Accounting for Managers

UNIT 1  Shareholders
Accounting Process  Management
The process of accounting involves  Potential Investors
recording classifying and summarizing of  Creditors
past events and transactions of financial  Government
nature, with a view to enabling the user of  Employees
accounts to interpret the resulting  Researchers
summary.  Citizens
Definition of Accounting Accounting Concepts
Accounting has been defined by the  Business Entity Concept
American accounting association  Going Concern Concept
committee as: “Accounting is the art of  Money Measurement Concept
recording, classifying and summarizing, in  Cost Concept
a significant manner and in terms of  Dual Aspect Concept (Double
money, transactions and events which are, Entry System)
in part at least, of a financial character and  Accounting Period Concept
interpreting the results”.
 Periodic Matching of Costs and
Functions of accounting are: Revenues
 Maintaining Systematic Records
 Realization Concept
 Communicating the Financial
Results Accounting Conventions
 Meeting Legal Requirements  Convention of Conservatism
 Protecting Business Assets  Convention Of Full Disclosure
 Assistance to Management  Convention Of Consistency
Advantages of Accounting  Convention Of Materiality
 Complete and Systematic Record Accounting Equation
 Determination of Selling Price Meaning of an Accounting Equation
 Valuation of the Business An Accounting Equation is a
 Helps in Raising Loan mathematical expression which shows that
 Evidence in Court of Law the assets and liabilities of a firm are
 In Compliance of Law equal.
 Inter-Firm or Intra-Firm The claims, also known as equities. are of
Comparison two types:
 Facilitates Audit 1. Owner's equity or capital, and
2. Outsiders Equity (Liabilities or
 Effective Management
amounts due to outsiders).
Limitations of accounting
We can express Accounting Equation as
 Accounting policies
follows:
 Estimates a) Assets = Liabilities + Capital
 Professional judgment or
 Verifiability b) Liabilities = Assets – Capital
 Using historical costing or
 Measurability c) Capital = Assets – Liabilities
 Predictive value Accounting Cycle
 Fraud & Errors Accounting Cycle 9 steps are-
 Cost benefit compromises 1. Analyze
Users of accounting information 2. Journalize

RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 1

 Accounting for Managers

3. Post A Business Transaction 5. Accounting is an information

4. Unadjusted Trial Balance system
5. Adjusting
Journal
6. Preparing
Definition and Explanation of Journal:
7. Preparing Financial Statements
8. Closing the account The word journal has been derived from
9. Post-Closing Trial Balance the French word "Jour" Jour means day.
So, journal means daily. Transactions are
9 recorded daily in journal and hence it has
8 1
named so. This book is known as journal.
7 Acco
untin 2
g Journal has the following features:
Cycle

6 3 1. Double entry system

5 4 2. Day book
3. Chronological book
4. Assistant to ledger
Classification of Accounts 5. Subsidiary book
Classification of Accounts 6. Narration is written below each
entry
Advantages of Journal: The following
are the advantages of journal:
1. Each transaction is recorded
2. No possibility of any transaction
being omitted.
3. Recorded in journal
chronologically with narration.
4. It can be easily ascertained.
5. No possibility of committing any
mistake in writing the ledger.
1. Personal Accounts 6. As a result ledger is kept tidy and
A. Representative Person’s Personal brief.
Account 7. Journal shows the complete story
B. Artificial Person’s Personal of a transaction in one entry.
Account Format of Journal:
C. Natural Person’s Personal Account Dat Particulars L. Amoun Amoun
2. Real Accounts e F t t
A. Tangible Real Account Account to be XXX
debited XXX
B. Intangible Real Account .............................Dr
3. Nominal Accounts .
Nature of accounting Account to be
credited
1. Accounting is a process (Narration)
2. Accounting is an art
3. Accounting is means and not an Ledger
Definition and Explanation of Ledger:
end:
The book in which accounts are
4. Deals with financial information
maintained is called ledger. Generally, one
and transactions
account is opened on each page of this

RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 2

 Accounting for Managers
book, but if transactions relating to a
particular account are numerous, it may
extend to more than one page. All
transactions relating to that account are
recorded chronologically.
Characteristics of Ledger Account:
The ledger has the following main
characteristics:
 It has two identical sides
 Debit aspect
 Credit aspects
 The difference of the totals
 Debit Balance
 Credit Balance
 Two sides are equal
 Closing balance
 Opening balance of the next year
Standard Form of Ledger Account:
To understand clearly as to how to write
the accounts in ledger, the standard form
of an account is given below with two
separate transactions:
Dr Cr
Date Particulars J.R Amount Date Particulars J.R Amount
2005
2005
Dec. Cash A/C xxxx Dec. Purchases
17 17 A/C
Trial Balance:
Definition and Explanation:
Trial balance may be defined as an
informal accounting schedule or statement
that lists the ledger account balances at a
point in time compares the total of debit
balance with the total of credit balance.
Purposes of Trial Balance:
The trial balance serves two main
purposes. These are as under:
 To check the equality of debits and
credits
 To provide information for use in
preparing final accounts.
Methods of Preparing Trial Balance:
There are three methods for the
preparation of trial balance. These
methods are:
 Total or gross trial balance
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA
 Balance or net trial balance
 Total - cum - balance trial balance
Characteristics of Trial Balance
 Report
 Summary of Closing balances
 Adjusted & non Adjusted Trial
balance
 Facilitate Preparation of Financial
Reporting
 Error Detection
 Format of Trial balance
Advantages of a trial balance are:
 It summarizes the result of all
transactions during a period.
 It proves the arithmetical accuracy of
accounting entries in the ledger.
 It supplies in one place ready
reference of all the balances of all the
ledger accounts.
 If any error is found, it can easily be
rectified.
 It is a basis, on which the final
accounts of a firm can be prepared.
UNIT-2
Final accounts:
xxxxxx Definition and Explanation of Final
Accounts:
The "final accounts" enable us to check on
the conduct of the business, and to
discover whether it is being run profitably.
Trading Account:
Definition:
The account which is prepared to
determine the gross profit or gross loss of
a business concern is called trading
account.
Features:
 It is the first stage of final accounts.
 It is prepared on the last day of an
accounting period.
 Only direct revenue and direct
expenses are considered in it.
 Direct expenses are recorded on its
debit side
 Direct revenue on its credit side.
 All items of direct expenses and
direct revenue.
Page 3
 Accounting for Managers
 If its credit side exceeds it
represents gross profit and
 If debit side exceeds it shows gross
loss.
Profit and Loss Account:
Definition and Explanation:
The account, through which annual net
profit or loss of a business is ascertained,
is called profit and loss account. Gross
profit or loss of a business is ascertained
through trading account and net profit is
determined by deducting all indirect
expenses (business operating expenses)
from the gross profit through profit and
loss account. Thus profit and loss account
starts with the result provided by trading
account.
Sequence of Expenses in Profit and Loss
Account
 Office and Administration Expenses
 Selling and Distribution Expenses
 Financial and Other Expenses
Features of Profit and Loss Account:
1. Determine the net result.
2. Second stage of the final accounts.
3. Only indirect expenses and indirect
revenues.
4. It starts with the closing balance of
the trading account i.e. gross profit
or gross loss.
5. All items of revenue concerning
current year
Balance Sheet - Last Stage in Final
Accounts:
Definition and Explanation:
Balance sheet is a list of the accounts
having debit balance or credit balance in
the ledger. On one side it shows the
accounts that have a debit balance and on
the other side the accounts that have a
credit balance.
Features of Balance Sheet:
Balance sheet has the following features:
 It is the last stage of final accounts
 It is prepared on the last day of an
accounting year.
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA
 It is not an account under the double
entry system - it is a statement only.
 It has two sides - left hand side asset
and right hand side liabilities.
 The total of both sides are always
equal.
 The balances of all asset accounts and
liability accounts are shown in it.
 It discloses the financial position and
solvency of the business.
 It is prepared after the preparation of
trading and profit and loss account.
Classification of Assets:
Assets may be classified as follows:
Fixed assets:
1. Tangible assets
2. Intangible assets
Current assets:
1. Liquid or quick assets
2. Floating or circulating assets
Classification of Liabilities:
Fixed or long term liabilities
Current or short term liabilities
1. Deferred liabilities
2. Liquid or quick liabilities
Limitations of Final Accounts/Financial
Statements
1. Ignores qualitative aspect Based
upon convention and practices
2. Ignores human resource
3. Ignores price level changes
4. Ignores interest of all concerned
parties
Accounting standards: An accounting
standard is a principle that guides and
standardizes accounting practices.
The Generally Accepted Accounting
Principles (GAAP) is a group of
accounting standards widely accepted as
appropriate to the field of accounting
necessary so financial statements is
meaningful across a wide variety of
businesses and industries.
Page 4
 Accounting for Managers

Meaning and Definition of Financial

AS 1 Disclosure of Accounting Policies Statement Analysis
AS 2 Valuation of Inventories “financial statement analysis is an
AS 3 Cash Flow Statements information processing system design to
AS 4 Contingencies and Events Occurring After the provide data for decision making models,
Balance Sheet Date
such as the portfolio selection model, bank
AS 5 Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies lending decision models and corporate
AS 6 Depreciation Accounting
financial models “.
Scope of financial analysis:
AS 7 Construction Contracts
 Financial statements as composed of
AS 8 Accounting for Research and Development data, which are the results.
AS 9 Revenue Recognition  Recorded facts concerning business
AS 10 Accounting for Fixed Assets transaction.
 Convention adopted to facilitate the
AS 11 The Effects of Changes in Foreign Exchange Rates
accounting technique.
AS 12 Accounting for Government Grants  Postulates or assumptions made to
AS 13 Accounting for Investments personal judgment.
AS 14 Accounting for Amalgamations  Application of correction and
postulates.
AS 15 Employees Benefits (Revised 2005)
Objectives of Financial Analysis
AS 16 Borrowing Costs  Find out the financial stability and
AS 17 Segment Reporting soundness of the business
AS 18 Related Party Disclosures enterprise.
AS 19 Leases
 Assess and evaluate the earning
capacity of the business.
AS 20 Earnings Per Share
 Estimate and evaluate the fixed
AS 21 Consolidated Financial Statements assets, stock, etc of the concern.
AS 22 Accounting for Taxes on Income  Estimate and determine the
AS 23 Accounting for Investments in Associates in possibilities of future growth of
Consolidated Financial Statements business.
AS 24 Discontinuing Operations  Assess and evaluate the firm’s
AS 26 Intangible Assets
capacity and ability to repay loans.
 Evaluate the administrative
AS 27 Financial Reporting of Interests in Joint Ventures
efficiency of the business
AS 28 Impairment of Asset
enterprise.
AS 31 Financial Instruments: Presentation
Financial analysis serves the following
AS 32 Financial Instruments: Disclosures purpose:
 To know the operational efficiency
UNIT-3 of the business.
Financial Analysis:  This will enable the management to
I. Introduction locate weak spots
Financial Analysis is the process of  Helpful in measuring the solvency of
identifying the financial strength and the firm in taking appropriate
weaknesses of the firm by properly decisions
establishing relationship between items of  Comparison of past and present
financial statements. results.

RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 5

 Accounting for Managers

 Helps the managers in taking certain  Profitability Ratios

decisions for improving the These classifications are discussed here
profitability. under
 Helps in judging the solvency i.e. the 1. Classification of Ratios on the basis of
capacity of the business to repay Balance Sheet
their loans. 2. Classification on the basis of Income
 Significance tool in predicting the Statements
bankruptcy and failure. 3. Classification on the basis of Mixed
 Help in assessing future development Statements
by making forecasts and preparing
budgets.
Types of Financial Statement Analysis
They are
1. Vertical analysis
2. Horizontal analysis
Techniques/Tools of Financial
Statement Analysis
A financial analyst can adopt the following
tools for analysis of the financial
statements.
These are also termed as methods or
techniques of financial analysis.
A. Comparative financial statements
B. Common size statements
C. Trend analysis
D. Ratio analysis
E. Funds flow analysis
F. Cash flow analysis Funds flow analysis:
Ratio analysis: Meaning of Fund
Meaning and Definition The term "Fund" refers to Cash, to Cash
The term 'ratio' refers to the mathematical Equivalents or to Working Capital and all
relationship between any two inter-related financial resources which are used in
variables. In other words, it establishes business.
relationship between two items expressed The term working capital may be:
in quantitative form. (a) Gross Working Capital and
According J. Batty, Ratio can be (b) Net Working Capital.
defined as "the term accounting ratio is Meaning of Flow of Funds
used to describe significant relationships The term "Flow of Funds" refers to
which exist between figures shown in a changes or movement of funds or changes
balance sheet and profit and loss account in working capital in the normal course of
in a budgetary control system or any other business transactions.
part of the accounting management." Components of flow of funds:
Classification of Ratios  Current Assets
This classification further grouped in to:  Non-Current Assets or Fixed Assets
 Liquidity Ratios  Current Liabilities
 Profitability Ratios  Non-Current or Capital& Long-Term
 Turnover Ratios Liabilities
 Solvency Ratios  Provision for Tax
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 6
 Accounting for Managers
 Proposed Dividend
Advantages of Funds Flow Statement:
 Fund Generating Capacity
 Changes in Working Capital
Position
 Projected Funds Flow Statement
 Highlights the Causes of Changes
 Evaluation of Credit-Worthiness
 Highlight the Causes of the
Following Contradictions
Limitations of Fund Flow Statement
 It is prepared on the basis of
information related to historical in
nature.
 This statement does not focus on
transactions involved in non-fund
items.
 It also ignores when transactions
involved between current accounts or
non-current accounts.
 It does not provide any additional
information to the management
because financial statements are
simply rearranged and presented.
Significance of Fund Flow Statement
 Analytical Tool
 Design Policies
 Control Device
 Reflect Financial Position
 Uses for Working Capital
 Help to Lenders
 Direction for Business
.Effects of Fund Flow on Working Capital
 Increase in the current year current
assets than previous year - Increase in
Working Capital
 Decrease in the current year current
assets than previous year - Decrease
in Working Capital
 Increase in the current year current
liabilities than previous year -
Decrease in Working Capital
 Decrease in the current year current
liabilities than previous year -
Increase in Working Capital
Preparation of Fund Flow Statement
Fund flow analysis involves the following
important three statements such as :
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA
 Fund from Operations
 Statement of Changes in Working
Capital
 Fund Flow Statement
Cash flow analysis:
In financial accounting, a cash flow
statement, also known as statement of
cash flows, is a financial statement that
shows how changes in balance
sheet accounts and income affect cash and
cash equivalents, and breaks the analysis
down to operating, investing and financing
activities.
People and groups interested in cash
flow statements include:
 Accounting personnel
 Potential lenders or creditors
 Potential investors
 Potential employees or contractors
 Shareholders of the business.
Purpose
The cash flow statement is intended to
 provide information on a
firm's liquidity and solvency
 provide additional information for
evaluating changes in assets, liabilities
and equity
 improve the comparability of different
firms' operating performance
 indicate the amount, timing and
probability of future cash flows
Cash Flow Activities
The cash flow statement is partitioned into
three segments, namely:
 Cash flow resulting from operating
activities;
 Cash flow resulting from investing
activities;
 Cash flow resulting from financing
activities.
Page 7
 Accounting for Managers
The money coming into the business is
called cash inflow, and money going out
from the business is called cash outflow.
Operating activities
Operating activities include
the production, sales and delivery of the
company's product as well as collecting
payment from its customers.
 Receipts for the sale of loans, debt or
equity instruments in a trading
portfolio
 Interest received on loans
 Payments to suppliers for goods and
services
 Payments to employees or on behalf of
employees
 Interest payments
 Buying Merchandise
Investing activities
Investing activities are
 Purchase or Sale of an asset (assets
can be land, building, equipment,
marketable securities, etc.)
 Loans made to suppliers or received
from customers
 Payments related to mergers and
acquisition.
Financing activities
Financing activities include the inflow of
cash from investors such
as banks and shareholders, as well as the
outflow of cash to shareholders
as dividends as the company generates
income.
 Payments of dividends
 Payments for repurchase of company
shares
 For non-profit organizations, receipts
of donor-restricted cash that is
limited to long-term purposes
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA
 Items under the financing activities
section include:
 Dividends paid
 Sale or repurchase of the
company's stock
UNIT-4
Meaning and Scope of Cost
Accountancy
The term cost accountancy is wider than
the term cost accounting. Accountants,
London, cost accountancy means, “the
application of costing and cost accounting
principles, methods and techniques to the
science, art and practice of cost control
Cost Accounting: Cost accounting is the
process of accounting for costs. It is thus
the formal mechanism by means of which
costs of products or services are
ascertained and controlled.
Costing: Costing is “the technique and
process of ascertaining costs.”
Cost Control: According to the Institute
of Cost and Works Accountants of India,
cost control means “The act of power of
controlling or regulating or dominating or
commanding costs through the application
of management tools and techniques”.
Objectives of Cost Accounting
1. Ascertaining Costs: -
2. Determining Selling Price:
3. Measuring and Increasing
Efficiency
4. Cost Control and Cost Reduction
5. Cost Management
6. Ascertaining Profits
7. Providing Basis for Managerial
Decision – Making
Methods of costing:
Different industries follow different
methods for ascertaining cost of their
products.
Methods of costing
• Job Costing
Page 8
 Accounting for Managers

• Contract Costing
• Batch Costing Financial accounting
• Process Costing  Provides information to users who
• Service (Operating) Costing are external to the business
• Operation Costing  It reports on past transactions to
• Multiple Costing draw up financial statements
Techniques of Costing  The format are governed by law
• Marginal Costing and accounting standards
• Standard Costing established by the professional
• Historical Costing accounting policies
• Direct Costing Management Accounting
• Absorption Costing  Comprises all cost accounting
Role of Cost Accounting functions
 Price fixation  The accounting for product and
 Helps in estimate service costs, management
 Helps in channeling production accounting extends to use various
 Wastages are eliminated internal accounting reports for
 Costing makes comparison possible planning, control and decision
 Provides data for periodical profit making
and loss accounts Cost accounting
 Determining and enhancing  Is concerned with internal users of
efficiency accounting information, such as
 Helps in inventory control operation managers
 Helps in cost reduction  The generated reports are specific
 Assists in increasing productivity to the requirement of the
Elements of Cost management
There are three broad elements of cost
 The reporting can be in any format
(a) Material
which suits the user
 Direct Material
 Indirect Material
(b) Labour
 Direct labour
 Indirect labour
(c) Expenses
 Direct expenses
 Indirect expenses
(d) Overheads
 Manufacturing (works, factory or
production) expenses:-
 Office and Administrative
expenses
 Selling and Distribution Expenses:-
Financial accounting Vs Management
Accounting Vs Cost accounting
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 9
 Accounting for Managers

By Controllability
1. Controllable
2. Uncontrollable
By Normality
1. Normal cost
2. Abnormal cost
By time
1. Sunk Cost
2. Estimated cost
Cost Sheet: Meaning
Cost sheet is a statement, which shows
various components of total cost of a
product. It classifies and analyses the
components of cost of a product.
Cost sheet is prepared on the basis of:
Cost Classification
 Historical Cost
Costs can be classified based on the
following attributes:  Estimated Cost
Importance of Cost Sheet
By Nature
1. Direct cost  Cost ascertainment
2. Indirect cost  Fixation of selling price
By Behavior  Help in cost control
1. Fixed cost  Facilitates managerial decisions
2. Variable cost Cost Sheet – Format
Opening Stock of Raw Material
3. Semi variable cost
Add: Purchase of Raw materials
By Elements Add: Purchase Expenses
1. Material cost Less: Closing stock of Raw Materials
2. Labor cost Raw Materials Consumed
3. expenses Direct Wages (Labour)
By Functions Direct Charges
Prime cost (1)
1. Production cost Add: - Factory Over Heads:
2. Administrative cost Factory Rent
3. Selling cost Factory Power
Indirect Material
4. Distribution cost
Indirect Wages
5. R&D cost Supervisor Salary
6. Pre production cost Drawing Office Salary
7. Conversion cost Factory Insurance
Factory Asset Depreciation
8. Prime cost Works cost Incurred
Add: Opening Stock of WIP

RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 10

 Accounting for Managers

Less: Closing Stock of WIP  All elements of costs are classified

Works cost (2) into fixed and variable costs.
Add: - Administration Over Heads:-  Marginal costing is a technique of
Office Rent cost control and decision making.
Asset Depreciation  Variable costs are charged as the cost
General Charges of production.
Audit Fees  Valuation of stock of work in
Bank Charges progress and finished goods is done
Counting house Salary on the basis of variable costs.
Other Office Expenses  Profit is calculated by deducting the
Cost of Production (3) fixed cost from the contribution, i.e.,
Add: Opening stock of Finished Goods excess of selling price over marginal
Less: Closing stock of Finished Goods cost of sales.
Cost of Goods Sold(4)  Profitability of various levels of
Add:- Selling and Distribution OH:- activity is determined by cost volume
Sales man Commission profit analysis.
Sales man salary Cost Volume Profit Analysis: Cost
Traveling Expenses Volume Profit Analysis (C V P) is a
Advertisement systematic method of examining the
Delivery man expenses relationship between changes in the
Sales Tax volume of output and changes in total sales
Bad Debts revenue, expenses (costs) and net profit. In
Cost of Sales (5)
other words it is the analysis of the
Profit (balancing figure)
Sales relationship existing amongst costs, sales
revenues, output and the resultant profit.
UNIT-5 Objectives The following are the
Behavioural classification of costs important objectives of cost volume profit
analysis:
1. Fixed cost
 Decision making
2. Variable cost  It makes use of the principles of
3. Semi variable cost Marginal Costing
 Financial results
Marginal Costing and Cost Volume
 Determination of break-even point
Profit Analysis  Measure of efficiency
Meaning  Choose a most profitable line of
Marginal Cost: The term Marginal Cost business.
refers to the amount at any given volume  Forecast the level of sales required.
of output by which the aggregate costs are Marginal Cost Equation
charged if the volume of output is changed The Following are the main important
by one unit. equations of Marginal Cost:
Marginal Costing: Marginal Costing may  Sales = Variable Cost + Fixed
be defined as "the ascertainment by
differentiating between fixed cost and Expenses ± Profit / Loss
variable cost, of marginal cost and of the  Sales - Variable Cost = Fixed Cost ±
effect on profit of changes in volume or Profit or Loss
type of output."
Features of Marginal Costing

RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 11

 Accounting for Managers
 Sales - Variable Cost = Contribution
(or) Contribution = Fixed Cost +
Profit
Contribution
The term Contribution refers to the
difference between Sales and Marginal
Cost of Sales. It also termed as "Gross
Margin."
. Contribution can be represented as:
 Contribution = Sales - Marginal Cost
 Contribution = Sales - Variable Cost
 Contribution = Fixed Expenses +
Profit
 Contribution - Fixed Expenses =
Profit
 Sales - Variable Cost = Fixed Cost +
Profit
Break-Even Analysis: Break-Even
Analysis is also called Cost Volume Profit
Analysis. The term Break-Even Analysis
is used to measure interrelationship
between costs, volume and profit at
various level of activity. A concern is said
to break-even when its total sales are equal
to its total costs.
Break Even Point in Sales
 BEP Sales= Fixed cost x Sales/Sales-
Variable Cost
(Or)
 BEP sales= Fixed Cost / PV Ratio
Break Even Point in units
 BEP in units= Total Fixed Cost
/Contribution Per Unit
 BEP in units= Total Fixed Cost
/Selling Price Per Unit – Variable
Cost Per Unit
Profit Volume Ratio (P I V Ratio)
Profit Volume Ratio is also called as
Contribution Sales Ratio (or) Marginal
Income Ratio (or) Variable Profit Ratio. It
is used to measure the relationship of
contribution, the relative profitability of
different products.
 PV Ratio= Contribution / Sales x 100
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA
 PV Ratio= Sales-Variable cost /sales x
100
 PV Ratio= Fixed cost+ profit / sales x 100
 Desired Sales= fixed cost+ desired profit /
PV ratio
Margin of Safety: The term Margin of
safety refers to the excess of actual sales
over the break-even sales. It is known as
the Margin of Safety. Margin of safety can
also be expressed as a percentage of sales.
Margin of safety can be improved by :
(a) Increasing the selling price
(b) Reducing the variable cost
(c) Selecting a product mix of larger PN
ratio items
(d) Reducing fixed costs
(e) Increasing the output
Margin of safety formula:
 Margin of safety= Total Sales – BEP
Sales
 Margin of safety = Profit PV ratio
 Margin of safety = Profit
Contribution x Sales
 Profit = Margin of safety x PV ratio
Margin of safety expressed as
percentage:
 Margin of safety = Margin of Safety
Total Sales x 100
 Margin of safety = Actual Sales –
BEP Sales / Total Sales x 100
Managerial Application of CVP
Analysis
 Break Even analysis
 Key factor distribution & analysis
 Optimization of Product mix
 Make or Buy decisions
 Capacity utilization
 Plant shutdown or continue
decision
Page 12