CA FINAL ADVANCED MANAGEMENT ACCOUNTING

1. CA FINALADVANCED MANAGEMENT ACCOUNTING Few concepts at a quick glance………

2. MARGINALCOSTING

3. MARGINAL COST STATEMENT SALES XXX (-) VARIABLE COST XXX CONTRIBUTION XXX (-) FIXED COST XXX PROFIT XXX LOSS REPRESENTS UNRECOVERED FIXED COST

4. RATIOS P/V RATIO V/C RATIO VARIABLE COST X 100 SALES CONTRIBUTION X 100 SALES P/V RATIO = 100% - V/C RATIO

5. 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.

6. SIGNIFICANCE OF BREAK EVEN POINT

7. 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

8. INDIFFERENCE POINT IT IS THAT LEVEL OF SALES WHERE THE COSTS AND PROFITS OF TWO OPTIONS ARE EQUAL. PROFIT OF OPTION 1 PROFIT OF OPTION 2 ---------------------------- AMOUNT (in Rs.) INDIFFERENCE POINT ------------------------ QUANTITY

9. FORMULA: INDIFFERENCE POINT (in Rs.) = DIFFERENCE IN FIXED COST DIFFERENCE IN V/C RATIO OR = DIFFERENCE IN FIXED COST DIFFERENCE IN P/V RATIO

10. 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.

11. SIGNIFICANCE OF INDIFFERENCE POINT

12. 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

13. 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.

14. SIGNIFICANCE OF SHUT DOWN POINT

15. KEY FACTOR OR THE LIMITING FACTOR • IT REPRESENTS A RESOURCE WHOSE AVAILABILITY IS LESS THAN ITS REQUIREMENT. • IT IS ALSO CALLED CRITICAL FACTOROR BUDGET FACTOR. • EXAMPLES OF KEY FACTOR: • SHORTAGE OF RAW MATERIAL • LABOUR SHORTAGE • RESTRICTIONS IN PLANT CAPACITY • DEMAND OR SALE EXPECTANCY • CASH AVAILABILITY

16. 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.

17. RELEVANT COSTING

18. MATERIAL COST ALREADY AVAILABLE TO BE PURCHASED REGULARLY USED RARELY USED PURCHASE PRICE, BEING OUT OF POCKET COST IS RELEVANT NET REALISABLE VALUE IS RELEVANT AS OPPURTUNITY COST CURRENT REPLACEMENT COST IS RELEVANT AS INCREMENTAL COST

19. LABOUR COST

20. OVERHEAD & OTHER COSTS

21. FIXED COST FIXED COSTS ARE IRRELEVANT FOR DECISION MAKING EXCEPTIONS: 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)

22. 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.

23. TRANSFER PRICING

24. PRODUCT / SERVICES TRANFERED RECIPIENT DIVISION TRANSFER DIVISION CONSIDERATION = TRANSFER PRICE COST REVENUE OBJECTIVE: TO BUY INTERNEDIATE PRODUCT & MAXIMISE REVENUE OBJECTIVE: TO SELL INTERNEDIATE PRODUCT & MAXIMISE REVENUE

25. FIXATION OF MINIMUM & MAXIMUM TRANSFER PRICE MINIMUM TRANSFER PRICE (ALWAYS FROM TRANSFER DIVISION VIEW): IT IS THE TOTAL OF FOLLOWING ITEMS: VARIABLE COST UPTO THE POINT OF INTERNAL TRANSFER. FIXED COST, IF SPECIFIC. OPPORTUNITY COST, IF APPLICABLE. NOTES: SELLING OVERHEADS ARE INCURRED FOR EXTERNAL SALES ONLY. OPPORTUNITY COST ARISES ONLY IF- - TRANSFERRING DIVISION PRODUCES MARKETABLE PRODUCTS - TRANSFERRING DIVION OPERATES AT FULL CAPACITY

26. FIXATION OF MINIMUM & MAXIMUM TRANSFER PRICE MAXIMUM TRASFER PRICE (ALWAYS FROM RECIPIENT DIVISION VIEW): IT IS THE LEAST OF FOLLOWING ITEMS: MARKET PRICE OF INTERMEDIATE PRODUCT (AS QUOTED BY OUTSIDE SUPPLIER) 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.

27. ACTIVITY BASED COSTING

28. 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.

29. STAGES IN ABC

30. THANK YOU & ALL THE BEST