Costing Formula PDF

Pocket Book 1 CA Ashish Kalra
MATERIAL
COST
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Material Cost 2 CA Ashish Kalra
DETERMINATION OF STOCK LEVELS
1.M inimum/ Re-order Normal x Normal

Buffer/ level Consumption Re-order Period
Safety
Level = Safety Stock Days x Annual Consumption
360 Days
2. Re-order Maximum Maximum

Level Consumption Re-Order Period
Or Safety Stock Normal Normal Re-order/
Level Consumption Average Period
Or Minimum level + Consumption during time lag period
3. Maximum Reorder Reorder Min. Min.

Level Level Quantity Consumption Period
4. Danger Normal Maximum delivery period

Level Consumption for emergency purchases
5. Average Maximum Stock Minimum Stock

Stock Level Level Level .
2
OR Minimum Stock Level + 1 /2 Re-order Quantity

Important Notes:
1) Consumption is also called Usage.
2) Reorder Period is also called Lead period
/Delivery Period.
3) In case Normal Consumption/Usage &/or Normal
Delivery/Lead/Reorder Period are not known, take
Average Consumption/Usage &/or Average Delivery
/Lead/Reorder Period.
ECONOMIC ORDER QUANTITY (EOQ)/

OPTIMAL REORDER QUANTITY (ROQ)/
MINIMUM COST ORDER UNIT:
WILSON/BAUMOL MODEL
Economic Order Quantity (EOQ) = 2xAxO

C
Where, A = Annual Quantity of Raw Material to be
purchased/Annual Requirement/Demand of Material/Usage/
Consumption of materials in units
O = Cost of placing an order (Ordering Cost per order)
C = Cost of interest & storing one unit of material for one year
(Carrying cost per unit per annum)

Diagrammatically, EOQ can be represented as:
Annual Carrying Costs

Costs
EOQ
Annual Ordering
Costs
Size of Order
TOTAL ANNUAL RELEVANT COST
Annual Ordering & Carrying = 2xA x OxC

Costs/Annual Relevant Cost
of Ordering EOQ AxO EOQ x C
EOQ 2
ANNUAL CARRYING COST
Annual = ROQ + SSL x Carrying Cost per unit

Carrying Cost 2
OR Annual Holding = Average Inventory x % of Annual
Cost Investment Carrying Cost

TOTAL COST OF INVENTORY
Total Total Annual Total Annual

Cost Purchase Cost Relevant Cost
NUMBER OF ORDERS PER ANNUM
Number of Annual Demand of Raw Material in units

Orders p.a. Reorder Quantity (ROQ)/Economic Order
Quantity (EOQ)
ANNUAL ORDERING COST
Annual Ordering Cost = No. of Orders x Ordering Cost per

Order
TIME BETWEEN TWO ORDERS
Time between Two Orders = 360 Days/12 months

No. of Orders p.a.
AVERAGE INVENTORY INVESTMENT
Average Inventory ROQ SSL Purchase

Investment 2 Price p.u.

INPUT-OUTPUT RATIO
Input-Output Input units x 100

Ratio (I-O Ratio) Output units
INVENTORY TURNOVER RATIO (ITR)
Inventory Raw Materials consumed .
Turnover Ratio Average Inventory of Raw Material

Where,
Raw Opening Stock Raw Closing Stock
Material = of Raw + Material - of Raw
Consumed Materials Purchased Materials
Simple Average Opening Stock Closing Stock
Inventory of = of Raw Materials + of Raw Material
Raw Materials 2
INVENTORY CONVERSION PERIOD/

INVENTORY VELOCITY PERIOD/ NO. OF
DAYS FOR WHICH INVENTORY IS HELD
Inventory Conversion 365/360/12/52 .
Period Inventory Turnover Ratio

DETERMINATION OF INVENTORIABLE COST
Invoice Price/ List Price xxx

Less: *Trade Discount (including Quantity Discount) (xxx)
Less: Govt.grants/Subsidy/Incentive given to Purchase
Raw Materials (xxx)
Net Invoice Price xxx
Add: Excise Duty xxx
(computed as a % of Net Invoice Price)
Net Invoice Price (Including Excise Duty) xxx
Add: Sales Tax/ VAT (computed as a % of Net Invoice xxx
Price including Excise Duty)
Add: Import Duty/ Customs Duty (computed as a % xxx
of Net Invoice Price converted in `)
Add: Packing Charges of Raw Material /Cost of Non- xxx
Returnable Containers of Raw Material
Add: Loading & Unloading Charges xxx
Add: Transit Insurance Premium xxx
Add: Carriage/ Freight Inwards of Raw Material xxx
Add: Commission/Brokerage Payable on Material
Purchased
Add: Octroi/Entry Tax xxx
Less: Realisable Value/Returnable Value of Packages (xxx)
& Empties
Inventoriable Cost of M aterial xxx
Note: *Cash discount will not be reduced.

Single Amount Apportionment (In the ratio

of of)
Sales Tax/VAT Net Invoice price inclusive of
given Excise Duty of Various materials
Custom Import Net Invoice Price of Various
Duty given Materials converted in `
Carriage Weight/Quantity of materials
Inwards loaded in vehicle
Weight/Quantity of Materials
Octroi
entering the State
Types Of Cost Treatment

Penalty or Not to be added to Purchase
Demurrage Cost
Normal loss of Units of Such Loss shall be
Material In Transit reduced & Cost of remaining
(evaporation etc.) Inventory will be inflated
Abnormal loss of
Charged to Costing P&L A/c
Material in Transit
Duties on which
CENVAT Credit is Not to be added
eligible

ABC ANALYSIS OF INVENTORY CONTROL
Ideal Level
Category % Value % Quantity Control
A 70% 10% Maximum
B 20% 20% Moderate
C 10% 70% Minimum
Value of Inventory held in
100
90
70
Storeroom
A
C
B
0 10 30 100
No. of Items held in Storeroom
FORMAT OF STORES LEDGER
Receipts Issues Balance

Parti-
Date Rate Amt Rate Amt Rate Amt
culars Units Units Units
` ` ` ` ` `
--- --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- --- ---

METHODS OF PRICING MATERIAL

ISSUES FROM STOREROOM
Name of the Method Basis of Pricing

1. Identifiable Cost
Method (Specific Price Actual Purchase Price
Method)
Price at which material is
2. First in First out
arrived in store first (or items
(FIFO)
held in stock for longest time).
3. Last in First out Price at which latest
(LIFO) inventory purchased
1. Price at which Costliest
inventory is priced/rated in
4. Highest in First out
store room.
Method (HIFO)
2. If Costliest lot exhausts
second costliest lot is taken.
Minimum quantity of inventory
carried at a price fixed year to
5. Base Stock Method year & units in excess of
minimum level valued at any one
of the methods.

Total Cost of Quantity held

6. Periodic
during the accounting period
Weighted Average .
Total Quantity held during

Price Method
the Accounting period
7.Perpetual Total Cost of Material held on the
weighted Average/ date of issue .
Weighted Average Quantity of Material held

Price Method prior to each issue
Total of Weighted Average price
8. Moving/Running
of current period & of preceding
Weighted Average
periods
Price Method
.
Number of Periods
Some Predetermined Standard
9. Standard Price
Price irrespective of the actual
Method
purchase cost of Material
Total of unit prices of Materials
10. Periodic Simple in a Particular Accounting Period
Average Method Number of Prices used in the
Period
11. *Perpetual
Simple Average Unit Latest Prices
/Simple Average Number of Prices
Price Method

12. Moving /
Total of Periodic Simple Average
Running Simple prices of given number of periods
Average Price .
Number of Periods
Method
Price includes a charge designed to
13. Inflated Price
cover contingency & related costs.
Issues are valued at the
14.Replacement/
replacement price/market price
Market Price
prevailing on the date of issue.
*The Lot which is exhausted (on the assumption that
FIFO method is followed on physical movement of
materials) is excluded in computation of average price.
CHOICE OF SUBSTITUTE MATERIAL
If Regular material for Production not available, then

Substitute M aterial having Least Cost per unit of Finished
Output shall be used.
TOTAL ORDERING COSTS
PARTICULARS (`)
Procurement Cost xxx
Add: Cost of receiving Material xxx

Add: Cost of collecting Material xxx

Add: Purchase Department Expenses xxx
Add: Cost of bringing Inventory/Carriage Inward xxx
Add: Loading/Unloading Charges xxx
Add: Cost of Bill payments xxx
Add: Inspection Cost of Incoming Materials xxx
Add: Transit Insurance Premium xxx
Add: Cost of Material Handling during xxx
Transportation
Total Ordering Cost xxx
TOTAL ANNUAL CARRYING COSTS
PARTICULARS (` )
Annual Storage Cost xxx
Add: Annual Interest Cost on Average Inventory xxx
Add: Annual Insurance Cost of Materials kept in
xxx
Storeroom
Add: Annual Spoilage, Wastage, Deterioration ,
Leakage expected normally in regard to Material xxx
held in Storeroom
Add: Cost of Materials handling for storing
xxx
activities
Total Annual Carrying Costs xxx

Labour Cost 14 CA Ashish Kalra
LABOUR
COST
COMPUTATION OF GROSS LABOUR COST
Basic Salary/Wages/Pay xxx

Add: Dearness Allowance (DA) xxx
Add: Other Allowances xxx
Add: Bonus xxx
Add: Commission xxx
Add: Leave Salary xxx
Add: Employer’s Contribution to:
Provident Fund xxx
Pension Fund (PF) xxx
Gratuity Fund xxx
Employees State Insurance (ESI) xxx
Employees Benevolent Fund xxx
Add: Perquisites/ Fringe Benefits (Free xxx
accommodation, Telephone, Transport, Gas,
Water, Education etc.)
Gross Wages for Normal Time Worked xxx
Add: Overtime Wages xxx
Gross Labour Cost (including Overtime xxx
Wages)

TREATMENT OF IDLE TIME IN

COST ACCOUNTS
1. Normal Idle Time:

It is treated as a part of the cost of production & thus,
on allowance for normal idle time is built into the labour
cost rates by computing Effective Hourly Wage Rate as
follows:
Effective Hourly Gross Wages for normal time worked

Wage Rate *Effective Labour Hours
*Effective Labour Total Labour Normal Idle
Hours Hours Hours
2. Abnormal Idle Time:

Cost is not included as a part of production cost and is
charged to Costing Profit & Loss Account.
Cost of Effective Abnormal
Abnormal Hourly Idle
Idle Time Wage Rate Hours

COMPUTATION OF NET CASH PAYABLE

TO WORKERS
Gross Labour Cost xxx
Less: Employer and Employee contribution to
(xxx)
Employee Provident Fund.
Less: Employer and Employee contribution to
(xxx)
Employee State Insurance Scheme (ESI)
Less: Employer & Employee Contribution to
(xxx)
Employees Benevolent fund
Less: Installments for repayment of any loan taken
(xxx)
by the employee
Less: Deductions against other Advances & Dues (xxx)
Less: Employer Contribution to Gratuity Fund (xxx)
Less: Non Cash Perks (xxx)
Less: Tax Deduction at Source (TDS) (xxx)
Net Cash Payable to Workers xxx
COMPUTATION OF OVERTIME & NORMAL

TIME WAGES AS PER FACTORIES ACT 1948
Workers will be paid wages which are higher of the following

two schemes:
I. Upto 48 hours a week: Normal Wage Rate per hour
Beyond 48 hours a week: Double of Normal Wage Rate
per hour.
II. Upto 9 hours per day: Normal Wage Rate per Hour
Beyond 9 hours per day: Double of Normal Wage Rate
per hour.
TREATMENT OF OVERTIME PREMIUM

IN COST ACCOUNTING
Treatment of Overtime
Cause of Overtime
Premium
1. Specific Request of Charged to Job as Direct
Customer Wages
Charge labour cost to all jobs
2. General Pressure at the following rate:-
of work to increase = Normal time Wages for
output regularly as a total time worked (+)
normal feature Overtime Premium .
Total Hours Worked

Where Total Hours Worked
= Normal + Overtime
Hours Hours
3. To meet the
requirements of Charge as Factory overheads
production irregularly

4. Abnormal reasons (e.g. Charge to Costing Profit &

Flood, Earthquake, etc). Loss A/c.
EFFICIENCY LEVEL OF WORKERS
Efficiency Time allowed for a job/work x 100

Level of Time taken for the job/work
Workers OR
= Actual output produced during actual hours worked x 100
Standard Output for actual hours worked
TIME RATE SYSTEM
Wages = Hours worked x Time Rate per hour
STRAIGHT PIECE RATE SYSTEM
Wages = No. of Units produced x Piece Rate per unit
TYPES OF TIME RATE SYSTEM
Types Particulars
(a) High A wage rate higher than the existing
Wages Plan wage rate is fixed.

Types Particulars
(b) Different Different hourly rates are fixed for
Time rates different levels of efficiency
(c) Measured Hourly rates are divided into variable
Day Work and fixed parts. Fixed part depends
on the nature of job. Variable
element depends on the cost of living
index and merit rating of the worker.
HALSEY SYSTEM
Halsey Time Time 50% x Time Time

System Taken Rate Saved Rate
HALSEY-WEIR PREMIUM PLAN
Halsey-Weir Time Time 30% x Time Time

System Taken Rate Saved Rate
ROWAN SYSTEM
Rowan Time Time Time Taken Time Time

System Taken Rate Time Allowed Saved Rate

PIECEWORK WITH GUARANTEED

MINIMUM DAILY WAGES
Earnings of the worker will be the higher of the two:

(a) No. of Units Produced x Piece Rate per Unit
(b) Minimum Time Wages for Actual Hours Worked
TAYLOR’S DIFFERENTIAL PIECE

WORK SYSTEM
Efficiency Piece Rate Applicable

Less than 100% 83% of Normal Piece rate
100% or more 125% of Normal Piece rate
MERRICK DIFFERENTIAL PIECE

WORK SYSTEM
Efficiency Piece Rate Applicable

Upto 83% Normal Rate
Above 83% & upto 100% 10% above Normal Rate
20% or 30% above Normal
Above 100%
Rate

BARTH SHARING PLAN
Wages Wage Rate Time Time

Payable per hour Allowed Taken
BEDAUX SYSTEM
Wages Time Time 75% of Bedaux Time

Payable Taken Rate Points Saved Rate
60
EMERSON EFFICIENCY SYSTEM
Efficiency Payment
Upto 66.67% Normal Time Rate
Above 66.67% Normal Time Rate plus Bonus
& upto 100% varies between 0.01% and 20%
Normal time rate plus Bonus of
20% of basic wages plus 1% for
Above 100%
each 1% increase in efficiency
above 100%

GANTT TASK AND BONUS SYSTEM
Efficiency Payment
Less than 100% Normal Time Wages
Equal to 100% 120% of Normal time wages
*High piece rate on entire output
More than 100%
produced.
* High Piece 120%x Time Allowed x Time Rate .
Rate Standard Output in Time Allowed
PERCENTAGE EFFICIENCY PLAN
Wages % Efficiency Normal Time

Payable Level Wages
ACCELERATED PREMIUM SYSTEM
In this system individual employer makes his own formula.

The following formula may be used for a general idea of
the scheme: Y = 0.8 x Normal Time Wages x X2
Where, Y = Wages & X = Efficiency

HAYNES MANIT SYSTEM
System similar to Bedaux Point system. Instead of

Bedaux points saved, ‘MANIT’ (Man-minutes) saved are
measured for payment of bonus. Distribution of Bonus:
Particulars Distribution Ratio
1. For
Workers & Supervisors 5:1
Repetitive work
2. For Non- Workers : supervisors :
5:1:4
Repetitive work employers
GROUP SYSTEM OF WAGE PAYMENT
The methods usually used for distributing wages to each

worker are as follows:
1. Equally, if all the workers of the group are of the same
grade and skill, same rate of pay and has worked for same
duration.
2. Pro-rata to the wages for time spent by each worker.
3. On a specified percentage basis; the percentage
applicable to a worker is predetermined on the basis
of the skill, rate of pay etc.

GROUP BONUS PLANS
Particulars M eaning
Priestman If actual output is more than standard
Production output, bonus is paid accordingly.
Bonus Plan
Cost Premium Bonus is paid for any cost savings done
System in a factory as bonus is dependent on
output.
Rucker’s Plan Based on relationship between the total
hourly earnings of the employees and
value added by the employees. Used in
manufacturing industries.
Scanlon Plan Focusses on the cost of labour & ‘added
value’ . Used in service sector
Towne Gain Bonus is dependent on the reduction in
Sharing Plan labour cost.

DIFFERENTIAL TIME RATE SYSTEM
Different hourly rates are fixed for different levels of

efficiency. Upto a certain level of efficiency the normal
time or day rate is paid. Based on efficiency level the
hourly rate increases gradually. The following table shows
different differential rates:
Up to, say 75% efficiency Normal (say ` N per hr.)
From 76% to 80% efficiency 1.10 x N
From 81% to 90% efficiency 1.20 x N
From GROUP SYSTEM
91% to 100% OF WAGE PAYMENT
efficiency 1.30 x N
From 101% to 120% 1.40 x N
efficiency
MEASUREMENT OF LABOUR TURNOVER
No. of Employees Replaced

Replacement during the period 100
M ethod *Avg. No. of Employees on Roll
DIFFERENTIAL during the period
TIME RATE
*Avg. No. of Opening No. of Closing No. of
Employees = permanent employees + permanent employees
2

No. of Employees Separated

Separation during the period 100
Method Avg. No. of Employees on Roll
during the period
Where No. of Employees Separated
= (Voluntary + Compulsory) Separations
Flux No. of Separations + No. of Accessions x 100

Method Average Number of Employees
on Roll during the period
Where No. of Accessions
= No. of replacements + New recruitments
COST OF LABOUR TURNOVER
1. Recruitment cost of New Workers (Advertisement

etc.)
2. Selection cost of new workers (interview cost etc.)
3. Training cost of new workers
4. Settlement/Retrenchment Compensation of old/
existing employees
5. Loss of potential contribution on account of Loss of
potential production due to Labour turnover.
.
Overheads 28 CA Ashish Kalra
OVERHEADS
EXAMPLES OF COMMON OVERHEADS

& BASIS OF THEIR APPORTIONMENT
Depreciation on Factory Building
Insurance Premium of Building
Municipal Tax of Factory Building
Air Conditioning & Centralised

Heating Floor Area/
Space
Cleaning Expenses of Factory Occupied
Building
Rent, Rates & Taxes of Factory

Building
– Repairs & Maintenance of Factory
Building
No. of Employees/
Supervision
No. of Machines/Area

Motive Kilowatt Hrs/Horse Power Hrs/

Power Horse Power x Machine Hrs/ Horse Power
Depreciation/ Rent of Plant &

Machinery Value of Plant
& Machinery
Insurance Premium of Machine
Maintenance hours/
Repairs and Maintenance Value of Plant &
of Plant & Machinery Machinery/ Machine
Hours
Lighting No. of Light points/Area/Cubic Content
Time Keeping Expenses
Canteen Expenses Number

of
Employee Welfare Expenses Employees
Personnel/Human Resource
Department Expenses

Employer’s contribution to
- Provident Fund
- Employee’s State Insurance Wage Bill
- Gratuity
- Pension fund
Information
InformationTechnology
Technology Expenses IT Hours
Inspection Inspection Hours
Leave with Pay/Leave Salary Wage Bill
Stores No. of Stores Requisition/

Overheads Value of Direct Material issued
Material Weight of Material/

Handling Value of Material
Cost
Crane Hours Devoted by Crane for
Expenses each Department
Manager’s Time Devoted by Manager for

Salary each Department

Misc. Expenses/ As given Or

Sundry Expenses/ Direct Wages/ Machine Hours
General Expenses /Labour Hours
Indirect Material Cost Direct Material Cost
Indirect Labour Cost Direct Labour Cost

Cost Cost
Internal Hours Devoted by Vehicle for
Transport each Department
Cost

CLASSIFICATION OF OVERHEADS
MANUFACTURING/
FACTORY OVERHEADS
OFFICE AND
ADMINISTRATIVE
FUNCTION OVERHEADS
-AL
ANALYSIS
RESEARCH &
DEVELOPMENT
OVERHEADS
SELLING AND
DISTRIBUTION
OVERHEADS
FIXED OVERHEADS
BEHAVIOU
-RAL VARIABLE OVERHEADS
ANALYSIS
SEMI VARIABLE
OVERHEADS

OVERHEADS DISTRIBUTION SHEET
Production Service
Particulars Basis Department Department
P1 P2 P3 S 1 S2
Primary
Distribution:
Direct Cost Allocated - - -  
Allocated O/Hs Allocated     
Common O/Hs Logical Basis     
Total Cost of  
Service Deptts.
Secondary
Distribution:
S1 Ratio of    () -
S2 Services    - ()
Rendered
Factory O/Hs   
of Production
Deptts.
Basis of O/H   
Absorption/
Recovery
Factory O/Hs   
Absorption
Rate

CRITERIA FOR SECONDARY DISTRIBUTION
Particulars Meaning
Ability to pay Higher the revenue of a
department, higher is the
charge for services.
Efficiency or Production targets are set and
incentive method: apportionment is made
accordingly.
Analysis or It is an arbitrary method of
survey: distribution. Apportionment of
overheads is made on the basis
of analysis and survey method.
General use of This method is used when data
indices: of actual services cannot be
obtained.
Service or use Overheads are apportioned on
method: the basis of services actually
received by various department

METHODS OF SECONDARY
DISTRIBUTION
1. Direct Re-Distribution Method: Service

Departments’ costs are apportioned among the Production
Departments only, totally ignoring the services render ed
by Service Departments to one another.
2. Step Method or Ladder or Non-reciprocal Method:
Service Department which provide services to other
departments but does not take services from other
departments ranks first for distribution. In case the
department provide reciprocal services, but Step/
Ladder method is preferred to be used, then the
sequence begins with the department that renders
maximum percentage of service to other service
departments & then distribution is made on non-
reciprocal basis.
3. Reciprocal Service Methods: Service department s,
render services to each other and, therefore, are
mutually dependent. The methods available for dealing
with reciprocal services are:
(i) Simultaneous Equation Method: Firstly, the costs of
service departments are ascertained by formulating
mathematical equations considering reciprocal services

by one department to another and vice-versa. These costs

are then re-distributed to production departments on the
basis of given percentages.
(ii) Repeated Distribution Method: Service
departments’ costs are distributed to other service
and production departments on agreed percentages
and this process continues to be repeated, till the figures
of service departments are either exhausted or reduced
to a negligible figure.
(iii) Trial & Error Method: The cost of first service
department is apportioned to other service department
only at a given percentage. The cost of the second service
department is then apportioned to the first service
department.
METHODS OF OVERHEAD
ABSORPTION/RECOVERY
1.Rate per unit of Output:

Overhead Rate Budgeted Production Overheads
per unit of of the Department
output Budgeted Output

2. Percentage to Direct Material Cost:

Direct Material Budgeted Production Overheads
Cost of the Department x 100
Percentage Rate Budgeted Direct Material Cost
3. Percentage to Direct Labour Cost:

Direct Labour Budgeted Production Overheads
Cost Percentage of the Department x 100
Rate Budgeted Direct Labour Cost
4. Percentage to Prime Cost:

Prime Cost Budgeted Production Overheads
Percentage of the Department x 100
Rate Budgeted Prime Cost
5. Direct Labour Hour Rate:

Direct Budgeted Production Overheads of the
Labour Department .
Hour Rate Budgeted Effective Direct Labour Hours
6. Machine Hour Rate:

Machine Budgeted Production Overheads allotted
Hour & apportioned to the machine .
Rate Budgeted Effective Machine Hours

7. Combined Machine Hour and Labour Hour rate:

The overheads are divided into two categories:
(i) The expenses directly attached to the machines are
allocated on the basis of machine hour.
(ii) Expenses other than (i) are allocated on the basis of
labour hours.
EFFECTIVE MACHINE HOURS
Effective Total Machine Normal Idle

Machine Hours Hours available Time of machines
STATEMENT SHOWING
COMPUTATION OF MACHINE HOUR
RATE
Particulars Amt in (` )
Fixed Costs Apportioned to M achine
Rent Rates & Taxes xxx
Add: Insurance Premium of Machine xxx
Add: Supervision Charges xxx
Add: Depreciation & Repairs of Machine xxx
(if charged on Time Basis)
Add: Lighting Charges xxx

Add: Operator Wages & Salaries(if xxx

payable on monthly basis)
Total Fixed Charges of the M achine xxx
Effective Machine Hours (Total Machine xxx
Hours – Normal Idle Time)
Fixed Charges per effective M achine xxx
Hour
Variable Costs:
Power per effective Machine Hour xxx
Add: Depreciation, Consumable stores & xxx
Repairs of Machine
(if charged on usage basis)
Add: Operator’s Wages (if payable on
hourly basis) xxx
M achine Hour Rate xxx
ASSUMPTIONS IN RELATION TO SET

UP TIME
Unless otherwise stated, it is assumed that:

1. Set up time is unproductive.
2. It does not require consumption of any power.

NORMAL IDLE TIME OF MACHINE
1. Time lost on account of normal repairs & maintenance.

2. Time lost on account of normal stoppage of machine.
3. Set up time (if unproductive).
BLANKET/ PLANT WIDE/ SINGLE

OVERHEAD ABSORPTION RATE
Blanket Budgeted Production Overhead Costs

Overhead for the whole factory
Rate Total Units of the Selected Base
USE OF BLANKET OVERHEAD ABSORPTION

RATE WHEN MORE THAN ONE PRODUCT
IS MANUFACTURED
1. When all products pass through all the departments.

2. All products spend equal time in all the departments.
3. Basis of absorption is Time (Machine hours/Labou r
Hours) & is logical to be used for all departments.
ACTUAL OVERHEAD RATE
Actual Overhead Actual Overhead for the period

Rate Actual Production for the period
PREDETERMINED OVERHEAD RATE
Pre-determined Budgeted Overhead for the period

Overhead Rate Budgeted Base for the period
MULTIPLE OVERHEAD RATE
Multiple Overhead allocated /apportioned to each

Overhead Department or Cost Centre or Product .
Rate Corresponding Basis of Absorption
METHODS OF SEGREGATING SEMI

VARIABLE COSTS INTO FIXED & VARIABLE
COSTS
M ethod M eaning
Graphical A large number of observations regarding
M ethod the total costs at different levels of outp u t
are plotted on a graph with the output on the
X-axis & the total cost on the Y-axis.
High The difference between the total cost at
points & highest & lowest volume is divided by the
low points difference between the sales value at the
method: highest & lowest volume.

Comparison Variable element of Cost

by period or = Change in the amount of expenses
level of Change in the quantity of output
activity:
Analytical Degree of variability is ascertained
method: for each item of semi-variabl e
expenses.
Least It is a statistical method & is based on
squared finding out a line of best fit for a
method: number of observations.
SEGREGATION OF FIXED & VARIABLE

OVERHEADS IN CASE OF SEMI VARIABLE
OVERHEADS
 Variable Overhead = Change in Total Overheads

Per Unit Change in Output
 Variable Overhead = Change in Total Overheads
per Machine/Labour Change in Machine/Labour
Hour Hour
 Fixed Overheads = Total Semi Variable
Overheads
(-) Variable Overheads

TREATMENT OF UNDER/OVER ABSORBED

OVERHEADS OCCURING DUE TO GENUINE
PRICE RISE/FALL
Underabsorbed Overheads = Absorbed Overhead <

Actual Overheads
Over Absorbed Overheads = Absorbed Overhead >
Actual Overheads
Supplementary = Under/Over Absorbed Overheads
Rate Equivalent Production Units
Particulars Dr. Cr.

Journal Entry For Under-absorbed Overheads:
Cost of Sales A/c Dr. xxx
(Units sold x Supplementary Rate)
Finished Goods Ledger Control A/c Dr. xxx
Units of Closing x Supplementary
Stock of Finished Goods Rate
WIP Ledger Control A/c Dr. xxx
Equivalent Units x Supplementary
of Closing WIP Rate
To Factory Overheads Control A/c xxx

Journal Entry for Over-absorbed Overheads:

Factory Overheads Control A/c Dr. xxx
To Cost of Sales A/c
xxx
(Units sold x Supplementary Rate)
To Finished Goods Ledger Control A/c
Units of Closing Supplementary xxx
Finished Goods Rate
Units of Closing Supplementary xxx
Equivalent WIP Rate

OVERHEADS DUE TO DEFECTIVE
PRODUCTION PLANNING
Journal Entry for Under-absorbed Overheads:

Costing Profit & Loss A/c Dr. xxx
To Overhead Control A/c xxx
Journal Entry of Over-absorbed Overheads:
Overhead Control A/c Dr. xxx
To Costing Profit & Loss A/c xxx


OVERHEADS OCCURING IN CURRENT
FINANCIAL PERIOD & ARE EXPECTED TO
BE SET OFF AGAINST FUTURE
OVER/UNDER ABSORPTION
Carry forward the under/over-absorbed Factory

Overheads in the next financial period.
No Journal Entry will be passed in this regard.
CONCEPTS RELATED TO CAPACITY
Types M eaning
i) Capacity of Machine/Plant
indicated by its
1.Rated/Maximum/
manufacturer
Plant / Installed/
ii) Maximum possible
Theoritical Capacity
productive capacity of a
plant
Takes into account loss of
2. Practical / Net/
time due to repairs,
Available/Operating
maintenance, idle time set up
Capacity
time etc
Types M eaning
i) Capacity expected to be
utilised over a Long period
based on sales expectation
3. Normal/Average
ii) Average utilisation of
Capacity
Capacity during one full
business cycle may extend
over 2 to 3 years
i) Capacity actually achieved
during a period
ii) It may lie between
4. Actual Capacity
Practical capacity &
Capacity based on sales
expectancy
5. Capacity based The capacity based on sales
on Sales expectancy is based on sales
Expectancy: for the year only.
It is the difference between
the practical capacity and
6. Idle Capacity
the capacity based on sales
expectancy.

ABSORPTION OF ADMINISTRATIVE
OVERHEADS AND SELLING &
DISTRIBUTION OVERHEADS
Expense Basis
Mostly on % age of Net
1. Administrative
Works Cost or Net Factory
Overheads
Cost
2. Selling &
Mostly as a % age of COGS
Distribution
/Sales Value/Per Unit Sold
Overheads


Activity Based Costing 50 CA Ashish Kalra
ACTIVITY BASED COSTING: CONCEPT
Production
Overheads
Activity Activity Activity Activity

Cost Cost Cost Cost
pool A pool B pool C pool D
Products/Jobs/Processes/Batches
ACTIVITY BASED COSTING: CONCEPT
Types M eaning
Unit Level Occurs every time a unit is produced
Batch Occurs every time a group (batch) of
level units is produced/purchased.

Types M eaning
Product Level Supports an entire product line but
not necessarily each individual unit
Facility Level Not caused by products or customer
service needs and cannot be traced
to individual units
STAGES OF ABC
Stages Particulars
Stage I Identify the major activities in the
organisation.
Stage II Determine Cost drivers i.e. the
underlying factor(s) which causes
the incurrence of cost relating to
that activity
Stage III Create Cost Pools
Stage IV Calculate cost driver rate
= Activity centre cost
Activity driver
Stage V Apply the activity cost driver rates
to products (cost units) to arrive at
activity based overhead cost.

Cost Sheet 52 CA Ashish Kalra
COST SHEET
ELEMENTS OF COST
Cost
Material Labour Expenses
Direct Indirect Direct Indirect Direct Indirect
Prime Cost
Overheads
Factory/Works/ Office & Selling &

Production Administration Distribution

Cost Sheet 54 CA Ashish Kalra
Profit
Selling & Distribution Overheads
Administration Overheads
Factory
Overheads Cost
Sales
Direct Cost of of
Expenses Factory Production Sales
Direct Prime Cost
Labour Cost
Direct
M aterial
BASIC COST SHEET WITHOUT STOCKS
Direct Material Cost xxx

Add: Direct Labour Cost xxx
Add: Direct Expenses xxx
Prime Cost xxx
Add: Factory/Works/Manufacturing/Prod. O/H xxx
Factory Cost / Works Cost xxx
Add: Office & Administration Overheads xxx
Cost of Production xxx
Add: Selling and Distribution Overheads xxx
Cost of Sales xxx
Add: Profit xxx
Sales xxx
COMPREHENSIVE COST SHEET
Opening Stock of Raw Materials xxx

Add: Purchases of Raw Materials (including xxx
Carriage Inwards, Transit Insurance etc.)
Less: Closing Stock of Raw Materials (xxx)
Raw M aterials Consumed xxx
Add: Direct/ Labour/Factory Wages xxx
Add: Direct/Chargeable Expenses xxx
Prime Cost xxx
Add: Factory/ Works/ Manufacturing/ xxx
Production Overheads
Gross Factory Cost / Gross Works Cost xxx
Add: Opening Stock of Work in Progress xxx
Less: Closing Stock of Work in Progress (xxx)
Net Factory Cost / Net Works Cost xxx
Add: Office & Administration Overheads xxx
Cost of Production xxx
Add: Opening Stock of Finished Goods xxx
Less: Closing Stock of Finished Goods (xxx)
Cost of Goods Sold xxx
Add: Selling and Distribution Overheads xxx
Cost of Sales xxx
Add: Profit xxx
Sales xxx

Reconciliation 56 CA Ashish Kalra

REASONS FOR DIFFERENCE IN PROFITS IN

COST ACCOUNTS & FINANCIAL ACCOUNTS
1. Items included in Financial Account only:

(a) Purely Financial Expenses:
(i) Interest on Loans, Bank Mortgages, debentures
(ii) Expenses, Discounts & losses on Issue of Shares,
Debentures etc.,
(iii) Losses on sale of Fixed Assets and Investments,
(iv) Fines and Penalties,
(v) Stamp Duty and Expenses on transfer of shares,
(vi) Goodwill written off,
(vii) Preliminary Expenses written off,
(viii) Donations and Subscriptions etc.,
(ix) Income Tax,
(x) Underwriting Commission written off,
(xi) Cash Discount Allowed,
(xii) Obsolescence Loss,
(xiii) Loss by fi re/theft/other abnormal losses,
(xiv) Foreign Exchange Fluctuation Loss,
(xv) Lawsuit Compensation payable/paid
(b) Purely Financial Incomes:
(i) Interest Income on Bank Deposits, Investment &
Loans given,
(ii) Dividends Income,

(iii) Profit on sale of Fixed Assets and Investments,

(iv) Rental Income,
(v) Fees Charged on issue and transfer of Shares,
(vi) Profit on sale of stores,
(vii) Insurance Compensation,
(viii) Cash Discount Received,
(ix) Lawsuit Compensation Receivable,
(x) Foreign Exchange Fluctuation Gain.
(c) Appropriations of Profits:
(i) Dividends (Interim/Proposed),
(ii) Transfer to Reserves.
2. Items included in Cost Accounts only:
These are usually notional charges called as Imputed
Costs/Opportunity Costs:
(a) Interest on capital at notional figure though not
incurred,
(b) Salary of owner manager at notional figure though not
incurred,
(c) Notional rent of own building,
(d) Notional Depreciation on the asset fully depreciated
for which book value is nil.
3. Under or Over-absorption of overheads, if
transferred to next year’s Accounts.
4. Different basis of Stock Valuation.
5. Different methods of charging depreciation.

RECONCILIATION STATEMENT
Net Profits as per Cost Accounts xx

Add: Profits taken in Financial A/c & not in Cost A/c xx
Add: Notional Expenses taken in Cost A/c & not in xx
Financial A/c
Add: Over absorption of overheads in Cost A/c xx
Add: Over valuation of Opening Inventory in Cost A/c xx
as compared to Financial A/c
Add: Under valuation of Closing Inventory in Cost A/c xx
Add: Depreciation overcharged in Cost A/c xx
Less: Expenses and Losses accounted for in Financial (xx)
A/c and not in Cost A/c
Less: Appropriations in Financial A/c only (xx)
Less: Notional Income taken in Cost A/c and not in (xx)
Financial A/c
Less: Under absorption of Overheads in Cost A/c (xx)
Less: Under valuation of Opening Inventory in Cost (xx)
A/c as compared to Financial A/c
Less: Over valuation of Closing Inventory in Cost A/c (xx)
Less: Depreciation undercharged in Cost A/c (xx)
Retained Earnings as per Financial Accounts xx

MEMORANDUM RECONCILIATION A/C
Particulars (`) Particulars (`)

To Purely Financial Expenses By Net Profits as per
xx xx
debited only in Financial A/c Cost A/c
To Under-valuation of By Purely Financial
xx xx
Opening Stock in Cost A/c Income
To Appropriation of profits By Purely Cost Expenses
xx xx
debited only in P&L App A/c charged only in Cost A/c
To Over-valuation of Closing xx
By Over-valuation of Opening
xx
Stock in Cost A/c Stock in Cost A/c
To Under-absorption of By Over-absorption of
xx xx
Overheads in Cost A/c Overheads in Cost A/c
To Depreciation By Depreciation
xx xx
undercharged in Cost A/c overcharged in Cost A/c
To Notional Income taken in By Under-valuation of Closing
xx xx
Cost A/c Stock in Cost A/c
To Retained Earnings as per
xx
Financial A/c
xx xx

COST BOOK
KEEPING
Cost Book Keeping 62 CA Ashish Kalra
NON-INTEGRATED ACCOUNTING
SYSTEM FLOWCHART
M aterials/ Stores Ledger

Control A/c
Wages Production Overhead

Control A/c Control A/c
Work in Progress Ledger

Control A/c
Administration Overhead Finished Goods

Control A/c Ledger Control A/c
Selling & Distribution

Cost of Sales A/c
Overhead Control A/c
Costing P&L A/c

NON-INTEGRATED ACCOUNTING
1.M aterials Purchased on Credit /for Cash:

(a) For Stock:
Stores Ledger Control A/c Dr. xxx
To General Ledger Adjustment A/c xxx
(b) For Special Jobs:
Work-in-Progress Ledger Control A/c Dr. xxx
2.M aterials Issued:
(a) Direct M aterial
To Stores Ledger Control A/c xxx
(b) Indirect M aterial
Respective Overhead A/c Dr. xxx
3. M aterials Returned to Supplier:
General Ledger Adjustment A/c Dr. xxx
4. M aterials Returned from Shop floor:
To Work-in-Progress Ledger Control A/c xxx
5. M aterials transferred from one job to
another job:
Work in Progress of Transferee Job A/c Dr. xxx
To Work in Progress of Transferor Job A/c xxx

6. Sale of M aterial:
Note: Loss on sale will be debited & profit on sale
will be credited to Costing profit & Loss A/c
7. Normal Loss of M aterials kept in Storeroom:
Or Work-in-Progress Ledger Control A/c Dr. xxx
8.Abnormal Loss of M aterials kept in Storeroom:
Costing P & L A/c Dr. xxx
9. Transportation of Incoming M aterial/
Carriage/ Freight Inwards
Production Overheads Control A/c
OR Stores Ledger Control A/c Dr. xxx
10. Labour Cost:
(a) Total Wages & Salaries paid (including
Employer’s contribution to various funds)
Wages & Salaries Control A/c Dr. xxx
xxx
To General Ledger Adjustment A/c
(b) Allocation of Direct & Indirect Labour Cost:
Work-in-Progress Ledger Control A/c (DL) Dr. xxx
Respective Overhead Control A/c (IL) Dr. xxx
xxx
` To Wages & Salaries Control A/c

11.Direct Expenses (Paid/Accrued):
Work in Progress Ledger Control A/c Dr. xxx
12.Overheads Incurred (Paid/Accrued):
Respective Overheads Control A/c Dr. xxx
13. Overheads Recovered:
(For Works Overheads Recovered)
(For Administration Overheads Recovered)
xxx
Cost of Sales A/c Dr.
(For Selling & Distribution Overheads Recovered)
xxx
To Respective Overhead Control A/c
14. Administration Overheads allocated to
Production:
Work-in-Progress A/c Dr. xxx
To Administration Overheads Control A/c xxx
15. Finished Goods Produced:
16.Administration Overheads allocated to Sales:
17. Cost of Goods Sold:
To Finished Goods Ledger Control A/c xxx

18. Cash/Credit Sales:

To Sales/Costing Profit and Loss A/c xxx
19. Cost of Goods Returned by Customers:
To Cost of Sales A/c xxx
20. Sales Return:
Sales Return/Costing P&L A/c Dr. xxx
21. For transferring Cost of Sales to Costing
P&L A/c
22.Underabsorbed Overheads written off:
To Respective Overheads A/c xxx
23.Overabsorbed Overheads written off:
Respective Overheads A/c Dr. xxx
To Costing P & L A/c xxx
24. For profit in Costing P&L A/c:
Costing P& L A/c Dr. xxx
25. For Losses in Costing P&L A/c:
To Costing P& L A/c xxx

INTEGRATED ACCOUNTING
1. M aterials purchased on credit/for cash:

(a) For Stock:
To Sundry Creditors/Cash A/c xxx
(b) For Special Jobs:
To Sundry Creditors/Cash A/c xxx
2. M aterials Issued:
(a) Direct M aterial:
(b) Indirect M aterial:
Relevant Overhead A/c Dr. xxx
3. M aterials returned to supplier:
Creditors A/c Dr. xxx
4.M aterials Returned from Shop Floor:
5. M aterials transferred from one job to
another job:
Work in Progress of Transferee Job A/c Dr. xxx
To Work in Progress of Transferor Job A/c xxx

6. Sale of M aterial:
Cash/Debtors A/c Dr. xxx
Note: Loss on sale will be debited & profit on sale
will be credited to Costing profit & Loss A/c
7. Normal Loss of M aterials kept in Storeroom:
Or Work-in-Progress Ledger Control A/c Dr. xxx
8.Abnormal Loss of M aterials kept in Storeroom:
9. Transportation of Incoming M aterial/
Carriage/Freight Inwards:
Production Overheads Control A/c /
To Cash A/c xxx
10. Labour Cost:
(a) Total Wages and Salaries paid (including
employer’s contribution to various funds)
Wages & Salaries Control A/c Dr. xxx
To Cash A/c / Accrued Wages & Salaries A/c xxx
(b) Allocation of Direct & Indirect Labour Cost:
Work in Progress Ledger Control A/c (DL) Dr. xxx
Respective Overheads Ledger Control (IL) Dr. xxx
To Wages & Salaries Control A/c xxx

11. Direct Expenses (Paid/Accrued):
To Cash A/c/Accrued Expenses A/c xxx
12. Overheads Incurred (Paid/Accrued):
Relevant Overheads Control A/c Dr. xxx
To Cash A/c xxx
13. Overheads Recovered:
(For Works Overheads recovered)
(For Administration Overheads recovered)
xxx
Cost of Sales A/c Dr.
(For Selling & Distribution Overheads recovered)
xxx
To Relevant Overheads Control A/c
14. Administration Overheads allocated to
Production xxx
Work-in-Progress A/c Dr. xxx
To Administration Overheads Control A/c
15. Finished Goods produced:
16. Administration Overheads allocated to Sales
17. Cost of Goods Sold:
To Finished Goods Ledger Control A/c xxx

18. Cash/Credit Sales:

Cash/Debtors A/c Dr. xxx
To Sales A/c xxx
19. Cost of Goods Returned by Customers:
20. Sales Return:
Sales A/c Dr. xxx
To Debtors A/c/Cash A/c xxx
21. Under absorbed overheads written off
Profit & Loss A/c Dr. xxx
To Relevant Overheads Control A/c xxx
22.Overabsorbed overheads written off
Relevant Overheads Control A/c Dr. xxx
To P &L A/ c xxx
23. For transferring Cost of Sales to P & L
A/c xxx
P & L A/c Dr. xxx
24. For Profits in P & L A/c
P&L A/c Dr. xxx
To Net Profits A/c xxx
25. For Losses in P & L A/c
Net Loss A/c Dr. xxx
To P & L A/c xxx


Process Costing 72 CA Ashish Kalra
FORMAT OF PROCESS A/C
Particulars Units Rate Amt Particulars Units Rate Amt

To Opening By Next
Stock of Raw    Process A/c
Materials Or   
To Opening By Finished
  
Stock of WIP Goods A/c
To Raw By Closing
Material    Stock of
  
Purchases Raw
To Previous Materials
  
Process A/c By Closing
To Direct Stock of   

Wages WIP
To Direct By Normal

Expenses Loss:
To Factory - W. Loss 
  
Overheads - Scrap
To Waste having
Disposal A/c Realisable
     
(Normal Value
Costs) By
To Abnormal Abnormal
     
Gain A/c Loss A/c
   

TREATMENT OF ABNORMAL LOSS &

GAIN IN PROCESS ACCOUNT
Abnormal Treatment in Process A/c

1. Loss Units & Value Credited to Process A/c
2. Gain Units & Value Debited to Process A/c
Note: Valuation of Abnormal gain & loss are computed on the
basis of cost per unit of normal output computed as follows:-
TREATMENT
Total OF ABNORMAL
Normal NRV GAIN
Normal IN Cost
Disposal
COST Loss
Value = Cost of Normal ACCOUNTS
Units of Normal Loss Units
Units Input – Units of Normal Loss
x Units of Abnormal Loss/Gain
ABNORMAL GAIN/EFFECTIVES A/C
To Normal Loss A/c xxx By Process A/c xxx

To Costing P&L A/c xxx
xxx xxx
ABNORMAL LOSS A/C
To Process A/c xxx By Bank A/c xxx

To Costing P&L A/c
xxx xxx

TREATMENT OF PART OF OUTPUT SOLD & PART

OF OUTPUT TRANSFERRED TO NEXT PROCESS
Units & Value of Output Credited in Process A/c

transferred to next from which such
process transfer is made
Units Sold or to be sold Credit in Process A/c
Cost Of Units Sold (By name of Warehouse
(Units Sold x Cost per A/c if Inventory is no t
unit Of yet sold OR Cost Of
Normal Sales A/c if Inventory
Output) has been sold)
COMPUTATION OF AMOUNT OF STOCK

TO BE SHOWN IN BALANCE SHEET IN
PROBLEMS INVOLVING INTER PROCESS
PROFITS
Add the Cost Column of all Closing Stocks

OR
Add the Total column of all Closing Stocks and reduce
the Stock Reserve

TREATMENT OF NORMAL LOSS
Normal Loss
Weight Scrap having Scrap

Loss Realisable Requiring
Value Disposal Cost
Units of Units & its Units of Normal

Normal Loss Normal Loss be credited &
be credited Realisable value Normal disposal
to Process be credited to cost be debited to
A/c Process A/c Process A/c
INTER PROCESS PROFIT

PROCESS A/C
Particulars Total Cost Profit Particulars Total Cost Profit

To Raw By Next
 
Materials Process
To Previous A/c/
     
Process A/c Finished
To Direct Output
 
Wages A/c
To Direct
 
Expenses
To Works
 
Overheads
Total Value
  
of Output
Less:
() () ()
Closing
Stock
Value of
Stock   
Tfd/Sold
To Profit  
     
ACCOUNTING OF PROCESS INVENTORIES
Inventory Raw Work in Finished

M aterials Progress Goods (FG)
(RM ) (WIP)
Units & Units & Units &
value value value
1. Opening
debited to debited to debited to
Stock
Process Process Process
A/C A/c Stock A/c
2. Closing Units & Units & Units &

Stock value value value

credited credited credited to

to Process to Process Process
A/c A/c Stock A/c
3. Preferred FIFO or FIFO or FIFO or
Valuation Weighted Weighted Weighted
methods Avg. Avg. Avg.
SOME SPECIAL POINTS FOR INVENTORY

VALUATION:
1. Raw Materials (RM)
If rate of opening stock not known, take current rate
of RM.
2. Finished Goods (FG)
a) Separate Process Finished Stock A/c is prepared.
b) Output of each Process transferred to Process
Finished stock A/c & transfer to next process is made
from there.
3. Work in Progress (WIP)
a) Statement of equivalent Production showing
equivalent units of Material, Labour, Overheads (with
regard to DOC) is prepared.
b) Cost per equivalent unit = Cost of each element.
Equivalent Production units
c) Value of WIP = Cost per equivalent unit x
Equivalent units of WIP
BASIC FORMAT OF STATEMENT OF

EQUIVALENT PRODUCTION
Conversion
Input Output M aterial
Particulars Cost
Units Units
% Units % Units
 Opening WIP     
Put &
  100%  100% 
Processed
Closing WIP     
Normal Loss  - - - -
Abnormal Loss     
Abnormal Gain () () () () ()
   
Note 1: In case degree of completion (DOC) of Closing
W.I.P. units is not known, assume it to be RM = 100% &
CC = 50%.
Note 2: If DOC of units lost is not known, then assume
DOC to be equal to 100% in all respects.
Note 3: The DOC of Abnormal Gain units will be 100%.

METHODS OF PREPARING STATEMENT OF

EQUIVALENT PRODUCTION
Cost per
Finished
Opening WIP Equivalent
Output
Units
FIFO To be completed Take Current Opening WIP
first & taken Cost & divide will be taken
first to compute them with first & then
Value of equivalent unit current units
Finished
Output.
Weigh To be merged Will take into Shall be
ted with current account both computed as
Avg. input (No regard Cost of follows =
to DOC) Opening WIP & Current
Current Costs. Production X
Cost per
equivalent unit.
LIFO Opening WIP Cost per Finished
will be kept in equivalent Output shall be
Closing WIP as units will be produced from
they will be used computed on Current Input
in the end. the basis of first and then
Current/ from opening
Latest Cost. WIP.

TREATMENT OF NORMAL, ABNORMAL LOSS &

ABNORMAL GAIN UNITS (STATEMENT OF
EQUIVALENT PRODUCTION)
Normal Loss Abnormal Loss Abnormal

(NL) (AL) Gain (AG)
Show Normal Units of Units to be
Loss units in Abnormal Loss reduced from
output column should be added Output Column
not in in both output and Equivalent
equivalent common & Units Column.
production equivalent units
units column column

TREATMENT OF BY PRODUCTS IN
PROCESS ACCOUNT
Treatment of By Products in Process A/c
Credit the Units

Credit the Credit the Units
in Process A/c &
Units & & share in Joint
Net Realisable
Normal Net Costs computed
Value of By
Realisable with the help of
Products to
Value of By Reverse Cost
Costing P&L A/c
Products to Method in
as Miscellaneous
Process A/c Process A/c
Income
By Products Treatment
Value
1. Negligible Credit the sale proceeds to
Value costing P&L A/c as
Miscellaneous Income
2. Considerable Treated as Joint Products
Total Value instead of by products (Using
Reverse cost method)
3. Small/ Deduct the Net realisable value

Moderate from total cost by crediting the
Total Value normal NRV of by products to
Process A/c
Cost Methods:
Methods Meaning
Used when by products are
used as raw materials in
1. Opportunity or
production. The basis of
replacement cost
costing by product is
method
opportunity cost or
replacement cost.
Standard cost is a combination
on the basis of technical
2. Standard cost
analysis and assessment for
each by product.
3. Apportionment Used where by products are of
on suitable basis significant value.

COMPUTATION OF SHARE IN JOINT

COST OF EACH BY PRODUCT USING
REVERSE COST METHOD:
By-Product
Particulars
X Y
Estimated Final Sales Value xxx xxx
Less: Estimated Net Operating Profits (xxx) (xxx)
Estimated Cost of Sales xxx xxx
Less: Estimated S&D Overheads (xxx) (xxx)
Estimated Cost of Production xxx xxx
Less: Estimated Admn. Overheads (xxx) (xxx)
Costs
Estimated Works Cost xxx xxx
Less: Estimated Further Processing (xxx) (xxx)
Costs
Share in Joint Costs xxx xxx

METHODS OF DISTRIBUTING JOINT

COSTS AMONGST THE JOINT PRODUCTS:
Ratio of Distribution of
Method
Joint Cost
1. Output /Weight / Output or Physical units,
Physical such as kg, gallons, litres,
Measurement tonnes, tonnes, metres etc.
2. Sales/Market
Output units x Selling Price
Value of output at
per unit at split off point
split off point
3. Final sales
(Final output units x Final
/Market value of
selling price per unit)
output
Estimated NRV =
Estimated Final sales value
4. Estimated Net of output (-) Estimated
Realisable Value Processing costs (-)
Estimated selling &
Distribution costs
5. Survey/ Point Physical output x Point value
value Method assigned per unit

6. Contribution Margin Method:

Type of Cost Ratio of Distribution
1. Variable Joint Cost Physical units/output
Ratio of Contribution of
output produced computed as
follows:
2. Fixed Joint cost Sales/Market Value of final
output - Variable Joint cost -
Variable further processing
costs, if any
7. Reverse Cost M ethod: The ratio in which Joint Costs

are to be apportioned can be computed as follows:
Joint Products X Y
Estimated Sales Value of Output xx xx
Less: Estimated Net Operating Profits (xx) (xx)
Estimated Cost of Sales xx xx
Less: Estimated S & D Overheads (xx) (xx)
Estimated Cost of Production xx xx
Less: Estimated Office& Administration
(xx) (xx)
Overheads
Estimated Works Cost xx xx
Less: Estimated Further Processing Cost (xx) (xx)
Ratio in which Joint costs are to be xx xx
apportioned
Job & Batch Costing 86 CA Ashish Kalra

ECONOMIC BATCH QUANTITY (EBQ)

/BAUMOL MODEL
EBQ = 2x A xS
C
Where,
A = Annual Demand or requirement of product in units
S = Set up Costs per setup
C = Carrying Cost per unit per annum
TOTAL ANNUAL RELEVANT COST
Annual Set up Costs & Carrying = 2 x A x S x C

Costs of producing EBQ
NUMBER OF SET UPS PER ANNUM
Number of Annual Demand of Product in units

Set ups p.a. EBQ
ANNUAL SET UP COST
Annual Set up Cost = No. of Set ups x Cost per Set up

Job & Batch Costing 88 CA Ashish Kalra
TIME BETWEEN TWO SET UPS
Time Between Two Set ups = 360 Days/12 months

No. of Set ups p.a.
ANNUAL CARRYING COST
Annual EBQ x Carrying Cost per unit

Carrying Cost 2
COST PER UNIT IN BATCH
Cost per Total Cost of a Batch

unit Number of Units produced in a Batch


Operating Costing 90 CA Ashish Kalra
ABSOLUTE (WEIGHTED AVERAGE) V/S

COMMERCIAL (SIMPLE AVERAGE) TONNES-KMS
Absolute Commercial
∑(Actual Tonnes Carried Avg. tonnes carried x
x Kilometers Travelled) Total Kilometers travelled
DIFFERENT COST UNITS
Simple Cost Unit Composite Cost Unit

Taxi/Auto : Per Taxi/Auto : Per Effective
Effective Km Passenger Km
Entire Bus : Per Km Bus or a trip : Per Effective
Passenger Km
Entire Truck/ Lorry/ Truck/Lorry on a route : Per
Tempo : Per Km Effective Tonne Km
Entire Airplane : Per Airplane on a route : Per
one way trip passenger per one way trip
Entire Hotel : Per day Rooms in hotel : Per room per
day
Entire Hospital : NA Beds/Rooms in Hospital : Per
Bed/Rooms per day
Entire Cinema : Per Seats in Cinema : Per sea t
Show (Usually NA) per show

OPERATING COST SHEET-TRANSPORT
Fixed Charges:
Driver’s salary (if paid on monthly basis) xxx
Cleaner/Manager/Supervisor/Accountant/Office
xxx
staff/Rent of office etc. apportioned
Insurance Premium of Vehicle xxx
Road Tax, License Fees, Permit Charges xxx
Garage Rent xxx
Depreciation (if charged on time basis eg- SLM,WDV,
xxx
etc.) & Interest of Vehicle
Repairs & Maintenance of vehicle (if charged on
xxx
monthly/annual basis)
Total Fixed Charges (A) xxx
Variable Charges:
Petrol/Diesel/Gas
xxx
Driver's Salary (if paid on daily basis)
Repairs & Maintenance (if done on usage basis) xxx
Depreciation of vehicle (if charged on usage basis) xxx
Tyres/Oil/Filters xxx
Total Variable Charges (B) xxx
Total Operating Cost (C) = (A) + (B) xxx
Effective Km/ passenger Kms/Ton Kms (D) xxx
Operating Cost per Effective Km/ passenger
xxx
Kms/Ton Kms (C)/(D)
Contract Costing 92 CA Ashish Kalra

CONTRACT ACCOUNT
Particulars Amt Particulars Amt

To Work In Progress b/d xx By Cost of Materials
xx
To Materials at site b/d xx returned to Store
To Plant at site b/d xx By Cost of Materials
xx
To Cost of Material issued returned to Supplier
xx
from Storeroom to site By Contract No……
To Cost of Materials (Cost of Material
xx xx
specifically purchased transferred to
To Contract No. …… (Cost Contract………)
of Materials transferred xx By Materials at site
xx
from Contract …………) c/d
To Direct Wages xx By WIP c/d
To Direct Expenses xx -Work Certified xx
To Cost of Plant & -Work Uncertified xx
Machinery specifically xx By WDV of Plant at
xx
purchased for a Contract site c/d
To Depreciation of Plant By WDV of Plant sent
xx
not specifically purchased xx to storeroom
for Contract By Loss transferred
xx
To Works Overheads xx to P&L A/c (B.F.)
To Administration
xx
Overheads apportioned
To Notional Profits c/d xx
To P&L A/c xx By Notional Profits b/d
xx
By WIP reserve c/d xx
TYPES OF CONTRACTS
TYPES VALUATION
a) Fixed Price agreed upon
between contractor & contractee.
1. Fixed Price
b) Deductions made for defectives
Contract
& extra payment made for
additional work.
a) Adopted when probable contra c t
cost cannot be ascertained with
2. Cost Plus reasonable accuracy.
Contracts b) When work to be done is no t
definitely fixed at the time of
making estimate.
a) Contract Price is fixed with a
provision that it will be increased
3. Contracts
with increase in prices of materia ls
with Escalation
or labour etc beyond a certain limit.
Clause
b) Such escalation is according to
mutually predetermined formula.
RESERVE ON W.I.P.
Reserve on = Notional - Profit transferable

W.I.P Profits to P&L A/c
NOTIONAL PROFITS
Notional Value of Work Cost of work Cost of work

Profit Certified to date uncertified
OR = Value of Work Certified + Cost of Work

Uncertified - Cost of work done to date
ESTIMATED PROFITS
Estimated Contract Total Estimated

Profits Price Costs
Total Estimated Costs = Cost of work done to date
+ Estimated further costs
BROAD GUIDLEINES FOR RECOGNITION

OF PROFITS ON AN INCOMPLETE
CONTRACT
1. In case of Loss Entire amount of loss

debited to Profit & Loss A/c

2. In Case of Notional Amount to be Credited to

Profits (% of WC to CP) Profit & Loss A/c
< 25% Nil
≥ 25% < 50% 1 x NP x CR
3 WC
≥ 50% < 90% 2 x NP x CR
3 WC
≥ 90% a) EP x WC x CR
CP WC
OR EP x CR
CP
b) EP x WC
CP
c) EP x COWTD
ETC
d) EP x COWTD x CR
ETC WC
e) NP x WC
CP
NP = Noti onal Profi ts CP = Contract Pri ce

CR = Cash Recei ved WC = Work Certi fi ed
EP = Esti mated Profi ts
COWTD = Cost Of Work Done To Date
ETC = Esti mated Total Cost

COST OF WORK TO DATE
Cost of Work to Date = Cost of Materials used on the

contract + Labour Cost + Direct Expenses + Works
Overheads + Depreciation on Plant + Administration
overheads apportioned + other expenses on contract
VALUE OF WORK CERTIFIED
Value of Contract Percentage of

Work Certified Price Work Certified
PROGRESS PAYMENT DURING THE

REPORTING PERIOD
Progress Value of Work Retention Payment to

Payment Certified Money Date
RETENTION MONEY KEPT BY CONTRACTEE
Retention Money = Value of Work Certified – Payment

actually made/ Cash paid to the contractor

COST OF WORK UNCERTIFIED
Cost of work done till end % age of work

of reporting period uncertified .
% of work done till the end of reporting period

OR = Cost of work done till end (-) Cost of work
of reporting period certified
PRESENTATION OF WIP IN BALANCE SHEET
Assets Amount
Work in progress: xxx
(Value of work certified + Cost of work
uncertified)
Less: Reserve for unrealised profit xxx
Less: Amount received from the contractee xxx
xxx
CASH RECIEVED TILL THE END OF

REPORTING PERIOD
= Value of Work X Fixed % of Cash Payable by

Certified Contractee as per the terms
of Contract
OR = Value of Work Certified - Retention Money

Budgetary Control 100 CA Ashish Kalra
CLASSIFICATION OF BUDGETS
Classification of Budgets
On the Basis of
Efficiency Conditions Period Scope

2
Fixed Long Period

Budget Budget
Flexible Short
Budget Period
Budget
Basic Functional
budget Budget
Master
Current Budget
Budget

.
Functional Budgets
Sales Budget
Production Budget
Material Budget
Production
Cost Labour Budget
Budget
Factory Overhead Budget
Administrative Overhead
Overheads
Budget
Budget
Selling & Distribution
Overhead Budget
Research and Development Budget
Capital Expenditure
Financial Budget
Budget
Cash Budget

FORMAT OF SALES BUDGET

Area Products Units Rate Amount
North Product A xxx xxx xxx
Product B xxx xxx xxx
Total xxx xxx
East Product A xxx xxx xxx
Total xxx xxx
West Product A xxx xxx xxx
Total xxx xxx
South Product A xxx xxx xxx
Total xxx xxx
PRODUCTION BUDGET (UNITS)
Product Product
Particulars
A B
Sales Quantity xxx xxx
Add: Closing Stock of Finished Goods xxx xxx
Less: Opening Stock of Finished Goods (xxx) (xxx)
Net Production Quantity xxx xxx
Add: Units of Normal loss xxx xxx
Gross Production Quantity xxx xxx

PRODUCTION COST BUDGET
Particulars Product A Product B

Direct Material Cost xxx xxx
Add: Direct Labour Cost xxx xxx
Add: Direct Expenses xxx xxx
Prime Cost xxx xxx
Add: Factory Overheads xxx xxx
Production Cost xxx xxx
DIRECT MATERIAL PURCHASE BUDGET
Particulars Product A Product B

Budgeted Production (in Units) xxx xxx
Direct Material Consumption p.u. xxx xxx
Direct Material Consumed (Units) xxx xxx
Add: Closing Stock of Direct xxx xxx
Materials (Units)
Less: Opening Stock of Direct (xxx) (xxx)
Materials (Units)
Direct Material Purchases xxx xxx
(Units)
Direct Materials Cost per unit xxx xxx
Direct Materials Purchase (`) xxx xxx

DIRECT LABOUR BUDGET
Particulars Hours Rate Amount

Skilled Labour:
Product A xxx xxx xxx
Total xxx xxx xxx
Semi Skilled Labour:
Total xxx xxx xxx
Unskilled Labour:
Total xxx xxx xxx
DIRECT EXPENSES BUDGET
Carriage Inwards xxx

Add: Royalty (on the basis of number of xxx
units produced)
Add: Octroi xxx
Total xxx

FACTORY/MANUFACTURING/
PRODUCTION/WORK OVERHEADS
BUDGET
Variable Overheads such as : Motive Power xxx
Semi Variable Overheads such as : Repairs & xxx
Maintenance Charges of Plant & Machinery
Fixed Overheads such as : Rent, Rates & Taxes xxx
Step Overheads xxx
Total xxx
OFFICE & ADMINISTRATION

OVERHEADS BUDGET
Variable Overheads xxx

Semi Variable Overheads xxx
Fixed Overheads xxx
Step Overheads xxx
Total xxx

SELLING & DISTRIBUTION OVERHEADS

BUDGET
Variable Overheads such as Selling Commission xxx

Semi Variable Overheads such as Telephone Bill xxx
Fixed Overheads such as : Advertising xxx
Step Overheads xxx
Total xxx
RESEARCH AND DEVELOPMENT BUDGET
Research Staff Salaries xxx

Research Survey Expenses xxx
Research Material Expenses xxx
Research Equipment Cost xxx
Total xxx
CAPITAL EXPENDITURE BUDGET
Land & Building xxx

Plant & Machinery xxx
Furniture & Fittings xxx
Other Fixed Assets xxx
Total xxx

CASH BUDGET
a.Opening Balance of Cash xxx

b. Cash Inflows or Receipts:
 Cash Sales xxx
 Receipts from Debtors xxx
 Other Revenue Receipts xxx
 Capital Receipts xxx
c. Cash Outflows or Payments:
 To Creditors for Goods & Services xxx
 Expenses xxx
 Other payments, which occur
periodically like debenture interest, xxx
advance tax, dividend, sales tax etc.
 Capital Expenditures xxx
 Repayment of Loans xxx
d. Closing Balance of Cash = a + b - c xxx
CONTROL RATIOS
1. Activity Ratio:
Activity = Standard Hours for Actual Output x 100
Ratio Budgeted Hours
= Efficiency Ratio x Capacity Ratio
2. Capacity Ratio:
Capacity Actual Hours Worked x 100
Ratio Budgeted Hours
3. Efficiency Ratio:
Efficiency Standard Hours for Actual Output x 100
Ratio Actual Hours Worked
4. Calendar Ratio:
Actual Number of Days Worked
Calendar during the Budget Period x 100
Ratio Number of Working Days Budgeted
for the Budget Period


Standard Costing 110 CA Ashish Kalra
DIRECT MATERIAL VARIANCES
1. Direct Material Cost Variance (DMCV):

DMCV Standard Material Cost Actual Cost of
for Actual Output produced material used
OR
Standard Quantity Standard Actual Actual
for Actual Output Price Quantity Price
= DMPV + DMQV
2. Direct Materials Price Variance (DMPV):

DMPV = Standard - Actual Actual
Price Price Quantity
3. Direct Materials Usage/Quantity/Volume

Variance (DMQV):
DMQV = Standard Quantity Actual Standard
for Actual Output Quantity Price
= DMMV + DMYV
4. Direct Materials Mix Variance (DMMV):

DMMV = Revised Standard Actual Standard
Quantity Quantity Price
Revised Standard Standard Quantity for
Quantity Total Actual Mix
5. Direct Materials Yield Variance/Revised Usage

Variance (DMYV):
DMYV = Standard Revised
Standard
Quantity for Standard
Price
Actual Output Quantity
OR
Actual Standard Output Standard Cost
Output for Total Actual Mix per unit of Output
DIRECT LABOUR VARIANCES
1. Direct Labour Cost Variance (DLCV):

DLCV = Standard Labour Cost for Actual Cost of
Actual Output Produced Labour Paid for
OR
Standard Hours Standard Actual Hours Actual
For Actual Output Rate paid for Rate
= DLRV + DLEV + ITV
2. Direct Labour Rate Variance (DLRV):

DLRV = Standard Actual Actual Hours
Rate Rate Paid for

3. Direct Labour Efficiency Variance (DLEV):

DLEV = Standard Hours Actual Hours Standard
for Actual Output Worked Rate
DLEV = DLMV + DLYV
4. Idle Time Variance (ITV):

ITV = (Abnormal Idle Time x Standard Rate)
5. Direct Labour Mix Variance (DLMV)/Direct Labour

Gang Variance:
DLMV = Revised Standard Actual
Hours for Actual Hours Standard
Hours Worked Worked Rate
6. Direct Labour Yield Variance (DLYV):

DLYV = Actual Standard Output Standard Cost
Output for Actual Mix per unit of output
Standard Hours Revised Standard Standard
for Actual Output Hours Rate
OVERHEAD TOTAL COST VARIANCES
Overhead Total Cost Variance (OTCV):

OTCV = Standard Overheads Actual Overheads
Cost for Actual Output Cost Incurred
VARIABLE OVERHEADS VARIANCES
1. Variable Overheads Cost Variance (VOCV):

VOCV = Standard Variable Overheads Actual Variable
Cost for Actual Output Overheads
OR
Standard Hours Standard Actual Actual
for Actual Output Rate Hours Rate
2. Variable Overheads Expenditure/Spending/Budget

Variance (VOBV):
VOBV = Standard Overheads Actual Actual
Absorption Rate Rate Hours
3. Variable Overheads Efficiency Variance (VOEV):

VOEV = Standard Hours Actual Standard Variable
for Actual Output Hours Overheads Rate
FIXED OVERHEADS VARIANCES
1. Fixed Overheads Expenditure/Budget Variance

(FOBV):
FOBV = Budgeted Fixed Actual Fixed
Overheads Overheads

2. Fixed Overheads Cost Variance (FOCV):

FOCV = Standard Fixed Overheads Actual Fixed
Cost for Actual Output Overheads Cost
OR Standard Hours Standard Actual Actual
for Actual Output Rate Hours Rate
= FOEV + FOVV
3. Fixed Overheads Volume Variance (FOVV):

FOVV = Standard Hours for Budgeted Standard
Actual Output Hours Rate
4. Fixed Overheads Efficiency Variance (FOEV):

FOEV = Standard Hours for Actual Standard
Actual Output Hours Rate
5. Fixed Overheads Capacity Variance (FOCAPV):
FOCAPV = Actual Budgeted Standard
Hours Hours Rate
FOCAPV = FOCALV + FORCAPV
6. Fixed Overheads Calendar Variance (FOCALV):

FOCALV = Possible Budgeted Standard
Hours Hours Rate
Possible Standard Working Actual Number of
Hours Hours Per Day Working Days

7. Fixed Overheads Revised Capacity Variance

(FORCAPV):
FORCAPV = Actual Possible Standard
Hours Hours Rate

Marginal Costing 116 CA Ashish Kalra

VARIABLE/MARGINAL COSTS
Variable Cost = Direct Labour + Direct Material

+ Direct Expenses + Variable Overheads
OR = Sales (100 - P/V Ratio)
OR = Sales x VC Ratio
FIXED COSTS
Fixed Costs (Period Cost) (such as Rent + Depreciation

+ Salaries+ Insurance)
= Sales x P/V Ratio – Profit + Loss
OR = Sales - Variable Cost - Profit + Loss
PROFITS
Profit = Sales – VC - Fixed Cost

= (Sales x P/V Ratio) - Fixed Cost
= Contribution – Fixed Cost
= P/V Ratio (Sales – Break-even sales)
= P/V Ratio x Margin of Safety
= P/V Ratio x M/S Ratio x Sales

CONTRIBUTION
Contribution = Sales – Variable Cost

OR = Selling Price p.u. – Variable Cost p.u.
OR = Fixed Costs + Profit /(-Loss)
OR = Sales x P/V Ratio
PROFIT/VOLUME RATIO OR
CONTRIBUTION/SALES RATIO
P/V Ratio = Contribution x 100
Sales
OR = Sales - Variable Cost x 100
Sales
OR = Change in Contribution x 100
Change in Sales
OR = Change in Profit/Loss x 100
Change in Sales
OR = 100 – Variable Cost Ratio
VARIABLE COST RATIO (V/C RATIO)

V/C Ratio = Variable Cost x 100
Sales
OR = 100 – P/V Ratio
OR = Change in Total Cost x 100
Change in Sales
BREAK EVEN POINT (BEP)

Break-Even Point (BEP) = Fixed Cost ..
` (in units) Contribution per unit

BEP (in Sales Value) = Fixed Cost
P/V Ratio
COMPUTATION OF DIFFERENCE
BETWEEN PROFITS AS PER ABSORPTION
& MARGINAL COSTING
= Fixed Factory Overheads x [Volume Produced

.
Denominator used for utilising (-) Volume Sold]

OR
= (Fixed factory overheads per unit) x (Change in
inventory units)
STOCK VALUATION
Inventory under absorption costing .
= Direct Material + Direct Labour + Variable

Manufacturing Costs + Fixed Manufacturing Costs
absorbed

SALES TO EARN DESIRED PROFITS
Desired Sales (in `) = Fixed Cost + Desired Profit

P/V Ratio
OR = Breakeven Point + Desired Margin of Safety
Desired Sales (in Units) = Fixed Cost + Desired Profit
Contribution per unit
KEY FACTOR/ LIMITING FACTOR/

PRINCIPAL BUDGET FACTOR
Material is in Contribution p.u

Short Supply of Material
Skilled Labour is Contribution per

in Short Supply Labour Hour
Key Machine Capacity Contribution per

Factor is in Short Supply Machine Hour
Sales Quantity is Contribution Per

in Short Supply Unit
Sales Value is the

P/V Ratio
Limiting factor
Ranking = Contribution
Key Factor
BREAK EVEN CHART
Sales Line
Profit Total
Selected Activity Sales Area Cost
Margin of Safety (`) Line
Angle of Incidence Selected
Sales and Costs (`)
Activity
Break-even Point
(Profit)
Variable
Cost
Margin of Fixed Cost

Safety Line
(Units)
0 Output (Units)

MARGIN OF SAFETY
M argin of Safety = Total Sales - Sales at BEP

(MOS) (`) = Profit .
P/V Ratio
M OS (in units) = Actual Sales units – B.E. Sales units
M OS Ratio = Total Sales - Sales at BEP x 100 or MOS x 100
Total Sales Sales
SEGREGATION OF SEMI-VARIABLE COSTS

INTO FIXED & VARIABLE COSTS
Variable Cost p.u = Change in Semi-Variable Costs

Change in Output
Total Semi-Variable Costs xxx
Less: Total Variable Cost (xxx)
(Variable Cost p.u x Output)
Total Fixed Cost xxx
ES

INCOME STATEMENT
(ABSORPTION COSTING)
Amount
Particulars
in (`)
Sales (A) xxx
Direct Material Consumed xxx
Add: Direct labour cost xxx
Prime Cost xxx
Add: Variable manufacturing overhead incurred xxx
Add: Fixed manufacturing overhead absorbed xxx
Gross Factory Cost xxx
Add: Variable administration overheads incurred xxx
Add: Fixed Administration overheads absorbed xxx
Cost of production xxx
Add: Opening stock of finished goods xxx
Less: Closing stock of finished goods (xxx)
Cost of Goods Sold xxx
Add: (or less) Under (or over) absorption of xxx
Manufacturing & Administration Overheads
Add: Selling and Distribution Costs incurred
xxx
(Fixed + Variable)
Total Cost (B) xxx
Profit (A) – (B) xxx
INCOME STATEMENT
(MARGINAL COSTING)
Amount
Particulars
in (`)
Sales (A) xxx
Variable Manufacturing Costs:
Direct material consumed/used xxx
Add: Direct labour xxx
Prime Cost xxx
Add: Variable manufacturing overhead xxx
Add: Variable Administration overhead xxx
Variable Cost of Goods Produced xxx
Add: Opening stock of finished goods xxx
Less: Closing stock of finished goods (xxx)
Variable Cost of Goods Sold xxx
Add: Variable Selling and distribution costs xxx
Variable Cost of Sales (B) xxx
Contribution (A) – (B) xxx
Less: Fixed Costs (Production, administration, (xxx)
Selling and distribution)
Net Profit xxx

COMMON SIZE
STATEMENT & TREND
ANALYSIS

Common Size Statement & Trend Analysis 1 26 CA Ashish Kalra
TYPES OF FINANCIAL STATEMENT ANALYSIS
Basis Classification
1. Nature of the Analysis  External Analysis
 Internal Analysis
2. Modus Operandi of  Horizontal Analysis
analysis  Vertical Analysis
3. Objectives of the  Long Term Analysis
analysis  Short Term Analysis
COMPARATIVE STATEMENTS
Types Meaning
1. Comparative It shows the balance of accounts of
Balance Sheet assets & liabilities on different dates
& the extent of their increase or
decrease between these dates
throwing light on the trends &
direction of changes in position over
the periods
2. Comparative It indicates the operating results for
Statement of a number of accounting periods &
profit & loss or changes in data in absolute periods, in
Income absolute money terms & relative
Statement percentage.

COMMON SIZE STATEMENTS
Types Meaning
1. Common The revenue from operations is
Size Income assumed to be equal to 100 and all
Statement other figures of costs are
expressed as percentage of sales.
2. Common The total of assets or equity &
Size Balance liabilities is assumed to be equal to
Sheet 100 and all figures are expressed
as percentage of the total.
COMPUTATION OF TREND
PERCENTAGES
Trend percentage can be calculated as follows:

= Absolute value of item in other statements x 100
Absolute value of same item in base statement

Ratio Analysis 128 CA Ashish Kalra

PROFITABILITY RATIOS BASED ON SALES

(INCOME STATEMENT PROFITABILITY
RATIOS)
1. Cost of Goods Sold (COGS) Ratio:

COGS Ratio = Cost of Goods Sold x 100
Net Sales
Where, COGS of a Trader = Opening Stock + Net
Purchases + Direct Expenses – Closing Stock
COGS of a M anufacturer = Opening Stock of Finished
Goods + Factory Cost of Production – Closing Stock of
Finished Goods – Abnormal Loss of Finished Goods (if any)
Net Sales = Total Sales – Sales Return
2. Gross Profit Ratio or Gross M argin Percentage:

Gross Profit Ratio = Gross Profit x 100
Net Sales
Where, Gross Profit = Net Sales – COGS
Relationship between COGS Ratio & GP Ratio:
COGS Ratio = 100 – GP Ratio
GP Ratio 100 – COGS Ratio
3. Expense Ratio:
(1) COGS Ratio has been discussed above
(2) Office & Admin Exp = Office & Admin Exp. x 100
Ratio Net Sales
(3) S & D Expenses = Selling & Distributi on Exp. x 100

Ratio Net Sales
(4) Fixed Expenses = Fixed Expenses x 100
Ratio Net Sales
(5) Variable Expenses = Variable Expenses x 100
Ratio Net Sales
(6) Material Cost = Material Consumed x 100
Ratio Net Sales
(7) Labour Cost = Labour Cost x 100
Ratio Net Sales
(8) Factory Overhead Cost = Overhead Cost x 100
Ratio Net Sales
4. Profit/Volume (P/V) Ratio:

P/V Ratio = Contribution x 100
Sales
Where, Contribution = Sales – Variable Cost
Or = Fixed Cost + Profit
5. Operating Ratio
= Cost of Goods Sold + Other Operating Exp. x 100
Net Sales
Or = COGS ratio + Office & Admin Exp. ratio + S&D Exp. ratio
Or = Variable Cost ratio + Fixed Operati ng Cost ratio
Where, Other Operating Expenses = Office & Administration
Exp. + Selling & Distribution Exp. + Interest on Bank Overdraft
+ Goodwill W/O
6. Net Operating Profit Ratio:

Net Operating = Net Operating Profits or EBIT x 100
Profit Ratio Net Sales
Where, EBIT = Gross Profit– Other Operating Expenses
Or = Net Sales – Variable cost – Fixed Cost
Or = Contribution – Fixed Cost
Or = Net Profits (PAT) + Non-Operating Expenses & Loans
including provision for income tax debited to P&L A/c – Non-
Operating income credited to P&L A/c
Relationship between Net Operating Profit Ratio &
Operating Ratio:
Net Operating Profit Ratio = (100 – Operating Ratio)
Operating Ratio = (100 – Net Operating Profit Ratio)
7. Net Profit Ratio:

Net Profit Ratio = Net Profit x 100
Net Sales
Where, Net Profit = Profits after Tax (PAT)

PROFITABILITY RATIOS BASED ON

CAPITAL & INVESTMENT
1. Return on Capital Employed or Return on Investment:

Return on Net Operating Profits Before
Capital Interest and Taxes (NOPBIT) x 100
Employed Average Capital Employed
OR 100 x Operating Profit x Sales .
Sales Capital Employed
Where,
NOPBIT = Gross Profit – Other Operating Expenses
Or = Net Profit + Provision for Tax+ Interest on Long
Term Debts + Other Non-Operating Expenses & Losses (bu t
not accrual adjustments for amortisation of Goodwill, Patents
rights, Copyrights, Trademarks etc.)
- Non Operating Incomes & Gains (such as Interest/ Dividend
from Non-Trade Investments, Profit on sale of Fixed Assets
& Investments)
Capital Employed = Equity Share Capital + Reserves & Surplus
+ Preference Share Capital + Long Term Debt – Fictitious
Assets & Losses – Non Trade Assets – P&L A/c (Dr.)
Or = Net Fixed Assets (including Intangible Fixed Assets like
Goodwill, Patents, Copyrights and Trademarks) + Net
Working Capital

2. Return on Equity (ROE):

(a) Return on Total Shareholder’s Funds/Net Worth:
Return on Shareholder’s = Net Profit After Tax x 100
Funds Ratio Average Shareholder’s Funds
(b) Return on Equity Shareholder’s Funds
Return on Equity Net Profit after Tax &
Shareholder’s = Preference Dividends x 100
Funds Ratio Equity Shareholder’s Funds
Where, Equity Shareholders Funds = Equity Share Capital
+ Reserves & Surplus (Preferably excluding Revaluation
Reserve) – Fictitious Assets and Losses – P&L A/c (Dr.)
Shareholder’s Funds/Net Worth/Proprietor’s Funds/
Owner’s Equity = Equity Shareholders Funds + Preference
Share Capital
3. Return on Total Assets:

Return on Net Profit After Tax x 100
Total Assets Average Total Assets
Where, Total Assets = Total Assets side of Balance
Sheet (excluding Fictitious Assets)
ACTIVITY OR PERFORMANCE OR
TURNOVER RATIOS
1. Total Assets Turnover Ratio:
Total Assets Net Sales .
Turnover Ratio Average Total Assets

2. Fixed Assets Turnover Ratio:

Fixed Assets Net Sales .
Turnover Ratio Average Net Fixed Assets

Where, Net Fixed Assets = Gross Fixed Assets -
Accumulated Depreciation
3. Net Working Capital Turnover Ratio:

Net Working Capital Net Sales . .
Turnover Ratio Average Net Working Capital

Where, Net Working Capital = Current Assets
– Current Liabilities
4. Stock or Inventory Turnover Ratio:

Inventory Cost of Goods Sold/Cost of Sales
Turnover Average Stock in Trade or
Ratio Finished Goods Inventory
Note: In case COGS cannot be determined, take Sales.
5. Raw M aterial Turnover Ratio:

Raw Materials Raw Materials Consumed . .
Turnover Ratio Average Inventory of Raw Materials

Where, Raw M aterials Consumed = Opening Stock of Raw
Material + Net Purchase of Raw Materials – Closing Stock
of Raw Materials

6. Finished Goods Turnover Ratio:

Finished Goods Sales or Cost of goods sold .
Turnover Ratio Average Inventory of Finished goods
7. Capital Turnover Ratio:

Capital Net Sales .
Turnover Ratio Average Capital Employed
8. Current Assets Turnover Ratio:

Current Assets Net Sales .
Turnover Ratio Average Current Assets
9. Debtors Turnover Ratio/Receivables Turnover Ratio:

Debtors Net Credit Sales .
Turnover Ratio Average Accounts Receivable

(Debtors + B/R)
Where, Net Credit Sales = Net Total Sales – Cash Sales
Note: Amount of Debtors should be net of Bad debt losses
but not net of provision for Bad or Doubtful debts.
10. Average Collection Period:

Average Collection Period = 360/12/ 52 .
Debtors Turnover Ratio

Or = Average Debtors & Bill Receivables x 360/12/52
Net Credit Sales/ Average monthly/daily credit sales

11. Creditors (or Accounts Payable) Turnover Ratio:

Creditors Net Credit Purchases .
Turnover Ratio Average Accounts Payable

(Creditors + B/P)
Where, Net Credit Purchases = Net Total Purchases
– Cash Purchases
12. Average Payment Period:

Average Payment 360/12/52 .
Period Creditors Turnover Ratio

Or =Average Creditors Bill Payables x 360/12/52
Net Credit Purchases
13. Average Inventory Conversion/Holding Period:

Average Finished Goods Conversion Period/Avg. Stock in
Trade Holding Period = 360/12/52
Stock Turnover Ratio
Or = Average Stock in Trade/Finished Goods x 360/12/52
Cost of Goods Sold
14. Raw M aterials Inventory Conversion Period:

Raw Materials 360/12/52 .
Conversion Period Raw Materials Turnover Ratio
Or = Average Stock of Raw Materials x 360/12/52

Raw Materials Consumed
COVERAGE RATIOS
1. Interest Coverage Ratio:

Interest Earnings before Interest and Taxes
Coverage Ratio Interest on Long Term Debts
2. Preference Dividends Coverage Ratio:

Preference Dividends Earnings After Tax .
Coverage Ratio Preference Dividends
3. Equity Dividends Coverage Ratio:

Equity Dividends Coverage Ratio
= Earnings available for Equity Shareholders or EPS .
Equity Dividends DPS
4. Total Dividends Coverage Ratio:

Total Dividends Earnings After Tax
Coverage Ratio Total Dividends
Total Dividends = Equity Dividends + Preference Dividends
5. Debt Service Coverage Ratio:

Debt EAT + Interest on Long Term Debt + Dep. +
Service Other Non-cash Expenditures Like amortisation
Coverage Interest on Long Term Debt Installment of
Ratio principal

MARKET TEST OR MARKET STRENGTH

ANALYSIS OR INVESTOR ANALYSIS RATIOS
1. Dividends per Share (DPS):

Dividends Dividends for Equity Shareholders
Per Share Number of Equity Shares
2. Earnings per Share (EPS):

EPS = Earnings Available for Equity Shareholders (EAE)
Number of Equity Shares
Where, EAE = EAT – Preference Dividends and CDT on
Preferences Dividends (if any)
Note: In order to Compute EPS & DPS, Weighted average

number of equity shares should be taken as a denominator.
In Case weighted average number of equity shares cannot
be Computed, them taken closing number of Equity Shares.
3. Book Value per Share/Net Asset Value per Share:

Net Asset Value Equity Shareholders Funds
Per Share Number of Equity Shares*
*Closing No. of Equity Shares
4. Dividends Yield in Equity Shares:

Dividends Yield Dividend per share x 100
Ratio Market Price per Share

5. Earnings Yield Ratio:

Earnings Yield Earnings per share x 100
Ratio Market Price per Share
6. Dividends Payout Ratio:

Dividends Dividends per share x 100
Payout Ratio Earnings per Share
OR = 100 – Retention Ratio
7. Retention Ratio:
Retention Earnings Retained during the year x 100
Ratio Earnings Available for Equity Holders
OR = 100 - Dividends Payout Ratio
8. Price-Earnings Ratio or P/E Ratio:

P/E Ratio = MPS OR 1 .
EPS Earnings Yield Ratio
9. M arket Value to Book Value per share:

Market Value to Market Value per share
Book Value Ratio Book Value per share

LIQUIDITY/SHORT TERM SOLVENCY RATIOS
1. Current Ratio:
Ideal 2:1
Current Current Assets
Ratio Current Liabilities
Where, Current Assets = Inventories + Prepaid Expenses +
Cash and Bank Balances + Receivables/ Debtors + Accrued
Income + Short Term Loans and Advances + Short Term
Marketable Investments + Advance Tax + Income Tax Refund
Receivable
Current Liabilities = Creditors for Goods and Services + Short

Term Loans + Bank Overdraft + Cash Credit + Outstanding
Expenses + Provision for Taxation + Proposed Dividend +
Unclaimed Dividend + Short Term Provisions + Advances from
Customers + Current maturity of long term debts
2. Acid Test/Quick/Liquidity Ratio: Ideal 1:1

Liquid Ratio = Liquid Assets .
Current Liabilities
Where, Liquid/Quick Assets = Current Assets – Stock –
Prepaid Expenses – Illiquid Debtors (Debtors expected to pay
after more than 3 months) + Liquid Value of Stock (if any) +
Liquid Value of Prepaid Expenses (if any)
Alternative Approach:
Quick Ratio = Quick Assets .
Quick Liabilities

Where, Quick Liabilities = Current Liabilities – Bank Overdraft

(except those payable on demand) – Cash Credit from bank &
other Short Term Loans
3. Ratio of Inventory to Working Capital:

Ideal 1:1
Inventory to Working Inventory .
Capital Ratio Working Capital
LONG TERM SOLVENCY RATIOS
1. Debt-Equity Ratio:
Ideal 2:1
Debt-Equity Ratio Debt .
(D/E Ratio) Equity

Or = Long Term Debt Funds .
Shareholders or Proprietors Funds or Net Worth

Where, Long Term Debt Funds = Long Term Loans (whether
Secured or Unsecured), e.g. Debentures, Bonds, Loans from
Financial Institutions
2. Debt to Total Funds Ratio/Debt Ratio: Ideal 2:3

Debt to Total Funds = Debt .
Ratio Total Funds

Or = Debt .
Debt + Equity
Where, Total Funds = Shareholders Funds + Long Term Debt

3. Proprietors Funds to Total Funds Ratio/Equity Ratio:

Equity Ratio Equity
Ideal 1:3
.
Debt + Equity
4. Debt to Total Assets/Debt to Value Ratio:

Debt to Total Debt
Ideal 2:3
.
Assets Ratio Total Assets
5. Proprietary Ratio:
Ideal 1:3
Proprietary Ratio = Shareholders Funds/Net Worth

Total Assets
Where, Proprietary Fund / Shareholders Funds / Net
Worth = Equity Share Capital + Preference Share Capital
+ Reserve & Surplus – Fictitious Assets & Losses
6. Gearing or Capital Gearing Ratio:

Capital Fixed Interest & Div. Bearing Securities
Gearing Ratio Equity Shareholders Funds
Where, Fixed Interest & Div. Bearing Securities
= Preference Share Capital + Long Term Debts
7. Fixed Assets Ratio: Ideal <1

Fixed Assets Ratio = Net Fixed Assets
Capital Employed

8. Solvency Ratio or Outside Liabilities/Total Assets

Ratio = Outside Liabilities .
Total Assets
DU-PONT ANALYSIS CHART (ROI)
Return on Investment (ROI)
Net Operating Capital

Profit Ratio x Turnover Ratio
÷ ÷
Net Net Capital
EBIT
Sales Sales Employed
Sales – COGS
– Office & Admn.
Expenses – S&D
Fixed + Net
Working
Assets
Expenses Capital

DU-PONT ANALYSIS CHART (ROTA)
Return on Total Assets
Net Profit Margin x Total Assets Turnover
÷ ÷
Net Net Net Total
Income Sales Sales Sales
Net Sales +/- Total Current

Non Operating - Costs Assets + Fixed
Assets
Surplus/Deficit
Cash,
Cost of Operating Bank & Receiv-
Goods Expenses Marketable ables
Securities
Interest Tax
Inventories Other

DU-PONT ANALYSIS CHART
(RONW OR ROE)

Cash Flow Statement 146 CA Ashish Kalra
CASH FLOW STATEMENT
1. Cash Flows from Operating Activities  

2. Cash Flows from Investing Activities  
3. Cash flows from Financing Activities  
Net Increase/Decrease in Cash & Cash

Equivalents
Add: Opening Cash and Cash Equivalents 
Closing Cash & Cash Equivalents 
CASH FLOWS FROM OPERATING

ACTIVITIES: DIRECT METHOD
Cash receipts from the sale of goods and the


rendering of services
Cash receipts from royalties, fees, commissions

and other revenue
Less: Cash payments to suppliers for goods and
()
services
Less: Cash payments to and on behalf of
()
employees
Less: Cash paid for Factory, Office & Selling
()
Expenses
Cash Generated from Operations 

Add: Income tax refund 

Less: Income tax paid ()
Cash Flows before Extraordinary Item 
Receipt/Payment against Extraordinary Item 
Net Cash from Operating Activities 
CASH FLOWS FROM OPERATING ACTIVITIES:

INDIRECT M ETHOD
Particulars Amt Amt

Cash Flows From Operating Activities
Retained Earnings 
Add: Provision For Taxation 
Add: Proposed Dividend 
Add: Interim Dividend 
Add: Transfer to General Reserve & other

reserves from P&L Appropriation A/c
Add: Premium or redemption of Preference

shares w/o from P&L App. A/c
Add: Extra-ordinary losses debited to P&L

A/c
Less: Extra-ordinary incomes credited to
() 
P&L A/c
Net Profits Before Tax & Extra-Ordinary

Items
Adjustment of Non Cash and Non-

Operating Items:
Add: Depreciation 
Add: Preliminary Expenses Written off 
Add: Underwriting Commission Written off 
Add: Share Issue Expenses Written off 
Add: Loss on Sale of Fixed Assets &

Investments
Add: Goodwill Written off 
Add: Interest expense on Debts 
Add: Discount Loss on Issue of Shares and

Debt Written Off
Add: Foreign Exchange Fluctuation Loss

written off
Less: Foreign Exchange Fluctuation Gain ()
Less: Amortisation of capital govt grant ()
Less: Profit on Sale of Fixed Assets &
()
Investments
Less: Rent Received ()
Less: Dividends Received ()
Less: Interest on Investment Received () /()
Profit Operating Before Working Capital

Changes

Add: Decrease in Operating CA and


Increase in Operating CL
Less: Increase in Operating CA and
() /()
Decrease in Operating CL
Cash Flows from Operating Activities 
Less: Income Tax Paid ()
Net Cash Flows from Operating

Activities
Note 1: An enterprise may hold securities and loans for
dealing or trading purposes, in which case they are similar
to inventory acquired specifically for resale. Therefor e,
cash flows arising from the purchase and sale of dealing
or trading securities are classified as operating
activities.
Note 2: Loans made by financial enterprises are usually
classified as operating activities since they relate to the
main revenue-producing activity of that enterprise.

CASH FLOWS FROM INVESTING ACTIVITIES
Particulars Amt
Cash Receipts from sale of Fixed Assets

(including intangibles)
Less: Cash Payments to acquire/ construct/
develop Fixed Assets (including Intangibles,
()
capitalised Research and Development Costs and
self-constructed Fixed Assets)
Less: Cash Payments to make Investment in
shares, warrants, or debt instruments and ()
interests in joint ventures
Add: Cash Receipts from disposal of Investment
in shares, warrants, or debt instruments and 
interests in joint ventures
Less: Cash advances & loans made to third
parties (other than advances and loans made by a ()
financial enterprise)
Add: Cash Receipts from the repayment of
advances and loans made to third parties (other 
than advances and loans of a financial enterprise)
Net Cash from Investing Activities 

CASH FLOWS FROM FINANCING ACTIVITIES
Particulars Amt
Cash Proceeds from Issue of shares, debentures,
loans, notes, bonds & other short or long-term 
borrowings
Less: Cash Repayments of Long & Short Term
()
Borrowings
Less: Redemption of Preference Shares/
()
Debentures
Less: Buyback of Securities ()
Less: Interest paid ()
Less: Dividends and CDT paid ()
Less: Payment of Issue Exp. ()
Net Cash from Financing Activities 
INCOME TAX PAID/INCOME TAX

REFUND RECEIVED
Should be shown If it can be linked

separately under the with CFI or CFF then
head CFO show them under
these heads

INTEREST/DIVIDENDS
Paid Received
Non-Financial Financial Non- Financial

entity (e.g., entity Financial entity
Trader, (Bank/FI, entity
M anufacturer) NBFC)
CFF* CFO CFI CFO
EXTRAORDINARY ITEMS
Show Cash flows If it cannot be

separately under each related to any of the
head heads
Show Separately
CFO CFI CFF under CFO

FOREIGN EXCHANGE FLUCTUATION

GAINS/LOSSES
In Cash & Cash In other Assets, such as

Equipments Debtors, Creditors, Loans
in foreign Currency
(Unrealised Gains, Losses)
Show as
reconciliation
between Opening Ignore while Preparing Cash
& Closing Cash & Flow Statement as per
Cash Equipment direct M ethod
NON-CASH TRANSACTIONS
Transactions that do not require the use of cash or cash

equivalents should be excluded from a cash flow statemen t.
Examples of non-cash transactions:
(a) The acquisition of assets by assuming directly related
liabilities.
(b) The acquisition of an enterpri se by means of issue of
shares.
(c) Conversion of debt into equity.

Funds Flow Statement 154 CA Ashish Kalra

SCHEDULE OF CHANGES IN WORKING

CAPITAL
Particulars Yr Yr Increase Decrease

1 2
CA    
CL    
Net  
Increase/
Decrease in
WC
EFFECT OF CHANGES IN CURRENT ASSETS

(CA) AND CURRENT LIABILITIES (CL) ON
NET WORKING CAPITAL (NWC)
Effect of changes in Current Assets (CA) and

Current Liabilities (CL) on Net Working Capital
(NWC):
Increase in CA = Increase in NWC
Decrease in CA = Decrease in NWC
Increase in CL = Decrease in NWC
Decrease in CL = Increase in NWC

FORMAT OF FUNDS FLOW STATEMENT
Sources Uses
Issue of Equity Shares/ Buy back of own securities
Preference Shares/ Bonds/
Debentures/ Public Deposits
Increase in Long Term Loans Decrease in Long Term Loans
Sale of Fixed Assets/Long Purchase of Fixed Assets/
Term Investments Long Term Investments
Funds from Operations (FFO) Funds Lost in Operations
(FLO)
Interest/ Dividends/ Rent Redemption of Preference
Received Shares/Debentures/Bonds/
Public Deposits
Introduction of Proprietor’s & Dividends/ Preliminary
Partner’s Capital Expenses/ Underwriting
Commission Paid
Receipts from Govt Grant Drawings by Proprietor &
(Capital Grant) Partners
Compensation Received Penalty/Compensation/
Donations Paid
Income Tax Refund Income Tax Paid
Net Decrease in Working Net Increase in Working
Capital (Bal Fig) Capital (Bal Fig)
Note: The Net Increase/ Decrease i n Worki ng capi tal w i ll match

w i th the balance i n Schedule of Changes i n Worki ng Capi tal.

COMPUTATION OF FFO & FLO
Retained Earnings (Closing P&L Appropriation A/c


– Opening P&L Appropriation A/c)
Add: Appropriation of Profits 
Add: Provision for Income Tax Dr to P & L A/c 
Add: Extraordinary losses Dr to P & L A/c (such

as Loss by fire, theft, penalties payable)
Add: Depreciation on Fixed Assets 
Add: Amortisation of Intangible and Deferred
Charges (such as goodwill, trademarks, patents,

copyrights, discount on issue of shares and
debentures, preliminary expenses, etc.)
Add: Non-Operating Expenses (excluding
interest expenses) & Losses Dr to P & L A/c (such 
as loss on sale of Investments & Fixed Assets)
Add: Non Cash allowances Dr to P & L A/c 
Less: Extraordinary Incomes Cr to P & L A/c
()
(such as Law suit compensation receivable)
Less: Non-Operating income Cr to P & L A/c (such
as profits on sale of Investments & Fixed Assets,
()
amortisation of capital grants received from
government)
Less: Any written back reserve and provision ()
FFO/(FLO) /()

TRANSACTION AFFECTING FLOW OF FUNDS
Current No Current
Assets Liabilities
Yes Yes
Non-Current No Non-Current
Assets Liabilities

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Pocket Book 1 CA Ashish Kalra

DETERMINATION OF STOCK LEVELS

1.M inimum/ Re-order Normal x Normal

2. Re-order Maximum Maximum

3. Maximum Reorder Reorder Min. Min.

4. Danger Normal Maximum delivery period

5. Average Maximum Stock Minimum Stock

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ECONOMIC ORDER QUANTITY (EOQ)/

Economic Order Quantity (EOQ) = 2xAxO

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Diagrammatically, EOQ can be represented as:

Annual Carrying Costs

TOTAL ANNUAL RELEVANT COST

Annual Ordering & Carrying = 2xA x OxC

ANNUAL CARRYING COST

Annual = ROQ + SSL x Carrying Cost per unit

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TOTAL COST OF INVENTORY

Total Total Annual Total Annual

NUMBER OF ORDERS PER ANNUM

Number of Annual Demand of Raw Material in units

ANNUAL ORDERING COST

Annual Ordering Cost = No. of Orders x Ordering Cost per

TIME BETWEEN TWO ORDERS

Time between Two Orders = 360 Days/12 months

AVERAGE INVENTORY INVESTMENT

Average Inventory ROQ SSL Purchase

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Input-Output Input units x 100

INVENTORY TURNOVER RATIO (ITR)

Inventory Raw Materials consumed .

Turnover Ratio Average Inventory of Raw Material

INVENTORY CONVERSION PERIOD/

Inventory Conversion 365/360/12/52 .

Period Inventory Turnover Ratio

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DETERMINATION OF INVENTORIABLE COST

Invoice Price/ List Price xxx

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Single Amount Apportionment (In the ratio

Types Of Cost Treatment

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ABC ANALYSIS OF INVENTORY CONTROL

FORMAT OF STORES LEDGER

Receipts Issues Balance

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METHODS OF PRICING MATERIAL

Name of the Method Basis of Pricing

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Total Cost of Quantity held

Total Quantity held during

Weighted Average Quantity of Material held

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CHOICE OF SUBSTITUTE MATERIAL

If Regular material for Production not available, then

TOTAL ORDERING COSTS

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Add: Cost of collecting Material xxx