cost management accounting

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Cost and management accounting

Transcript of cost management accounting

Page 1: cost management accounting

Cost and management accounting

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Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations.These ratios measure the ability of a company to pay off its short-term liabilities when they fall due.

The important ratios in measuring short term solvency are:

1. current ratio

2. quick ratio

3.absolute liquid ratio

LIQUIDITY RATIO

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The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.

It compares a firm's current assets to its current liabilities.

current ratio = Current asset

_______________

Current liability

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QUICK RATIO

It is also known as Acid test ratio, or quick ratio, or liquid ratio.

It measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.

Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

QUICK RATIO = ( CURRENT ASSET- INVENTORY- ACCOUNTS RECEIVABLE)

_____________________________________CURRENT LIABILITY

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The absolute liquidity ratio is used to calculate what the company's net worth is.It is the ratio of absolute liquid assets to current liabilities.This ratio is used to determine the absolute liquid position of a firm or company. 

ABSOLUTE LIQUID RATIO

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It measure a company's ability to generate earnings relative to sales, assets and equity.

These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested.Major profitability ratio are:

1.Gross profit margin

2. Net profit margin

3.Cash profit ratio

4.Return on total asset

5. Return on shareholder's fund

Profitability ratio

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GROSS PROFIT MARGINThe ratio measures the gross profit margin on the total net sales made by the company.

Gross profit margin = cost of goods sold x 100

_____________________

Sales

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NET PROFIT MARGINThis ratio is designed to focus attention on the net profit margin arising from the business operation before interest and tax is deducted.

Net profit margin = net profit after tax x 100

_____________________

Sales

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CASH PROFIT RATIOCash profit ratio measures the cash generation in the business as a result of the operations expressed in the sales.Cash profit ratio = cash profit x 100 _________________ Sales

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RETURN ON TOTAL ASSET

This ratio indicates the efficiency of utilisation of assets in generating revenue.Return on total asset =

Net profit after tax x 100_____________________ Total assets

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DIFFERENCE BETWEEN COST ACCOUNTING AND MANAGEMENT

ACCOUNTING

Scope :

It is suitable only for such business concerns which are engaged in manufacturing, production, mining or providing some service (e.g. bus company electric supply company etc.)

It is suitable for all businesses - manufacturing, production or even in marketing only.

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Pre-determined and historical accounting

In cost accounting, the expenditure to be incurred is estimated and standard cost of product is found. Thus, it act as a pre-determined process.

In Financial accounting, accounting is done after the expenditure has already been incurred and not prior to that. So it is historical accounting.

Pre-determined and historical accounting

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Nature of transactions Transactions related with production activities only are accounted for in this method. Donations, dividend received, etc. are not taken into account as these are not related with production.

All economic transactions are taken into account, whether these are related with production or not.

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SELLING PRICE

By cost accounting the price of the product can be fixed more accurately in a scientific manner.

In the absence of information about cost, the selling price fixed by this method may be misleading.

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Profit & Loss Profit calculated by this method expresses the result of production activities.

Profit calculated by this method expresses the profit of the organization.

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Information about cost Full and correct information about the cost, per unit cost, various elements of cost, etc. of the product is made available in cost accounting.

Financial accounting does not give such detailed and correct information.

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