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MATERIAL

COST

Material Cost 2 CA Ashish Kalra


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



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)



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



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)



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



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.



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



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



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.



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



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



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


-

LABOUR

COST



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



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



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



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



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.



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.



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



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



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



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 predetermined on the basis

of the skill, rate of pay etc.



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.



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 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



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


OVERHEADS



–

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



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



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



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



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



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



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



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



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.



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



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.



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



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



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



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.



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



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


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



Carry forward the under/over-absorbed Factory

Overheads in the next financial period.

No Journal Entry will be passed in this regard.


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



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.



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



Activity Based Costing 50 CA Ashish Kalra


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.



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.

Cost Sheet 52 CA Ashish Kalra


COST SHEET



ELEMENTS OF COST

Cost

Material Expenses

Labour

Direct Indirect Direct Indirect Direct Indirect

Prime Cost

Overheads

Factory/Works/

Production

Office & Administration

Selling & Distribution

Cost Sheet 54 CA Ashish Kalra


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



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




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,



(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.



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



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



COST BOOK

KEEPING

Cost Book Keeping 62 CA Ashish Kalra


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


Overhead Control A/c

Costing P&L A/c



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



`

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



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



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



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



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



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



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



Process Costing 72 CA Ashish Kalra


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



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



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



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



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



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.



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%.



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



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)



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



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.



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



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



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




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


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



Operating Costing 90 CA Ashish Kalra


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



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




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



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



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



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



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



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



Budgetary Control 100 CA Ashish Kalra


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



. Functional Budgets

Sales Budget

Production Budget

Production

Cost Budget

Material Budget

Labour Budget

Factory Overhead Budget

Administrative Overhead Budget


Overhead Budget

Research and Development Budget

Capital Expenditure

Budget

Cash Budget

Overheads

Budget

Financial

Budget



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



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



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


Total xxx xxx xxx

Unskilled Labour:

Product A 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



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



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



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



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



Standard Costing 110 CA Ashish Kalra


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



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



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



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



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



7. Fixed Overheads Revised Capacity Variance

(FORCAPV):

FORCAPV = Actual Possible Standard

Hours Hours Rate

Marginal Costing 116 CA Ashish Kalra




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



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



`

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)



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



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



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



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



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



COMMON SIZE

STATEMENT & TREND

ANALYSIS

Common Size Statement & Trend Analysis 126 CA Ashish Kalra


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



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.

Ratio Analysis 128 CA Ashish Kalra




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



(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



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)



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



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



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.



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



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



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



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.



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



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



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



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



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



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



DU-PONT ANALYSIS CHART

(RONW OR ROE)

Cash Flow Statement 146 CA Ashish Kalra


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



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



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



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.



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



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



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



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

Funds Flow Statement 154 CA Ashish Kalra




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



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.



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



TRANSACTION AFFECTING FLOW OF FUNDS

Current

Assets

Current

Liabilities

Non-Current

Assets

Non-Current

Liabilities

Yes Yes

No

No

Documents

MATERIAL - CA Study Web | 26 May 2020...Material Cost 4 CA Ashish Kalra Download IGP App TOTAL ANNUAL RELEVANT COST Annual Ordering & Carrying = 2 x A x O x C Costs/Annual