100
Ratio Net Sales
(4) Fixed Expenses = Fixed Expenses x 100
Ratio Net Sales
(5) Variable Expenses = Variable Expenses x 100 Ratio Net Sales
(6) Material Cost = Material Consumed x 100
Ratio Net Sales
(7) Labour Cost = Labour Cost x 100
Ratio Net Sales (8) Factory Overhead Cost = Overhead Cost x 100
Ratio Net Sales
4. Profit/Volume (P/V) Ratio:
P/V Ratio = Contribution x 100 Sales
Where, Contribution = Sales – Variable Cost
Or = Fixed Cost + Profit
5. Operating Ratio
= Cost of Goods Sold + Other Operating Exp. x 100
Net Sales Or = COGS ratio + Office & Admin Exp. ratio + S&D Exp. ratio Or = Variable Cost ratio + Fixed Operating Cost ratio Where, Other Operating Expenses = Office & Administration Exp. + Selling & Distribution Exp. + Interest on Bank Overdraft + Goodwill W/O
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7. Net Profit Ratio:
Net Profit Ratio = Net Profit x 100
Net Sales
Where, Net Profit = Profits after Tax (PAT)
6. Net Operating Profit Ratio:
Net Operating = Net Operating Profits or EBIT x 100
Profit Ratio Net Sales
Where, EBIT = Gross Profit– Other Operating Expenses
Or = Net Sales – Variable cost – Fixed Cost
Or = Contribution – Fixed Cost Or = Net Profits (PAT) + Non-Operating Expenses & Loans
including provision for income tax debited to P&L A/c – Non-
Operating income credited to P&L A/c
Relationship between Net Operating Profit Ratio &
Operating Ratio:
Net Operating Profit Ratio = (100 – Operating Ratio)
Operating Ratio = (100 – Net Operating Profit Ratio)
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PROFITABILITY RATIOS BASED ON
CAPITAL & INVESTMENT
1. Return on Capital Employed or Return on Investment: Return on Net Operating Profits Before
Capital Interest and Taxes (NOPBIT) x 100
Employed Average Capital Employed
OR 100 x Operating Profit x Sales .
Sales Capital Employed Where,
NOPBIT = Gross Profit – Other Operating Expenses
Or = Net Profit + Provision for Tax+ Interest on Long
Term Debts + Other Non-Operating Expenses & Losses (but not accrual adjustments for amortisation of Goodwill, Patents
rights, Copyrights, Trademarks etc.)
- Non Operating Incomes & Gains (such as Interest/ Dividend
from Non-Trade Investments, Profit on sale of Fixed Assets
& Investments) Capital Employed = Equity Share Capital + Reserves & Surplus
+ Preference Share Capital + Long Term Debt – Fictitious
Assets & Losses – Non Trade Assets – P&L A/c (Dr.)
Or = Net Fixed Assets (including Intangible Fixed Assets like
Goodwill, Patents, Copyrights and Trademarks) + Net Working Capital
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2. Return on Equity (ROE):
(a) Return on Total Shareholder’s Funds/Net Worth:
Return on Shareholder’s = Net Profit After Tax x 100 Funds Ratio Average Shareholder’s Funds
(b) Return on Equity Shareholder’s Funds
Return on Equity Net Profit after Tax &
Shareholder’s = Preference Dividends x 100
Funds Ratio Equity Shareholder’s Funds Where, Equity Shareholders Funds = Equity Share Capital
+ Reserves & Surplus (Preferably excluding Revaluation
Reserve) – Fictitious Assets and Losses – P&L A/c (Dr.)
Shareholder’s Funds/Net Worth/Proprietor’s Funds/
Owner’s Equity = Equity Shareholders Funds + Preference Share Capital
3. Return on Total Assets:
Return on Net Profit After Tax x 100
Total Assets Average Total Assets
Where, Total Assets = Total Assets side of Balance Sheet (excluding Fictitious Assets)
ACTIVITY OR PERFORMANCE OR
TURNOVER RATIOS
1. Total Assets Turnover Ratio:
Total Assets Net Sales .
Turnover Ratio Average Total Assets
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2. Fixed Assets Turnover Ratio:
Fixed Assets Net Sales . Turnover Ratio Average Net Fixed Assets
Where, Net Fixed Assets = Gross Fixed Assets -
Accumulated Depreciation
3. Net Working Capital Turnover Ratio:
Net Working Capital Net Sales. . Turnover Ratio Average Net Working Capital
Where, Net Working Capital = Current Assets
– Current Liabilities
5. Raw Material Turnover Ratio:
Raw Materials Raw Materials Consumed. .
Turnover Ratio Average Inventory of Raw Materials
Where, Raw Materials Consumed = Opening Stock of Raw Material + Net Purchase of Raw Materials – Closing Stock of Raw Materials
4. Stock or Inventory Turnover Ratio:
Inventory Cost of Goods Sold/Cost of Sales
Turnover Average Stock in Trade or Ratio Finished Goods Inventory
Note: In case COGS cannot be determined, take Sales.
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8. Current Assets Turnover Ratio:
Current Assets Net Sales .
Turnover Ratio Average Current Assets
7. Capital Turnover Ratio:
Capital Net Sales .
Turnover Ratio Average Capital Employed
9. Debtors Turnover Ratio/Receivables Turnover Ratio:
Debtors Net Credit Sales .
Turnover Ratio Average Accounts Receivable (Debtors + B/R)
Where, Net Credit Sales = Net Total Sales – Cash Sales
Note: Amount of Debtors should be net of Bad debt losses but not net of provision for Bad or Doubtful debts.
10. Average Collection Period:
Average Collection Period = 360/12/ 52 .
Debtors Turnover Ratio Or = Average Debtors & Bill Receivables x 360/12/52
Net Credit Sales/ Average monthly/daily credit sales
6. Finished Goods Turnover Ratio:
Finished Goods Sales or Cost of goods sold . Turnover Ratio Average Inventory of Finished goods
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11. Creditors (or Accounts Payable) Turnover Ratio:
Creditors Net Credit Purchases . Turnover Ratio Average Accounts Payable
(Creditors + B/P)
Where, Net Credit Purchases = Net Total Purchases
– Cash Purchases
13. Average Inventory Conversion/Holding Period:
Average Finished Goods Conversion Period/Avg. Stock in
Trade Holding Period = 360/12/52
Stock Turnover Ratio
Or = Average Stock in Trade/Finished Goods x 360/12/52
Cost of Goods Sold
14. Raw Materials Inventory Conversion Period:
Raw Materials 360/12/52 .
Conversion Period Raw Materials Turnover Ratio
Or = Average Stock of Raw Materials x 360/12/52
Raw Materials Consumed
12. Average Payment Period:
Average Payment 360/12/52 .
Period Creditors Turnover Ratio
Or =Average Creditors Bill Payables x 360/12/52
Net Credit Purchases
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1. Interest Coverage Ratio:
Interest Earnings before Interest and Taxes
Coverage Ratio Interest on Long Term Debts
COVERAGE RATIOS
2. Preference Dividends Coverage Ratio:
Preference Dividends Earnings After Tax . Coverage Ratio Preference Dividends 3. Equity Dividends Coverage Ratio:
Equity Dividends Coverage Ratio
= Earnings available for Equity Shareholders or EPS .
Equity Dividends DPS
5. Debt Service Coverage Ratio: Debt EAT + Interest on Long Term Debt + Dep. +
Service Other Non-cash Expenditures Like amortisation
Coverage Interest on Long Term Debt Installment of
Ratio principal
4. Total Dividends Coverage Ratio:
Total Dividends Earnings After Tax
Coverage Ratio Total Dividends
Total Dividends = Equity Dividends + Preference Dividends
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MARKET TEST OR MARKET STRENGTH
ANALYSIS OR INVESTOR ANALYSIS RATIOS
1. Dividends per Share (DPS):
Dividends Dividends for Equity Shareholders
Per Share Number of Equity Shares
4. Dividends Yield in Equity Shares:
Dividends Yield Dividend per share x 100
Ratio Market Price per Share
3. Book Value per Share/Net Asset Value per Share:
Net Asset Value Equity Shareholders Funds
Per Share Number of Equity Shares* *Closing No. of Equity Shares
2. Earnings per Share (EPS):
EPS = Earnings Available for Equity Shareholders (EAE)
Number of Equity Shares Where, EAE = EAT – Preference Dividends and CDT on Preferences Dividends (if any)
Note: In order to Compute EPS & DPS, Weighted average number of equity shares should be taken as a denominator.
In Case weighted average number of equity shares cannot
be Computed, them taken closing number of Equity Shares.
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5. Earnings Yield Ratio: Earnings Yield Earnings per share x 100 Ratio Market Price per Share
6. Dividends Payout Ratio:
Dividends Dividends per share x 100
Payout Ratio Earnings per Share
OR = 100 – Retention Ratio
7. Retention Ratio:
Retention Earnings Retained during the year x 100
Ratio Earnings Available for Equity Holders
OR = 100 - Dividends Payout Ratio
8. Price-Earnings Ratio or P/E Ratio: P/E Ratio = MPS OR 1 .
EPS Earnings Yield Ratio
9. Market Value to Book Value per share:
Market Value to Market Value per share
Book Value Ratio Book Value per share
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LIQUIDITY/SHORT TERM SOLVENCY RATIOS
1. Current Ratio:
Current Current Assets Ratio Current Liabilities Where, Current Assets = Inventories + Prepaid Expenses + Cash and Bank Balances + Receivables/ Debtors + Accrued Income + Short Term Loans and Advances + Short Term Marketable Investments + Advance Tax + Income Tax Refund Receivable
Ideal 2:1
2. Acid Test/Quick/Liquidity Ratio:
Liquid Ratio = Liquid Assets .
Current Liabilities
Where, Liquid/Quick Assets = Current Assets – Stock – Prepaid Expenses – Illiquid Debtors (Debtors expected to pay after more than 3 months) + Liquid Value of Stock (if any) + Liquid Value of Prepaid Expenses (if any) Alternative Approach: Quick Ratio = Quick Assets . Quick Liabilities
Ideal 1:1
Current Liabilities = Creditors for Goods and Services + Short Term Loans + Bank Overdraft + Cash Credit + Outstanding Expenses + Provision for Taxation + Proposed Dividend + Unclaimed Dividend + Short Term Provisions + Advances from
Customers + Current maturity of long term debts
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LONG TERM SOLVENCY RATIOS
3. Ratio of Inventory to Working Capital:
Inventory to Working Inventory .
Capital Ratio Working Capital
Ideal 1:1
1. Debt-Equity Ratio:
Debt-Equity Ratio Debt .
(D/E Ratio) Equity
Or = Long Term Debt Funds .
Shareholders or Proprietors Funds or Net Worth Where, Long Term Debt Funds = Long Term Loans (whether
Secured or Unsecured), e.g. Debentures, Bonds, Loans from
Financial Institutions
Ideal 2:1
2. Debt to Total Funds Ratio/Debt Ratio:
Debt to Total Funds = Debt . Ratio Total Funds Or = Debt . Debt + Equity Where, Total Funds = Shareholders Funds + Long Term Debt
Ideal 2:3
Where, Quick Liabilities = Current Liabilities – Bank Overdraft (except those payable on demand) – Cash Credit from bank & other Short Term Loans
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6. Gearing or Capital Gearing Ratio:
Capital Fixed Interest & Div. Bearing Securities
Gearing Ratio Equity Shareholders Funds
Where, Fixed Interest & Div. Bearing Securities
= Preference Share Capital + Long Term Debts
5. Proprietary Ratio:
Proprietary Ratio = Shareholders Funds/Net Worth
Total Assets
Where, Proprietary Fund / Shareholders Funds / Net
Worth = Equity Share Capital + Preference Share Capital
+ Reserve & Surplus – Fictitious Assets & Losses
Ideal 1:3
7. Fixed Assets Ratio:
Fixed Assets Ratio = Net Fixed Assets Capital Employed
Ideal <1
3. Proprietors Funds to Total Funds Ratio/Equity Ratio:
Equity Ratio Equity .
Debt + Equity
Ideal 1:3
4. Debt to Total Assets/Debt to Value Ratio:
Debt to Total Debt .
Assets Ratio Total Assets
Ideal 2:3
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8. Solvency Ratio or Outside Liabilities/Total Assets
Ratio = Outside Liabilities .
Total Assets
DU-PONT ANALYSIS CHART (ROI)
Return on Investment (ROI)
Net Operating Profit Ratio
EBIT Net Sales ÷
Sales – COGS
– Office & Admn.
Expenses – S&D Expenses
Capital Turnover Ratio
Capital
Employed Net
Sales
Net
Working Capital
Fixed
Assets
÷
+
x
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DU-PONT ANALYSIS CHART (ROTA)
Return on Total Assets
Net Profit Margin Total Assets Turnover
Net
Income
Net
Sales ÷
Net Sales +/- Non Operating Surplus/Deficit
Total
Costs -
Cost of Goods
Operating Expenses
Interest
x
Net
Sales
Total
Sales ÷
Fixed
Assets
Current
Assets +
Cash,
Bank &
Marketable
Securities
Receiv-ables
Tax Inventories Other
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DU-PONT ANALYSIS CHART
(RONW OR ROE)
Cash Flow Statement 146 CA Ashish Kalra
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CASH FLOW STATEMENT
1. Cash Flows from Operating Activities
2. Cash Flows from Investing Activities
3. Cash flows from Financing Activities
Net Increase/Decrease in Cash & Cash
Equivalents
Add: Opening Cash and Cash Equivalents
Closing Cash & Cash Equivalents
CASH FLOWS FROM OPERATING
ACTIVITIES: DIRECT METHOD
Cash receipts from the sale of goods and the rendering of services
Cash receipts from royalties, fees, commissions
and other revenue
Less: Cash payments to suppliers for goods and
services ()
Less: Cash payments to and on behalf of
employees ()
Less: Cash paid for Factory, Office & Selling
Expenses ()
Cash Generated from Operations
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Add: Income tax refund
Less: Income tax paid ()
Cash Flows before Extraordinary Item
Receipt/Payment against Extraordinary Item
Net Cash from Operating Activities
Particulars Amt Amt
Cash Flows From Operating Activities Retained Earnings
Add: Provision For Taxation
Add: Proposed Dividend Add: Interim Dividend
Add: Transfer to General Reserve & other
reserves from P&L Appropriation A/c
Add: Premium or redemption of Preference shares w/o from P&L App. A/c
Add: Extra-ordinary losses debited to P&L
A/c
Less: Extra-ordinary incomes credited to P&L A/c
()
Net Profits Before Tax & Extra-Ordinary
Items
CASH FLOWS FROM OPERATING ACTIVITIES:
INDIRECT METHOD
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Adjustment of Non Cash and Non-Operating Items:
Add: Depreciation
Add: Preliminary Expenses Written off Add: Underwriting Commission Written off
Add: Share Issue Expenses Written off
Add: Loss on Sale of Fixed Assets &
Investments
Add: Goodwill Written off
Add: Interest expense on Debts
Add: Discount Loss on Issue of Shares and Debt Written Off
Add: Foreign Exchange Fluctuation Loss
written off
Less: Foreign Exchange Fluctuation Gain () Less: Amortisation of capital govt grant ()
Less: Profit on Sale of Fixed Assets &
Investments ()
Less: Rent Received () Less: Dividends Received ()
Less: Interest on Investment Received () /()
Profit Operating Before Working Capital
Changes
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Add: Decrease in Operating CA and
Increase in Operating CL
Less: Increase in Operating CA and
Decrease in Operating CL () /()
Cash Flows from Operating Activities
Less: Income Tax Paid ()
Net Cash Flows from Operating
Activities
Note 1: An enterprise may hold securities and loans for
dealing or trading purposes, in which case they are similar
to inventory acquired specifically for resale. Therefore,
cash flows arising from the purchase and sale of dealing or trading securities are classified as operating
activities.
Note 2: Loans made by financial enterprises are usually
classified as operating activities since they relate to the main revenue-producing activity of that enterprise.
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CASH FLOWS FROM INVESTING ACTIVITIES
Particulars Amt
Cash Receipts from sale of Fixed Assets (including intangibles)
Less: Cash Payments to acquire/ construct/
develop Fixed Assets (including Intangibles,
capitalised Research and Development Costs and self-constructed Fixed Assets)
()
Less: Cash Payments to make Investment in
shares, warrants, or debt instruments and
interests in joint ventures
()
Add: Cash Receipts from disposal of Investment
in shares, warrants, or debt instruments and
interests in joint ventures
Less: Cash advances & loans made to third
parties (other than advances and loans made by a
financial enterprise)
()
Add: Cash Receipts from the repayment of advances and loans made to third parties (other
than advances and loans of a financial enterprise)
Net Cash from Investing Activities
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CASH FLOWS FROM FINANCING ACTIVITIES
Particulars Amt
Cash Proceeds from Issue of shares, debentures,
loans, notes, bonds & other short or long-term
borrowings
Less: Cash Repayments of Long & Short Term Borrowings
()
Less: Redemption of Preference Shares/
Debentures ()
Less: Buyback of Securities () Less: Interest paid ()
Less: Dividends and CDT paid ()
Less: Payment of Issue Exp. ()
Net Cash from Financing Activities
Should be shown
separately under the
head CFO
If it can be linked
with CFI or CFF then
show them under
these heads
INCOME TAX PAID/INCOME TAX
REFUND RECEIVED
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INTEREST/DIVIDENDS
Paid
Received
Non-Financial
entity (e.g.,
Trader,
Manufacturer)
Financial
entity
(Bank/FI,
NBFC)
Non-
Financial
entity
Financial
entity
CFF*
CFO
CFI
CFO
EXTRAORDINARY ITEMS
Show Cash flows
separately under each
head
If it cannot be
related to any of the
heads
CFF CFO
CFI
Show Separately
under CFO
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FOREIGN EXCHANGE FLUCTUATION
GAINS/LOSSES
In Cash & Cash
Equipments
In other Assets, such as
Debtors, Creditors, Loans
in foreign Currency
(Unrealised Gains, Losses) Show as
reconciliation
between Opening
& Closing Cash &
Cash Equipment
Ignore while Preparing Cash
Flow Statement as per
direct Method
Transactions that do not require the use of cash or cash
equivalents should be excluded from a cash flow statemen t.
Examples of non-cash transactions: (a) The acquisition of assets by assuming directly related
liabilities.
(b) The acquisition of an enterpri se by means of issue of
shares.
(c) Conversion of debt into equity.
NON-CASH TRANSACTIONS
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Effect of changes in Current Assets (CA) and
Current Liabilities (CL) on Net Working Capital (NWC): Increase in CA = Increase in NWC
Decrease in CA = Decrease in NWC Increase in CL = Decrease in NWC
Decrease in CL = Increase in NWC
EFFECT OF CHANGES IN CURRENT ASSETS
(CA) AND CURRENT LIABILITIES (CL) ON
NET WORKING CAPITAL (NWC)
Particulars Yr
1
Yr
2
Increase Decrease
CA
CL
Net
Increase/
Decrease in
WC
SCHEDULE OF CHANGES IN WORKING
CAPITAL
Funds Flow Statement 156 CA Ashish Kalra
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Sources Uses
Issue of Equity Shares/ Preference Shares/ Bonds/ Debentures/ Public Deposits
Buy back of own securities
Increase in Long Term Loans Decrease in Long Term Loans
Sale of Fixed Assets/Long Term Investments
Purchase of Fixed Assets/ Long Term Investments
Funds from Operations (FFO) Funds Lost in Operations (FLO)
Interest/ Dividends/ Rent Received
Redemption of Preference Shares/Debentures/Bonds/ Public Deposits
Introduction of Proprietor’s & Partner’s Capital
Dividends/ Preliminary Expenses/ Underwriting Commission Paid
Receipts from Govt Grant (Capital Grant)
Drawings by Proprietor & Partners
Compensation Received Penalty/Compensation/ Donations Paid
Income Tax Refund Income Tax Paid Net Decrease in Working Capital (Bal Fig)
Net Increase in Working Capital (Bal Fig)
FORMAT OF FUNDS FLOW STATEMENT
Note: The Net Increase/ Decrease in Working capital wi ll match
with the balance in Schedule of Changes in Working Capital.
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Retained Earnings (Closing P&L Appropriation A/c – Opening P&L Appropriation A/c)
Add: Appropriation of Profits
Add: Provision for Income Tax Dr to P & L A/c
Add: Extraordinary losses Dr to P & L A/c (such
as Loss by fire, theft, penalties payable)
Add: Depreciation on Fixed Assets
Add: Amortisation of Intangible and Deferred
Charges (such as goodwill, trademarks, patents,
copyrights, discount on issue of shares and
debentures, preliminary expenses, etc.)
Add: Non-Operating Expenses (excluding
interest expenses) & Losses Dr to P & L A/c (such
as loss on sale of Investments & Fixed Assets)
Add: Non Cash allowances Dr to P & L A/c
Less: Extraordinary Incomes Cr to P & L A/c (such as Law suit compensation receivable)
()
Less: Non-Operating income Cr to P & L A/c (such
as profits on sale of Investments & Fixed Assets,
amortisation of capital grants received from government)
()
Less: Any written back reserve and provision ()
FFO/(FLO) /()
COMPUTATION OF FFO & FLO
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TRANSACTION AFFECTING FLOW OF FUNDS
Current
Assets
Current
Liabilities
Non-Current
Assets
Non-Current
Liabilities
Yes Yes
No
No
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