ACCOUNTING

Introduction
 Book-Keeping
 The Procedural aspects of recording
transaction is called Book-keeping.

 It is fundamental to accounting.
 ACCOUNTING-Definition

 Art of recording, classifying, summarizing,

analyzing, interpreting and communicating the
the result there of .
 ACCOUNTING.

FUNCTIONS : BOOKS MAINTAINED

 Recording: Journal.

 Summarizing: TrialBalance.

 Analyzing: P&L A/C and Balance Sheet.

 Communicating: Ratio Anlysis,FundsFlows

 Book-Keeping Vs. Accounting.
BOOK-KEEPING ACCOUNTING
 Art of recording.  Art of
recordig,Classifying &
 Procedural aspects of Summarizing.
Accounting.  Starts when Book-
 Aim-Recording only. keeping ends.
 Aim-Reporting
 Uses Accounting data. Financial statements.
 Uses disciplines like
MIS,OR,Economics ….
 Functions of Accounting
 Recording and financial statements
preparation.
 Communicating to the stake holders.
 Protection of shareholder`s property by
up to date recording.
 Internal control
 Tool for Effective planning.
 Following statutory requirements.
 Characteristics of Accounting
 Art as well as Science.

 Monetary transactions.

 Managerial Decision-making.

 Information system.
 Evolution of Accounting-1
Michael Russell `s article ‘Evolution of Accounting:

 Archeologists have found clay tokens as old as

8500 BC in Mesopotamia which were usually
cones, disks, spheres and pellets. These tokens
correspond touch commodities like sheep,
clothing or bread.

 During 3600 BC in Babylonia payment of

salaries was recorded in clay tablets.
 Evolution of Accounting-2
John R. Alexander on ‘History of Accounting:

 Double entry book keeping was introduced in

14thcentury and the following seven key
elements:
 Private property, Capital,
 Commerce, Credit,
 Writing, Money,
 Arithmetic
 Evolution of Accounting-3.
 Luca Pacioli-Father of Accounting.
 Cost Accounting and it`s role.
 Management Accounting
 UNIT 2

Accounting
concepts & Assumptions
 Accounting Principles
 Doctrines associated with theory and
procedures and current practices of accounting.

 Principles -Concepts & Conventions

 Concepts: They are a set of Assumptions
/conditions.
 Conventions: Customs and traditions
 Accounting Concepts
 1.Business Entity Concept

 2.Going Concern Concept

 3.Money measurement concept

 4.Periodicity concept

 5.Accrual Concept.
 Accounting Assumptions
•1.Principle of Income recognition

•2.Principle of expense

•3.Principle of matching cost and revenue

4.Principle of Historical cost

5.Principle of full disclosure

6.Double aspect principle

 Accounting Assumptions.
 7.Modifying Principle

 8. Principle of materiality

 9. Principle of consistency

 10.Principle of conservatism or prudence

 UNIT 3

DOUBLE ENTRY
BOOK KEEPING
 Double Entry Principle.
 In every transaction, there are two aspects-
Debit and Credit.

 Also called Dual Aspect Principle.

 Accounting Equation
 Double Entry Principle expressed in Equation
form.

Assets=Liabilities+ Capital(Equity).
or
A=L+C (Y-X)
or
USES OF FUNDS=SOURCES OF FUNDS
 Accounting Trail
Accounting trail is the process of:
1.Identifying the transactions or events,
2.Preparation of vouchers,
3.Recording them as journal entries(Primary
books)
4. Preparation of Ledger accounts & balancing
5.Incorporating all adjustments, preparation of a
Trail Balance
6.Preparing the financial statements and balance
sheet.
 UNIT 4

PRIMARY BOOKS
 Primary Books

 Book of Original Recording is called Primary

books.

 Recording of transactions with respective

vouchers.
 JOURNAL
 1.Is the book of prime entry.
 
 2.As soon as transaction originates it is
recorded in journal

 3.Transactions are recorded in order of

occurrence i.e. strictly in order of dates.

 4.Ledger folio is written

 JOURNAL
 5.Relevant information cannot be ascertained readily (Eg:Cash
in hand at the same time)

 6.Narration (brief description) is written for each entry.

 7.Final accounts can't be prepared directly from journal.

 8. Accuracy of the books can't be tested.

 9. Debit and credit amounts of a transaction are recorded in

adjacent columns.

 10. Journal has two columns one for debit amount another for
credit amount.
 Types of Primary Books
 Purchase Day Book
 Sales Day Book
 Purchase Return Book
 Sales Return Book
 Bills receivable Book
 Bills Payable Book
 Cash Book
 JournalProper
 1.PURCHASE LEDGER
 Records goods and services that a business
purchases on credit.

 Also Known as Bought ledger.

 PURCHASE DAY BOOK-Model
Dte Name of Supplier Inward Amount
LF InvoiceNo.
16t-March-
2008 X&Co.Ltd
100 Kgs of Kitkat@200

20,000

LessDiscount10%-
2000 18,000

-------
 2.PURCHASE ReturnBOOK

• It Records all the return on

goods purchased.
• It is also called-
Retun Outward Journal
Why PURCHASE RETURN BOOK?

 Goods purchased are inferior

types
 Goods are not as per our
specification
 Goods didn`t send intime(sent
late)
 Damaged Goods.
 Purchase Return Book
Date Name if the LF Debit Note Amount
supplier No.
 DEBIT NOTE

 It is statement sent by the

supplier to the Business
stating the net amount to pay
 3.SALES DAY BOOK

 It Records all credit sales of

Goods and services.
 Also called Sold Book ledger
 Sales day Book -Model
Date Name of Customer LF Outward Amount
Invoice No.
28-032008
Mr.JM:
30 Packets
ofCornFlakes
@ 10 each : 300
270
LessDis.10% 30
------
 4.SALES RETURN BOOK
 When goods are returned, for whatever
reason, this is recorded in the sales returns book


Also called Return Inward Book.
 Why Sales return Book?

 Inferior quality goods

 Late delivery goods
 Not as per order(Price,numbers,quantity,size)
 Cannot be sold in the market
 Damagedgoods(Transit)
 Sales return Book -Model
Date Name of Customer LF Credit Amount
NoteNo.
 CREDIT NOTE

Statement sent by the
business to the customer
stating the net amount to
pay.
 5.Bill Receivable Book(B/R Book)
 When credit sales are there, thebusiness men
will get the amount in future date only.

 But he requires cash for which he draws the

bill against the customer and the customer
accepts it.
 Usually B/R Book shows Debit Balance,and
hence it is an asset.
 Bill of Exchange-Meaning

 It is a document in
writing,promising to
pay a certain amount to
the drawer at a certain
date.
Bill of Exchange –Parties involved
 Drawer:The businessman who draws the bill.
 Drawee/acceptor:The person to whom it is
drawn.The drawee becomes the acceptor after
he accepts the bill.
 Payee:The person to whom the payment is to
be made.
 Terms in Bills of Exchange
 Due date/Maturity Period:The date on which
bill expires.
 Days ofGrace: Extra Three days allowed by the
drawer to present the bills
 Dishonour ofBills:Lack of Fund/payment in
the bank on the duedate
 B/R Book -Model
No. Date Date From Acep Whe Term Due LF Amo Rem
of of of who tor re ofBil Date unt arks
The recei Bill m paya l
bill pt of recei ble
Bill ved
 6.Bills payableBook(B/P Book)
 What is B/R for a drawer is Bills
payable to the drawee.

 B/P Account usually shows

Credit Balance and its a liability.
 B/P Book -Model
No. Date To Dra Paye Whe Ter Due LF Am Date rem
of of Who wer e re m Date ount paid arks
the the m paya ofBi
bill of give ble ll
Bill n
 7.CASH BOOK

It records all cash

transactions.
(Cash
receipts&payments).
 Types of Cash Book
 Simple cash Book(single column)
 Two ColumnCashBook(Double
Column)
 Three Column CashBook(Triple
Column)
 Petty Cash Book
 SIMPLE CASH BOOK
 Two sides-Receipts &Payments.

 Balance shows cash position of the Company

 Model of Simple CashBook
Date Receipts Cash(Rs.) Date Payments Cash(Rs.)
To balance B/d xxx
To................ xxxxx By........... xxxxxxx

By Balance C/d xxxx

________ _______
XXXXXXX XXXXXXX
 Two Column CashBook
 Two amount columns-Cash and Bank cloumns.
 Cash column represents Cash in the business
 Bank column represents Cash kept in the Bank.
 Bank Column of CashBook is a reflection of
Bank passBook
 CONTRA ENTRY
 Debit and Credit aspect of
one transaction is recorded in
the same Account.
 It is denoted with letter, (c)
 Eg: Cash withdrwal,Cash
deposited into Bank.
 TwoColumn Cash Book-Model
Da Receipts Cash(R Bank(R Date Payments Cash(R Bank(R
te s) s) s) s)
ToBalanceb/ xxxxxx xxxx By..... xxx xxxxxx
d xxxx
To......

By xxxxx
_______ Balancec/d _______
XXXXX XXXXX
X XX
 Three Column Cash Book-Model
Da Receipts Disc. Cash Bank Dat Paymen Dis. Cash Bank
te (Rs) (Rs) (Rs) e ts (Rs) (Rs) (Rs)
 Three Column CashBook
 Also called cashbookbank and
DiscountColumn.
 On Both side three amount columns-Discount,

Cash and Bank.

Discount Column:
 Debitside-Discount allowed.
 Credit Side-Discount Received.
 Discount columns are not balanced
 PETTY CASH BOOK
 Derived from French word “Pettit” means
small.
 In large organisations,petty expenses like

stationary,postage,stamps,carriage,TA willbe
in large number and very insignificant value.
 These will be recorded by Petty cashier.
 He willget a definite sum of money at the

beginning of a month and gives a statement of

account at the end of the period to Main/Chief
cashier
 ImprestSystem
(AnalyticalPettyCashBook)
 Under this, a definte sum of money, at the
beginning of a month will be given to the petty
cashier for petty expenses.
 End of the month petty cashier will submit
Account Statement of the expenses.
 At the commencement of the next month,the
petty cashier receives equal to what is spent
during earlier period.
 Model of Analytical Petty Cash Book
Amo Ca Da particula Vo TotalP Analytical Payments L Ledg
unt sh te rs uc ayment F A/c
recei Bo h. s T statin Posta Wa S
ved kF No A ary ge ges u
oli . n
o d
r
y
 Journal proper
It Records:
 Opening Entries
 Closing Entries
 Adjusting Entries
 Transfer Entries
 Rectification Entries
 Journal proper
 Credit Purchase and credit sale of
FixedAssets
 Loss by fire ,theft...
 Dishonour of Bills
 Withdrawal of goods for personal
use.
 Dishonour of Bills
 UNIT 5

SUBSIDIARY BOOKS

or

SECONDARY BOOKS
SECONDARY
BOOKS
 LEDGER
 Meaning: It is a summary of device.
 It is shaped like the Letter “T” and hence,

called a T account.
 Derived from dutch word-”Legger”,means

“To Ly”(to keep)

 It is called Secondary Books.

 It got sides-Debit and Credit side

 LEDGER
 5. Folio of the journal or sub-journal is written.
 6. Since transactions of particular nature are
grouped at one place therefore relevant
information can be ascertained.
 7. Ledger is the basis of preparing final
accounts.
 8. Accuracy of the books is tested by means of
list of balances.
 LEDGER

 1. Is the book of final entry.

 2. Transactions are posted in the ledger after
the same have been recorded in the journal.
 3. Transactions are classified according to the
nature and are grouped in the concerned
accounts.
 4. Narration is not required.
 LEDGER
 9. Debit and credit amounts of a transaction are
recorded in two different sides of two different
accounts.
 10. Ledger has two sides: left side is debit side
right side is credit side.
 11. Every account in the ledger is balanced at
appropriate time.
 LEDGER-Types
 Main Ledger
 Main Ledger:Records all Ledger Account

 Subsidiary ledger:Also called Sub-Booksedger

 Subsidiary ledger

 General ledger-Self Sufficient ledger which

records all ledger accounts. It mainatains two
Control Accounts-Sundy debtorsA/C and
Sundry creditors A/C.
 Debtors Ledger-Customers`s Account
 Creditors Ledger-Supplier`s account
 Unit 6

TRIAL BALANCE

AND
ERRORS
 TRIAL BALANCE
 Definition: A list of balances extracted from
ledger accounts prepared to ascertain the
arithmetical accuracy of books of account.

 In short, it s a summary of all ledger accounts

balances.
 T/B vs. BS
 Trial Balance:  Balance sheet.
1.Extracted list of ledger 1.Statement showing
final position.
accounts.
2.Two sides- Assets and
2.Three columns- Liabilities.
Particulars, Debit
Totals, credit totals.
3.Rule: Debit
total=Credit totals. 3.Rule: Asset
side=Liabilities side
4.Prepared at the end of
4.Prepared on a
the year
particular date
 T/B vs.B/S
 Trial Balance:  Balance sheet.
 5.No particular order  5.Order of Liquidity
in presenting data. or order of
 6.Disagreement Permanence
indicates errors in  .6.Disagreement
ledger accounts, indicates wrong
Hence Suspense Trialbalance,hence
Account posting Suspense Account.
 Errors and Frauds
 Meaning.

 Errors:Unintentional mistakes by an
accountant. It can be Rectifiable.

 Fraud: Intentional mistakes. It can be

Dictatable and Rectifiable.
 Errors and Frauds
 1.Unintentional type  1.Intentional type.
 2.View-  View-cheating
Carelessness,Ignorance...
 3.Solution-  3.Solution-
Rectify,Training Dictate,Rectify,Legal
Action, Termination of
 4. 4.Types- staff.
Principle,commission,O
4.Types-
mission,duplicating,origi
nal entry, Compensating Manipulation,embuzzle
ment and
misappropriation.
 Types of Errors
 Error of Omission: Omit partly or wholly a
transaction.
 Error of Commission: error in casting, posting
or balancing.
 Error of principle: Lack of accounting
knowledge.
 Compensating Errors: Errors to offset one
wrong aspect.
 Types of Errors
 Duplicating Errors: Repeated errors.
 Error of Original Entry: Mistake in recording
an original transaction.
 Fraud
 Meaning: Deliberate /intentional mistake.
 Types:

 1.Manipulation of accounts

 2.Misappropriation of Accounts.

 3.Embuzzlement of cash

SOLUTION: Dictate(Audit),Rectify, Legal action.

 Suspence Account

Temporary Account maintained to

incorporate all errors affected by
TrialBalance is called
SuspenceAccount
 UNIT-7

FINAL ACCOUNTS
 FINAL ACCOUNTS
Final accounts of sole trader consist of:

A. TRADING ACCOUNT.

B. PROFIT AND LOSS ACCOUNT.

c. BALANCE SHEET
 Trading Account
It is the account ,which shows merely the result of
buying and selling of goods. i.e. gross profit or gross
lose on trading without taking into account
administration ,selling and financial expenses
incurred in running the business.
It discloses the gross profit of the business during a
particular period.
P& L Account
The profit and loss account is an account ,which
shows the net profit or net loss of a business for a
trading period.
 The Trading and Profit & Loss
Account
 The Gross Profit.
This is calculated in the Trading Account and is the excess
of sales over the cost of goods sold during the period.
The Net Profit.
This is calculated in the Profit and Loss Account and is
what remains after all other costs used up in the period
have been deducted from the Gross Profit.
 The Trading Account also shows any items of expenditure
which can properly be allocated to expenses connected
with the purchase, manufacture or stage of goods, i.e. rent
of warehouse, wages of store men, carriage inwards, etc.
 Balance Sheet
The balance sheet is a statement prepared to
measure the financial position of the business on a
certain fixed date.

The balance sheet provides information on

what the company owns(its asstes) , what it owes( its
liabilities) and the value of the business to its
stockholders(Equity)
 UNIT-8

INTRODUCTION TO
MANAGEMENT ACCOUNTING
 Management Accounting

Meaning:
Accounting service to the Management.
Techniques inManagement Accounting.
 Break Even Analysis

 Costing

 Budgeting

 Ratio Analysis

 Variance Analysis
Fin.Accounting Vs.Mgmt.Accounting

Basis of Fin. Mgmt

Distinction Accounting Accounting
Nature Objective Subjective
Legality Compulsory Not Legal
Purpose Reporting to Reporting to
stake holders Management
Data Past Data Future Data
Audit Must Voluntary
Publication Mandatory Voluntary
 UNIT-9

FINANCIAL STATEMENT ANALYSIS

RATIO ANAYSIS
 RATIO ANALYSIS
 Meaning: A ratio shows the relationship
between two or more variables.
 
 Definition: “A ratio is an indicator quotient of
two mathematical expressions and as the
relationship between two or more variables”.
 EXPRESSION of RATIOS

Ratios can be expressed in the following forms:

 Percentages (%)

 Proportion(A:B)

 Times (2 times)
 Advantages of Ratios

 Measures profitability/operational efficiency.

 Measures solvency
 Measures liquidity
 Inter –firm comparison
 Reports financial state of affairs.
 Simplifying accounting information
 Locating weak spots
 Useful in forecasting trends
 CLASSIFICATION of RATIOS

Ratios are classified in to 5 groups:

1.Liquidity Ratios
2.Solvency Ratios.
3.Profitability Ratios .
4.TurnoverRatios(Activity Ratios)
5.Leverage Ratios
 Current Ratio
 The ratio between Current Assets and Current
Liabilities

 Current Ratio = Current Assets : Current

Liabilities

 Ideal level(Standard level) 2:1

 Liquid Ratio
 Also called ‘Quick ratio’/Acid Test
Ratio
 Quick Assets=(Current assets – stock)
 Standard 1:1
 ProfitabilityRatios
 Profitability measures look at how much profit
the firm generates from sales or from its capital
assets
 Different measures of profit – gross and net
 Gross profit – effectively total revenue (turnover) –
variable costs (cost of sales)
 Net Profit – effectively total revenue (turnover) –
variable costs and fixed costs (overheads)
 Profitability
 Gross Profit Margin = Gross profit / turnover
x 100
 The higher the better
 Enables the firm to assess the impact of its sales
and how much it cost to generate (produce)
those sales
 A gross profit margin of 45% means that for
every £1 of sales, the firm makes 45p in gross
profit
 GrossProfit Ratio

 Gross Profit Margin

= Gross profit / turnover x 100
 The higher the better
 Enables the firm to assess the impact of its sales
and how much it cost to generate (produce)
those sales
 A gross profit margin of 45% means that for
every £1 of sales, the firm makes 45p in gross
profit
 NetProfit Ratio
 Net Profit Margin = Net Profit / Turnover x 100

 Net profit takes into account the fixed costs

involved in production – the overheads

 Keeping control over fixed costs is important –

could be easy to overlook for example the amount
of waste - paper, stationery, lighting, heating, water,
etc.
 Activity/Turnover Ratios

 These ratios measures the speed with which

various accounts are converted into sales/cash
Important Ratios:
 STR

 DTR

 CTR
 Stock Turnover
 Stock turnover = Cost of goods sold / Average stock
 CGS=OS+Purchases-CS
 Avg.Stock=OS+CS/2
 The rate at which a company’s stock is turned over
 A high stock turnover might mean increased efficiency?
 But: dependent on the type of business – supermarkets
might have high stock turnover ratios whereas a shop
selling high value musical instruments might have low
stock turnover ratio
 Low stock turnover could mean poor customer satisfaction
if people are not buying the goods (Marks and Spencer)
 Debtor`s Turnover Ratio
 Also called Debtor`s Veocity
 DTO = TotalDebtors / Cr.Sales x 365
 Total Drs(Accounts Receivables=Drs.+B/R
 Shorter the better
 Gives a measure of how long it takes the business to
recover debts
 Can be skewed by the degree of credit facility a firm
offers
 Creditor`s Turnover Ratio

 CTO= TotalCreditors / Credit Purchases x 365

 Accounts payable (Total Creditors)include
Creditors+B/P
 Shorter the better
 Gives a measure of how long it takes the business to
recover debts
 Can be skewed by the degree of credit facility a firm
offers
 LEVERAGE RATIOS

 These ratios show the capital structuremix of

an organisation.
 CapitalGearing Ratio
 Gearing Ratio = Fixedcost Capital / Capital
employed x 100
 Fixed cost bearincapital=Deb.+P.shares+Long
Term Loans
 Capital Employed=E.capital+Res.&Surplus
 The higher the ratio the more the business is
exposed to interest rate fluctuations and to
having to pay back interest and loans before
being able to re-invest earnings
 Solvency Ratios

 These ratios analyse the long term financial

position of a firm
 Debt-Equity Ratio
 Debt-Equity Ratio
=LongTermDebt/Shareholder`s Funds
Standard Ratio is 2:1
LTD=Deb.+Longtermloans+Redeemble P.Shares
 UNIT-10

FUNDS FLOW ANALYSIS.

 Funds Flow Statement
 The term “funds” include cash , working
capita and total financial resources.
 Also called : Statement of Sources and Uses of
Funds
 It is a statement which depicts the sources from
whichfunds are obtained and the uses to which
they are being put.
 Funds Flow Statement
 Steps in preparation:

 a) Schedule of working capital changes

 b) Preparation of Adjusted Profit and Loss
Account (APL)
 c) Statement of changes in Financial position
 Statement of changes in Working
Capital(SCWC)

It is also known as “Comparative change in

WorkingCapital Statement” or “Working
Capital Variation Statement”.
The net change in working capital is projected
here in the place of individual changes in all
the current assets and current liabilities in the
Funds Flow Statement.
 Rules for SCWC
 i) increase in Current Assets will increase the
Working Capital
 ii) Decrease in Current Assets will decrease the
Working Capital
 iii) Increase of Current Liabilities will decrease
the Working Capital
 iv) Decrease in Current Liabilities will increase
the Working Capital
 UNIT-11

 CASH FLOW ANALYSIS

CASH FLOW STATEMENT(CFS)
 Also known as “Statement Accounting for
variations in cash” .
 It shows themovement of cash and their causes
during the period under consideration.

It is prepared to show the impact of financial

policies and procedures on the cash position.

 It takes into account all the transactions that

have a direct impact upon cash.
 FFS Vs.CFS
 1. FFS is related with accrual basis whereas CFS is
on cash basis.
 2. In FFS, a Schedule of changes in working capital
delinkingthe current assets and currentliabilities
are made. But in CFS, no schedule is prepared.
 3. FFS shows the causes of the changes in net
working capital. CFS shows the causes forthe
change in cash
 4. In FFS, no opening or closing balances are
recorded. But in CFS both are incorporated
 FFS Vs.CFS
 5.FFS is not based on the Ledger mode. But CFS is prepared
on the basis of Ledgerprinciples.
 6. In FFS, “To” and “By” are indicated. In CFS, these are
indicated.
 7. In FFS, net effect of receipts and disbursements are
recorded. In CFS only cash receipts and payments are
recorded.
 8. FFS is concerned with the total provision of funds. CFS is
concerned with only cash.
 9. FFS is flexible but CFS is rigid
 10. FFS is more relevant for long range financial strategy. CFS
concentrates on short term aspects mostly affecting the
liquidity of the business.
 Unit-12

Understanding Cost
 COST
 Meaning: Cost is the amount of resources given
up in exchange of some goods and services
 It represents expenses.
 It is a sacrifice in advance. It concerns with a
release of something ofvalue.

 Definition: “ the amount of expenditure (actual

or notional) incurred on or attributable to a
given thing.”.(CIMA)
Elements of Cost
 Cost Elements-Materials
 Materials: The substances from which
products are manufactured. These materials
may be in a raw or a manufactured state.
Materials may be :
 Direct -the physical items used in
manufacturing.
 Eg;cement,bricks for a building
 Indirect.(materials are consumed in the course
of production).
 Eg:Lubricants,petrol,oil …
 Cost Elements-Labour
 It represents wages payable / paid to those
employees who directly engaged in the
conversion of raw materials into final product.

 Indirect labour -the labor which is not directly

engaged in the production operations. They
help in the production operations.
 Eg.Supervisor` s salary,Depreciation of plant
 Elements of Cost- Expenses
Direct Expenses- expenses which may be
allocated to a specific job,process or operation.
Examples:
a) cost of pattern, designs, drawings
b) hire charges of special machinery,plant.
c) architects and surveyors fees .
d) Cost of any experimental work
Elements of Cost-Indirect Expenses
Indirect expenses:
These are those expenses which cannot be
directly and conveniently allocated to specific
cost units / cost centers.
 Also called Overheads

Eg: rent, rates,salary to staff…

 Components of Total Cost
1.Prime cost=DirectMaterials+Direct Labour+
Direct Expenses.

2.Factory Cost=Prime cost+ Factory Overheads

(WorksCost)
3.Cost of Production=
Works cost+Office/Admn.Overheads
 Components of Total Cost
4. Cost of Sales/Total Cost=
Cost of Production+Selling &Distribution
Overheads

5. Sales= Total Cost+Profit

 Cost sheet
 Cost sheet is a statement prepared to show the
different components of the total cost.

 It generally shows the total cost and sales as

well as cost and selling price per unit.

 It is presented in a tabular form.

 Model of Cost Sheet

 Direct Materials x
 +Direct Labour x
 +Direct Expenses x
 =PrimeCost XXX
 +Factory Overheads x
 =Works/FactoryCost XXXX
 +Office&Admn.Cost x
 =Cost of production XXXXX
 +Selling&Distn.Cost x
 =TotalCost XXXXXX
 +Profit X
 =Sales XXXXXXXXX
 Unit-13

Marginal Costing
and
Break Even analysis
 Marginal Cost
 “Marginal Cost means the amount at any given
volume of outputby which aggregate costs are
changed if the volume of output is increased or
decreased by oneunit”.
 It is also known as Variable Cost.
 Marginal cost is the sum total of direct material
cost,direct labor cost, variable direct expenses
and all variable overheads
 MC=Prime Cost+Variable Overheads
 Some terms in Marginal Cost
 Cost Drivers-The activities that cause costs tobe
incurred
 Fixed cost:The cost which remains unchanged
in total as the level of activity.
 Variable cost:The cost which changes according
to level of activity.
 CVP Analysis:The technique summarizes the
effects of changes in an organization’s volume
of activity on its costs, revenue and profit.
 BreakEven chart
 Graphic or visual presentation of the
relationship between costs, volume and profit.

 It also indicates the estimated profit or loss at

different levels of production.

 This can be drawn in Contribution method and

Total Cost method
 Break even analysis
It is a simple method of presenting the effect of changes
in volume on profits.
Assumptions:
 a) All costs can be classified into fixed and variable

 b) Sales mix will remain constant.

 c) There will be no change in general price level

 d) The state of technology, Methods of production

and efficiency remain unchanged.

 e) Costs and revenues are influenced only by volume

 f) Unit produced and sold are same.

 FORMULAE

 Formulaes in Break Even Analysis Context.

 Basic formula-Break EvenAnlysis
(Equation Approach)

 This approach is based on

Profit Equation.

Sales x PV Ratio=FixedCost+ Profit

 Break Even statement

Sales xxxxx
Less Variable cost xxx
_______
Contribution xxxx
Less Fixed Cost xxx
_______
Profit xxx
 Contribution

 Excess of Sales over Variable cost is

contribution.

 Contribution= Sales- Variable Cost

or
C= S-VC
Contribution Per Unit= Selling Price perUnit-
Variable Cost per Unit
 Profit Volume Ratio(P/V Ratio)
 Meaning: Contribution expressed in Ratio format
is called P/V Ratio.

 New name for P/V Ratio is MCSR(Marginal

Contribution to Sales Ratio)

 This is the amount of revenue that is available to

contribute to covering fixed expenses after all
variable expenses have been covered or recovered.
 P/V Ratio
 PVRatio= Contribution/Sales x 100
or

=Contribution per unit/selling price per unit.

or
=Change in Profit/Change in Sales x 100
 Break Even point

 The point where there is no profit nor loss is

called Break Even Point.

 It is the Zero Point Profit.

 When Total Revenue Curve intersectsTotalCost
then it occurs.

 It occurs when TR=TC or Sales= Cost

 Break Even Point

 BEP(Rs.)= Fixed Cost/PV Ratio

 BEP( Units)=Fixed Cost/Contribution perUnit

 Target Profit(Desired profit)
 The profit amount which is decided in
advance is called Desired/Target Profit.

 Number of units to be sold=Fixed expenses +

Desired or Target profit / PVRatio
or
= Fixed expenses + Desired or Target profit /
Contribution per unit.
 Margin of Safety(MoS)
 Difference between Present Sales and Break
Even sales is called Margin of safety.

The safety margin gives management a feel for

how close projected operations are to the
organization’s break even point.
MoS = Total Sales-BreakEven Sales
or
MoS= Profit/PV Ratio
 Angle of Incidence

 The angle formed above Break Even Point is

called Angle of Incidence.

 It shows the profit earning capacity of the firm.

 Wider the angle larger will be the profitability.

 Application of Marginal Costing.
 Level of planning.
 Alternate methods o production.
 Make or Buy decisions.
 Fixation of Selling price.
 Selection of Optimum sales mix.
 New product introduction.
 Balancing of Profits.
 Final Balancing decisions.
 UNIT-14


BUDGETARY CONTROL
Budget, Budgeting and Budgetary control

 Budget: A numerical statement expressing the

plans, policies and goals of an enterprise for a
definite period in the future.

 Budgeting: Process of preparing budget.

 Budgetary control: Managerial action of

Budget.
 Objectives of Budgetary control
 To forecast and plan for future to avoid losses
and to maximize profits.
 To help the concern in planning the activities
both physical and financial.
 To bring about coordination between different
functions of the enterprise.
 To control; actual actions by ensuring that
actual are in tune with targets.
 Merits of Budgetary Control
 1. It forces basic policies to initiatives
 2. Aims at the maximization of profits
 3.Fixes the goals and targets without which operations lack
direction
 4. Cost Reduction
 5. It brings about overall efficiency in result.
 6. It ensures proper utilization of Capital Employed
 7. It enables the management to decentralize responsibility
without losing control
 8. It helps in decision making
 9. Budgetary control facilitates an intelligent and planned
forecast of the future.
 Limitations of Budgeting
 1.Based on Estimation.

 2.Not a substitute to management.

 3.Quantitative data are rigid in certain

situations.

 4.Installation of budget is a costlier effort

 Essential of Budgetary Control
 Definition of policies
 Forecasting.
 Budget Committee.
 Accounting system.
 Sound Organizational Structure.
 Team work.
 Reporting
 Statistical information
 Staff motivation
 Steps in Budgetary Control.
 Defining policies.

 Forecasting.

 Budget preparation.

 Forecast combinations.
 Types of Budgets
I. Fixed Budget.

II. Flexible Budgets.

III. Functional Budgets

 FIXED BUDGET

 It is also known as static budgets.

 It is prepared for a fixed or standard volume
of activity.
 They do not change with change in the volume
of activity.
 Deviations are expected in this budget, as it is
prepared in advance.
 FLEXIBLE BUDGET
 It is prepared with a view to take into
account the periodic changes in the level of
activity attained.

 A budget prepared in a manner to give

budgeted costs for any level of activity is,
known as flexible budget.
 The flexible budget is designed to change
appropriately with fluctuations in level of
activity.
 Model of Flexible Budget

Particulars Amount(Level of
activity)

1.Fixed Expenses

2.Semivariable Expenses

3.Varaiable Expenses

Total
 FUNCTIONAL BUDGET
 Also known as subsidiary budgets.
 These are prepared on the basis of approved
forecasts for individual department.
 Since departments are created based on

functions, they are known as functional budgets.

 Eg: Cash Budget ,Sales budget., Production

budget, selling and distribution overhead

budget, plant budget, R&D Budget.
 Cash Budget
 Cash budgeting is the process of forecasting the
expected receipts( cash inflows) and expected
payments ( cash outflows )to meet the future
obligations.

 The written statement of receipts and

payments is cash budget.

 It is a crystal ball which enables one to observe

the future movements in cash position
 Model of CASH BUDGET
Particulars Amount

A. Opening Balance

B. Cash Receipts(Cash in lows):

1.Cash sales
2.Collection from Debtors.
3.OtherReceipts
Total (A+B)

C. Cash payments(Cash outflows):

1.Cash purchases.
2.Payment to Creditors.
3.Purchase of assets
4.Other cash payments
Total
D .Closing Cash balance(A+B-C)
 UNIT-15

STANDARD COSTING
 Standard Costing
 Definition:
“Technique of cost accounting which compares
the standard cost of each product or service
with the actual cost to determine the efficiency
of the operation ”.
 Meaning:

It compares the predetermined and actual costs.

 Standard Costing Vs. Budgetary Control

BUDGETARY CONTROL STANDARD COSTING

1.Wider scope 1.Limited scope.

2.Extensive application. 2.Intensive application.
3.Deals with cost 3.Deals with cost only.
&Revenue. 4.Technical assessment
4. From Past data to data.
Future data. 5.Projection of Cost A/C.
5.Projection of Final A/C. 6.Variances are revealed.
6.Varaiance are not
revealed.
 Standard costing Process
 Deciding standards.
 Establishing standards forMaterials,labour and
Overheads.(Cost,price,Quantity).
 Provide allowances for Wastages /Constraints.
 Comparison of Actual with standards set.
 Pinpoint the Variance.
 Variance analysis.
 Controlling the variance
 Variance

 Favorable Variance: When the actual cost is less

than the standard cost, the difference is termed
as “favorable” or “credit” variance.
 It is a sign of efficiency of the organization

 Unfavorable Variance: When actual cost exceeds

the standard cost, the difference is termed as
"unfavorable”, “adverse” or “debit” variance.
 It is a sign of inefficiency.
 Variance.
 Meaning: Deviation of actual data
from the set standard.

 Variances indicate the extent to

which standards set have been
achieved.
 Types of VARIANCE ANALYSIS
 1.Material Cost Variance(MCV)

 Labour Cost Variance(LCV)

 Overheads Variance.
 Material Cost Variance
 It is the difference between the standard cost
of materials allowed for the actual output and
the actual cost of materials used.
 Material Variance has got two sub variances:

 Material Price Variance(MPV) and Material

Usage Variance(MUV)

 Therefore MCV=MPV+MUV
 Material Cost Variance(MCV)

Material Cost Variance = Standard Cost – Actual Cost

or

MCV=( SQ x SP)- ( AQ x AP)

 Standard cost = actual output x standard rate per unit
of output
 Actual cost = actual quantity consumed x actual price
per unit of material.
 Material Price Variance(MPV)
 Material Price Variance = (Standard Price –
Actual Price ) x Actual quantity used
or
 MPV= ( SP – AP ) AQ
 Material Usage Variance(MUV)
 Also known as material quantity variance or
efficiency variance.

 It is that portion of material cost variance

which measures the difference in material cost
arising from higher or less consumption of
materials than the standard material
consumption for the actual output.
 Material Usage Variance(MUV)
 Material Usage Variance = (Standard
Quantity –Actual Quantity ) Standard Price

or

MUV = (SQ – AQ) SP

 Material Mix Variance(MMV)
This variance arises only when more than one
type of materials are used in manufacturing the
product and the quantities of materials issued to
production are not in proportion of standard
mix.
 It is defined as that portion of the direct

materials usage variance which is due to

difference between the standard and actual,
composition of a mixture
 MaterialMixVariance(MMV)
Material Mix Variance = Revised standard
quantity for each material – actual MMV
Quantity for each material) x standard price.

 RSQ = standard quantity for each material /

total of standard quantity of all types of
materials x actual mix total

 RSQ = Total weight of actual mix / total weight

of standard mix X standard quantity.
 Material Yield Variance(MYV)
 This variance arises only when the rate of output is
known.
 It is that portion of the direct material usage variance

which is due to the difference between standard yield

specified and actual yield obtained.
 It measures the loss or saving due to wastage of

materials.
MYV = (Standard yield – Actual Yield ) x standard rate
per unit of output
or
( Standard Loss – Actual Loss ) x standard rate per unit of
output
 Labour Variance
 It is the difference between actual labor cost
and the standard labor cost of production
achieved. It is calculated as :

Labor Cost Variance = Standard Cost – Actual

Cost
 LCV= SC -AC

or
=(Standard labor hours x standard rate per hour )
– (Actual labor hours x Actual rate per hour
Labour Efficiency Variance(LEV)
It is that portion of labor cost variance which is
due to the difference between the standard
labour hours specified for the activity i.e
output achieved and the actual labor hours
worked.

LEV = Standard hours – actual hours worked ) x

standard rate
or
LEV = (SH – AH ) SR
 Labour Rate Variance(LRV)
It is that portion of labor cost variance which
is due to the difference between the standard rate
specified and actual rate paid.
Labour Rate variance = (Standard Rate –
Actual Rate ) x Actual hours paid
or
LRV = ( SR – AR) AH
 Labour Idle Time Variance
 It is that portion of labor cost variance which is
due to abnormal idle time of workers.
 This variance is calculated to show separately
the effect of abnormal causes affecting
production such as failure of power supplies,
machine break down, waiting for materials,
waiting for instructions, strike, lockouts.

Labor idle time variance = Idle hours x standard

hourly rate
 Labour Mix Variance(LMV)
The variance shows to the management as to how
much of the labor cost variance is due to the
changes in the composition of labor force.

 LMV = (Revised standard hours – actual hours

worked) x standard hourly rate
or
 LMV=(RSLH – ALH) x SR
 Labour Yield Variance(LYV)
This is due to the difference in the standard
output specified and the actual output
obtained.

LYV : (Actual output – Standard output ) x

standard cost per unit
 Final Word

 GOOD LUCK Dear Students………..