Journal

Date Particulars LF Debit account Credit Account

Ledger

Date Particulars J/F Amount Date Particulars J/F Amount

Total

Trial Balance

Sr. No Particulars Debit Amount Credit Amount

Trading account

Particulars Amount Particulars Amount

To opening Stock By sale( Cash + Credit)
To purchases Sales returns : Returns
inward
Less : Purchase By goods distributed
returns, Returns as free samples
outward
To wages By goods destroyed by
Outstanding fire
To Carriage inward By goods withdrawn
for personal use by
proprietor
To Octroi By closing stock
To custom duty/ By gross loss C/d
Import duty Trans p&L
To freight Total
To Clearing charges
To coal gas
To royalty
To fuel power and
lighting
To factory rents
+Outstanding -prepaid
To works managers
salary
To gross profit
Transferred to profit
and loss account
Total
Profit and loss statement

Particulars Amount Particulars Amount

To gross loss c/d By gross profits
To salaries By discount received
+ outstanding
To insurance By commission
-prepaid received
To office rent and By interest received
rates- - prepaid/
outstanding
To electricity Charges By rent received
To printing and By dividend received
stationary
To postage and By interest on
telegram drawings
To telephone charges By other income
To general expenses By net loss transfreed
to capital account
To office expenses
To trade expenses
To advertising
To audit fees
To income tax
To legal charges
To interest paid on
capital
To commission paid
To motor car expenses
To carriage outward
To travelling expenses
To sundry expenses
To discount allowed
To loss by fire
To depreciation
To bad debts
+ new rdd
Old rdd
To net profit
transferred to capital
BALANCE SHEET

Liabilities Amount Amount Assets Amount Amount

Capital Plant machinery
Less (-)Drawings
+ net profit- Loss Less depreciation
Good withdrawn Land and buildings
Interest on capital Less depreciation
Furniture and fixtures
Sundry Creditors Less depreciation
Bills payable Motor /Vehical
Bank overdraft Less depreciation
Loans from others Goodwill
Outstanding salaries Loose tools
Outstanding wages Patents
Outstanding Expenses Sundry debtors
Outstanding rent Less: bad debts
Less: New RDD
Bills receivable
Investments
Closing stocks
Loans to others
Cash in hand
Cash at bank
Prepaid rent and
salaries
Prepaid insurances
Preliminary Expenses
 Cost Sheet ( for 2000 units)

Particulars Amount Rs
Direct material
Opening stock of raw material
+ purchases
+ carriage inwards
+ expenses on purchases
- Closing stock of raw material

Direct labour
Direct expenses
Prime cost

Factory overheads
Indirect materials
Indirect wages
Supervisors’ salaries
Depreciation in factory
Fuel, gas, water.
Oil and lubricants
Opening stock of work in progress
Closing stock of work in progress
Factory cost

Office and administration overheads

Office salaries
Rents
Electricity bill
Cost of production
Opening stock of finished goods
Closing stock of finished goods
Cost of goods sold

Selling and distribution overheads

Cost of sales
Profit/loss
Sales

Cost per unit= TOTAL COST / NO of UNITS=

Selling Price Per unit= SALES / No of Units=

 Cash Budget

Cash Budget January Rs February Rs march Rs

[Link] cash balance

B. Estimate Cash Recp.

Sales
Cash
Credit
Asset sale
Int. On Investment
Issue Of Shares
Collection From Customers

C. Total Cash Balance (A+B)

D. Estimated Cash Payments

Purchases
Expenses
Wages
Rents
Tax
Salaries
Total (D)

Closing Balance (C-D)

Flexible Budget

Particulars 50% 60% 80% 100%

Fixed expenditure (A)

1. Management
salaries
2. Rent and taxes
3. Sundry off taxes
4. depreciation
Total

Semi variable
expenses (B)

1. maintenance
2. Indirect labour
3. Selling and
distribution
expenses
4. Salesman salary
Total

Variable expenses
(C)
1. Direct expenses
2. Direct material
3. Direct labour
4. Variable
overheads

Total cost ( A+B+C)

Profit/Loss (e-d)
Inventory (FIFO, Simple average, weighted
average)

Date Particulars Receipts Issue Balance

Units Rate Amount Units Rate Amount Units RateRs Amount

 Standard Costing

Material cost variance = Standard cost – Actual cost

Material Price variance = Actual qty (Std. price – Actual price)

Material Usage variance = Std. price (Std. qty – Actual qty.)

Material cost variance= Material Price variance+ Material Usage

variance

Material Mix Variance = (RSQ – AQ ) × SP

Material Yield Variance = (SQ- RSQ) x SP

Labor Cost Variance = Standard cost – Actual cost

Labor Rate Variance= Actual Hours/Time( Std Rate-Actual Rate)

Labor Efficiency Variance= Std Rate( Stad Hours- Actual Hours)

Idle time Variance = Std Rate X Idle Hours

 Marginal Costing

Break-even Point
1. In sales value
BEP = Fixed cost / PV ratio
2. In units
BEP = Fixed cost / Contribution per unit

Profit Volume Ratio = (contribution / sales) X 100

= (changes in profit/ changes in sales) X 100
= (Sales – volume cost/ sales) X 100

Contribution = Sales- Variable cost

= Fixed cost + Profit or – Loss
= Sales X P/V ratio

Contribution per unit

1. In sales value = S.P. per unit – variable cost per unit

2. In units = Fixed value / BEP units

Margin of Safety = (Profit/ PV ratio)

= (Profit / contribution per unit)
= (Units sold – BEP units

Sales to earn certain amount of profit :-

1. In units = ( fixed value + Desired value) / Contribution per unit

2. In sales value = ( fixed value + Desired value) / PV Ratio
Variable Cost = sales x% of variable cost

% of variable cost = 100% - PV ratio

Fixed cost = Contribution – Profit

Fixed cost = ( sales X PV ratio ) – Profit

MOS as % of sales = (MOS IN rupees X Sales) X 100

= (Sales – BEP sales / Sales ) X 100

Profit at desired sales = (Desired sales X PV ratio ) – Fixed Cost

 BUDGETARY CONTROL

❖ Budget :
Financial statement, prepared to a definite period of time, of policy to be
pursued during that period for the purpose of attaining a given objective.
• An estimate prepared in advance for the period to which it applies.
• Finished products, forward programmes of future operations and
expected results.
• Estimated in terms of money or quality.
• Include Objective to attend and policy to pursue

❖ Objectives:
• Perform evaluation of business activities
• Profit maximization
• Defining responsibilities
• Helps to lower production cost
• Minimum wastage of time, money, energy.

❖ Limitations:
• Personal bias
• Success depends on workers efficiency
• Leads to restriction on freedom of work
• Budget forecast may be proven wrong by the business situations.

❖ Budgeting:
• Technique related to formulate, implement and evaluating budget
• Preparation of comprehensive operating and financial plans for specific
interval of time

❖ Objective:
• Future forecasting
• Increase managerial efficiency
• Fixing standards
• Cost control and cost reduction
• Comparative performance evaluation
❖ Budgetary control:
Establishment of budgets relating the responsibilities of executives to
the requirement of a policy and the continuous comparison of actual
with budgeted results, either to secure by an individual action the
objectives of that policy or to provide basis for its revision.

❖ Types of budgets:

❖ Based on flexibility:

1. Fixed budget
• Objectives and targets are fixed.
• Established for a specific activity
• Shirt period
• For fixed expenses
• Not adjusted to actual level of activity attained at the time of
comparison between adjusted and actual results

2. Flexible budget:
• Adjustment possible
• Designed to change with fluctuations
• A basis for comparison for any level of activity
• For various level of productions

❖ Based on sales and marketing

1. Sales budget – Total sales in terms of quantity or money.

2. Selling and distribution budget – Selling and distribution cost for selling no.
of quantities considered in sales budget
3. Advertising cost budget – Intention of incurring advertising cost in to
increase the sales by advertising the product

❖ Based on production
1. Production budget -
• Forecast of production for budget period
• Production in terms of quantity and money

2. Purchase budget:
• Forecast of quantity and value of direct and indirect material required
• Material budget

❖ Personnel budget:
• Labour budget
• Indicates the requirement of personnel or labour force either direct or
indirect to confirm to sales forecast and the production of budget

❖ Financial budget:

1. Cash budget:
• Estimate of expected cash receipts and expected cash payment, whether
of revenue or capital nature: operating or non-operating
• Summary of future cashbook
• Disclose both cash in hand and cash at bank.

2. Capital expenditure budget:

• Plan of proposed investment in fixed assets
• Based on forecast of capital expenditures
• Related to sales production cash budget

3. Research and development budget :

• Related to research and development
• Need prior approval

4. Overhead cost budget - overhead incurred

5. Surplus budget – revenue >expenses during budgeted time.
6. Deficit budget – expenses > revenue during budgeted time
7. Balanced budget – revenue= expenses during budgeted time
8. Master budget – After all functional budgets are prepared individually and are
co-ordinated with ach over, master budget can be incorporating all the above
budgets.

❖ Zero Balance Budgeting:

• Joins planning, budgeting, and review each other.
• Emphasize on rationality of each stern of expense in current budget.
• Each manager has to justify his entire budget request each period in
details from scarth.
• Justify aspects of budget taking zero as a base.
 Cash budget
Particulars Jan feb march april

[Link] bank balance

[Link] cash
receipts
1. Cash sales
2. Interest
3. Issue of shares
4. debentures
5. Bank loans
6. Sales of assets

3. Total cash balance

(a+b)

4. Estimated cash
payments

1. Cash purchases
2. Payment to
supplier
3. Wages
4. Manufacturing
expenses
5. Commission
6. Rent, dividends,
taxes
7. Interest on loans
8. Drawings
Total

CLOSING BALANCE
FLEXIBLE BUDGET
 Particulars 50% 60% 80% 100%

Fixed expenditure (A)

5. Management
salaries
6. Rent and taxes
7. Sundry off taxes
8. depreciation
Total

Semi variable
expenses (B)

5. maintenance
6. Indirect labour
7. Selling and
distribution
expenses
8. Salesman salary
Total

Variable expenses
(C)
5. Direct expenses
6. Direct material
7. Direct labour
8. Variable
overheads

Total cost ( A+B+C)

Profit/Loss (e-d)
 Marginal Costing
❖ Marginal Costing :-

• A specialized technique to show the state of profitability at the given

level of activity
• An amount at any given volume of output by which the total cost
increases if volume of output is increases or decreases by one unit.
• Based on classification of costs into fixed cost and variable cost
• Combines technique of cost recording, cost controlling, cost reporting
• A technique of presenting meaningful accounting information to top
management
• Pays special attention to behaviour of costs with changes in the volume
of output
• Only variable cost is changed and fixed cost remain same if volume is
increased or decreased

❖ Advantages :-

• Simple to understand and easy to operate

• There is no arbitrary appointment of fixed cost
• Current fixed cost is not forward to the next year
• Variable cost is controllable so, management is always interested in this
cost and this cost which is easily available in this technique
• It provides more reliable measures for decision making.
• Shows relative contribution to profit
• Relation between costs, selling price, volume are properly explained.

❖ Disadvantages :-

• Total cost cannot easily segregated into fixed and variable cost
• Fixed cost remains constant for a short period of time
• Tax authorities don’t accept this valuation of stocks.
 • Management cannot takes a quality decision based on this information
only
• It is very difficult to pre-determine the degree of variability of semi
variable costs.

❖ Cost volume profit analysis :-

• A planning process that management uses to predict the future volume

of activity, costs incurred, sales made and profits received.
• It computes how changes in costs and sales will affect income in future
periods.
• Fixed costs are expenses that don’t fluctuate directly. Eg. Rent
• Variable Cost changes with the level of production
• These costs include materials and labour Eg. Bicycle

❖ Uses :-
• Forecasting of profits
• Helps in determining prices
• Helps in profit planning as well as decision making

❖ Break-even Point :-

• The point where no profits or loss position is observed

• The point at which cost or expenses and revenue are equal and there is
no net profits or loss.
• Point at which total revenue is equal to total costs.
• Point from which profit is about to start
• Helps in fixation of selling prices.
• Highlights the impact of increases or decreases in fixed and variable cost
on profits.
• Helps in decision making process.

❖ Advantages :-
• Easy To understand
• Important decisions can be taken on the basis of margins of safety.
• Fixation of selling price
 • Selection of profitable mix
• Make or buy decisions regarding to a product
• Selection of optimum volume of production and selling price
• Prior determination of cost as a percentage of sales.

Break-even Point
3. In sales value
BEP = Fixed cost / PV ratio
4. In units
BEP = Fixed cost / Contribution per unit

❖ Profit Volume Ratio :-

• Known as contribution to sales ratio
• Ratio of contribution over sales
• Measures profitability of firm
• Contribution is extra amount of sales over variable cost
• Shows relationship of contribution over cost

Profit Volume Ratio = (contribution / sales) X 100

= (changes in profit/ changes in sales) X 100
= (Sales – volume cost/ sales) X 100
❖ Contribution :-
• Difference between sales revenue and variable cost
• Also known as gross margin
• First recover fixed cost and then balance amount is added to net profits
• Variable cost is most important cost in profitability

Contribution = Sales- Variable cost

= Fixed cost + Profit or – Loss
= Sales X P/V ratio

Contribution per unit

3. In sales value = S.P. per unit – variable cost per unit

4. In units = Fixed value / BEP units

❖ Margin of Safety :-
 • Excess of actual sales over break-even point
• Difference between actual sales or output and break even sales
• Indicator of soundness of business
• High margin will indicate that profits will be earned even if there is a
substantial fall in sales or production

Margin of Safety = (Profit/ PV ratio)

= (Profit / contribution per unit)
= (Units sold – BEP units
❖ Angle of incidence :-
• An angle where sales line intersects total cost lines which indicates
profits earning capacity over BEP
• Large angle – high margin of profits
• Small angle – Low rate of profits

Sales to earn certain amount of profit :-

3. In units = ( fixed value + Desired value) / Contribution per unit

4. In sales value = ( fixed value + Desired value) / PV Ratio

❖ Variable Cost = sales x% of variable cost

❖ % of variable cost = 100% - PV ratio

❖ Fixed cost = Contribution – Profit

❖ Fixed cost = ( sales X PV ratio ) – Profit

❖ MOS as % of sales = (MOS IN rupees X Sales) X 100

= (Sales – BEP sales / Sales ) X 100

❖ Profit at desired sales = (Desired sales X PV ratio ) – Fixed

Cost
 Standard Costing
❖ Standard cost :-
• Pre-determined cost
• Based on technical estimate for material labour and overhead for a
selected period
• Determine with each product or service should cost under certain
circumstances

❖ Standard Costing :-
• Used in industry where production is repetitive
• Preparation of standard cost and applying them to measure variations
from actual cost
• To maintain maximum efficiency
• Standard cost – Actual cost

❖ Importance :-
• Determine standard cost
• Measure actual cost to find variance
• To make analysis

❖ Disadvantages :-
• Require high level of skills
• Revise Continuously

❖ Variance :-
• Standard Cost – Actual Cost
• Positive – Favourable (F)
• Negative – Unfavourable/ Accrual (A)

❖ Variance Analysis :-
• Detailed examination of each variance between actual and expected
costs.
• Determine why budgeted costs are not met.
 • Analyse new product or process

❖ Material Variances :-
❖ Material Cost variance = Standard cost – Actual cost
❖ Material Price variance = Actual qty (Std. price – Actual price)
❖ Material Usage variance = Std. price (Std. qty – Actual qty.)
❖ Material Cost variance = Material Price variance + Material Usage
variance
❖ Revised std. Qty. = (Total Actual qty. / Total Std. qty.) X std.
qty.

❖ Labour Variances :-
❖ Labour Cost variance = Standard cost – Actual cost
❖ Labour Efficiency variance = Std. rate (Std. Hrs – Actual Hrs)
❖ Labour Rate variance = Actual hrs. (Std. Rate – Actual Rate)
❖ Labour Mix variance = ( Revised std. hrs. – Actual hrs. ) x Std.
hrs
❖ Labour Yield Variance = ( Std hrs. – Revised std. hrs. ) X std.
Labour Rate per unit
❖ Idle Time variance = Idle Time X STD. rate
❖ Revised std. hrs. = (Total Actual hrs. / Total Std. hrs) X std.
hrs

Particulars 50% 60% 80% 100%

Fixed expenditure (A)

9. Management
salaries
[Link] and taxes
[Link] off taxes
[Link]
Total

Semi variable
expenses (B)
 9. maintenance
[Link] labour
[Link] and
distribution
expenses
[Link] salary
Total

Variable expenses
(C)
9. Direct expenses
[Link] material
[Link] labour
[Link]
overheads

Total cost ( A+B+C)

Profit/Loss (e-d)