Management Accounting

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Management Accounting

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Dear students these revision notes which you are going to read may have grammatical & spelling mistakes, if you find any one of them, please point out & let us know this will help us to recover & maintain the notes in most suitable language boundaries as much as possible for us. As the user of these notes you can not copy, reissue or reprint it without the permission of author. You are legally & ethically bound to take the permission first before doing any such thing. Thanks for your cooperation

AMMAR MUSHTAQ KHAN Ammar.acca@gmail.com 0336-5586866

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Management Accounting

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Management Accounting
Cost Accounting
Cost Accounting
• • • • • • • •

Managerial Accounting
Managerial Accounting
• • • • • •

Cost Concepts and Classifications Labor Overhead Costs Manufacturing Accounts Marginal costing & Absorption Costing Other Costing Techniques Process Costing Stock Valuation

Budget Costs Volume Profit (CVP) Analysis Pricing Decisions Standard Costing & Variance Analysis Short Term Decisions Variances

Chapter

chapter

Page # 3 4 7 10 11 14 17 20 24 32 34 37 48 49 52 58 77 103 167

Introduction One The nature & purpose of Management accounting Two Types of cost & cost behaviour Three Business mathematics Four Ordering & accounting for inventory Five Order quantities & reorder levels Six Accounting for labour Seven Accounting for overheads Eight Marginal & absorption costing Nine Relevant costing Ten Dealing with limiting factors Eleven Job , batch & process costing Twelve Services & operation costing Thirteen Budgeting Fourteen Standard costing Fifteen Spreadsheet Sixteen Terms Dictionary Seventeen Question bank Eighteen Test your knowledge
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Chapter one 1 Level of planning
Strategic planning & control: Formulate long-term objectives & plans. Information at this level is in summaries form. (Directors level)

Tactical planning & control: Make short term plan for the nest year. Information at this level is in medium quantity (senior manager level) Operational planning & control Day to day planning & decision making, information is in expanded form (all manager level) Hierarchy of management tasks
Strategic planning & control: Formulate long-term objectives & plans. Information at this level is in summaries form. (Directors level) Planning Activities

Tactical planning & control: Make short term plan for the next year. Information at this level is in medium quantity (senior manager level)

Operational planning & control Day to day planning & decision making, information is in expanded form (all manager level) Controlling Activities

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Responsibility accounting is based indemnifying individual parts of a business which responsibility of a single manager. Responsibility centre is an individual part of a business whose manger has responsibility for its performance

Cost centre: is a production or service location, function activity or item of
equipment whose costs are identified and recorded

Revenue centre: is a part of the organization that earns sales revenue. Profit centre: a profit centre is a part of the business for which both the
costs incurred & revenues earned are identified.

Investment centre: managers of investment centre are responsible for
investment decisions as well as decision affecting the cost & revenue. Therefore mangers are accountable for profit & capital employed. The performance measured in term of ROCE.
Manager’s Authority increases

Cost/revenue Centre

profit centre

investment centre

Managerial process of planning decision making & control *) Planning involves establishing objectives & formulating relevant strategies that can be used to achieve those objectives. *) Decision making involve choosing the best plan from all the available plans *) Control involves receiving actual results compare with budgets; revise the original objectives if necessary

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Difference between management accounting & financial accounting Notes Information produce for Purpose Management accounting Internal use To aid planning, decision making & control Financial accounting External use To record the financial performance in a period & the financial position at the end of the period. Limited company must produce According to accounting standard Mostly financial Mainly an historical records

Legal requirement Format Nature of information Time period

none Management choice Financial & non-financial Historical & forward looking

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Chapter Two 2 Classification of cost
Classification of cost

By Element

By Nature

By Behaviour Fixed Variable Semi-variable Step-fixed

By Function

Direct

Indirect

Material

Labour

Expenses

Production

Non-production

Direct material Direct labour Direct expenses Variable P.O.H Fixed P.O.H Prepared by

Administration cost Selling cost Distribution cost Finance cost

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Cost behaviour
V.C in total V.C/unit F.C in total F.C/unit

Semi-V.C in total Semi-V.C /unit step-fixed cost

Cost behavior Variable Fixed Mixed (semi-variable)

In total varies The same Varies

Per unit The same varies Varies (often inversely)

The basic assumption is that cost behaviour shown in above graphs & table only works in relevant range. Outside the relevant range of the activity levels the total fixed cost or variable cost per unit may change so always consider the relevant range of activity levels.

High/low method
(Use for analysis of cost into fixed & variable elements)

Step 1*Define the high & low activities (considered the benchmark) Step 2*Calculate the difference between the high & low activities and the
high & low cost, so the calculated cost divided by the calculated unit, you got the variable cost per unit Step 3* calculate the total fixed cost

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Cost equation
Y=a+b(x) A= fixed cost B= variable cost per unit X= number of unit (independent variable) Y= total cost (dependent variable)

Cost object: a cost objects is any activity for which a separate
measurement of cost is undertaken.

Cost unit: a cost unit is a unit of product or service in relation to which
cost are ascertained.

Cost centre: a cost centre is a production or service location, function,
activity or item of equipment for which cost can be ascertained.

Cost card: all direct cost, production & non-production cost are brought
together & recorded on a cost card.

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Chapter Three 3 Expected value: is a long run average. It is weighted average of a
probability distribution. Use for the simple & repetitive decision.

Expected value= sum of PX
P= probability (chances of occurrence) X= outcome

Expected level (chances): Probability = expected value / X (outcome) Linear regression analysis (use for analysis of cost into fixed & variable
elements)

Correlation: correlation measures the strength of relationship between
two variables in particular whether movements are related. Degrees of correlation • Perfect positive correlation means that high values of the one variable are associated with high value of another variable & vise versa. (Linear relationship) • Perfect negative correlation means that low values of the one variable are associated with high values of other variable and vise versa. (Linear relationship) • Partial or moderate correlation means that there is no exact linear relationship between two variables but that high/low values of one variable tend to be associated with high/low values of other variable. • Uncorrelated means that there is no correlation between the two variables.

Correlation Coefficient: (r) uses to measure the “how correlated” the
two variables are. Correlation Coefficient answer should fall in the ranges of +1 to -1. It measure the strength of a linear relationship between two variables, it can therefore give an indication of how reliable the estimated linear function is for a set of data.

Coefficient of determination:
Coefficient of determination is the square of correlation coefficient (r), Is a measures of how much variation in the depended variable (y) is explained by the variation of the independent variable (x).
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Chapter Four 4 Purchase requisition: When department requires new material a
purchase requisition is completed & sent to the purchasing department.

Purchase order: On the receipt of properly authorized requisition the
purchasing department will select a supplier & create an order on purchase order form.

Material requisition notes: Are issued by production department. Their
purpose is to authorize the store keeper to releases the goods which have been requisitioned & to update the store record

Material returned notes: Are used to record any unused materials which
are returned to stores. They also used to update the store record.

Material transfer notes: Document the transfer of material from one
production department to another. They also used to update the store record.

Purchase invoice: Bill of purchases sends by supplier. GRN: Good receive notes used to enter the full detail of good received GRN: A good delivery note is the notes that containing the full detail of
goods send by the supplier.

Accounting for inventory
Material inventory account
Debit entries reflect an increase in inventory Opening balance ** Credit entries reflect a decrease in inventory (Withdrawals) Direct material (W.I.P) Indirect material (F.O.H) Purchases return Obsolete items (I.S) * * * *

(Additions) Purchase Return to store * *

Closing balance Total *** Prepared by

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Finding different elements of material accounts Opening balance + addition= closing balance + withdrawal Opening balance + addition – withdrawal = closing balance Opening balance + addition – closing balance = withdrawal Closing balance + withdrawal - Opening balance = additions Closing balance + withdrawal – additions = Opening balance

Slow moving stock: are the items of inventory which take a long time to be
used up.

Obsolete items: are the items of inventory which have become out of date
& are no longer required.
Sometime Physical Inventory differs from paper based inventory that ultimately cause loss to the holder of inventory. The reason of difference may be the following

Loss

Waste

Treatments
Losses those occurs because of the theft, pilferage, damage, or similar means. Normally these losses are not expected & can not be make the estimated in advance. Treatment is *) Inventory losses must be written off against profits as soon as possible. The loss that occurs because of breaking bulk receipts into smaller quantities. & normally it is expected that it occur & estimate can be make in advance. Treatments are *) write off against the profit. Or *) charge to customer by raising the price of good.

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Flow of cost inventory accounts
Raw material
Opening balance + Purchases

work in progress (WIP)
Opening balance Direct material usage Direct material Direct labour Direct expenses Production O.H incurred Total Cost of good manufactured

Ending balance Total Total

Ending balance Total

Cost of sales (COS)
Opening balance

Finish goods (FG)
Opening balance Cost of goods manufactured Cost of good sold

Cost of good sold Ending balance Total Total

Ending balance Total Total

Inventory valuation methods are FIFO: Materials prices are charge in the order of material were received.

LIFO: Materials prices are charge in the reverse order of material were
received,

WEIGHTED AVERAGE COST: value all item of inventory and issue at
an average price.

Perpetual inventory is the recording of inventory as they occur of receipt,
issues & the resulting balances of individual items of inventory in either quantity or quantity & value.

Periodic stock taking: involve checking the balance of every item of
inventory on the same date, usually at the end of an accounting period.

Continuous stock taking: involve counting & valuing selected item of
inventory on a rotating basis.
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Chapter Five 5 Holding cost: costs associated with holding inventory are known as
holding costs. It include interested on capital tied up in inventory, cost of storage space, cost of insurances.

Ordering cost: The costs associated with placing the order are known as
ordering costs & include administrative cost & delivery cost Cost type Interest on capital tied up Cost of storage space Cost of insurance Administrative cost Delivery cost Fixed cost ************ Fixed holding cost (Step fixed cost) Fixed holding cost ************ ************ Variable cost Variable holding cost *********** *********** Variable ordering cost Variable ordering cost

Stock out cost: costs associated with running out of inventory and they
include loss sales, loss of customers & reduce profit.

Objective of inventory control : is the to maintain the inventory at a
level where total cost of holding cost , ordering cost and the stock out costs at a minimum.

EOQ: is the reorder quantity which minimizes the total cost associated with
holding & ordering. EOQ with discount: If a quantity discount is accepted this will have the following effects *) annual purchase price will decrease *) annual holding cost will increase *) annual ordering cost will decrease. Steps to calculate: *) calculated the EOQ ignoring the discount. *) if EOQ is smaller then the minimum purchase quantity to obtain the bulk discount, calculated the total for EOQ of the annual stock holding cost, stock ordering cost and stock purchasing costs. *) recalculate the total annual cost (sum of total purchasing, holding & ordering cost) at the level of just enough to qualify for the bulk discount.
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To accept discount or not, compare the total annual cost at discount level & total annual cost without discount. Discount quantity one Normal Deduct the discount rate one EOQ/2 * holding Quantity one / 2 cost per unit * holding cost per unit Annual Annual demand/EOQ * demand/quantity ordering cost per one * ordering unit cost per unit ********** ************* Normal EOQ Discount quantity two Deduct the discount rate two Quantity two / 2 * holding cost per unit Annual demand/quantity two * ordering cost per unit ************

Purchase price Holding cost

Ordering cost

total

Gradual replenishing of inventory :( refilling)
The decision faced by organization that manufacture & store their own products involving deciding weather to produce large batches at long intervals or produce smaller batches at short intervals.

EBQ (economic batch quantity) model is primarily concerned with
determining the number of item that should have to produce in a batch at which machine setup cost & holding cost are at minimum level. In the formula the D is an annual demand, Ch is a cost of holding per unit, Co is a machine setup cost (replacing the ordering cost) R is an annual replenishment rate (annual production rate). In the EOQ inventory is replenished instantaneously where as here it is replenished over a period of time. Its depending on the demand rate, part of batch will be sold or used while the remainder is still being produced. For the same size of batch (Q), the average inventory held in the EOQ model (Q/2) is the greater than the average in this situation. EOQ Buy from supplier Holding + ordering EBQ Produce in batch Holding + machine setup

Find Inventory quantity Total cost

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Total cost (for EOQ with discount) = purchase cost + holding cost +
ordering cost

Total cost (for EOQ without discount) = holding cost + ordering cost Purchase cost = total number of units * purchase cost per unit Holding cost = EOQ/2 * holding cost per unit Ordering cost = annual demand/EOQ * ordering cost per order. Reorder level: the level of inventory at which order will be place. Lead time: time expected to elapse between placing an order & receiving
an order for inventory.

Reorder quantity: when the reorder level is reached the quantity of
inventory to be ordered is know as the reorder quantity (EOQ)

Demand: this is the rate at which inventory is being used up. It is also
known as inventory usage. a) Reorder level (demand constant in lead time) = usage * lead time b) Reorder level (demand not constant in lead time) = maximum usage * maximum lead time. c) Maximum inventory level = reorder level + reorder quantity – (minimum usage * minimum lead time ) d) Minimum inventory level = reorder level – (average usage* average lead time) e) Average inventory = (reorder quantity/2) f) Average inventory = (reorder quantity/2) + minimum inventory g) Free inventory = physical inventory + inventory on order – inventory requisitioned (not yet issued).

Free inventory: represent the real quantity of inventory that is available
for use by an organization in the future.

Buffer or minimum inventory: this is the warning that inventory levels
are dangerously low & that stock-outs are the potential threat. Buffer inventory held for emergencies & to prevent the stock out to occurring it is also known as safety inventory. It’s mostly kept when there is variation expected in lead time or quantity used in this lead time.

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Chapter Six 6
Direct labour cost Basic pay for basic hours Overtime –basic pay Overtime-premium Training Sick pay Idle time Employers N.I.C Time spend by direct workers doing indirect jobs Shift premium/ shift allowance Bonus ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** Indirect labour cost

Over time payment

Basic pay Direct labour

Overtime premium Indirect labour

Overtime premiums are treating as direct labour cost when it is the
specific request of customers because they want a job to be finished as soon as possible. Labour Account
Dr Bank/cash * Cr W.I.P (direct labour) * Production over heads (indirect labour) Indirect labour (basic pay) Overtime premium Shift premium Sick pay Idle time Total ** Total * * * * * ** AMMAR MUSHTAQ KHAN

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Remuneration methods Time based systems
Total wages = (Hours worked * basic rate of pay per hour) + (Overtime hour worked * overtime premium per hour)

Piece work systems
Total wages (unit produced * rate of pay per unit)

Incentives schemes Halsey- the employee receives 50 % of the time saved
Bonus= time allowed – time taken / 2 * time rate

Rowan- the proportion paid to the employee is bases on the ratio of the
time taken to the time allowed Bonus=time taken/time allowed*time saved * time rate

Labour turnover
Number of leaver who require replacement / average number of employees * 100

Labour efficiency, production volume & capacity ratio

Labour efficiency ratio measures the efficiency of labour against the pre
set targets.

Labour production ratio measures the standard hour required for actual
output with reference to the budgeted hours for that work. Labour capacity ratios measures the number of hours spent actively working as a % of the total budgeted hours.
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Labour efficiency ratio = standard hour / actual hours * 100

Labour production ratio = standard hour / budgeted hour * 100

*

Labour capacity ratio

= actual hour / budgeted hours * 100

Labour production ratio = Labour efficiency ratio * Labour capacity ratio (Standard hours= standard time allowed * actual output)

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Chapter Seven 7 Fixed production overheads= indirect material + indirect labour +
indirect expense

Expense

Direct Expense

Indirect Expense

Goes to W.I.P

Production overheads *) Variable production FOH (Mostly direct charge to statement) *) Fixed FOH (in absorption costing)

In absorption costing the fixed factory overhead are shared out between the units of production. The absorption costing has the following way for the sharing of production over head. The Allocating the production overhead which is specifically related to specific department

Allocation: charging overhead directly to the specific department. Normally have $ sign in question

After allocation the process of apportionment will start, in which we have
to share out the overhead to cost centers (departments) by using the suitable bases.

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After apportionment some of the cost that was charges to the services
departments. Now transfer that all cost to production department, the simple trick is to transfer the all cost of that service department first, which gives cost to its next service department too. & then the one who distribution its cost only to production departments (if having only 2 service departments)

Re-Apportionment: service cost centers are not directly involve in production , so the total fixed production cost of the service cost centers share out between the production cost centers using the suitable basis .

Reciprocal Re-Apportionment method used where the services centers
also for each other so in this case transfer the cost of service cost center to the production cost center using suitable basis until the service cost center’s cost turn into zero or near to zero.

Reciprocal Re-Apportionment: this repeated distribution method used where service cost centre do work for each other. It’s required many reapportionments until all cost shared about to production cost centers.

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Absorption rates OAR = total production over head / total of absorption basis Budgeted OAR= budgeted total production over head / budgeted total of
absorption basis

Departmental OAR= departmental total production over head /
departmental total of absorption basis Overhead absorbed= predetermined OAR * actual level of activity Over or under absorbed = difference between actual overhead Vs overhead absorbed Journal & ledger entries for manufacturing overheads Production overheads
Labour (actual) Store (actual) Expense (actual) * * * W.I.P (absorbed) *

Over absorption (if any) Balance figure

*

Under absorption (if any) * Balance figure

Total

**

Total

**

The production overhead account acts as a collecting place for all the indirect costs of a production process. All cost debited to this account, once the amount of absorbed has be calculated they are transfer to the WIP account, the difference will be the under or over absorbed, this is the balancing figure and transferred to the over /under-absorption account & ultimately transferred to income statement where it is written of (underabsorbed overheads) or increase profit (over –absorbed overhead) Working backwards (simple trick) Actual overheads Absorbed overheads (OAR * actual activity) Over or (under) absorbed
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Over/under absorption over heads
Production overheads (Under absorption) Total Or Income statements * * Income statements *

**

Total Or Production overheads (Over absorption) Total

**

*

Total

**

**

Cost card (total cost of one unit of product)
Direct material Direct labour Direct expense ** ** **

Prime cost
Variable production overheads

***
**

Marginal production cost
Fixed production overheads

***
**

Total production cost
Non production overheads: Administration Selling Distribution

***

** ** **

Total cost
Profit

***
*

Sales price

****

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Chapter Eight 8
Cost Elements
Direct Material, Direct labour, (Variable Cost) Factory Overhead Cost (Variable & Fixed Cost)

In absorption costing, fixed manufacturing overheads are absorbed into
cost units. Thus stock is valued at absorption cost and fixed manufacturing overheads are charged in the profit and loss account of the period in which the units are sold.

In marginal costing, fixed manufacturing overheads are not absorbed into
cost units, Stock is valued at marginal (or variable) cost and fixed manufacturing overheads are treated as period costs and are charged in the profit and loss account of the period in which the overheads are incurred.

(Under absorption costing stock will include variable and fixed overheads whereas under marginal costing stock will only include variable overheads.) Marginal cost is the accounting system in which the variable cost are charged to cost units & fixed costs for the period are written off in full to the income statement. In absorption costing the fixed factory overhead are shared out between the units of production.

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Absorption costing profit statement
Sales Less cost of sales (Valued at full production cost) Opening inventory * Variable cost of production * Fixed overhead absorbed * * (*) (*) * (*) / * * (*) *

Marginal costing profit statement
Sales Less cost of sales (Marginal production cost only) Opening inventory * Variable cost of production * Less closing inventory (*) (*) *

Less closing inventory

*

Less other variable cost

(*)

(Under)/over absorption Gross profit Less non production costs

Contribution * Less fixed cost (actually incurred) (*)

Profit / (loss)

(*) / *

Profit / (loss)

(*) / *

Valuation of inventory
Opening & closing inventory are valued at full production cost under absorption costing Opening & closing inventory are valued at full marginal cost under marginal costing

Under or over absorbed overheads
An adjustment for under or over absorption of overhead is necessary in absorption costing profit statement No adjustment for under or over absorption of overhead is need in marginal costing profit statement. The actual costs incurred are deducted from contribution earned.

Marginal cost is the accounting system in which the variable cost are
charged to cost units & fixed costs for the period are written off in full to the income statement.

Contribution=sale price – variable cost Total contribution= contribution /unit * sales volume Profit= total contribution - fixed over head
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If stock levels are rising from opening to closing balance Absorption Costing profit > Margin Costing profit (More profit) (Less profit)

If stock levels are falling from opening to closing balance Absorption Costing profit < Margin Costing profit (Less profit) (More profit) (Fixed costs carried forward are charged in this period, under absorption costing)

If stock levels are the same Absorption Costing profit = Margin Costing profit (Same profit) (Same profit)

Reconciliation formula Profit as per absorption costing system Add Opening stock @ fixed FOH rate at opening date Less Closing stock @ fixed FOH rate at closing date Profit as per marginal costing system

Rs. xxx xxx (xxx) ------xxx

(The only difference between using absorption costing and marginal costing as the basis of stock valuation is the treatment of fixed production costs.) Arguments against absorption costing In absorption costing the fixed costs do not change as a result of a change in the level of activity. Therefore such costs cannot be related to production and should not be included in the stock valuation

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Advantages of marginal costing Contribution per unit is constant unlike profit per unit which varies with changes in sales volumes There is no over or under absorption of overheads Fixed over heads are period cost & are charged in full to the period under consideration Marginal costing is useful in the decision making process It is simple to operate Overheads According to SSAP 9

Advantages of absorption costing Absorption costing includes the element of fixed overheads in inventory values in accordance with SSAP 9 Analysis under/over absorption of overhead is useful exercise in controlling the cost. Is a best way of estimating job costs & profit on jobs in small organizations

Overhead charges, if any, should be included in the cost valuation to the extent that is appropriate having regard to recognised accounting practice and to the principle of consistency. The provisions of the Companies Act are reflected in generally accepted accounting practice, SSAP9 (paragraphs 19 and 20 of Part 2 and paragraphs 1- 10 of Appendix 1). Overheads are classified, under SSAP9 (paragraph 20 of Part 2), according to their function, for example, production, selling or administration. Into which category a particular expense falls and whether a cost is directly attributable to the production process and must be included, or rather is an expense which may be included, will depend on the precise facts. Broadly, however:

Overhead expenses which vary directly with the volume of production are considered to be ’directly attributable' to the production process and should be included. The fact that an overhead accrues on a time basis is not in itself a reason for its exclusion from the stock valuation (see paragraph 20 of Part 2 of SSAP9). But generally the classification of such overheads is less certain. Overheads accruing on a time basis may be more remote from the production process. An accounts treatment that has consistently excluded such overheads from a stock valuation may be within the range of generally accepted accounting practice for the specific industry and may still be a valid basis in the particular circumstances.

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COST – VOLUME – PROFIT ANALYSIS
Marginal concept work very well in the decision making & in the working of CPV analysis, relevant costing & limiting factor analysis.

Decision making is the process of choosing the best optimal option from
all the available options after evaluating their merit & demerits.

CVP analysis may also be used to predict profit levels at different volumes
of activity based upon the assumption that costs and revenues exhibit a linear relationship with the level of activity. Cost-volume-profit analysis determines how costs and profit react to a change in the volume or level of activity, so that management can decide the 'best' activity level. Following are the assumptions which are used in CVP analysis. 1. Variable costs and selling price (and hence contribution) per unit are assumed to be unaffected by a change in activity level. 2. Fixed costs, whilst not affected in total by a change in the activity level, will change per unit as the activity level changes and there are more (or less) units over which to "share out" the fixed costs if fixed costs per unit change with the activity level, then profit per unit must also change. CVP is a relationship of four variables Sales Volume Variable cost Cost Fixed cost Cost Net income Profit

CVP analysis includes • Contribution to sales ratios & breakeven points • Margin of safety & target profit • Sales volume to achieve the Target profit

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Contribution to sales ratios & breakeven points Contribution to sales ratio (P/V ratio)
Contribution to sales ratio per unit = contribution per unit / selling price per unit. Contribution to sales ratio in total = total contribution / total sell revenue

Breakeven point is the point where revenue = cost, so the profit is zero or
the total contribution is equal to the total fixed cost. Point in the term of number of unit sold = fixed cost / contribution per unit. Point in the terms of sale revenue ratio. = fixed cost / contribution to sales

Margin of safety & target profit
The margin of safety is the amounts by which anticipated sales (in units) can fall below budget before a business make the loss. & the target profit is use to find the amount of unit (or total sales) have to sale in order to earn the certain level of profit. Margin of safety as % of sales = budgeted sales – breakeven sales / budgeted sales * sales

Margin of safety in units

= budgeted sales – breakeven point sales

Sales volume to achieve the Target profit
= fixed cost + required profit (targeted contribution) / contribution per unit.

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Charts Traditional Breakeven chart

Cost & Revenue In $

Sales revenue total cost

Variable costs

Fixed cost Margin of Safety Budgeted sales Breakeven point output in units

Contribution Breakeven chart
Cost & Revenue In $ Sales revenue Profit Total cost Contribution Fixed Cost Variable costs

Breakeven point

output in units

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P/V chart
Breakeven chart usually show both cost & revenue over a certain level of activity. They do not highlight directly the amount of profit or losses at the various level of activity. However, a P/V chart clearly identifies the net profit or loss at different level of activity.

$ Margin of safety Profit

0

units Sales

Breakeven point

budgeted sales

Loss = fixed cost at zero sales activity

Loss

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Chapter Nine 9 Relevant costing
Decision making process involves making a choice between two or more alternatives. Decisions will generally be based on taking the decision that maximize the shareholder value so all the decisions will be taken using relevant cost & revenues. Relevant cost and revenues are those cost & revenues that change as a direct result of a decision taken. Features: • They are future cost & revenue. • They are cash flows. • They are incremental cost & revenues. • Relevant cost terms:

Differential costs are the differences in total cost or revenue between two
alternatives

Opportunity cost is an important concept in decision making. It represents
the best alternative that is fore gone in taking the decision. The opportunity cost emphasizes that decision making is concerned with alternatives & that the cost of taking one decision is the profit or contribution foregone by not taking the next best alternative. Avoidable costs are the specific cost associated with an activity that would be avoided if that activity did not exist. Variable cost normally assume as relevant cost unless examiner told.

Non- Relevant cost
Following are non relevant costs:

Sunk cost are the past cost or historic cost Committed costs are the future cost that can not be avoided Non cash flows costs are the costs which do not involve the flow of cash. General fixed costs are usually not relevant to decision, but stepped fixed
costs are normally treated as relevant cost if it changes with the decision. Net book values are not relevant cost because they are determined by accounting conventions rather than by future cash flows
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Relevant cost for Material
Are materials already in stock?

Relevant cost of overheads
Relevant cost of overheads

No Yes
Will they be replaced? Cost of purchase

No Yes
Replacement Will they be used for other purposes? Only those overheads that vary as a direct result of a decision taken are relevant overheads. Mostly the variable cost and the increase in fixed cost (step).

Yes
Contribution from alternative use

No
Net Realizable value

Relevant cost for labour
Does spare capacity exist?

Relevant cost for Non-current Assets
Does plant to be replace at the end?

No
Can extra employees be hired?

Yes
Nil cost unless overtime worked or extra labour hired, when cash outlay

Yes
Replacement cost

No

No

Yes
Cost of hiring

Higher of

Contribution from alternative products which must be abandoned to create spare capacity

If sold= Sales Proceeds

If not sold= Net cast inflow arising from the use of asset

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Chapter Ten 10 Dealing with limiting factor A limiting factor is a factor that prevents a company from achieving the
level of activity that it would like to. Here using the contribution concept to address the problem of scare Resources.

Scare resources are where one or more of the manufacturing inputs
needed to make a product are in short supply. Production can also be affected by the number of units of a product that is likely to be demanded is a period (sales demand) Optimal production plan where there is a single limiting factor To make the plan the following steps are necessary *) identify the limiting factor. *) Contribution per unit of limiting factor or scare resources (Contribution per limiting factor / units of limiting factor required per unit) *) Compare which product / unit earning the high contribution per limiting factor. & make it first until it meet the required quantity. Then move to the next one. Multi limiting factors – linear programming Linear programming involves Formulating a linear programming problem *) Define the unknowns (the variables) *) Formulate the constraints (the limitations, the scare resource) ( there is a non-negative constraint also which means you can not make the product in negative amount so there fore each variable be greater than or equal to zero) *) Formulate the objective function (maximize the profit or minimize the cost)
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Graphic solution Steps are following *) define the unknowns (the variable that need to be determined) *) formulate the constraints (suppose x=0 find y then suppose y=0 & find x) *) formulate the objective function. *) graph the constraint and objective function. *) Determine the optimal solution to the problem by reading the graph. By contribution earn at each point or by using contribution line.
Feasible region is OABCD. Feasible region is a region in which all the constraints can deal effectively & the maximum profit can be attained from the combination of products lying in this region.

Y Units

B

C

A

Sales constraint

Variable A Variable B 0 units D X

Contribution line: The contribution line is draw just for the purpose of knowing the slope of the line. My simple general trick To know the highest contribution at which combination, is to move the imaginary contribution line to upward (for maximization of profit) the most outer point of feasible region mostly give the highest contribution, be remember that isolated or one product combination cant give (mostly) the highest contribution. (One product combinations are at the horizontal or vertical axis joining points)

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Algebraic solution Make the equations of constraints. & Solve the equations *) Remove the one variable by multiplying the whole equation with suitable number. *) obtain the value of other variable either by multiplying or dividing the amount. *) put the value of other variable in the equation.

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Chapter Eleven 11 Job, Batch and Process costing.
Production costing Continuous costing Specific order costing

Job costing

Process costing

Batch costing

Specific order costing is the costing system used when the work done by an
organization consists of separately identifiable jobs or batches.

Continuous costing is the costing method used when goods or services are
produced as a direct result of sequence of continuous operations or processes.

Job costing is a form of specific order costing it is used when a customer
order specific job to be done. Each job is priced separately & each job is unique. Aim is to identify the cost associated with completing the order Individual jobs are given a unique job number. Job cost sheet or job card used for recording the cost. Selling prices calculated by adding the profit margin to the cost of job.

Batch costing is a form of specific order costing which is similar to job
costing With in Each batch are a number of identical units but each batch will be different. Each batch has separate batch number. Cost separately measured for each batch. After completion the cost per unit is found by = total production cost of batch / number of units in batch Batch costing is common in the engineering components industry & manufacturing industries. The selling prices of batch can be calculated in the say way as the selling price of job.
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Process costing is the costing method used when mass production of many
identical products takes place. For example Production of bars of chocolates, tins of paints. All products in the process are identical & indistinguishable. Normally average cost per unit is calculated for each process Average cost per unit = cost of the production / expected or normal output Normally in process costing Output of one process is the input of the next process until it becomes finish product. Closing W.I.P found in process costing. This become opening WIP in next period. Profit calculation for job & batch costing Difference between the sale price & total cost is the profit. Profit Mark up expresses profit as a % of the total production cost of the product. (Multiply the cost with 100+ % you get the sale price) Profit margin expresses profit as a % of the selling price of the product. (Divide the cost by 100-% you get the sale price of the product)(net profit on sales)
Markup 20% Margin 20%

Sales price =120%

Sales price =100%

Cost =100%

Profit =20%

Cost = 80%

Profit = 20%

Process costing
The details of process costs and units are recorded is a process account which shows the material, labour & overhead input to the process & the material output at the end of the process

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Process account # 1
Description Material Direct labour Departmental overhead units *** $ **** **** **** description units $

Out put transferred to Process 2 Total *** ****

***

****

***

****

Process account # 2
Description Input transferred from Process 1 Additional material Direct labour Departmental O.H units $ description units $

***

**** **** **** **** Out put transfer to Process 3 *** *** **** ****

Total

***

****

Average cost per unit = cost of production / expected or normal output Process account with losses and gains

Normal losses some time in process the Total input may be differ from the
total output. This is quite normal and usually happens when there are losses or gains in the process. Losses may occur due to evaporation or wastage of materials & this may be an expected part of the process. Losses may sometimes be sold & generate revenue which is generally referred to as scrap proceeds or scrape value. Normal loss is the loss that is expected in a process & it is often expressed as a percentage of the materials input to the process.
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Process costing with normal loss Average cost per unit = total cost of input / (units input-normal loss) Process costing with normal loss & scrap value Average cost per unit = Total cost of input - scrap value of normal loss / (units input-normal loss) Process costing with normal loss & scrap
Description Material Direct labour Departmental overhead units *** $ **** **** **** description Normal loss units ** $ ***

Out put transferred to Next Process account Total *** ****

***

****

***

****

Scrap account
Des Process account unit ** $ *** Cash *** des unit $

Total

**

***

***

Abnormal losses & gains Abnormal losses & gains are unexpected or different from the expected loss & gains. The cost of abnormal losses & gains are not absorbed into the cost of good output but are shown as the losses & gains in the process account. Abnormal loss & gain units are valued at the same cost as the units of goods output.

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Approach:
1) 2) 3) 4) 5) 6) 7) Draw process account- enter inputs (units & values) Enter the normal loss (units & value, if any) Enter the good output (Units only) Balance the units, the balancing figure is the abnormal loss or gain. Calculate the average cost per unit. (Formula) Value the normal loss at the scrap value Value the good output & abnormal loss or gain at this average cost/unit. Process accounts
Des Material Labour Departmental overheads units *** $ des units ** ** $ *** *** **** normal loss **** **** abnormal loss (balancing)

Transfer to next ……

***

****

Total

***

****

***

****

Abnormal gain & losses account
Des units $ des units $

Process account

**

***

scrap (units * average cost) Income statement (loss)

*** ***

Total

***

****

***

****

Scrap value
Des Process account Normal loss Abnormal gain or loss units $ des units $

*** *** Cash (units * price) **** *** ****

Total

***

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42

WIP & EU (Ending work in progress & equivalent units) At the end of accounting period there may be some unit that have entered a production process but the process has not been completed these units are called closing WIP units. If we assume that there is no opening WIP, then the output at the end of a period will consist of the following. Fully- processed units. Part- processed units (WIP) It would not be fair to allocate a full unit cost to the part-processed units and so we need to use the concept of EUs which spreads out the process cost of a period fairly between the fully-processed & part-processed units. Equivalent units Basic concept is to express the part-processed units as a proportion of fullyprocessed units. Such as if 100 units are 50% completed so we can say that these effectively equal to 50 fully complete units. Average cost per EU = cost incurred / EU Material= mostly added at the start of the process. So this means that material cost should be spread all over units. Labour & expenses (conversion cost) = add with the process. So this means that conversion cost should be spread over EU. Statement of EU
Description Out put Units **** **** Materials % EUs Conversion % EUs

Fully processed units WIP Total units

100% full units 100% full units 100% full units % EU ******* ******

Cost Cost per EU (cost/EU)

cost of material cost material/EU

conversion cost conversion/EU

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43

Material cost Value of W.I.P goods Conversion Cost

EU * material/unit EU * conversion/unit

Opening W.I.P

Weighted average method

FIFO method

Weighted average method
Over all average cost/unit = Opening inventory value (+) Current costs

Process account
Des Opening W.I.P Material Labour Departmental overheads units *** *** $ des units ** ** $ *** ***

**** Normal loss **** **** abnormal loss (balancing) ****

Transfer to next …… Ending W.I.P Total *** ****

*** **** *** **** *** ****

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Statement of EU
Description Out put Units **** **** Materials % EUs Conversion % EUs

Fully processed units WIP Total units

100% full units 100% full units 100% full units % EU ******* Total cost of material cost material/EU ****** Total cost of conversion conversion/EU

Cost (opening + current) Cost per EU (cost/EU)

Value of finish goods & ending WIP calculate as did above.

FIFO method Opening WIP
Cost of Opening WIP + Current period cost

Assumption: opening WIP units are completed first.

Finish goods Completed in current year

Net Current production cost (after on opening)
Ending WIP At year End Carry forward to next year Current year Finish goods Started & ended in current year

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Process account
Des Opening W.I.P Material Labour Departmental overheads units *** *** $ **** **** **** **** des Normal loss units ** $ ***

abnormal loss (balancing)

**

***

Transfer to next …… Ending W.I.P Total *** ****

*** **** *** **** *** ****

Statement of EU
Description Out put Units **** **** **** Materials % EUs 100% EU 100% EU 100% EU Conversion % EUs % EU 100% EU % EU

Opening WIP Fully processed units Ending WIP

Total units Cost (opening + current) Cost per EU (cost/EU)

******* ****** Total cost of Total cost of material conversion cost material/EU conversion/EU

When abnormal losses occur with in the process then the EU must be adjusted. Description Out put Units **** **** Materials % EUs 100% EU 100% EU Conversion % EUs 100% % EU EU

Fully processed units Abnormal loss

Total units

******* Total cost of material cost material/EU Prepared by

****** Total cost of conversion conversion/EU

Cost (opening + current) Cost per EU (cost/EU)

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Management Accounting

46

Joint & by products
Sometime Process often produce more then one product .these addition products may be describe as joint product or by product

Joint products: Joint products are both main products.

By-products: One is main product & the by products are incidental to main products. Features Secondary product. Relatively low sale value

Features High saleable value of both products. Normally both are equally important.

Treatments
Material cost Conversion cost
Preseparation cost, Common cost, Joint cost

By-product does not pick up a share of the cost.

Joint Process

If the sales value of by-product is known at splitoff point.

If the sales value of by-product is not-known at split-off point.

Split-off Point

Apportioned the joint cost. Basis Sales value Units produce NRV

Sales value of the by product at the split-off point is treated as reduction in cost instead of an income. Just like normal loss.

Product A + Cost after split

Product B + Cost after split

Product C + Cost after split

Value become known after the some processing activities then the net income of the by product is used to reduce the costs of the process.

Net income = Sales value -- Further processing costs.

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Process account for the joint products & by-products
Treatment of products

Joint products= normal products By-products=normal loss Material/EU= material cost - scrap value-sales value of by - product / EU Good output= opening unit + input units – normal loss – by-product – abnormal loss Abnormal loss= good output – normal loss – by-product

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Chapter Twelve 12 Service costing
Service costing is used when the organization or department provides a service. Service Intangible(performance) Highly variable (Human involvement) Produce & consume can not inspect in advance of receiving it. It Can not be stored product Tangible (goods) Relatively Standardized Can inspect & check before receiving the product. Products can store.

Cost unit Single cost unit is more appropriate if a service is a function of the one variable. (Hour worked, Meal served) Composite cost unit is more appropriate if a service is a function of the two variables. (Tonne-miles, patient-day) Cost per service unit = total cost for providing the service / service cost unit. Service cost analysis If the organization in the same service industry use the same service cost units then comparisons between the companies can be made easily. Simple trick Calculate the cost of each element of the service to the total cost in %. Calculate per unit cost, individually & collectively.

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Budget slack: It is deliberate over-estimation of cost or underestimation of revenue, which make it easier to achieve the targets.

Chapter thirteen 13
Budgeting
Budgeting A budget is a quantitative expression of plan of an action prepared in advance of the period to which it relates.

Purpose of budgeting

Stages of budget

Budgetary control

The purpose of budget changes with the nature of organization but the main aims of the budgeting are as follow.

Before starting the budgeting process the long-term objective must be define first so that the budgets prepared are working toward the goal of business

Comparing the plan of the budget with the actual result & investigating any significant difference between the two.

Planning for the future
In line with the objective of the organization

Budget committee is formed.
Person involve in preparation of budget.

Fixed budget
Report in which comparing the original budget against the actual results.

Controlling costs
Comparing plan Vs budgeted

Budget manual is produced.
An instruction, responsibility, charts setting.

Flexible budget
Budget at different levels of activities such as 70%, 90% or 110% of original budget.

Coordination
Managers work for came common goal.

Communication
Communicate the targets

Limiting factor identified.
Known as principal budget factor

Flexed budgets
Is a budget which recognizes different cost behaviour pattern & is designed to change as the volume of activity changes (actual activity level). Variance is the difference between actual Vs budgeted Total variance is the combination of volume & expenditure variance.

Motivation
Budget encourage when they beat the target. Bonuses are offered

Final steps
*) Initial budget is prepared. *) Initial budget review & integrated in principal budget. *) Make adjustments. *) Budgets are reviewed regularly.

Evaluation
Judging the performance of mangers.

Authorization
Act as a Form of authorization of expenditure.

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Other: Changes according to the nature of business

50 Periodic:
It’s a budget for the year ahead (or budget period) fixed in the term of time. After the end of year new budget will prepare.

Types of budget

By Time By function Continuous: (rolling budget)
Budget is prepared for a year ahead & is updated regularly by adding further accounting period when the first accounting period expired

Production

Sales

Overheads

Labour

Material

Budget production =Forecast sales + closing inventory – opening inventory of finish goods.

Fixed overhead: Not changes with the level of activity in total (with in relevant range) Variable overheads Changes with the level of activity.

Material purchases budget = material usage budget+ closing inventory – opening inventory Material usage budget = Production budget * price per unit (kg)

Units sales* sale price/unit

Labour budget= Labour hour * rate/hour

Principal budget factor: is a factor that limits the activities of an undertaking.

Variance

Total variance is the difference between fixed budget & actual result.

Volume variance: Difference in cost due to changes in volume (activity). (fixed & flexible budgeted figures )

Expenditure variance: Difference in cost due to actual expenditure differing from fixed budget figures.

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Sales budget

Production budget

Raw material

Labour

Factory overheads

Cost of good sold budget Selling & distribution budget General & administrative budget

Master budgets Budgeted income statement Cash budget Capital expenditure budget

Budgeted balance sheet

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52 A standard cost is the planned unit cost of a product or service. Use as a target cost, Use for planning, variance calculations,

Chapter fourteen 14
Standard costing

Basic standard Long term standards, Remain unchanged, Use to show trend, Least useful

Ideal standards Based on perfect operating conditions (No wastage, no idle time, no stoppages)

Attainable standards Based on efficient operating conditions, mostly used, Included allowances, Bases on high performance level.

Current standards Based on current level of activity in term of allowances, Improvement chances are very low

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Variance
Actual cost Vs Attainable hours * S.Rate

Sales Price Variance Sales Variance Sales Volume Variance Overheads cost variance

Controllable Variance

Material cost variance

Labour cost variance

Price Variance

Usage variance

Rate variance

Efficiency Variance

Idle capacity variance
Actual hour worked * S.Rate

VS
Budgeted cost for actual hours worked (activity)

Variable overheads variance

Fixed overheads variance

Expenditure Variance

Efficiency Variance

Expenditure Variance

Volume variance

Capacity Variance

Efficiency Variance

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Sales variance Under absorption costing Actual quantity * actual price Actual quantity * standard price Actual quantity * profit Budgeted quantity * profit Under Marginal costing Actual quantity * actual price Actual quantity * standard price Actual quantity * contribution Budgeted quantity * contribution
Volume Variance Price Variance Volume Variance Price Variance Reasons Price variance Unplanned prices increase or decreases Volume Variance Unexpected Fall or raise in demand of product. Production difficulty.

Material variance Actual quantity * actual price = actual cost Actual quantity * S.R =expected cost (For actual Q) = flexed cost
Usage variance:
Quantifying the effect on profit of using different quantity of material from expected for the actual production achieved

Price Variance Usage Variance

Total material Variance

S.Q * S.R * Actual units

Price variance: Analysis weather the company paid more or less than expected for materials.

Reasons: Supplies from different sources, Unexpected prices increases, Change in quantity discounted, substitution.

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Labour variance Actual Hours * actual Rate = actual cost Actual Hours * S.R =expected cost (For actual H) = flexed cost
Efficiency variance:
Analysis weather the company used more or less than expected for Labour

Rate Variance Efficiency Variance

Total Labour Variance

S.H * S.R * Actual units

Rate variance: Analysis weather the company paid more or less than expected for Labour.

expected. Reasons:
An Unexpected notional wage award. Overtime different from plan. Substitution the Labour.

Reasons: Changes in working conditions. Learning effect. Staff training, incentive schemes. Substitution of Labour.

Variable Overhead variance
Expenditure Variance Efficiency Variance

Actual Hours * actual Rate = actual cost Actual Hours * S.R =expected cost (For actual H) = flexed cost

Total variable overhead Variance

S.H * S.R * Actual units

Expenditure variance: The variable overhead cost per hour was different to that expected.

Efficiency variance:
Working more or fewer hours than expected for the actual production.

Reasons:
Incorrect budgeting. Overheads calculations have mistakes.

Reasons: Changing in working method. Learning effect. Incentive schemes. Substitution of Labour.

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Fixed overhead variance
Actual & expected fixed overhead do not change when there is change in the level of activity however the effect on profit depend upon weather a marginal or absorption costing system is being used. Total variance

Fixed overhead (both costing) Actual expenditure Budget expenditure S. Fixed OA Rate * Actual unit

Expenditure variance under marginal & absorption costing Volume variance is only for absorption costing.

Remember: Over/under absorption of overhead are due to over or under absorption of overhead on the level of activity .its showing that the volume variance can arise in absorption costing. Fixed overhead total variance in an absorption costing is the same as any under /over absorption of over head (actual VS actual units* OAR) In volume variance we think reverse about the variances, as the favorable consider here adverse & vise versa.

In marginal costing the expenditure variance = total variance In absorption costing the total variance is = to the combination of expenditure & efficiency variances.

Volume variance
Explaining why the level of activity was different from that budgeted

Budgeted expenditure

Capacity variance measure weather workforce worked more or fewer hours than the budgeted for the period. Efficiency variance measures weather the workforce took more or less tile than the expected in producing their output for the period.

Actual hours * FOAR per hour

S.H * S.FOAR for actual production

Reasons: Expenditure variance: changes in fixed overheads, seasonal difference Volume variance: changing in production, changing in productivity, lost production through strikes. Prepared by AMMAR MUSHTAQ KHAN

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Reconciliation statement

Operation statement (in absorption costing ) Budgeted profit Sales volume variance (using profit per unit) Standard profit on actual sales Sales price variance Cost variance Material price Material usage Labour rate Labour efficiency Variable overhead rate Variable overhead efficiency Fixed overhead volume -production Fixed overhead expenditure-production Fixed overhead expenditure- non production Total Actual profit

F

A *

$

****

*

* **** **** ****

Note * The sales volume variance is calculated using the standard contribution per unit. There is no fixed overhead volume variance (and therefore capacity & efficiency variance) in the marginal costing operating statements.

Interrelationships between variance
Variance may Move in same direction, opposite direction, single or combined. If supplies of a specified material are not available, this may lead to a favorable price variance but an adverse usage variance, an adverse fixed overhead volume variance and an adverse sales volume variance. A new improved machine become available which causes an adverse fixed overhead expenditure variance but favorable wages efficiency & fixed overhead volume variance. Workers try to improve the productivity cause the favorable Labour efficiency variance & may be the adverse material usage variance Prepared by AMMAR MUSHTAQ KHAN

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The Microsoft Excel Window

The Title Bar

This lesson will familiarize you with the Microsoft Excel screen. You will start with the Title bar, which is located at the very top of the screen. On the Title bar, Microsoft Excel displays the name of the workbook you are currently using. At the top of your screen, you should see "Microsoft Excel - Book1" or a similar name. The Menu Bar

The Menu bar is directly below the Title bar. The menu begins with the word File and continues with Edit, View, Insert, Format, Tools, Data, Window, and Help. You use a menu to give instructions to the software. Point with your mouse to a menu option and click the left mouse button. A drop-down menu opens. You can now use the left and right arrow keys on your keyboard to move left and right across the Menu bar. You can use the up and down arrow keys to move up and down the drop-down menu. To choose an option, highlight the item on the dropdown menu and press Enter. An ellipse after a menu item signifies additional options; if you choose that option, a dialog box opens. Do the following exercise, which demonstrates using the Microsoft Excel menu bar. 1. 2. 3. 4. 5. Point to the word File, which is located on the Menu bar. Click your left mouse button. Press the right arrow key until Help is highlighted. Press the left arrow key until Format is highlighted. Press the down arrow key until Style is highlighted. Press the up arrow key until Cells is highlighted. 6. Press Enter to choose the Cells menu option. 7. Point to Cancel and click the left mouse button to close the dialog box.

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When using Microsoft Excel, you can set an option to tell Microsoft Excel to always show full menus or to show only the most frequently and recently used options. All the lessons in this tutorial assume you have your menus set to Always Show Full Menus. To set your menu to display full menus: 1. 2. 3. 4. 5. 6. Point to the word Tools, which is located on the menu bar. Click your left mouse button. Press the down arrow until customize is highlighted. Press Enter. Choose the Options Tab by clicking on it. If Always Show Full Menus does not have a check mark in it, click in the Always Show Full Menus box. 7. Click Close to close the dialog box. Toolbars

59

The Standard Toolbar

The Formatting Toolbar Toolbars provide shortcuts to menu commands. Toolbars are generally located just below the Menu bar. Before proceeding with this lesson, make sure the toolbars you will use -- Standard and Formatting -- are available. Follow the steps outlined here: 1. 2. 3. 4. 5. Point to View, which is located on the Menu bar. Click the left mouse button. Press the down arrow key until Toolbars is highlighted. Press the right arrow key. Both Standard and Formatting should have a check mark next to them. If both have a check mark next to them, press Esc two times to close the menu. If either does not have a check mark, press the down arrow key until Customize is highlighted. Press Enter. The Customize dialog box opens. Choose the Toolbars tab. Point to the box or boxes next to the unchecked word or words, Standard and/or Formatting, and click the left mouse button. A check mark should appear. Note: You turn the check mark on and off by clicking the left mouse button. Point to Close and click the left mouse button to close the dialog box.

6. 7. 8.

9.

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Worksheets

60

Microsoft Excel consists of worksheets. Each worksheet contains columns and rows. The columns are lettered A to IV; the rows are numbered 1 to 65536. The combination of a column coordinate and a row coordinate make up a cell address. For example, the cell located in the upper left corner of the worksheet is cell A1, meaning column A, row 1. Cell E10 is located under column E on row 10. You enter your data into the cells on the worksheet. The Formula Bar

Formula Bar If the Formula bar is turned on, the cell address displays in the Name box on the left side of the Formula bar. Cell entries display on the right side of the Formula bar. Before proceeding, make sure the Formula bar is turned on. 1. Point to View, which is located on the Menu bar. 2. Click the left mouse button. A drop-down menu opens. On the drop-down menu, if Formula Bar has a check mark next to it, the Formula bar is turned on. Press the Esc key to close the drop-down menu. 3. If Formula Bar does not have a check mark next to it, press the down arrow key until Formula Bar is highlighted; then press Enter. The Formula bar should now appear below the toolbars. 4. Note that the current cell address displays on the left side of the Formula bar. The Status Bar

Status Bar If the Status bar is turned on, it appears at the very bottom of the screen. Before proceeding, make sure the Status bar is turned on. 1. Point to View, which is located on the Menu bar.

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2. Click the left mouse button. A drop-down menu opens. 3. On the drop-down menu, if Status Bar has a check mark next to it, it is turned on. Press the Esc key to close the drop-down menu. 4. If Status Bar does not have a check mark next to it, press the down arrow key until Status Bar is highlighted; then press Enter. The Status bar should now appear at the bottom of the screen. Notice the word "Ready" on the Status bar at the lower left side of the screen. The word "Ready" tells you that Excel is in the Ready mode and awaiting your next command. Other indicators appear on the Status bar in the lower right corner of the screen. Here are some examples: The Num Lock key is a toggle key. Pressing it turns the numeric keypad on and off. You can use the numeric keypad to enter numbers as if you were using a calculator. The letters "NUM" on the Status bar in the lower right corner of the screen indicate that the numeric keypad is on.

Press the Num Lock key several times and note how the indicator located on the Status bar changes.

The Caps Lock key is also a toggle key. Pressing it turns the caps function on and off. When the caps function is on, your entry appears in capital letters.

Press the Cap Lock key several times and note how the indicator located on the Status bar changes.

Other functions that appear on the Status bar are Scroll Lock and End. Scroll Lock and End are also toggle keys. Pressing the key toggles the function between on and off. Scroll Lock causes the movement keys to move the window without moving the cell pointer. End lets you jump around the screen. We will discuss both of these later in more detail. Make sure the Scroll Lock and End indicators are off and complete the following exercises. The Down Arrow Key You can use the down arrow key to move downward one cell at a time. 1. Press the down arrow key several times. 2. Note that the cursor moves downward one cell at a time. The Up Arrow Key You can use the Up Arrow key to move upward one cell at a time. 1. Press the up arrow key several times. 2. Note that the cursor moves upward one cell at a time. The Tab Key You can use the Tab key to move across the page to the right, one cell at a time. 1. Move to cell A1. 2. Press the Tab key several times. 3. Note that the cursor moves to the right one cell at a time.

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The Shift+Tab Keys

62

You can hold down the Shift key and then press the Tab key to move to the left, one cell at a time. 1. Hold down the Shift-key and then press Tab. 2. Note that the cursor moves to the left one cell at a time. The Right and Left Arrow Keys You can use the right and left arrow keys to move right or left one cell at a time. 1. 2. 3. 4. Press the right arrow key several times. Note that the cursor moves to the right. Press the left arrow key several times. Note that the cursor moves to the left.

Page Up and Page Down The Page Up and Page Down keys move the cursor up and down one page at a time. 1. 2. 3. 4. Press the Page Down key. Note that the cursor moves down one page. Press the Page Up key. Note that the cursor moves up one page.

The End Key

The Status Bar The End key, used in conjunction with the arrow keys, causes the cursor to move to the far end of the spreadsheet in the direction of the arrow. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Press the End key. Note that "END" appears on the Status bar in the lower right corner of the screen. Press the right arrow key. Note that the cursor moves to the farthest right area of the screen. Press the END key again. Press the down arrow key. Note that the cursor moves to the bottom of the screen. Press the End key again. Press the left arrow key. Note that the cursor moves to the farthest left area of the screen. Press the End key again. Press the up arrow key. Note that the cursor moves to the top of the screen.

Note: If you have entered data into the worksheet, the End key moves you to the end of the data area. The Home Key The Home key, used in conjunction with the End key, moves you to cell A1 -- or to the beginning of the data area if you have entered data.

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1. 2. 3. 4. 5. Move the cursor to column J. Stay in column J and move the cursor to row 20. Press the End key. Press Home. You should now be in cell A1.

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Moving Quickly Around the Worksheet The following are shortcuts for moving quickly from one cell to a cell in a different part of the worksheet. Go to -- F5 The F5 function key is the "Go To" key. If you press the F5 key while in the Ready mode, you are prompted for the cell to which you wish to go. Enter the cell address, and the cursor jumps to that cell. 1. Press F5. The Go To dialog box opens. 2. Type J3. 3. Press Enter. The cursor should move to cell J3. Go to -- Ctrl-G You can also use Ctrl-G to go to a specific cell. 1. Hold down the Ctrl key while you press "g" (Ctrl-g). The Go To dialog box opens. 2. Type C4. 3. Press Enter. You should now be in cell C4. Name Box You can also use the Name box to go to a specific cell.

1. Type B10 in the Name box 2. Press Enter. Excel moves to cell D10.

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Selecting Cells

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If you wish to perform a function on a group of cells, you must first select those cells by highlighting them. To highlight cells A1 to E1: 1. Place the cursor in cell A1. 2. Press the F8 key. This anchors the cursor. 3. Note that "EXT" appears on the Status bar in the lower right corner of the screen. You are in the Extend mode. 4. Click in cell E7. Cells A1 to E7 should now be highlighted. 5. Press Esc and click anywhere on the worksheet to clear the highlighting. Alternative Method: Selecting Cells by Dragging You can also highlight an area by holding down the left mouse button and dragging the mouse over the area. In addition, you can select noncontiguous areas of the worksheet by doing the following: 1. Place the cursor in cell A1. 2. Hold down the Ctrl key. Do not release it until you are told. Holding down the Ctrl key enables you to select noncontiguous areas of the worksheet. 3. Press the left mouse button. 4. While holding down the left mouse button, use the mouse to move from cell A1 to E7. 5. Continue to hold down the Ctrl key, but release the left mouse button. 6. Using the mouse, place the cursor in cell G8. 7. Press the left mouse button. 8. While holding down the left mouse button, move to cell I17. Release the left mouse button. 9. Release the Ctrl key. Cells A1 to E7 and cells G8 to I17 are highlighted. 10. Press Esc and click anywhere on the worksheet to remove the highlighting. Entering Data In this lesson, you are going to learn how to enter data into your worksheet. First, you place the cursor in the cell in which you would like to enter data. Then you type the data and press Enter.

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Management Accounting
1. Place the cursor in cell A1. 2. Type John Jordan. 3. The Backspace key erases one character at a time. Erase "Jordan" by pressing the backspace key until Jordan is erased. 4. Press Enter. The name "John" should appear in cell A1.

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Editing a Cell After you enter data into a cell, you can edit it by pressing F2 while you are in the cell you wish to edit. 1. 2. 3. 4. 5. 6. Move the cursor to cell A1. Press F2. Change "John" to "Jones." Use the backspace key to delete the "n" and the "h." Type nes. Press Enter.

Alternate Method: Editing a Cell by Using the Formula Bar You can also edit the cell by using the Formula bar. You can change "Jones" to "Joker" as follows: 1. Move the cursor to cell A1. 2. Click in the formula area of the Formula bar.

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Management Accounting

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3. Use the backspace key to erase the "s," "e," and "n." 4. Type ker. 5. Press Enter.

Alternate Method: Editing a Cell by Double-Clicking in the Cell You can change "Joker" to "Johnson" as follows: 1. 2. 3. 4. 5. 6. Move the cursor to cell A1. Double-click in cell A1. Press the End key. Your cursor is now at the end of your text. Use the backspace to erase "r," "e," and "k." Type hnson. Press Enter.

Changing a Cell Entry Typing in a cell while you are in the Ready mode replaces the old cell entry with the new information you type.

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Management Accounting
1. Move the cursor to cell A1. 2. Type Cathy. 3. Press Enter. The name "Cathy" should replace "Johnson."

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Wrapping Text When you enter text that is too long to fit in a cell into a cell, it overlaps the next cell. If you do not want it to overlap the next cell you can wrap the text. 1. 2. 3. 4. 5. 6. 7. 8. Move to cell A2. Type Text too long to fit. Press Enter. Return to cell A2. Choose Format > Cells from the menu. Choose the Alignment tab. Click Wrap Text. Click OK. The text wraps.

Deleting a Cell Entry To delete an entry in a cell or a group of cells, you place the cursor in the cell or highlight the group of cells and press Delete. 1. Place the cursor in cell A2. 2. Press the Delete key. Entering Numbers as Labels or Values In Microsoft Excel, you can enter numbers as labels or as values. Labels are alphabetic, alphanumeric, or numeric text on which you do not perform mathematical calculations. Values are numeric text on which you perform mathematical calculations. If you have a numeric entry, such as an employee number, on which you do not perform mathematical calculations, enter it as a label by typing a single quotation mark first. Enter a number: 1. Move the cursor to cell B1. 2. Type 100. 3. Press Enter.

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The number 100 appears in cell B1 as a numeric value. You can perform mathematical calculations using this cell entry. Note that by default the number is right-aligned. Enter a value: 1. Move the cursor to cell C1. 2. Type '100. 3. Press Enter. The number 100 appears in cell C1 as a label. Note that by default the cell entry is left-aligned and a green triangle appears in the upper left corner of the cell. Smart Tags When you make an entry that Microsoft Excel believes you may want to change, a smart tag appears. Smart tags give you the opportunity to make changes easily. Cells with smart tag in them appear with a green triangle in the upper left corner. When you place your cursor in the cell, the Trace Error icon appears. Click the Trace Error icon and options appear. When you made your entry in cell C1 in the previous section, a smart tag should have appeared. 1. Move to cell C1. 2. Click the Trace Error icon. An options list appears. You can convert the label to a number, obtain help, ignore the error etc. Saving a File This is the end of Lesson1. To save your file: 1. 2. 3. 4. Choose File > Save from the menu. Go to the directory in which you want to save your file. Type lesson1 in the File Name field. Click Save.

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Numbers and Mathematical Calculations
Microsoft Excel has many functions that you can use. Functions allow you to quickly and easily find an average, the highest number, the lowest number, a count of the number of items in a list, and make many other useful calculations. Reference Operators Reference operators refer to a cell or a group of cells. There are two types of reference operators, range and union. A range reference refers to all the cells between and including the reference. A range reference consists of two cell addresses separated by a colon. The reference A1:A3 includes cells A1, A2, and A3. The reference A1:C3 includes A1, A2, A3, B1, B2, B3, C1, C2, and C3. A union reference includes two or more references. A union reference consists of two or more cell addresses separated by a comma. The reference A7,B8,C9 refers to cells A7, B8, and C9.

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Functions

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Microsoft Excel has a set of prewritten formulas called functions. Functions differ from regular formulas in that you supply the value but not the operators, such as +, -, *, or /. For example, you can use the SUM function to add. When using a function, remember the following: Use an equal sign to begin a formula. Specify the function name. Enclose arguments within parentheses. Use a comma to separate arguments. Here is an example of a function: =SUM(2,13,A1,B27) In this function: The equal sign begins the function. SUM is the name of the function. 2, 13, A1, and B27 are the arguments. Parentheses enclose the arguments. A comma separates the arguments. The SUM function adds the arguments together. In the exercises that follow, we will look at various functions. Typing a Function 1. 2. 3. 4. 5. 6. 7. 8. 9. Open Microsoft Excel. Type 12 in cell B1. Press Enter. Type 27 in cell B2. Press Enter. Type 24 in cell B3. Press Enter. Type =SUM(B1:B3) in cell A4. Press Enter. Microsoft Excel sums cells B1 to B3.

Alternate Method: Entering a Function by Using the Menu 1. 2. 3. 4. 5. Type 150 in cell C1. Press Enter. Type 85 in cell C2. Press Enter. Type 65 in cell C3.

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6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Press Enter. Your cursor should be in cell C4. Choose Insert > Function from the menu. Choose Math & Trig in the Or Select A Category box. Click Sum in the Select A Function box. Click OK. The Functions Arguments dialog box opens. Type C1:C3 in the Number1 field, if it does not automatically appear. Click OK. Microsoft Excel sums cells C1 to C3. Move to cell A4. Type the word Sum. Press Enter.

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As you learned in Lesson 2, you can also calculate a sum by using the Sum icon. Calculating an Average You can use the AVERAGE function to calculate the average of a series of numbers. 1. 2. 3. 4. Move your cursor to cell A6. Type Average. Press the right arrow key to move to cell B6. Type =AVERAGE(B1:B3). Press Enter. The average of cells B1 to B3, which is 21, will appear.

Calculating an Average by Using the Sum Icon In Microsoft Excel XP, you can use the Sum icon to calculate an average. 1. 2. 3. 4. 5. Move your cursor to cell C6. Click the drop-down arrow next to the Sum icon. Click Average. Highlight C1 to C3. Press Enter. The average of cells C1 to C3, which is 100, appears.

Calculating Min You can use the MIN function to find the lowest number in a series of numbers. 1. 2. 3. 4. 5. Move your cursor to cell A7. Type Min. Press the right arrow key to move to cell B7. Type = MIN(B1:B3). Press Enter. The lowest number in the series, which is 12 appears.

Calculating Max You can use the MAX function to find the highest number in a series of numbers. 1. 2. 3. 4. 5. Move your cursor to cell A8. Type Max. Press the right arrow key to move to cell B8. Type = MAX(B1:B3). Press Enter. The highest number in the series, which is 27, appears.

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Note: You can also use the drop-down menu next to the Sum icon to calculate minimums and maximums. Calculating Count You can use the count function to count the number of items in a series. 1. 2. 3. 4. 5. 6. 7. Move your cursor to cell A9. Type Count Press the right arrow key to move to cell B9. Click the down arrow next to the Sum icon. Click Count. Highlight B1 to B3. Press Enter. The number of items in the series, which is 3 appears.

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Filling Cells Automatically You can use Microsoft Excel to fill cells automatically with a series. For example, you can have Excel automatically fill in times, the days of the week or months of the year, years, and other types of series. Days of the week and months of the year fill in a similar fashion. The following demonstrates filling the days of the week: 1. 2. 3. 4. 5. 6. 7. 8. Move to Sheet2. Move to cell A1. Type Sun. Move to cell B1. Type Sunday. Highlight cells A1 to B1. Bold cells A1 to B1. Find the small black square in the lower right corner of the highlighted area. This is called the Fill Handle. 9. Grab the Fill Handle and drag with your mouse to fill cell A1 to B24. Note how the days of the week fill the cells in a series. Also, note that the Auto Fill Options icon appears.

10. Click the Auto Fill Options icon. 11. Choose the Copy Cells radio button. The entry in cells A1 and B1 are copied to all the cells highlighted. 12. Click the Auto Fill Options icon again. 13. Choose the Fill Series radio button. The cells fill as a series from Sunday to Saturday again. 14. Click the Auto Fill Options icon again. 15. Choose the Fill Without Formatting radio button. The cells fill as a series from Sunday to Saturday, but the entries are not bolded. 16. Click the Auto Fill Options icon again. 17. Choose the Fill Weekdays radio button. The cells fill as a series from Monday to Friday.

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Some of the entries in column B are too long to fit in the column. You can quickly adjust the column width to fit the longest entry. 1. Move your cursor over the line that separates column B and C. The Width Indicator appears.

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2. Double-click. The Column adjusts to fit the longest entry. The following demonstrates filling time: 1. Type 1:00 into cell C1. 2. Grab the Fill Handle and drag with your mouse to highlight cells A1 to A24. Note that each cell fills using military time. 3. Press Esc and then click anywhere on the worksheet to remove the highlighting. To change the format of the time: 1. 2. 3. 4. 5. 6. Select cells C1 to C24. Choose Format > Cells from the menu. Choose the Number tab. In the Category box, choose Time. In the Type box, choose 1:30 PM. Click OK. The time is no longer in military time.

You can also fill numbers. Type a 1 in cell D1. 1. Grab the Fill Handle and drag with your mouse to highlight cells D1 to D24. The number 1 fills each cell. 2. Click the Auto Fill Options icon. 3. Choose the Fill Series radio button. The cells fill as a series starting with 1, 2, 3. Here is another interesting fill feature. 1. 2. 3. 4. Go to cell E1. Type Lesson 1. Grab the Fill Handle and drag with your mouse to highlight cells E1 to E24. The cells fill in as a series: Lesson 1, Lesson 2, Lesson 3, and so on.

Printing The simplest way to print is to click the Print icon located on the Standard toolbar. Dotted lines will appear on your screen after you click the print icon. The dotted lines indicate the right, left, top, and bottom edges of your printed pages.

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Print Preview

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There are many print options. You can select print options options in Page Setup or in Print Preview. In Print Preview, you can see the results of your selections onscreen. You can use print options to:

• • •

Determine whether to print landscape or portrait. If you print portrait on an 8 1/2 by 11 sheet of paper, the length across the top of your page will be 8 1/2 inches. If you print landscape on an 8 1/2 by 11 sheet of paper, the length across the top of your page will be 11 inches. Scale your document. If your data is small in comparison to the page, you may want to scale upward so the data fills the entire page. If your data is too large to fit on the page, you may want to scale downward. Specify how many pages wide and how many pages long you want your printed document to be. Select the paper size and print quality. Set the first page number.

If you choose the Margins tab, you can:
• •

Set the size of your margins including your header and footer margins. Center your spreadsheet horizontally and/or vertically on the page.

If you choose the Header/Footer tab, you can select headers and footers. A header is text that appears at the top of every page. A footer is text that appears at the bottom of every page. You can use headers and footers to insert page numbers, dates, and other information. To choose a header: 1. Choose the Header/Footer tab. 2. Click the down arrow next to the Header field to open the drop-down box for the header field. 3. Choose a Header from the list. To choose a footer: 1. Choose the Header/Footer tab. 2. Click the down arrow next to the Footer field to open the drop-down box for the Footer field. 3. Choose a Footer from the list. Click the Custom Header or Custom Footer button to customize your headers and footers.

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Use the Left Section to place your options on the left side of the page, the Center Section to place your options in the center of the page, and the Right Section to place your options 9on the right side of the page. The Sheet tab has options that allow you to choose which rows and columns will repeat at the left and the top of the page. It also has options that allows you to determine whether gridlines and/or row column headings print To preview and print your spreadsheet: 1. 2. 3. 4. 5. 6. 7. Choose File > Preview from the menu. Click Setup. Choose the Page tab. Choose Portrait. In the Adjust To field, type 110% to set the size to 110%,. Choose the Margin tab. Check the Horizontally box in the Center On Page frame to center your spreadsheet horizontally. 8. Click OK. 9. Click Print. The Print dialog box opens. 10. Click OK to print the file. Saving Your File To save your file: 1. 2. 3. 4. Choose File>Save from the menu. Go to the directory in which you want to save your file. Type File Name in field. Click Save.

Creating Charts Using Microsoft Excel, you can represent numbers in a chart. You can choose from a variety of chart types. And, as you change your data, your chart will automatically update. You can use Microsoft Excel's Chart Wizard to take you through the process step-by-step. Creating a Column Chart

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To create the column chart shown above, start by creating the spreadsheet below exactly as shown.

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After you have created the spreadsheet, you are ready to create your chart. 1. Highlight cells A3 to D6. You must highlight all the cells containing the data you want in your chart. You should also include the data labels. 2. Choose Insert > Chart from the menu. 3. Click Column to select the type of chart you want to create. 4. In the Chart Sub-type box, choose the Clustered Column icon to select the chart sub-type.

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Click Next. To place the product names on the x-axis, select the Columns radio button. Click Next. Type Toy Sales in the Chart Title field. Toy Sales will appear as the title of your chart. Type Products in the Category (X) Axis field. Products will appear as your x-axis title. Type Units Sold in the Value (Y) Axis field. Units Sold will appear as your y-axis title. Choose the Data Labels tab. Select Value in the Labels Contain Frame to display the data labels as values. Choose the Data Table tab. Select Show Data Table. The data table will appear below your chart. Click Next.

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16. Choose As Object In Sheet1 to make your chart an embedded object and part of the worksheet. 17. Click Finish 18. Your chart will appear on the spreadsheet. Changing the Size and Position of a Chart

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When you select a chart, handles appear on the right and left sides, the top and bottom, and the corners of the chart. You can drag the handles on the top and bottom of the chart to increase or decrease the height of the chart. You can drag the handles on the left and right sides of the chart to increase or decrease the width of the chart. You can drag the handles on the corners of the chart to increase or decrease the size of the chart proportionally.

You can change the position of a chart by clicking on the chart and dragging 1. Use the handles to adjust the size of your chart. 2. Click the chart and drag to position the chart under the data.

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