CA FINALADVANCED MANAGEMENT
ACCOUNTING
Few concepts at a quick glance………
MARGINAL COSTING
MARGINAL COST STATEMENT
SALES XXX
(-) VARIABLE COST XXX
CONTRIBUTION XXX
(-) FIXED COST XXX
PROFIT XXX
LOSS REPRESENTS UNRECOVERED FIXED COST
RATIOS
P/V RATIO
V/C RATIO
CONTRIBUTION X 100 SALES
VARIABLE COST X 100 SALES
P/V RATIO = 100% - V/C RATIO
BREAK EVEN POINT(BEP)
LEVEL OF SALES WHERE THERE IS NO PROFIT NO LOSS SITUATION
i.e. CONTRIBUTION = FIXED COST
BREAK EVEN POINT(in Rs.) = FIXED COST
P/V RATIO
BREAK EVEN POINT(in Units) = FIXED COST CONTR. P . u.
SIGNIFICANCE OF BREAK EVEN POINT
LEVEL OF SALES IMPACT ON PROFITS
LESS THAN BEP FIRM INCURS LOSSES (CONTRIBUTION < F.C.)
EQUAL TO BEP NO PROFIT NO LOSS (CONTRIBUTION = F.C.)
GREATER THAN BEP FIRM EARNSPROFIT (CONTRIBUTION > F.C.)
MARGIN OF SAFETY (MOS)
IT IS THE DIFFERENCE B/W TOTAL SALES AND BREAK EVEN SALES
MOS (in Rs.) = TOTAL SALES – BREAK EVEN SALES
OR PROFIT / PV RATIO
MOS (in Qty.) = PROFIT / CONTRIBUTION PER UNIT
INDIFFERENCE POINTIT IS THAT LEVEL OF SALES WHERE THE COSTS AND
PROFITS OF TWO OPTIONS ARE EQUAL.
PROFIT OF OPTION 1
PROFIT OF OPTION 2
INDIFFERENCE POINT
---------------------------- ------------------------
AMO
UN
T (
in R
s.)
QUANTITY
FORMULA:
A)INDIFFERENCE POINT (in Rs.) = DIFFERENCE IN
FIXED COST DIFFERENCE IN V/C
RATIO
OR
= DIFFERENCE IN FIXED COST
DIFFERENCE IN P/V RATIO
FORMULA:
B) INDIFFERENCE POINT (in Units) = DIFFERENCE IN FIXED
COST DIFFERENCE IN
VARIABLE COST p.u
OR
= DIFFERENCE IN FIXED COST
DIFFERENCE IN CONTR. p.u.
LEVEL OF SALES MOST PROFITABLE
OPTION
REASON
BELOW INDIFFERENCE POINT
OPTION WITH LOWER FIXED COST
LOWER THE FIXED COST, LOWER THE BEP, HENCE MORE PROFIT BEYOND BEP
AT INDIFFERENCE POINT
BOTH OPTIONS ARE EQUALLY PROFITABLE
INDIFFERENCE POINT
ABOVE INDIFFERENCE POINT
OPTION WITH HIGHER PV RATIO (LOWER VARIABLE COST)
THE HIGHER THE PV RATIO, THE BETTER IT IS.
SIGNIFICANCE OF INDIFFERENCE POINT
SHUT DOWN POINTIT INDICATES THE LEVEL OF OPERATIONS BELOW WHICH IT IS NOT JUSTIFIED TO PURSUE PRODUCTION.
FOR THE ABOVE PURPOSE DIVIDE THE FIXED COST
AVOIDABLE OR DISCRETIONARY FIXED COST
UNAVOIDABLE OR COMMITTED FIXED COST
FORMULAS:
SHUT DOWN POINT (in Rs.) = AVOIDABLE FIXED COST P/V RATIO
SHUT DOWN POINT (in Qty.) = AVOIDABLE FIXED COST CONTRIBUTION p.u.
AVOIDABLE F.C. = TOTAL F.C. – UNAVOIDABLE F.C.
LEVEL OF SALES
DECISION REASON
BELOW SHUT DOWN POINT
CLOSE DOWN OPERATIONS
AVOIDABLE FIXED COSTS ARE NOT BEING RECOVERED
AT SHUT DOWN POINT
CONTINUE OPERATIONS
AVOIDABLE FIXED COSTS ARE JUST RECOVERED
ABOVE SHUT DOWN POINT
CONTINUE OPERATIONS
AVOIDABLE F.C. ARE RECOVERED, FURTHER CONTR. RECOVERS BALANCE F.C.
SIGNIFICANCE OF SHUT DOWN POINT
KEY FACTOR OR THE LIMITING FACTOR
• IT REPRESENTS A RESOURCE WHOSE AVAILABILITY IS LESS THAN ITS REQUIREMENT.
• IT IS ALSO CALLED CRITICAL FACTOR OR BUDGET FACTOR.
• EXAMPLES OF KEY FACTOR:1. SHORTAGE OF RAW MATERIAL2. LABOUR SHORTAGE3. RESTRICTIONS IN PLANT CAPACITY4. DEMAND OR SALE EXPECTANCY5. CASH AVAILABILITY
KEY FACTOR- DECISION MAKING STEPS
IDENTIFY THE KEY FACTOR. COMPUTE TOTAL CONTRIBUTION OR CONTRIBUTION PER UNIT OF PRODUCT. COMPUTE CONTRIBUTION PER UNIT OF THE KEY FACTOR i.e. CONTRIBUTION per DIRECT LABOUR HOUR. RANK THE PRODUCTS BASED ON CONTRIBUTION PER UNIT OF THE KEY FACTOR ALLOCATE THE KEY RESOURCES BASED ON RANKS GIVEN ABOVE.
RELEVANT COSTING
MATERIAL COST
ALREADY AVAILABLE TO BE PURCHASED
REGULARLY USED
RARELY USED
CURRENT REPLACEMENT
COST IS RELEVANT AS INCREMENTAL
COST
NET REALISABLE VALUE IS RELEVANT
AS OPPURTUNITY COST
PURCHASE PRICE, BEING OUT OF POCKET
COST IS RELEVANT
SITUATION RELEVANT COST
1. LABOUR FORCE ALREADY AVAILABLE A) EXCESSIVE LABOUR FORCE- NO
RETRENCHMENT POLICY NIL
B) EXCESSIVE LABOUR FORCE- REDUCTION IN IDLE TIME COST
NIL
C) USED FOR SPECIAL CONTRACT NECESSITATES REPLACEMENT
REPLACEMENT COST i.e. WAGES OF NEW WORKERS
D) YIELDING CONTRIBUTION IN A DIFFERENT DEPARTMENT
VARIABLE COST + OPPORTUNITY COST (CONTR. FOREGONE)
2. WORKERS TO BE APPOINTED OUT OF POCKET COST i.e. WAGES OF NEW WORKERS
3. LABOUR SHORTAGE SITUATIONS VARIABLE COST + OPPORTUNITY COST (CONTR. FOREGONE)
LABOUR COST
NATURE OF COST
RELEVANT COST
VARIABLE OVERHEADS • IRRELEVANT IF ALREADY INCURRED• RELEVANT, ONLY IF SUCH COSTS ARE TO BE INCURRED IN FUTURE
FIXED OVERHEADS RELEVANT ONLY UNDER SPECIFIC SITUATIONS. (REFER NEXT SLIDE)
DEPRECIATION IRRELEVANT AS IT IS AN APPORTIONMENT OF HISTORICAL COST
OTHER DEPARTMENT COSTS
• IRRELEVANT IF ALREADY INCURRED• RELEVANT IF THEY ARE TO BE INCURRED SPECIFICALLY FOR ANY CONTRACT
OVERHEAD & OTHER COSTS
FIXED COSTFIXED COSTS ARE IRRELEVANT FOR DECISION
MAKING
EXCEPTIONS:
1. SPECIFICALLY INCURRED FOR A CONTRACT
2. INCREMENTAL3. INCREASE DUE TO CHANGE IN LEVEL OF
ACTIVITY4. AVOIDABLE OR DISCRETIONARY FIXED COST5. ONE COST IS INCURRED IN LIEU OF
ANOTHER (DIFFERENCE IN COSTS WILL WE RELEVANT)
OPPORTUNITY COST
VALUE OF SACRIFICE MADE/BENEFIT OF OPPORTUNITY FOREGONE BY SELECTING ONE ALTERNATIVE IN PREFERENCE TO OTHERS.
FEATURES OF OPPORTUNITY COST:
• TAKEN INTO CONSIDERATION ONLY WHEN ALTERNATIVES ARE COMPARED.• ARISES ONLY IN RESOURCE SHORTAGE SITUATIONS i.e. KEY FACTOR SITUATION.• USEFUL ONLY FOR DECISION MAKING & NOT FOR ACCOUNTING, REPORTING & COST CONTROL.• ARISES ONLY IN SHORT RUN.
TRANSFER
PRICING
TRANSFER DIVISION
RECIPIENTDIVISION
PRODUCT / SERVICES TRANFERED
CONSIDERATION = TRANSFER PRICE
OBJECTIVE: TO SELL INTERNEDIATE
PRODUCT & MAXIMISE REVENUE
OBJECTIVE: TO BUY INTERNEDIATE
PRODUCT & MAXIMISE REVENUE
REVENUE COST
FIXATION OF MINIMUM & MAXIMUM TRANSFER PRICE
MINIMUM TRANSFER PRICE (ALWAYS FROM TRANSFER DIVISION VIEW):
IT IS THE TOTAL OF FOLLOWING ITEMS:a) VARIABLE COST UPTO THE POINT OF
INTERNAL TRANSFER.b) FIXED COST, IF SPECIFIC.c) OPPORTUNITY COST, IF APPLICABLE.
NOTES:
1. SELLING OVERHEADS ARE INCURRED FOR EXTERNAL SALES ONLY.2. OPPORTUNITY COST ARISES ONLY IF- - TRANSFERRING DIVISION PRODUCES MARKETABLE
PRODUCTS - TRANSFERRING DIVION OPERATES AT FULL CAPACITY
FIXATION OF MINIMUM & MAXIMUM TRANSFER PRICE
MAXIMUM TRASFER PRICE (ALWAYS FROM RECIPIENT DIVISION VIEW):
IT IS THE LEAST OF FOLLOWING ITEMS:
1. MARKET PRICE OF INTERMEDIATE PRODUCT (AS QUOTED BY OUTSIDE SUPPLIER)
2. INTERNAL TRANSFER PRICE (AS QUOTED BY TRANSFERRING DIVISION)
NOTES:IF THE PRICE QUOTED BY THE TRANSFERRING DIVISION IS MORE THAN THE PRICE QUOTED BY THE OUTSIDE SUPPLIER THEN IT IS ALWAYS BETTER TO PURCHASE FROM OUTSIDE.
ACTIVITY BASED
COSTING
COST OBJECTS:
ITEM FOR WHICH COST MEASUREMENT IS REQUIRED.
ACTIVITY BASED COSTINGMEANING:
IT IS THE IDENTIFICATION OF COST WITH EACH COST DRIVING ACTIVITY AND MAKING IT AS THE BASIS FOR APPORTIONMENT / ASSIGNMENT OF COSTS OVER DIFFERENT COST OBJECTS /JOBS/ PRODUCTS/ CUSTOMERS/SERVICES.
COST DRIVER:IT IS THE FACTOR THAT CAUSES A CHANGE IN THE COST OF AN ACTIVITY.
RESOURCE COST DRIVERS: MEASURE OF QUANTITY OF RESOURCES CONSUMED BY AN ACTIVITY & USED TO ASSIGN THE COST OF A RESOURCE TO AN ACTIVITY/COST POOL
ACTIVITY COST DRIVER: MEASURE OF FREQUENCY AND INTENSITY OF DEMAND, PLACED ON ACTIVITES BY COST OBJECTS & USED TO ASSIGN ACTIVITY COSTS TO COST OBJECTS.
STEP PARTICULARS
1. IDENTIFY VARIOUS ACTIVITES WITHIN FIRM INTO- PRIMARY AND SECONDARY.
2. RELATE THE OVERHEADS TO ACTIVITIES USING RESOURCE COST DRIVERS.
3. APPORTION THE COST OF SUPPORT ACTIVITIES OVER PRIMARY ACTIVITIES.
4. DTERMINE ACTIVITY COST DRIVERS FOR EACH ACTIVITY / COST POOL.
5. COMPUTE ABC RATE = TOTAL COST OF ACTIVITY ACTIVITY COST DRIVER
6. ASSIGN COSTS TO THE COST OBJECTS USING THE FORMULA = RESOURCES CONSUMED X ABC RATE
STAGES IN ABC
THANK YOU&
ALL THE BEST
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