230 w ; = Weneates pat Q.5. What is cost - volume - profit (CVP) analysis Gin w wi objectives. ive ity) po’ eee | +N ipich P Profits of an undertaking depends u ee sw abs Is upon a large Rumbe; How factors. But the most important of these factors are the age 5 tye com of manufacture, volume of sales and selling prices of the Products, sould v analytical technique used to study the behaviour of BF ae response to the changes in volume, costs and prices is called Cost § geet Volume-Profit (CVP) analysis. In other words cost, volume ang profit analysis analyse the three variables viz. Cost, Volume ang Profit. It explores the relationship existing amongst costs, revenve activity levels and the resulting profit. CVP analysis stresses the 10. What ¥? relationship among the factors affecting profits. profit re Cost - Volume - Profit analysis is a management accounting 11. What é tool, show the relationship between these ingredients of profit expendit planning. The entire gamut of profit planning is associated with Cost-vol CVP inter-relationships. unagemnent. Herman C. Heiser, in his book Budgeting — Principles and wfitable price Practice stated that the most significant single factor in profit jimisation of planning of the average business is the relationship between the ——____ volume of business, costs and profits. 26 What When volume of output increases, unit cost of production __ ven @ decreases and vice-versa, because the fixed cost remains unaffected. tratages. When the output increases, the-fixed cost’ per unit decreases- : Therefore profit will be more, when sales price remains Break-eve =~ Generally costs may not change in direct proportion to the igre Lites, Thus, a small change in the volume will affect the profit. Itis ig. Pl : ide, volume, which is perhaps the largest single factor which nine be > Of th costs. As such an intimate relationship exists among costs, man and profit. 1 1 itionsh; Objectives of Cost - Volume - Profit Analysis : eA helps tg The study of cost-volume-profit analysis is very significant 1 key, the management. It assists the management in profit planni™® vis The Ve control and decision making, Management apply the Pro itap tk to get the arswers to the following questions. By. Pilit ae i. 8 1. What should be the sales level to earn a desired profi » Bay dy, 2. How much sales should be made to avoid losses? ty nk" ANAGEMENT ACCOUNTIN AND x IG , 231 PARR wilt be the effect of change in prices o 5 Wheat change in cost effect profit 2 ee a Which Product or product mix is more rofitable ? Bis are the costil 6. How the change chp yf the products. The viour of profit jy rices is called Cog. ; cost, volume ang | Cost, Volume and ngst costs, revenue, nalysis stresses the in selling price the company ? Selling price affect the profit position of x Should we make or purchase so e some product o 2 . What will be th ae production? "2 °f Production for varying levels of 9. What will be the amount of profit ious levels of to Profit at various | ; rious levels of ~ 10. What will be the impact of plant expansion on cost-volume- w& Profit relationship ? agement accounting gredients of profit o associated with 11. What sales volume is required to’ meet the proposed expenditure. Cost-volume-profit analysis is a useful tool in the hands of management. It helps the management in determining the oe inciples and \profitable price for the products. It assists ice in ing - P' oe optimisation of profits and maximum utilisation of resources. ngle facto cee ae ea tionship betaoeen Hie Break-even chart offers the following advantages. the understand. It presents 1. It is simple to construct and easy to idea of the problem at a glance. wegen It is an useful guide to i wing 5. The break-even chart helps Bas various Profitability of different prose ence the . By studying the angle of in cor product io = enn be etl) es change it Fr roduc! mix. =e It helps i stocting 8¢ oesn ” Q.4. What do you mean by Trend Analysis 2 Wri 4, a advantages. Mi aning * ; , Trend analysis is an important tool of horizonta, t sealy This method is highly useful in making a con Sudy of financial statements for several years, By stu dng eg anges, upon the direction of changes, the opinions can be formed, Baseg trends of each item we can know the direction of ch Trend:can be analysed in any of the following ways, (a) By calculating trend ratio or percentage. (b) By plotting on graph paper or chart. Trend Ratio of Percentages: The method of calculating treaj ratio or percentages involves the calculation of percentage relationship that each item bears to the same item in the base yex. Any year may be taken as base year. It is usually the earliest yex The value of one particular item out of several items shown ine financial statements is converted into ratio or percentage taking of that item in the base year as equal to 100. Procedure for calculating trend ratio : i j the (i) Select any year as base year. The selected year aes normal year. For base year the trend value is taken a i" (ii) Trend ratio or percentage for each item should be calet using the following formula A Current Year Value Trend Ratio = —=SNt Xear \ 00 Base Year Value ™ ql Advantages : Trend analysis is an important tool of horizontal analysis. This method is highly useful in making @ cone Study of financial statements for several years. By st trends of each item we can know the direction of changes:7 AND MANAGEMENT ACCOUNTING| rages of Trend Analysis : on aval of Smee in-maing «pee Bee sae dicoee aonetha r Tp ah compe chat and make a comprehensive study [Short Answer Questions| Q.1. What is the role of. Management Accountant ? ) Management Accountant designs the frame - work of cost and financial accounts and prepares reports. ib) He plays an important role in forecosting (c) He has a major role to play is raisin management in taking future business. of funds and theit ) The management acco! reports €.g, standard costs, ° analysis, performance evaluati (8) He performs a staff ful vem the accountant and other ee pie ancial statements: sate a nction acost AND MANAGEMENT ACCOUNTING] , SS COUNTING) Definition : Labour tumover ma > 91 in the labour force i be defi change i” ein an or De defined = period Sanisation during » (Me tate Measurement of Labour tur, comparison between two periods labo) three methods of computing labour tu 5 mover, 1, Separation Method : In this method calculated on the basis of workers who lef formula is : ni BO Specified, Mover : For ur turnover is the purpose of “ Measured. There oo turnover rate is employment. This No. of workers who left the employment duri sft the empl nt durin, Average No. of workers during hap on 2. Replacement or Assession Meth t od : In this method Dour turnover tells ealctlatedl athe (aie 9 meee am employment. The formula is : Who joe No. of workers replaced during the year Average No. of workers during that period “1? 3. Flux Method : This method takes into consideration both separation and replacements. The formula is: No. of workers left + No. of workers replaced 199 ‘Average No. of workers during that period Cost of Labour turnover : The cost of labour turnove! . (1) Preventive Costs, (2) Replacement Costs. These costs include the cost incurred © ; them in the job. ) r may be divided into two categories 1. Preventive Costs : Satisfy the workers and keep (a) Medical. facilities. im free travelling rs i 5S (b) Welfare activities like recreation free education and subsidised food: mainnsining good it nt fo! (c) Cost of personal manager; anagem relations between workers ag igh 08° pas (d) Other facilities like pension gra 4 awn | (e) Other requisites: the 2. Replacement Costs * | losses which arises due t nell : Thee eedCOST AND MANAGEMENT ACCOUNT (a) Cost of the recruitment, training and placement, (b) Loss of Output due to some time gap in obtaining workers, (c) Cost of tools and machine breakage. (d) Cost of Scrap and defective work (e) Cost of additional supervision (£) Cost of accidents due to new workers. (g) Loss due to deterioration in the quality of output, Q. 18. What are the Various labour incentive schemes ? : Aoi é ‘ ‘ us plans which are combination time and piece rate systems. Some schemes appl individual while others apply o> workers, PPly to indivi individual in The following are the YF, - Halsey, an America N hourly ‘or day rate . time 1S fixed for the performan® Pleted in Jegg than standard time, H 301 Nta, . (usually 3 % or 50%) ofMees | iy S Stich leet the NSUMptiog 4 bin Contains from the ements till the next ¢. tock to meet the 4 cone Mirements Inventory *ASUMption rec ll the actual receipt of the date 4 vplain ABC analysis BC technique, materials are analysed according te aluable materials are i tion and care. All items of materials are classified according t aie ue or cost significance high, medium and low values, which known as A, B and © items respectively. ABC technique s times called Always Better Control method. iat costly and more y Items - These are high value items which may oo = Re { i é their hig! nly a small percentage of the total items, eee -—? shea srials should be under the tightes t, these materials § ser coneatit cos! 08 erie’ responsibility of the most exp'cost AND = tials which sho; These are medium value materi B' Items - Thes ita ormal control procs di ; ald es e are low value materials which may repr es mber of items, These materials should be under i, _ Sy eG methods of control. spa fyi tegories is to e The idea of classifying stock by ABC categ O ensun hat material management focuses on-A items were sophisticatey that m: é h control should be installed. B items may be given less attention and¢ items least attention. Thus ABC technique is a selective control which aims a concentrating efforts on those items of materials where. attention is needed most. This is so because it is unwise to give equal attention to all items in stock. The items are listed and ranked in. the order.of their descending importance showing quantit 1 ou and vi item. This is illustrated below with an i z —— rbitrary percentage figures. under then 'C Item - Category oof Total Value % of Total quality 70 10 B 25 ic 5 a In the gi iti 9 eee ee it is shown a that 1 as 70! 0 3 ee a the total value, no the total items significance, The second pyar, oO! becayge Se AEE A category quantity but account for 92° OF ite 8e Of their high cost which need rout 8% tepresen| Beane pan ize Of contre’® tOtal vay t 30%of the total items which nee, ; ntro], ue, anti » Fina * Nese i These © items are kept, acount er lly, the items oe B items regar ing Purchasing. ston eet simple t 5% of h ‘epresenting items should be frameg mae and isouehYSical oe total value. eee eee a diy in, “Ontro]. - [ 2.5. What ts Penge —"8 thee vale, ations ad lat and j, ‘Ories mages? 5 “importance The contro} of ang = through what is rer geet ae hat are its wi© Mit OF the product is sold to a in selling price, the difference between the selling eekal'cost of the unit of product indicates the amount of — | Per unit. Short Answer Questions! Batch Quantity ; In order to control batch cost, tity to be produced in each ba cost at optimum level. intity of a batch which enabi cost at minimum level. , it is important to decide the itch which enables to keep the Economic batch quantity is that les the management to keep the If the quantity of a batch is either Mincreased or decreased from the economic batch gantity determined the batch cost will increase and become more than the batch cost incurred when economic batch quantity is produced. It has already been mentioned that the batch cost consists of two types of costs as under : 1. Setting -up cost : The cost associated with setting up a piece of uw production equipment. This would include the cost of the setup mechanic, the cost of scheduling, record keeping, moving the starting material and testing the first few units of output to becertain the equipment is set up properly. Carrying Cost : Carrying costs, also known as holding costs and ‘nventory carrying costs, are the costs a business pays for holding inventory in stock. A business can incur a variety of “arrying costs, including taxes, insurance, employee costs, depreciation, the cost of keeping items in storage, the cost of ‘placing perishable items and opportunity costs Even the “ost of capital that helps to generate income for the business is ‘carrying cost,centres’ on some sultabdle basis. Thi = overheads. Indirect expenses Fe is is ¢ These indirect expenses or dveleidnoe ct S may factory indi expenses, office indir be further ia distribution overheads. ect Q. 11. What are the elements exclu noes led from the co ear - om the cost sheet ? The following items should bi a Sell © excluded while preparing Cost 1, Income tax. nN Transfer to Reserves. Charities. vo 4. Dividend on capital. 5. Goodwill. 6. Preliminary expenses. 7 8. Discount on debentures. . Underwriters commission.9, Bonus declared to Dir base). 10. Capital losses ( fi. Interest and commission received. due to sale of assets). 12. Rent received. 13. Commission paid to partners. 14. Discount on shares. 15. Pension to staff. 16. Donations. 17. Cash discount. 18. Capital collection costs. 19. Compensations. 20. Cost of Abnormal Idle time. 21. Abnormal Wastage of materials 23. Profit or Loss on sale of Fixed Assets, 24. Profit or Loss on Sale of Investments, 25. Appropriation of Profits, ‘ 26. Incomes nop. telati ; om -relatin, i es eis 8 t profits (Transfe, 27. Abnormal bag di 2B. Transter fog Note? There are by lebts, Teceived on, difference re transfer,O*C_—— Q.9. State the steps involved in installa system. "10n of a costing The very firs y ame 4 The rap first thing to Femiemies about a costing system is that ld always be treated as an investme:! [f should not be i at all, if one can feel that there is no possibility of ng any benefit out of: installing a costing system. The stallation has a number of implications.COST AND MANAGEMEN? 5 = MENT ACCOY (i) Since there cannot be ready made cost g business, a system has to be designed for an un ae 5 specific needs. dertaking (ii) That the amount to be spent upon the j costing system should be strictly proportiong instal te to tha bonehe to be obtained (iii) Another implication is that in costing re, accuracy is sufficient Before installing a Cost system care should be taken to hese implications. Otherwise the system Will be a mistig advantage will not be derived from it, Steps to be taken to install a costing system : (1) Nature method and stages of Production, the number vaneties and the quantity of each product and such other " aspects should be examined. (2) What are the objects ‘which the management acnieve and what sort of information does Scvevement of such should be kept in view. wants: it require for | (3) Factors that are significant. For example, if materials © insignificant, an elaborate system of materials control will necessary (4) Methods of purchase, Should be examined and modifi (5) The remuneration, receipt storage and issue of ied wherever considered necessary. *ype of labour which is required and the methods (6) The cost system to be installed must be simple and easy °perate. The system can be efficiently run if it is appropriate an Properly suited to the organization, 7) The choice of the unit regarding which costs have to! obtained. 4 (8) Forms and a ‘ minim ds should be designed so as | um clerical Work and expenditure, prod total elem As § The (b) L (a) 3 mat conf whic unit: mat (ii) with Prox Sho ider cha, ang Also fol