You are on page 1of 84

1 CLASSIFICATION OF COSTS: Manufacturing We first classify costs according to the three elements of cost: a) Materials b) Labour c) Expenses Product

and Period Costs: We also classify costs as either 1 Product costs: the costs of manufacturing our products; or Period costs: these are the costs other than product costs that are charged to! debited to! or "ritten off to the income statement each period# $he classification of Product Costs: %irect costs: %irect costs are generally seen to be &ariable costs and they are called direct costs because they are directly associated "ith manufacturing# 'n turn! the direct costs can include: %irect materials: ply"ood! "ooden battens! fabric for the seat and the bac(! nails! scre"s! glue# %irect labour: sa"yers! drillers! assemblers! painters! polishers! upholsterers %irect expense: this is a strange cost that many texts don)t include; but *'nternational +ccounting ,tandard) '+, ! for example! includes it# %irect expenses can include the costs of special designs for one batch! or run! of a particular set of tables and-or chairs! the cost of buying or hiring special machinery to ma(e a limited edition of a set of chairs#

$otal direct costs are collecti&ely (no"n as Prime Costs and "e can see that Product Costs are the sum of Prime costs and .&erheads# 'ndirect Costs: 'ndirect costs are those costs that are incurred in the factory but that cannot be directly associate "ith manufacture# +gain these costs are classified according to the three elements of cost! materials labour and o&erheads# 'ndirect materials: ,ome costs that "e ha&e included as direct materials "ould be included here# 'ndirect labour: Labour costs of people "ho are only indirectly associated "ith manufacture: management of a department or area! super&isors! cleaners! maintenance and repair technicians 'ndirect expenses: $he list in this section could be infinitely long if "e "ere to try to include e&ery possible indirect cost# Essentially! if a cost is a factory cost and it has not been included in any of the other sections! it has to be an indirect expense# /ere are some examples include: %epreciation of e0uipment! machinery! &ehicles! buildings Electricity! "ater! telephone! rent! Council $ax! insurance

$otal indirect costs are collecti&ely (no"n as .&erheads# 1inally! "ithin Product Costs! "e ha&e Con&ersion Costs: these are the costs incurred in the factory that are incurred in the con&ersion of materials into finished goods# $he classification of Period Costs: $he scheme sho"s fi&e sub classifications for Period Costs# When "e loo( at different organisations! "e find that they ha&e period costs that might ha&e sub classifications "ith entirely different names# 2nfortunately! this is the nature of the classification of period costs; it can &ary so much according to the organisation! the industry and so on# 3e&ertheless! such a scheme is useful in that it gi&es us the basic ideas to "or( on# +dministration Costs: Literally the costs of running the administrati&e aspects of an organisation# +dministration costs "ill include salaries! rent! Council $ax! electricity! "ater! telephone! depreciation! a potentially infinitely long list# 3otice that there are costs here such as rent! Council $ax! that appear in se&eral sub classifications; in such cases! it should be clear that "e are paying rent on buildings! for example! that "e use for manufacturing and storage and administration and each area of the business must pay for its share of the total cost under re&ie"# Without "ishing to o&erly extend this listing no"! "e can conclude this discussion by saying that the costs of ,elling! the costs of %istribution and the costs of 4esearch are all accumulated in a similar "ay to the "ay in "hich +dministration Costs are accumulated# Conse0uently! our tas( is to loo( at the selling process and classify the costs of running that process accordingly: ad&ertising! mar(et research! salaries! bonuses! electricity! and so on# $he same applies to all other classifications of period costs that "e might use# 1inance Costs: 1inance costs are those costs associated "ith pro&iding the permanent! long term and short term finance# $hat is! "ithin the section headed finance costs "e "ill find di&idends! interest on long term loans and interest on short term loans# 1inally! "e should say that "e can add any number of subclassifications to our scheme if "e need to do that to clarify the "ays in "hich our organisation operates# We "ill also add further subclassifications if "e need to refine and further refine out cost analysis#

9 COST SHEET FORMAT Particulars .pening ,toc( of 4a" Material +dd: Purchase of 4a" materials +dd: Purchase Expenses Less: Closing stoc( of 4a" Materials 4a" Materials Consumed %irect Wages *Labour) %irect Charges Prime cost *1) +dd :6 1actory .&er /eads: 1actory 4ent 1actory Po"er 'ndirect Material 'ndirect Wages ,uper&isor ,alary %ra"ing .ffice ,alary 1actory 'nsurance 1actory +sset %epreciation Wor(s cost 'ncurred +dd: .pening ,toc( of W'P Less: Closing ,toc( of W'P Wor(s cost * ) +dd:6 +dministration .&er /eads:6 .ffice 4ent +sset %epreciation 7eneral Charges +udit 1ees 8an( Charges Counting house ,alary .ther .ffice Expenses Cost of Production *9) +dd: .pening stoc( of 1inished 7oods Less: Closing stoc( of 1inished 7oods Cost of 7oods ,old +dd:6 ,elling and %istribution ./:6 ,ales man Commission ,ales man salary $ra&eling Expenses +d&ertisement %eli&ery man expenses ,ales $ax +mount +mount 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555 555

; 8ad %ebts Cost of ,ales *:) Profit *balancing figure) ,ales 3otes:6 1) 1actory .&er /eads are reco&ered as a percentage of direct "ages ) +dministration .&er /eads! ,elling and %istribution .&erheads are reco&ered as a percentage of "or(s cost# 555 555 555 555

: MATERIAL 1) 4eorder le&el < Maximum usage 5 Maximum lead time *.r) Minimum le&el = *+&erage usage 5 +&erage Lead time) ) Minimum le&el < 4eorder le&el > *+&erage usage 5 +&erage lead time) 9) Maximum le&el < 4eorder le&el = 4eorder 0uantity > *Minimum usage 5 Minimum lead time) ;) +&erage le&el < Minimum le&el =Maximum le&el Minimum le&el = ? 4eorder 0uantity :) %anger le&el *or) safety stoc( le&el <Minimum usage 5 Minimum lead time *preferred) *or) +&erage usage 5 +&erage lead time *or) +&erage usage 5 Lead time for emergency purposes @) E.A *Economic .rder Auantity 6 WilsonBs 1ormula) < C +.-C Where + < +nnual usage units . < .rdering cost per unit C < +nnual carrying cost of one unit i#e# Carrying cast D 5 Carrying cost of unit E) +ssociated cost < 8uying cost pa = Carrying cost pa F) 2nder E.A 8uying cost < Carrying cost G) Carrying Cost < +&erage in&entory 5 Carrying cost per unit pa 5 Carrying cost D *.r) +&erage 'n&entory 5 Carrying cost per order pa 1H) +&erage in&entory < E.A11) 8uying cost < 3umber of .rders 5 ordering cost 1 ) 3umber of .rders < +nnual %emand - E.A 19) 'n&entory $urno&er *$#.) 4atio < Material consumed +&erage 'n&entory 1;) 'n&entory $#. Period < 9@: # 'n&entory $urn o&er 4atio *or)

@ 1:) safety stoc( < +nnual %emand 5*Maximum lead time 6 +&erage lead time) 9@: 1@) $otal 'n&entory cost < .rdering cost = Carrying cost of in&entory =Purchase cost 1E) 'nput .utput 4atio < Auantity of input of material to production ,tandard material content of actual output 4emar(s :6 1) /igh 'n&entory $#. 4atio indicates that the material in the 0uestion is fast mo&ing ) Lo" 'n&entory $#. 4atio indicates o&er in&estment and loc(ing up of "or(ing Capital in in&entories Pricing of material 'ssues:6 1) Cost price method:6 a) ,pecific price method b) 1irst in 1irst .ut method *1'1.) c) Last in 1irst .ut method *L'1.) d) 8ase stoc( method ) +&erage price method:6 a) ,imple a&erage price method < b) Weighted a&erage price method < $otal unit price $otal 3o# of purchases $otal cost $otal 3o# of units

c) Periodic simple a&erage price method < $otal unit price of certain period $otal 3umber of purchases of that period *$his rate is used for all issues for that period# Period means a month *or) "ee( *or) year) d) Periodic "eighted a&erage price method < $otal cost of certain period $otal 3umber of units of that period e) Mo&ing simple a&erage price method < $otal of periodic simple a&erage of certain number of periods 3umber of periods

E f) Mo&ing "eighted a&erage price method < $otal of periodic "eighted a&erage of certain number of periods 3umber of periods 9) Mar(et price method:6 a) 4eplacement price method < 'ssues are &alued as if it "as purchased no" at current mar(et price b) 4ealiIable price method < 'ssues are &alued at price if it is sold no" ;) 3otional price method:6 a) ,tandard price method < Materials are priced at pre determined rate *or) ,tandard rate b) 'nflated price method < $he issue price is inflated to co&er the losses incurred due to natural*or)climatic losses :) 4e use price method < When materials are returned *or) reJected it is &alued at different price# $here is no final procedure for this method# +8C +nalysis *or) Pareto +nalysis :6 'n this materials are categoriIed into Particulars L+M > 'mportant material L8M > 3either important nor unimportant LCM > 23 'mportant 3ote:6 1) Material recei&ed as replacement from supplier is treated as fresh supply ) 'f any material is returned from %epartment after issue! it has to be first disposed in the next issue of material 9) loss in the boo( balance of stoc( and actual is to be transferred to 'n&entory adJustment a-c and from there if the loss is normal it is transferred to .&er /ead control a-c# 'f it is abnormal it is transferred to costing profit and loss a-c# ;) C'1 < Cost 'nsurance and 1reight *$his consignment is inclusi&e of prepaid insurance and freight) Auantity 1HD HD EHD Kalue EHD HD 1HD

F :) 1.8 < 1ree on 8oard *Materials mo&ing by sea > insurance premium is not paid) @) 1.4 < 1ree on 4ail *'nsurance and freight is not borne by the supplier but paid by the company or purchase) E) 1or each receipt of goods < 7oods 4eceipt note F) 1or each issue of goods < Materials 4e0uisition note *or) Material 'ssue note +ccounting $reatment :6 1) 3ormal Wastage < 't should be distributed o&er goods output increasing per unit cost ) +bnormal Wastage< 't "ill be charged to costing profit and loss a-c 9) ,ale &alue of scrap is credited to costing profit and loss a-c as an abnormal gain# ;) ,ale proceeds of the scrap can be deducted from material cost or factory o&erheads# :) ,ale proceeds of scrap may be credited to particular Job# @) 3ormal %efecti&es < cost of rectification of defecti&es should be charged to specific E) +bnormal %efecti&es < $his should be charged to costing profit and loss a-c F) Cost of 3ormal spoilage is to borne by good units G) +bnormal spoilage should be charged to costing profit and loss a-c

G LABOUR Method of 4emuneration: 1) $ime 4ate system a) 1lat time 4ate b) /igh "age system c) 7raduated time rate ) Payment by 4esults a) Piece rate system i) ,traight piece rate ii) %ifferential piece rate $aylor system Merric( system b) 7roup 8onus ,ystem i) 8udgeted Expenses ii) $o"ne gain sharing scheme iii) Cost efficiency bonus i&) Priest man system c) Combination of $ime and Piece rate i) 7antt tas( and 8onus scheme ii) Emerson Efficiency system iii) Point scheme 8edaux system /aynes manit system d) Premium bonus plans i) /alsey premium plan ii) /alsey "eir premium plan iii) 4o"an scheme i&) 8arth scheme &) +ccelerating premium bonus scheme e) .ther incenti&e schemes i) 'ndirect monetary incenti&e Profit sharing Co6partnership ii) 3on6Monetary 'ncenti&e

1H 1) $ime rate system < /ours "or(ed 5 4ate per hour *8asic "ages) ) Piece rate system: i) ,traight piece rate earnings < 3umber of units produced 5 4ate per unit ii) %ifferential Piece rate a) 1#W#$aylorBs differential rate system N F9D of piece rate "hen belo" standard N 1 :D of piece rate "hen abo&e or at standard b) Merric( differential or multiple piece rate system Efficiency le&el N up to F9D N F9D to 1HHD N +bo&e 1HHD iii) 7antt $as( and 8onus system .utput N 8elo" standard N +t standard N +bo&e standard i&) EmersonBs Efficiency system Efficiency N 8elo" @@#ED N from @@#ED to 1HHD N +bo&e 1HHD Payment N /ourly 4ate N /ourly rate *=) increasing bonus according to degree of efficiency on the basis of step bonus rates N /ourly rate *=) HD 8onus *=) additional bonus of 1D of hourly rate for e&ery 1D increase in efficiency Payment N $ime rate *guaranteed) N HD 8onus of $ime rate N 1 HD of ordinary piece rate Piece rate N3ormal piece rate N 11HD of 3ormal rate N 1 HD of 3ormal rate

&) /alsey Premium Plan < 8asic "ages = :HD of time sa&ed 5 /ourly 4ate &i) /alsey Weir Premium Plan < 8asic "ages = 9HD of time sa&ed 5 /ourly rate &ii) 4o"an Plan < 8asic "ages = $ime sa&ed $ime allo"ed 5 8asic Wages

&iii) 8edaus Point system < 8asic "ages = E:D 5 8edaus point-@H 5 4ate-hr

11 ix) 8arthBs ,ystem < /ourly rate 5 C,td time 5$ime ta(en Labour $urno&er:6 1) ,eparation rate method < ,eparation during the period +&erage 3o# of "or(erBs during the period ) 3et labour $#. rate *or) 4eplacement method < 3umber of replacements +&erage 3o# of "or(erBs during the period 9) Labour flux rate < 3o# of separation = 3o# of replacement +&erage 3o# of "or(erBs during the period +ccounting $reatment 1) 3ormal 'dle time < Charged to factory o&erheads ) 3ormal but un6controllable < 't should be charged to Job by inflating "age rate# 9) +bnormal < 't should be charged to costing P O L a-c

1 OVER HEADS 4eapportionment of ser&ice department expenses o&er production department :6 1) %irect redistribution method: ,er&ice department costs are di&ided o&er production department# 'gnore ser&ice rended by one dept# to another ) ,tep method of secondary distribution *or) 3on reciprocal method: ,er&ice department "hich ser&es largest number of ser&ice department is di&ided first and go on# 9) 4eciprocal ser&ice method: i) ,imultaneous e0uation method *or) +lgebraic method E0uation is formed bet"een ser&ice departments and is sol&ed to find the amount due# ii) 4epeated distribution method: ,er&ice department cost separated repeatedly till figure of ser&ice dept# is exhausted or too small# iii) $rial and Error method: Cost of ser&ice department is apportioned among them repeatedly till the amount is negligible and the total is di&ided among production department# $reatment of .&er-2nder absorption of o&erheads:6 i) 'f under absorbed and o&er absorbed o&erheads are of small &alue then it should be transferred to costing profit and loss a-c ii) 'f under and o&er absorption occurs due to "rong estimates then cost of product manufactured should be adJusted accordingly# iii) 'f the same accrued due to same abnormal reasons the same should be transferred to costing profit O loss a-c +pportionment of o&erhead expenses > 8asis a) ,tores ser&ice expenses < Kalue of materials consumed b) 1actory rent < 1loor area

19 c) Municipal rent! rates and taxes < floor area d) 'nsurance on 8uilding and machinery < 'nsurable &alue e) Welfare department expenses f) g ) h ) ,uper&ision 3umber of employees +menities to employeeBs Employees liability for insurance

J) Lighting po"er < Plug point () ,tores o&er heads < %irect material l) 7eneral o&er heads < %irect "ages 4eapportionment of ser&ice department cost to production department :6 1) Maintenance dept# < /ours "or(ed for each dept# ) Pay roll and time (eeping < $otal labour *or) machine hours *or) 3umber of employees in each department 9) Employment *or) Personnel department < 4ate of labour $#. *or) 3o# of employees of each department ;) ,tores Peeping department < 3o# of re0uisitions *or) &alue of materials of each department :) Purchase department < 3o# of purchase orders &alue of materials of each department @) Welfare! ambulance! canteen! ser&ice! recreation room expenses < 3o# of employees in each department# E) 8uilding ser&ice department < 4elati&e area each dept# F) 'nternal transport ser&ice *or) o&erhead crane ser&ice < "eight! &alue graded product handled! "eight and distance tra&eled#

1; G) $ransport department < Crane hours! truc( hours! truc( mileage! 3umber of pac(ages# 1H) Po"er house *electric po"er cost) < /ousing po"er! horse po"er machine hours! 3o# of electric points etc# 11) Po"er house < 1loor area! cubic content#

1: RECONCILATION OF COST AND FINANCIAL A/C Causes of differences:6 1) Purely financial items : i) +ppropriation of profits Q$ransferred to reser&es! good"ill! preliminary expenses! di&idend paid etc# ii) Loss on sale of in&estment! penalties and fines iii) 'ncome Q 'nterest recei&ed on 8an( deposits! profit on sale of in&estments! fixed assets! transfer fees# ) Purely cost account items: 6 3otional 4ent - 'nterest - ,alary 9) Kaluation of stoc(:6 i) 4a"6material < 'n financial a-cBs stoc( is &alued at cost or mar(et &alue Whiche&er is less! "hile in cost a-cBs it is &alued at L'1.! 1'1. etc# ii) Wor( in progress < 'n financial a-cBs administrati&e expenses are also considered "hile &aluing stoc(! but in cost a-cBs it may be &alued at prime *or) factory cost *or) cost of production iii) 1inished 7oods < 'n financial a-cBs it is &alued at cost or mar(et price "hiche&er is less! in cost a-cBs it is &alued at total cost of production# ;) .&erheads: 'n financial < +ctual expenses are ta(en 'n cost < Expenses are ta(en at predetermined rate# :) %epreciation: 'n financial < Charged in diminishing or fixed balance method 'n cost < Charged in machine hour rate @) +bnormal 7ains: 'n financial < $a(en to profit O Loss a-c 'n cost < Excluded to cost a-cBs or charged in costing profit O Loss a-c

1@ JOB AND BATCH COSTIN With Job costing! "e are dealing "ith one off situations# We are dealing "ith organisations that carry out functions and ser&ices on a one at a time basis# 7ood examples of Job costing situations include Jobbing builders: the builder "ho "ill pro&ide a householder! or a shop o"ner! or a factory o"ner "ith a ser&ice that he pro&ides for no one else# $he Jobbing builder "ill build an extension! or reno&ate some property to a design that "ill probably not be copied any"here else at any time: it is a one off Job# Rob costing can apply in non manufacturing situations as "ell as in manufacturing situations# E&en though many Jobbing enterprises are small scale! "e are not suggesting that all Jobbing enterprises are small scale enterprises# +n engineering shop may be "or(ing on a Job for a customer that ta(es se&eral months and many man and machine hours to complete# /ere are t"o definitions: + Job is L+ customer order or tas( of relati&ely short durationM Rob costing is L+ form of specific order costing; the attribution of cost to JobsM 8atch costing is not normally seen as much of an ad&ance on Job costing# + batch is + group of similar articles "hich maintains its identity throughout one or more stages of production and is treated as a cost unit 8atch costing is + form of specific order costing; the attribution of costs to batches# Economic 8atch Auantity < E8A < C +,-C Where + < +nnual %emand , < ,etting up cost per batch C< Carrying cost - unit of production#

1E !ROCESS COSTIN 1ormat of process a-c


Particulars $o %irect material $o %irect Labour $o 'ndirect material $o .ther Expenses $o +bnormal gain*8-1) $otal 2nit 4ate 4s# Particulars 8y 3ormal Loss 8y 2nits transferred to other process 8y +bnormal loss *8-1) $otal 2nit 4ate 4s#

1ormat of +bnormal loss


Particulars $o Process a-c $otal 2nit 4s# Particulars 8y ,ale of "asted units 8y costing P O L a-c $otal 2nit 4s#

1ormat of +bnormal gain a-c


Particulars $o 3ormal Loss a-c $o costing POla-c $otal 2nits 4s# Particulars 8y Process a-c *names of different process) $otal 2nits 4s#

1)$o find the cost per unit for &aluation of units to be trans# to next process and also for abnormal! loss or gain < $otal process cost > ,al&age &alue of normal spoilage $otal units introduced > 3ormal loss in units ) $o find abnormal loss *or) gain *all in units): < 2nits from pre&ious process = fresh units introduced > 3ormal loss > units transferred to next process *'f the result is positi&e then abnormal loss# 'f negati&e then abnormal gain) 9) 'n case of opening W'P and closing W'P are gi&en then there are different methods of &aluation of closing W'P i) 1'1. Method ii) L'1. Method iii) +&erage Method i&) Weighted +&erage Method ;) Karious statements to be prepared "hile W'P is gi&en: i) ,tatement of e0ui&alent production ii) ,tatement of cost

1F iii) ,tatement of apportionment of cost i&) Process cost a-c :) 1'1. Method: 'n these method total units transferred to next process includes full opening stoc( units and the closing stoc( includes the units introduced during the process# 'n this method the cost incurred during the process is assumed as to be used a) 1irst to complete the units already in process b) $hen to complete the ne"ly introduced units c) 1or the "or( done to bring closing in&entory to gi&en state of completion @) L'1. Method < Cost incurred in process is used for: a) 1irst to complete ne"ly introduced units b) $hen to complete units already in process in this method closing stoc( is di&ided into t"o : i) 2nits "hich represent opening stoc( but lie at the end of the period ii) 3e"ly introduced units in closing stoc(# E) +&erage Method: 'n this method a) 3o distinction is made bet"een opening stoc( and ne"ly introduced material# b) 'n finding cost per unit! cost incurred for opening stoc( is also to be added "ith current cost# *$his addition is not done in L'1. O 1'1. method as cost incurred in that process is only ta(en) F) Weighted a&erage method: $his method is only used "hen &aried product in processed through a single process# 7eneral procedure is adopted here# a) ,tatement of "eighted a&erage production should be prepared# 2nder this statement output of each products is expressed in terms of points# b) Cost of each type of product is computed on basis of Points# Points of &ital importance in case of +bnormal 7ain - Loss: a) Calculate cost per unit by assuming there is no abnormal loss - gain b) Cost per unit arri&ed abo&e should be applied for &aluation of both abnormal Loss-gain units and output of the process#

1G c) ,eparate a-c for both abnormal loss-gain is to be prepared# JOINT !RODUCT AND B" !RODUCT COSTIN Methods of apportioning Joint cost o&er Joint products : 1) Physical unit method < Physical base to measure *i#e#) output 0uantity is used to separate Joint cost# Roint cost can be separated on the basis of ratio of output 0uantity# While doing this "astage is also to be added bac( to find total 0uantity# ) +&erage unit cost method < 'n this method Joint cost is di&ided by total units Produced of all products and a&erage cost per unit is arri&ed and is multiplied With number of units produced in each product# 9) ,ur&ey method or point &alue method < Product units are multiplied by points or "eights and the point is di&ide on that basis# ;) ,tandard cost method < Roint costs are separated on the basis of standard cost set for respecti&e Joint products# :) Contribution margin method < Cost are di&ided into t"o categories *i#e#) &ariable and fixed# Kariable costs are separated on unit produced# 1ixed on the basis of contribution ratios made by different products# @) Mar(et &alue method:6 a) Mar(et &alue at the point of separation: Roint cost to sales re&enueS percentage is found "hich is called as multiplying factor < Roint cost 5 1HH ,ales 4e&enue Roint cost for each product is apportioned by applying this D on sales re&enue of each product# ,ales re&enue < ,ales 4e&enue at the point of separation# $his method cannot be done till the sales re&enue at the separation point is gi&en# b) Mar(et &alue after processing: Roint cost is apportioned on the basis of total sales Kalue of each product after further processing# c) 3et 4ealiIable &alue method < 1orm sales &alue follo"ing items are deducted i) Estimated profit margin ii) ,elling and distribution expenses if any included# iii) Post split off cost

H $he resultant amount is net realiIable &alue# Roint cost is apportioned on this basis# 8i6product T Method of accounting $reat as other income in profit and loss a-c 3et 4ealiIable &alue of 8i6product is reduced from cost of main product# 'nstead of standard process! ,tandard cost or comparati&e price or re6use price is credited to Joint process a-c#

1 O!ERATION COSTIN ,er&ice costing is L+ cost accounting method concerned "ith establishing the costs of ser&ices renderedM# ,er&ice costing is also applied "ithin a manufacturing setting# $he %ifferences 8et"een Product Costing and ,er&ice CostingU $here may be &ery fe"! if any! materials to "orry about .&erheads "ill comprise the most significant portion of any costs of "hich! labour costs may "ell comprise as much as EHD 3o# 1# # 9# ;# :# @# E# F# G# 1H# Enterprise 4ail"ays or bus companies /ospital Canteen Water supply ser&ice 8oiler /ouse 7oods $ransport Electricity 8oards 4oad maintenance department 8ric(s /otel Cost per unit Per passenger6(ilometer Per patient-day! per bed-day Meals ser&ed ! cups of tea Per 1HHH gallons 1HHH (g of steam Per tonne (m! 0uintal (m Per (ilo"att > hours Per mile or road maintenance .ne thousand Per room-day

'n this &arious terms such as passenger (m! 0uintal (m! tonne (m! these are all (no"n as composite units and are computed in "ays: a) +bsolute *"eighted a&erage): *e#g#) tones (m 6 Multiplying total distance by respecti&e load 0uantity# b) Commercial *simple a&erage): *e#g#) tonne Pm>Multiplying total distance by a&erage load 0uantity +ll accumulated cost is classified into 9 categories: 1) ,tanding charges *or) fixed cost ) 4unning cost *or) &ariable cost 9) Maintenance charges *or) semi &ariable cost 4unning charges < 1uel! %ri&er Wages! %epreciation! oil etc# Maintenance charges < ,uper&ision salary! 4epairs and Maintenance

3ote:6

D of factory o&erheads on direct "ages D of administration o&erheads on "or(s cost D of selling O distribution o&erheads on "or(s cost D of profit on sales

.perating cost sheet :6 Particulars + ,tanding charges :6 License fees 'nsurance Premium 4oad tax 7arage rent %ri&erBs "ages +ttendant6cum6cleanerBs "ages ,alaries and "ages of other staff $otal 8 4unning charges :6 4epairs and maintenance Cost of fuel *diesel! petrol etc#) Lubricants! grease and oil Cost of tires! tubes and other spare parts %epreciation $otal C $otal charges V *+) = *8) W $otal cost Cost per (m

9 CONTRACT COSTIN Contract costing is L+ form of specific order costing; attribution of costs to indi&idual contractsM# + contract cost is L+ggregated costs of a single contract; usually applies to maJor long term contracts rather than short term JobsM# 1eatures of long term contracts: 8y contract costing situations! "e tend to mean long term and large contracts: such as ci&il engineering contracts for building houses! roads! bridges and so on# We could also include contracts for building ships! and for pro&iding goods and ser&ices under a long term contractual agreement# With contract costing! e&ery contract and each de&elopment "ill be accounted for separately; and does! in many respects! contain the features of a Job costing situation# Wor( is fre0uently site based#

We might ha&e problems "ith contract costing in the follo"ing areas 'dentifying direct costs Lo" le&els of indirect costs %ifficulties of cost control Profit and multi period proJects

$he source of the follo"ing has eluded me: my sincere gratitude for "hoe&er the author might be# XContract Costing such Jobs ta(e a long time to complete O may spread o&er t"o or more of the contractor)s accounting yearsM# F#atur#$ %f a C%ntract $he end product $he period of the contract $he specification $he location of the "or( $he price Completion by a stipulated date $he performance of the product

; C%&&#cti%n %f C%$t$ : %esirable to open up one or more internal Job accounts for the collection of costs# 'f the contract not obtained! preliminary costs be "ritten off as aborti&e contract costs in POL 'n some cases a series of Job accounts for the contract "ill be necessary: to collect the cost of different aspects to identify different stages in the contract S'#cia& f#atur#$ Materials deli&ered direct to site# %irect expenses ,tores transactions# 2se of plant on site

T(% '%$$i)&# acc%unting *#t+%,$: Where a plant is purchased for a particular contract O has little further &alue to the business at the end of the contract Where a plant is bought for or used on a contract! but on completion of the contract it has further useful life to the business +lternati&ely the plant may be capitalised "ith Maintenance and running costs charged to the contract#X 1ormat:6 Particulars $o Materials a# Purchased directly b# 'ssue from site c# ,upplied by contractee $o Wages and salaries $o .ther direct Expenses $o ,ub6contractor fees $o Plant O Machinery *purchase price-8oo( &alue) $o 'ndirect expenditure *apportioned share of o&erheads) $o 3otional profit *,urplus) $otal 4s# Particulars 8y materials returned 55 8y Material sold *cost 55 price) 55 55 8y W'P Wor( certified 55 Wor( 2ncertified 55 8y Materials at site 55 55 8y Plant and machinery*W%K) 55 $otal 4s# 55 55 55 55 55 55 55

: Profit of 'ncomplete contract :6 1) When D of completion is less than or e0ual to :D then full 3otional profit is transferred to reser&e# ) When D of completion is abo&e :D but less than :HD follo"ing amount should be credited to profit O loss a-c < 1-9 5 3otional Profit 5 YCash recei&ed - Wor( certifiedZ 9) When D of completion is more than or e0ual to :HD then the amount transferred to profit is < -9 5 3otional Profit 5 YCash recei&ed - Wor( certifiedZ V8alance is transferred to reser&e a-cW D of completion < YWor( certified-Contract priceZ 5 1HH ;) When the contract is almost complete the amount credited to profit O loss a-c is a) Estimated total profit 5 YWor( certified - Contract priceZ b) Estimated total profit 5 YCash recei&ed - Contract priceZ c) Estimated total profit 5 YCost of "or( done - Estimated total profitZ d) Estimated total profit5YCost of "or( done5Cash recei&ed Estimated total cost 5 Wor( certifiedZ :) Wor(6'n6Progress is sho"n in 8alance ,heet as follo"s:6 ,(eleton 8alance sheet
Liabilities Profit O loss a-c *"ill include) Profit on contract *,pecify the contract number) Less : Loss on contract *,pecify the contract number) ,undry creditors *"ill include) Wages accrued %irect expenses accrued +ny other expenses *,pecify) *4,) +sset Wor(6in6progress Kalue or "or( certified Cost of "or( uncertified Less :6 4eser&e for unrealiIed profit Less :6 +mount recei&ed from contractee *4s)

@) Escalation Clause < $his is to safeguard against li(ely change in price of cost elements rise by and certain D o&er the prices pre&ailing at the time tendering the contractee has to bear the cost#

MAR INAL COSTIN ,tatement of profit:6 Particulars ,ales Less:6Kariable cost Contribution Less:6 1ixed cost Profit +mount 555 555 555 555 555

1) ,ales < $otal cost = Profit < Kariable cost = 1ixed cost = Profit ) $otal Cost < Kariable cost = 1ixed cost 9) Kariable cost < 't changes directly in proportion "ith &olume ;) Kariable cost 4atio < YKariable cost - ,alesZ 5 1HH :) ,ales > Kariable cost < 1ixed cost = Profit @) Contribution < ,ales 5 P-K 4atio E) Profit Kolume 4atio VP-K 4atioW:6 YContribution - ,alesZ 5 1HH YContribution per unit - ,ales per unitZ 5 1HH YChange in profit - Change in salesZ 5 1HH YChange in contribution - Change in salesZ 5 1HH F) 8rea( E&en Point V8EPW:6 1ixed cost - Contribution per unit Vin unitsW 1ixed cost - P-K 4atio Vin &alueW *or) 1ixed Cost 5 ,ales &alue per unit *,ales > Kariable cost per unit) G) Margin of safety VM.PW +ctual sales > 8rea( e&en sales 3et profit - P-K 4atio Profit - Contribution per unit V'n unitsW 1H) ,ales unit at %esired profit < Y1ixed cost = %esired profitZ - Cont# per unit

E 11) ,ales &alue for %esired Profit < Y1ixed cost = %esired profitZ - P-K 4atio 1 ) +t 8EP Contribution < 1ixed cost 19) Kariable cost 4atio < Change in total cost Change in total sales 5 1HH

1;) 'ndifference Point < Point at "hich t"o Product sales result in same amount of profit < Change in fixed cost *in units) Change in &ariable cost per unit < Change in fixed cost Change in contribution per unit < Change in 1ixed cost Change in P-4atio < Change in 1ixed cost Change in Kariable cost ratio *in units) *in 4s#) *in 4s#)

1:) ,hut do"n point < Point at "hich each of di&ision or product can be closed < Maximum *or) ,pecific *or) +&ailable fixed cost P-K 4atio *or) Contribution per unit 'f sales are less than shut do"n point then that product is to shut do"n# 3ote :6 1) When comparison of profitability of t"o products if P-K 4atio of one product is greater than P-K 4atio of other Product then it is more profitable# ) 'n case of 'ndifference point if ,ales [ 'ndifference point 666 ,elect option "ith higher fixed cost *or) select option "ith lo"er fixed cost#

STANDARD COSTIN Method one of reading:6 Material:6 ,P 5 ,A ,P 5 +A ,P 5 4,A *1) (2) (3) (4) a) Material cost &ariance < *1) > *;) b) Material price &ariance < (2)(4) c) Material usage &ariance < *1) > * ) d) Material mix &ariance < *9) > * ) e) Material yield &ariance < *1) >*9)

+P 5 +A

Labour :6 ,45,$ ,45+$ *paid) ,454,$ +45+$ ,45+$*"or(ed) (1) (2) (3) (4) (5) a) Labour Cost &ariance < b) Labour 4ate &ariance < c) Labour Efficiency &ariance < d) Labour mix &ariance < e) Labour 'dle time &ariance < *1) > *;) * ) > *;) *1) > * ) *9) > *:) *:) > * )

Kariable .&erheads cost &ariance :6 ,4 5 ,$ ,4 5 +$ +4 5 +$ (1) (2) (3) a) Kariable .&erheads Cost Kariance < *1) > *9) b) Kariable .&erheads Expenditure Kariance < * ) > *9) c) Kariable .&erheads Efficiency Kariance < *1) > * ) [Where: ,4 <,tandard rate-hour < 8udgeted &ariable ./ 8udgeted /ours W 1ixed .&erheads Cost Kariance:6 ,45,$ ,45+$*"or(ed) ,4548$ (1) (2) (3) (4) (5) a) 1ixed .&erheads Cost Kariance b) 1ixed .&erheads 8udgeted Kariance < < ,458$ *1) > *:) *;) > *:) +45+$*paid)

G c) 1ixed .&erheads Efficiency Kariance < *1) > * ) d) 1ixed .&erheads Kolume Kariance < *1) > *;) e) 1ixed .&erheads Capacity Kariance < * ) > *9) f) 1ixed .&erheads Calendar Kariance < *9) > *;) ,ales &alue &ariance:6 8udgeted Price58A 8P5+A 8P58udgeted mix (1) (2) (3) (4) a) ,ales &alue &ariance < b) ,ales price &ariance < c) ,ales &olume &ariance < d) ,ales mix &ariance < e) ,ales 0uantity &ariance < 3ote :6 i) +ctual margin per unit *+MP2) < +ctual sale price > selling cost per unit ii) 8udgeted margin per unit *8MP2) < 8udgeted sale price > selling price per unit ,ales margin &ariance :6 8MP258A 8MP25+A (1) (2) (3) 8MP258udgeted mix (4) +MP25+A *4)(1) *;) > * ) * ) > *1) * ) > *9) *9) > *1)

+P5+A

a) ,ales margin &ariance < *;) > *1) b) ,ales margin price &ariance < *;) > * ) c) ,ales margin &olume &ariance < * ) > *1) d) ,ales margin mix &ariance < * ) > *9) e) ,ales margin 0uantity &ariance < *9) > *1) Control 4atio :6 1) Efficiency 4atio < ,tandard hours for actual output 5 1HH +ctual hours "or(ed ) Capacity 4atio < +ctual /ours Wor(ed 5 1HH 8udgeted /ours 9) +cti&ity 4atio < +ctual hours "or(ed 5 1HH 8udgeted /ours Kerification: +cti&ity 4atio < Efficiency 5 Capacity 4atio

9H

STANDARD COSTIN Method t"o of reading:6 Material:6 a) Material cost &ariance < ,C > +C < *,A5+A) > *+A5+P) b) Material price &ariance < +A *,P > +P) c) Material usage &ariance < ,P *,A > +A) d) Material mix &ariance < ,P *4,A > +A) e) Material yield &ariance < *+\ > ,\ for actual input) ,tandard material cost per unit of output f) Material re&ised usage &ariance *calculated instead of material yield &ariance) < Vstandard 0uantity > 4e&ised standard for actual output 0uantity W 5 ,tandard price Labour :6 a) Labour Cost &ariance < ,C > +C < *,/5,4) > *+/5+4) b) Labour 4ate &ariance < +/ *,4 6 +4) c) Labour Efficiency or time &ariance < ,4 *,/ >+/) d) Labour Mix or gang composition Kariance < ,4*4,/6+/) e) Labour 'dle $ime Kariance < 'dle hours 5 ,4 f) Labour \ield Kariance < V+ctual .utput > ,tandard output for actual inputW 5 ,tandard labour cost-unit of output g) Labour 4e&ised Efficiency Kariance *instead of L\K) < V,tandard hours for actual output > 4e&ised standard hoursW 5 ,tandard rate

91 3otes :6 i) LCK < L4K = LMK = '$K = L\K ii) LCK < L4K = LEK = '$K iii) LEK < LMK! L\K *or) L4EK .&erhead &ariance :6 *general for both &ariable and fixed) a) ,tandard o&erhead rate *per hour) < 8udgeted .&erheads 8udgeted /ours b) ,tandard hours for actual output < 8udgeted hours 5 +ctual .utput 8udgeted output c) ,tandard ./ d) +bsorbed ./ e) 8udgeted ./ f) +ctual ./ g) ./ cost &ariance < ,tandard hrs for actual output 5 ,tandard ./ rate per hour < +ctual hrs 5 ,tandard ./ rate per hour < 8udgeted hrs 5 ,tandard ./ rate per hour < +ctual hrs 5 +ctual ./ rate per hour < +bsorbed ./ > +ctual ./

Kariable .&erheads &ariance :6 a) Kariable ./ Cost Kariance < ,tandard ./ > +ctual ./ b) Kariable ./ Exp# Kariance < +bsorbed ./ > +ctual Kariable ./ c) Kariable ./ Efficiency Kariance < ,tandard ./ > +bsorbed ./ < V,tandard hours for > +ctual 5 ,tandard rate actual output hoursW for &ariable ./ 1ixed .&erheads &ariance :6 a) 1ixed ./ Cost Kariance < ,tandard ./ > +ctual ./ b) 1ixed ./ expenditure &ariance < 8udgeted ./ > +ctual ./ c) 1ixed ./ Efficiency Kariance < ,tandard ./ *units based) > +bsorbed ./ */ours based) d) 1ixed ./ Kolume Kariance < ,tandard ./ > 8udgeted ./

< V,tandard hrs for > 8udgeted actual output hours W e) 1ixed ./ capacity &ariance < +bsorbed ./>8udgeted ./

9 5 standard rate

f) 1ixed ./ Calendar Kariance < V4e&ised budgeted hrs > 8udgeted hrsW 5 ,tandard rate-hrs 3ote:6 When there is calendar &ariance capacity &ariance is calculated as follo"s :6 Capacity &ariance < V+ctual hours > 4e&ised 5 ,tandard *4e&ised) 8udgeted hrsW rate-hour Kerification :6 i) &ariable ./ cost &ariance < Kariable ./ Expenditure &ariance = Kariable ./ Efficiency &ariance ii) 1ixed ./ cost &ariance < 1ixed ./ Expenditure &ariance = 1ixed ./ &olume &ariance iii) 1ixed ./ &olume &ariance < 1ixed ./ Efficiency &ariance = Capacity &ariance = Calander &ariance ,ales &ariances :6 $urno&er method *or) sales &alue method :6 a) ,ales &alue &ariance < +ctual ,ales > 8udgeted ,ales b) ,ales price &ariance < V+ctual Price > ,tandard priceW 5 +ctual 0uantity < +ctual sales > standard sales c) ,ales &olume &ariance < V+ctual68udgeted 0uantityW 5,tandard price < ,tandard sales > 8udgeted sales d) ,ales mix &ariance < V+ctual 0uantity > 4e&ised standard 0uantityW 5 ,tandard price < ,tandard sales > 4e&ised sales e) ,ales 0uantity &ariance < V4e&ised standard &ariance > 8udgeted 0uantityW 5 ,tandard price < 4e&ised ,tandard sales > 8udgeted sales

99 Profit method:6 a) $otal sales margin &ariance < *+ctual Profit>8udgeted price) < Y+ctual 0uantity 5 +ctual profit per unitZ6 Y8udgeted 0uantity 5 ,tandard profit per unitZ b) ,ales margin price &ariance<+ctual profit>,tandard profit < Y+ctual Profit per unit > ,tandard profit per unitZ 5 +ctual 0uantity of sales c) ,ales margin &olume &ariance < ,tandard profit > 8udgeted Profit < Y+ctual 0uantity > 8udgeted 0uantityZ 5 ,tandard profit per unit d) ,ales margin mix &ariance < ,tandard profit > 4e&ised ,tandard profit < Y+ctual 0uantity > 4e&ised standard 0uantityZ 5 ,tandard profit per unit e) ,ales margin 0uantity &ariance < 4e&ised standard profit 6 8udgeted profit < Y4e&ised standard 0uantity > 8udgeted 0uantityZ 5 ,tandard profit per unit

9;

STANDARD COSTIN %iagrammatic 4epresentation: 6 Material Kariance: 6 Material cost &ariance < ,C > +C < *,A5+A) > *+A5+P) Labour Kariances:6 Labour Cost &ariance < ,C > +C < *,/5,4) > *+/5+4) 1ixed .&erhead Kariance : 6 a) ,tandard ./ < ,tandard hrs for actual output 5 ,tandard ./ rate per hour b) +bsorbed ./ c) 8udgeted ./ d) +ctual ./ < +ctual hrs 5 ,tandard ./ rate per hour < 8udgeted hrs 5 ,tandard ./ rate per hour < +ctual hrs 5 +ctual ./ rate per hour

e) 4e&ised 8udgeted /our < +ctual %ays 5 8udgeted /ours per day *Expected hours for actual days "or(ed) When Calendar &ariance is as(ed then for capacity &ariance 8udgeted .&erhead is *8udgeted days 5 ,tandard ./ rate per day)

9: 4e&ised 8udgeted /our *8udgeted hours for actual days) < +ctual days 5 8udgeted

hours per day Kariable .&erhead Kariance : 6

,ales Kalue Kariances : 6 ,ales &alue &ariance < +ctual ,ales > 8udgeted ,ales ,ales Margin Kariances : 6

9@ $otal sales margin &ariance < *+ctual Profit>8udgeted price) < Y+ctual 0uantity 5 +ctual profit per unitZ6 Y8udgeted 0uantity 5 ,tandard profit per unitZ VWhere :6 ,C < ,tandard Cost! ,P < ,tandard Price! +P < +ctual Price! +\ < +ctual \ield! 4,A < 4e&ised ,tandard Auantity! ,$ < ,tandard $ime +$ < +ctual $ime 8P < 8udgeted Price! 48$ < 4e&ised 8udgeted $ime 8MP2 < 8udgeted Margin per 2nit +MP2 < +ctual Margin per 2nit 4econciliation:6 4econciliation statement is prepared to reconcile the actual profit "ith the budgeted profit Particulars 1a&orable 2nfa&orable *4s) 8udgeted Profit : +dd 1a&orable &ariances Less 2nfa&orable &ariances ,ales Kariances : ,ales price &ariance ,ales mix &ariance ,ales 0uantity &ariance C%$t -arianc# :. Material : Cost &ariance 2sage &ariance Mix &ariance +C < +ctual Cost ,A < ,tandard Auantity +A < +ctual Auantity ,\ < ,tandard \ield ,4 < ,tandard 4ate! +4 < +ctual 4ate! 4,$ < 4e&ised ,tandard $ime! 8A < 8udgeted Auantity

9E Labour : 4ate &ariance Mix &ariance Efficiency &ariance 'dle time &ariance 1ixed o&erhead &ariance : Expenditure &ariance Efficiency &ariance 1ixed o&erhead &ariance : Expenditure &ariance Efficiency &ariance Capacity &ariance Calendar &ariance

NON.INTE RATED ACCOUNTS ,cheme of Journal entries:6 Material: a) 1or material purchases *cash or credit) i) Material control a-c %r $o Cost ledger control a-c ii) ,tores ledger control a-c %r $o Material control a-c b) Purchases for a special Job Wor(6in6progress ledger control a-c %r $o Cost ledger control a-c c) Material returned to &ender

9F Cost ledger control a-c %r $o ,tores ledger control a-c d) Material *direct) issued to production Wor(6in6progress control a-c %r $o ,tores ledger control a-c e) Material *indirect) issued to production Manufacturing o&erheads a-c %r $o ,tores ledger control a-c f) Material returned from shop to stores ,tores ledger control a-c %r $o Wor(6in6progress control a-c g) Material transferred from Rob 1 to Rob Rob a-c %r $o Rob 1 a-c i) Material issued from stores for repairs Manufacturing o&erhead a-c $o ,tores ledger control a-c %r

Labour: a) %irect "ages paid i) Wage control a-c %r $o Cost ledger control a-c ii) Wor(6in6progress a-c $o Wage control a-c %r

b) 'ndirect "ages paid to "or(ers in Production! +dministration! ,elling and %istribution departments i) Wage control a-c %r $o Cost ledger control a-c ii) Production .&erhead a-c +dministrati&e .&erhead a-c ,elling O %istribution .&erhead a-c $o Wage control a-c %r %r %r

9G c) %irect Expenses on a particular Job Rob a-c %r $o Cost ledger control a-c .&erheads:6 a) .&erhead expenses incurred Production o&erhead a-c %r +dministrati&e .&erhead a-c %r ,elling O %istribution .&erhead a-c %r $o cost ledger control a-c b) Carriage in"ard Manufacturing .&erhead a-c $o Cost ledger control a-c %r

c) Production .&erheads reco&ered Wor(6in6progress control a-c %r $o Production .&erhead a-c d) +dministrati&e .&erhead reco&ered from finished goods 1inished goods ledger control a-c %r $o +dministrati&e .&erhead a-c e) ,elling and %istribution .&erhead reco&ered from sales Cost of sales a-c %r $o ,elling O %istribution a-c f) 'f o&er-under absorbed amounts are carried for"ard to subse0uent year! the balance of each .&erhead account "ill ha&e to be transferred to respecti&e .&erhead suspense *or reser&e) +ccounts as follo"s: i) 1or o&er reco&ery : Production .&erhead a-c %r $o Production o&erhead suspense a-c ii) 1or under reco&ery : +dministrati&e .&erhead ,uspense a-c %r $o +dministrati&e .&erhead a-c ,elling O %istribution .&erhead ,uspense a-c %r $o ,elling O %istribution .&erhead a-c g) 'n case the 2nder-.&er absorbed o&erheads are transferred to costing profit O loss

;H a-c then the rele&ant entries are: i) 1or .&er reco&ery: Production .&erhead a-c %r $o Costing Profit O Loss a-c ii) 1or 2nder reco&ery: Costing Profit O Loss a-c %r $o +dministration .&erhead a-c ,ales:6 1or sales effected: Cost ledger control a-c %r $o Costing Profit O Loss a-c Profit - Loss: a) 'n case of profit the entry is as follo"s Costing Profit O Loss a-c $o Cost ledger control a-c b) 4e&erse the entry in case of loss %r

$he main accounts "hich are usually prepared "hen a separate cost ledger is maintained is as follo"s:6 i) Cost ledger control a-c ii) ,tores ledger control a-c iii) Wor(6in6progress control a-c i&) 1inished goods control a-c &) Wage control a-c &i) Manufacturing-Production-Wor(s .&erheads a-c &ii) +dministrati&e .&erhead a-c Kiii) ,elling O %istribution .&erhead a-c ix) Cost of sales a-c x) Costing profit O loss a-c

;1

Tran$f#r !ricing + transfer price is the amount of money that one unit of an organisation charges for goods and ser&ices to another unit of an organisation# .ne of the (ey aspects here is that a transfer price is e0ui&alent to an ordinary selling price and that any department or di&ision that sets a transfer price is effecti&ely selling its goods and ser&ices at a profit or a loss to another department or di&ision "ithin its organisation# +ny part of an organisation using transfer pricing "ill be classed as a profit centre: since it is operating "ith a &ie" to ma(ing a profit *"hether positi&e! profit! or negati&e! loss)# 'f goods and ser&ices are transferred bet"een departments and di&isions at cost! then no profit or loss arises and the issue of transfer pricing does not! or should not! arise# .rganisations ha&e a system of transfer pricing! therefore! in order to assess the efficiency and effecti&eness of its department and di&isional managers# $his maybe in spite of the fact that transfer prices may be artificial in the sense that it is felt that there is no rationale for LsellingM bet"een departments and di&isions#

; Criteria for fixing $ransfer Pricing:6 i) ii) External Capacity not fully utiliIed < Kariable Cost Capacity fully 2tiliIed a) 'f single product :6 ,elling Price *>) ,elling Expenses b) 'f multiple product Kariable cost = .pportunity cost *measured on the basis of Product actually sacrificed) iii) 'f no mar(et for 'ntermediate product Cost of supplying di&ision of optimum le&el *6) Cost of the supplying di&ision at pre&ious output le&el# %ifference in .utput *$his "ould be e0ual to Kariable cost "hen 1ixed Cost is same at all le&els) 3ote:6 i) ii) 'gnore Kariable ,elling expenses on 'nter %epartment $ransfer 'n case of *ii) abo&e 'f selling expenses is not gi&en "e ha&e to assume some D as selling Expenses but it should not exceed :D # Bu,g#tar/ C%ntr%&

8udget 4atios:6 1) Capacity usage 4atio < # 8udgeted /ours # Maximum possible "or(ing hours in budget period ) ,tandard Capacity Employed 4atio < +ctual /ours Wor(ed 5 1HH 8udgeted hours 9) Le&el of +cti&ity 4atio < ,tandard /ours for +ctual Production 5 1HH ,tandard /ours for 8udgeted Production ;) Efficiency 4atio < ,tandard /ours for +ctual Production +ctual /ours 5 1HH 5 1HH

;9 :) Calendar 4atio < +ctual Wor(ing days 5 8udgeted "or(ing days ]ero 8ase 8udgeting: $he name Iero base budgeting deri&es from the idea that such budgets are de&eloped from a Iero base: that is! at the beginning of the budget de&elopment process! all budget headings ha&e a &alue of ]E4.# $his is in sharp contrast to the incremental budgeting system in "hich in general a ne" budget tends to start "ith a balance at least e0ual to last year)s total balance! or an estimate of it# %efinition of ]ero 8ase 8udgeting *]88) L+ method of budgeting "hereby all acti&ities are ree&aluated each time a budget is set# %iscrete le&els of each acti&ity are &alued and a combination chosen to match funds a&ailableM# 1HH

.bJecti&es and 8enefits of ]88 What Iero base budgeting tries to achie&e is an optimal allocation of resources that incremental and other budgeting systems probably cannot achie&e# ]88 starts by as(ing managers to identify and Justify their area*s) of "or( in terms of decision pac(ages *0&)# +n effecti&e Iero base budgeting system benefits organisations in se&eral "ays# 't "ill 1ocus the budget process on a comprehensi&e analysis of obJecti&es and needs Combine planning and budgeting into a single process Cause managers to e&aluate in detail the cost effecti&eness of their operations Expand management participation in planning and budgeting at all le&els of the organisation

;;

Acti-it/ Ba$#, c%$ting 'n $raditional Method "e split the .&er /ead incurred in production! based on machine hours "hich are not acceptable for many reasons# 'n +8C method .&er /ead are splited according to the related acti&ity! for each type of .&er /ead# .&erhead are apportioned among &arious Production cost centers on the basis of +cti&ity cost dri&ers# Relevant C%$ting . $%*# t+#%r/ 'ntroduction: 6 + management decision in&ol&es predictions of costs O re&enues# .nly the costs and re&enues that "ill differ among alternati&e actions are rele&ant to the decision# $he role of historical data is to aid the prediction of future data# 8ut historical data may not be rele&ant to the management decision itself# Aualitati&e factors may be decisi&e in many cases! but to reduce the number of such factors to be Judged! accountants usually try to express many decision factors as possible in

;: 0uantitati&e terms# Meaning of 4ele&ant Costs: 6 4ele&ant costs represent those future costs that "ill be changed by a particular decision# While irrele&ant costs are those costs that "ill not be affected by a decision# 'n the short run! if the rele&ant re&enues exceed the rele&ant costs then it "ill be "orth"hile accepting the decision# $herefore rele&ant costs playa maJor role in the decision6ma(ing process of an organiIation# + particular cost can be rele&ant in one situation but irrele&ant in another! the important point to note is that rele&ant costs represent those future costs that "ill be changed by a particular decision! "hile irrele&ant costs are those costs that "ill not be affected by that decision# We shall no" see "hat are rele&ant costs and re&enues for decision6ma(ing process# 'n summary rele&ant information concerns: .ther 'mportant $erminologies : 6 4ele&ant costs are costs appropriate to aiding the ma(ing of specific management decisions# +ctually! to affect a decision a cost must be: 1uture: Past costs are irrele&ant as they are not affected them by future decisions O decisions should be made as to "hat is best no"# 'ncremental: $his refers to additional re&enue or expenditure! "hich may appear as a result of our decision6ma(ing# *+ cash flo" 6 ,uch charges as depreciation may be future but do not represent cash flo"s and! as such! are not rele&ant#) ,un( costs: Past costs! not rele&ant for decision ma(ing Committed costs: $his is future in nature but "hich arise from past decisions! perhaps as the result of a contract# 4ele&ant Costs: Problem areas: 1 Problems in determining the rele&ant costs of materials: When considering &arious decisions! if the any materials re0uired is not ta(en from existing stoc(s but "ould be purchased on a later date! then the estimated purchase price "ould be the rele&ant material cost# + more difficult problem arises "hen materials are ta(en from existing stoc(# 'n this situation the rele&ant cost of materials for a particular Job *say Job ^) depends on

;@ Material is in regular use of the company Material is not in regular use of the company Material is in short supply# 'f the material is in regular use of the company then the material ta(en from existing stoc( re0uires replacement for the purpose of regular use therefore the rele&ant cost of material "ill be the 4eplacement cost# 'f the material is not in regular use of the company the rele&ant cost of the materials depends on their alternati&e use# $he alternati&e use of the materials "ill be either to sell them or to use them on other Jobs# /ence the cost of using the materials results in an opportunity cost consisting of either $he net sales re&enue if the materials "ere sold *or) $he expense that "ould be a&oided if the materials "ere used on some other Job Whiche&er is greater# 'f the material is in short supply the only "ay material for the Job under consideration can be obtained is by reducing production of some other product - Job# This would release material for the order. but the reduced production "ill result in loss of contribution "hich should be ta(en in to account "hen ascertaining the rele&ant costs for the specific order# $herefore the rele&ant cost "ill be Contribution lost *before the material cost since the material cost "ill be incurred in any case) "ill be the rele&ant cost# labour: %etermining the direct labour that are rele&ant to short 6 term decision depends on the circumstances# Where a company has temporary sparse capacity and the labour force is to be maintained in the short 6 term! the direct labour cost incurred "ill remain same for all alternati&e decisions# $he direct labour cost "ill therefore be irrele&ant for short 6 term decision 6 ma(ing purposes# /o"e&er "here casual labour is used and "here "or(ers can be hired on a daily basis; a company may then adJust the employment of labour to exactly the amount re0uired to meet the production re0uirements# $he labour cost "ill increase if the company accepts additional "or(! and "ill decrease if production is reduced# 'n this situation the labour cost be a rele&ant cost for decision 6 ma(ing purposes# 'n a situation "here full capacity exists and additional labour supplies are una&ailable in the short 6 term! and "here no further o&ertime "or(ing is possible! the only "ay that labour resources could then be obtained for a specific order "ould be to reduce existing production# This would release labour for the order. but the reduced production "ill result in loss of contribution! "hich should be ta(en in to

;E account "hen ascertaining the rele&ant costs for the specific) order# $herefore the rele&ant cost "ill be Contribution lost *before the labour cost) "ill be the rele&ant cost# P4.8LEM, 1# 'n a firm! material + has no alternati&e uses and HH units of "hich lie in stoc(# $he information belo" has been collected# \ou are re0uired to find the rele&ant price of 1 H units and :H units respecti&ely# 8oo( &alue Current price ,ale price obtainable 4s# per (g 4s#9 per (g 4s# #FH per (g # +ssume in the abo&e problem the material is in regular use of the company 9# +ssume in the abo&e problem the material is in short _supply and it is not possible to obtain the stoc( of material for some more time# +t present the material is used in another product on "hich a contribution at the rate of 4s#1 .-unit is earned *after meeting the material cost)# Each unit of the product re0uires 1 P7 of 4a" material +#

Ca$+ an, fun, f&%( $tat#*#nt 4ules for preparing schedule of changes in "or(ing capital :6 'ncrease in a current asset! results in increase in "or(ing capital > so +dd %ecrease in current asset! results in decrease in "or(ing capital > so %ecrease 'ncrease in current liability! results in decrease in "or(ing capital > so %ecrease %ecrease in current liability results in increase in "or(ing capital > so +dd 1unds from operations > 1ormat Particulars 3et profit +dd : %epreciation 7ood"ill "ritten off Preliminary Exp# Written off %iscount on share "ritten off $ransfer to 7eneral 4eser&e 4s# 55 5 55 5 55 4s# 555

;F Pro&ision for $axation Pro&ision for %i&idend Loss on sale of asset Loss on re&aluation of asset 5 55 5 55 5 55 5 55 5 55 5 55 5

555

555 Less : Profit on sale of asset 55 Profit on 4e&aluation of asset 5 55 5 1und flo" statement 1und flo" statement Particulars ,ources of funds : 6 'ssue of shares 'ssue of %ebentures Long term borro"ings ,ale of fixed assets .perating profit 4s# 555 555 555 555 555 555 $otal ,ources 555 +pplication of funds : 6 555 4edumption of 4edeemable preference shares 555 4edumption of %ebentures 555 Payment of other long term loans 555 Purchase of 1ixed assets 555 .perating Loss 555 Payment of di&idends! tax etc 555 $otal 2ses 555 3et 'ncrease - %ecrease in "or(ing capital *$otal sources > $otal uses) 555 Cash flo" statement 555 555

;G Cash 1rom .peration : 6 < 3et profit = %ecrease in Current +sset = 'ncrease in Current Liability 6 'ncrease in Current +sset 6 %ecrease in Current Liability Cash flo" statement ,ources .pening cash and ban( balance 'ssue of shares 4aising of long term loans ,ales of fixed assets ,hort term 8orro"ings Cash 'nflo" Closing 8an( .-% 4s# 55 55 55 55 55 55 55 +pplication .pening 8an( .-% 4edumption of Preference ,hares 4edumption of Long term loans Purchase of fixed assets %ecrease in %eferred payment Liability Cash .utflo" $ax paid %i&idend paid %ecrease in 2nsecured loans! %eposits Closing cash and ban( balance 4s# 55 55 55 55 55 55 55 55 55 55 55

55

Rati% Ana&/$i$ +) Cash Position 4atio : 6 1) +bsolute Cash 4atio < Cash 4eser&oir Current Liabilities

:H ) Cash Position to $otal asset 4atio < Cash 4eser&oir *Measure li0uid layer of assets) $otal +ssets 5 1HH

9) 'nter&al measure < Cash 4eser&oir *ability of cash reser&oir to meet cash expenses) +&erage daily cash expenses * +ns"er in days) 3otes : 6 Cash 4eser&oir < Cash in hand = 8an( = Mar(etable 3on trade in&estment at mar(et &alue# Current liabilities < Creditors = 8ills Payable = .utstanding Expenses = Pro&ision for tax *3et of ad&ance tax) = Proposed di&idend = .ther pro&isions# $otal assets < $otal in asset side > Miscellaneous expenses > Preliminary expenses = +ny increase in &alue of mar(etable non trading 'n&estments# +&erage cash expenses <$otal expenses in debit side of P O L a-c > 3on cash item such as depreciation! good"ill! preliminary expenses "ritten off! loss on sale of in&estments! fixed assets "ritten off = ad&ance tax *'gnore pro&ision for tax) # $he net amount is di&ided by 9@: to arri&e a&erage expenses# 4emar(s : 6 'n Comparison When absolute cash ratio is lo"er then current liability is higher When cash position to $otal +sset ratio is lo"er then the total asset is relati&ely higher# When cash inter&al is lo"er the company maintain lo" cash position# 't is not good to maintain too lo" cash position or too high cash position# 8) Li0uidity 4atio : 6 1) Current ratio < Current asset Current Liability ) Auic( ratio or +cid $est ratio < Auic( +sset Auic( liability 3otes : 6 Auic( +sset < Current +sset > ,toc( Auic( Liability < Current liability > Cash credit! 8an( borro"ings! .% and other ,hort term 8orro"ings# ,ecured loan is a current liability and also come under cash credit ,undry debtors considered doubtful should not be ta(en as 0uic( asset#

:1 Creditors for capital W'P is to be excluded from current liability# Current asset can include only mar(etable securities# Loans to employees in asset side are long term in nature and are not part of current assets# Pro&ision for gratuity is not a current liability# 7ratuity fund in&estment is not a part of mar(etable securities# $rade in&estments are not part of mar(etable securities#

4emar(s : 6 /igher the current ratios better the li0uidity position# C) Capital structure ratios : 6 1) %ebt e0uity ratio *or) Le&erage ratio < %ebt E0uity < Long term debt Long term fund < External E0uity 'nternal E0uity < ,hare holders fund Long term fund

) Proprietary ratio < Proprietary fund $otal +ssets 9) $otal Liability to 3et "orth ratio < $otal Liabilities 3et "orth ;) Capital gearing ratio < Preference share capital = %ebt E0uity > Preference share capital 3otes : 6 ,hare holders fund *or) E0uity *or) Proprietary fund *or) ."ners fund *or) 3et "orth < E0uity share = Preference share = 4eser&es and surplus > P O L a-c > Preliminary Expenses# %ebt *or) Long term liability *or) Long term loan fund < ,ecured loan *excluding cash credit) = unsecured loan = %ebentures# $otal asset < $otal assets as per 8alance sheet > Preliminary expenses# $otal liability < Long term liability = Current liability *or) short term liability Long term fund < $otal asset > Current liability < ,hare holders fund = long term loan fund# 4emar(s : 6 'n debt e0uity ratio higher the debt fund used in capital structure! greater is the ris(#

: 'n debt e0uity ratio! operates fa&orable "hen if rate of interest is lo"er than the return on capital employed# 'n total liability to 3et "orth 4atio < Lo"er the ratio! better is sol&ency position of business! /igher the ratio lo"er is its sol&ency position# 'f debt e0uity ratio is comparati&ely higher then the financial strength is better#

%) Profitability 4atio : 6 1) 7ross Profit 4atio < 7ross Profit ,ales ) 3et Profit 4atio < 3et Profit ,ales 5 1HH 5 1HH 5 1HH

9) .perating Profit ratio < .perating profit ,ales

;) 4eturn to shareholders < 3et profit after interest and tax ,hare holders fund :) 4eturn on 3et Worth < 4eturn on 3et "orth 3et "orth 5 1HH

@) 4eturn on capital employed *or) 4eturn on in&estment < 4eturn *E8'$) Capital Employed E) Expenses 4atios :6 a) %irect expenses 4atios : 6 i) 4a" material consumed 5 1HH ,ales ii) Wages 5 1HH ,ales iii) Production Expenses 5 1HH ,ales b) 'ndirect expenses 4atios : 6 i) +dministrati&e Expenses 5 1HH ,ales ii) ,elling Expenses 5 1HH ,ales iii) %istribution Expenses 5 1HH

:9 ,ales i&) 1inance Charge ,ales 5 1HH

3otes : 6 'n the abo&e the term LtermM is used for business engaged in sale of goods! for other enterprises the "ord Lre&enueM can be used# 7ross profit < ,ales > Cost of goods sold .perating profit < ,ales > Cost of sales < Profit after operating expenses but before 'nterest and tax# .perating Expenses < +dministration Expenses = ,elling and distribution expenses! 'nterest on short term loans etc# 4eturn < Earning before 'nterest and $ax < .perating profit < 3et profit = 3on operating expenses > 3on operating 'ncome Capital employed < ,hare holders fund = Long term borro"ings < 1ixed assets = Wor(ing capital 'f opening and closing balance is gi&en then a&erage capital employed can be substituted in case of capital employed "hich is .pening capital employed = Closing capital employed E) %ebt ser&ice co&erage ratios < Profit a&ailable for debt ser&icing Loan 'nstallments = 'nterest 3otes : 6 Profit a&ailable for debt ser&icing < 3et profit after tax pro&ision = %epreciation = .ther non cash charges = 'nterest on debt# 4emar(s : 6 /igher the debt ser&icing ratio is an indicator of better credit rating of the company# 't is an indicator of the ability of a business enterprise to pay off current installments and interest out of profits#

1) $urno&er 4atios: 6 i) +ssets turno&er < ,ales $otal assets

:; ) 1ixed assets turno&er < ,ales 1ixed assets V3umber of times fixed assets has turned into salesW

9) Wor(ing capital turno&er <

,ales Wor(ing capital

;) 'n&entory turno&er < Cost of goods sold *for finished goods) +&erage in&entory :) %ebtors turno&er *or) +&erage collection period < Credit sales *in ratio) +&erage accounts recei&able *or) < +&erage accounts recei&able 5 9@: *in days) Credit sales @) Creditors turno&er *or) +&erage payment period Credit purchases *in ratio) +&erage accounts payable *or) < +&erage accounts Payable 5 9@: *in days) Credit Purchases E) 'n&entory $urno&er *for W'P) < Cost of production +&erage 'n&entory *for W'P) F) 'n&entory $urno&er *for 4a" material) < 4a" material consumed +&erage in&entory *for ra" material) 1H) 'n&entory /olding Period < 9@: # 'n&entory turno&er ratio

11) Capital $urno&er ratio < Cost of sales Capital employed 3ote : 6 Wor(ing capital < Current asset > Current liability < H# : 5 Proprietary ratio +ccounts 4ecei&able < %ebtors = 8ills recei&able +ccounts payable < Creditors = 8ills Payable 4emar(s : 6 'f assets turno&er ratio is more than 1! then profitability based on capital employed is profitability based on sales# /igher in&entory turno&er is an indicator of efficient in&entory mo&ement# 't is an indicator of in&entory management policies#

:: Lo" in&entory holding period lo"er "or(ing capital loc(ing! but too lo" is not safe# /igher the debtors turno&er! lo"er the credit period offered to customers# 't is an indicator of credit management policies# /igher the creditors turno&er! lo"er the credit period offered by suppliers#

7) .ther 4atios: 6 1) .perating profit ratio < 3et profit ratio = 3on operating loss - ,ales ratio ) 7ross profit ratio < .perating profit ratio = 'ndirect expenses ratio 9) Cost of goods sold - ,ales ratio < 1HHD 6 7ross profit ratio ;) Earnings per share < 3et profit after interest and tax 3umber of e0uity shares :) Price earning ratio < Mar(et price per e0uity share Earning per share @) Pay out ratio < %i&idend per e0uity share Earning per e0uity shares 5 1HH

E) %i&idend yield ratio < %i&idend per share 5 1HH Mar(et price per share F) 1ixed charges co&erage ratio < 3et profit before interest and tax 'nterest charges G) 'nterest co&erage ratio < Earning before interest and tax 'nterest charges 1H) 1ixed di&idend co&erage ratio < 3et profit # +nnual Preference di&idend 5 1HH

11) .&er all profitability ratio < .perating profit Capital employed 1 ) Producti&ity of assets employed <

3et profit # $otal tangible asset

19) 4etained earning ratio < 4etained earnings 5 1HH

:@ $otal earnings /) 7eneral 4emar(s: 6 1all in 0uic( ratio "hen compared "ith last year or other company is due to huge stoc( pilling up# 'f current ratio and li0uidity ratio increases then the li0uidity position of the company has been increased# 'f debt e0uity ratio increases o&er a period of time or is greater "hen comparing t"o ratios! then the dependence of the company in borro"ed funds has increased# %irect expenses ratio increases in comparison then the profitability decreases# 'f there is "ages - ,ales ratio increases! then this is to &erified a) Wage rate b) .utput - Labour rate 'ncrement in "age rate may be due to increased rate or fall in labour efficiency# +gain there are many reasons for fall in labour producti&ity namely abnormal idle time due to machine failure! po"er cut etc# 4eduction in 4a" material consumed - sales ratio may be due to reduction in "astage or fall in material price# 'ncrease in production expenses ratio may also be due to price raise# ,toc( turno&er ratio denotes ho" many days "e are holding stoc(# 'n stoc( turno&er ratio greater the number of days! the mo&ement of goods "ill be on the lo"er side# 1inancial ratios are Current ratio! Auic( ratio! %ebt e0uity ratio! Proprietary ratio! 1ixed asset ratio# ,hort term sol&ency ratios are current ratio! Li0uidity ratio Long term sol&ency or testing sol&ency of the company ratios are %ebt e0uity ratio! fixed asset ratio! fixed charges co&erage ratio *or) 'nterest co&erage ratio# $o compute financial position of the business ratios to be calculated are > current ratio! %ebt e0uity ratio! Proprietary ratio! fixed asset ratio# 1ictitious asset are Preliminary expenses! %iscount on issue of shares and debentures! Profit and loss account debit balance#

A$$ign*#nt 1) 8asis of $echni0ue used is minimiIation $echni0ue

:E ) 't can also be done in maximation $echni0ue 9) Karious steps in +ssignment Problem are ,tep 1: Chec( "hether the problem is balanced or unbalanced by chec(ing "hether ro" is e0ual to column! if unbalanced add dummy column or ro" to balance the problem ,tep : 'dentify Least 3umber in each ro" and subtract "ith all number in that 4o"# ,tep 9: 'dentify least number of each column and subtract "ith all number in that column# ,tep ;: Chec( "hether solution is reached "ith Iero selection in one ro" and column! ie# Co&er all the Iero "ith minimum number of lines! solution is reached only "hen selected Ieros is e0ual to number of ro"s or columns or number of lines is e0ual to order of matrix# ,tep :: 'f solution is not reached so maximum stic(ing ,tep @: ,elect the least element in "ithin the unstri(ed Element ,tep E: $he element selected abo&e is i) ,ubtracted "ith all the unstri(ed element ii) +dded to all the double stri(ed element *'ntersection of t"o lines) ,tep F: Chec( the solution ,tep G: 'f solution is not reached continue "ith the process from step :#

Lin#ar !r%gra**ing ,implex Method:6

:F ,teps:6 1# %etermine the obJecti&e function ]# .bJecti&e may be maximiIation or minimiIation# # 1or maximation problem the constraints "ould be < sign# 1or minimiIation problem the constraints "ould be [ sign# 9# 'ntroduce slac( &ariable 1or ` sign > add the slac( &ariable ie# +dd ,1 1or [ sign > subtract the slac( &ariable and add artificial &ariable ie# ,ubtract ,1! add +1# ;# Change the .bJecti&e function 1or ,1 > +dd _H,1B 1or +1 > +dd _M+1B :# ,implex table format:6 CJ Auantity Kariable Const# ^ \ ] ,1 , ,1 , ]J CJ 6 ]J @# E# 44

]J is arri&ed by summation of constant column "ith ^!\!] columns Criteria for selecting the (ey column :6 1or Maxima ion Problem > /ighest &alue of CJ > ]J 1or MinimiIation Problem > Lo"est Kalue of CJ > ]J %i&ide the Auantity Column "ith Pey column to arri&e at 44 Criteria for ,electing the Pey ro" :6 1or Maximation O MinimiIation Problem > Lo"est Positi&e 44 is selected

F# G#

1H# $he Meeting Point is (ey Element 11# Criteria for deciding the optimal solution 1or Maximation Problem > +ll elements in CJ > ]J ro" is negati&e or Iero#

:G 1or MinimiIation Problem > +ll elements in CJ > ]J ro" is positi&e or Iero 3ote > 1or finding "hether all the elements in CJ > ]J ro" is positi&e or Iero for minimiIation problem substitute all the _MB "ith highest &alue# 1 # 'f solution is not reached next table is formed# 19# 'nput for next table is 1irst (ey ro" in the next table is filled by di&iding all the numbers in the (ey ro" of the pre&ious table "ith the (ey element# 4emaining all the ro"s is arri&ed as follo"s: 6 Corresponding pre&ious a *Kalue relating to that 5 Corresponding $able ro" element ro" in the (ey column element in (ey ro" in the nd table as filled in pre&ious step) 1;# Chec( the optimal solution! if not reached form the third table# 1:# 'f solution is reached then ans"er is amount in 0uantity column corresponding to the &ariable# .ther Points : 6 We can con&ert the MinimiIation Problem into Maximation Problem# $his is (no"n as duality# We can change the [ sign to ` sign to match the problem E#g# ^ = \ ` 1HH is con&erted into 6^ 6 \ [ 61HH

Tran$'%rtati%n

@H $he procedure follo"ed is MinimiIation Procedure Problem is generally sol&ed in KogelBs +pproximation Method*K+M)

,teps for the problem is : 6 1# Con&ert profit matrix into loss matrix# # 8alance the problem# 9# +rri&e at 4o" penalty and column penalty 4o" penalty and column penalty is calculated at * corresponding ro" or column#
nd

least > 1st least) in the

;# ,elect from the entire 4o" penalty and column penalty maximum number# :# 1rom the entire 4o" or Column minimum is selected# @# ,tri(e the ro" or column "hich gets eliminated# E# Continue until the entire item in the table is stri(e# F# Write separately 'nitial solution table# G# Chec( for %egeneracy# %egeneracy occurs "hen all the elements in the initial solution is e0ual to *4o" = column > 1) 1H# 'f degeneracy occurs introduce efcilon > _eB# _eB is introduced in least independent cell# 11# 1orm 2K Matrix# 't is formed by the element in the original solution corresponding to the element in the 'nitial solution# 1 # 1ind unalloted elements in the 2K Matrix 19# 1ind 'J i#e#*.riginal Matrix abo&e) element > 2nalloted element found

1;# Chec( for optimal solution ie# +ll items must be Iero or positi&e# 1:# 'f not reached select the maximum negati&e in 'J matrix#

1@# 1orm a loop and reallocate the solution# 1E# 4epeat from step G#

@1 3otes: 6 1# 'f there is Iero in 'J matrix "hile another solution for the problem# arri&ing at optimal solution then there is

# %ummy column can be introduced in profit or loss matrix# 9# 'f there is penalty-redundancy payment for unsatisfying demand etc# is gi&en then fills the dummy ro" or column "ith that amount or fill it "ith Ieros# ;# 'f there is constraint in the problem first satisfy the constraint and then sol&e# :# &arious other methods for sol&ing the problem is Least cost method 3orth "est corner rule @# 7enerally K+M method is used

N#t(%r0 Ana&/$i$ 1C!M/!ERT2

@ C!M $otal float < L, > E, *or) L1 > E1 1ree float < $otal float > /ead e&ent slac( 'ndependent float < 1ree float > $ail e&ent slac( 'n the diagram Es < Lf in the critical path Critical path is the longest duration $o find the minimum time associated cost *i#e# +dditional cost incurred per unit of time sa&ed) follo"ing formula is used :6 Crash cost per day *or) +cti&ity cost supply < Crash cost > 3ormal cost 3ormal time > Crash time 'nterfacing float < 't is the part of the total float "hich causes reduction in the float of the succession acti&ities# 'n other "ords it is the portion of acti&ity float "hich cannot be continued "ithout affecting ad&ersely the float of the subse0uent acti&ity or acti&ities# ,teps in proceeding the problem : 6 # 1irst find and fill the E, and L1 column from the diagram# 9# $hen find L, and E1 as follo"s :6 Ls < Lf > %uration Ef < Es = %uration ;# 1ind total float :# 1ind free float# Where&er total float column has Iero free float column is also ta(en has Iero and remaining elements is filled as said abo&e @# 1ind 'ndependent float# Where&er free float column has Iero 'ndependent float column is also ta(en has Iero and remaining elements is filled as said abo&e

@9 3otes: 6 1# E, < Earliest ,tart# 'ndicates earliest time that the gi&en acti&ity can be scheduled # E1 < Earliest 1inish# $ime by "hich the acti&ity can be completed at the earliest# 9# L1 < Latest 1inish# Latest allo"able occurrence time of the head e&ent of the acti&ity# ;# L, < Latest ,tart# :# $otal duration of the critical path is the maximum time-amount consumed for the acti&ity# $his should be crashed "ith respect to crashing days and crashing cost# $his crashing should not change the critical path# !ERT : 6 Expected *or) +&erage time is found by assigning "eights as follo"s : 6 1 for optimistic ; for Most li(ely 1 for pessimistic +&erage time < 1 optimistic = ; most li(ely = 1 pessimistic @ ,tandard %e&iation < *Pessimistic time > .ptimistic time) @ Kariance < *,tandard %e&iation) Probability of completing the proJect in 3 days < 4e0uired time*3) *6) Expected time *critical path duration) ,tandard %e&iation V3othing but ] < *^ 6 Mean) - ,tandard de&iationW < \ *say) < 1ind ]*y) < Probability D 6 'f re0uired time [ Expected time then < H#: = ]*\) 6 'f re0uired time ` Expected time then < H#: > ]*\)

@; L#arning Cur-# Learning is the process of ac0uiring s(ill! Pno"ledge! and ability by an indi&idual# +ccording to learning cur&e theory the producti&ity of the "or(er increases "ith increase in experience due to learning effect# $he learning theory suggests that the best "ay to master a tas( is to Llearn by doingM# 'n other "ords! as people gain experience "ith a particular Job or proJect they can produce each unit more efficiently than the preceding one# $he speeding up of a Job "ith repeated performance is (no"n as the learning effect or learning cur&e effect# $he cumulati&e a&erage time per unit produced is assumed to fall by a constant percentage e&ery time the total output is doubled# ,o generally learning effect is found in the multiples of # 'f learning cur&e effect is as(ed bet"een t"o e&en numbers then Learning cur&e e0uation is formed ie# Learning cur&e effect is expressed mathematically as follo"s: Learning cur&e e0uation < \ < a*x) 6b Where \ < +&erage time per unit a < $otal time for first unit x < Cumulati&e number of units manufactured b < the learning cur&e index Learning cur&e index *b) < log *16 D decrease) Log

@: Manag#*#nt Acc%unting an, Financia& Ana&/$i$ Int#rnati%na& Financia& Manag#*#nt 1# %irect Auote *eg) 1b < 4s#;G # 'ndirect Auote *eg) 4s#1 < #H H;b 9# $$ 4ate < $elegraphic $ransfer 4ate ;# $.M 4ate < $omorro" 4ate :# ,pot 4ate < $odayBs rate# 3ormally it "ill be 9td day rate from $$ 4ate# %irect Auote is used in all country except 2P "here indirect 0uote is used# .ffer 4ate < ,elling 4ate ,pread 4ate < .ffer 4ate > 8id 4ate ,pread 4ate *D) < .ffer 4ate > 8id 4ate .ffer 4ate 5 1HH *111lr to that of 3P 4atio)

,"ap points is ascending stage it is at premium# 'f it is descending stage it is at discount# 'f it is said as '34-b then the meaning is 3umerator factor < Local Currency < '34 %enominator factor < 1oreign Currency < b 1or"ard Auotation *D) *'#e# Premium-%iscount expressed at annualiIed D) < 1or"ard 4ate > ,pot 4ate 5 1 5 1HH *in months) ,pot 4ate n < 1or"ard 4ate > ,pot 4ate ,pot 4ate 5 9@: n 5 1HH *in days)

'f the 0uote is direct or 'ndirect is to be found and the relation is "ith c *pound) both direct and 'ndirect 0uote is to be said# Maturity Kalue < P *1=r) n

@@ 'nterest 4ate Parity: i) %omestic 4ate ` 1oreign 4ate = 1or"ard Premium - %iscount *'n this case in&est in foreign currency) ii) %omestic 4ate [ 1oreign 4ate = 1or"ard Premium - %iscount *'n this case in&est in %omestic Currency) 1or"ard 4ate: 't is rate negotiated for the deli&ery to be made - ta(en on a future date for present transaction# 1uture spot rate: 't is actual rate pre&ailing on the agreed future date# .ther points:6 Currency country "hich has less 'nterest rate "ill ha&e for"ard rate at premium and &ice &ersa 'f t"o rates ie# H# 9 - 9: is gi&en then highest rate is offer rate! lo"est rate is bid rate# 'f '34 - %7 is gi&en and "e ha&e to %7 - '34 then it is 1 - *'34 - %7) 1 - *8id 4ate) < .ffer 4ate# 1 - *.ffer 4ate) < 8id 4ate# 'nterest rate s"ap: 6 7enerally interest rate differs from company to company because of their grade *reputation) and rates can be fixed rates or floting rate# 'f there is company under different grade and different fixed - floating rate can gin ad&antage by reducing their interest rate by L'nterest rate s"apM# 'n this if _Company +B "ants to borro" at floating rate and _Company 8B "ants to borro" and fixed rate! then interest rate s"ap is applied by "hich company + borro"s at floating 4ate of company 8 and company 8 borro"s at fixed rate of company +# 8y this s"ap one company gains and other company losses# 3et gain is splited bet"een t"o companies so that the t"o companies benefits by paying lo"er interest rate for their barro"ing# $o loo( at the problem 0uic(ly the theory follo"ed in L%ifference in fixed rate interest of t"o companies is profitM and L%ifference in floating rate interest of t"o companies is lossM# $hen net gain - loss are found#

@E Ca'ita& Bu,g#ting Process of Capital 8udgeting: /uge cash outlay# %ecision ta(en is irressable# 'n&est in lumsum the receipt is piecemeal Wrong decision "ill affect the &ery base of the company#

Capital 8udgeting 4ules: 'gnore accounting profit and ta(e only cash flo"s# $ry only incremental basis ignore +&erage calculation# Consider all incidental effects# 'gnore sun( cost *ie# Cost remain unaltered for &arious alternati&es a&ailable is sun( cost) Consider opportunity cost *.pportunity Loss is .pportunity cost) 8e"are of allocated cost > 'gnore them %epreciation is an important cash flo" "hen taxation is considered# 'f no taxation! no depreciation# 'nterest should not be considered as part of the cost! in the arri&al of cash inflo" for in&esting decision problems# 'f deducted add bac( post tax interest# ,eparate in&esting decision and financing decision# 8e consistent "ith inflation rates# +ll future cash flo"s is assumed as "ithout inflation# ,uch cash flo"s are referred as real cash flo"s# Cash flo"s under the influence of inflation "ould be referred to as money cash flo"s# *Money cash flo"s *or) 3ominal Cash 1lo"s *or) Mar(et cash flo"s) 2nless other"ise stated cost of capital is considered after tax basis because cash flo"s "ill be considered only on after tax basis# *PK factor is the in&erse of compounding factor) E0uation to find out the PK of an amount if cost of capital and 'nflation rate is gi&en *1 = Money 4ate) < *1 = 4eal %iscount rate) 5 *1 = 'nflation 4ate)

Method of e&aluating Capital 8udgeting: 1# Pay bac( method # +nnual 4ate of 4eturn 9# %iscounted cash flo" 3et Present Kalue *3PK)

@F 'nternal 4ate of 4eturn *'44) Profitability 'ndex *P') *or) 8enefit cost 4atio E0uated +nnuity Cost *E+C) *or) E0uated +nnuity 8enefit *E+8) %iscounted Pay 8ac( *or) $ime adJusted 8EP
Expressed

'n Pay 8ac( Period +nnual 4ate .f 4eturn 3PK '44 \ears D 4s# D

8ench mar( *8asis of ,election) ,hortest /ighest 7reatest Kalue /ighest

1ormula 4eco&ery time of in&estment 1) +4 - '' ) +4 - +' %iscounted C' 6 %iscounted C. +t this rate %iscounted C' < %iscounted C. and 3PK < 1! P' < 1 %iscounted C' %iscounted C. E+C < %iscounted C. PK 1actor E+8 < 1) %iscounted C' +nnuity 1actor ) 3PK PK 1actor 4eco&ery time of 'n&estment

When to use When no cost of capital is gi&en When no cost of capital is gi&en When t"o proJects is same in all aspects ie# 3o disparity 4arely used in finding Cost of Capital# ,iIe %isparity Life %isparity

Profitability 'ndex *P') E+C *or) E+8

Points 4s#

/ighest E+C < Lo"est E+8 < /ighest

%iscounted Pay 8ac(

\ears

,hortest

8rea( e&en time

Where: 6 +' < +&erage 'n&estment +1 < +nnuity 1actor '' < 'nitial 'n&estment

C' < Cash 'nflo" C. < Cash .utflo"

Error: 4eference source not found 'nternal 4ate of 4eturn *'44):6 '44 other"ise called as yield on in&estment! Marginal efficiency of capital! Marginal producti&ity of capital! 4ate of 4eturn! $ime adJusted rate of return#

@G %iscounting = %ifference calculated in present &alue and re0uired cash outlay 1actor %ifference in calculated present &alues 5 %ifference in 4ate $o approximately locate the factor in "hich the amount returns 1 < ' - C Where 1 < 1actor to be located ' < .riginal 'n&estment C < +&erage Cash 'nflo"s per year 'n the PK table year column must be seen to trace the nearest fa(e annuity# \ear column is the year of economic life of machine# 3otes: 6 'f actual cash flo" is higher than a&erage cash flo"s in the initial years then increase the fa(e '44 point a fe" D up"ard# 'f it is lo"er in the initial years then decrease the percentage fe" points lo"er to find fa(e '44 'f discount rates are not (no"n but cash inflo"s and outflo"s are (no"n then '44 is calculated as ' < 4 - *1=r) Where ' < Cash outflo" *or) 'nitial 'n&estment 4 < Cash inflo" 4 < 4ate of return yielded by the 'n&estment *or '44) Calculating %iscounting 1actor:6 1 - *1=rate) n Where n < \ears Method of ran(ing proJects:6 %esirability factor *Profitability 'ndex) &s# 3PK Method &s# '44 ,election of proJects out of t"o mutually exclusi&e proJects ha&ing same funds at disposal then 3PK method is preferred# 'n '44 Method the presumption intermediate cash inflo"s are rein&ested at same rate i#e# '44# 8ut in 3PK method it is rein&ested at cut off rate# 4ein&estment at cut off rate is more possible than '44# /ence 3et Present Kalues being obtained from discounting at a fixed cut off rate are more reliable in ran(ing or more proJects than '44# Models of 4is( +nalysis:6 i) /illerBs Model: /e ta(es into account mean of present &alue of the cash flo"s and the ,% of such cash flo"s# n M < i<H *1=r)61 mi *used to determine the present &alue of mean)

EH n < *1=r)6 i 5 i *2sed to find the present &alue of &ariance) i<H Where mi <Mean of cash flo" in the ith period > expected cash flo" for year i Kariance in the ith period# i < r < %iscounting 1actor M < $otal of Present &alue of mean < $otal of present &alue of &ariance 8ench mar( < ProJect "ith lo"er ,% "ill be preferred# 1) 4eal Cash flo"s restated in terms of nominal cash flo"s as follo"s:6 *1 = inflation rate) 5 4eal cash flo"s +fter this discounting cash flo" is applied to find 3PK# ) Con&erting nominal discounting rate into real terms 4eal discount rate < 1 = 3ominal discount rate 61 1 = inflation rate With this real discount rate the Cash 'nflo"s are discounted to find 3PK# 9) Pay bac( reciprocal < +&erage annual cash inflo"s 'nitial 'n&estment *'t is used for reasonable approximation of '44)

;) $he formula for deflation is 'ndex 3umber at the beginning 5 Cash 'nflo"s 'ndex 3umber at the end *or) Cash 'nflo"s - *1='nflation 4ate) n 3ote: 'f in a problem 4eal cash flo"s are gi&en and 'nflation 4ate and Cost of Capital is gi&en then i) Con&ert 4eal Cash 1lo"s into 3ormal Cash 1lo"s by using formulae said in *1) abo&e# ii) +dJust for %epreciation and tax and find Cash 1lo" after $ax before %epreciation# iii) %eflate the amount arri&ed abo&e by using formulae said in *;)# i&) With the amount arri&ed abo&e find 3PK using C.C#

,ummary:6 i) 4is( +dJusted %iscount rate approach < 3PK for C1+$ at 4is( adJusted %iscount 4ate#

E1 ii) Certainty E0ui&alent +pproach < 3PK for *Certainty E0ui&alent Coefficient 5 C1+$) at 4is( less 'nterest rate# iii) Probality %iscount approach < 3PK for *C1) at ris( less 'nterest rate#

Ana&/$i$ %f Ri$0 an, Unc#rtaint/ 1) ,ensiti&ity +nalysis: 6 't pro&ides different cash flo" estimates under 9 assumptions a# "orst b# $he expected *Most li(ely) c# $he best# 3PK is found under these three assumptions and decision is ta(en# ) Precise measure of ris(:6

E a) ,tandard de&iation: 6 +bsolute measure of ris(# n < C d Pi * C1 > C1 ) i<1 C1 < Cash flo" i < \ear C1 < Mean cash flo" *C1 of particular proJects total di&ided by number of C1) < d C1 5 P P < Probability b) Kariance < *) < n d Pi * C1 > C1 ) i<1

c) Co > Kariance *a!b) < Pi * C1a > C1a ) * C1b > C1b ) d) Coefficient of correlation of t"o &ariable factor < Co > Kariance *a!b)
ab

e) 4eturn of portfolio < Wa 5 4a = Wb 5 4b Where f) 4is( of portfolio < C Pa 5 a = Pb 5 b

W > Proportion in&ested 4 > 4eturn = Pa 5 Pb 5 a 5 b 5 Cor*a!b)

g) Co > Efficient of &ariation < + relati&e measure of ris(# ,tandard %e&iation K< Expected cash flo" mean *or C1 *or) ) *.r) Expected 3PK *3PK ) 3PK < 3PK 5 Probability h) 4is( adJusted discount rate approach: 6 'n this ris( adJusted discount rate is ta(en as PK factor and calculated as 3PK method# <d *C1+$) t 6 C. Where Pr < 4is( adJusted discount rate *1 = Pr) t i) Certainty E0ui&alent *CE) approach < 4is( less Cash 1lo" 4is(y Cash 1lo" J) 'f Correlation Coefficient VCor*a!b)W is Cor*a!b) p # =1 *Pa 5 a) = *Pb 5 b) Vie# 'f it is perfectly positi&ely correlatedW 61 *Pa 5 a) > *Pb 5 b) Vie# 'f it is perfectly negati&ely correlatedW H +bo&e p formula "ill apply

E9 () Probability %istribution approach: 6


t

*,% of C1) < C d p *C1 > C1) < d C1

C1

6 C. < 3PK
t

*1=i) Where C1 < Cash 1lo"

< Mean i#e# $otal of cash flo" multiplied by probability for the period *or) expected &alue for C1+$ in period t) i < 4is( less rate of interest# t < ,% for period t *,% for particular period)

l) ,% for the probability distribution of 3PK is *ie# ,% of C1) *3PK) < C d *t ) - *1 = i) t *this is used for uncorrelated C1) *3PK) < d *t) - *1 = i) t *used for perfectly correlated C1) Where ' < 4ate of 4eturn# m) .ptimum proportion at "hich ris( is minimum < ^a < b - *a = b) *or) a ^ 6 b *16^) < H 3PK for the period is calculated by ta(ing C1 as C1 for respecti&e period and calculated normally 3ote:6 i) 'n certainty E0ui&alent approach rate of discount is the ris( less rate of 'nterest as the ris( is adJusted "ith C1+$# ii) 'n this case C1+$ is multiplied "ith certainty e0ui&alent and PK is calculated by ris( less rate of interest# iii) 'f proJects are ran(ed "ith respect of ris( and return# ProJect "ith respect to ris( re0uires d 3PK *i#e# d*3PK 5 Probability)) and the proJect "ith respect to return find co6efficient of &ariation <- d 3PK

i&) Probability that 3PK "ould be ]ero or less ] < H > 3PK $he ] Kalue is con&erted "ith the _] $ableB &alues and the probability of the 3PK being Iero or less "ould be < H#: > *] Kalue)# &) Probability that 3PK being greater than ]ero "ould be 1 > *Probability less than ]ero) &i) Probability that 3PK "ithin the range ^ and \ ]1 < ^ > 3PK ] < \ > 3PK

E; &ii) 'f in the 4is( adJusted %iscount approach both cost of control and 4is( adJusted discount rate is gi&en 1or the C1 of the years apply 4is( adJusted discount rate to find %iscounted C1# 1or the ,crap &alue of the machine after the end of the life the C1 on sale is discounted at cost of capital D to find %iscounted C1# &iii) 'f probability *or) Certainty e0ui&alence is gi&en then find the +dJusted C1 *C1 5 Probability) and then use the 4is( less 4ate of return to find %iscounted C1# ix) 4is( is ,tandard de&iation ,ummary:6 i) 4is( +dJusted %iscount 4ate +pproach < 3PK for C1+$ at 4is( +dJusted %iscount 4ate ii) Certainty E0ui&alent +pproach < 3PK for *CE coefficient 5 C1+$) at 4is( less interest rate iii) Probability %iscount +pproach < 3PK for *C1) at 4is( less 'nterest 4ate

D#ri-ati-#$ Call .ption: 6 7i&es buyer L4ight but not the obligationM to buy the share# Put .ption: 6 7i&es buyer L4ight but not the obligationM to sell the share# Kalue of the Call .ption:6 i) 8lac( ,choles Model:6 Kalue of the call option < K. < V, 5 3 *d1)W > V*x) 5 *e6t5rf) 5 *3 *d ))W Where d1 < ln *s-x) = *rf = Y - Z) 5 t

E: Ct ln < 3atural log d < d1 6 Ct s < Present spot rate x < 1uture stri(e *excise) price rf < 4is( free rate ,e&en step to sol&e the problem:6 i) 1ind log *s-x) ii) 1ind d1 iii) 1ind d i&) 1ind 3 *d1) &) 1ind 3 *d ) i&) 1ind 3 *d1) 3ormal $able Kalue = H#: &) 1ind 3 *d ) &i) 1ind _eB &alue &ii) +pply 8lac( ,chools Model# ,ub step to step 1:6 a) Log *s-x) < Log s > Log x H#;9;9 b) 'f x and s are digit figure the &alue shall be *1 = Log table &alue)# c) 'f x and s are 9 digit then the &alue shall be * = Log table &alue)# ,ub step to step @:6 a) 't is to find the po"er &alue of _eB# b) e6t5rf < 1 1 = r-9@: 5 3o# of days *t)

*or)

1 # 1 = r-9@: 5 3o# of Months *t)

Kalue of Put option: 6 < V*x) 5 *e6t5rf) 5 *3 *6d ))W 6 V, 5 3 *6d1)W Excise price:6 't is the price at "hich the person "rites the prices on a share to buy after a period# Expected Kalue of the share:6 't is the total of estimate mar(et price of the share multiplied "ith the respecti&e probability# Expiration &alue: 6 Excise price > Expected Kalue Expected *or) $heoretical &alue of the call option price at expiration *Pay off of Call

E@ option) :6 < d *Estimated mar(et price > Excise Price) 5 Probability < VMax *s > x)! HW 5 Probability Pay off of call option Expected *or) $heoretical &alue of the put option price at expiration *Pay of put option):6 < d *Excise Price 6 Estimated mar(et price) 5 Probability *or) < VMax *x > s)! HW 5 Probability Pay off of Put option Where *Estimated mar(et price > Excise Price) is called pay off# 'f it is negati&e it is ta(en as Iero# s < Estimated Mar(et Price# Put call parity < Put call parity e0uation is *Kalue of call option = Present &alue of excise price) < *&alue of put option = ,pot rate) 3ote:6 i) Changes to be made in computation of 8lac( ,choles model for di&idend stoc(s:6 ,ubstitute in all the places of LsM "ith Ls > PK of di&idendM ii)'n the abo&e all PK is found at 4is( free rate# *or)

B#ta 8eta means! it measures the &olatility of securities to the changes in the mar(et# e *le&el of ris() <s 5 Cor *s!m)
m

"here s < ,% of return on securities m < ,% of return on mar(et portfolio

*or) Co&ariance*s!m) - m e should al"ays be applied on ris( premium and not to the entire return#

EE rs < rf = *rm > rf ) 5 e Where rf < 4is( free rate rs < Expected return on securities *or) VCapital +ppreciation = %i&idend of the companyW rm < Expected return on mar(et portfolio *or) VMar(et index YMar(et rateZ appreciation = Mar(et di&idend yield

DW Portfolio $heory *P$):6 rp *expected return under CML) < rf = *rm > rf) 5 *p - m) $he abo&e formula is based on total ris(# Where p < ,% of efficient portfolio# When expected return under efficient portfolio is as(ed then rp *expected return under efficient portfolio) < Capital mar(et line*CML) > Express e0uilibrium price relationship bet"een expected return and %, Capital +sset Pricing Model *C+PM):6 rs *expected return portfolio in C+PM) < rf = *rm > rf) 5 V*s - m) 5 cor*s!m)W *or) rf = V*rm > rf)W 5 e Where rm < rf = Mar(et premium 8eta of the portfolio < * ea 5 Pa ) = * eb 5 Pb ) Where Pa! Pb < Proportion of in&estment in Company + and Company 8# 3ote:6 i) *rm > rf) < Mar(et ris( premium *or) Compensation per unit of ris(# ii) Cor*s!m) is =1 under CML iii) rf = *rm > rf) 5 V*s - m) 5 cor*s!m)W < $his portion in C+PM formula is ris( premium i&) *rm > rf) - m < Mar(et ris( return trade off *slope)# 3otes:6 $o find the in&estment to be made in ris( free in&estments to get a certain e is e of expected portfolio < *W1 5 e1) =*W 5 e ) *or) < *W1 5 e1) = *16W1) e Where W1 is "eitage gi&en to existing securities#

EF W is "eitage gi&en to ris( free securities# 'n this case e1 is e of existing securities and f is e of rf securities *ie#H) $his can also be use to find in&estment in other then rf securities# 'n that case that e is substituted in e # $he "eitage *W1!W ) is multiplied "ith mar(et &alue of existing portfolio to find the proportion of in&estment#

H%&,ing C%*'ani#$ 'ndex of Main Points:6 1# 'f there is a %ebit balance in Minority 'nterest first it is adJusted against uncalled capital and balance is adJusted against reser&e# # 'n case of Cumulati&e Preference shares of subsidiary di&idend declared must be deducted from P O L a-c of subsidiary# 9# 'f no di&idend is declared in abo&e case then donBt deduct# ;# 'f di&idend is declared for Cumulati&e Preference shares then deduct from P O L a-c of subsidiary and balance is splited# 'f not declared then it must be

EG sho"n outside the 8alance sheet# :# 8ut in the case1 @# C1, deduct in the abo&e case "hether declared or not# E# Preference shares of subsidiary held by the holding company is to be cancelled against in&estment of /olding company "hile preparing C1,# F# 'f /olding company sells goods belo" cost then unrealiIed loss is calculated by ta(ing cost or 3et 4ealiIable Kalue "hiche&er is lo"er for &aluation# G# 'f there is difference in accounting policy bet"een /olding and subsidiary then both should be brought under uniform policy before consolidation# 1H# 'f uniform policy cannot be brought then it should be disclosed# 11# $he effect of change in +ccounting Policy before ac0uit ion must be ta(en as pre ac0uit ion reser&e and after post ac0uit ion reser&e# 1 # 'f /olding Company holds %ebenture in subsidiary then "hile preparing C1, it should be cancelled as 'nter Company loan# 19# 'n abo&e case if excess is paid for %ebenture holders then the excess is adJusted against consolidated reser&e# 1;# Pre ac0uit ion reser&e and profit is treated as capital profit 1:# Post ac0uition reser&e and profit is treated as re&enue reser&e and re&enue profit respecti&ely# 1@# Miscellaneous expenses of subsidiary must be deducted against reser&e as Capital or 4e&enue 4eser&e# 1E# 'n case of 'nter Company transactions if it is do"n stream then unrealiIed profit of /olding company must be adJusted against Consolidated P O L a-c# 1F# 'n case of 'nter Company transaction if it is upstream it is splited into t"o as belonging to /olding company and Minority 'nterest and the former is deducted against Consolidated P O L a-c and Minority 'nterest is deducted from computation of $otal Minority 'nterest# 1G# Post ac0uit ion di&idend recei&ed is to be retained in P O L a-c# H# Pre ac0uit ion di&idend recei&ed is to be transferred from /olding company P O L a-c to Cost of 'n&estment# 1# Post ac0uit ion di&idend recei&able *Proposed) by /olding company out of subsidiary current year profit is to no" credited to /olding company Consolidated P O L a-c# # 'n case of analysis of profit Proposed %i&idend must be deducted from current year profit only# 9# 'f in the abo&e case if there is inade0uate profit for di&idend! the appropriation should be done 1st out of current year profits and thereafter out of b-f profit# ;# 'n case 'nter Company sale or purchase is carried bet"een t"o subsidiaries then for consolidated stoc( it is considered as it is 1st transferred from one subsidiary to /olding > upstream rule apply and then from /olding to nd subsidiary > %o"n stream rule apply# :# 'n 'nter Company transaction if there is sale of 1ixed +sset bet"een /olding

FH and ,ubsidiary unrealiIed profit should be remo&ed only to the extent of unamortiIed portion# @# 'n the absence of information regarding rate of depreciation! depreciation must be ignored# E# 'n case of ac0uition and sale of shares! profit on such sale must be included in P O L a-c "hile calculating reser&es for C8,# F# 'n the e&ent of current year di&idend is greater than the trading profits +3% if there is another source of income i#e# ,ubsidiary di&idend then the di&idend declared must be deducted only in +pportionment of profits# G# 'nter corporate loans in general refer to borro"ings from corporate bodies# 9H# 'n case of re&erse "or(ing for stoc( consolidation < Company + = Company 8 > ,toc( reser&e for %ebtors and creditors < Company + = Company 8 > 'nter company consolidation transactions 91# 'n case of +ssociate accounting 'nter Company transaction should not be cancelled only /olding company interest of unrealiIed profit is only ta(en# 9 # Losses in associate are ta(en only up to the liability in share capital# 99# Minority 'nterest calculation is not applicable in case of associate accounting# 9;# 'n the case "here subsidiary company is foreign company then con&ert the accounts into 'ndian Currency and remaining are same# 1or con&ersion rules applicable are:6 ,hare capital > 4ate on the date of ac0uition of share# 4eser&es > Pre > 4ate on the date of ac0uition Post > +&erage rate Current +ssets! Current liabilities > Closing rate 1ixed assets! 'n&estments > 4ate on the date of ac0uition 9:# Exchange rate difference "hich occurs on the abo&e con&ersion is to be setoff against post ac0uition Profit - 4eser&es and the balance is only to be apportioned for consolidation procedure# 9@# 'n case of t"o or more ac0uition by /olding Co# *or) ac0uition and sale! 'n all the cases date for apportionment etc is the date of 1st ac0uition and share holding pattern is the final share holding pattern# 9E# 'n case of +ssociate accounting! to find the carrying amount of 'n&estment of the associate in the consolidated balancesheet the calculation is similar to minority interest# .nly difference is to add the good"ill found in C.C# !ie! ,hare Capital 555 *=) Capital Profit 555 *=) 4e&enue Profit 555 *=) 7ood"ill 555 555

F1

A*a&ga*ati%n 'ndex of Main Points:6 1# Points to be satisfied to treat the amalgamation in the nature of merger +ll assets and liabilities of transforer is to be ta(en o&er at their boo( &alues by resulting company +ll or at least GHD of the ,hare /olding of +malgamating Company must be the ,hare /olders of +malgamated Company# E0uity shares of selling company must be gi&en only e0uity shares of purchasing company#

F Liabilities of $ransferor must not be discharged; it must be ta(en o&er by the resulting company# 8ut exemption is the fraction shares can be gi&en in cash# ,ame ris( and return and nature of company must be same# # .rder of +dJustment of consideration is first 7eneral 4eser&e and then P O L a-c# 'f the problem has statutory reser&e it should not be adJusted# 't is carried o&er as such# 9# +s per ,E8' guidelines! under"riting commission is #:D on e0uity shares and on 1st :HHH Preference ,hares it is 1#:D and the balance Preference ,hares it is 1D# ;# Capital employed is considered as 3et 4e&aluation amount of $angible +sset# :# 'n case purchasing company holding shares in selling company! 3et asset method is applied as usual and outside shareholders portion is calculated separately as balancing figure# @# 'f in the abo&e case! settlement of e0uity share holding of selling company is gi&en then that exchange pertains to outside share holderBs settlement and it should not be splitted# E# 'n the boo(s of selling company the shares held by the purchasing company must be cancelled by transferring it to realiIation a-c E0uity share capital a-c %r $o 4ealiIation F# 'f Preference share holders of selling company is discharged by preference share holders of purchasing company at premium then the premium portion must be transferred to realiIation a-c in the boo(s of selling company# G# 'n case of Merger "hile drafting Rournal Entry in the boo(s of purchasing company for 'ncorporation of +sset O Liability in the "or(ings! the consideration is aggregate consideration including shares already purchased by purchasing company and current purchase payable# 1H# 'n case of merger in the boo(s of purchasing company "hile calculation excess - shortage to be adJusted against the reser&e of selling company# $he purchase consideration is aggregate consideration including amount already paid *shares of selling company held by purchasing company) = amount no" paid *amount paid to outsiders)# 11# 8usiness purchase in case of shares of selling company held by purchasing company is the amount gi&en to outsiders only# 1 # 'f in the asset side of selling company %ebtors is gi&en as 7ross *>) 4eser&es - Pro&ision for %oubtful %ebts then in the boo(s of selling company "hile transferring all assets and liabilities to realiIation account %ebtors is transferred at gross amount and pro&ision is transferred along "ith liability# 8ut in the abo&e case in the boo(s of purchasing company "hile incorporating assets and liabilities of selling company debtors is ta(en net of pro&isions#

F9 19# .n entry for ta(eo&er of assets and liabilities of selling company in purchasing company boo(s > +ssets debited must be excluding good"ill in purchase method and difference in debit or credit is treated as 7ood"ill 4eser&es# 1;# 'n&estment allo"ance 4eser&e is not a current liability# 1:# When purchasing company holding shares in selling company then the shares held by purchasing company must be cancelled in the selling company boo(s# 1@# While canceling the shares held by the purchasing company it must be cancelled at fair &alue# 1E# $o bring the reser&e li(e 'n&estment allo"ance reser&e in purchasing company boo(s the entry "ill be +malgamation adJustment a-c %r $o 'n&estment allo"ance reser&e 'n the amalgamated 8-, in&estment allo"ance reser&e "ill appear in the liability side and amalgamation adJustment account "ill appear in the asset side for same amount# 1F# 'ncase of 'nter Company holding if di&ided is declared by any one company then di&idend recei&able by other company is to be 1st incorporated as pre amalgamation e&ent# %i&idend recei&able account %r $o P O L a-c Entry in the 1st company "hich has declared di&idend P O L a-c %r $o proposed di&idend 1G# 'n case of 'nternal reconstruction cancellation of +rrears %i&idend forgone by shareholder "ill not affect the 8-,# ,o no entry# 'n this case +rrears of di&idend is seaIed to be contingent liability# Preference shareholders "ill seiIe to ha&e the &oting right at par "ith e0uity shares "hich "as a&ailable due to arrears of di&idend# H# 'n %emerger "hile ma(ing transfer entry of +sset and liability in purchasing company fixed asset net is to be ta(en but "hile ma(ing the transfer entry in selling company fixed asset gross is ta(en in credited and pro&ision for depreciation is debited# 1# 'n case of 'nter Company - ,ingle side holding etc# to find the intrinsic &alue of each company! the in&estment held by one company in the shares of other company is also to be &alued as intrinsic &alue only and not to be ta(en at boo( &alue# 1or inter company holding this intrinsic &alue of shares of each company can be found by framing a linear e0uation# # 'n case of calculation of purchase consideration *Cross holding) $otal number of shares in selling company 555 *6) ,hare already held by Purchasing company 555 3umber of shares held by outsiders 555 Kalue of abo&e number of shares 4s# 555 3umber of purchasing company to be issued to selling company 555 *6) 3umber of shares already held by selling company 555 3et number of shares purchasing co# has to issue to selling co# 555

F; 9# 'n case of settlement of shareholders of selling company the amount "ill be < ,hares no" recei&ed from purchasing company = Purchasing company shares already held by selling company# ;# 'n amalgamated 8-, if there is %ebit in P O L a-c it should be netted of "ith 7eneral 4eser&e as per schedule K'# :# 'n case of assets and liabilities is ta(en o&er at re&alued amount it is in the nature of purchase and in the Journal entry for incorporating account ta(eno&er only the re&alued amount is to be ta(en# @# 'n case of selling company holding shares in purchasing company then in&estment is to be &alued at intrinsic &alue if specified# E# 'n the abo&e case of holding company gi&es shares at particular &alue to the subsidiary company for settlement then in&estment is to be &alued at the &alue F# When selling company holding shares in

purchasing company then "hile transferring assets and liabilities to realiIation account in selling company boo(s! +ssets transferred must be excluding the 'n&estment in purchasing company#