Enhancing Business Decision Making Skill

with the help of

Management Accounting

Presentation of

Abdul Rahim Suriya

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 Exercise -1

Sitara Corporation has opening inventory of

Rs300,000 as of Jan 01,2003. During the
year cost of goods manufactured is Rs 1.9
million. Sales Rs 2 million . Gross profit rate
is 20% of sales

Required:
Calculate cost of closing inventory as
Dec 31 ,2003

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 Exercise - 2

• ABC & CO’s trial balance showed following balances as

of Dec 31, 2004:
• Sales Rs 10 million,
• Purchases Rs 2.4 million,
• Direct Labor Rs 3 million,
• Factory overheads Rs 1.9 million,
• Selling expenses Rs 1.3 million,
• Administration expenses Rs 1.2 million,
• Inventories : opening closing
Finished goods 400,000 600,000
Work-in-process 150,000 125,000
Raw materials 200,000 150,000
• Required: prepare P/L A/C for manufacturing concern.
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 Answer to Exercise - 2

Rs. Rs. Rs.

Sales 8,000,000
Less: Cost of goods sold
Material inventory (opening) 200,000
Purchases 2,400,000
Material available for use 2,600,000
Less Material inventory (ending) 150,000
Direct material consumed 2,450,000
Direct labour 3,000,000
Factory overhead 1,900,000
Total Manufacturing Cost 7,350,000
Add work in process inventory (opening) 150,000
Cost of goods available for use 7,500,000
Less work in process inventory (closing) 125,000
Cost of Goods Manufactured 7,375,000
Add fininshed goods inventory (opening) 400,000
Cost of goods available for sale 7,775,000
Less finished goods inventory (ending) 600,000
Cost of goods sold 7,175,000

Gross profit 825,000

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 EXERCISE
PRODUCT AND PERIOD COSTS

Variable cost of a car assembling:

• Direct material Rs. 80,000
• Direct labor Rs. 40,000
• Variable overhead Rs. 30,000
Total fixed cost Rs. 500,000 pm
No. of cars produced 10 pm
No. of cars sold (@ Rs. 300,000) 8 pm

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 PRESENTATION OF PROFIT & LOSS ACCOUNT
UNDER ABOSRPTION COSTING

Rs.
Sales revenue 40,000
Cost of goods sold 24,000
Gross profit 16,000
Operating expenses:
Selling and Marketing 6,000
Administrative 4,000
10,000
Income from operations 6,000
Assumption:
All units produced are sold.There is no opening and
closing inventory.
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 PRESENTATION OF PROFIT & LOSS ACCOUNT
UNDER ABOSRPTION COSTING

CASE STUDY
Based on the Profit and Loss
Account displayed ,work out
impact on profits if sales has
increased by 10%

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 FORMULA TO COMPUTE BREAK EVEN
Break-even sales in units = Fixed expenses/CM per
unit

Breakeven Sales in rupees = Fixed Expenses/CM %

Profit = Margin of safety x CM ratio

Margin of safety = Sales – BE

Contribution margin % = Sales / VC

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 EXAMPLE ii

a) Work out Break even :

• A company sells T-Shirt @ Rs 8/-per unit.
Management expects to sell between 12000 units to
20000 units.
• The business will incur fixed expenses of Rs
10,000/- and variable expenses of 50% of sales.

b)
• If the company desire to earn profit of Rs 14,000 in
above example.
Q-What should be the sale level?
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 EXAMPLE iii
Sitara Company’s most recent income statement is shown below:
Total Per Unit
Sales (20,000 units) ………. Rs.300,000 Rs. 15.00
Less : Variable expenses …… 180,000 9.00
Contribution margin ..……… 120,000 Rs. 6.00
Less : Fixed expenses ……… 70,000
Net income ……………… Rs. 50,000
Required
Prepare new income statement under each of the following condition
separately :

A) The selling price increases by Rs. 1.50 per unit, Fixed expenses increase by
Rs. 20,000.the sales volume decreases by 5%.

B) The selling price increases by 12% ,Variable expenses increase by 5%

The sales volume decreases by 10%,and fixed expenses reduced by 25%

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 CASE STUDY : TRAINING ORGANISATION

• Terrabiz ,an event management company ,is involved in

conducting open house and In-house Training Workshop also.

• It has panel of Trainers for variety of fields. Terrabiz pays 50%

and 70% to trainer of net profit in respect of open house and In-
house workshops respectively.

• The profit is calculated by taking only direct cost incurred like cost
of circulars / flyers, printing and dispatch cost, advertisement in
newspapers, hotel conference room, meal, charges and course
material printing whereas indirect cost incurred at Terrabiz like its
office rent and other office maintaining cost is not taken into cost
calculation for the purpose of working out share of the Trainer.

• Terrabiz is organizing an open house workshop and hired a

trainer. The details of cost is as follows:

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 Cost Data
• Flyers printing 5000 copies @ Rs. 6/- per copy 30,000
• Courier Charges 5,000
• Photography 2,000
• Charges of Tea, Food per participant Rs. 1200/- per head
(with minimum of 10 Participants)
• Audio Visual equipment 3,000
• Multimedia and lap top ,rental cost 3,000
• Miscellaneous expenses 2,000
• Printing of course material @ Rs. 300/- per set
• Salaries to office manager (per month) 40,000
• Salaries to office telephone operator (per month) 10,000
• Office rent (per month) 35,000
• Various other office maintenance (per month) 22,000
• Trainers Cost based on percentage agreed as above
• Program is planned on 15th March and execution date is April 20th

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 Required :

• What should be Registration Fee if Trainer is expecting a share

of profit Rs. 60,000 with expectation that 15 participants
would attend.

• What should be minimum level of Registration to avoid loss

situation ie Break even at the time of planning?

• If minimum fee of Rs. 30,000 is guaranteed to be paid the

Trainers, what should be the minimum no of participants at
planning time?

• What should be minimum level of Registration to Break even if

it is being thought over three days before the program?

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