IIUC- Dhaka Campus MBA Program Course Outline on Managerial Accounting
Course Objective: The main objective of studying the course is to acquire both the theoretical & technical knowledge on the various aspects of “Managerial Accounting”. The major aspects include concepts significance role of managerial accounting , Cost Behavior Analysis , Cost –Volume Profit Analysis ,Variable Costing vs. Absorption Costing ,Budgeting ,Relevant Costing ,Standard Costing &Variance Analysis , Responsibility Accounting ,Performance Measurement etc. The learners would get ample opportunities to develop their analytical &professional skills after solving practical oriented problems & case studies on the aforesaid main aspects . These skills may be used to take various managerial decisions in a sound manner while one is employed / serving in the managerial positions of any organizations whether business, service, trading, govt. &other non-govt. etc.
Concept of Managerial Accounting (MA) & its significance difference between MA & FA –Role of MA –Business Environment –Professional ethics.
Cost terms ,Concepts &Classification: Cost concept –classification of cost & its basis product vs. period costs –Manufacturing vs. Non Manufacturing costs. Cost Behavior Analysis &Use : Concepts of CB & CA scenario –Variable, Fixed &Mixed costs –high low analysis problems &solutions. Cost Volume Profit Analysis (CVPA) : Concepts of CVPA –Assumption & Usefulness ,Contribution Margin & CM Ratio- Break –Even Point, Its computation &graphic presentation –Target Profit Analysis –Margin of Safety –problems and solutions.
5. Variable Costing (VC) & Absorption Costing (A/C): Concepts of VC & A/C, Comparison –Income Statement under VC & AC – Reconciliation –Reasons for difference in Income – Problems & Solutions. 6. Master Budget (MB) & Flexible Budget(FB): Concepts of MB –types of MB –operating and financial advantages of MB –preparation of sales, purchase and production budgets, cash budget–problems &solutions. 07.Relevent Costing : Relevant and irrelevant costs –reasons for isolating RC – Make or Buy & Replacement decisions –special orders – problems and solution. 08.Standard Costing & Variance Analysis : Concepts –purpose –types of variance –computation of variances –variances report – problems and solutions. 09. Responsibility Accounting: Concepts and significance – responsibility centre –cost center -investment centre – profit centre –segment reporting and ROI analysis –segmented statements –problems and solutions; 10.Performance Measurement : Concepts and significance- measurement criteria – profitability and productivity –types of productivity – productivity vs. profitability –problems and solutions
Managerial Accounting (Tenth Edition) By, Garrison Noreen Reference Book : Cost Accounting- a managerial approach by C.T. Horngren. Name of Course Teacher: Dr. Md .Jahirul Hoque Designation- Professor of DBA, IIUC-DC Phone – 8127366, 01716524423
01. Concepts; Managerial accounting (MA) is concerned with providing information to managers for their use internally in the organization. Financial accounting is concerned with providing information to stockholders, creditors and others outside of the organization. 02. Significance; Essentially, the manager carries out three major activities in an organization; planning, directing and motivating, and cont rolling. All three activities involve decision making. 03. Difference between MA & FA; In contrast to financial accounting , managerial accounting ;a) focuses on the needs of the manager,2)places more emphasis on the future ,c) emphasize s relevance and flexibility rather then precision ,d) emphasizes the segment of an organization , e) is not governed by GAAP and f) is not mandatory. 04. Just in time system; a) The characteristics of the JIT approach include the following; # Reducing the number of suppliers and requiring suppliers to make frequent deliveries of defect –free goods. # Creating a continuous flow of product through the plan, minimizing the investment in raw materials, work in process, and finished goods. #Making production operation more efficient by redesigning workstations and improving the plant layout by creating individual product flow lines. # Reducing setup time. # Reducing defects. #Cross training employees so that all are multiskilled and can perform all functions required at a particular workstation.b) A successful JIT system requires suppliers who are willing to make frequent deliveries of defect –free goods in small quantities. This often requires weeding out unreliable suppliers and working intensively with a few, ultra-reliable suppliers.
Competence Perform duties in accordance with relevant technical standards.05. In addition. such behavior is a discredit to the profession. increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest. the ethical course of action would be for Perelman to insist on writing down the obsolete inventory. Perelman would also be concealing unfavorable and subverting the goals of the organization. are responsible for both operations and recording the results of operations. Perlman would not be preparing a complete report using reliable information. Furthermore.
Members of the management team. 06. Taking the ethical action would require considerable courage and self – assurance. This would not. Hiding the obsolete inventory impairs the objectivity and relevance of financial statements. Integrity
Avoid conflicts of interest. Professional Ethics . however. Refrain from activities that prejudice the ability to perform duties ethically. be an easy thing to do. the ethical action may anger her colleagues and make her very unpopular.
. Disclose all relevant information. Ethical Standards (Solution to P. of which Perlman is a part. Apart from adversely affecting her own compensation. Prepare complete reports using reliable information. a) Failure to report the obsolete nature of the inventory would violate the Standards of Ethical conduct as follows. Refrain from subverting the legitimate goals of the organization. Objectivity Communication of information fairly and objectively. Refrain from discerning the profession.
b) As discussed above.
By failing to write down the value of the obsolete inventory. Since the team will benefit from a bonus. 1-7). generally accepted accounting principles (GAAP) require the write down of obsolete inventory.
responsibility without accountability is meaningless. should go together . Integrity. Second Step: He should verify whether the mark up percentage & the figure of profit are obtained or not if WIW is delivered directly from manufacturer other than getting delivery from A-1. Firstly. Charlie has a responsibility to disclose all the relevant information regarding A-1 and advice the concerned management about the situation. Loyalty of organization. as WIW’s controller Charlie’s responsibility is to make sure the proper implementation of JIT approach. E-commerce. A-1 cannot delivery the order fully from his won warehouse and in addition. Regularity. So. objectivity ensures communicating information.
a) b) c) d) e)
TQM. the present arrangement with A-1 neglects most of the benefits t5hat can acquire from the JIT. introducing IT in commerce. Ethics: Just in Time Requirement 01: Considering the IMS’s standards of ethical conduct Charlie cannot ignore the situation described about WIW. must be loyal. some of the orders were late and not complete. Requirement 02: Charlie should follow some specific steps to resolve this matter is mentioned below: First Step: Charlie has to verify whether the collected information is correct or not. Global business: international business.B told Charlie that WIW has been trying to implement “Just in Time” system. Objectivity. behavioral aspect must be pleasant. J. JIT. provide necessary inventory looking at the minimum level. As per the situation described on WIW. Responsibility and accountability. Dutiful.
07. training and b) c) d) e)
g) h) i)
understanding. Secondly. So. must maintain confidentiality. should be a man of high integrity which includes morality. Both from the views of customers and enterprises. Must maintain regularity in duties. Charlie is informed that A-1 is more of a jobber than a warehouse. process engineering ensuring a business process. Confidentiality of the organization. a publicly owned corporation. Business environment.a) Competence requires qualification. Re-engineering. as part the standard of ethical conduct management account must “avoid actual or apparent conflicts of interest and advice all appropriate parties of any potential conflict”. Pleasant behavior. experience.
This presumes t6hat legal counsel has advised the board that the arrangement with A-1 doesn’t violet any loss and that the company has made adequate disclosure in its public feelings. II.B is ignoring the interest of the company for that relationship though A-1 is not fit as supplier for JIT approach. The members of the management team had advised her just to ignore the matter as obsolete inventory. Required. What would be the responsibility of Linda in respect of the obsolete inventory? Examine in the context of the following standards of ethical conducts.
. Other wise. Competence. Charlie’s only alternative is to submit a memorandum to the board of Directors.
a) I. Thomas and Mrs. Both Mr. Linda has been given the responsibilities of inspecting the stores for the last ten years and asked to give a report on inventory. III. Linda will face while recording the obsolete inventory in her report? How she would overcome those. Only Charlie can makeup the decision as to weather or not he can continue at WIW under these circumstances.B and A-1. The memorandum should present only the fact. all the members including Linda will have to face adverse impact on their compensation. Linda are the president and assistant controller respectively of a sugar mill of a country which has 20 stores spread over the whole country. If the board approves the continued relationship with A-1 Charlie may possible conclude that his concerns about an apparent conflict of interest do not represent an actual conflict. Mrs. In the mean time she has discussed the matter with the other members of the management team and sought their opinions on the matter. Linda have been working in the mill for the last fifteen years. J. Thomas and Mrs. Forth Step: If J.
Case Study: 01
Mr. Final Step: After trying every possible step if Charlie fails to establish a proper system in WIW he has to decide whether he will continue with this company or not. He needs to be confirmed that J.B refuse to follow this course of action.Third Step: He should verify the situation again with J.B before informing the concerned management anything about the relationship between J.B should be notified of this action in advance. Integrity and Objectivity What difficulties Mrs. While inspecting the stores Linda has discovered a sizable number of inventories not recorded in the stores account during the period.
As goods are sold. When fixed costs are involved. the alternatives might consist of purchasing one machine rather than another in order to make a product. 02. As goods are completed.
. the flow is from direct materials. 06. direct labor and manufactured overhead. A product cost is any cost involved in the purchase or the manufacture of goods. as production declines. An opportunity cost is the potential benefit that is given up when one alternative is selected over another.Chapter -2
Cost terms. they are sometimes called inventoriable cost. 05. The difference in the fixed costs of purchasing the two machines would be a differential cost. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future. A differential cost is a cost that differs between alternatives in a decision. since a constant fixed cost figure will be spread over fewer units. the cost of a unit of product will depend on the number of units being manufactured. A variable cost is a cost that varies. Since product cost follow units of product into inventory. total. 03. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. Conversely. In direct production to change in the level of activity. in. Concepts and Classifications
01. A variable cost is a constant per unit of product. For example. this costs consists of direct materials. 04. their cost is removed from finished goods and transferred into cost of goods sold in an expense on the income statement. the cost per unit will rise. direct labor and manufacturing overhead into work in process. their cost is removed from work in process and transferred into finished goods. Differential costs can be either variable or fixed. A fixed cost is a fixed in total. Concepts and Classification. the cost per unit will fall as the fixed cost is spread over more units. but will vary inversely on a per unit basis with changes in the level of activity. As production increases. In the in the case of manufactured goods.
3. The cost of advertising a Madonna rock concert in New York city ………………………….for example. Property taxes on your local cinema …………………… 6.. the advertising costs don’t go up.07. 4. 10. The cost of synthetic materials used to make Nike running shoes …………………………………………. Exercise-2. one can argue that if the price is within reason. The cost of leasing an ultra-scan diagnostic machine at the American hospital in Paris …………….Cola bottling plant ………………………………………………………… 8.The electrical cost s of running a roller coaster at Magic Mountain …………………………………… 5. some may argue that the cost of advertising a Madonna rock concert is a variable cost since the number of people who come to the rock concert depends upon how much advertising there is . Commission paid to salespersons at Nordstroms ……………………………………………….9
A few of these costs may generate lively debate .property insurance on a Coca. x x x x x x x X x X
.However. any Madonna rock concert in New York City will be sold out and the function of advertising is simply to let people know the event will be happening.. The cost of shipping Panasonic televisions to retail stores ………………………………………………. Moreover. 9. X-ray film used in the radiology lab at Virginia Mason Hospital in Seattle …………………………… 2. Cost behavior Variable Fixed
1.. Depreciation on the Planet Hollywood restaurant building in Hong Kong ……………………. 7. while advertising may affect the number of persons who ultimately buy tickets..
Commissions paid to Encyclopedia Britannica salespersons ………………. mat. labor O/H
Period (selling& adm. Insurance on a Bausch and lomb factory producing contract lenses ……………. Problem-2-14
Name of the Cost Rental revenue Foregone.08. x 4. Apples processed and canned by a Del Monte Corporation. $ 80 per unit Rental cost o Warehouse . Sunk cost cost
X X X X X
. Exercise-2. Salary of a supervisor overseeing production of computer board at Hewlett-Packard …………… 8.000 Per year Direct materials cost. 10.. Steering wheels installed in BMWs …………………… x
Selling and Product Administrative Cost Cost
x x x X x x x
x x x
09. Depreciation of factory lunchroom facilities at a General Electric plant ……….5
Cost Behavior Variable Fixed
Opp. x 2. 6. Insurance on IBM’s corporate Headquarter ……………… 7. $500 Per month Rental cost of
Variable Fixed Cost Cost
Product cost Direct Direct Mfg. x 9. Advertising by a dental Office ……………………… 3. Hamburger burns at a McDonald’s outlet ………. Shipping canned apples from a Del Monte plant to customers.$30. x 5..
$3000 per year
X X X X X X X X
X X X X X X
10. Rent on a factory building … 3. Insurance on a building used in producing TV sets ………………. $60 per unit Depreciation of annex space . $8000 per year Advertising cost ..2-20
Cost Item Cost Behavior Variable Fixed
X X X X X X X X X X X X X X X X X X X X
Units of Product Direct Indirect
1. 12. X 10.$120 per unit Shipping cost . Depreciation air purification equipment used in furniture production ……….Picture tubes used in TV sets ……… X
. Janitorial salaries …………………… 8. Cloth used in drapery production X 4.. X 2. 7. $ 4000 per month Direct labor cost . $50000 per year Supervisors salary.Lubricants needed for machines …….Equipment. Peaches used in canning fruit………. Production superintendents salary 5. Suger used in soft drink production … X 11. Wages of labors assembling a product X 6. Property taxes on the factory ………. Depreciation of cafeteria equipment 14. Electricity used in operating machines …………………. $9 per unit Return earned on investment . X 9. Problem. 15. $1500 per month Electricity for machines. Wages of workers painting a product … X 13.
A variable cost is one that remains constant on a per unit basis.Chapter-3
Cost Behavior.50 4. Cost behavior refers to how a cost will react or respond to changes in the level of business activity. Cost Behavior Scenario Type of cost Fixed costs Variable costs
Total costs No change Increase / Decrease
Per unit cost Decrease or increase No change
a) Variable cost .50 Units Produced and sold $80. A mixed cost is a cost that contains both variable and fixed costs elements.000 200000 250000 360000 360000 560000 610000 2. inversely with changes in volume . Concepts. Allocation of Mixed cost: High-low Method: Under this method the variable cost element is found out from the mixed cost by applying the following the variable rate formula
Valuable rate=Change in cost ÷ Change in equity
After finding out variable cost. if expressed on a per unit basis.000 $100. c) Mixed cost.000 150000 360000 510000 2.60 6. but which changes.50 7. fixed cost can be found out by deducting variable cost from total mixed cost
Exercise 5-5: Requirement 01. A Fixed cost is one that remains constant in total amount. Analysis and Use
Variable costs Fixed costs Total cost Cost per unit: Variable cost Fixed cost Total cost per unit Requirement-02
.00 2. but which changes in total indirect relation to change in volume.00 8.50 3. b) Fixed cost.50 6.
Shipping Expense: 12000 ÷ 1500=$8 2. Cost formula:
56000 36000 20000
143000 108000 35000
Shipping Expense: $ 20000 plus $8 per unit or Y=$20000 + 8X Salary Etc: $ 35000 plus $24 per unit or Y=$35000 + 24X Frankel Ltd Income Statement for the month ended June 4500 $ 630000 252000 36000 108000 70000 20000 35000
Sales in unit Sales revenue Less: Variable costs: Cost of goods sold Shipping Salary etc Contribution Margin Less: Fixed costs: Advertising Shipping Salary etc
.50) Contribution Margin Less: Fixed Costs Net Income
675000 225000 450000 360000 90000
Exercise 5-11 1.000 12000
Salary etc 143. Salary expense: 36000 ÷ 1500= $24 B. Valuable Cost Element: Valuable rate=Change in cost ÷ Change in equity 1. Fixed Cost Element:
Shipping Expense Salary Expense
Cost of High level less.000 44.000 107. Identification of Company’s expenses (see sheet) 2. Separation of Mixed Expenses under High-Low Method Units Shipping Exp High level of Activity Low level of Activity Change 4500 3000 1500 56.5) Less: Variable cost (9000@2. VC 45000 units @ $8 45000 units @ $24 FC C.000 36000
A.Income statement for 9000 units Sales revenue (9000@7.
Salaries and comm. Income statement For the month ended September 30
. Variable rate= Change in cost Change in activity
1.5000 Low level of activity ……………. Variable cost element.Variable Advertising expenses …………………… Fixed Shipping expenses ……………………… Mixed Salaries and commission ……………….. Fixed cost element …………. 5-15
1.The cost formulas are...Insurance Depreciation Net Income
2.Fixed cost element.. A$4000 1000units =A$4 per unit.Expenses A$90000 60000 A$30000
B. expense.. A$30000 per month plus A$12 per unit or Y= A$30000+A$12X Morrisey &Brown. Unites Expenses High level of activity ………….. Salary and Com.1000 A. 20000 5000 units x A$12 ……. A$18000 per month plus $ 4 per unit or Y= A$18000+A$4X Salary and Com. Costs of goods sold ……………………. 5000 units x A$4 …….. Problem.. 2. Ltd.4000 Change …………………………. Analysis of the mixed expenses. Shipping expense. Shipping Expenses Cost of high level of activity… A$38000 Less variable cost element. Mixed Insurance expenses……………………… Fixed Depreciation expenses…………………… Fixed 2. A$18000
C.= A$12000 1000units =A$12 per unit. A$90000 78000 A$ 12000
Shipping Expenses A$38000 34000 A$ 4000
Salary and Comm.
Utilities cost ………………….Sales in units …………………………………… Sales revenue (@A$100) ……………………….80/MH 2. Less variable expenses.60 per machinehour or Y=$9000÷$1.. Maintenance cost at the 90000 machine-hour level of activity can be isolated as follows. Level of activity 60000M 90000MH Total factory overhead cost ……………… $174000 $246000 Deduct.Expenses (@A$12) …………… Contribution margin ……………………………… Less fixed expenses...
1. Fixed cost element ……………………………………… $153000 144000 $9000
Therefore. Salary and Com.Expenses ……………………….. Change in activity = 48000 30000MH = $1.. Shipping expense ………………………………… Salary and Com. (48000) (72000) Supervisory salaries ……………….80/MH* …………….60 0. Advertising expenses …………………………….80 Fixed Cost $9000
. Machine hours 90000 60000 30000 Machine cost $153000 105000 $48000
Change in cost Variable rate.60/MH Total fixed cost. ………………. Total maintenance cost at the high activity level………… Less variable cost element (90000MHx$1... Utilities cost @$0. ………………. High-low analysis of maintenance cost. Problem.. (21000) (21000) Maintenance cost ……………………… $105000 $153000 *$48000/60000MH=$0. $9000 per month plus $1..60X 3. Cost of goods sold (@A$60) ……………………. the cost formula for maintenance is..60) ………….. Maintenance cost ………………. Insurance expenses ………………………………. Depreciation expenses …………………………… Net income …………………………………………
5000 A$500000 A$300000 20000 60000 21000 18000 30000 6000 15000
03. Shipping expenses (@A$4) ……………………. Variable Rate per Machine-Hour $1. High activity level Low activity level Changes ……………….
4.40 x75000MH) ……………….40
. the cost formula would be.40X. Fixed costs ……………………………………… $30000 Variable costs ($2. Total overhead cost at an activity level of 75000 machine-hours. 180000 Total overhead costs ………………………………….Supervisory salaries cost ……… Total
Costs are linear and can be accurately divided into variable and fixed elements.Chapter-4
Cost Volume Profit (CVP) Analysis
01. direct wages etc.
. The variable element is constant per unit and the fixed element is constant in total over the entire relevant range. sales revenue. In manufacturing companies inventories do not change. CVP analysis involves finding the most favorable combination of variable costs. It is used in profit planning. Concept of (CVP) analysis.
CVP is one of the important financial management tools & techniques. Assumptions . Variable costs .
02. selling price. Trade offs are possible between types of costs as well as between costs and selling price. Usefulness of CVP Analysis. Assumption of CVPA. sales volume and mix of products sold. Total costs consist of variable costs & fixed costs. CVPA is used. Costs that change in direct proportion to changes in volume of output. In order to know the target profit of a company. Fixed costs . Sometimes trade-offs are desirable and sometimes they are not. margin of safety. no profit & no loss point both in terms of quality and amount of that company.
Total cost should be divided into VC & FC.
It is study of the effects of output/ sales volume. The number of units produced equals the number of units sold. In multiproduct companies. expenses (Costs) &net income (profit). Examples – material cost. Costs that do not change directly with changes in volume of output. the sales mix is constant.
03. fixed costs. CVP analysis provides the manager with powerful tools for identifying those courses of action that will improve profitability.
04.PU –VC PU
FC BEP in amount = CM. Sales =VC+ FC Or.FC Or.
b) Contribution Margin Approach. d) Changes in CM – Must be adjusted e) Changes in Sales -.Must is adjusted. (Sales per unit x Q) = (VC per unit x Q) +FC BEP in amount = Q x Sales per unit. Computation.
BEP in quantity = Sales – Variable Costs. Sales in case of target net profit.
Contribution Margin =Sales –VC
FC BEP in unit= CM per unit Or FC S . BEP. Ratio Or FC CM/ Sales Or FC 1.Must be adjusted
a) CM Approach
Sales in Unit =FC+ Target NP(TNP) CM per unit
It is that level of sales at which revenue equals to expenses & net income becomes zero. Two approaches—
a) Equation Technique.VC pu/ S pu
Where CM Ratio = CM Sales C) Changes in Costs.
Sales in Amount=FC + TNP CM Ratio
b) Equation Technique Sales in unit= VC + FC +TNP Or; (S. pu x Q) = (VC pu x Q) + FC + TNP
Sales in Amount = Sales in Quantity x S pu
Voter Company’s contribution format income statement for the most recent year is given below; Total Per Unit Percent of Sales Sales (20000 units) …….. $1200, 000 $60 100% Less variable expenses …... 900,000 45 ?% Contribution margin …… 300,000 $15 ?% Less fixed expenses ………. 240,000 Net operating Income …… $60,000 Requirement;
a) Compute the company’s CM ratio and variable expenses ratio. b) Compute the company’s break even point in both units and sales
dollars. c) Assume that sales increase by $400,000 next year .if cost behavior pattern remain unchanged .How much will the companies net operating income increase? Use the CM ratio to determine your answer. d) Assume that next year management wants the company to earn a minimum profit of $90,000.how many units will be sold to meet this target profit? e) Compute the company’s margin of safety in both dollar and percentage form .
Solution; a) CM ratio =Contribution margin Selling price =$15÷$60 =25% Variable Expense Ratio= Variable expense x 100 Selling price = ($45÷$60) x 100 = 75% b) Break Even Sales = Variable expenses+ Fixed expenses +Profits $60 Q= $45Q +$240000+$0 $15Q=$240,000 Q = $240,000/0.25 Q=16,000 units. BEP in Amount = 16000 units x $60 PU = $960000 c) Increase in sales ……………… $400000 Multiply by the CM ratio …….. X 25% Expected increasing in contribution margin $100000 Since the fixed expenses are not expected to change, net operating income will increase by the entire $100000 increasing in contribution margin computed above. d) Equation method; Sales = Variable expenses+ Fixed expenses +Profits $60Q= $45Q +$240000 + $90000 $ 15Q = $330000 Q= $330000/$15 per unit Q= 22000 units. Contribution margin method; = Fixed expenses +Target profit Contribution margin per unit = $240000+$90000 $15per unit =22,000units
e) Margin of safety in dollars = Total sales- Break –even sales =$1200000-$960000 =$240000 Margin of safety percentage = Margin of safety in dollars Total sales =$240000/$1200000 =20% 07. Concept of CM Ratio; The contribution margin (CM) ratio is the ratio of contribution margin to total sales revenue. The CM ratio shows the change in contribution margin that will result from increase and decreases in sales revenue. a dollar increases in contribution margin will result in a dollar increase in net income .therefore for planning purpose a knowledge of a products CM ratio is extremely helpful in projecting potential contribution margin and potential net income. 08. Concept of MS: The margin of safety is the excess of budgeted sales over the break-even volume of sales. It states the amount by which sales can drop before losses begin to be incurred.
Exercise 6-6: Solution; 1. a) BEP in units: FC ÷ CM (PU) where CM $ 12 = $ 150000 ÷ $ 12 =12500 units b) BEP in amount: SP (PU) x Units = $40 x 12500 =$ 500000 2. Total CM at BEP in $ 150000 since CM is equal to fixed expenses at BEP. or. CM 12500 units x $12 PU = $ 150000 3. Target Sales= ( Fixed Expenses + Target Profit) ÷ Unit CM = (150000+18000) ÷ 12 = 14000 units Income Statement Total Unit Sales ( 14000 units @ $40) $ 560000 $ 40 Less: Variable expense(14000@$28) 392000 28 168000 12 Less: Fixed expense 150000 Net Income 18000
Exercise. $360000 b) The contribution margin is $216000 since the contribution margin is equal to fixed expenses at the break-even point. or at $30 per unit.6-6
a) Sales = Variable expenses+ Fixed expenses +Profits $30Q=$12Q+$216000+$0 $18Q=$216000 Q=$216000/$18 Q=12000units.4. Break-even point= Fixed expenses Unit contribution margin =$216000/$18 = 12000 units or ar$30 per unit. c)
.67% 5. CM Ratio= CM ÷ Sales = 180000 ÷ 600000 = 30% New Sales: $ 600000 + $80000= $ 680000 Expected Total CM ( 680000@ 30%)=204000 Present Total CM ( 600000 @ 30%) = 180000 Increased CM or NI = 24000 Income Statement Sales Less: Variable expense(70 % of sales) CM Less: Fixed expense Net Income Less present NI Increased NI Note: Variable exp. Ratio=VE ÷ Sales = 420000 ÷ 600000 =70% Total $ 680000 476000 204000 150000 54000 30000 24000
09. Margin of Safety (MS) a) In $ MS= Total Sales – BE Sales = $ 600000-500000 = $ 100000 b) MS ( in %)= MS ÷ TS = $ 100000 ÷ $ 600000 = 16. $360000 Alternative solution.
$50000 incremental sales x 60% =$ 30000 Since in this case the company’s fixed expenses will not change.. $300000 270000 $ 30000 Total $510000 204000 306000 216000 $90000 Unit $30 12 $18
. d) Margin of safety in dollar terms. Margin of safety = Total sales – Break –even sales $450000-$360000=$90000 Margin of safety in percentage terms. Sales (17000units x $30) …………. Margin of safety in dollars Total sales =$90000/$450000 =20% e) The CM ratio is 60% Expected total contribution margin ($500000 x 60%) Present total contribution margin ($ 450000 x 60%) Increased contribution margin Alternative solution. Net income ……………………………. Less fixed expenses …………………….Target sales = Fixed expenses + Target profit Unit contribution margin =4216000+ $90000 $18 =17000 units. Less variable expenses (17000 units x $12) Contribution margin ……………………... quarterly net income will also increase by $30000.
$600000/$40 = 15000 units.
1. Sales = Variable expenses+ Fixed expenses +Profits $40Q = $28Q +$180000+$ 0 $12Q =$180000 Q = $ 180000/$12 Q = 15000 units. a) Sales price Less variable expenses Contribution margin Let Q = Break –even point in units. Variable expenses. 15000 units x $40 = $600000 Alternative solution.70X + $180000+ $0 0. Exercise. b) $40Q = $28Q + $180000+ $60000 $12Q = $240000 Q = $240000/$12 Q = 20000 units In sales dollars. Let X =Break-even point in sales dollars. In sales dollar.10.30 X =$600000 In units.30X = $180000 X = $180000÷0. X = 0.30%) =$28 2. 20000 units x $40 = $800000 $40 28 $12 100% 70 30%
$40 x (100%.
Exercise. The contribution margin per person would be
Price per ticket Less variable expenses Dinner Favors and program Contribution margin per person
$35 $18 2 20 $15
The fixed expenses of the dinner-dance total $6000. at $35 per person. $14000 Alternative solution Fixed expenses $6000 Unit contribution margin $15 = 400 persons. Sales = variable expenses+ fixed expenses +profits $35Q = $20Q + $ 6000 + $ 0 $15Q = $6000 1 Q = $6000/$15 Q = 400 persons. Variable cost per person ($18+$2)
Fixed cost per person ($ 6000/300) Ticket price per person to break-even
$20 20 $40
2. $14000. Or. The break-even point would be.11. or.
1. at $35 per persons.
A.on Income Statement D. V/C signifies that fixed factory O/H is not inventoried.when Inventory is Variable F. Comparison. O/H immediately .when Inventory is Variable F.to Inventory as are sold ---..
Under V/C fixed manufacturing O/H are excluded from cost of product .
02. In contrast. A/C indicates that inventory values include fixed factory O/H. Variable costing
Costs to Account for Inventoried Costs on B/S Exp.M Initially applied as goods Become Expired D.to Inventory as are sold ---.on Income Statement D. --------. Income Statement is prepared on the basis of variable costing approach when C. ………Expires Immediately………. O/H Unexpired costs sold.
In this method.M Initially applied as goods Become Expired D. Income Statement under A/C Method . O/H Unexpired costs sold. In other words. Income Statement is prepared on the basis of absorption costing approach when income is found out first & then income is determined. Fixed F. Fixed F.Becomes Expired
B. Income Statement under V/C Method.but under A/C such O/H are included in cost of products. O/H
In this method.M is found out first & the income is determined. Concepts.Absorption Costing Costs to Account for Inventoried Costs on B/S Exp. --------.Chapter-5
Variable Costing (VC)&Absorption Costing (A/C) 01.
04.W .W .
Differences between income under V/C & income under A/C can be reconciled as follows. Reasons for differences in Income. O. Under V/C. Difference between these two methods. But in V/C revenue less variable costs is C. a) Computation of Unit product cost: Production: Direct Materials Direct Labor Variable M.05.’ full cost rate). The format for A/C income statement separate & costs into the major categories of manufacturing & non manufacturing. fixed O/H is included in two places one. But under V/C.
Unit product cost varies. under V/C income statement separate costs into fixed & variable. Reconciliation of income between V/C & A/C.
07. Under A/C. H Unit Product Cost
06. In contrast. F. inventories are valued according to variable & fixed factory O/H rate (i.P. as a part of the cost of goods sold & as a production volume variance. Fixed F/O/H does not appear as a separate item in A/C income statement. inventories are valued according to only variable (standard) factory O/H rate. Fixed O/H rate x Change in inventory units (both opening &ending) Where.e.O/H Rate= Budgeted fixed O/H Expected volume of production
$ 18 7 2 8 35
Exercise 7-1: 1.
Valuation of inventories is different.M.H Fixed M. O. In A/C revenues less manufacturing costs is G.
O/H Net Income 2. O.b) Income Statement under A.H Unit Product Cost b) Income Statement under V. expense Fixed Selling & Admin.C $ Sales (16000 @50) Less: Cost of Goods Sold Beginning Inventory Cost of goods manufactured(20000@$35) Goods available for sale Less: Ending inventory(20000-16000)x$35 Gross Margin Less: Selling and Admin. O. Production: Direct Materials Direct Labor Variable M.C $ Sales (16000 @50) Less: Variable expense Cost of goods sold(16000@$27) Selling and Admin O/H(16000@$5) CM Less: Fixed expense Manufacturing O/H Selling & Admin O/H Net Income 432000 80000 160000 110000 $ 800000 512000 288000 270000 18000 0 700000 700000 140000 110000 80000 $ 800000
560000 240000 190000 50000
$ 18 7 2 27
Reconciliation Statement: NI as per AC 50000 NI as per VC 18000 Difference 32000 Difference is explained as follows: Fixed Manufacturing Overhead Rate (160000÷20000) = $8 Change in Inventory= 4000 units @ $8= $ 320000 Exercise 7-2: Solution Computation Unit Product Cost Under VC.H Unit Product Cost Income Statement under VC $ 10 4 2 16
. a) Computation of Unit product cost: Production: Direct Materials Direct Labor Variable M. O/H Variable Selling & Admin.
75) Less: Variable expense Cost of goods sold(40000@$16) Selling and Admin O/H(40000@$3) CM Less: Fixed expense Manufacturing O/H Selling & Admin O/H Net Income 640000 120000 250000 300000
$ 1350000 760000 590000 550000 40000
Reconciliation Statement: NI as per AC 900000 NI as per VC 40000 Difference 50000 Difference is explained as under: Fixed Manufacturing Overhead Rate = $5 Change in Inventory= (0-10000) units= 10000 units Difference=10000 units x FM O/H Rate =10000 X $5 =$50. Costs ……………. Contribution margin ………………. $ 1054000
613600 440400 88000 352400 44000 396400
. Rate (2000 X 44) ………………………… Add ending inventory at standard ………. Practical problem # 16.. Direct materials ………………….. Rate (1000 X 44) …………………………..$ Sales (40000 @33.. 285000 Direct labor ………………………… 174200 Factory O/H ……………………… 36000 Selling &Admen. 118400 Less Opening Inventory at Standard …………..000
Solution Income statement under V/C $ Sales …………………………………… Less variable expenses.
Direct labor ……………………… Factory O/H (Fixed & variable) (95000+36000) Less operating inventory at absorption rate (44+7) i. 285000 174200 131000
590200 463800 102000 361800 51000 412800 193400 219400
Reconciliation Statement Operating income under V/C Operating income under A/C Differences to be explained Fixed O/H rate Change in inventory units. Costs (75000+118400) …….. Direct materials ………………….e. Operating inventory Ending inventory Fixed O/H rate X change in inventory $7 x1000 226400 219400 $7000 $7 2000 1000 7000
..Less fixed costs.. Operating income ……………………………
Income statement under A/C $ Sales 1054000 Less cost of goods Manufactured. S & A O/H …………………………. Sales & admin... Operating income ………………………………. (2000 X 51) Add ending inventory at absorption rate (1000 X 51) Gross profit ……………………………………… Less non-manufacturing costs. Factory O/H ………………………….
. $18 Fixed manufacturing O/H (300000/25000 U) 12 Unit production cost ………………… 30
b) The absorption costing Income statement..7-5
a) The unit product cost under absorption costing would be . Exercise. Less fixed expenses. Variable cost of goods sold (35000 units at $12) ………………... Sales (35000 units at $25) …………… Less variable expenses.
Sales (20000units X $50) …………….
600000 270000 $130000
11.. Contribution margin ……………………. 400000 Selling & administrative expenses ………. 150000 Gross margin …………………………….
$875000 $420000 70000 490000 385000
1. Less cost of goods sold.
. Variable Selling & administrative expenses (35000 units at $12) ………………….09.
Direct materials ………………………… $6 Direct labor ……………………… 9 Variable manufacturing overhead ………. Net income ………………………………. Beginning inventory …………… $0 Add cost of goods manufactured (25000 units x $ 30) ………… 750000 Goods available for sale …………………. Exercise. 3 Total variable costs ……………………. 750000 Less Ending inventory (5000 units x $30) ……………..
Direct materials ………………. $5 Direct labor …………………… 6 Variable manufacturing overhead 1 Total variable manufacturing cost $12
2.. Unit production cost …… $20 8 2 10 $40 $600000
b. a.. $35000
11. Less Selling & administrative expenses Net income …………………….. $15000 Add. Direct materials ………………. Fixed manufacturing O/H differed in inventory under the absorption costing.Fixed manufacturing O/H ……………… Fixed Selling & administrative expenses Net income ……………………………. The difference in net income can be explained by the $20000 in fixed manufacturing O/H differed in inventory under the absorption costing method. Sales (8000 units x $75) …………… Less cost of goods sold..
320000 280000 248000 $32000
. Beginning inventory ……………… $ 0 Add cost of goods manufactured ($ 10000 units x $40) ………….. Direct labor …………………… Variable manufacturing overhead Fixed manufacturing O/H ($100000/10000units) ……….
1. Exercise. Variable costing net income ……………. 400000 Goods available for sale ………… 400000 Less Ending inventory (2000 units x $ 40) 80000 Gross margin …………………. 5000units X $4 in fixed manufacturing cost per unit ………… 20000 Absorption costing net Income …….
Variable cost of goods sold (@$12) 480000 600000 Variable Selling & administrative expenses (@$2) 80000 100000 Total variable expenses 560000 700000 Contribution margin …………. The unit product costs under the variable costing method would be
computed as follows . Direct materials $20 Direct labor 8 Variable manufacturing overhead 2 Unit product cost $30 12. 7-10
$48000 200000 $248000
1. Year 1 Year 2 Sales ……………………. fixed manufacturing overhead deferred in inventory under absorption costing (5000 units x $6per unit) Deduct. Exercise. $1000000 $1250000 Less variable expenses. a.. 440000 550000 Less fixed expenses. the variable costing income statements can be prepared.Variable (8000 units x $6) Fixed Total 2. Variable costing net income Add. Fixed manufacturing O/H 270000 270000 Fixed Selling & administrative expenses 130000 130000 Total fixed expenses 400000 400000 Net income $ 40000 $ 150000 Year 1 $40000 30000 --$70000 Year 2 150000 --30000 $120000
2. fixed manufacturing overhead released from inventory under absorption costing (5000 units x $6 per unit) Absorption costing net income
. Direct materials $4 Direct labor 7 Variable manufacturing overhead 1 Unit product cost $12 With this figure..
purchases. purchases & operating expenses all are geared to the rate of sales activities. 4. Preparation of main MB: 4. Can uncover potential bottlenecks before they occur. productions. It is a statement of cash and credit sales & collection of cash from credit sales.
02. Components of MB: A) Operating Budgets:
• • • • • • • Sales budget Purchase budget Production budget Cost of production budget Cost of goods sold budget Operating expenses budget Budgeted income statement
B) Financial Budgets:
• • • Capital budget Cash budget Budgeted balance sheet.1. 4. Forces FM to think ahead their plans.
03. Production & Cost of production Budget: It is a statement of sales plus closing inventory less opening inventory. It shows cash &credit purchases and payments for credit purchases. Whenever.3. we shall get cost of production. quantity of production will be multiplied by the rate of cost of production per unit.
. Aids FM in coordinating their efforts effectively. Sales Budget:
It is the starting point of budgeting because production & inventory levels. All this should be in terms of quantity. Purchase Budget : It is a statement of desired ending inventory plus cost of goods sold less opening inventory. Provides a means of allocating financial resources effectively. Defines properly the goals &objectives that can serve as benchmarks for evaluating actual performances. finance etc is called MB.Chapter -6
Master Budget (MB) and Flexible Budget
01.2. Concept of MB:
A budget that immerses the planned activities of all the sub units of an enterprise like sales. A budget is a pre lustration of plans is terms of numerical figures according to predetermined period. Advantages of MB:
• • • • • • Means of communicating management plans.
Exercise: 9-1 Requirement-1: Schedule of expected Cash Collection: Particulars July May Sales ( $430000x 10%) 43000 June Sales $540000 x 70% 378000 $540000 x 10% July Sales $600000 x 20% 120000 $600000 x 70% $600000 x 10% August Sales $900000 x 20% $900000 x 70% September Sales $500000 x 20% Total Cash Collection 541000
Total 43000 432000
54000 420000 60000 180000 630000 654000 100000 790000
600000 810000 100000 1985000
Requirement 2: Accounts Receivable on September 30: From August Sales (900000 x 10%) =$90000 From September Sales (500000x 80%) = $400000 = $490000 Exercise: 9-7 Particulars Cash Balance Beginning Add collections Total Cash Available Less Disbursement Purchase of inventory Operating expense Equipment Purchase Dividends Total disbursement
Expenses ( Deficiency) cash available Financing: Borrowing Repayment Total financing Cash Balance Ending
Quarter 9 76 85 40 36 10 2 88 (3) 8(3+5) 8 5 5 90 95 58 42 8 2 110 (15) 20 20 5 5 125 130 36 54 8 2 100 30 (25) (25) 5 5 100 105 32 48 10 2 92 13 (7) (7) 6
Year 24 391 415 166 180 36 8 390 25 28 (32) (4) 21
then loan can not be repaid in full by June 30. cash collection Total cash collection Less cash disbursement Merchandising purchase Payroll Lease Payment Advertising Equipment Purchase Total cash Disbursement Excess/ Deficit Cash Financing Borrowing Repayments Interest Total financing Cash Balance ending April 26000 181000 207000 108000 9000 15000 70000 8000 10000 (3000) 30000 30000 27000
150000 8000 60000 225000 285000 50000 283000 50000 681200 198000
Months May 27000 217200 244200 120000 9000 15000 80000 ------224000 20200
June 30000 283000 313000 180000 8000 15000 60000 -------263000 50000 (30000) (1200) 31200 18800
Total 83000 681200 764200 408000 26000 45000 210000 8000 697000 67200 30000 (3000) (1200) (1200) 66000
Requirement: 03 If the company needs $20000 minimum cash balance to start each month. If the loan is repaid in full.
. the cash balance will drop only to $ 9000 on June 30 as shown above.Exercise: 9-14 Requirement: 01 Schedule of expected cash collection Particulars April From Accounts Receivable $141000 From Budget Sales: April Sales $200000 x 20% 40000 $200000 x 75% $200000 x 4% May Sales $300000 x 20% $300000 x 75% June Sales $250000 x 20% Total Cash Collection Requirement 2: Particulars Cash Balance Beginning Add. Some portion of loan will have to be carried over to July.
From June sales: $200000 x (70% + 10%) …. Total accounts receivable ……………………
$50000 160000 &210000
6..5.. May sales $500000 x 20% 70% …………… June sales $200000 x 20% Total cash collection April $23000 182000 60000 $26000 210000 100000 $30000 350000 40000 $265000 $336000 $420000 May June Total $ 23000 208000 300000 450000 40000 $1021000
2. Accounts receivable at June 30: From May sales: $500000 x 10% ………………. February sales: $230000 x 10% March sales: $2600000 70% 10% ………. June sales $300000 x 70% 3% From budgeted sales: July $400000 x 25% 70% . Schedule of expected cash collection: July From accounts receivable: May sales $250000 x 3 % …………. 70% September $320000 x 25% ……… Total cash collections …… 2.. 3% ………… August $600000 x 25%.. Problem 9-13
1. Add receipts: Collection from customers July $44500 317500 August $28000 439000 Month September $ 23000 512000 Quarter $44500 1268500 $ 7500 210000 $9000 Month August September Quarter $7500 219000
$12000 420000 80000 $512000
392000 570000 80000 $1268500
. April sales $300000 x 20% 70% 10% ……. Cash budget: Cash balance beginning ………. Exercise 9-5
as shown above . than the loan cannot be repaid in full by September 30. If the company needs$20000minium cash balance to start each month.
. 40000 Cash balancing ending $28000
467000 240000 50000 145000 9000 444000 23000 ----$23000
535000 350000 40000 80000 9000 479000 56000 -(40000) (12000) (41200) $14800
1313000 770000 135000 355000 27000 10000 1297000 16000 40000 (40000) (12000) (12000) $14800
3.Total cash available ……… 3621000 Less cash disbursements: Merchandise purchases 180000 Salaries and wages 45000 Advertising ………. 130000 Rent payments ……… 9000 Equipment purchases 10000 Total cash disbursements 374000 Excess (deficiency) of receipts over disbursement (12000) Financing: Borrowings ………………… 40000 Repayments ………………… -Interest ……………………. Some portion of the loan balance will have to be carried over to October. -Total financing ………. the cash balance will drop to only $14800 on September 30 . If the loan is repaid in full. at which time the cash inflow should be sufficient to complete repayment.
Therefore. Purchase of Raw Materials 3. Disposal of Fixed Assets Outflows 1. Cash sales of Inventories 2. The task of preparing cash budget is known as cash budgeting. It is an important technique of cash planning and control. Purposes of Cash Budget The main purpose of a cash budget is to determine the requirements of cash in advance for a particular period of time in order to smooth running of a firm. Collection of Accounts Receivables 3. cash disbursements and cash balances of a firm over specified period of time. To achieve the main purpose the following specific purposes should be considered : i) ii) iii) iv) To coordinate the timings of cash needs. Maintenance Expanses
Concepts of Cash Budget and Cash Budgeting Cash budget is a schedule of estimated cash receipts. subtract the disbursements from the receipts to determine net cash flows and then select that cash balance which maximizes the present value of the net cash flows. cash disbursements with various cash balances. Overhead Expenses 5. It should be determined in the light of the circumstances and requirements of a particular case. surplus or deficiency of a firm as it moves from one budgeting sub – period to another is highlighted by the cash budget. Such projection of cash receipts (cash inflows) and cash disbursements (cash outflows) is known as cash budgeting. Accounts Payable 2. ii) Selection of the factors that have a bearing on cash flows. The net cash position. Cash flows may be two types which are presented below: Operating Cash Flows: Inflows 1. To enable a firm having sufficient cash to take advantage of cash discount on its accounts payable To help arrange requisite funds on the most favorable terms and prevent the accumulation of excess funds. Elements of Cash Budget The following are the main elements of cash budgeting system: i) Selection of time period to be covered by the budget. It is known as planning horizon. To pin point the period(s) when there is likely to be excess cash. the financial management of a firm should project the future cash receipts. Payroll 4.
Interest Paid 5. Purchase of Raw Materials Months
. Disposal of Fixed Assets 4. Loans 5. Cash sales of Inventories 2. Cash Inflows 1. the final step is the preparation of cash budget. Dividend Receipts 5.1 presents the Format for a Cash Budget Particulars A. Interest Receipts 7. Tax Payments 2. Refund of tax B Cash Outflows 1. Collection of Accounts Receivables 3. Dividend Paid 6. Rent Paid Outflows
Preparation of Cash Budget and Format for a Cash Budget After the time span of the cash budget has been decided and the pertinent operating and financial cash flows have been identified. Repurchase of share 4. The flowing figure 14. Dividend Receipts 8. 6. Purchase of Fixed Assets Financial Cash Flows Inflows 1. Net cash flows which is determined by estimating the cash disbursements and cash receipts expected to be generated each period. 9. Sale of Securities 6. Rent Receipts. While preparing cash budget one has to consider the flowing main points: i) ii) Target or minimum cash balance which a firm desires to maintain in order to run its business smoothly.6. Loans 2. Repayment of Loan 3. Interest Receipts 4. Rent Receipts. Refund of tax 1. Accounts Payable 2. Sale of Securities 3.
Repayment of Loan 9. Payroll 4.B) D Beginning Cash Balance E… Ending Cash Balance F. Maintenance Expanses 6. Rent Paid C Net Cash Flows (A. ii) Scheduling of Receipts and Disbursements Method : Under this method. The following paragraphs follow discussion on each of the methods: i) Maintaining Target/Minimum Cash Balance: Under this method. the exceeding balance is called positive net cash flow. Surplus (deficit) Cash (E – F) Methods There are three methods of preparation of cash budget namely : i) Maintaining Target/Minimum Cash Balance. the firm desires to maintain a target or minimum cash balance in order to conduct its business without interruption. if the ending cash balance is lower than the target cash balance that shortfall amount is considered as deficit cash balance. On the other hand. As a result. Target/Minimum Cash Balance G. Tax Payments 8. if the net cash flows and the beginning cash balance together which comprise the ending cash balance exceeds the target cash balance. Whenever the total receipts exceed the total disbursement. Repurchase of share 10. Interest Paid 11. Overhead Expenses 5. both the target method and scheduling method are followed simultaneously. This method is regarded as the best one since it considers both the target and scheduling methods. Dividend Paid 12.
. iii) Combination of (i) and (ii) methods : Under this method.3. that exceeding amount is treated as surplus cash balance. ii) Scheduling of Receipts and Disbursement Method and iii) Combination of (i) and (ii). when total cash disbursement exceed the total receipts the exceeding balance is termed as negative cash flow which is unexpected for a firm. the net cash flow is determined by deducting total cash disbursements from total cash receipts. On the other hand. Purchase of Fixed Assets 7.
3. $63. 72.Problems and Solutions Unilever Ltd.080 5. wants to prepare a cash budget for the months of September through December.300 36.000.000. Cash Receipts/Inflows : Cash sale (10% of sales) 7.000.640 October 6. 11. A new equipment will be purchased in October for $2.900 31. Purchases are 60% of sales. November and December respectively.000 in June and $60.300.480 28.500 5.000.000 for the months of August.500 21.500 18.500 30% in the second month following 18.080 8. 8.000 loan payments are paid every month. 2.600 29.000 19.200 5. 15% of which are paid in cash. Monthly rent is $2.000 in July.720
. October. Cash Disbursements/Outflows 15% cash purchases (ii) 65% are paid one month later 20% are paid two months after 5. Sales were $50. Every 4 months 500 of dividends from investments are expected.500 payable in December.840 6.000 dividends are paid twice a year in March and September.200 Collections of Accounts Receivables(i) 50% in the 1st month following sales 32.040 21.000 + 5% of sales in each month.500 interest will be paid in November. $8. Sales have been forecasted to be $65. In the past. 5.500 6.000. Wages and salaries are $1. 30% in the second month and 10% in the third month following the sales.600 6. Solution Unilever Ltd.500 65.000 and $56.670 24. The first dividend payment was received in January.010 7.000 67. From the following information prepare the cash budget and state if the company will need to invest excess funds or borrow funds during these months : 1. The company would like to maintain a minimum cash balance of $10. $59.000. 12.000 500 63. 4. Taxes are paid $6.200 6. 6. 10% of sales were on cash basis and the collections were 50% in the first month. 10. September. 65% are paid 1 month later and the rest is paid 2 months after purchase. Cash Budget for the Months of September to December (In Dollar) Particulars September A. $1. 9.570 7. 7.900 7.000 sales 10% in the 3rd month following sales Cash Dividend (3rd Installment) Total Cash Receipts B.560 November December 5. $1.310 23.800 5. August’s ending cash balance is $3.200 61.
900 14.000 1.000 39.000 6. Beginning Cash Balance(iii) E. 2.000 4.000 53. How do you prepare a cash budget? Review Problem Problem – 1 Consider the balance sheet of Beximco Textile Ltd. $43.300 49.400 3.300 1. Notes : (i) a.890
The company will need to invest surplus funds during October. it has to forecasts its cash requirements for January.e. (ii) Total purchases for September.000 4. But it will need to borrow fund during September in order to meet its deficit cash.500 1.800.540 7. 50% are collected from August’s sale and so on for other months. What are the methods of preparation of cash budget? Explain in detail. February and March.940
2.000 2.260 20.590 10. October November and December are 60% of the sales of the respective months i. The company has received a large order and anticipates the need to go to its Bank to increase its borrowing.500 1. Define cash budget and cash budgeting.400 and 33. (iii) August’s ending cash balance is the beginning balance for September and so on for other months Review Questions Short Questions 1.000 7.000 2.650 27.890 10.940 49. In September 30% are collected from July’s sales and so on for other months. In September.600 58. 3.600)
2.000 1. 37. November and December.000 17.200. c. Minimum Cash Balance G. As a result.400 10. Broad Questions 1.850 21. Discuss the elements of cash budget.Dividend payment Rent Taxes Purchase of Equipment Interest Loan repayment Wages and Salaries Total Cash Disbursement C. 3.800 46. 35. Surplus (Deficit) Cash (E.400 27. Ending Cash Balance F. In September 10% are collected from June’s sales and so on for other months. 2.150 47. 4. b.F) Summary :
8. The company collects 20% of its sales in
.B) D. What are the purposes of cash budget? Explain.800 4.000 (2. Net Cash Flows (A .600.590 63.950 43.000 3..940 10. Show the format for a cash budget.000 3. Describe the main elements of cash budget.590
50. December 600. April 750. 2.000 par month. All sales are on credit. b) Determine the amount of additional bank borrowings necessary to maintain a minimum cash balance of 50.00.
. Payments for these purchases occur in the month after the purchase.000 taka.000. February and March. Other expenses are expected to be 1.000 in January. Required : a) Preparation of cash budget for the month of January. March 650. 50 530 545 1836 2961 Accounts Payable Bank Loan Accruals Long – term debt Common Stock Retained Earnings Tk. 360 400 212 450 100 1439
Total 2961 Purchases of raw materials are made in the month prior to the sale an amount to 60% of sales in subsequent month. 70% in subsequent month and 10% in the second month after sale.the month of sale. February 1. Labor costs are expected to be 1. January 600.000 in March. (in ‘000) Cash Accounts Receivable Inventories Net Fixed Assets Total Tk. Actual sale are as follows (in ’000): November 500.000 in February and 1.00.60.
Historical cost (past cost) has no direct bearing on a decision.Chapter -7
Relevant Costing 01. the salary is irrelevant to the selection of products.
. Costs of new machine are relevant. So. Such definition indicates that opportunity cost in not the usual outlay cost recorded in Accounting. is a prediction of future & not a summary of the past. consider cost of direct material which will remain same regardless of material used .
02. Avoidable & Unavoidable costs
Avoidable costs. (Incremental costs ) The difference in total cost between two alternatives known as D. Again. Because a decision can not affect past data.I.So labor cost is irrelevant. Combination of I&R. As example.20 $. these costs are not relevant. Gain or loss on disposal.
04.Concepts of Relevant Information (RI)
The predicted future costs & revenues will differ among alternative courses of actions Note that R. For instance. Decision always affects the expected future data. outlay & differential costs .
03.30 Difference . Salary forgone by a person who quits a job to start a new business Differential costs .Make or Buy or Replacement or Not decision
b) Opportunity . Unavoidable costs.10
Here. Book value of old machine is irrelevant. Avoidable costs include departmental salaries & other costs that could be eliminated by not operating specific dept.Any item that will remain the same regardless of the alternative selected in irrelevant. Costs that continue even if an operation is halted are not relevant because they are not affected by a decision to delete the dept.C
c) Make or Buy Decision. if a departmental manager’s salary will be the same regardless of the products stocked or not. Cost that will not continue if an ongoing operating is changed for deleted are relevant. the relevant cost is the expected future cost of copper compared with expected future cost of aluminum. What quantitative factors are relevant to such a decision? A key factor is whether there are idle facilities or not.They apply relevant cost analysis to such a decision . The key to make or Buy Decision is identifying the additional costs for making (or costs avoided by buying) d) Replacement or not of old machine .C or I. Aluminum Copper Direct Materials $. Depreciation is also irrelevant. Companies often must decide whether to make a product or service or Buy it from outside supplies .Example
Cost of direct material of an ashtray goes as follow. Disposal value is relevant. An opportunity cost is the maximum available contribution to profit forgone by using limited resources for a particular purpose. only those that will differ from alternative to alternative are relevant to the decision .
O/H-traceable 2 Total cost 17 20 So.50
Costs of 20000 units Make Bye 470000 96000 140000 64000 80000 380000
The remaining $6 fixed manufacturing overheads would not be relevant. Analysis of Make or Buy Decision: Per unit differential cost Particulars Make Bye Cost of Buying 23. Exercise: 13-10 1.80 Direct Labor 7. Analysis of Make or Buy Decision: Particular s Cost of Buying ( As above) Cost of Making ( as above) Segment Margin foregone on new product ( Opportunity cost) Make 255000 65000 320000
Costs of 15000 units Make Bye 300000 90000 120000 15000 30000 255000
So. should accept the offer & Purchase from outside suppliers. outside suppliers offer is not accepted. O/H-traceable 4.00 Total cost 19. The $ 150000 rental value of the space being used to produce part R-# represent an opportunity cost of continuing to produce internally.50 Cost of Making Direct Materials 4.20 Fixed M. Difference is favor of making $ 3 Comment: No.00 23. Thus complete analysis goes as follows: Particular s Cost of Buying ( As above) Cost of Making ( as above) Segment Margin foregone on new product ( Opportunity cost) Make 380000 150000 Bye 470000
. since it would continue even if the specific part were purchased.Exercise: 13-4 1. 2. Analysis of Make or Buy Decision: Per unit differential cost Particulars Make Bye Cost of Buying 20 Cost of Making Direct Materials 6 Direct Labor 8 Variable M O/H 1 Fixed M.00 Variable M O/H 3. Difference in favor of Buying from outside Suppliers Comment: Thus the Co.
Comment: Thus the Co. Exercise.Total cost
530000 Net Advantage in favor of Buying
470000 60. Keep product Drop product Difference net income Line Line increase or decrease …DR850000 DR 0 DR (850000) 330000 42000 18000 390000 460000 270000 80000 105000 32000 8000 45000 540000 DR (80000) 0 0 0 0 0 0 80000 105000 0 0 45000 230000 DR (230000) 330000 42000 18000 390000 (4600000)… 270000 0 0 32000 8000 0 310000 DR (150000)
Sales Less variable expenses. should accept the offer & bye from the outside suppliers. Contribution margin lost if the line is dropped Fixed cost that can be avoided if the line is dropped. Variable manufacturing expenses Sates commission Shipping Total variable expenses Contribution margin … Less fixed expenses.
05. Advertising Deprecation of equipment General factor overhead Salary of product line manager Insurance on inventories Purchasing department expenses Total fixed expenses Net loss
No the bilge pump product line should not be discontinue. Advertising …………………………… DR270000 Salary of the product line manager ……… 32000 Insurance of inventories …………. The computations are. 8000 Net disadvantage of dropping the line ……… DR (460000)
310000 DR (150000)
The same solution can be obtained by preparing comparative income statement.
segment margin foregone on a potential new product line 150000 Total cost ……………….. Per unit Differential cost 30000 units Make Buy Make Buy Cost of purchasing …………… $21. 2.00 $630000 Cost of making. $ 19. Direct materials ………………. The costs that are relevant in a make or buy decision are those costs that can be avoided as a result of purchasing from the outside. Based on this data. per unit differential cost Make Buy $35 $14 10 3 2 $29 $35 $6 15000 units Make Buy $525000 $210000 150000 45000 30000 $435000 $525000 $90000
Cost of purchasing …………… Direct materials ………………. The remaining book value of the special equipment is a sunk cost.
Make Buy Cost of purchasing (part-1) …………… $525000 Cost of making (part -1) …………….00 $570000 $630000
. $3.. hence the $4 per unit depreciation expense is not relevant to this decision..
1. .00 $21...40 72000 Fixed O/H ………………… 3.. Direct labor ……………….60 $108000 Direct labor ………………. The analysis for this exercise is. $585000 $525000 Difference in favor of purchasing from the outside supplier ……………….06.. $435000 Opportunity cost. $60000 Thus the company should accept the offer and purchase the parts from the outside supplier. the company should reject the offer and should continue to produce the parts internally.00 300000 Variable overhead 2. Variable manufacturing overhead Fixed manufacturing O/H traceable Fixed manufacturing O/H common Total costs Difference in favor of continuing to make the parts ………………
Only the supervisory salaries can be avoided if the parts are purchased.00 90000 Total costs ……………. 10.Exercise.
.. Make $570000 80000 $650000 $20000 Buy $630000 $630000
Keep the Drop the Difference net flight flight income Increases or decreases
Ticket revenue ..................................... Thus............... Total flight expenses .. Less Variable expenses ...............................The remaining $6 of fixed overhead cost would not be relevant.............................. Fuel for air craft ................. Liability insurance ..................... Rental value of the space (opportunity cost) Total cost including opportunity cost Net advantage in favor of buying ....... Net loss ...... Flight promotion ...................................... Overnight cost for flight crew ............. 07.......................... Baggage loading . flight assistance ....... Depreciation of aircraft . The $ 80000 rental value of the space being used to produce part s-6 represents an opportunity cost of continuing to produce the internally..................................... Salaries..... Exercise.......... $14000 1050 12950 1800 750 1550 6800 4200 500 1700 300 17600 $(4650) $0 0 0 $(14000) 1050 (12950) 0 750 0 6800 1400 500 0 300 9750 $(3200)
1800 0 1550 0 2800 0 1700 0 7850 $(7850)
........................ Since it will continue regardless of whether the company makes or buy the parts.... the completed analysis would be Total cost as above ..................... Contribution margin .......................................... flight crew ......................... Less flight expenses Salaries..........
. if variance is U. Material price variance (MPV) = It is difference between price to be paid for materials and actual price. Whenever. Direct material cost (DMC).
Types of Variance: Based on three elements of costs. & Overheads costs.e. Material Variance: They are known as Material Cost variance (MCV). Direct Labor costs. Hence standard in relation to costs refers to benchmark or predetermined costs of production. The control process involves comparison of actual costs with standard costs. Material Usage Variance (MUV) = It is difference of actual usage of materials and the standard usage Labor Variance: They are known as Labor Cost variance (LCV). the variance is called as favorable (F). actual cost are higher than the standard costs.Chapter -8
Standard costing &Variance Analysis Concepts Standard refers to benchmark or predetermined. MCV is the difference between standard cost of the materials that should have been incurred and the cost of materials that has been actually incurred. if actual costs are lower than the standard costs. then necessary corrective action needs to be undertaken. So variance related to Cost of Production is the difference between Standard costs & Actual costs. budgeted Direct material cost. After comparison. Determination of standard costs is known as Standard Costing. direct labor cost (DLC) and overhead costs (O/H C). On the other hand. It is divided into 2 sub variances. It is divided into 2 sub variances. the variance is called Unfavorable (U). LCV is the difference between standard labor cost and actual labor cost. As for example. Variance refers to the difference between Standard & Actual. the cost variances are classified into three types. Purpose of Standard Costing & Variance Analysis The main purpose of Standard Costing & Variance Analysis is to control costs of production of the various elements of cost i. Standard costs are determined on the basis of budgeted costs.
Labor Rate Variance (LRV) = It is difference between standard wages rate and actual wages rate. In June the materials purchased were used with the following results.e Variable Overhead Variance & Fixed Variance. i. It is two types i.00 4.00 5. Determination of Variances (Formulas Used) Material Cost Variance (MCV) = Total Standard Costs (TSC) – Total actual costs (TAC) Material Price Variance (MPV) = (Standard Price – Actual Price) Actual Quantity Material Usage Variances (MUV) = (Standard Quantity – Actual Quantity) Standard Price Labor Cost Variance (LCV) = Total Standard Costs (TSC) – Total Actual Costs (TAC) Labor Rate Variance (LRtV) = (Standard Rate – Actual Rate) Actual Hour Labor Usage / Efficiency Variance (LUV/LEU) = (Standard Hour – Actual Hour) Standard Rate.50per hr) Variable overheads (Tk 2 per DL hr) Total Taka 4.00 13. The firm bought direct materials for Tk 1.00
In May 1990 the production manager receives a very favorable report from the purchase dept. Budgeted production 8000 units Actual production 7200units Direct labor (16200 hrs) Tk 40000 Variable Overhead Tk 33000 Materials used 1 15840 kg
. Labor Efficiency / Usage Variances (LEV / LUV) = It is difference actual efficiency of labor and the standard efficiency of labor. Problem: A firm makes a product with the following standards Particulars Direct Materials (2kg @ Tk 2 per kg) Direct Labor (2 hr @ 2. Overhear Variance: They are known as Overhead Cost variance (OHCV). OHCV is the difference between standard overhead cost and actual overhead cost.50 per kg.
Material Usage Variance = (Standard Quantity – Actual Quantity) × Standard Rate = [(7200 × 2kg) .50 = Tk4500 (U) Standard Hour = (7200units × 2hrs) = 14400hrs
.L Rate Variance = (Standard wage rate – Actual wage rate) × Actual hour = (Tk2.469) × 16200 = Tk500 (F) Actual wage rate = tk 40000/16200=2. Material Cost Variance = [Total Standard Material Cost .50) = Tk 28800 –Tk 23760 = Tk 5040 ( F ) Computation of relevance variable: Direct Material variance: Confirmation: Direct Material Cost Variance = Direct Material Price Variance + Direct Material Usage Variance Solution Computation of relevance variable: Direct Labor Variance: D.Required: A.469 tk Labor Efficiency Usage Variance =(Standard hour – Actual Hour) × Standard wage rate = (14400 . Prepare the Variance report showing the probable reasons for the Variance.15840] ×Tk2 = Tk2880 (U) 3.16200) × 2.50 – Tk2. Determine the relevance Materials and labor Variance.Total Actual Material cost] = (14400 × 2) – (15840 × 1.50) × 15840 = Tk7920 ( F ) 2. B. Solution Computation of relevant variances: Direct Material variance: 1. Material Price Variance =(Standard Rate – Actual Rate) ×Actual Quantity = (Tk2 – Tk1.
(RM7.60per kg Material quantity variance = SP (AQ – SQ) RM8 per kg.35per lb -$2. RM168000 Actual cost incurred (given) RM171000 Total standard cost (above) 168000 Total material variance – unfavorable RM 3000 2.Labor cost Variance = (Total Standard labor Cost – Total Actual labor Cost) = (14400 × 2.6 Total standard kilograms allowed … 21000 Standard cost per kilograms ……… x RM8 Total standard cost ……………….50 per lb) =$3000 F Material quantity variance = SP (AQ – SQ) $2. 35000 Standard kilograms of plastic per helmet x 0. ($2.00 per kg) = RM9000 F RM171000/22500kgs = RM7.Number of helmets …………….50) – Tk40000 = Tk4000 (U) Nature of Main Reason Types of Variances Responsibility
Material cost variance Material Price variance Material usage variance Labor cost variance Labor Rate variance Labor Efficiency Variance
Variance F F U U F U
Lower Actual Material Price Lower Actual Material Price High Material use High actual use Lower labor/ wage rate Higher actual hours
Purchase Manager Purchase Manager Production Manager Production Manager Production Manager Production Manager
Solution Computation of Relevance Variable: Direct Labor Variance: Confirmation: Labor cost Variance = Direct Labor Rate Variance + Labor Efficiency usage Variance Exercise:1 1.Material price variance = AQ (AP -SP) 22500kgs. (22500kgs – 21000 kgs) = RM 12000 U Exercise-2 Material price variance = AQ (AP -SP) 20000lbs.60 per kg – RM8.50per lb (20000lbs – 18400 lbs) = $4000U
00 per hr) = $ 1150 F $21850/5750 hrs = $3.00 per hr (5750 hrs – 6000 hrs) = $ 1000 F
01.00per hour) = $1425 U 10425/750hrs = $13.$12. 72000 Total variance – unfavorable $ 1600 Actual hours of input Actual hours of input Standard hours allowed at the Actual Rate at the standard rate for output at the standard rate (AH x AR) (AH x SR) (SH x SR) $73600 5750 hrs x1200 per 6000hrs x $12000 hr = $69000 per hr = $72000 Exercise-5 Variable overhead spending variance = AH (AR – SR) 5750 hrs ($3.$4.Exercise-3 Labor rate variance = AH (AR . Number of helmets
…………….3 hours Actual direct labor cost ………………….90per hour .3 Total standard hours of labor time allowed 6000 Standard direct labor rate per hour x $12 Total standard direct labor cost $72000 18 minutes /60 minutes per hour = 0. $73600 Standard direct labor cost …………….80 per hr . Standard kilograms of plastic per helmet Total standard kilograms allowed … Standard cost per kilograms ……… Total standard cost ……………….80 per hr Variable overhead efficiency variance = (AR –SR) $4.
35000 x 0.SR) 750hrs ($13. Exercise
1.90 per hour Labor efficiency variance = SR (AH-SH) $1200per hour (750 hrs – 800 hrs) = $600F Exercise-4 Number of units manufactured ……… 20000 Standard labor time per unit …………… x 0.6 21000 x RM8 RM168000
$12.50per lb (20000lbs – 18400 lbs) = $4000U
Material price variance = AQ (AP -SP) 20000lbs.SR) 750hrs ($13. (RM7.00per hour) = $1425 U 10425/750hrs = $13.
Number of unites manufacturer ……… 20000
. Exercise. Material price variance = AQ (AP -SP)
RM171000 168000 RM 3000
22500kgs.50 per lb) =$3000 F Material quantity variance = SP (AQ – SQ $2.90per hour .Actual cost incurred (given) Total standard cost (above) Total material variance – unfavorable 2. (22500kgs – 21000 kgs) = RM 12000 U
02.90 per hour Labor efficiency variance = SR (AH-SH) $1200per hour (750 hrs – 800 hrs) = $600F
04.35per lb -$2.00 per kg) = RM9000 F RM171000/ 22500kgs = RM7. ($2.60per kg Material quantity variance = SP (AQ – SQ) RM8 per kg. Exercise.60 per kg – RM8.
Labor rate variance = AH (AR . Exercise.
Variable overhead spending variance = AH (AR – SR) 5750 hrs ($3. Standard direct labor cost …………….80 per hr .$4. Total variance – unfavorable 2.3 6000 x $12 $72000
$73600 72000 $ 1600
Actual hours of input Standard hours allowed at the standard rate for output at the standard rate (AH x SR) (SH x SR) 5750 hrs x1200 per 6000hrs x $12000 hr = $69000 per hr = $72000
05.00 per hr (5750 hrs – 6000 hrs) = $ 1000 F
. Actual hours of input at the Actual Rate (AH x AR) $73600
x 0. Exercise.3 hours Actual direct labor cost ………………….00 per hr) = $ 1150 F $21850/5750 hrs = $3.Standard labor time per unit …………… Total standard hours of labor time allowed Standard direct labor rate per hour Total standard direct labor cost 18 minutes /60 minutes per hour = 0.80 per hr Variable overhead efficiency variance = (AR –SR) $4.
2 60.Chapter -9
Concept: Cost Center: A cost center is a business segment whose manager has control over costs but not over revenue or in investment fund. As for example. Total Co. Investment Center: An investment center is any segment of an organization whose manager has control over cost. Prime cost center. may be product segment. overhead cost center etc. Segmented Financial Statement: Those Financial Statements which are prepared segment wise of an organization.8 51. revenue and investments in operating assets.3
400000 208000 192000 240000
100 52 48 60
600000 180000 420000 330000
100 30 70 55
500000 200000 300000 200000
100 40 60 40
. cost f sales enter. segmented balance sheet etc. Cost centers. Return on Investment (ROI): ROI can be found out as follows:
Computation of ROI= Margin = X Turnover X Sales Average Operating Assets Net operating Income Sales
Residual Income (RI): RI is the excess of net operating income over minimum required return on operating assets: Segmented Income Statement
Exercise: 12-5 01. revenue or investment funds. market segment etc. $ % Sales Less Variable Expense CM Less: Traceable fixed Expense
1500000 588000 912000 770000 100 39. Segmented Income statement. As for example. As for example. profit centers and investment centers are all known as responsibility center. net profit center etc. Production cost center. gross profit center. As for example. a profit center is any business segment whose manager has control over both cost and revenue. Such segment. Fixed asset investment center and current asset investment center Responsibility Center: Responsibility Center is broadly defined as any part of an organization whose manager has control over cost. Profit Center: In contrast to a cost center.
09 X =18% Western Division: 105000 1750000 = .5 (11.2)
02. This is so because of higher ROI of Western Division 21% than that of Eastern Division 18%. Incremental Sales (600000 x 0.07 X X 3
. Exercise: 12-9 01.5 X 2
02. Computation of ROI= Margin X X Turnover Sales Average Operating Assets
Net operating Income Sales Perth Division: = 630000 900000 . (not Traceable) (945000-770000) Net loss
9. Completion of ROI= Margin X X Turnover Sales Average Operating Income
Net operating Income Sales Eastern Division: 90000 1000000 = .15) CM Ratio Incremental CM Less: Advertising Incremental NOI
$90000 70% 63000 25000 $38000
Yes the increased advertising program is recommended since it would lead to an incremental Net operating Income of $ 38000 Exercise: 12-7 01.Segment Margin Less: Common F. it can be said that Western Division Manager is doing better job as compared to DM of Eastern.06 =21% X X 3.7)
(2.E. From the data available.
Exercise.09 X = 18% 02.000 6. (15000) (1.000 18.= Darwin Division:
1800000 20000000 = .0 Contribution margin …… 610000 61 Less traceable fixed expenses 535000 53.5 Less common fixed expenses not traceable to divisions 90000 9.0 Net income (loss) ……….. Total company Sales ………………….30. $70000 x 60% 42000 15000 $27000
.00. Incremental sales ($3500000 x 20%) Contribution margin ratio Incremental contribution margin ………….5 Divisional segment margin 75000 7.. 12-5
1. Yes. $1000000 100% Less variable expenses 390000 39.00.5) East Central $250000 100% $400000 100% 130000 52 120000 30 120000 48 280000 70 160000 64 200000 50 $(40000) (16%) $80000 20% West $350000 100% 140000 40 210000 60 175000 50 $35000 10%
$6 25000-$ 535000 = $90000 2.000 (480000) 150000
Darwin Division 1.
01. Less incremental advertising expenses ……… Incremental net income ………………….000 (1600000) 200000
03. The Darwin Division is simply larger than the Perth Division in terms of operating asset & for this reason one would expect that it would have a greater amount of residual income.00. the advertising program should be initiated. No. Computation of Residual Income: Average Operating Asset Average Operating Asset (a) Net Operating Income Minimum Required Return on operating Asset 16% on (a) Residual Income
Perth Division 30.00.
5% = 21%
1. Exercise. The greater turnover more than offsets the lower margin. 1.25% =18% 2.
04. Although his margin of the Queensland division. Osaka Yokohama
. ROI computation.5 as compared to a turnover of two for the Queensland division). resulting in a 21%ROI as compared to an 18% ROI for the other division.02. Exercise. ROI = Margin x Turnover = Net operating income x Sales sales average operating assets
Queensland division = $360000 x $7000000 $4000000 $2000000 = 6% x 3. The manager of the New South Wales division seems to be doing doing job. His turn over is higher (a turn over of 3. ROI = Margin x Turnover = Net operating income x Sales Osaka division sales average operating assets
= $210000 x $3000000 $3000000 $1000000 = 7% x 3% = 21% Yokohama division = $720000 x $9000000 $9000000 $4000000 = 8% x 2.
15% x (a) 150000 Residual income …… $60000
$4000000 $720000 600000 $120000
3. Exercise.2% x5% =16% 2. Average operating assets Required rate of return Required operating income Actual operating income Asia Europe $3000000 $7000000 x 14% x 10% $420000 $700000 $600000 $560000 North America $5000000 x 16% $800000 $800000
.Average operating assets $1000000 Net operating income $210000 Minimum required return on average operating assets.
05. No. the Yokohama division is simply larger than the Osaka division
and for this reason one would expect that it would have a grater amount of residual income.12-16
1. ROI = Margin x Turnover = Net operating income x sales Sales average operating assets Asia = $600000 x $12000000 $12000000 $3000000 = 5% x 4% = 20% Europe = $560000 x $14000000 $14000000 $7000000 = 4% x 2% =8% North America = $800000 x $25000000 $25000000 $5000000 = 3.
Required operating income Residual income
420000 $ 180000
700000 $ (140000)
800000 $ 0
sales. Productivity refers to production / output in relation input . financial & non financial.12%
b) Return on investment = c) Return to Equity =
Net Profit x 100 = 13%. Performance refers to job or activities & measurement refers to evaluation or assessment.Chapter -10
01. Types of measurement. b) Non financial performance refers to refer to performance which is subject to qualitative measurement only. is meant evaluation or assessment of job of an organization. managers efficiency. 02. 03. Types of performances. profit / loss. Profitability measurement. As for example. Is known as productivity. performance of an organization.labor (hours &costs)etc . purchase etc.M.15% Equity d) Return on Capital Employed = Net Profit x 100 = 15%-16% Capital Employed
B) Productivity Measurement. So by P. A. that is production / output divided by input like raw materials ( units &costs ). quality of product.
.6% = 10%. Performances are of 2 types namely. As for example. a) Financial performance refers to performance which is subject to measurement financially or quantitatively.
a) Profit margin = Ratios Net Profit x Sales Net Profit x Investment 100 100 Standard Norm = 5%. Concepts.
4 1525000 =1.Measures of productivity.92-2.P = 1394000 X 1.83 = 139.8-39)page 325 &326 Solution. = Sales Revenue X Rate of Inflation Direct labor cost = 1394000 X 1. = 3. = 1.53 times For 19 X 7 = Sales Revenue X Inflation Pounds of L.P = 720000 1360000 =0. Labor productivity in terms of financial measures For 19 X 4 = Sales Revenue Direct labor cost = 720000 316000 = 2.28 = 71.4 498000 =3.92 Comparison.6%(increase) 2. of units Cost of sales Total Machine Hours
04. of good Units Sales revenue Sales revenue Possible Inputs Actual Labor Hours Cost of raw materials Raw materials in units Raw materials cost Raw materials in units Total No.28 times For 19 X 7. 1.53 X 100 0. Resources Labor Possible outputs Standard Labor Hours Value of output Output in Units Sales Revenue Output in Units No. Labor productivity in terms of physical measures For 19 X 4 = Sales Revenue Pounds of L.9%(increase)
.27 times Comparison.28 X 100 2.Practicle Problem (P.27-0.
in other word it is a measure over time comparing the performance of this year with previous year which shows the improvement achieved by the organization and reflect the return of resources employed. It’s measurement can stimulate operational improvement. Productivity refers to a comparison between the output and input.
= Sales Revenue X Rate of Inflation Direct labor Hours = 1394000 X 1. These are also useful in inter. pointing to bottle –necks and barriers to performance.
Comparison.96 X100 15.83 times = 41. Productivity indices help to indices help to establish realistic targets and checkpoints for diagnostic activities during an organization development process. installation and operation of a measurement system can improve labor productivity.taking all these productivity concepts into consideration total productivity may be defined as the ratio of the value of total output/ value added to the value of all input factors.96 times
For 19 X 7.3. In enterprises productivity is measured to help analyzing effectiveness and efficiency.Productivity defined .
. More specifically it is the ratio between input and output. In order to measure productivity output/ value added can be compared with capital or with labor or with all the input factors taken together. sometimes by 5 to 10 percent with no other organizational change or investment.4 46600 =41. the very announcement.09% (Increase)
05. The comparison between the labor and the value of output/ value added is labor productivity and the comparison between capital and the value of output/ value added is capital productivity . wages levels and gain – sharing policies without a sound analysis system . Furthermore there can be no improvement in industrial relations or proper correspondences between productivity.83 – 15. Productivity analysis is important for productivity improvement. productivity measures in terms of Direct Labor Hours .country and inter-firm comparisons. For 19 X 4 = Sales Revenue Direct labor Hours = 720000 45100
= 15.96 = 162.
g) System approach based models. c) Production based models. Before selecting any model one should go through the model to see whether the model fulfils the following characteristics for a sound productivity measurement model. d) Product – oriented models. 07. b) Financial ratios as measurement of productivity. Models and techniques of productivity analysis. # To isolate problem areas and identify priority areas for improvement. change in cost per unit of output and change in performance index numbers.06. • It should breakdown change in profit to reflect the contribution from each recourse use in production (labor. It is a systematic assessment of the company’s profitability and productivity performance. • It should transform the above measures of change in profit into corresponding measures of change in profitability.. The following major categorization of models is possible in on the basis of approaches or concepts on which they have been constructed. • It should be consistence signals for profit improvement regardless of the units in which the measure in express. a) Production function models. Each of the above models has its merits when seen in the proper perspective.
. The purpose of this approach is two fold.energy) • It should broken-down the contribution to profit change from each resource into productivity terms and a price recovery term.quality). e) Surrogate models. f) Economic utility models. # To establish productivity indicators for the whole organization. There are many models of productivity measurement and analysis in enterprises. QPA consists of the three components. a) Company performance appraisal (CPA) b) Qualitative assessment. profit .materials . • It should provide simple and unambiguous signals to improve performs (productivity . But there is no single universal model for productivity measurement and analysis. c) Inter-firm comparison. Quick Productivity Appraisal (QPA) Approach. capital .
labor productivity shows how well the labor force has been used and capital productivity evaluation shows how well available capital is allocated and managed . primary productivity ratio is to be calculated. It is one of the best measurements of evaluating of overall performance of an enterprise. Considering the relationships among 3ps (Productivity. For this purpose it is important to look into the secondary producitivity ratios too. Therefore it is necessary to segregate profitability into productivity and price recovery. Qualitative assessment can be done by evaluating profitability and productivity trends.
08. Profitability refers to profit earning capacity of an enterprise. Trends in producitivity: The economic performance of the company is discussed in this section with the help of productivity. the approach suggests a flow of company performance. performance . generally the trend exhibited by total producitivity indicates the overall performance of the company . But primary ratios are not enough to identify the priority area for improvement. Profitability may be changed due to productivity or price cost movement. Profitability and Price recovery) profitability is defined as the product of productivity and price recovery. Qualitative Assessment. But measurement of productivity alone cannot identify the causes of productivity changes.CPA. It is an exchange of information regarding costs. Productivity and Profitability Relationship. In order to get the picture of above productivity performance. The following demonstrates this relationship: Output Value Profitability Input Value Where: = Output Quantity = Productivity = Quantity Used x Unit Price x Price Recovery x Unit Cost
Profitability = Output Value Input Value Productivity = Output Quantity Quantity Used Price Recovery = Unit Price Unit Cost 09. Inter-firm comparison . efficiency and other relevant data between firms engaged in similar activities .
strengthen market strategy. market research.In the long run low productivity will eat up profits. advertising and pricing policy. Shut down / bankruptcy.Productivity Analysis Chart
Primary Ratios Total Productivity Labor Productivity 1) Value added Total working-hours worked 2) Value added Number of workers 3) Value added Salaries/Wages Value added Labor + capital Capital Productivity
Value added Value added Total assets Fixed assets
Secondary Producitivity Ratios
Value added Direct/salaries &wages Value added Value added Indirect salaries Inventory &wages Machinery Value added Accounts receivable Value added Value added Plant & Machinery Building construction
10. Productivity / Profitability Relationship: IF
Case 1 2 Profitability HIGH HIGH Productivity LOW LOW What will happen Financial condition will be sound and stable High profitability may not be sustained on a longterm basis .
What should be done Maintain or increase productivity further Improve productivity
Improve profitability. The company may soon be operating at a loss and may be on the bring of a shut down. Improve productivity and strengthen market.
. market promotion.
Adapt available manpower to machines.
Poor productivity performance Satisfactory productivity performance Unfavorable productivity performance Poor productivity performance
6 7 8
/ \ \
\ / \
\ \ \
. b) Retraining displaced labor for other jobs. First increase capital productivity . and then increase capital productivity.Capital / Labor Relationship: THEN IF
Case 1 2 3 4 Labor productivity / / / \ Capital productivity / / \ / C/L ratios / \ / / What happens Good productivity performance Good productivity performance Unfavorable productivity performance Satisfactory productivity performance What should be done Maintain or increase productivity further Maintain or increase productivity further Increase capital productivity Increase labor productivity by a) developing identifying other jobs for displaced labor. Increase capital productivity Increase labor productivity First increase labor productivity.11.