Financial Statements

19 September 2021 09:53

Deferred Tax
29 May 2022 13:20
27 March 2022 09:57
27 March 2022 14:59
04 June 2022 14:42
25 September 2021 14:01
25 September 2021 15:21
Ratio Analysis
25 September 2021 14:01
09 April 2022 12:08
09 April 2022 16:29
25 September 2021 14:01
05 June 2022 11:52
 Cash Flow - Direct Method
29 May 2021 16:17

Illustration 3: Mayo Ltd., engaged in trading business, operations commenced on April 1,

2018. Below is the statement of profit and loss for the year ended March 31, 2019:
Statement of Profit and Loss of Mayo Ltd. for the Year Ended March 31, 2019
Rs in ‘000
Revenue from operations 10,000
Inventory at the close of the year 2,000
12,000
Purchases 8,000
Expenses 2,000
Depreciation 500
Income Tax 600
11,100
Profit earned during the year 900

Additional notes:
(a) Accounts receivables at year end : Rs 20,00,000.
(b) Accounts payables for goods at year end : Rs 10,00,000.
(c) Accounts payables for services at year end : Rs 5,00,00.
(d) Income tax in statement in profit and loss account includes 2,00,000 as deferred tax expense.
(e) The tax liability other than deferred tax expense was paid as advance tax.
Required
Calculate the amount of cash flows from operating activities using direct method for the year
2018-2019
Solution
Cash flows from operating activities can be measured directly from the information provided by
Mayo Ltd. as follows:
Rs in ‘000
Cash inflows
Cash receipts from customers 8,000
Cash outflows
Purchase of goods 7,000
Operating expenses 1,500
Income tax paid 400 (8,900)
Net cash flow from operating activities (900)

Cash receipts from customers (Rs in ‘000) Sales- Receivable as on 31st March 2019
= 10,000-2000
= 8,000

Cash paid for goods

Cash paid for goods (Rs in ‘000) Purchases- Payables for goods as on 31st March 2019
= 8,000-1000
= 7,000

Cash paid for operating expenses

Cash paid for operating expenses (Rs Operating Expenses - Payables for services as on 31st
in ‘000) March 2019
= 2,000-500
= 1,500

Cash paid for taxes

 Cash paid for taxes (Rs in ‘000) Taxes- deferred tax liability
= 600-200
= 400

á Depreciation is a non-cash expense; therefore, it has no cash flow implication.

Deferred tax expense means the liability of tax which has not been paid in cash. It is deferred to
following years due to various reasons (for details, please refer the earlier units on financial
statements)
02 April 2022 13:02
01 August 2021 12:06
01 August 2021 12:29
Cash Flow- Indirect Method
31 July 2021 20:32

Amount in Rs
Revenue from Operations 1,00,000
Other Income (profit on sale of land) 2,000
Total Revenues 1,02,000
30,000
Cost of Materials Consumed
10,000
Purchases
10,000
Employees Expenses

Interest expense 5,000

Depreciation 5,000
Other Expenses 12,000
Total Expenses 72,000
Profit before Tax 30,000

Solution
Let us understand various items one by one.
3. Other income includes profit on sale of land which is a part of investing activity. It will be
deducted from the net profit while calculating cash flows from operating activities.
Cash generated/used in Operating activities:

Profit before tax 30,000

Add: Depreciation 5,000
Add: Finance Cost 5,000
Less: Other Income (2,000)
Cash generated from operating activities 38,000

Illustration 5: From the information given in illustration 4 and below given

additional information, calculate the cash from operating activities using indirect
method.
Additional Information
31st March 2019 31st March 2018
Outstanding rent 2,000 2,500
Accounts payables 21,000 25,000
Accounts receivables 15,000 21,000
Stock 25,000 22,000

Solution
Cash generated/used in operating activities:

Profit before tax 30,000

Add: Depreciation 5,000
Add: Finance Cost 5,000
Less: Other Income (2,000)
Cash generated from operating activities before working capital changes 38,000
Working capital changes
Less: Increase in accounts receivables (6,000)
Add: Decrease in stock 3,000
Add: Increase in accounts payables 4000
Less: Increase in accounts receivables (6,000)
Add: Decrease in stock 3,000
Add: Increase in accounts payables 4000
Add: Increase in outstanding rent 500
Cash generated from operating activities 39,500
11 June 2022 15:40
Cash Flows
26 September 2021 10:04
31 July 2021 20:35

Illustration 6: Heavy Motors Ltd has provided the following information about their
machinery and they seek your advice for cash flows from investing activities:
Balance at the beginning of the year (1st April,2018) 50,00,000
Balance at the end of the year (31st March,2019) 60,00,000
Accumulated Depreciation at the beginning of the year (1st April,2018) 25,00,000
Accumulated Depreciation at the end of the year (31st March,2019) 15,00,000

Machine worth Rs 25,00,000 was sold during the year with depreciation accumulated till date
Rs 15,00,000. Sales proceeds for the machinery sold was Rs 13,00,000.

Solution:
Cash flow generated/used from investing activities
Cash from sale of machinery 13,00,000
Cash used in purchase of machinery (35,00,000)
Net cash used in Investing Activities (22,00,000)
Let’s see the detailed working
Machinery:
Balance at the beginning of the year 50,00,000
Less: Cost of machinery sold (25,00,000)
Less: Balance at the end of the year (60,00,000)
Purchase of machinery during the year 35,00,000 (investing activities)

Accumulated Depreciation:
Balance at the 25,00,000
beginning of the year
Less: Depreciation on (15,00,000)
asset sold
Less: Balance at the (15,00,000)
end of the year
Depreciation charged 5,00,000 (not related to investing activities, however, it will be added
during the year back to cash flow from operations prepared by indirect method)

Asset Disposal:
Cost of asset sold 25,00,000
Less: Accumulated (15,00,000)
depreciation
Less: Sales (13,00,000)
proceeds
Profit on sale of 3,00,000 (not related to investing activities, however, it will be deducted
machinery from cash flow from operations prepared by indirect method)
03 April 2022 15:46
31 July 2021 20:36

Illustration 7: For Heavy Motors Ltd the following transactions occurred during the year:
a. Common stock was issued in exchange for a new truck.
b. A cash dividend of 2,00,000 was paid.
c. Long term loan repaid to the extent of 2,50,000
d. Cash received from receivables amounting to 3,50,000
e. Depreciation expense for the year was 3,00,000.
f. Bonds with a face value of 2,50,000 were issued at par.
Required- Use this information to compute cash flows from financing activities.
Solution:
a. Common stock was issued in exchange for a new heavy truck: This transaction does not
have any implication on cash so will not be a part of cash flows from financing activities.
b. A cash dividend of 2,00,000 was paid: Payment of dividend is financing activity. Outflow of
cash.
c. Long term loan repaid to the extent of 2,50,000: Payment of loan is financing activity.
Outflow of cash.
d. Cash received from receivables amounting to 3,50,000 : Operating activity
e. Depreciation expense for the year was 3,00,000. Non-cash transaction
f. Bonds with a face value of 2,50,000 were issued at par. Proceeds from issue of bonds will be
inflow from financing activities.
Cash generated/used in financing activities:

Payment of cash dividend (b) (2,00,000)

Repayment of loan (c ) (2,50,000)
Proceeds from issue of bonds (f) 3,00,000
Cash used in financing activities (1,50,000)
03 April 2022 11:27
31 July 2021 20:37

Illustration 8: FTL Ltd. presented the following information for the year ended
31st March 2019. Advise them for the preparation of cash flow statement using
indirect method.
Balance Sheet as on 31st March 2019 and as on 31st March 2018
31st March 2019 31st March 2018
Assets
Non-Current Assets
Tangible assets 5,00,000 5,00,000
Intangible Assets 95,000 1,00,000
Long-term investments 1,00,000 -
Current assets:
Stock 1,30,000 50,000
Accounts Receivables 1,20,000 80,000
Cash and Bank Balance 3,27,000 2,05,000
12,72,000 9,35,000
Equity and Liabilities:
Share Capital 7,00,000 5,00,000
Reserves and surplus 3,50,000 2,00,000
Non-Current Liabilities
Long-term borrowings: Bank Loan 50,000 1,00,000
Current Liabilities:
Accounts payables 45,000 50,000
Other current liabilities 7,000 5,000
Short-term provisions 1,20,000 80,000
12,72,000 9,35,000

Additional Information
1.During the year, equipment costing Rs 80,000 was purchased.
2. Tangible assets include equipment of 2,30,000 as on 31st March 2019 and
2,00,000 as on 31st March 2018. It also includes furniture of 2,70,000 as on 31st
March 2019 and 3,00,000 as on 31st March 2018.
3. Rs 5,000 loss was incurred on sale of equipment.
4. Depreciation of Rs 15,000 and Rs 3,000 charged on equipment’s and
furniture.
5. Short term provisions include proposed dividend of 70,000 as on 31st March
2019 and 50,000 as on 31st March 2018. It also includes provision for taxation of
50,000 as on 31st March 2019 and 30,000 as on 31st March 2018.
Solution:
Cash Flow Statement of FTL Ltd. for the year ended 31st March 2019
Particulars (Rs)
Cash flows from Operating Activities:
Net profit before taxation & extraordinary items 2,70,000
Add: Depreciation on equipment 15,000
Depreciation on furniture 30,000
Patents written-off 5,000
Loss on sale of equipment 5,000

Operating profit before working capital changes 3,25,000

Working capital changes:
Add: Increase in Outstanding rent 2000
Less: Decrease in accounts payables (5,000)
Increase in accounts receivables (40,000)
Increase in stock (80,000)

Cash generated from Operating Activities 2,02,000

Less: Tax paid (30,000)
Cash Inflows from Operating Activities (A) 1,72,000
Cash flows from Investing Activities
Proceeds from sale of equipment 30,000
Purchase of new equipment (80,000)
Purchase of Investments (1,00,000)
Cash used in Investing Activities (B) (1,50,000)
Cash flows from Financing Activities
Issues of equity share capital 2,00,000
Repayment of bank loan (50,000)
Payment of dividend (50,000)
Cash Inflows from Financing Activities (C) 1,00,000
Net increase in Cash & cash equivalents (A+B+C) 1,22,000
Add: Cash and cash equivalents in the beginning 2,05,000
 Cash and Cash equivalents in the end 3,27,000

Working Notes:
(1) Net Profit before taxation
Net Profit during the year (3,50,000-2,00,000) 1,50,000
Add: Provision for tax during the year 50,000
Add: Proposed dividend 70,000
Net Profit before taxation 2,70,000

(2) Equipment:

Balance at the beginning of the year 2,00,000

Add: Equipment purchased during the year 80,000
Less: Depreciation (15,000)
Less: Balance at the end of the year (2,30,000)
Less: Loss on sale of equipment (5,000)
Proceeds from sale of equipment 30,000

(3) Patents written off during the year

=.Rs 1,00,000 – Rs 95,000
= Rs 5,000
(4) Depreciation on furniture
=Rs 3,00,000 – Rs 2,70,000)
=Rs 30,000
(5) Dividend of Rs 50,000 and tax of Rs 30,000 provided in 2017- 2018 has been
paid during the year 2018-19. Therefore, proposed dividend and provision for tax
during the year amounts to Rs 70,000 and Rs 50,000 respectively.
01 August 2021 13:30
11 June 2022 14:24
Cost Concepts
05 October 2021 18:54
05 October 2021 19:36
05 October 2021 20:07
12 June 2022 12:32
EOQ
18 June 2022 14:59
FIFO-LIFO METHOD
18 June 2022 15:24

Calculate the value of closing stock from the following according to FIFO method: 1st January,
2014: Opening balance: 50 units @ Rs. 4 Receipts: 5th January, 2014: 100 units @ Rs. 5 12th
January, 2014: 200 units @ Rs. 4.50 Issues: 2nd January, 2014: 30 units 18th January, 2014:
150 units (a) Rs. 765 (b) Rs. 805 (c) Rs. 786 (d) Rs. 700 Q.30.

Calculate the value of closing stock from the following according to LIFO method: 1st January, 2014: Opening balance:
50 units @ Rs. 4 Receipts: 5th January, 2014: 100 units @ Rs. 5 12th January, 2014: 200 units @ Rs. 4.5Issues: 2nd
January, 2014: 30 units 18th January, 2014: 150 units (a) Rs. 765 (b) Rs. 805 (c) Rs. 786 (d) Rs. 700
Overhead Apportionment
16 April 2022 11:56

Expense Amount (₹)

Rent 8000
Repair 4000
Depreciation 2400
Lighting 500
Supervision 9000
Fire Insurance for stock 2700

Particulars PR1 PR2 PR3 SR1 SR2 Total

Area Sq ft 400 200 100 80 40 820
Number of 30 40 20 15 10 105
workers
Wages 1500 1200 1000 5000 3000 45000
0 0 0
Plant Value 6500 5200 4500 3000 19200
0 0 0 0 0
Stock value 3500 2500 1500 75000
0 0 0
Horsepower of 600 300 200 150 100 1350
plant

Expense Total Base PR1 PR2 PR3 SR1 SR2

Rent 8000 Area Sq ft 3902 1951 976 781 390
Repairs 4000 Plant value 1354 1083 938 625 -
Depreciation 2400 Plant value 813 650 563 375 -
Lighting 500 Area Sq ft 244 122 61 49 24
Supervision 9000 No. of 2348 3130 1565 1174 783
workers
Fire Insurance for 2700 Stock value 1260 900 540 - -
stock
ABSORPTION OF OVERHEAD
16 April 2022 13:24
Machine Hour Rate
07 October 2021 20:21

Cost of a Machine ₹. 200000 19400

9.14 per hour
Estimated life 10 years
Scrap value ₹.6000
Factory operation hours in a week 48 2122 hours
Machine breakdown time 15%
Electricity used by machinery is 10 units/ hr ₹. 50 p / unit 10*.5
= 5 5 Rs per hour
Repair & Maintenance Cost ₹. 400/ month 2.26
per hour
Other Overheads for machinery ₹. 10500 4.95 per
hour
Machine operators wages ₹. 6000/ month 33.93
per hour
Absorption Costing
06 June 2021 10:23

INCOME DETERMINATION UNDER ABSORPTION COSTING

Income Statement (Absorption Costing)

Rs.
A. Sales --------
Production (Manufacturing) Costs:
Direct material cost --------
Direct labour cost --------
Variable manufacturing cost --------
Fixed manufacturing cost --------
Fixed Variable Production Overheads
Total Cost of goods produced ---------
Add:
Opening stock of finished goods
----------
Less:

Closing stock of finished goods ----------

Cost of goods sold ` -----------
Add: Under-absorbed Fixed Production Overheads
Less: Over-absorbed Fixed Production Overheads

Add: Selling and Distribution Costs ---------

Variable and Fixed Administrative Costs --------- ----------
B. Total Cost ----------
Profit (Sales-Total cost) (A-B) ----------
**Working Notes:
Total Cost= Production Costs +Opening Stock of finished goods + Under-absorbed fixed production overheads + Selling & Distribution
costs + Variable & Fixed administrative costs - Closing stock of finished goods - Over-absorbed fixed production overheads.

Example 1.
ABC Ltd. supplies the following data: Rs.
Direct material cost 58,000
Direct labour cost 32,000
Variable Expenses-Factory 15,000

-Office & Selling 3,000

Fixed Expenses -Factory 22,000
-Office & Selling 9,000
Sales 1,50,000

Prepare an income statement under absorption costing.

Solution:
Income Statement (Absorption Costing)
1. (a) Sales 1,50,000
Direct materials cost 58,000
Direct labour cost 32,000
Factory Expenses- Variable 15,000
Fixed 22,000
37,000
Cost of Production 127,000
Office & Selling Cost-Variable 3,000
Fixed 9,000
12,000
(b)Total Cost 139,000
Profit (a-b) 11,000
Variable Costing
06 June 2021 10:29

INCOME DETERMINATION UNDER VARIABLE COSTING

Income Statement (Variable Costing)
A. Sales -------
Variable manufacturing costs
-Direct material cost --------
-Direct labour cost --------
- Direct expenses --------
-Variable manufacturing expenses --------
Variable Cost of good produced --------
Add: Opening stock of finished goods ---------
---------
Less: Closing stock of finished goods ----------
Cost of goods sold ----------
Add: Variable office, selling and distribution expense ----------
B. Total Variable cost of sales ----------
Contribution (Sales-Total variable cost) (A-B) -----------
Less: Fixed Costs (Production, office, selling and distribution) ------------
Net Profit (Contribution – Fixed Cost) ------------

Example 2:
We will continue with the information of ABC Ltd. as used in example 1 for understanding the preparation of income
statement under variable costing
ABC Ltd. supplies the following data: Rs.
Direct material cost 58,000
Direct labour cost 32,000
Variable Expenses-Factory 15,000
-Office & Selling 3,000
Fixed Expenses -Factory 22,000
-Office & Selling 9,000
Sales 1,50,000
Prepare an income statement under variable costing.

Solution:
Income Statement (Marginal Costing)
1. Sales 1,50,000
Direct material cost 58,000
Direct labour cost 32,000
Variable expense-Factory 15,000
Cost of Goods Sold 105000
Variable expense -Office & Selling 3,000
(b) Variable Cost 108,000
(c) Contribution (A-B) 42,000
Fixed Expense- Factory 22,000
- Office & Selling 9,000
(d) Total fixed expenses 31,000
Profit (C-D) 11,000
 Income Statement under Absorption & Variable Costing
06 June 2021 10:31

Absorption Costing Variable Costing

Product Costs Period Costs/Charged to P&L Account Product Costs Period Costs/Charged to P&L Account
Direct Material Direct Material
Direct Labour Direct Labour
Variable Manufacturing Variable Manufacturing
Overhead Overhead
Fixed Manufacturing Fixed Manufacturing Overhead
Overhead
Variable Selling, general and administrative costs Variable Selling, general and administrative costs
of units sold of units sold
Fixed Selling, general and administrative costs Fixed Selling, general and administrative costs

Example 3- Calculation of Product cost in Absorption costing and Variable costing

ABDC firm produces 100,000 units each year with the following per unit costs: direct material of Rs 20, direct labour of Rs
27.50, and variable manufacturing overhead of Rs 7 per unit, and fixed manufacturing overhead costs of Rs 17,00,000. The
company also has variable selling and administrative costs of 3.50 per unit sold, and fixed selling and administrative costs
of Rs. 7,00,000. The selling price of each product is Rs 100. Calculate Product Cost as per both the systems of costing?
Solution:

Product Cost
Absorption costing (Rs) Variable costing (Rs)
Direct material 20 Direct material 20
Direct Labour 27.50 Direct Labour 27.50
Variable manufacturing 7 Variable manufacturing overhead 7
overhead
Fixed manufacturing 17
overhead
Cost of Production per unit Rs 71.5 Cost of Production per unit Rs 54.5

Example 4- Calculation of Net Income in year 1 (When Production = Sales)

ABDC firm produces 100,000 units each year with the following per unit costs: direct material of 20, direct labour of 27.50,
and variable overhead of 7 per unit, and fixed manufacturing overhead costs of 17,00,000. The company also has variable
selling and administrative costs of 3.50 per unit sold, and fixed selling and administrative costs of 7,00,000. The firm sold all
100,000 units in year 1. The selling price of each product is 100.
Solution:
Cost of goods sold (COGS) (DM Rs. 20 + DL Rs. 27.50 + V/O Rs. 7 + F/O Rs. 17) = 71.50 per unit.
Variable Cost (DM Rs. 20 + DL Rs. 27.50 + V/O Rs. 7) Plus (Var Selling & Admn. Cost Rs. 3.5) = (54.5 +3.5) = Rs 58 per unit
Note: In this variable cost of Rs 58 per unit, 54.5 is production cost per unit and Selling & admin cost per unit is Rs 3.50. This
implies that any unsold inventory at year end will be valued at Rs 54.5 per unit in variable costing method while inventory
will be valued at Rs 71.5 Rs per unit in absorption costing method.

Year 1 Comparison of Absorption and Variable Costing

(1,00,000 units produced and sold)
Absorption costing (Rs) Variable costing (Rs)
Sales 1,00,00,000 Sales 1,00,00,000
Less: COGS (Rs 71.5/unit) 7,150,000 Less: Variable costs (Rs 58/unit) 5,800,000
Gross Profit (GP) 2,850,000 Contribution Margin 4,200,000
Less: S & A cost (Rs 7+ Rs3.5) 1,050,000 Less: Fixed Cost 2,400,000
Net Income 1,800,000 Net Income 1,800,000

In example 4, when the production is equal to sales, the profit/loss under absorption and variable costing are same
because there is no opening and closing stock. If the opening and closing stocks are equal then also profit/loss under both
costing technique will be same.
Example 5- Calculation of Net Income in year 2 (When Production > Sales)
ABDC Firm produces 100,000 units each year with the following per unit costs: direct material of 20, direct labor of 27.50,
and variable overhead of 7 per unit, and fixed manufacturing overhead costs of 17,00,000. The company also has variable
selling and administrative costs of 3.50 per unit sold, and fixed selling and administrative costs of 7,00,000. The firm sold
80,000 units in year 2. The selling price of each product is 100.
Solution:

Year 2 Comparison of Absorption and Variable Costing

(1,00,000 units produced and 80,000units sold)
Absorption costing (Rs) Variable costing (Rs)
Sales 80,00,000 Sales 80,00,000
Less: COGS 5,720,000 Less: Variable costs 4,64,0000
Gross Profit (GP) 2,280,000 Contribution Margin 3,36,0000
Less: S & A cost 9,80,000 Less: Fixed Cost 2,400,000
Net Income 1,300,000 Net Income 9,60,000
Working Notes:
 COGS= 80000 units x Rs. 71.5= Rs 5,72,000

 S & A cost= Rs 7,00,000 (given fixed cost) plus Rs 2,80,000 (80000x Rs. 3.5)= Rs. 9,80,000

 Variable cost= 80000x Rs 58= Rs 4,640,000

 Difference in Net Income = Rs 3,40,000 (1,300,000 – 9,60,000)

 The net income is more in absorption costing because in closing stock of 20000 units the proportionate fixed
manufacturing cost of Rs 340000 is absorbed at the rate of Rs 17 per unit. This fixed cost is carried forward to next period
as part of inventory. In variable cost entire fixed manufacturing cost is deducted in this period only. This results into higher
profits in income statement prepared as per absorption costing

Example 6: Calculation of Net Income in year 3 (When Production < Sales)

ABDC Firm produces 100,000 units each year with the following per unit costs: direct material of 20, direct labor of 27.50,
and variable overhead of 7 per unit, and fixed manufacturing overhead costs of 17,00,000. The company also has variable
selling and administrative costs of 3.50 per unit sold, and fixed selling and administrative costs of 7,00,000. The firm sold
1,20,000 units in year 3. The selling price of each product is 100.

Solution:
Year 2 Comparison of Absorption
and Variable Costing
(1,00,000 units produced and
1,20,000units sold)
Absorption costing (Rs) Variable costing (Rs)
Sales 120,00,000 Sales 120,00,000
Less: COGS 8,580,000 Less: Variable costs 6,960,000
Gross Profit (GP) 3,420,000 Contribution Margin 5,040,000
 (1,00,000 units produced and
1,20,000units sold)
Absorption costing (Rs) Variable costing (Rs)
Sales 120,00,000 Sales 120,00,000
Less: COGS 8,580,000 Less: Variable costs 6,960,000
Gross Profit (GP) 3,420,000 Contribution Margin 5,040,000
Less: S & A cost 1,120,000 Less: Fixed cost 2,400,000
Net Income 2,300,000 Net Income 2,640,000

Working Notes:
 COGS= 120,000 units x Rs. 71.5= Rs 8,58,000

 S & A cost= Rs 7,00,000 (given) plus Rs 4,20,000 (120,000x Rs. 3.5) = Rs. 1,120,000

 Variable cost= 1,20,000x Rs 58= Rs 6,96,000

 Difference in Net Income = Rs 3,40,000 (2,300,000 – 2,640,000) (Because 20000 units extra sold)

The net income is less in absorption costing because in opening stock of 20000 units, the proportionate fixed manufacturing cost of previous year Rs 340000 is
carried forward to this year. In variable cost fixed manufacturing cost of only this period is deducted. Opening inventory in case of variable costing is valued
only at variable cost per unit, there is no component of fixed cost of previous year. This results into higher profits in income statement prepared as per
variable costing
Examples
14 August 2021 15:45

Following information is available of GGSS Ltd. for year ended Dec 2020:
Sales (units) 1000 (Rs.3/ unit), Production (units) 1500, Variable
manufacturing- Rs 800, Fixed manufacturing- Rs 600, Variable office
expenses- Rs 900, Fixed office expenses- Rs 300, What will be amount
of profit earned during the year using the absorption costing technique?

Following information is available of GGSS Ltd. for year ended Dec 2020: Sales (units) 1000
(Rs.3/ unit), Production (units) 1500, Variable manufacturing- Rs 800, Fixed manufacturing-
Rs 600, Variable office expenses- Rs 900, Fixed office expenses- Rs 300, What will be amount
of profit earned during the year using the marginal costing technique?

Output and sales 50,000 units with sale price of Rs. 15/unit. Material & Labour cost per unit
Rs.7 & Variable Rs. 3/unit. Fixed Rs. 70,000 & Other fixed overheads Rs. 90,000. Calculate Net
income under Absorption costing?

Output and sales 50,000 units with sale price of Rs. 15/unit. Material & Labour cost per unit
Rs.7 & Variable Rs. 3/unit. Fixed Rs. 70,000 & Other fixed overheads Rs. 90,000. Calculate Net
income under Marginal costing?
19 June 2022 13:12
CVP Analysis
28 May 2021 16:52

Illustration 3:
In a factory, the manager has provided with following
information
Variable Cost = 150,000
Fixed Cost = 20,000
Selling Price = 180,000
Calculate the contribution and profit from the given
information

Illustration 4:
Sales 2,00,000
Variable Costs 1,20,000
Fixed Costs 40,000

Illustration 5:
Hero cycles, has forecast information about volume (12,000
bikes)
Price per cycle = 8000
Variable cost per cycle= 3000
Fixed costs related to cycle production = 55,00,000
Target profit = 2,00,000
Estimated sales = 12,000 bikes
Calculate contribution and P/V Ratio

Illustration 6:
If a firm sells its output at Rs 12 per unit, variable cost per unit is Rs 7,
Fixed Cost is Rs 10000. Calculate the number of units, it must sell to
cover all its cost and reach at break-even?

Illustration 7: The management of a company wants to know the volume

of sales required to achieve a profit of Rs. 60000/-. Selling Price, Total
Fixed Cost and Variable Cost per unit are expected to remain unchanged.
The following data are available:
Fixed Expenses for the period: Rs. 2, 00,000/-
Selling Price per unit: Rs. 100/-
Variable Cost per unit: Rs. 60/-
llustration 8: Calculate Actual Sales on the basis of following
information:
Fixed Cost = Rs. 20, 000
Profit earned = Rs. 5, 000
Break-even Sales = Rs. 60, 000

llustration 9:
Break-even Point = Rs. 60, 000
Profit = Rs. 3, 000
Fixed Cost = Rs. 15, 000
What is the amount of Variable Cost?
llustration 10:
a) You are provided with the information that the fixed cost of
the company is 90,000/- and its sales is 3,00,000/- and also
the profit is 60, 000/-. Calculate the Profit/Volume Ratio.
Also calculate the sales volume if in the next period, the
company suffered a loss of Rs. 30, 000.
b) Calculate the Margin of Safety for a profit of Rs. 60, 000 in
(a) above?

Illustration 11: From the following data, which product would

Illustration 11: From the following data, which product would
you recommend to be manufactured in a factory, time being the
key factor?
Particulars Per unit Per unit
Product A Product B
Direct Material Rs. 24 Rs. 14
Direct Labour (Rs. 1 per 2 3
hour)
Variable Overhead (Rs. 2 4 6
per hour)
Selling Price 100 110
Standard time to produce 2 hours 3 hours
26 February 2022 14:34
Setting price
28 May 2021 15:59

Example
Following cost composition is available for a manufacturing firm:
Fixed Cost Rs. 1,05,000 (total)
Variable Cost Rs. 8 per Unit
Present Sales Price Rs. 9 per Unit
Unit Produced 50,000 Units
Should manufacturing firm sell or not?
Solution:
Fixed Cost Rs 1,05,000 (Given as remains same)
-----------------
Rs 5,05,000 (*Total Cost= Variable cost + Fixed Cost)
-----------------
Cost Per Unit= Total Cost/Total Output (Units produced)
=Rs 5,05,000/ 50,000 Units = Rs 10.10
Make or Buy Decision
28 May 2021 16:14

A television producing firm finds that while it costs Rs.5.25 to make spare
part P-566, the similar is accessible in the market at Rs. 4.75 each, with a
guarantee of constant supply. The total cost comprises of following
components:
Materials Rs. 2.50 each
Labour Rs 1.50 each
Variable cost Rs. 0.25 each
Fixed cost Rs. 1.00 each.
Total cost Rs. 5.25

Should you make or buy?

Solution:

The variable cost of manufacturing the spare part is given below:

Rs.
Materials 2.50
Labour 1.50
Other variable cost 0.25
Variable/Marginal cost 4.25
Fixed cost 1.00
 SALES MIX/PRODUCT MIX-without key factor
28 May 2021 16:14

Example

ABC ltd had a record of sales/production mix of different product as follows:

a. 3,000 Units of X and 3,000 Units of Z
b. 5,000 Units of Y
c. 1000 Units of X, 1500 Units of Y and 1200 Units of Z

The cost per Unit is as follows:

A B C
Direct materials (Rs.) 19 15 36
Direct Labour (Rs.) 06 08 18

Fixed cost is Rs. 22,000 and variable expenses per Unit of X, Y and Z are Rs. 3, Rs. 5 and Rs. 8
respectively. Selling prices of X, Y and Z are Rs. 38, Rs. 40 and Rs. 90 per Unit respectively. Calculate
the marginal contribution per Unit of X, Y and Z and the profits resulting from product mixes (a), (b)
and (c).

Solution:
Marginal Cost Statement
Per Unit of products
X (Rs.) Y (Rs.) Z (Rs.)
Selling Price 38 40 90

Direct material 19 15 36
Direct labour 06 08 18
Variable Expenses 03 05 08
Variable cost (V) 28 28 62
Contribution (S-V) 10 12 28

Statement Showing Comparative Profitability

Sales Contribution Total Contribution Fixed cost Profit

(TC - FC)

a. X 3,000 Units 30,000

Z 3,000 Units 84,000 1,14,000 22,000 92,000

b. Y 5,000 Units 60,000 60,000 22,000 38,000

c. X 1,000 Units 10,000
Y 1,500 Units 18,000
Z 1,200 Units 33,600 61,600 22,000 39,600
 SALES MIX/PRODUCT MIX-with key factor
28 May 2021 16:19

Example

DBFD firm produces three products. The budgeted quantity, selling prices and output
costs are given below:

X (Rs) Y (Rs) Z (Rs)

Raw materials (@ Rs. 15 per kg) 70 30 20
Direct labour (@ Rs. 6 per kg) 08 12 10
Variable Expenses 10 20 15
Fixed Expenses 08 15 10
Budgeted Production (in Units) 5000 3000 2000
Selling price per Unit (in Rs.) 120 100 80

Required:
(a) Present a statement of budgeted profit.
(b) Set optimal product-mix and calculate the profit, if the supply of raw materials is restricted to
19,000 kg.
Solution:
(a) Statement of Budgeted Profit
X Y Z Total
Budgeted Production (Units) 5,000 3,000 2,000
Selling Price (Rs) 120 100 80
Sales 6,00,000 3,00,000 1,60,000 10,60,000

Raw materials 3,50,000 90,000 40,000

Direct Wages 40,000 36,000 20,000
Variable expenses 50,000 60,000 30,000
Total Variable cost 4,40,000 1,86,000 90,000
Contribution 1,60,000 1,14,000 70,000 3,44,000
Less: Fixed Cost 40,000 45,000 20,000 1,05,000
Profit 1,20,000 69,000 50,000 2,39,000
Contribution/Unit 1,60,000/5000 1,14,000/3000 70000/2000
= Rs 32 = Rs 38 = Rs 35

(b) When raw materials is the key factor

X Y Z
Raw material per Unit of output 4.67 2 1.33
Total Raw material consumed (kg) 5000@ 4.67 3000@2 2000@1.33
23,350 kg 6,000 kg 2,660 kg
Contribution per kg of raw material 160000/23350 kg 114000/6000 kg 70000/2660 kg
=Rs. 6.85 =Rs. 19 =Rs. 23.32
RANKS III II I
*Contribution per kg of raw materials is calculated as: Total Contribution/Total Raw materials
consumed.
Suggested Sale mix (raw material is the key factor)
Rank I- Product Z - 2000 Units x 1.33kg= 2660 kg
Rank II- Product Y- 3000 Units x 2kg= 6000 kg
Rank III- Product X- 2585 Units x 4.67 kg (balance)= 10340 kg
Total materials available= 19,000 kg

Thus, the suggested product mix is X- 2585 Units. Y-3000 Units and Z-2000 Units.

Working Notes:
Calculation of Profit
Product X 2585 Units @ Rs. 32 (contribution/Unit) = Rs 82,720
Product Y 3000 Units @ Rs. 38 = Rs 1,14,000
Product Z 2000 Units @ Rs. 35 = Rs 70,000
Calculation of Profit
Product X 2585 Units @ Rs. 32 (contribution/Unit) = Rs 82,720
Product Y 3000 Units @ Rs. 38 = Rs 1,14,000
Product Z 2000 Units @ Rs. 35 = Rs 70,000
Total Contribution Rs 2,66,720
Less:- Total Fixed Cost Rs 1,05,000
Profit Rs. 1,61,720
OPERATE PLANT OR SHUT DOWN
28 May 2021 16:19

Example
A producing firm supplies the following information:
Production Capacity of Plant 20,000 Units
Fixed Cost Rs. 2,00,000
Marginal cost per Unit Rs. 65
Estimated Sales price Rs. 70
Estimated Sales volume at this sales price 10,000 Units

Solution:
Marginal Cost Statement
Total Sales (10,000 Units x Rs 70) Rs 7,00,000
Less: Marginal Cost (10,000 Units x Rs. 65) Rs 6,50,000
Contribution Rs. 50,000
Fixed Cost Rs. 2,00,000
Loss (Contribution-Fixed cost) Rs (1,50,000)
DECISION-MAKING AND DIFFERENTIAL COST ANALYSIS
28 May 2021 16:33

Example 1:

Choice 1 Choice 2 Differential Cost/ Profit

Output (Units) 6,000 8,200 2,200
Rs. Rs. Rs.
Raw Materials 30, 000 40,000 10,000
Direct Labour 6,000 9,000 3,000
Variable Expenses 5,000 6,000 1,000
Fixed Expenses 4,000 5,000 1,000
Total Cost 45,000 60,000 15,000
SALES 60,000 80,000 20,000
DEFINING OPTIMUM LEVEL OF PRODUCTION
28 May 2021 16:41

Example
PQR firm has a capacity of producing 90,000 Units of a certain product in a month. The sales department report that
the following schedule of sales prices is possible:
Volume of Production Selling price per Unit (Rs.)
At 60% capacity 60,000 Units 0.89
At 70% capacity 70,000 Units 0.79
At 80% capacity 80,000 Units 0.74
At 90% capacity 90,000 Units 0.66
At 100% capacity 1,00,000 Units 0.60

Variable cost of manufacture is 20 paise per Unit and total fixed cost Rs. 35,000.
Prepare a statement showing increased profit and differential cost of each stage. At which volume of production will
the profit be higher?

Solution:

Capacity Output (Units) Variable cost @ Rs. 0.20 Fixed Cost Total Cost Differential Sales Increased
Rs. Rs. Rs. Cost Rs. Sales
Rs. Rs.
60% 60,000 12,000 35,000 47,000 ------------ 53,400 ----------
70% 70,000 14,000 35,000 49,000 2000 55,300 1900
80% 80,000 16,000 35,000 51,000 2000 59,200 3900
90% 90,000 18,000 35,000 53,000 2000 59,400 200
100% 1,00,000 20,000 35,000 55,000 2000 60,000 600

Here at 80% volume of production, profit is higher. This is because at this level, increased profit is Rs. 3,900 whereas,
differential cost is Rs 2,000, resulting in additional profit of Rs, 1,900 (i.e., Rs 3,900-2000). After 80% level, differential
cost exceeds increased profit thereby resulting in loss.
ACCEPTANCE/ REJECTION OF AN ADDITIONAL (SPECIAL)
ORDER
28 May 2021 16:43

Example
Continuing above example, if there is a bulk offer for export at 40 paise per Unit
for the balance capacity over the maximum profit volume and the price quoted
will not affect the internal sales, will you advise accepting this bid and why?
Solution:

Internal Special Order for export Total

Market (20,000 Units) (1,00,000
(80,000 Units)
Units)
Variable Cost @ 20 16,000 4,000 20,000
Paise per Unit
Fixed Cost 35,000 ---------------- 35,000
Total Cost 51,000 4,000 55,000
Sales 59,200 8,000 67,200
Profit 8,200 4,000 12,200

Here in the above case, it is wise to receive the bulk offer even at 40 paise per
Unit for the balance of 20,000 Units (i.e., 1,00,000 minus 80,000) for special order
for export as it will cause in the increment of profit by Rs 4,000.
ADDING OR DROPPING A PRODUCT LINE
28 May 2021 16:44

Example
The manufacturing Unit is thinking whether they should drop one product from the product line and replace with other option.
The data of current cost and Units produced is as follows:
Product Price Variable costs per Unit Rs. Percentage of sales
Text Books 50 30 40%
Notebooks 90 50 30%
Story Books 190 110 30%
Total fixed cost per year Rs 700,000
Sales Rs, 24,00,000

The manufacturing Unit is considering the idea of dropping the product line of notebooks and adding the new product line of
stationary. If it happens, the producer forecasts the following cost and new Units which are as follows:
Product Price Variable costs per Unit Rs. Percentage of sales
Text Books 50 30 50%
Stationary 150 50 20%
Story Books 190 110 30%
Total fixed cost per year Rs 700,000
Sales Rs, 25,00,000

Should the manufacturing Unit accept this proposal? Comment.

Solution:
Comparative Profit Statement
Particulars Present Proposed Production
Production
Text Books Note Story Total Text Books Stationary Story Total
Books Books Books
Sales 9,60,000 7,20,000 7,20,000 24,00,000 12,50,000 5,00,000 7,50,000 25,00,000
(-) Variable Cost 5,76,000 4,00,000 4,16,842 1,392,842 7,50,000 1,66,667 4,34,210 1,350,878
Contribution 3,84,000 3,20,000 3,03,158 1,007,158 5,00,000 3,33,333 3,06,789 1,149,122
(-) Fixed Cost 7,00,000 7,00,000
Profit 3,07,158 4,49,122

Increased Revenue (Sales) = Rs 25,00,000 – Rs 24,00,000 = Rs 1,00,000

Differential Cost = Rs 1,392,842 – Rs 1,350,878 = Rs (41,964)
Additional Profit = Increased Revenue – Differential Cost
= Rs 1,00,000 – Rs (-41,964) = 1,41,964
Actual Profit = Rs 4,49,122- Rs 3,07,158 = Rs 1,41,964
DECISIONS RELATING FURTHER PROCESSING OF
JOINT/BY-PRODUCTS
28 May 2021 16:44

Example
A manufacturing Unit engaged in producing of four products emerge from a unique technique of production. The total cost of raw materials
for the period ended 31st August 2019, is Rs. 2,35,000. The details of production, additional cost after “split-off-point” and sales amount of all
products are given below:

Products Production (in kgs) Share in Joint Cost Additional process cost split-off-point Sales amount (Rs)
M 7,000 80,000 55,000 1,70,000
N 4,000 65,000 15,000 1,00,000
O 5,000 40,000 5,000 50,000
P 4,000 50,000 15,000 80,000
If the products are sold at “split-off-point” without further processing, the sales amount would have been:
M Rs. 1,10,000
N Rs. 80,000
O Rs. 45,000
P Rs. 70,000
Prepare a statement of profitability and advise whether product should be sold at split off point or should be further processed.
Solution:

Products Production Cost allotted Sales at split-off-point Profit at split-off-point Increased Sales amount Increase
(Kgs) (Rs) (Rs) (Rs) Cost (Rs) (Rs) d
Sales (Rs)
M 7,000 80,000 1,10,000 30,000 55,000 1,70,000 60,000
N 4,000 65,000 80,000 25,000 15,000 1,00,000 20,000
O 5,000 40,000 45,000 5,000 5,000 50,000 5,000
P 4,000 50,000 70,000 20,000 15,000 80,000 10,000
*Note: 1. The profit at split-off is the excess of sales at split off pint and cost allotted.
2. Increased cost is extra processing cost after split off point.
3. Increased revenue is the excess of sales at split-off-point and sales after further processing.
Budget & Budgetary Control
27 February 2022 12:00
Sales Budget
29 May 2021 07:37

Example 1:

A producing company submits the following data of product ‘CGG’ for the first quarter
of 2019:

April 60,000 Target of 2nd Quarter 2019:

Sales (in units) Sales quantity rise 20% and sales price rise 10%.
May 50,000
June 70,000

Selling price per unit Rs. 120. Prepare Sales Budget for the 2nd Quarter of 2019?
Solution: Following sales budget is prepared after applying the targets for 2nd quarter,
SALES BUDGET
(for the second quarter of 2019)
Month Units Price per unit (Rs) Amount
April 72,000 132 9,504,000
May 60,000 132 7,920,000
June 84,000 132 11,088,000

Example 2: R. K. International Mart Ltd, produces two brands of pencils- one sold under the name of
‘Supreme’ and other under the name of ‘Cello’. Sales department of the enterprise has three
departments. Figures of sales budget as on 31st March 2018 were: Supreme- Section A- 2,00,000:
Section B- 5,52,500: Section C- 1,70,000; and Cello- Section A- 5,00,000: Section B- 6,00,000 and
Section C- 30,000. The selling prices are Rs. 4 and Rs. 1.30 in all sections for Supreme and Cello.
With the help of advertisement campaigns, the sales of ‘cello’ in Section A will rise by 1,50,000. It is
also expected that by increasing production and arranging advertisement Section C will be enabled to
increase the sale of ‘cello’ by Rs. 50,000.
It is recognized that the estimated sales by Section B represent an unsatisfactory target. It is agreed to
rise for both Supreme and Cello by 20%.
Show Sales Budget for the year 2019.
Solution:
Following sales budget is prepared after applying the revisions for 2019,
Sales Budget for 2019
Sections Supreme@ Rs. 4 Cello @ Rs. 1.30 Total
Quantity Rs. Quantity Rs.
Section A 2,00,000 8,00,000 6,50,000 8,45,000 16,45,000
Section B 6,63,000 26,52,000 7,20,000 9,36,000 35,88,000
Section C 1,70,000 6,80,000 80,000 1,04,000 7,84,000
Total 10,33,000 4,132,000 14,50,000 18,85,000 60,17,000
Production Budget
29 May 2021 07:40

Example 3. From the following data, Make a Production Budget for an enterprise XYZ Ltd.
Stocks for the budget period:
Product As on 1st Jan, 2018 As on 30th June, 2018
AB 7,000 11,000
BC 8,000 7,000
CD 9,000 12,000
Requirements to fulfill sales programme:

AB 50,000 units
BC 60,000 units
CD 90,000 units

Solution:
Production Budget

Particulars Products
AB units BC units CD units
Sales 50,000 60,000 90,000
11,000 7,000 12,000
Add: Stock on 30th June2018
61,000 67,000 10,2000
Less: Stock on 1st Jan, 2018 7,000 8,000 9,000
Production Requirement 54,000 59,000 93,000
 Cash Budget
29 May 2021 07:41

Example 4: Prepare a cash budget for the month of May, June, and July 2019 as
per the figures given below:
Income and Expenditure Forecasts:
Months Credit Credit Wages Production Office Selling
Sales (Rs) Purchases (Rs) Costs (Rs) Costs (Rs) Costs (Rs)
(Rs)
March 60,500 36,500 9,500 4,200 2,500 4,500
April 62,500 38,500 8,500 3,200 1,500 5,500
May 64,500 33,500 10,500 4,500 2,500 5,000
June 58,500 35,500 8,500 3,500 2,000 3,500
July 56,500 39,500 9,500 4,000 1,500 4,000
August 60,500 34,500 8,500 3,000 1,500 5,000

(1) The opening cash balance as on 1st May 2019 Rs 10,000.

(2) Machinery Rs 15,000 is due for delivery in July and payable 10% on delivery and
the balance after 3 months.
(3) Rs 7,000 each is payable in March and June as Advance Tax.
(4) Delay in payment by creditor – two months and to debtors- one month.
(5) Delay in payment of production costs- half month.
(6) Delay of office and selling costs-one month.

Solution:
Cash Budget

Particulars May 2019 (Rs) June 2019 July 2019

(Rs) (Rs)

Opening Balance 10,000 14,650

23,650
Add: Earnings
Credit Sales 62,500 64,500 58,500
72,500 79,150 82,150
Total Earnings
Less: Expenditures
Credit Purchases 36,500 38,500 33,500
Wages 10,500 8,500 9,500
Manufacturing Costs 3,850 4,000 3,750
Office Costs 1,500 2,500 2,000
Selling Costs 5,500 5,000 3,500
Machinery-Payment on delivery -- -- 1,500
Advance Tax -- 7,000 --
57,850 55,500 53,750
Total Expenditures II
Closing Balance (I-II) 14,650 23,650 28,400

Working Notes:
(i) The amount of credit purchases of March will be paid in May as 2 months lag period is given to creditors.
(ii) The amount of credit sales of April will be received in May as a month lag period is given to debtors.
(iii) Half of production cost of April and half of May will be paid in May because the allowed lag period is half
month ((1/2 of Rs. 3,200) + (1/2 of Rs. 4,500) = Rs. 3,850). It will go same like in other months.
(iv) Lag period in office and selling costs is a month, so cost of April shall be paid in May and so on.
(v) Closing balance of May will become the opening balance of June and so on.

For Cash Ltd. estimated sales for June, July, August, September, October are Rs 1,86,000, Rs 1,98,000,
Rs 1,28,000, Rs 1,84,000 and Rs 1,34,000. In case 50% of sales are realized in the next month and
balance in the next of next month, determine cash collection from sales in August & September?
 Flexible Budget
29 May 2021 07:43

Example 6: Budgeted Costs for the production of 10,000 units in a

manufacturing unit are as under:

Particulars Per Unit

(Rs.)
Raw Materials 70
Direct Labour 25
Variable Costs 20
Fixed Costs (Rs. 1,00,000) 10
Direct Variables Costs 5
Selling and Distribution Costs (20% Fixed) 20
Administrative Costs (Rs. 50,000 fixed for all levels of 5
production)
155

Make a budget for 8,000 units.

Solution:
Flexible Budget

Production 10,000 8,000

Units Units
Particulars Per Unit Amou Per Unit Amou
(Rs.) nt (Rs.) nt
Production
Cost:
Material 70 7,00,0 70 5,60,0
00 00
Labour 25 2,50,0 25 2,00,0
00 00
Overheads 20 2,00,0 20 1,60,0
00 00
Direct Variable 5 50,000 5 40,000
Costs
Fixed Costs 10 1,00,0 12.50 1,00,0
00 00
Selling &
Distribution
Costs:
Fixed 4 40,000 5 40,000
Variable 16 1,60,00 16 1,28,00
0 0
Administrative 5 50,000 6.25 50,000
Costs
Total Cost 155 15,50,0 159.75 12,78,0
00 00
Working Notes:
(i) Fixed cost per unit is Rs. 12.50/- (1,00,000/8000 units).
(ii) Administrative cost per unit is Rs. 6.25/- (50,000/8000 units).