Accounts Assignment

On

Marginal Costing and

Accounting Definitions

Self Assessment Question of

Marginal Costing 1. To obtain the break-even point in rupee sales volume, total fixed

costs are divided by

a) Variable cost per unit

b) Contribution margin per unit

c) Fixed cost per unit

d) Profit/volume ratio

2. The break even point is the point at which

a) There is no profit no loss

b) Contribution margin is equal to fixed cost

c) Total revenue is equal to total cost

d) All of the above

3. Margin of safety is referred to as

a) Excess of actual sales over fixed expenses

b) Excess of actual sales over variable expenses

c) Excess of actual sales over break-even sales

d) Excess of budgeted sales over fixed costs

4. The break even analysis may be described as

a) Comparison between production and sales

b) Comparison to make out capacity utilization

c) Comparison between target set and actual achievement

d) Comparison between sales and cost

5. An increase in sales price

a) Does not effect the break-even point

b) Lowers the net profit

c) Increases the break even point

d) Lowers the break even point

6. Fixed cost per unit decreases when

a) Production volume increases

b) Production volume decreases

c) Variable cost per unit decreases

d) Prime cost per unit decreases

7. Within a relevant range, the amount of variable costs per unit

a) Differs at production level

b) Remains’ constant at production level

c) Increases as production increases

d) Decreases as production increases

8. Each of the following would affect the break even point except a

change in the

a) Number of units sold

b) Variable cost per unit

c) Total fixed cost

d) Sales price per unit

9. Margin of safety

a) Profit/P.V Ratio

b) Profit*Sales/Sales-Variable cost

c) Excess sales over break even sales/Actual sales

d) All of them

10. Under marginal costing system, the contribution margin discloses the

excess of

a) Revenue over fixed cost

b) Projected revenue over break even point

c) Revenue over variable cost

d) Variable cost over fixed cost

Answer Key

1) Contribution margin per unit

2) All the above

3) Excess of actual sales over break even sales

4) Comparison between sales and cost

5) An increase in sales price

6) Production volume increases

7) Increase as production increases

8) Total fixed cost

9) All the above

10) Revenue over variable cost

Accounting Definitions

Fixed Assets

Accounting view Fixed assets refers to those assets which are held for the purposes of providing or

producing goods or services and those that are not be held for resale in the normal course

of business. It may be classified as under:

1) Tangible fixed assets – Refers to those fixed assets which can be seen and touched. For e.g. Land and Building,

Plant and Machinery and Furniture and Fixtures.

2) Intangible fixed assets- Refers to those fixed assets which cannot be seen and touched. For e.g. Goodwill, Patent,

Trademark, Copyright.

Managerial view It is the investment done by the Organisation for doing the production. It is also included

in the total market value of the Organisation. It helps Organisation to take loan or credit

from the market.

Example: 1)Mr. X purchases a machinery of Rs. 10 lakh.

2)Mr. Y purchases business of Mr.Z for Rs. 20 lakh which includes 18 lakh tangible

fixed assets and 2 lakh as Goodwill.

Debtors

Accounting view Debtors are person and/or other entities who owe to an enterprise an amount for buying

goods and services on credit. The total amount standing against such person and/ or

entities on the closing date, is shown in the balance sheet as sundry debtors on the

assets side

Managerial view Debtors means the money of the organization is blocked with the outsiders and we have

to spend money to recover the blocked money. It affects the liquidity of the company as

money is not in the flow. So it is the liability for the company.

Example: 1000 units are sold to Mr. X @ Rs.50 on credit then Mr. X is debtor to

business.Rs.200 paid as recovering charge.

Profit

Accounting view Profit is the excess of revenue over the expenses to earn that revenues.

Profit = Revenue – Expenses

Types of Profit:

1) Revenue profit Profit earned by a company in ordinary course of business

2) Capital profit Excess of proceeds realized from sale, transfer, or exchange of assets of business not held

by company for sale in ordinary course of business.

3) Gross profit Excess of proceeds of goods and services sold during certain period over their cost before

taking into account administrative, selling and financing expenses.

G.P= Sales - Cost of goods sold

4)Operating profit Net profit arising from normal operation and non operating activities but without

considering interest expenses. It is also referred as profit before Interest and Tax(PBIT)

(PBIT)=(Sales)+(Other income)-(C.O.G.S,Admin,Selling,&DepriciationExp.)

5)Net profit Excess of revenue over expenses of business. Income tax is paid on this profit.

6)Profit after Tax Profit left after paying income tax. From this amount

-dividend on preference share is paid

-dividend on equity share is paid

-remaining is kept as reserve of company (also known as retained earning)

Managerial view It is the return for the Organisation for performing the business process. It helps the

Organisation to increase the position in the market as the value of shares increases so the

return to stake holders investment are also very good . It increases the liquidity of the

Organisation. Increase in PAT means that their reserve is also increasing so if they want

any expansion/diversification in their business in future so they will not borrow full

amount from outside.

Example: Rs.24 crore is the net profit of X ltd. For this financial year

Discount

Accounting view

Discount is the deduction in the price of the goods sold .It is offered in two ways

.Offering deduction of agreed percentage of list price at the time of selling goods is one

way of giving .Such discount is called “Trade discount”. It is generally offered by

manufacturer to wholesellers and by wholeseller to retailers. After selling the goods on

credit basis the debtors may be given certain deduction in amount due in the case if they

pay the amount on the amount payable . Hence, it is called as cash discount .Cash

discount acts as an incentive that encourages prompt payment by the debtors.

Managerial view It is the benefit for the Organisation as Organisation has to pay less amount then the due

amount after using the other’s money for its own business for a certain period of time.

Example:Mr.Ram purchases goods from Mr.Hari for Rs.5 lakh and received 5% cash

discount and 3% trade discount.

Capital

Accounting view Capital is the excess of assets over external liabilities. IT refers to amount invested in an

enterprise by the Proprietors(in case of proprietorship) or partners (in case of partnership

concern). This amount is increased by the amount of profits earned and the amount of

additional capital introduced and is decreased by the amount of losses incurred and the

amount withdrawn (weather in the form of cash or kind). It represents the owners claim

on the assets of the enterprise.

Managerial view It is the investment done by the entrepreneur to run the Organisation and use the facilities

available to him. It helps the outsider to know the present position of the Organisation in

the market. So that the Organisation can borrow money from the market and run its

business.

Example: Mr. Hari invested Rs.25 lakh and started the business.

Creditor

Accounting view Creditors are the person or other entities who have to be paid by an enterprise an amount

for providing the enterprise goods and services on credit. The total amount standing to

the favour of such person or entities on the closing date, is shown in the Balance Sheet as

Sundry Creditors on the Liabilities side

Managerial view

It means the Organisation is doing business on others money. They are using others

capability to increase their position. As in creditors company uses outsiders money

without any mortgage.

Example: Mr. Anurag has sold us goods of Rs.2 lakh on credit. So we are using Anurag

money without any interest.

Goodwill

Accounting view Goodwill is an intangible assets which tells the present position of the organization in the

market. It is mainly taken into consideration at the time of admission , retirement, or

death of any partner or at the time of sales of business. It is the reputation of the business

in the market which can be cashed at any time

Managerial view Goodwill helps the manager to calculate the accurate assets and liabilities of the company

at the time of admission ,retirement or death of any partner or sales of the business.It also

tells the market position of the company to manager to take certain step for betterment of

the organization.

Example:Mr.X purchases business of Mr.Z for Rs.20 lakh . It include Goodwill 1 lakh ,

Fixed assets 14 lakh, Current assets 5 lakh .

Long term loan

Accounting view Loans taken by the organization which are for more then 5 years are known as Long term

loan. Usually all long term loans are secured loans they are for the longer period of time

so some assets are mortgaged. Generally long term loans are take for the advancement of

the business or to introduce new technologies in the business. Interest rate is also less as

loan is for the longer period of time.

Managerial view

As in the long term loan organization uses its assets in dual aspect as it takes the services

of assets and he also mortgage them to take the money from the market. So that liquidity

can increase and organization can introduce new technologies to reduce the cost of

production so that the profit can be increased and organization can grow and compete in

the competitive market.

Example: Ram and Co.taken a loan of Rs.50 lakh for 8 years by giving building as

mortgage

Interest on long term loan

Accounting view It is the return on the money taken from the market for the longer period of time .As the

time period is long so interest is always less then short term loan.

Managerial view It is the return given by the organization for using the outsiders money for longer period

of time. It is the loss for the organization as total profit is decreased but it is compulsory

as organization is using the outsiders money and increasing its liquidity.

Example: Interest paid to Bank of Maharashtra Rs.2000 on the loan of Rs.20 lakh.

Provisions for expenses

Accounting view

An amount written of or retained by way of providing for:

a)depreciation

b)doubtful debts

c)diminution in value of assets or

d)known liability amount of which cannot be determined with substantial accuracy

Managerial view It is made for the expected expenses in the future so that company is able to meet

expenses. It is the blockage of money for the organization as it can not use its cash for the

production process. Full amount of expenses should not be taken as provision a part can

be taken to meet a sudden loss.

Example: A provision of 5% is made on the debtors.

Bibliography

• Cost Accounting

Jawahar Lal

• Financial Accounting

D.K.Goel

P.C.Tulsian