Q:- What is meaning of ratio analysis ? What is the procedure of establishing the ratios ?
Ans. Definitions of Ratio and its analysis :-
It is an important technique for analyzing the financial statement . In this method we establish various ratios and give the results through interpretation .The relation in the ratio of items of f/s .
A ratio is simply a relationship of two items which are express in arithmetic number . It is arithmetical expression of relationship of one number to another .It may be indicated quotation of two mathematical expression .
According to Accountant hand books of wixen , kell and bed ford .
“ A ratio is an expression of the quantitative relationship between two numbers .”
“ A ratio is relationship of two out of item A to another item B . It is a simple fraction , integer or decimal or percentage .
In simple words ,” Ratio means one number expressed in terms of another and can be calculated by dividing one number into another .
Procedure
The following is the procedure for interpreting the result of financial analysis through ratio analysis .
1 Take the ratio to be calculate
2. Selection of item for the purpose of ratio from the financial statement
3. Calculation of Ratio
4. Comparison of calculated ratio
5. Interpretation of ratios
Sunday, June 22, 2008
management accounting and its importance
Q:- What is management accounting .What are the scope , nature , function & importance and limitation of management accounting .?
Ans . Management accounting is an art of work done through other and accounting is art of recording , classification and summarising the business transaction .
1 According to me ,” Management accounting is concept with accounting information that is useful to management .”
Characteristics /function /use/ objects /Importance
- Proper planning through providing accounting information
- Controlling through cause and effect analysis
- Use of special techniques and concepts
- Taking some important decisions
- provide information
- Helpful in organizing
- increasing efficiency
- helpful in communication
- helpful in co-ordination
- helpful in forecasting
Saturday, June 7, 2008
kaizen costing
Q:-Define kaizen costing ?
Ans :-Kaizen costing is combination of two words kaizen and costing . Kaizzen here means continous improvement . This is Japanese word . So kaizen costing is a system in which we try to reduce cost when we are in production stage . In kaizen costing we can taken following steps to reduce cost
More motivation employees
To minimize the waste
to improve the efficiency of machine
Q:- Define activity based costing (ABC) give its procedure
Ans Activity based costing is that method costing in which we calculate total cost on basis of different activities .
Steps taken in Abc
1.Identification of main activities
First of all we identify all activities of our production and sale department
Ist Activity To run machine
2nd Activity To produce finished product
3rd activity To sale the finished product
2. Identify the main cost drive :-
Cost driver may be no of units , no. of hours , no. of workers .
Creation of cost center
Cost center may be machine man or place who is responsible for cost .
Ans :-Kaizen costing is combination of two words kaizen and costing . Kaizzen here means continous improvement . This is Japanese word . So kaizen costing is a system in which we try to reduce cost when we are in production stage . In kaizen costing we can taken following steps to reduce cost
More motivation employees
To minimize the waste
to improve the efficiency of machine
Q:- Define activity based costing (ABC) give its procedure
Ans Activity based costing is that method costing in which we calculate total cost on basis of different activities .
Steps taken in Abc
1.Identification of main activities
First of all we identify all activities of our production and sale department
Ist Activity To run machine
2nd Activity To produce finished product
3rd activity To sale the finished product
2. Identify the main cost drive :-
Cost driver may be no of units , no. of hours , no. of workers .
Creation of cost center
Cost center may be machine man or place who is responsible for cost .
Friday, June 6, 2008
Sale price Variance
Q:-9 How can you calculate sale price variance ?
Ans:- Management besides reviewing all the expenditure variance also take great care to investigate any variances in sales revenue.
This is because any variances in sales revenue has a direct impact upon the contribution and profitability of the business.
In a marginal cost system, the variances are calculated in contribution terms whereas:
In an absorption costing system, the sales variances are determined in terms of profit.
The TOTAL Sales Variance are segregated into the following two(2) variances:
Sales PRICE Variance
Measures the effect of the difference between the standard selling price per unit and the actual selling price.
Formula:
[Standard selling price per unit-Actual selling price per unit] x Actual quantity of units sold
Sales VOLUME Variance
· Measure the effect on contribution or profit of the divergence between actual sales and the budgeted level of sales.
· In a marginal costing system the difference between the actual and budgeted sales is multiplied by the standard contribution per unit.
· In an absorption system this difference is multiplied by the standard profit per unit.
· Formula:
[ Budgeted Sales level-Actual Sales level]x Standard Contribution or profit per unit
Illustration:
Company A budgeted sales are 3,500 Product A per month at a standard price of $70 each against their unit cost of $35. At the end of the third month, the actual sales revenue was $780,000 and 12,000 Product A had been sold.
Further details:
Volume Unit selling price Profit per unit
Budget 10,500 70 35
Actual 12,000 65 30
Required:
Compute:
(a) the sales VOLUME profit variance;
(b) the sales PRICE variance.
Solution:
(a) The Sales VOLUME variance is:
[Actual units sold-budgeted units sold]x Standard profit per unit
=(12,000-10,500]x$35
=$52,500F
(b) The Sales PRICE variance is:
[Actual selling price-budgeted selling price]x actual sales volume
=[$65-$70] x 12,000
=$60,000A
To recheck:
Total PROFIT Variance= Sales Price Variance + Sales Volume Variance
Budgeted profit
=10,500 x $35=$367,500
Less:
Actual profit
=12,000 x $30=$360,000
Total PROFIT variance=$367,500-$360,000= $7,500A
From solution a & b:
Sales VOLUME variance($52,500F) +Sales PRICE variance($60,000A)= $7,500A
Ans:- Management besides reviewing all the expenditure variance also take great care to investigate any variances in sales revenue.
This is because any variances in sales revenue has a direct impact upon the contribution and profitability of the business.
In a marginal cost system, the variances are calculated in contribution terms whereas:
In an absorption costing system, the sales variances are determined in terms of profit.
The TOTAL Sales Variance are segregated into the following two(2) variances:
Sales PRICE Variance
Measures the effect of the difference between the standard selling price per unit and the actual selling price.
Formula:
[Standard selling price per unit-Actual selling price per unit] x Actual quantity of units sold
Sales VOLUME Variance
· Measure the effect on contribution or profit of the divergence between actual sales and the budgeted level of sales.
· In a marginal costing system the difference between the actual and budgeted sales is multiplied by the standard contribution per unit.
· In an absorption system this difference is multiplied by the standard profit per unit.
· Formula:
[ Budgeted Sales level-Actual Sales level]x Standard Contribution or profit per unit
Illustration:
Company A budgeted sales are 3,500 Product A per month at a standard price of $70 each against their unit cost of $35. At the end of the third month, the actual sales revenue was $780,000 and 12,000 Product A had been sold.
Further details:
Volume Unit selling price Profit per unit
Budget 10,500 70 35
Actual 12,000 65 30
Required:
Compute:
(a) the sales VOLUME profit variance;
(b) the sales PRICE variance.
Solution:
(a) The Sales VOLUME variance is:
[Actual units sold-budgeted units sold]x Standard profit per unit
=(12,000-10,500]x$35
=$52,500F
(b) The Sales PRICE variance is:
[Actual selling price-budgeted selling price]x actual sales volume
=[$65-$70] x 12,000
=$60,000A
To recheck:
Total PROFIT Variance= Sales Price Variance + Sales Volume Variance
Budgeted profit
=10,500 x $35=$367,500
Less:
Actual profit
=12,000 x $30=$360,000
Total PROFIT variance=$367,500-$360,000= $7,500A
From solution a & b:
Sales VOLUME variance($52,500F) +Sales PRICE variance($60,000A)= $7,500A
What is the use of Standard costing
Q:- What is the use of Standard costing ?
Ans. Reasons for using a Standard Costing System:
There are several reasons for using a standard costing system:
Cost Control: The most frequent reason cited by companies for using standard costing systems is cost control. One might initially think that standard costing provides less information than actual costing, because a standard costing system tracks inventory using budgeted amounts that were known before the first day of the period, and fails to incorporate valuable information about how actual costs have differed from budget during the period. However, this reasoning is not correct, because actual costs are tracked by the accounting system in journal entries to accrue liabilities for the purchase of materials and the payment of labor, entries to record accumulated depreciation, and entries to record other costs related to production. Hence, a standard costing system records both budgeted amounts (via debits to work-in-process, finished goods, and cost-of-goods-sold) and actual costs incurred. The difference between these budgeted amounts and actual amounts provides important information about cost control. This information could be available to a company that uses an actual costing system or a normal costing system, but the analysis would not be an integral part of the general ledger system. Rather, it might be done, for example, on a spreadsheet program on a personal computer. The advantage of a standard costing system is that the general ledger system itself tracks the information necessary to provide detailed performance reports showing cost variances.
Smooth out short-term fluctuations in direct costs: Similar to the reasons given in the previous chapter for using normal costing to average the overhead rate over time, there are reasons to average direct costs. For example, if an apparel manufacturer purchases denim fabric from different textile mills at slightly different prices, should these differences be tracked through finished goods inventory and into cost-of-goods-sold? In other words, should the accounting system track the fact that jeans production on Tuesday cost a few cents more per unit than production on Wednesday, because the fabric used on Tuesday came from a different mill, and the negotiated fabric price with that mill was slightly higher? Many companies prefer to average out these small differences in direct costs.
When actual overhead rates are used, production volume of each product affects the reported costs of all other products: This reason, which was discussed in the previous chapter on normal costing, represents an advantage of standard costing over actual costing, but does not represent an advantage of standard costing over normal costing.
Costing systems that use budgeted data are economical: Accounting systems should satisfy a cost-benefit test: more sophisticated accounting systems are more costly to design, implement and operate. If the alternative to a standard costing system is an actual costing system that tracks actual costs in a more timely (and more expensive) manner, then management should assess whether the improvement in the quality of the decisions that will be made using that information is worth the additional cost. In many cases, standard costing systems provide highly reliable information, and the additional cost of operating an actual costing system is not warranted.
Summary of Actual Costing, Normal Costing and Standard Costing:
The following table summarizes and compares three commonly-used costing systems.
Actual Costing System
Normal Costing System
Standard Costing System
Direct Costs:
(Actual prices or rates x actual quantity of inputs per output) x actual outputs
(Actual prices or rates x actual quantity of inputs per output) x actual outputs
(Budgeted prices or rates x standard inputs allowed for each output) x actual outputs
Overhead Costs:
Actual overhead rates x actual quantity of the allocation base incurred.
Budgeted overhead rates x actual quantity of the allocation base incurred.
Budgeted overhead rates x (standard inputs allowed for actual outputs achieved)
The following points are worth noting:
1. All three costing systems record the cost of inventory based on actual output units produced. The static budget level of production does not appear anywhere in this table.
2. Actual costing and normal costing are identical with respect to how direct costs are treated.
3. With respect to overhead costs, actual costing and normal costing use different overhead rates, but both costing systems multiply the overhead rate by the same amount: the actual quantity of the allocation base incurred.
4. Normal costing and standard costing use the same overhead rate.
5. Standard costing records the cost of inventory using a flexible budget concept: the inputs “that should have been used” for the output achieved.
There are costing systems other than these three. For example, some service sector companies apply direct costs using budgeted prices multiplied by actual quantities of inputs. For example, many accounting firms track professional labor costs using budgeted professional staff hourly rates multiplied by actual staff time incurred on each job.
There are several reasons for using a standard costing system:
Cost Control: The most frequent reason cited by companies for using standard costing systems is cost control. One might initially think that standard costing provides less information than actual costing, because a standard costing system tracks inventory using budgeted amounts that were known before the first day of the period, and fails to incorporate valuable information about how actual costs have differed from budget during the period. However, this reasoning is not correct, because actual costs are tracked by the accounting system in journal entries to accrue liabilities for the purchase of materials and the payment of labor, entries to record accumulated depreciation, and entries to record other costs related to production. Hence, a standard costing system records both budgeted amounts (via debits to work-in-process, finished goods, and cost-of-goods-sold) and actual costs incurred. The difference between these budgeted amounts and actual amounts provides important information about cost control. This information could be available to a company that uses an actual costing system or a normal costing system, but the analysis would not be an integral part of the general ledger system. Rather, it might be done, for example, on a spreadsheet program on a personal computer. The advantage of a standard costing system is that the general ledger system itself tracks the information necessary to provide detailed performance reports showing cost variances.
Smooth out short-term fluctuations in direct costs: Similar to the reasons given in the previous chapter for using normal costing to average the overhead rate over time, there are reasons to average direct costs. For example, if an apparel manufacturer purchases denim fabric from different textile mills at slightly different prices, should these differences be tracked through finished goods inventory and into cost-of-goods-sold? In other words, should the accounting system track the fact that jeans production on Tuesday cost a few cents more per unit than production on Wednesday, because the fabric used on Tuesday came from a different mill, and the negotiated fabric price with that mill was slightly higher? Many companies prefer to average out these small differences in direct costs.
When actual overhead rates are used, production volume of each product affects the reported costs of all other products: This reason, which was discussed in the previous chapter on normal costing, represents an advantage of standard costing over actual costing, but does not represent an advantage of standard costing over normal costing.
Costing systems that use budgeted data are economical: Accounting systems should satisfy a cost-benefit test: more sophisticated accounting systems are more costly to design, implement and operate. If the alternative to a standard costing system is an actual costing system that tracks actual costs in a more timely (and more expensive) manner, then management should assess whether the improvement in the quality of the decisions that will be made using that information is worth the additional cost. In many cases, standard costing systems provide highly reliable information, and the additional cost of operating an actual costing system is not warranted.
Summary of Actual Costing, Normal Costing and Standard Costing:
The following table summarizes and compares three commonly-used costing systems.
Actual Costing System
Normal Costing System
Standard Costing System
Direct Costs:
(Actual prices or rates x actual quantity of inputs per output) x actual outputs
(Actual prices or rates x actual quantity of inputs per output) x actual outputs
(Budgeted prices or rates x standard inputs allowed for each output) x actual outputs
Overhead Costs:
Actual overhead rates x actual quantity of the allocation base incurred.
Budgeted overhead rates x actual quantity of the allocation base incurred.
Budgeted overhead rates x (standard inputs allowed for actual outputs achieved)
The following points are worth noting:
1. All three costing systems record the cost of inventory based on actual output units produced. The static budget level of production does not appear anywhere in this table.
2. Actual costing and normal costing are identical with respect to how direct costs are treated.
3. With respect to overhead costs, actual costing and normal costing use different overhead rates, but both costing systems multiply the overhead rate by the same amount: the actual quantity of the allocation base incurred.
4. Normal costing and standard costing use the same overhead rate.
5. Standard costing records the cost of inventory using a flexible budget concept: the inputs “that should have been used” for the output achieved.
There are costing systems other than these three. For example, some service sector companies apply direct costs using budgeted prices multiplied by actual quantities of inputs. For example, many accounting firms track professional labor costs using budgeted professional staff hourly rates multiplied by actual staff time incurred on each job.
What is standard costing
Q:-What is standard costing?
Ans Introduction to Standard Costing
Standard costing is an important subtopic of cost accountng. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.
Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.
If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.
The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts.
If we assume that a company uses the perpetual inventory system and that it carries all of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs:
1. Direct material 2. Direct labor 3. Manufacturing overhead a. Variable manufacturing overhead b. Fixed manufacturing overhead
Ans Introduction to Standard Costing
Standard costing is an important subtopic of cost accountng. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.
Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.
If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.
The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts.
If we assume that a company uses the perpetual inventory system and that it carries all of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs:
1. Direct material 2. Direct labor 3. Manufacturing overhead a. Variable manufacturing overhead b. Fixed manufacturing overhead
Standard costing
Q:- 7 Defined standard cost and standard costing? Preliminaries to the establishment of standard costing ?
Ans . Definition of standard cost
Standard costing is the predetermined cost based on the technical estimation of material , labours and overheads for a selected period and working condition.
Definition of standard costing
standard costing is the technique of costing in which we calculate standard cost and identify the variation from standard cost and analysing the causes of variations .
Preliminaries to establishment of standard costing / steps
Ist step
1Make standard cost center .
standard cost center may be machine , a man or place who is responsible for cost. First of all , we must establish cost centre before calculating standard cost.
2nd step
determination any type of standard
i) short term standard
It may use for calculating the standard cost of current asset .
ii) Medium term / normal standard
it may use for 5 years
iii) basic / long term standard
It may use 15 to 20 years standard cost .
3rd step
3 Setting of standard
a) standard cost of direct material
i) For Quantity
ii) for rate
B) standard cost of direct labour
When we set the standard cost of direct labour , we must kept following point in our mind .
i) No. of workers
ii)Standard hour rate for per worker
iii)standard hours
c) Standard cost of overheads or indirect expenses
When we set the standard cost of indirect expenses , we must kept following point in mind
i)standard rate
ii)standard category of respective expenses.
You can determine any type under any situation
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