MA formula
Ratio analysis:
a) Profitability Ratios
Net Profit Ratio
EBITDA/Sales
Operating Profit Ratio
Return On Equity
Return On Capital Employed
Return on total assets
b) Liquidity ratios
Current Ratio
Quick Ratio/Liquid Ratio
c) Turnover ratios
Stock Turnover Ratio
Debtors Turnover Ratio
Turnover to Fixed Assets
d) Solvency ratios
Debt to Equity Ratio
Total Debt to Equity Ratio
Profit After Tax Higher the better
-------------------- x 100
Sales
EBITDA Higher the better
-------------- x 100
Sales
Operating Profit Higher the better
---------------------- x 100
Sales
Profit After Tax Higher the better
---------------------- x 100
Equity
Profit Before Interest & Tax Higher the better.
---------------------- ---------------- 100
Equity + Long Term Borrowings
EBIT Higher the better
--------------------- x 100
Average total assets
Current Assets Ideal 2:1
-----------------------
Current Liabilities
Liquid Assets- inventory & prepaid Ideal 1:1
expenses
-----------------------
Current Liabilities
Sales Higher the better
-----------------------
Average Inventory
Trade Receivables Lower the better
----------------------- x 365 days
Sales
Sales Higher the better
-----------------
Fixed Assets
Long Term Debt (non current Ideal 1:1
liabilities)
-----------------------
Equity+reserves
Long Term Debt + Short Term
Debt
-----------------------
Equity + reserves

e) Capital
EPS market ratios
Price To Book Value Ratio
(Most imp for private
companies)
Price To Earnings Ratio ( P/E )
Profit After Tax – Preference Higher the better
Dividend
----------------------------------
Number of Equity Shares
Market price of Shares Higher the better
-------------------------------
Book Value Per Share
Market Price Per Share Higher the better
EPS

o No. of equity shares = Equity share capital / Face Value per share
o Book value per share= (Equity capital + Reserves and surplus)/ Number of shares
o Changes in inventory of WIP & FG negative if closing stock more than opening stock
o Shortcut for operational profit
 EBIT or PBIT= Profit before exceptional items + Financial cost – Other income

Interest coverage ratio PBIT Higher the better

----------
Interest
Expenditure on employee Employee benefit
expenses from every 100 rs of expenses
sales. Imp for IT companies ------------------------------- x 100
Sales

o Revenue per employee = Revenue / No. of employees

o Profit generated by each employee = PAT/No. of employees
o Average salary = Employee benefit expenses / no. of employees
o For supermarkets compare per square feet sales
o For manufacturing companies compare material consumption ratios

Cost accounting

o Prime cost = Direct material cost + Direct labour + direct expenses

o Overheads = Indirect material + indirect labour + indirect expenses
o Factory cost = factory overheads + opening WIP – Closing WIP+ Prime cost
o Cost of production = Factory cost + quality control cost + R&D cost + Office and
administration expenses related to production activity
o Cost of goods sold or CoGS = Cost of production+ opening stock of FG – closing stock of FG
o Cost of sales or total cost = CoGS + office overheads + sale and distribution overheads
o Bad debts divided into normal and abnormal. Only normal bad debts are part of cost sheet.
Bad debts following the past trend is called normal beds, sudden increase (over and above
 the trend) is called abnormal, will go into P&L directly. When nothing mention, assumd as
normal, under sales n distribution overheads.
o Expenses excluded from costing
o Income tax and advance tax
o Dividend paid
o Discount on issue of debentures
o Underwriting commission payment
o Capital losses
o Expense for purchasing of fixed assets
o Loss on sale of fixed assets
o Interest on capital
o Abnormal loss of material
o Investment of profit
o Restructured P&L

 
Particulars

Revenue from operations

Less expenses:

Cost of material consumed

Purchase of stock in trade

Changes in inventory of WIP and FG

Depreciation and Amortization

Employee expenses

Other expenses

Profit before Interest and Tax (PBIT) or operating

profit

Budgeting and budgetary control

o Budget is a plan/forecast/estimate, cash flow statemnt is historical.

o Marginal costing technique can be used to decide find out the selling price, break even point,
to decide the ideal sales run make or buy decision etc
o Basic equations under marginal costing:
 Sales – Total cost = Profit
 Sales – Variable cost – fixed cost = Profit
 Sales – variable cost = contribution = fixed cost +profit
 Profit volume ratio = indicates how much contribution is generated for ever 100rs
sale.
 PV = (Contribution/ sales) x100
 P/V ratio = (Change in profit / Change in sales) x 100
 Break even point = level of sales where there is no profit no loss
  BEP in units formula = (fixed cost / contribution in units)
 BEP in value formula = (Fixed cost / (PV Ratio) )
 Margin of safety means sales achieved over and above the break even sales
 Margin of safety = Actual sales - break even sales

Standard Costing and Variance Analysis

The major aspect of managerial control is cost control . Hence it is very important to plan and control
costs. Standard costing is a technique which helps management to control costs and business operations . It aims
at eliminating wastes and increasing efficiency in performance through setting up standards or formulating cost
plans Standard means yard stick or bench mark. The standard cost is predetermined cost which determines
in advance what each product or service should cost under given circumstances. Standard costing helps the
management in evaluating the performance of various cost centers. It helps management in formulating
production planning By comparing the actual cost with the standard cost, variance are determined. Management
by exception – Management can focus only on those areas where performance is less than the standard.
Standard Costing helps to cost control and cost reduction The setting of standard for different elements of costs
required a detailed study of manufacturing, administrative and selling expenses.
In standard costing, the first step is determining standard material cost, labour cost and Overheads. In deciding
standard for Direct material, standard quantity of material and standard price of material are required to be
determined. While setting the standard for Direct Labour cost, standard labour time and standard labour rate are
required to be determined. While calculating standard overheads, determination of labour hours or unit
manufactured and deciding the overhead rate is important.
Variance
The deviation between standard cost, standard sales, profits and actual cost, sales, profits is called deviation.
The variance may be favorable and unfavorable. If actual cost is less than the standard cost , the variance is
favorable and if actual cost is more than the standard cost, the variance is called unfavorable. The variance
may be classified in to following categories:
Material Cost Variance , Labor Cost Variance, Overhead Cost variance, Sales and Profit Variance

Material Cost Variance

 Material Cost Variance = Material Price Variance + Material Usage Variance

 Material Cost Variance = Material Price Variance + Material Mix Variance + Material Yield Variance
 Material Cost Variance = Standard Material Cost – Actual Material Cost
 Material Usage Variance = Material Mix Variance + Material Yield Variance
 Material Usage Variance = Standard Price ( Standard Quantity – Actual Quantity)
 Standard Material Cost = Standard Price per unit X standard quantity of material
 Actual Material Cost = Actual Price per unit X Actual quantity of material

 Material Price Variance = Actual Quantity ( Standard Price – Actual Price )

 Material Mix Variance = Standard Price ( Revised Standard Cost – Actual Quantity)

 Material Yield Variance = Standard Cost Per Unit ( Std. output for Actual Mix – Actual output)

 Standard qty = standard input qty x std output qty.