Managerial Accounting (Fin704)

Regards: Mahboob Hassan

[Total number of units manufacture]

Total Units manufactured = Units sold + Ending finished goods Opening finished
goods

[Cost of each unit manufactured]

Per Unit cost = Cost of goods manufactured / Units manufactured

[Cost of goods manufactured]

Total Cost = Per unit cost units manufactured

[Per unit cost (Current year)]

Per unit cost = Ending finished goods inventory (cost) / Ending finished goods units

[Ending finished goods inventory]

Ending Inventory = Per unit cost Ending f/g units

[Per unit cost (Last year)]

Per unit cost = Opening finished goods inventory (cost) / Opening finished goods units

[Opening finished goods inventory]

Opening Inventory = per unit cost opening f/g units

[Applied Rate at the starting of the years]

Applied rate = Estimated FOH / Normal capacity

[Variable Rate]

Variable rate = Estimated Variable FOH / Normal Capacity

[Fixed Rate]

Fixed rate = Applied variable Rate

[Total cost]

Total cost = fixed cost (Estimated fixed FOH) + variable cost (Estimated variable FOH)

[Overall variance]

Applied FOH = Applied rate Actual capacity

[Budget / Spending Variance]

Estimated FOH for capacity attained = Fixed cost + Variable cost (where variable cost
= variable rate actual capacity)

[Capacity Variance]

Capacity variance = fixed rate in capacity (where in capacity = normal capacity

actual capacity)

Basis for the application of Factory overhead (FOH)

[Direct Material cost base]

Rate = Estimated FOH / Estimated direct material cost 100

[Direct Labor cost base]

Rate = estimated FOH / Estimated direct labor cost 100

[Prime cost base]

Rate = Estimated FOH / Estimated prime cost 100

[Direct Labor hour base]

Rate = Estimated FOH / Estimated direct labor hours

[Machine Hours base]

Rate = Estimated FOH / Estimated machine hours

[Units of production base]

Rate = Estimated FOH / Estimated units

Behavior of Cost

Variable Cost
Variable cost changes in total
Variable cost remain constant in per unit
Example: Machine produces 50 units for Rs.10 each
Total variable cost (50*10) = Rs.500

Per unit variable cost = Rs.10

If machine produces 100 Units than

Total variable cost (100*10) = Rs.1000

Per unit variable cost = Rs.10

If machine produces 200 Units than

Total variable cost (200*10) = Rs.2000

Per unit variable cost = Rs.10

Hence it is proved that variable cost changes in total (500, 1000, and 2000) but
remain constant in total (10)

Fixed Cost
Fixed cost changes in per unit
Fixed cost remain constant in Total
Example: Machine fixed Rent is Rs.1000 per month and produces 50 units in a month
Per unit fixed cost (1000/50) = Rs.20

Total fixed cost = Rs.1000

If machine produces 100 Units than

Per unit fixed cost (1000/100) = Rs.10
If machine produces 200 Units than

Total variable cost = Rs.1000

Per unit fixed cost (1000/200) = Rs.5

Total variable cost = Rs.1000

Hence it is proved that fixed cost changes in per unit (20, 10, and 5) but remain
constant in total (1000)

Formulas

[Economic Order Quantity]

EOQ =

2 Annual Requirement Ordering cost

Carrying cost

Breakeven
Break Even Point in Units = Fixed Cost / Contribution Margin per units
(Where C/M per units = )
Break Even Points in Rs = Break Even point in units Sale price per units
OR
Break Even Points in Rs = Fixed cost / C/M ratio
(Where C/M ratio = Contribution Margin / sale)
Required Units OR Required Sale = Fixed cost + Target profit / C/M Ratio
Margin of Safety
Margin of Safety in Units = Actual units Break Even Units

Margin of Safety in % = Margin of Safety in Units / Actual Units sold

Margin of Safety in Rs = Actual sales in Rs Break Even sales in Rs

Variances Analysis
Sale Cost of goods sold = Gross profit
Sale =
(i) Sale Price Variance
(ii) Sale Volume Variance
CGS =
(i) Cost Price Variance
(ii) Cost Volume variance)
GP = (i) Sale Price Variance
(ii) Sale Volume Variance
(iii) Cost Price Variance
(iv) Cost Volume variance)
[Sale price variance]
Actual sale

xxx

Actual sale Budgeted price

[A = Unit sale price
xxx]
[B = unit sale price

xxx
___________________
Xxx
___________________
[Sale volume variance]

Actual sale budgeted price

xxx

Budgeted sale

xxx
___________________
Xxx
___________________
[Cost price variance]

Actual CGS
Actual sale Budgeted cost
[A = Unit CGS
xxx]
[B = unit CGS

xxx
xxx
___________________
Xxx

___________________

[Cost volume variance]

Actual sale budgeted cost
Budgeted CGS

xxx
xxx
___________________
Xxx
___________________
[Gross Profit Variance]

Sale price variance

xxx

Volume variance
Cost volume variance
Sale volume variance

Cost price variance

Favorable/unfavorable

xxx
xxx

xxx
___________________
Xxx
xxx
___________________
Xxx
___________________

[Gross Profit detection]

If Gross Profit changes due to sale price variance then

Sale price increases = Gross Profit also increases

If Gross Profit changes due to cost variance then

Cost increases = Gross Profit decreases

If Gross Profit changes due to volume variance then

More units produces = Gross Profit increases

If Gross Profit changes due to mix variance then

More units sold = Gross Profit increases

Mix Variance
[Sale mix variance]
Actual sale budgeted price

xxx

Actual sale budgeted cost

xxx
___________________

Difference

xxx

Actual sale weighted average Gross Profit

xxx

___________________
Xxx
___________________
[Final sale volume variance]
xxx

Budgeted sale
Budgeted CGS

xxx

xxx

Actual sale weighted average Gross Profit

xxx

___________________
Xxx
___________________

Variable FOH Variance

[Overall variance]
Actual unit Standard per unit cost
Actual unit actual per unit cost

xxx
xxx

___________________
xxx
___________________

Favorable/Unfavorable

[Expenditure variance]
Actual hour Standard per unit cost
Actual hour actual per unit cost
Favorable/Unfavorable

xxx
xxx

___________________
xxx
___________________
[Efficiency variance]

Actual hour Standard per unit cost

Standard hour standard per unit cost
Favorable/Unfavorable

xxx
xxx

___________________
xxx
___________________

Fixed FOH Variance

[Overall variance]
Actual unit Standard per unit cost
xxx
Actual unit actual per unit cost
xxx
___________________
Favorable/Unfavorable
xxx
___________________
[Expenditure variance]
Budgeted unit Standard per unit cost
xxx
Actual unit actual per unit cost
xxx
___________________
Favorable/Unfavorable
xxx
___________________
[Volume variance]
Budgeted unit Standard per unit cost
xxx
Actual unit standard per unit cost
xxx
___________________
Favorable/Unfavorable
xxx
___________________
[Efficiency variance]
Standard hour Standard per unit cost

xxx

Actual unit standard per unit cost

Favorable/Unfavorable

xxx
___________________
xxx
___________________

[Capacity variance]
Budgeted hour Standard per unit cost

xxx

Actual hour standard per unit cost

Favorable/Unfavorable

xxx

___________________
xxx
___________________
[Actual sale volume variance]

Budgeted sale unit Standard per unit profit

Actual sale unit standard per unit profit
Favorable/Unfavorable

xxx
xxx

___________________
xxx
___________________

Material Variance

[Actual quantity of material used variance (Material Quantity Variance)]

Actual kg used Standard per kg rate

xxx

Standard kg allowed standard per kg rate

Favorable/Unfavorable

xxx

___________________
xxx
___________________

[Actual direct material cost variance (Material price variance)]

Actual kg purchased/used Standard per kg rate

xxx

Actual kg purchased/used Actual per kg rate xxx

Favorable/Unfavorable

___________________
xxx
___________________
[Overall Variance]

Material price variance

xxx

Material quantity variance

xxx
___________________
xxx
___________________

Favorable/Unfavorable

[Material Mix Variance]

Actual quantity at individual standard material cost

xxx

A = Quantity
Rate
B = Quantity
Rate

Actual quantity at weighted average standard material cost (Input)

xxx
A = Actual Quantity
B = Actual Quantity
C = Actual Quantity
______________
Total Actual Qty
Total Qty Weighted average cost
Weighted average cost
Actual input (Total standard cost / total
input units)

___________________
Favorable/Unfavorable

xxx
___________________

[Material Yield Variance]

Actual quantity at weighted average standard material cost (Input)

xxx
A = Quantity
B = Quantity
C = Quantity
__________
Total Qty
Total Qty Weighted average cost
Weighted average cost
Actual input (Total standard cost / total
input units)

Actual output quantity at weighted average standard material cost (Output) xxx
Actual output output rate
Output rate
Actual output (Total standard cost / total output
standard units)

Favorable/Unfavorable

___________________
xxx
___________________

Labor Variance

[Actual direct labor hour variance (Labor efficiency variance)]

Standard hour allowed Standard per hour rate

xxx

Actual hour used standard per hour rate

xxx

___________________
xxx
___________________

Favorable/Unfavorable

[Actual direct labor cost variance (Labor rate variance)]

Actual hour Standard per hour rate
Actual hour actual per hour rate
Favorable/Unfavorable

xxx
xxx

___________________
xxx
___________________
[Overall Variance]

Labor rate variance

xxx

Labor efficiency variance

xxx

Favorable/Unfavorable

___________________
xxx
___________________

[Actual variable overhead cost variance]

Actual hour Standard per hour variable overhead rate

xxx

Actual hour actual per hour variable overhead rate

xxx

___________________
xxx
___________________

Favorable/Unfavorable

Two Variance Method

[Controllable Variance]
Actual FOH (Actual hour Actual rate)

xxx

Budgeted FOH at standard hours allowed

Fixed FOH
Variable FOH

xxx
___________________
xxx
___________________

xxx
xxx

(Actual hour Variable

rate)

[Volume Variance]
Budgeted FOH at standard hours allowed

xxx

FOH charged to production

xxx
___________________
xxx
___________________

Standard hour
standard rate

Three Variance Method

[Spending Variance]
Actual FOH (Actual hour Actual rate)

xxx

Budgeted FOH at actual hours

xxx

Fixed FOH
Variable FOH

___________________
xxx
___________________

xxx
xxx

(Actual hour Variable

rate)

[Idle Capacity Variance]

Budgeted FOH at actual hours

xxx

FOH charged to production

xxx
___________________
xxx
___________________

Standard hour
standard rate

[Efficiency Variance]
Actual hour Standard rate

xxx

Standard hour standard rate

xxx
___________________
xxx
___________________

Four Variance Method

[Spending Variance]

Actual FOH (Actual hour Actual rate)

xxx

Budgeted FOH at actual hours

xxx

Fixed FOH
Variable FOH

xxx
xxx

___________________
xxx
___________________

(Actual hour Variable

rate)

[Variable Efficiency Variance]

Budgeted FOH at actual hours

xxx

Budgeted FOH at standard hours

xxx

___________________
xxx
___________________
[Fixed Efficiency Variance]
Actual hour fixed rate

xxx

Standard hour fixed rate

xxx
___________________
xxx
___________________
[Idle Capacity Variance]

Normal capacity fixed rate

xxx

Actual hour fixed rate

xxx
___________________
xxx
___________________

Ufff......Itny zyada Variance nikalty nikalty apny dimaagh ka variance

bahir aanay lagta hai...

Units produced and sold calculation

[How to calculate production]

Sold units

xxx

Less Opening inventory

Add

Ending Inventory

(xxx)
xxx

Production

__________________
xxx
___________________
[How to calculate Sold Units]

Production
Add

xxx

Opening inventory

Less Ending Inventory

Sold Units

xxx
(xxx)

__________________
xxx
___________________

Production and sale relationship in Marginal & Absorption

Costing

Production

more

Sale

Less

Production

less

sale

more

Production

same

sale

same

Opening inventory

less

closing inventory more

Opening inventory

more

closing inventory less

Opening inventory

same

closing inventory same

Profit (Absorption)

more

Profit (Marginal) less

Profit (Absorption)

less

Profit (Marginal) more

Profit (Absorption)

same

Profit (Marginal) same

Mahboob Pvt. Ltd

Income Statement (Absorption Costing)
For the year ending 31-12-2015

Sale

xxx
Direct Material

xxx

Direct Labor

xxx

Variable FOH

xxx

Fixed FOH (Absorption)

xxx
________________

Add

Cost of goods manufactured

xxx

Opening Inventory

xxx
________________

Cost of goods to be sold

Less Ending inventory

xxx
(xxx)

________________
Cost of goods sold (at normal)
Less/Add

Over/under applied FOH

xxx
xxx

________________

Cost of goods sold at actual

xxx

(xxx)
________________

Gross Profit

xxx

Less Operating Expense

Admin cost

xxx

Variable selling cost

xxx

Fixed selling cost

xxx

(xxx)
________________

Operating profit

xxx
________________

Mahboob Pvt. Ltd

Income Statement (Direct Costing)
For the year ending 31-12-2015

Sale

xxx
Direct Material

xxx

Direct Labor

xxx

Variable FOH

xxx
________________

Add

Cost of goods manufactured

xxx

Opening Inventory

xxx
________________

Cost of goods to be sold

Less Ending inventory

xxx
(xxx)

________________
Cost of goods sold

xxx

(xxx)
________________

Gross contribution margin

Less Non-Production Variable cost

xxx

Variable selling overhead

xxx

(xxx)
________________

Contribution Margin

xxx

Less Fixed expenses

Fixed FOH

xxx

Fixed Admin cost

xxx

(xxx)
________________

Gross Profit

xxx
________________

Mahboob Pvt. Ltd

Cost of goods sold statement
For the year ending 31-12-2015
(1)

Direct Material
Opening inventory
Add

Purchases

Add

freight

xxx
xxx
xxx

Less Purchase return

(xxx)

Less Purchase discount

(xxx)

___________________
Material available for use
Less Closing inventory

xxx
(xxx)

Material consumed

xxx

(2)

Direct Labor

xxx

(3)

Factory Overhead (Applied)

xxx
___________________

Manufactured cost / Total factory cost

xxx

Add

xxx

Opening work-in-process inventory

___________________
Cost put into process / Cost of goods to be manufactured
Less Closing work-in-process inventory

xxx
(xxx)

___________________
Cost of goods manufactured / cost of finished goods / completed xxx
Add

Opening finished goods inventory

xxx
___________________

Goods available for sale

xxx

Less Closing finished goods inventory

(xxx)
___________________

Cost of goods sold at normal

xxx

Add Under applied FOH / Less Over applied FOH

xxx

___________________
Cost of goods sold at actual

xxx
___________________