M.

A FORMULAS

MANAGEMENT ACCOUNTING (M.A)

FORMULAS

CVP ANALYSIS AND BREAKEVEN

1. CONTRIBUTION = SALES – VARIABLE COST

MARGIN

= CM RATIO × MARGIN OF SAFETY RATIO

2. PROFIT RATIO OR
𝐍𝐄𝐓 𝐏𝐑𝐎𝐅𝐈𝐓
=𝐁𝐔𝐃𝐆𝐄𝐓𝐄𝐃 𝐒𝐀𝐋𝐄𝐒

1. C.M – F.C
3. NET PROFIT 2. BUDGETED SALES × PROFIT %
3. M/S × C.M RATIO
4. BUDGETED SALES × CM RATIO × MARGIN OF SAFETY
RATIO

= M/S RATIO × C.M PER UNIT

3.1. PROFIT PER OR
UNIT 𝑩𝑼𝑫𝑮𝑬𝑻𝑬𝑫 𝑺𝑨𝑳𝑬𝑺 𝑼𝑵𝑰𝑻𝑺
= 𝑵𝑬𝑻 𝑷𝑹𝑶𝑭𝑰𝑻

𝐓𝐎𝐓𝐀𝐋 𝐂𝐎𝐍𝐓𝐑𝐈𝐁𝐔𝐓𝐈𝐎𝐍
= × 100
𝑻𝑶𝑻𝑨𝑳 𝑺𝑨𝑳𝑬𝑺
OR
𝐂𝐎𝐍𝐓𝐑𝐈𝐁𝐔𝐓𝐈𝐎𝐍 𝐏𝐄𝐑 𝐔𝐍𝐈𝐓
= × 100
𝑺𝑨𝑳𝑬𝑺 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
4. CM RATIO / PROFIT OR
𝐒𝐀𝐋𝐄𝐒 – 𝐕𝐀𝐑𝐈𝐀𝐁𝐋𝐄 𝐂𝐎𝐒𝐓
VOLUME RATIO = × 100
𝑺𝑨𝑳𝑬𝑺
OR
∆ 𝐂𝐎𝐍𝐓𝐑𝐈𝐁𝐔𝐓𝐈𝐎𝐍/𝐏𝐓𝐎𝐅𝐈𝐓
=
∆ 𝑺𝑨𝑳𝑬𝑺

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M.A FORMULAS

QUANTITY:
𝐓𝐎𝐓𝐀𝐋 𝐅𝐈𝐗𝐄𝐃 𝐂𝐎𝐒𝐓
=
𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
OR
𝐕𝐀𝐋𝐔𝐄 𝐎𝐅 𝐁𝐑𝐄𝐀𝐊𝐄𝐕𝐄𝐍 𝐏𝐎𝐈𝐍𝐓
=
𝑺𝑨𝑳𝑬𝑺 𝑷𝑹𝑰𝑪𝑬 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
5. BREAKEVEN POINT OR
SALES VALUE:
𝐓𝐎𝐓𝐀𝐋 𝐅𝐈𝐗𝐄𝐃 𝐂𝐎𝐒𝐓
= × SALES PRICE PER UNIT
𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
OR
𝐓𝐎𝐓𝐀𝐋 𝐅𝐈𝐗𝐄𝐃 𝐂𝐎𝐒𝐓
=
𝑷𝑹𝑶𝑭𝑰𝑻 𝑽𝑶𝑳𝑼𝑴𝑬 /𝑪𝑴 𝑹𝑨𝑻𝑰𝑶

QUANTITY:
𝐓𝐎𝐓𝐀𝐋 𝐅.𝐂 + 𝐃𝐄𝐒𝐈𝐑𝐄𝐃 𝐏𝐑𝐎𝐅𝐈𝐓
=
𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
6. SALE FOR DESIRED
PROFIT
VALUE:
𝐓𝐎𝐓𝐀𝐋 𝐅.𝐂 + 𝐃𝐄𝐒𝐈𝐑𝐄𝐃 𝐏𝐑𝐎𝐅𝐈𝐓
=+
𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵 𝑴𝑨𝑹𝑮𝑰𝑵 𝑹𝑨𝑻𝑰𝑶
OR
𝐓𝐎𝐓𝐀𝐋 𝐅.𝐂 + 𝐃𝐄𝐒𝐈𝐑𝐄𝐃 𝐏𝐑𝐎𝐅𝐈𝐓
= × SALES PRICE PER UNIT
𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻

PERCENTAGE
𝑩𝑼𝑫𝑮𝑬𝑻𝑬𝑫 /𝑨𝒄𝒕𝒖𝒂𝒍 𝒔𝒂𝒍𝒆𝒔 − 𝒃𝒓𝒆𝒂𝒌𝒆𝒗𝒆𝒏 𝒑𝒐𝒊𝒏𝒕
= × 100
𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 / 𝑨𝒄𝒕𝒖𝒂𝒍 𝒔𝒂𝒍𝒆𝒔

QUANTITY:

= BUDGETED/ ACTUAL SALE QUANTITY – BREAKEVEN QTY

7. MARGIN OF SAFETY
OR
𝑽𝑨𝑳𝑼𝑬 𝑶𝑭 𝑴𝑨𝑹𝑮𝑰𝑵 𝑶𝑭 𝑺𝑨𝑭𝑬𝑻𝒀
= 𝑺𝑨𝑳𝑬𝑺 𝑷𝑹𝑰𝑪𝑬 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
VALUE:
= BUDGETED/ ACTUAL SALES VALUE – B.E.P SALES VALUE
OR
= QUANTITY OF M.O.S × S.P PER UNIT

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M.A FORMULAS

QUANTITY:
𝐓𝐎𝐓𝐀𝐋 𝐅𝐈𝐗𝐄𝐃 𝐂𝐎𝐒𝐓
=
𝑾𝑬𝑰𝑮𝑯𝑻𝑬𝑫 𝑪𝑶𝑵𝑻𝑰𝑩𝑼𝑻𝑰𝑶𝑵 𝑴𝑨𝑹𝑮𝑰𝑵 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻

8. MULTI PRODUCT VALUE

BREAK EVEN SALES
𝐓𝐎𝐓𝐀𝐋 𝐅𝐈𝐗𝐄𝐃 𝐂𝐎𝐒𝐓
=
𝑾𝑬𝑰𝑮𝑯𝑻𝑬𝑫 𝑪𝑴 𝑹𝑨𝑻𝑰𝑶

HI -LO METHOD

𝑪𝑶𝑺𝑻 𝑶𝑭 𝑯𝑰𝑮𝑯𝑬𝑺𝑻 𝑳𝑬𝑽𝑬𝑳 − 𝑪𝑶𝑺𝑻 𝑶𝑭 𝑳𝑶𝑾𝑬𝑺𝑻 𝑳𝑬𝑽𝑬𝑳

=
𝑨𝑪𝑻𝑰𝑽𝑰𝑻𝒀 𝑶𝑭 𝑯𝑰𝑮𝑯𝑬𝑺𝑻 𝑳𝑬𝑽𝑬𝑳 − 𝑨𝑪𝑻𝑰𝑽𝑰𝑻𝒀 𝑨𝑻 𝑳𝑶𝑾𝑬𝑺𝑻

HI -LO METHOD THEORY

WHEN THERE ARE TWO LEVEL OF ACTIVITIES SO WE NEED TO USE HIGH LOW METHOD
1. SUB SE PHELE YE DEKH LO KE DIVIDE KIS LEVEL KI ACTIVITY SE KRNA HE?
 UNITS
 HOURS (LABOUR OR MACHINE)
 DOLLARS/ RS.
2. FIXED COST KISKI HE?
 FACTORY COST = USE PRODUCTION UINITS
 SELLING AND ADMIN COST = USE SALES UNITS
3. HIGH LOW KI AMOUNT KIS PERIOD KA HE (MONTHLY, QUARTERLY, ANNUALY)

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M.A FORMULAS

WHO'S PROFIT WILL BE GREATER?

WHEN: CLOSING STOCK > OPENING STOCK

PROFIT WITH: ABSORPTION COSTING > MARGINAL COSTING

WHEN: CLOSING STOCK < OPENING STOCK

PROFIT WITH: ABSORPTION COSTING < MARGINAL COSTING

ABSORPTION MARGINAL AND SUPER VARIABLE COSTING

METHODS PRODUCT COST PERIOD COST

1. ABSORPTION DIRECT MATERIAL
COSTING DIRECT LABOR -
VARIABLE FOH
FIXED FOH
2. MARGINAL COSTING DIRECT MATERIAL
DIRECT LABOR FIXED FOH
VARIABLE FOH

3. SUPER VARIABLE DIRECT LABOR

COSTING/ DIRECT MATERIAL VARIABLE FOH
THROUGHPUT FIXED FOH
ACCOUNTING

OVER AND UNDER APPLIED TREATMENTS

COST PROFIT
OVER APPLIED LESS ADD
UNDER APPLIED ADD LESS
BEGINNING STOCK COGS PROFIT

ENDING STOCK COGS PROFIT

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M.A FORMULAS

THROUGHPUT ACCOUNTING

Theory of constraints (TOC) is an approach to production management which aims to

maximize sales revenue less material cost. It focuses on bottlenecks which act as
constraints to the maximization of throughput.

Throughput is the money generated from sales minus the cost of the materials used in
making the items sold.
 All costs other than materials are seen as fixed in the short term.
 Inventory is valued at material cost only.
Bottleneck resource or binding constraint – an activity which has a lower capacity than
preceding or subsequent activities, thereby limiting throughput.

1. Throughput = Sales – Material costs

margin
2. Throughput
return per factory 𝐒𝐚𝐥𝐞𝐬− 𝐝𝐢𝐫𝐞𝐜𝐭 𝐦𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐜𝐨𝐬𝐭𝐬
=
hour: (TM PER 𝐔𝐬𝐚𝐠𝐞 𝐨𝐟 𝐛𝐨𝐭𝐭𝐥𝐞𝐧𝐞𝐜𝐤 𝐫𝐞𝐬𝐨𝐮𝐫𝐜𝐞 𝐢𝐧 𝐡𝐨𝐮𝐫𝐬 (𝐟𝐚𝐜𝐭𝐨𝐫𝐲 𝐡𝐨𝐮𝐫𝐬)
BNR)
=

3. Total Factory Cost = Fixed production costs, including labor

(TFC)

4. Cost per factory 𝐓𝐨𝐭𝐚𝐥 𝐟𝐚𝐜𝐭𝐨𝐫𝐲 𝐜𝐨𝐬𝐭𝐬

hour (FC PER BNR)
=
𝐓𝐢𝐦𝐞 𝐨𝐧 𝐤𝐞𝐲 𝐫𝐞𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐢𝐧 𝐡𝐨𝐮𝐫𝐬 (𝐟𝐚𝐜𝐭𝐨𝐫𝐲 𝐡𝐨𝐮𝐫𝐬)

5. Throughput 𝐓𝐡𝐫𝐨𝐮𝐠𝐡𝐩𝐮𝐭 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 𝐨𝐟 𝐛𝐨𝐭𝐭𝐥𝐞𝐧𝐞𝐜𝐤 𝐫𝐞𝐬𝐨𝐮𝐫𝐜𝐞

accounting ratio
=
𝐅𝐚𝐜𝐭𝐨𝐫𝐲 𝐜𝐨𝐬𝐭 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 𝐨𝐟 𝐛𝐨𝐭𝐭𝐥𝐞𝐧𝐞𝐜𝐤 𝐫𝐞𝐬𝐨𝐮𝐫𝐜𝐞
Or
𝐑𝐞𝐭𝐮𝐫𝐧 𝐩𝐞𝐫 𝐟𝐚𝐜𝐭𝐨𝐫𝐲 𝐡𝐨𝐮𝐫
=
𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐟𝐚𝐜𝐭𝐨𝐫𝐲 𝐡𝐨𝐮𝐫

6. EFFEICENCY OF 𝐑𝐞𝐪𝐮𝐢𝐫𝐞𝐝 𝐮𝐧𝐢𝐭𝐬 𝐩𝐞𝐫 𝐡𝐨𝐮𝐫/𝐝𝐚𝐲/𝐰𝐞𝐞𝐤

BOTTLENECK 𝐀𝐯𝐚𝐢𝐚𝐛𝐥𝐞 𝐜𝐚𝐩𝐚𝐜𝐢𝐭𝐲 𝐩𝐞𝐫 𝐡𝐨𝐮𝐫/𝐝𝐚𝐲/𝐰𝐞𝐞𝐤

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 M.A
INVENTORY MANAGEMENT
1. ECONOMIC ORDER QUANTITY:
2. ANNUAL DEMAND:
3. OPTIMUM NO. OF ORDERS:
4. TOTAL ORDERING COST (ACO)
5. TOTAL CARRYING COST (ACC)
6. SAFETY STOCK
7. REORDER POINT/ LEVEL
8. AVERAGE INVENTORY
9. NORMAL MAXIMUM INVENTORY
10. ABSOLUTE MAXIMUM INVENTORY
11. MINIMUM INVENTORY (SAFETY
STOCK)
SYED SHAHBAZ RAZA ZAIDI
FORMULAS
𝟐 × 𝐀𝐍𝐍𝐔𝐀𝐋 𝐃𝐄𝐌𝐀𝐍𝐃 × 𝐎𝐑𝐃𝐄𝐑𝐈𝐍𝐆 𝐂𝐎𝐒𝐓 𝐏𝐄𝐑 𝐎𝐑𝐃𝐄𝐑
√
𝑪𝑨𝑹𝑹𝒀𝑰𝑵𝑮 𝑪𝑶𝑺𝑻 𝑷𝑬𝑹 𝑼𝑵𝑰𝑻
= NORMAL USE PER DAY × WORKING DAYS PER YEAR
𝐀𝐍𝐍𝐔𝐀𝐋 𝐃𝐄𝐌𝐀𝐍𝐃
= 𝐄𝐎𝐐
NO. OF ORDERS × ORDERING COST (CO)
OR
ANNUAL DEMAND × ORDERING COST/EOQ
WITHOUT SAFETY STOCK
𝐄𝐎𝐐
× CARRYING COST PER UNIT (CC)
𝟐
WITH SAFETY STOCK
𝐄𝐎𝐐
+ SAFETY STOCK × CARRYING COST PER UNIT (CC)
𝟐
(MAXIMUM USE PER DAY – NORMAL USE PER DAY) × LEAD
TIME
WITH SAFTEY STOCK
(DEMAND FOR MATERIAL ITEM PER DAY/ WEEK × LEADTIME
IN DAYS/ WEEK) + SAFETY STOCK
WITHOUT SAFTEY STOCK
(MAXIMUM USAGE × MAXIMUM LEAD TIME)
𝐄𝐎𝐐 𝐨𝐫 𝐎𝐐
+ SAFETY STOCK
𝟐
RE-ORDER LEVEL + ORDERING QUANTITY - [NORMAL USAGE ×
NORMAL LEAD TIME]
RE-ORDER LEVEL + ORDERING QUANTITY - [MINIMUM USAGE
× MINIMUM LEAD TIME]
RE-ORDER LEVEL - [NORMAL USAGE × NORMAL LEAD TIME]
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M.A FORMULAS

WORKING CAPITAL MANAGEMENT

1. WORKING CAPITAL TOTAL CURRENT ASSETS – TOTAL CURRENT LIABILITIES

𝑻𝑶𝑻𝑨𝑳 𝑪𝑼𝑹𝑹𝑬𝑵𝑻 𝑨𝑺𝑺𝑬𝑻𝑺

2. CURRENT RATIO
𝑻𝑶𝑻𝑨𝑳 𝑪𝑼𝑹𝑹𝑬𝑵𝑻 𝑳𝑰𝑨𝑩𝑰𝑳𝑰𝑻𝑰𝑬𝑺

𝑻𝑶𝑻𝑨𝑳 𝑸𝑼𝑰𝑪𝑲 𝑨𝑺𝑺𝑬𝑻𝑺

3. QUICK RATIO
𝑻𝑶𝑻𝑨𝑳 𝑪𝑼𝑹𝑹𝑬𝑵𝑻 𝑳𝑰𝑨𝑩𝑰𝑳𝑰𝑻𝑰𝑬𝑺

4. QUICK ASSETS TOTAL CURRENT ASSETS – STOCK (INVENTORIES) – PREPAID

𝐓𝐎𝐓𝐀𝐋 𝐋𝐈𝐀𝐁𝐈𝐋𝐈𝐓𝐈𝐄𝐒
5. DEBT RATIO × 100
𝐓𝐎𝐓𝐀𝐋 𝐀𝐒𝐒𝐄𝐓𝐒

𝐓𝐎𝐓𝐀𝐋 𝐄𝐐𝐔𝐈𝐓𝐈𝐄𝐒
6. EQUITY RATIO × 100
𝐓𝐎𝐓𝐀𝐋 𝐀𝐒𝐒𝐄𝐓𝐒

TOTAL ASSETS – CURRENT LIABILITY

OR
7. CAPITAL EMPLOYED LONG TERM LIABILITY – EQUITIES
OR
WORKING CAPITAL – FIXED ASSETS

8. ROCE 𝑵𝑬𝑻 𝑷𝑹𝑶𝑭𝑰𝑻

𝑪𝑨𝑷𝑰𝑻𝑨𝑳 𝑬𝑴𝑷𝑳𝑶𝒀𝑬𝑫

9. RETURN ON EQUITY 𝑵𝑬𝑻 𝑷𝑹𝑶𝑭𝑰𝑻

𝑺𝑯𝑨𝑹𝑬 𝑯𝑶𝑳𝑫𝑬𝑹 𝑬𝑸𝑼𝑰𝑻𝒀

TIMES
𝑪𝑶𝑵𝑺𝑼𝑴𝑷𝑻𝑰𝑶𝑵
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑹𝑨𝑾 𝑴𝑨𝑻𝑬𝑹𝑰𝑨𝑳

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M.A FORMULAS

10. RAW MATERIAL (DAYS) DAYS

= TIMES × 365
OR
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑹𝑨𝑾 𝑴𝑨𝑻𝑬𝑹𝑰𝑨𝑳
× 365
𝑪𝑶𝑵𝑺𝑼𝑴𝑷𝑻𝑰𝑶𝑵

TIMES
𝑪𝑶𝑺𝑻 𝑶𝑭 𝑷𝑹𝑶𝑫𝑼𝑪𝑻𝑰𝑶𝑵
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑾𝑰𝑷

11. WORK- IN PROCESS (DAYS)

DAYS
= TIMES × 365
OR
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑾𝑰𝑷
× 365
𝑪𝑶𝑺𝑻 𝑶𝑭 𝑷𝑹𝑶𝑫𝑼𝑪𝑻𝑰𝑶𝑵

TIMES
𝑪𝑶𝑺𝑻 𝑶𝑭 𝑮𝑶𝑶𝑫𝑺 𝑺𝑶𝑳𝑫
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑭. 𝑮

12. FINISHED GOODS (DAYS)

DAYS
= TIMES × 365
OR
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑭.𝑮
× 365
𝑪𝑶𝑺𝑻 𝑶𝑭 𝑮𝑶𝑶𝑫𝑺 𝑺𝑶𝑳𝑫

TIMES
𝑪𝑹𝑬𝑫𝑰𝑻 𝑺𝑨𝑳𝑬𝑺
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑫𝑬𝑩𝑻𝑶𝑹𝑺

13. DEBTORS (A/R) (DAYS)

DAYS
= TIMES × 365
OR
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑫𝑬𝑩𝑻𝑶𝑹𝑺
× 365
𝑪𝑹𝑬𝑫𝑰𝑻 𝑺𝑨𝑳𝑬𝑺

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TIMES
𝑪𝑹𝑬𝑫𝑰𝑻 𝑷𝑼𝑹𝑪𝑯𝑨𝑺𝑬𝑺
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑪𝑹𝑬𝑫𝑰𝑻𝑶𝑹𝑺

14. CREDITORS (A/P) (DAYS)

DAYS
= TIMES × 365
OR
𝑨𝑽𝑬𝑹𝑨𝑮𝑬 𝑪𝑹𝑬𝑫𝑰𝑻𝑶𝑹𝑺
× 365
𝑪𝑹𝑬𝑫𝑰𝑻 𝑷𝑼𝑹𝑪𝑯𝑨𝑺𝑬𝑺

15. WORKING CAPITAL

OPERATING CYCLE/ CASH INVENTORY TURNOVER (DAYS) + DEBTORS TURNOVER (DAYS –
OPERATING CYCLE/ NET CREDITORS TURNOVER (DAYS)
OPERATING CYCLE

16. DAYS 𝟑𝟔𝟎

Lesser the days are better 𝑻𝑰𝑴𝑬𝑺

17. TIMES 𝟑𝟔𝟎

More the time is better 𝑫𝑨𝒀𝑺

18. TOTAL TIME (YEAR/ = TIMES × DAYS

QUARTER/ MONTH

a) Raw material a) Consumption

b) Finished goods b) Cost of sales
19. SUMMARY c) WIP c) Cost of production
d) Debtors d) Credit sales
e) Creditors e) Credit purchases

1) VOLUME
2) INFLATION
3) DAYS/ TIMES
𝑵𝑬𝑾 𝑫𝑨𝒀𝑺
𝑶𝑳𝑫 𝑫𝑨𝒀𝑺

𝑶𝑳𝑫 𝑻𝑰𝑴𝑬
𝑵𝑬𝑾 𝑻𝑰𝑴𝑬
20. CHANGES Change in Volume impact on followings
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a) Sales volume / units

b) Purchase volume
c) Raw material
d) WIP
e) F.G
f) Debtors
g) Creditors
Fixed expenses does not change with change in units/ volume

RECEIVABLES & PAYABLES MANAGEMENT

1. Effective cost of trade credit

2. Nominal cost of trade credit 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 % 𝟑𝟔𝟓

×
𝟏−𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 % 𝒕

3. Effective rate of loan Normal rate × (1+ % of compensating balance)

(when we maintain
0.07 × 1.05
compensating balance)
=0.0735

4. FACTORING OF ACCOUNT (INTEREST EXP + FEES PAID TO BANK – BAD DEBTS

RECEIVABLE SAVINGS)
= ANNUAL SAVINGS

TRADE CREDIT
“The act of obtaining funds by delaying payments to supplier (give-up
early discounts)”

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PROJECT APPRAISAL METHOD

FV = PV (1 + 𝒓)𝒏
1. FUTURE VALUE PV = present value
(Compounding) FV = future value
r = cost of capital or interest rate
n = number of years/ periods

2. PRESENT VALUE 𝐅𝐕
PV =
(Discounting) (𝟏 + 𝒓)𝒏

3. Net present value = DISCOUNTED CASH OUTFLOW – DISCOUNTED CASH INFLOW

(NPV)

Future value of annuity

(𝟏 + 𝒓)𝒏 −𝟏
FV = P
𝒓

4. ORDINARY Present value of annuity

(𝟏 + 𝒓)𝒏 − 𝟏
ANNUITY PV = P
𝒓 (𝟏 + 𝒓)𝒏

𝟏 − (𝟏 + 𝒓)−𝒏
PV = P
𝒓

FV = Future value of annuity

P = Periodic payments
PV = Present value of annuity

Future value of annuity

(𝟏 + 𝒓)𝒏 −𝟏
FV = (1 + r) × P
𝒓

Present value of annuity

(𝟏 + 𝒓)𝒏 − 𝟏
5. ANNUITY DUE PV = P + P
𝒓 (𝟏 + 𝒓)𝒏−𝟏

𝟏 − (𝟏 + 𝒓)−𝒏+𝟏
PV = P +1
𝒓

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6. PERPETUITY 𝐀𝐧𝐧𝐮𝐚𝐥 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰

PV OF PERPETUITY =
𝒓

𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐚𝐧𝐧𝐮𝐚𝐥 𝐩𝐫𝐨𝐟𝐢𝐭 𝐟𝐫𝐨𝐦 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭

× 100
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
OR
𝐄𝐬𝐭𝐢𝐦𝐚𝐭𝐞𝐝 𝐭𝐨𝐭𝐚𝐥 𝐩𝐫𝐨𝐟𝐢𝐭
× 100
7. ACCOUNTING RATE 𝐄𝐬𝐭𝐢𝐦𝐚𝐭𝐞𝐝 𝐢𝐧𝐢𝐭𝐢𝐚𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
OR
OF RETURN 𝐄𝐬𝐭𝐢𝐦𝐚𝐭𝐞𝐝 𝐚𝐯𝐞𝐫𝐚𝐠𝐞 𝐩𝐫𝐨𝐟𝐢𝐭𝐬
(ARR) × 100
𝐄𝐬𝐭𝐢𝐦𝐚𝐭𝐞𝐝 𝐢𝐧𝐢𝐭𝐢𝐚𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭

 Average investment

𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 + 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆

𝟐

8. EFFECTIVE RATE 𝟏 +𝒓 𝒎
=( ) -1
𝒎

𝑷
IRR = A + × (B-A) %
9. INTERNAL RATE OF 𝑷−𝑵
RETURN (IRR) Where
A is the (lower) rate of return
B is the (higher) rate of return
IRR is the rate at which our
P is the NPV at A
project NPV is zero N is the NPV at B
OR
Discounted cash out flow =
Discounted cash inflow

𝑰𝑵𝑰𝑻𝑰𝑨𝑳 𝑰𝑵𝑽𝑬𝑺𝑻𝑴𝑬𝑵𝑻
10. IRR OF ANNUITY 𝑨𝑵𝑵𝑼𝑨𝑳 𝑪𝑨𝑺𝑯 𝑭𝑳𝑶𝑾 𝑨𝑭𝑻𝑬𝑹 𝑻𝑨𝑿

 Check answer in cumulative table FOR particular years for rate

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𝑷𝑽 𝑶𝑭 𝑪𝑨𝑺𝑯 𝑰𝑵𝑭𝑳𝑶𝑾𝑺
11. PROFITTABILITY
=
𝑷𝑽 𝑶𝑭 𝑪𝑨𝑺𝑯 𝑶𝑼𝑻𝑭𝑳𝑶𝑾𝑺
INDEX OR
𝑵𝑷𝑽
=
𝑷𝑽 𝑶𝑭 𝑪𝑨𝑺𝑯 𝑶𝑼𝑻𝑭𝑳𝑶𝑾𝑺

= (1 + MONEY RATE) = (1 + REAL RATE) × (1 + INFLATION RATE)

12. INFLATION
Money rate: Adjusted to inflation
Real rate: without inflation

13. EQUIVALENT 𝐏𝐕 𝐎𝐅 𝐂𝐎𝐒𝐓 𝐎𝐕𝐄𝐑 𝐎𝐍𝐄 𝐑𝐄𝐏𝐋𝐀𝐂𝐄 𝐂𝐘𝐂𝐋𝐄

= 𝑪𝑼𝑴𝑼𝑳𝑨𝑻𝑰𝑽𝑬 𝑷𝑽 𝑭𝑨𝑪𝑻𝑶𝑹 𝑭𝑶𝑹 𝑻𝑯𝑬 𝑵𝑶,𝑶𝑭 𝒀𝑬𝑨𝑹𝑺 𝑰𝑵 𝑪𝒀𝑪𝑳𝑬
ANNUAL COST
Annualized equivalent is calculated when our projects have different
life!
So we cannot compare them on the basis of NPV, the we calculate AE
Do ranking On the basis of
14. CAPITAL  NPV
RATIONING  Profitability index
When we have limited capital! So we accept only those projects
which shows better NPV, projects might be divisible or non-divisible.

15. SENSITIVITY 𝑵𝑷𝑽 𝑶𝑭 𝑷𝑹𝑶𝑱𝑬𝑪𝑻

= × 𝟏𝟎𝟎
ANALYSIS 𝑷𝑽 𝑶𝑭 𝑷𝑹𝑶𝑱𝑬𝑪𝑻 𝑨𝑭𝑭𝑬𝑪𝑻𝑬𝑫 (𝑽𝑨𝑹𝑰𝑨𝑩𝑳𝑬)

How responsive the projects NPV is to changes in the variables that

are used to calculate NPV

USE THIS WHEN THERE IS NO DEPRICIATION NO TAX

16. COST OF CAPITAL, Cost of capital before tax (KD BT) = INTEREST RATE (I)
COST OF DEBT,
BORRWING COST USE THIS WHEN THERE IS DEPRICIATION & TAX
OR RATE OF Cost of capital after tax (KD AT) = I × (1 – tax rate)
RETURN

17. CAPITAL
ALLOWANCE 𝐂𝐎𝐒𝐓 – 𝐑𝐄𝐒𝐈𝐃𝐔𝐀𝐋 𝐕𝐀𝐋𝐔𝐄
(DEPRECIATION 𝑳𝑰𝑭𝑬

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1. DEPRICIATION
18. TAX SAVE(SHIELD) 2. LOSS ON DISPOSAL
3. INCREASE IN EXPENSES

VARIANCE ANALYSIS
MATERIAL VARIANCE

1. MATERIAL PRICE = (STANDARD PRICE – ACTUAL PRICE) × ACTUAL MATERIAL USED

VARIANCE

2. MATERIAL = (STANDARD QUANTITY – ACTUAL QUANTITY) × STD. PRICE PER UNIT

QUANTITY/ USAGE/
VARIANCE MATERIAL USAGE VARIANCE = (MIX VARIANCE + YIELD VARIANCE)

2.1. MATERIAL MIX = (ACTUAL USING STD. MIX – ACTUAL KG) × STD. COST
VARIANCE
ACTUAL USING STD. MIX = ACTUAL INPUT/ STD OUTPUT × SPECIFIC STD. INPUT

2.2. MATERIAL YIELD = (OUTPUT SHOULD BE – ACTUAL OUTPUT) × STD. COST

VARIANCE
OUTPUT SHOULD BE = ACTUAL INPUT/ STD. INPUT × STD. OUTPUT

3. MATERIAL = (STANDARD PRICE – ACTUAL PRICE) × UNITS PURCHASED

PURCHASE
VARIANCE

4. MATERIAL = (STANDARD PRICE – ACTUAL PRICE) × MATERIAL UNITS ISSUED/

CONSUMPTION CONSUMED
VARIANCE

STANDARD QUAJNTITY 𝐒𝐓𝐀𝐍𝐃𝐀𝐑𝐃.𝐂𝐎𝐒𝐓

=
𝑺𝑻𝑨𝑵𝑫𝑨𝑹𝑫 𝑷𝑹𝑰𝑪𝑬

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STANDARD COST CARD

INPUT PER OUTPUT OUTPUT PRICE OUTPUT COST
4 kg/ unit Rs. 10 per kg Rs 40/ unit

LABOR VARIANCE

1. LABOUR WAGE = (STANDARD RATE – ACTUAL RATE) × ACTUAL HOURS

RATE VARIANCE

2. LABOUR = (STANDARD HOURS – ACTUAL HOURS) × STANDARD RATE PER HOUR

EFFICIENCY
VARIANCE

2.1. LABOUR MIX = (ACTUAL USING STD. MIX – ACTUAL HOURS) × STANDARD RATE PER
VARIANCE HOUR
ACTUAL USING STD. MIX = ACTUAL INPUT/ STD OUTPUT × SPECIFIC STD. INPUT

2.2. LABOUR YIELD = (OUTPUT SHOULD BE – ACTUAL OUTPUT) × STANDARD OUTPUT COST
VARIANCE
OUTPUT SHOULD BE = ACTUAL INPUT/ STD. INPUT × STD. OUTPUT

3. IDLE TIME = (ACTUAL HOURS – PAID FOR HOURS) × STANDARD RATE PER HOUR
VARIANCE

ACTUAL HOURS 𝐀𝐂𝐓𝐔𝐀𝐋 𝐋𝐀𝐁𝐎𝐔𝐑 𝐂𝐎𝐒𝐓

=
𝑨𝑪𝑻𝑼𝑨𝑳 𝑹𝑨𝑻𝑬 𝑷𝑬𝑹 𝑯𝑶𝑼𝑹

VARIABLE FOH VARIANCE

1. TOTAL VARIABLE FOH = (STD. V.FOH FOR ACTUAL OUTPUT – ACTUAL V.FOH)
VARIANCE

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2. SPENDING VARIANCE = (STD. V.FOH FOR ACTUAL HOURS WORKED - ACTUAL V.FOH)

3. EFFICIENCY = (STANDARD HOURS – ACTUAL HOURS) × STD. V.FOH RATE

VARIANCE

FIXED OVERHEAD VARIANCE

1. TOTAL FIXED FOH = (APPLIED/ABSORBED – ACTUAL)

VARIANCE
May be under or over absorbed

2. BUDGETED FIXED = (BUDGETED – ACTUAL)

FOH EXPENDITURE
VARIANCE

3. VOLUME FIXED FOH

VARIANCE = (BUDGETED – APPLIED/ABSORBED)

“It’s not required to calculate in marginal costing”

(i) EFFICIENCY
VARIANCE
(ii) CAPACITY VARIANCE

3.1. EFFICIENCY = (STD HOURS – ACTUAL HOURS) × RATE

VARIANCE

3.2. CAPACITY
VARIANCE = (ACTUAL HOURS – ESTIMATED HOURS) × RATE

SALES VARIANCE

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1. SALES PRICE = (STD. SELLING PRICE – ACTUAL SELLING PRICE) × ACTUAL NO. OF UNITS
VARIANCE SOLD

= (STD. UNITS SOLD – ACTUAL UNITS SOLD) × STD. PRICE/ G.P/

2. SALES VOLUME CONTRIBUTION PER UNIT
VARIANCE
SALES VOLUME VARIANCE = SALES MIX VARIANCE + SALES QUANTITY
VARIANCE

2.1. SALES MIX VARIANCE

= (ACTUAL UNITS - ACTUAL UASING STD. MIX) × STD. PROFIT

2.2. SALES QUANTITY

VARIANCE = (ACTUAL USING STD. MIX – STD. UNITS) × STD. PROFIT

3. COST VOLUME VARIANCE

(comparison of sales = (ACTUAL UNITS SOLD - BUDGETED SALE UNITS) × STANDARD COST
units/ volume) PER UNIT

4. SALES VOLUME PROFIT = (ACTUAL UNITS SOLD - BUDGETED SALE UNITS) × STANDARD
VARIANCE PROFIT PER UNIT

CONTIBUTION 5 FIXED FOH/ UNIT × BUDGETED UNITS

5. BUDGETED FIXED FOH NET PROFIT (3) 2 × 10000
FIXED FOH/ UNIT 2 =20000

PLANNING VARIANCE

= ORIGINAL BUDGET/STANDARD – REVISED BUDGET/STANDARD

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OPERATIONAL VARIANCE

= REVISED BUDGET/STANDARD – ACTUAL

IMPORTANT: STANDARD COST BOOKKEEPING

ADVERSE VARIANCES ARE DEBITED
FAVOURABLE VARIANCES ARE CREDITED

RECORDING VARIANCES – GENERAL RULES

Record all variances at the point at which they arise

Materials price variance in materials control stock account

Labor rate variance in wages control account stock

‘Quantity’ variances (material usage, efficiency variances) in work in progress account

Overhead variances in production overhead control account

Sales values recorded at actual amounts. No accounts are kept for sales variances

Finished goods stock held at standard cost.

Transfer to cost of sales and to P & L made at standard cost

MAULA ALI (A.S)

“BLESSED IS HE WHO’S KNOWLEDGE & PRACTICE, LOVE & HATE,
ACCEPTANCE & REFUSAL, SPEECH & SILENCE, WORDS & ACTIONS ARE
SINCERELY FOR THE SAKE OF ALLAH”

NOTE: FOR MORE EDUCATIONAL CONTENT YOU CAN CONTACT ME:

NAME: SYED SHAHBAZ RAZA ZAIDI

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CONTACT NO: 03122580232

EMAIL ADDRESS: rshahbaz069@gmail.com

GOOGLE DRIVE LINK: MANAGERIAL LEVEL 2 STUDY MATERIAL

https://drive.google.com/drive/folders/1x5aD78zy-411sHAFjZjqzjxYJo_t9WZK?usp=sharing

Present value of minimum lease payment

(𝟏 + 𝒓)𝒏 − 𝟏
PV = Installment
𝒓 (𝟏 + 𝒓)𝒏
19. ORDINARY Or
𝟏 − (𝟏 + 𝒓)−𝒏
ANNUITY PV = Installment
𝒓

 Use when we do payment in arrears

 At the end of each year (DEC 31)

Present value of minimum lease payment

(𝟏 + 𝒓)𝒏 − 𝟏
PV = INST+ INST
𝒓 (𝟏 + 𝒓)𝒏−𝟏
Or
20. ANNUITY DUE 𝟏 − (𝟏 + 𝒓)−𝒏+𝟏
PV = Installment +1
𝒓

 Payment at the start of each year (JAN 1)

 Jan 1 first year no interest because of today concept
 Record interest payment due to accrual concept on DEC 31 &
pay on the next day and reverse payable

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