Download fixed cost

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