Professional Documents
Culture Documents
Unit-1:
HISTORY OF ACCOUNTING :
The Italian Renaissance brought the artistic accomplishments of man to new heights. At
this time, Venice was the business cradle of Europe, and it was here among merchants
that double entry accounting was invented and practised. During this period Fra Luca
Pacioli wrote his Book "Summa" dealing with record keeping and double-entry
accounting, one of the very first published books of the time that would become the
accounting "textbook" for the next 500 years. One section of this book was dedicated to
the description of double-entry accounting. The Summa was one of the first books
published on the Gutenberg press, became an instant success and was translated into
German, Russian, Dutch, and English. The Summa made Pacioli a celebrity and
insured him a place in history, as "The Father of Accounting."
INTRODUCTION :
The knowledge economy along with the ongoing information technology changes are
affecting the way we are doing business. We are becoming customers of each other,
and the economic value chain is integrating our businesses with our suppliers,
customers, and governments. As accounting is concerned, these peculiar changes are
being reflected in the present trends of shifting our attention from an obsolete
quantitative approach to a qualitative obsession where quality, customer satisfaction,
and innovation become the most important components. It suggests that accounting is
about providing information to others. Accounting
information is economic
information - it relates to the financial or economic activities of the business or
organisation.
Accounting information needs to be identified and measured. This is done by way of
a "set of accounts", based on a system of accounting known as double-entry
bookkeeping. The accounting system identifies and records "accounting
transactions".
or loss has been made by a business in a particular period. As we will see, the
measurement of accounting information often requires subjective judgement to come
to a conclusion
- The definition identifies the need for accounting information to be communicated. The
way in which this communication is achieved may vary. There are several forms of
accounting communication (e.g. annual report and accounts, management accounting
reports) each of which serve a slightly different purpose. The communication need is
about understanding who needs the accounting information, and what they need to
know!
DEFINITIONS OF ACCOUNTING
According to American Institute of Certified Public Accountants (AICPA) :The art of recording , classifying and summarizing in a significant manner and in terms
of money , transactions and event which are, in part at least of financial character and
interpreting the results there of
According to American Accounting Association (AAA) : Accounting is the process of identifying , measuring, and communicating economic
information to permit informed judgments and decisions by user of the information
According to Accounting principles Board of AICPA :The function of accounting is to provide quantitative information, primarily financial in
nature, and economic entities, that is intended to be useful in making economic
decisions
According to Smith and Ashburne :Accounting is a means of measuring and reporting the results of economic activities
According to Bierman & Derbin :Accounting may is means of collecting, summarizing, analyzing, and reporting in
monetary terms the information of the business
According to RN Anthony :-
Accounting system is
activities.
According to.AICPA
The art of recording, classifying, and summarizing in a significant manner and in terms
of money, transactions and events which are, in part at least, of financial character, and
interpreting the results thereof.(AICPA)
External User
Owners
Proprietors
Managers
Employees
Users of
Accounti
ng
Informat
ion
Creditors
Prospective
Investor
Government
Customers
Researchers
Foreigners
Others
Internal Users :
1) Owners / Proprietors : The business is done with a primary objective of making
profit. The accounting records reflects the profitability , financial position and the
financial soundness of the business
2) Managers : In case of large industrial organizations, where the owners and
managers are different, the managers are responsible for the day to day affair of
the business, The accounting records provide the vital information of the
performance of the business and analysis, which in turn helps management to
improve the performance by taking corrective action
3) Employee : The employees are interested I the job security and the future
growth. Both of these are related to the performance of the business.
External Users :
1) Creditors : Creditors are the persons who have extended credit to the
company. The creditors include the suppliers of goods and services, bankers
and other lenders. The financial statements helps them in ascertaining the
liquidity position of the business . i.e. the ability to meet the financial obligation,
as and when they fall due. For determining the credit worthiness of the
organization. Terms of credit are set according to the assessment of their
customers' financial health. Creditors include suppliers as well as lenders of
finance such as banks.
2) Prospective Investors : A Prospective investor is interested in knowing the
financial strengths of the business The expected rate of return on the
investment could be estimated based on the study of the financial statement. for
analyzing the feasibility of investing in the company. Investors want to make
sure they can earn a reasonable return on their investment before they commit
any financial resources to the company.
3) Government : The Government is interested in the financial statements form
the point of view of taxations compliance to corporate and labour laws.
4) Customers : The customers who have developed loyalty to a business are
interested in the continuance of the business. They are also interested I knowing
the future plans of the origination with which they can also link their growth. For
assessing the financial position of its supplier which is necessary for a stable
source of supply in the long term.
5) Researchers : Researchers need financial information for testing financial
hypothesis and development of theories and models.
6) Foreigners : The whole world has how became one big market due to modern
means of transport and communicating .
Many foreign agencies are
entrepreneurs are interested to have collaboration with Indian Enterprises of this
country. On the basis of accounting information, the foreigners make u their
mind for imports , experts also
7) Tax Authorities: For determining the credibility of the tax returns filed on behalf
of the company.
8) Regulatory Authorities: for ensuring that the company's disclosure of
accounting information is in accordance with the rules and regulations set in
order to protect the interests of the stakeholders who rely on such information in
forming their decisions.
BRANCHES OF ACCOUNTING
Accounting can be divided into several areas of activity. These can certainly overlap and
they are often closely intertwined. But it's still useful to distinguish them, not least
because accounting professionals tend to organize themselves around these various
specialties.
Financial Accounting : Financial accounting is the periodic reporting of a company's
financial position and the results of operations to external parties through financial
statements, which ordinarily include the balance sheet (statement of financial
condition), income statement (the profit and loss statement, or P&L), and statement of
cash flows. A statement of changes in owners' equity is also often prepared. Financial
statements are relied upon by suppliers of capital - e.g., shareholders, bondholders and
banks - as well as customers, suppliers, government agencies and policymakers.
There's little use in issuing financial statements if each company makes up its own rules
about what and how to report. When preparing statements,
Management Accounting : The part of Accounting that has to do with the provision of
information to interested parties inside the business, especially to managers, to help
them with decision making, planning, management and control, is called cost and
management accounting. Where financial accounting focuses on external
users, management accounting emphasizes the preparation and analysis of accounting
information within the organization. According to the Institute of Management
(viii) Taxation: This includes computation of income in accordance with the tax laws,
filing of returns and making tax payments.
(ix) Office Services: This includes maintenance of proper data processing and other
office management services, reporting on best use of mechanical and electronic
devices.
(x) Internal Audit: Development of a suitable internal audit system for internal control.
(iv) Monetary measurement: In financial accounting only such economic events find
place, which can be described in money. However, the management is equally
interested in non-monetary economic events, viz., technical innovations, personnel in
the organization, changes in the value of money, etc.
These events affect
management's decision and, therefore, management accounting cannot afford to ignore
them. 15 For example, change in the value of money may not find a place in financial
accounting on account of "going concern concept". But while affecting an insurance
policy on an asset or providing for replacement of an asset, the management will have
to take into account this factor.
(v) Periodicity of reporting: The period of reporting is much longer in financial
accounting as compared to management accounting. The Income Statement and the
Balance Sheet are usually prepared yearly or in some cases half-yearly. Management
requires information at frequent intervals and, therefore, financial accounting fails to
cater to the needs of the management. In management accounting there is more
emphasis on furnishing information quickly and at comparatively short intervals as per
the requirements of the management.
(vi) Precision: There is less emphasis on precision in case of management accounting
as compared to financial accounting since the information is meant for internal
consumption. (vii) Nature: Financial accounting is more objective while management
accounting is more subjective.
This is because management accounting is
fundamentally based on judgment rather than on measurement.
(viii) Legal compulsion: Financial accounting has more or less become compulsory
for every business on account of the legal provisions of one or the other Act. However,
a business is free to install or not to install system of management accounting. The
above points of difference between Financial Accounting and Management Accounting
prove that Management Accounting has flexible 16 approach as compared to rigid
approach in the case of Financial Accounting. In brief, financial accounting simply
shows how the business has moved in the past while management accounting shows
how the business has to move in the future. An attempt may now be made to compare
and study the two types of accounting on basis of the characteristics of the data used.
Cost accounting is the process of accounting for costs. It embraces the accounting
procedures relating to recording of all income and expenditure and the preparation of
periodical statements and reports with the object of ascertaining and controlling costs.
It is, thus, the formal mechanism by means of which the costs of products or services
are ascertained and controlled. On the other hand, management accounting involves
collecting, analyzing, interpreting and presenting all accounting information, which is
useful to the management. It is closely associated with management control, which
comprises planning, executing, measuring and evaluating the performance of an
organization. Thus, management accounting draws heavily on cost data and other
information derived from cost accounting.
Today cost accounting is generally
indistinguishable from the so-called management accounting or internal accounting
because it serves multiple purposes. However, management accounting can be
distinguished from cost accounting in one important respect. Management accounting
has a wider scope as compared to cost accounting. Cost accounting deals primarily
with cost data while management accounting involves the considerations of both cost
and revenue. Management accounting is an all inclusive accounting information
system, which covers financial accounting, cost accounting, and all aspects of financial
management. But it is not a substitute for other accounting functions. It involves a
continuous process of reporting cost, financial and other relevant data in an analytical
and informative way to management. We should not be very much concerned with
boundaries of cost accounting and management accounting since they are
complementary in nature. In the absence of a suitable system of cost accounting,
management accountant will not be in a position to have detailed cost information and
his function is bound to lose significance. On the other hand, the management
accountant cannot effectively use the cost data unless it has been reported to him in a
meaningful and informative form.
2. Persistent efforts. The conclusions draws by the management accountant are not
executed automatically. He has to convince people at all levels. In other words, he
must be an efficient salesman in selling his ideas.
3. Management accounting is only a tool: Management accounting cannot replace the
management. Management accountant is only an adviser to the management. The
decision regarding implementing his advice is to be taken by the management. There is
always a temptation to take an easy course of arriving at decision by intuition rather
than going by the advice of the management accountant.
4. Wide scope: Management accounting has a very wide scope incorporating many
disciplines. It considers both monetary as well as non-monetary factors. This all brings
inexactness and subjectivity in the conclusions obtained through it.
5. Top-heavy structure: The installation of management accounting system requires
heavy costs on account of an elaborate organization and numerous rules and
regulations. It can, therefore, be adopted only by big concerns.
6. Opposition to change: Management accounting demands a break away from
traditional accounting practices. It calls for a rearrangement of the personnel and their
activities, which is generally not like by the people involved.
7. Evolutionary stage: Management accounting is still in its initial stage. It has,
therefore, the same impediments as a new discipline will have, e.g., fluidity of concepts,
raw techniques and imperfect analytical tools. This all creates doubt about the very
utility of management accounting.
This concept has now been extended to accounting separately for various divisions of a
firm in order to ascertain the results for each division separately. It has been of immense
value in determining results by each responsibility centre-Responsibility Accounting.
2. Money Measurement Concept.
Accounting records only those transactions which are expressed in monetary terms.
This concept assumes that all business transactions must be in terms of money that is
in the currency of a country. In our country such transactions are in terms of rupees.
Thus, as per the money measurement concept, transactions which can be expressed in
terms of money are recorded in the books of accounts.
For Example Investment 100,000/-Purchase of Machinery 30,000/- and Furniture
30,000/-etc.are expressed in terms of money, and so they are recorded in the books of
accounts. Lovality, honesty and Employees are not recorded in books of accounts
because these cannot be measured in terms of money although they do affect the
profits and losses of the business concern.
3. Cost Concept:
Cost concept states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and installation and
not at its market price. It means that fixed assets like building, plant and machinery,
furniture, etc are recorded in the books of accounts at a price paid for them. But some
times we have necessarily to be satisfied with an estimate only-the amount of
depreciation to be charged each year in respect of asset. It helps in calculating
depreciation on fixed assets.
For example we purchased one land for Rs.500, 000/-,and registration charges
20,000/- Out considers it as worth 700,000/-The total amount at which the land will be
recorded in the books of accounts 520,000/- (including expenses) not market price.
4. Going concern concept:
This concept assumed that the business will exist for a long time and transactions are
recorded from this point of view. It means that every business entity has continuity of
life. Thus, it will not be dissolved in the near future. This is an important assumption of
accounting, as it provides a basis for showing the value of assets in the balance
sheet; It is of great help to the investors, because, it assures them that they will continue
to get income on their investments
For example, a company purchases a plant and machinery of Rs.100, 000/ and its life
span is 10 years. According to this concept every year some amount will be shown as
expenses and the balance amount as an asset.
5. Dual-Aspect Concept.
Dual aspect concept basic principle of accounting. It provides the very basis of
recording business transactions in the books of accounts. This concept assumes that
every transaction has a dual effect, i.e. it affects two accounts in their respective
opposite sides. Therefore, the transaction should be recorded at two places. It means,
both the aspects of the transaction must be recorded in the books of accounts. The
interpretation of the Dual aspect concept is that every transaction has an equal effect on
assets and liabilities in such a way that total assets are always equal to total liabilities of
the business. This concept helps accountant in detecting error
For example if a business has purchased machinery for cash. There are two aspects 1)
Machinery received and 2) Cash paid. These two aspects are to be recorded. Thus, the
duality concept is commonly expressed in terms of fundamental accounting equation
Assets=Liabilities +Capital; or, rather,
Capital=Assets-Liabilities.
In other words, capital, the owners share of the assets of the firm is always what is left
out of assets after playing off outsiders. This is called the accounting Equation. It is self
evident but very useful.
6. Relisation concept:
Accounting is a historical record of transactions; it records what was happened. This
concept states that revenue from any business transaction should be included in the
accounting records only when it is realised. The term realisation means creation of legal
right to receive money. This is of great importance in stopping business firms from
inflating their profits by recording sales and incomes that are likely to accrue. Unless
money has been realized either cash has been received or a legal obligation to pay
has been assumed by the customer-no sales can be said to have taken place and no
profit or income can be said to have arisen. It helps in making the accounting
information more objective
For example Mr X Company received an order for supply Air conditioners worth
Rs.1,000,000/-.on 1st December.2011.They supplied worth Rs.500, 000/- up to
31stDecember.2011 and remaining supplied in Jan.2012.In this case X Company
recognized as a revenue up to 31st December.2011 only Rs. 500,000/- not
Rs.1,000,000/-.
7. Accrual Concept:
Accrual concept means that revenues are recognised when they become receivable.
Though cash is received or not received and the expenses are recognized when they
become payable though cash is paid or not paid. Both transactions will be recorded in
the accounting period to which they relate. Therefore, the accrual concept makes a
distinction between the accrual receipt of cash and the right to receive cash as regards
revenue and actual payment of cash and obligation to pay cash as regards expenses. It
helps in knowing actual expenses and actual income during a particular time period. It
helps in calculating the net profit of the business.
For Example Mr. X Company sold goods to Mr. Company worth of Rs.1, 000,000/- on
15thDecember.2011.cash received on 5 th Jan..2012. As per Accrual concept Mr. X
Company recognized revenue on 15 th December.2011 not 5th Jan.2012. Because
transaction happened on that day.
8. Accounting period Concept.
When accountants prepare financial statements like profit and loss account and balance
sheet, they assume that the life of the business can be divided into time periods. This is
called the accounting period concept. Normally periods divided like monthly, quarterly,
half-yearly and yearly basis.
It helps in future planning of the business. It helps in business liability of tax for specific
period. It helps in at the time divided declaration. It helps to creditors company financial
strength for particular period.
9. Matching Concept
The principle that requires a company to match expenses with related revenues.
Expenses are incurred for the purpose of producing revenue. In measuring net income
for a period, revenue should be offset by all the expenses incurred in producing that
revenue. This concept called Matching concept. The term matching means appropriate
association of related revenues and expenses. . On account of this concept,
adjustments are made for all outstanding expenses, accrued revenues, prepaid
expenses and unearned revenues, etc, while preparing the final accounts at the end of
the accounting period. It is very useful for find the exact revenues, expenses and profit
of the company for particular period.
For example if a company paid commission to sales man in January, 2012, for sale
made by him in December, 2011. According to this concept commission should be
adjust against sales of December 2000 because this expense is incurred for producing
revenue in December 2011.
Accounting Conventions:
Learning Objectives:
1. What are accounting conventions? Explain important accounting conventions.
The term "conventions" includes those customs or traditions which guide the
accountants while preparing the accounting statements. The following are the important
accounting conventions.
1. Convention of Disclosure
2. Convention of Materiality
3. Convention of Consistency
4. Convention of Conservatism
Convention of Disclosure:
The disclosure of all significant information is one of the important accounting
conventions. It implies that accounts should be prepared in such a way that all material
information is clearly disclosed to the reader. The term disclosure does not imply that all
information that any one could desire is to be included in accounting statements. The
term only implies that there is to a sufficient disclosure of information which is of
material in trust to proprietors, present and potential creditors and investors. The idea
behind this convention is that any body who want to study the financial statements
should not be mislead. He should be able to make a free judgment. The disclosures can
be in the way of foot notes. Within the body of financial statements, in the minutes of
meeting of directors etc.
Convention of Materiality:
It refers to the relative importance of an item or even. According to this convention only
those events or items should be recorded which have a significant bearing and
insignificant things should be ignored. This is because otherwise accounting will be
unnecessarily over burden with minute details. There is no formula in making a
distinction between material and immaterial events. It is a matter of judgment and it is
left to the accountant for taking a decision. It should be noted that an item material for
one concern may be immaterial for another. Similarly, an item material in one year may
not be material in the next year.
Convention of Consistency:
This convention means that accounting practices should remain uncharged from one
period to another. For example, if stock is valued at cost or market price whichever is
less; this principle should be followed year after year. Similarly, if depreciation is
TEST QUESTIONS
1. What do you mean by management accounting? Explain giving examples.
2. What are the functions of a management accountant? Elaborate each one of them.
3. Explain the benefits of management accounting in the business sector and service
sector.
4. Distinguish management accounting from financial accounting and cost accounting.
5. Explain the limitations of management accounting.
6. What are concepts and conventions of accounting.
Unit-2
Basic Accounting Terminology,
Non-accounting people can get puzzled by the accounting terms used. Every trade has
it's own jargon and accounting is no exception. Accountants need these terms to do
their job correctly. For the lay person it can however be quite daunting. The common
accounting terms are listed below, together with notes for Cashbook Complete users in
italics.
Accounting.Term.Definition
Accounts Payable Also called A/P or Creditors. Accounts payable are the bills your
business owes to suppliers. See the Bills to Pay screen in Cashbook Complete.
Accounts Receivable Also called A/R or Debtors, accounts receivable are the amounts
owed to you by your customers. See the Invoicing section in Cashbook Complete.
Accrual Based Accounting With the accrual method, you record income when the sale
occurs, not necessarily when you receive payment. You record an expense when you
receive goods or services, even though you may not pay for them until later. Cashbook
Complete uses Cash Based Accounting because it is easier to learn and understand.
Assets Things of value held by the business. Assets are balance sheet accounts.
Examples of assets are accounts receivable, furniture, fixtures and bank accounts. See
Balance
Sheet
Categories
in
the
Categories
Setup.
Balance Sheet Also called a statement of financial position, it is a financial "snapshot" of
your business at a given point in time. It lists your assets, your liabilities, and the
difference between the two, which is your equity, or net worth. Found under the
Cashbook
menu
in
Cashbook
Complete.
Capital Money invested in the business by the owners. Also called equity.
Cash Based Accounting If you use the cash method, you record income only when you
receive cash from your customers. You record an expense only when you write the
check to the vendor. Cashbook Complete uses this method,of accounting.
Chart of Accounts The list of account titles you use to keep your accounting records.
Cashbook Complete uses a simplified version of a chart of accounts and is called
Cashbook
Categories
(in
the
Setup
Wizard).
Cost of Goods Sold (COGS) Cost of items or services sold to your customers.
Creditor A company or individual whom you owe money to. See the Bills to Pay screen
in
Cashbook
Complete.
Credits At least one component of every accounting transaction (journal entry) is a
credit. Credits increase liabilities and equity and
decrease
assets.
Current Assets Assets that are in the form of cash or will generally be converted to cash
or used up within one year. Examples are accounts receivable and inventory.
Current Liabilities Liabilities payable within one year. Examples are accounts payable
and
payroll
taxes
payable.
Debits At least one component of every accounting transaction (journal entry) is a debit.
Debits
increase
assets
and
decrease
liabilities
and
equity.
Debtor A company or individual who owes you money. See Invoices Outstanding in
Cashbook
Complete.
Depreciation An annual write-off of a portion of the cost of fixed assets, such as vehicles
and equipment. Depreciation is listed among the expenses on the income statement.
With Cashbook Complete, this is normally done by your accountant at the end of the
year.
Double Entry Accounting In double-entry accounting, every transaction has two entries:
a debit and a credit (called a journal entry). Debits must always equal credits. All
General
Ledger
based
accounting
programs
use
double
entry
accounting.
End of Year Rollover With general ledger based accounting programs, the P & L
categories are zero'd and balance sheet categories are carried forward. This is a term
used in old accounting systems and not used much these days. Modern accounting
systems tend to use open ended accounting. See "End of Year" procedure in Cashbook
Complete
Help.
Equity The net worth of your company. Also called owner's equity or capital. Equity
comes from investment in the business by the owners, plus accumulated net profits of
the
business
that
have
not
been
paid
out
to
the
owners.
Fixed Assets Assets that are generally not converted to cash within one year. Examples
are
equipment
and
vehicles.
General Ledger A general ledger is the collection of all balance sheet, income, and
expense accounts used to keep the accounting records of a business. A general ledger
works with double entry accounting and journal entries for each transaction. Cashbook
Complete
uses
cash
based
accounting.
Income Accounts These are the accounts you use to keep track of your sources of
income. Examples are merchandise sales, consulting revenue, and interest income.
Income Statement Also called a profit and loss statement or a "P&L." It lists your
income, expenses, and net profit (or loss). The net profit (or loss) is equal to your
income minus your expenses. This is found under the Cashbook menu in Cashbook
Complete.
Inventory (Stock) Goods you hold for sale to customers. Inventory can be merchandise
you buy for resale, or it can be merchandise you manufacture or process, selling the
end product to the customer. See Products and Service in Cashbook Complete.
Journal The chronological, day-to-day transactions of a business are recorded in sales,
cash receipts, and cash payment journals. A general journal is used to enter period end
adjusting and closing entries and other special transactions not entered in the other
journals. In a traditional, manual accounting system, each of these journals is a
collection of multi-column spreadsheets. See "Journal Entries" in Cashbook Complete
Help.
Liabilities What your business owes creditors. Examples are accounts payable, payroll
taxes
payable,
and
loans
payable.
Long Term Liabilities Liabilities that are not due within one year. An example would be a
mortgage
payable.
Net Income Also called profit or net profit, it is equal to income minus expenses. Net
income is the bottom line of the income statement (also called the profit and loss
statement).
Profit & Loss Statement Also called an "Income Statement" or "P&L." It lists your
income, expenses, and net profit (or loss). The net profit (or loss) is equal to your
income minus your expenses. This is found under the Cashbook menu in Cashbook
Complete.
Retained Earnings Profits of the business that have not been paid to the owners; profits
that
have
been
"retained"
in
the
business.
Trial Balance A list of the categories (or general ledger accounts) and their totals. See
the Cash Trial Balance report in Cashbook Complete.
UNIT-3
Preparing Trial Balance / Accuracy of Ledger:
Learning Objectives:
1. Define and explain trial balance.
2. What are the advantages of preparing a trial balance?
3. What are the different methods of preparing trial balance?
Definition and Explanation:
Having posted all the transactions into the ledger, it is necessary to check the
correctness of the work done before proceeding further. In order to test the arithmetical
accuracy of our ledger we should prepare a statement called trial balance.
A trial balance is a statement prepared by taking out the debit and credit balances of all
accounts appearing in the ledger.
Objectives and Advantages of Preparing a Trial Balance:
The following are the main objectives of preparing a trial balance.
1. Trial balance helps in knowing the arithmetical accuracy of the accounting
entries. Trial balance represents a summary of all ledger balances and, therefore,
if the two sides of the trial balance tally, it is an indication of this fact that the
books
of
accounts
are
arithmetically
accurate.
2. Trial balance forms the basis for preparing financial statements such as income
statement / Trading and profit and loss account and balance sheet. In case, the
trial balance is not prepared, it will be almost impossible to prepare the financial
statements.
3. The entire ledger is summarised in the form of a trial balance. Thus the position
of a particular account can be judged simply by looking at the trial balance.
Proof of Accuracy:
If the debit and credit totals of the trial balance are equal and also correspond with the
total of journal, we may be satisfied that the posting have been properly made and are
arithmetically accurate.
How to Prepare a Trial Balance - An Example:
The trial balance is usually prepared on a loose sheet of paper. The ruling of trial
balance is similar to that of a journal. We may prepare a trial balance in one of the
following forms:
1. Total Trial Balance Method
2. Balance Trial Balance Method
Total Trial Balance Method:
According to total trial balance method two sides of each ledger account i.e., debit and
credit side are added up and debit and credit totals so obtained are placed in the debit
and credit columns of the trial balance respectively. Thus we may draw the following trial
balance by taking out the debit side total and credit side total of each account in
the ledger
Trial Balance
Ledger Account
J.F
Total Debits
Total Credits
Rs
12,453
43,675
23,654
430
26,670
-10,000
20,000
-3,400
600
1,000
Cash Account
Sundry Debtors Account
Sundry Creditors Account
Discount Account
Purchases Account
Sales Account
Machinery Account
Building Account
Capital Account
Rent Account
Wages Account
Salaries Account
1,141,882
Rs
8,436
34,453
31,298
550
-32,145
--35,000
---1,141,882
One clear defect of this method is that mistakes may be committed more often while
preparing the trial balance, because large number of figures would be required to be
enlisted. Thus, the process becomes unwieldy and cumbrous.
Balance Trial Balance Method:
The task of preparing a trial balance under balance - trial balance method is much
simplified. There is well known axiom that if equals are subtracted from equals the
remainders are equal. On this assumption, in place of writing against each account the
debit as well as the credit total the balance alone is written. The difference between the
two sides of an account is called the balance. If the debit side of an account is greater
than the credit side, the balance falls on the debit side and is known as "debit balance."
If the credit side of an account is greater than the debit, the the balance is on the credit
side and is called "credit balance."
Rules of Balancing Accounts:Rules of balancing each account is as follows:
1. Add up both sides of the account
2. Find out the difference in a separate slip.
3. Put the difference on the lighter side.
4. Add up both sides again.
5. Rule off.
The trial balance prepared above, if prepared with the balance of accounts will appear
as under (see example of ledger page):
Trial
Ledger Account
Balance
J.F
Dr. Balance
Cr. balance
Rs
Cash Account
Sundry Debtors Account
Sundry Creditors Account
Discount Account
Purchases Account
Sales Account
Machinery Account
Building Account
Capital Account
Rent Account
Wages Account
Salaries Account
4,017
9,222
--26,670
-10,000
20,000
-3,400
600
1,000
74,909
Rs--7,644
120
-32,145
--35,000
----
74,909
The second method has the added advantages and is the one that is generally used.
There are comparatively less chances of committing errors. As the magnitude of figures
is smaller the process is not cumbrous. It does not appear to be unwieldy. Moreover, in
a trial balance, the exact position of any account on the date of trial balance can be
determined at a glance.
Examples of Trading and Profit and Loss Account and Balance Sheet:
Learning Objectives:
1. Prepare trading and profit and loss account and balance sheet.
Example 1:
From the following balances extracted from the books of X & Co., prepare a trading
and profit and loss account and balance sheet as on 31st December, 1991.
Rs
Rs
11,000
Returns outwards
500
Bills receivables
4,500
Trade expenses
200
Purchases
39,000
Office fixtures
1,000
Wages
2,800
Cash in hand
500
700
Cash at bank
4,750
1,100
Insurance
Sundry debtors
30,000
Carriage inwards
800
Carriage outwards
1,450
Commission (Dr.)
800
Sales
60,000
Interest on capital
700
Bills payable
3,000
Stationary
450
Creditors
19,650
Capital
17,900
Returns inwards
1,300
X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991
To Opening stock
To Purchases
Less returns o/w
11,000
39,000
500
38,500
To Carriage
inwards
|By Sales
60,000
Less
|
returns i/w
1,300
58,700
By Closing
|
stock
25,000
800
To Wages
2,800
30,600
|
|
83,700
83,700
|
To Stationary
450
By Gross
|
profit b/d
1,100
To Carriage
outwards
1,450
To Insurance
700
To Trade expenses
200
To Commission
800
To Interest on
capital
700
To Net profit
transferred to
capital a/c
|
25,200
|
|
30,600
30,600
30,600
|
X & Co.
Balance Sheet
As at 31st December, 1991
Liabilities
Assets
Creditors
19,650
|Cash in hand
500
Bills payable
3,000
|Cash at bank
4,750
Capital
17,900
|Sundry debtors
30,000
25,200
|Bill receivable
4,500
|Stock
25,000
|Office equipment
1,000
43,100
|
65,750
65,750
|
Example 2:
The following trial balance was taken from the books of Habib-ur-Rehman on December
31, 2011
Cash
13,000
Sundry debtors
10,000
Bill receivable
8,500
Opening stock
45,000
Building
50,000
10,000
Investment (Temporary)
5,000
15,500
Bills payable
9,000
Sundry creditors
20,000
Habib's capital
78,200
Habib's drawings
1,000
Sales
100,000
Sales discount
400
Purchases
30,000
Freight in
1,000
Purchase discount
500
5,000
Advertising expenses
4,000
500
8,000
1,000
Interest income
1,000
Interest expenses
800
2,08,700
2,08,700
100,000
400
Net Sales
99,600
45,000
Purchases
30,000
Add: Freight in
1,000
31,000
Less purchase discount
500
Net purchases
30,500
75,500
10,000
65,500
Gross profit
34,100
Operating Expenses:
Selling Expenses:
Sales salary expenses
5,000
Advertising expenses
4,000
500
9,500
General Expense:
Office salaries expenses
8,000
1,000
9,000
18,500
15,600
1,000
800
Net increase
200
Net income
15,800
Habib-ur-Rehman
Balance Sheet
As at December 31, 2011.
ASSETS
Current Assets:
Cash
13,000
Sundry debtors
10,000
Bills receivable
8,500
10,000
Investment
5,000
46,500
Fixed Assets:
Buildings
50,000
15,500
10,000
75,500
Total Assets
122,000
LIABILITIES:
Current Liabilities:
Sundry creditors
20,000
Bills payable
9,000
29,000
Fixed Liabilities:
Habib's capital
78,200
15,800
94,000
Less: Drawings
1,000
93,000
122,000
Total
10,000
77,000
25,000
65,000
50,000
5,000
8,000
2,40,000
1,00,000
15,000
1,25,000
2,40,000
Consider the above Trial Balance. There are a total of 4 nominal accounts with either
debit or credit balances.
Purchases a/c [Debit Balance]
To ascertain the profit or loss made by the organisation, the balance in these accounts
should be transferred to the "Trading and Profit & Loss a/c". The journal entries for
these transfers would be:
Journal Entries Hide/Show
Trading and Profit & Loss a/c
The "Trading and Profit & Loss a/c" would be
Dr
Trading and Profit & Loss a/c
Date
Particulars
J/F Amount
Date
Particulars
Cr
J/F Amount
(in Rs)
30/06/0
5
"
"
To Purchases a/c
To Salaries &
Wages a/c
To Rent Paid a/c
sub-total
30/06/0
5
To Bal (Profit)
Total
65,000 30/06/0
5,000 5
8,000
78,000
(in Rs)
By Sales a/c
sub-total
1,25,000
1,25,000
47,000
1,25,000
Total
1,25,000
Since the credit side total is greater, the account has a credit balance. Since a credit
balance in a nominal account indicates a gain, we can say that there is a profit.
Trading Account
Balance Sheet
Trading Account
It is a Nominal Account and is prepared for calculating the GROSS PROFIT or GROSS
LOSS arising as a result of trading activities of a business.
According to J.R.Batliboi:The Trading Account shows the results of buying and selling of goods. In
preparing, this account, the general establishment charges are ignored and only
the transactions in goods are included
Importance of Trading Account
Trading Account is prepared for the following reasons
To know the Gross Profit or Gross loss arising due to trading activities of the
business.
To find out the direct expenses incurred by the business for the goods sold during
the year.
Find out how much closing stock is left as compared to previous years and thus
find out the performance of the business.
Gives the trader an idea of the increase/decrease in Gross Profit /Gross Loss
and to assess the performance of the business and take corrective measures, if
needed.
It shows the financial position on a particular day not for a period of time.
Need and Importance of Preparing a Balance Sheet
A Balance Sheet serves the following purposes:
The true financial position of the business can be ascertained at a particular point
of time.
Reveals the amount of assets owned by the business for example machinery,
cash, debtors and so on.
Show the liabilities of the business such as total creditors, share capital etc.
Opening entries for the next financial year are based on the Balance Sheet of the
previous year.
Items appearing on a Balance Sheet
Assets
Assets of a business are what it owns. They can be classified as:
Fixed assets: All those assets which are owned by the business and last for more than
an accounting year. Examples include Land, building, machinery, vehicle, furniture and
fixtures and the like.
Current assets: It includes all those assets which either in the form of cash or can be
easily converted into cash within one accounting period. Current Assets include Cash,
Debtors and Stock.
Liabilities
Liabilities represents what the business owes to outside persons other than owners.
These liabilities are classified on basis of time period of repayment.
Long term liabilities: These are liabilities which the business owes for more than one
accounting period, e.g. long term bank loans, debentures etc.
Current liabilities: These are short term debts of the business that are to be repaid
within one accounting period, e.g. creditors and bank overdraft.
Owners Equity
Owners equity represents what the business owes its owner.
It is equal to total assets minus total liabilities.
It does not have debit or credit side but has two sections i.e. assets and liabilities.
The balances shown in the Balance Sheet act as Opening Balances for the next
accounting period.
Closing stock
The valuation of closing stock is not necessary to prepare a Trial Balance whereas
Balance Sheet cannot be prepared unless the Closing stock for that particular
accounting year is not ascertained.
Types of Accounts
Balances of all types of accounts are recorded in a Trial Balance i.e. Personal, real and
nominal. Balance Sheet records balances of personal and real accounts only.
Adjustments
Adjustment for outstanding expenses, prepaid expenses and accrued incomes are not
required for the preparation of Trial Balance. A Balance sheet is only complete after all
the necessary adjustments are made.
Closing Stock
Closing stock refers to the goods remaining unsold during the year.
They are valued at Cost price or Market Price whichever is lower.
Closing entries
Closing Stock Account
Dr.
Trading Account
For closing Stock transferred to
tradingaccount
Treatment in Final Accounts
When closing stock is given outside the Trial Balance
It will appear on
Dr.
Accounting treatment
Outstanding expense amount is added to that particular expense account in the Profit
and loss or Trading Account because it was the expense for that year. (Based on the
matching principle)
Outstanding expenses are liabilities for the business. Thus they will appear under the
Current Liabilities in the Balance Sheet.
Note: If the Outstanding expense appears in the Trial Balance then it will only be
recorded in the Liabilities side of the Balance Sheet.
Prepaid Expenses
All those expenses which are due next year but paid for in advance during the current
year are termed as Prepaid Expenses.
Adjustment Entries
Prepaid Expense Account
Dr.
Expense Account
(For expense paid in advance)
Accounting Treatment
The concerned expense will be deducted by the prepaid amount in the Trading Account
or Profit & Loss account.
Prepaid expenses are assets for the business thus it will appear under the Current
Assets in the Balance Sheet.
Note: If the Prepaid expense is given inside the Trial Balance, then the prepaid
expense will only appear in the Current Asset of the Balance Sheet.
Depreciation
Depreciation is the fall in the value of fixed assets over a period of time.
Adjustment Entries
Depreciation Account
Dr.
Assets Account
(Being depreciation charged)
Accounting Treatment
Depreciation amount is entered as expense on the Debit Side of Profit and Loss
account.
Depreciation is deducted from the value of the concerned asset in the Balance Sheet.
Accrued Income
Incomes which are earned during the year but not received till the end of the accounting
year are termed as Accrued Income / Earned Incomes/ Income Receivable.
Adjustment Entries
Accrued Income Account
Dr.
Income Account
(Being income received in advance)
Accounting treatment
Accrued income will be added to the concerned income account in the Profit and Loss
account because it the income for that particular year (matching principle)
Accrued incomes are asset for the business and appear under the Current Assets in the
Balance Sheet.
Note: If Accrued Incomes appear inside the Trial Balance then it will ONLY appear
under the Current Assets in the Balance Sheet.
Unearned Income/Revenue
All incomes or revenues which are received in advance but not earned during the year
are treated as unearned revenue. There may be times when a certain income is
received in the current year but the whole amount of it does not belong to the current
year.
Adjusting Entries
Revenue Account
Dr.
Dr.
Dr.
Dr.
Dr.
Debtors Account
(Bad debts written off)
This amount is then written off the books as Bad debts. It is a loss for the business and
thus it is written on the debit side of the Profit and Loss account.
Closing Entry
Profit and Loss Account
Dr.
Dr.
Recovery of bad
debts
(Being bad debts
recovered)
Dr.
Dr.
Dr.
Debtors Account
(Being partial recovery of debts)
Provision for Doubtful Debts
Even after deducting the amount of actual bad-debts from the Debtors, there may still
be some debts which may be regarded as bad or doubtful. Thus a business might make
an estimate of the amount of such doubtful debts, that is, debts that are likely to become
bad, and charge them as an expense against the current periods revenue.
When Provision for Doubtful Debts is set up for the first time
Accounting Entries
Doubtful Debts Account
Dr.
Dr.
Dr.
Dr.
Doubtful Debts
(Being transfer of doubtful debts expense to the Profit and
Loss Account)
Decreasing the Existing Provision for Doubtful Debts
Adjusting Entry
Provision for doubtful debts Account
Dr.
Dr.
Dr.
Q. What is budget? Explain with example how budgets are useful for the
manager.
Ans: An itemized forecast of an individual's or company's income and expenses
expected for some period in the future. With a budget, an individual is able to carefully
look at how much money they are taking in during a given period, and figure out the
best way to divide it among a variety of categories. When making a personal budget, an
individual will typically designate the appropriate amount of money to fixed
expenses such as rent, car payments, or utility bills, and then make an educated
estimation for how much money they will spend in other categories, such as groceries,
clothing, or entertainment. By keeping track of where one's money goes, one may be
less likely to overspend, and more likely to meet their financial goals.
Q.3 Write short notes on
1. Zero based budgeting:
Zero-based budgeting is an approach to planning and decision-making which reverses
the working process of traditional budgeting. In traditional incremental budgeting,
departmental managers justify only variances versus past years, based on the
assumption that the "baseline" is automatically approved. By contrast, in zero-based
budgeting, every line item of the budget must be approved, rather than only changes.
During the review process, no reference is made to the previous level of expenditure.
Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting
from the zero-base. This process is independent of whether the total budget or specific
line items are increasing or decreasing.
The term "zero-based budgeting" is sometimes used in personal finance to describe
"zero-sum budgeting", the practice of budgeting every dollar of income received, and
then adjusting some part of the budget downward for every other part that needs to be
adjusted upward.
Zero based budgeting also refers to the identification of a task or tasks and then funding
resources to complete the task independent of current resourcing.
Advantages of ZBB:
1 Efficient allocation of resources, as it is based on needs and benefits rather than
history.
2. Classification of costs
The Meaning of Classification of Cost. (Cost Accounting)
Cost classification is the process of grouping costs according to their common
characteristics. A suitable classification of costs is of vital importance in order to identify
the cost with cost centres or cost units. Cost may be classified accounting to their
nature, i.e., material, labor and expenses and a number of other characteristics. The
same cost figures are classified according to different ways of costing depending upon
the purpose to be achieved and requirements of particular concern. The important ways
of classification are:
On the basis of Identity: According to this classification, the costs are divided into
there categories i.e., Materials, Labor and Expenses. There can be further subclassification of each element; for example, material into raw material components, and
spare parts, consumable stores, packing material etc. This classification is important as
it helps to find total cost, how such total cost is constituted and valuation of work-inprogress.
On the basis of Function: Production, Administration, Selling & Distribution are three
important functions of a business concern. Taking these functions into consideration,
costs have been classified by:
(a) Production or Manufacturing Cost: Manufacturing costs are those costs which are
incurred in the course of manufacture. It includes cost of raw material, cost of labour,
other direct cost and factory indirect cost. Example of production or manufacturing costs
may be power, lighting, heating, rent, depreciation etc.
(b) Office and Administration Cost: These costs are incurred for the general
administration of the enterprise. It includes office costs as well as administration cost.
For example, salary of office staff, rent of office building, electricity charges, audit fee,
printing and stationeries etc.
(c) Selling and Distribution Cost: It includes both selling cost as well as distribution cost.
Selling costs are those costs which are incurred in connection with the selling of goods
and services Distribution costs are those costs which are incurred on dispatch of
finished goods to the consumers. Example of selling and distribution costs are: sales
men salary, packing charges, carriage, out ward, advertisement, ware house charges
etc.
On the basis of Variability: The behavior of cost varies from one another as
production increases, some cost remains constant or varies in direct proportion to the
volume of out put, or others may vary partially. Thus on the basis of variability, costs can
be classified into the following three categories.
(a) Fixed Cost / Period Cost: Fixed costs are those costs which remain fixed irrespective
of the change in volume of output. As production increases cost per unit of the fixed cost
decreases and as production decreases fixed costs are, rent of the factory building
depreciation, salary of the office manager etc.
(b) Variable Cost / Product Cost: Variable costs are those costs which vary in direct
proportion to the volume of output. As production increases total cost increases but also
per unit remains constant. As production decreases total cost decreases and cost per
unit also decreases. Examples of variable costs are, cost of raw materials labor etc.
(c) Semi-Variable Cost / Semi-Fixed cost: These costs are partly fixed and partly
variable. Examples of variable costs are telephone rent. It includes partly fixed charge
up to a certain level and then varies according to the calls.
On the basis of controllability: From the point of view of controllability, the cost has
been classified in to two categories as controllable cost and uncontrollable cost.
(a) Controllable Cost: These costs are regulated or controlled by specified member of
an organization. Most of the variable costs are controllable. Generally direct material,
direct labor and direct expenses are controlled by the lower level of the management.
(b) Uncontrollable Cost: These costs can not be regulated or controlled by specified
member of an undertaking. Most of the fixed costs are uncontrollable. Example of
uncontrollable costs are, factory rent, managers salary etc.
On the basis of normality: On this basis the costs have been classified in to two
categories as.
(a) Normal cost: It is the cost which is normally incurred at a given level of out put.
These costs are part of cost production.
(b) Abnormal cost: It is the cost which is not normally incurred at a given level of out put.
These costs are not charged to the cost of production. It is transferred to the costing
profit and loss account.
On the basis of Time: On this basis the costs have been classified as
(a) Historical Cost: These costs are ascertained after they have been incurred such
costs are available only when the production of a particular thing has already been
done.
(b) Pre-determined Cost: Pre-determined costs are estimated costs which are set in
advance on a scientific way. It becomes standard cost and compared with the actual for
adopting controlling measures.
3. Cost center:
A department or other section of a company where managers are directly responsible
for costs. For example, consider a company that has a manufacturing department,
a research and development department, and a payroll department. Each department
could be a cost center, and the directors of each department would be responsible to
keep costs to as low a level as possible. The company thus accounts for each cost
center separately, which allows managers to take immediate responsibility for cost
growth and credit for cost cutting.
4. FIFO
FIFO, which stands for "first-in-first-out," is an inventory costing method which assumes
that the first items placed in inventory are the first sold. Thus, the inventory at the end of
a year consists of the goods most recently placed in inventory. FIFO is one method
used to determine Cost of Goods Sold for a business.
Q.4 What is marginal costing? Explain 1. P/V ratio, 2. Break Even Point, 3. Margin of
safety.
Marginal Costing: In economics and finance, marginal cost is the change in total
cost that arises when the quantity produced changes by one unit. That is, it is the cost
of producing one more unit of a good. If the good being produced is infinitely divisible,
so the size of a marginal cost will change with volume, as a non-linear and nonproportional cost function includes the following:
constant terms independent to volume and occurring with the respective lot size,
1 P/V ratio: The Profit Volume (PV) Ratio is the ratio of Contribution over Sales. It
measures the Profitability of the firm and is one of the important ratios for
computing profitability. The Contribution is the extra amount of sales over
variable cost. Contribution is also fixed cost plus profit.
Profit = Sales - Variable Cost - Fixed Cost.
Thus Contribution is:
Profit + Fixed Cost = Sales - Variable Cost.
Therefore PV Ratio = (Contribution/Sales) X100. (This as a percentage of sales)
3. Breakeven point:
Q.5 What is labour turnover? What are the causes of Labour turnover? How is it
measured?
Labour turnover refers to the movement of employees in and out of a business.
However, the term is commonly used to refer only to wastage or the number of
employees leaving.
High labour turnover causes problems for business. It is costly, lowers productivity and
morale and tends to get worse if not dealt with.
Causes of labour turnover
A high level of labour turnover could be caused by many factors:
Inadequate wage levels leading to employees moving to competitors
Poor morale and low levels of motivation within the workforce
Recruiting and selecting the wrong employees in the first place, meaning they leave to
seek more suitable employment
A buoyant local labour market offering more (and perhaps more attractive)
opportunities to employees
Measuring labour turnover
The simplest measure involves calculating the number of leavers in a period (usually a
year) as a percentage of the number employed during the same period. This is known
as the "separation rate" or "crude wastage rate" and is calculated as follows:
Number of leavers / average no employed x 100
For example, if a business has 150 leavers during the year and, on average, it
employed 2,000 people during the year, the labour turnover figure would be 7.5%
rather than just meeting the standards. In other companies, engineered standards are
being replaced either by a rolling average of actual costs, which is expected to decline,
or by very challenging target costs.
Q.What is idle time? What are the factors causes it? How can it be controlled?
Meaning and Definition of Idle Time in Cost Accounting.
Generally idle time means that time for which the employer pays, but from which he
obtains no production. Otherwise it is the difference between the times for which
workers are paid but the workers do not work. So it is a loss to the organization. It can
be minimized but, cannot be controlled during idle time; the workers remain due and
contribute nothing towards production. It is the difference between actual hour and
actual hour worked. There are two types of idle times:
1 Normal idle time: The normal idle time is that idle time which cannot be fully
avoided but effective effort should be made to reduce it.
2 Abnormal idle time: Abnormal idle time arises due to various causes which can be
avoided. Abnormal idle time can be avoided if proper precautions are taken. Thus
the factors which are responsible for controlling and avoiding idle time must be
taken care of.
Normal idle time is permitted but abnormal idle time should be avoided.
Factor causes for it:
1. Normal causes
Some idle time is inherent in every situation. The time lost between factory gate and the
place of work, the interval between one job and another, the setting up time for the
machine, normal fatigue etc result in normal idle time.
2. Abnormal causes
Idle time may also arise due to abnormal factors like lack of co-ordination, power failure,
break-down of machines, non-availability of Raw Materials, strikes, lock-outs, poor
supervision, fire, flood etc. the causes for abnormal idle time should be further analyzed
into controllable and uncontrollable.
Controllable idle time refers to that idle time which could have been put to productive
use had the management not been more alert and efficient. All such time which could
have been avoided is controllable idle time. However time lost due to abnormal causes,
over which the management does not have any control Example: - breakdown of
machines, floods etc may be characterized as uncontrollable idle time.
Control:
Idle time can be prevented or reduced considerably by advanced production planning,
timely procurement of stores, proper maintenance of tools & machinery, assurance of
supply of power from own power plant, advance planning for machine utilization &
personnel etc. For causes which are not within the control of the organization, idle time,
in spite of best efforts shall arise to some extent.
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Q.8 From the following figures extracted from the books of ABC Ltd. For the year
ended on 31.03.2008. Prepare cost sheet showing:
1. Prime Cost 2. Works Cost 3. Cost of Production 4. Cost of Sales 5. Profit
(MBA Dec. 2010, New Syllabus)
Particulars
Direct Materials
Amount
70,000
Indirect Wages
Factory Rent & rates
Indirect Materials
Depreciation of Office Assets
General Factory Expenses
General Selling Expenses
Office Salaries
Advertisement
Direct Wages
Other Direct Expenses
Office Rent & Rates
Depreciation of Machines
Salary to Managing Directors
Travelling expenses
General Office Expenses
Carried Outward
Sales
10,000
50,000
500
100
5,700
1,000
4,500
2,000
75,000
15,000
500
1,500
12,000
1,100
1,000
1,000
2,50,000
Solution:
In the books of ABC Ltd.
Cost Sheet (For the year ended 31.03.2008)
Particulars
Rs.
Rs.
Direct Materials
70,000
75,000
15,000
1 Prime cost
1,60,000
10,000
50,000
3 Indirect materials
500
100
5,700
6 Depreciation of machines
1,500
2 Work cost
67,800
4,500
2 Advertisement
2,000
500
2,27,800
2,47,800
4 Salary of M.D.
12,000
1,000
3 Cost of production
2,50,900
(900)
2,50,000
1,000
2 Travelling exp
1,000
Q.9. Methods or Price of issue materials (MBA April 2010, New syllabus)
The following transactions occur in the purchase and issue of material
April 02
Purchased
40,000 units
@ Rs. 4 p.u.
April 20
Purchased
5,000 units
@ Rs. 5 p.u.
May 05
Issued
20,000 units
May 10
purchased
60,000 units
May 12
Issued
40,000 units
June 02
Issued
10,000 units
@ Rs. 6 p.u.
June 05
Issued
10,000 units
June 15
Purchased
45,000 units
June 20
Issued
30,000 units
Apr. 2
Apr. 20
Particulars Receipt
Qty
Rate
Total
Issues
Qty
Rate Total
Qty
Rate
Total
Purchase
d
40,000
1,60,000
40,000
1,60,000
Purchase
d
5,000
25,000
40,000
1,60,000
5,000
25,000
Issued
20,000
80,000
20,000
80,000
5,000
25,000
20,000
80,000
5,000
25,000
60,000
3,60,000
45,000
2,70,000
May 5
Purchase
d
60,000
3,60,000
May 10
40,000
Issued
20,000
5,000
May 12
80,000
25,000
90,000
15,000
June 2 Issued
10,000
60,000
35,000
2,10,000
June 5 Issued
20,000
1,20,000
15,000
90,000
15,000
90,000
45,000
5.50
2,47,500
30,000
5.50
1,65,000
Purchase
June 15 d
ne 20
45,000
5.50
2,47,500
30,000
Issued
15,000
15,000
90,000
5.50
82,000
Q.10 Standard costing- Labour Variances (MBA Dec. 2008, New Syllabus)
The details regarding composition and the weekly wage rates of labour force engaged
on job scheduled to be completed in 30 weeks are as follows:
Actual
Standard
No. of
Workers
Type of Workers
Weekly
Rate (Rs.)
Skilled
75
60
70
70
Semi-skilled
45
40
30
50
Unskilled
60
30
80
20
Standard
Type of workers
Skilled
Semi skilled
unskilled
Actual
Standard
proportion of
actual weeks
Weeks
Rate
(Rs.)
Total (Rs.)
Weeks
Rate
(Rs.)
Total
(Rs.)
75*30=
2250
60
1,35,000
70*32= 2240
70
1,56,800
2,400
40
54,000
30*32= 960
50
48,000
1,440
30
54,000
80*32= 2560
20
51,200
1,920
2,56,000
5,760
45*30=
1350
60*30=
1800
5,400
2,43,000
5,760
Skilled
(60-70)*2240
Semi-skilled
(40-50)*960
Unskilled =
(30-20)*2560
= 22,400(Adverse)
= 9,600 (Adverse)
= 25,600 (favorable)
6,400
(Adverse)
2 Labour efficiency variance (LEV)= (Standard Time- Actual Time)* standard rate
Skilled
(2250-2240)* 60
= 600 (F)
Semi-skilled =
(1350-960)* 40
= 15,600(F)
Unskilled
= 6,600(A)
3 Labour cost variance (LCV)= Standard Cost- Actual Cost
Skilled= (1, 35,000-1, 56,000)
= 21,800 (A)
= 6,000 (F)
Unskilled
= (54,000- 51,200)
= 2,800 (F)
= 13,000 (A)
4 Labour mix variance (LMV)= Standard Rate * Difference in mix
Skilled= 60*(2,400-2,240)
Semi-skilled = 40*(1,440-960)
Unskilled
= 9,600 (F)
= 30*(1,920-2,560)
= 9600 (F)
= 19,200 (F)
= 19,200 (A)
Sales
300
120
Variable costs
220
90
Fixed overhead
40
20
Rahuls unit runs at 100% capacity and Sujatas at 60% capacity. They decided
to merge the two units from Kumar Brothers
1 Calculate for the individual pre-merge status 1. P/V ratio 2. BEP
2 Calculate the post-merge 1. P/V ratio 2. BEP
3 Find the profit of the merged firm at 75% capacity.
Solution:
1 Individual pre-merge status:
Rahul
P/V Ratio =
= 80/300 * 100
= 26.67%
BEP = Fixed Cost/ P/V ratio
= 40/26.67%
= 149.98 lakhs
Sujata
P/V Ratio = contribution /sales * 100
= 30/120*100
= 25%
BEP = Fixed Cost/ P/V ratio
= 20/25%
= 80 Lakhs
2 Computation of post merge P/V Ratio and BEP:
rticulars
Rahul
Sujata
Total
100%
60%
100%
300
120
420
ss Variable costs
220
90
310
ntribution
80
40
30
20
110
60
40
10
50
xed cost
ofit
= 60/ 26.190%
= 229.09 Lakhs
3 Profit of the merged firm at 75% capacity
Particulars
Rs. In lakhs
Sales
315.00
232.50
Contribution
82.50
60.00
Profit
22.50