Scdl - Pgdba - Finance - Sem 1- Management Accounting

Management Accounting

Management Accounting

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Management Accounting

Q.1 Explain the term Accounting. What are the different streams of accounting? How are they related to each other? Ans. Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money transactions, and events, which are part, at least, of a financial character and interpreting the results thereof. The analysis of above definition brings out the following functions of accounting: 1.

2.

3.

4.

5.

Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are recorded but also that they are recorded in an orderly manner. Recording of transactions is done in “Journal” or subsidiary books. The number of subsidiary books to be maintained will be according to the nature and size of the business. Classifying: Classification is concerned with the systematic analysis of recorded facts, with a view to group transactions or entries of one nature at one place. This is done in the book called “Ledger”. The Ledger contains different pages of individual account heads under which all financial transactions of similar nature are collected. For example the expenses may be classified under various heads like Travelling, Communication, Printing and Stationery, Advertisement etc. All the entries in the Ledger shall flow based on the entries passed in the Journal. The Ledger accounts will help in knowing the total expenditure under various heads for a given period. Summarizing: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of financial statements. This process involves preparation of a) Trial Balance b) Income Statement c) Balance Sheet. Deals with financial transactions: Accounting records only those transactions and events in terms of money, which are of a financial nature. In other words the transaction which are not of financial nature are not recorded in the books of accounts. For example a company, which has a team of employees with sound technological knowledge, cannot expressed in terms of financial numbers and hence will not be recorded in the books of accounts of the company. Interpretation: This is the final function of the accounting. The recorded financial data is interpreted in a manner that the end-users can make a meaningful judgement about the financial condition and profitability of the business operations. The data is also used for preparing the future plans and framing of policies for executing such plans.

Objectives of Accounting The following are the main objectives of the accounting: 1.

To keep systematic records: Accounting is done to keep systematic records of financial transactions. In absence of a scientific method of accounting, there would have been tremendous burden on the human memory, which in most cases would have been impossible to bear.

2.

To protect business properties: Accounting provides protection to business properties from unjustified and unwanted use. This is possible by providing information the following information to the management: (i) The amount of owner’s fund invested in the business;

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Management Accounting (ii) (iii) (iv)

How much the business owes to others; How much the business has to recover from others; How much business owns the assets;

The information helps the management in ensuring that the assets do not remain idle of under-utilized. 3. To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit or loss carrying on the business. This is done by maintaining the proper record of revenues and expenses for a particular period. 4. To ascertain the financial position of the business: The profit and loss accounts reflect the performance of the business during a particular period. However, it is also necessary to know the financial position i.e. where do we stand. What we owe and what we own. The objective is met by Balance sheet, which shows the state of affairs of assets and liabilities as on a given date. It serves as barometer for ascertaining the financial health of the business. 5. To help rational decision – making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required level of authority in order to facilitate rational decision-making.

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Management Accounting Q5. What do you man by Bank Reconciliation Statement? Why is it prepared? Give a standard format of Bank reconciliation statement. Answer. A form that allows individuals to compare their personal bank account records to their account balance according to the bank in order to uncover any possible discrepancies. Since there are timing differences between when data is entered in the banks systems and data is entered in the individuals system, there is sometimes a normal discrepancy between account balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing. Need for Bank Reconciliation Statement ‘Reconciliation’ between the cashbook and the bank statement final balance simply means an explanation of the differences. This explanation takes the form of a written calculation (see page xx for an example). The process can be seen as follows:

Differences between the cashbook and the bank statement can arise from:  

Timing of the recording of the transactions Errors made by the business, or by the bank

PREPARING THE BANK RECONCILIATION STATEMENT When a bank statement has been received, reconciliation of the two balances is carried out in the following way: Step 1 The cashier will tick off the items that appear in both the cashbook and the bank statement. Step 2 The unticked items on the bank statement are entered into the bank columns of the cashbook to bring it up to date. Step 3 The bank columns of the cashbook are now balanced to find the revised figure. Step 4 The remaining unticked items from the cashbook will be the timing differences. Step 5 The timing differences are used to prepare the bank reconciliation statement

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Management Accounting

Custome r Accounts Current Account with the Bank

Banks' Accounts "Customer " Account

Debit Details Balance to reconciliatio n date, 30.6.xx Amounts appearing only on the Bank Statement 30.6.xx Credit: Interest 30.6.xx Debit: Bank charges 27.6.xx Credit: Error Amounts that appear only in our accounts 30.6.xx Check to supplier, Not yet presented to bank

Credit

1,000

Credit

1,500

50 10 300

1050 Adjusted Balance as at 30.6.xx

Debit

1,040

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10

160 460

1,500 1,040 Debit

Management Accounting

Q 14. Write Short notes on any three : Answer. Cash budget A forecast of estimated cash receipts and disbursements for a specified period of time. A cash budget is extremely important, especially for small businesses because it allows a company to determine how much credit can be extended to customers before they begin to have liquidity problems. A cash flow budget is a projection of your business's cash inflows and outflows over a certain period of time. A typical cash flow budget predicts the anticipated cash receipts and disbursements of a business on a month-to-month basis. However, a cash flow budget could predict the cash inflows and outflows on a weekly or daily basis. Because of the uncertainty involved in the cash flow budget, trying to project too far into the future may prove to be less than worthwhile. At the same time, a cash flow budget that doesn't look far enough into the future will not predict future events early enough for you to take corrective action in your cash flow. A six-month cash flow budget minimizes the amount of uncertainty involved in the budget. It also predicts future events early enough for you to take corrective action. However, if you're applying for a loan, you may need to create a cash flow budget that extends for several years into the future, as part of the application process. The primary purpose of using a cash flow budget is to predict your business's ability to take in more cash than it pays out. This will give you some indication of your business's ability to create the resources necessary for expansion, or its ability to support you, the business owner. The cash flow budget can also predict your business's cash flow gaps — periods when cash outflows exceed cash inflows when combined with your cash reserves. You can take cash flow management steps to ensure that the gaps are closed, or at least narrowed, when they are predicted early. These steps might include lowering your investment in accounts receivable or inventory, or looking to outside sources of cash, such as a short-term loan, to fill the cash flow gaps. Flexible Budget A set of revenue and expense projections at various production or sales volumes. The cost allowances for each expense are able to vary as sales or production vary. A flexible budget is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period. A key difference between a flexible budget and a static budget is the use of the actual output level in the flexible budget. Steps in developing a Flexible Budget – Step 1: Determine budgeted selling price, budgeted variable cost per unit, and budgeted fixed cost. Step 2: Determine the actual quantity of output. Step 3: Determine the flexible budget for revenues based on budgeted selling price and actual quantity of output. Step 4: Determine the flexible budget for costs based on budgeted variable costs per output unit, actual quantity of output, and the budgeted fixed costs.

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Management Accounting

Under Absorption and Over Absorption of Overheads In Cost Accounting the analysis and collection of overheads, their allocation and apportionment to different cost centers and absorption to products or services plays an important role in determination of cost as well as control purposes. A system of better distribution of overheads can only ensure greater accuracy in determination of cost of products or services. It is, therefore, necessary to follow standard practices for allocation, apportionment and absorption of overheads for preparation of cost statements. Absorption of overheads - Absorption of overheads is charging of overheads from cost centers to products or services by means of absorption rates for each cost center, which is calculated as follows: Overhead absorption Rate

Total overheads of the cost center = _____________________ Total quantum of base

The base (denominator) is selected on the basis of type of the cost center and its contribution to the products or services, for example, machine hours, labour hours, quantity produced etc. Overhead absorbed = Overhead absorption rate x units of base in product or service A pre-determined rate may be used on a provisional basis for internal management decision-making such as cost estimates for quotation, fixation of selling price etc. These rates are to be calculated for each cost center for a particular period. Budgeted overheads for the respective cost centers for the period concerned are to be taken as numerator and budgeted normal base for the period as denominator for determining the rate. Budgeted Overheads for the period Pre-determined overhead Rate = _______________________________ Budgeted normal base for the period The amount of total overheads absorbed by a product, service or activity will be the sum total of the overheads absorbed from individual cost centers on predetermined basis. The difference between overheads absorbed on predetermined basis and the actual overheads incurred is the under- or overabsorption of overheads. The under- or over- absorption of overheads is mainly due to variation between the estimation and actual. Overheads shall be analysed into variable overheads and fixed overheads.

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Management Accounting The variable production overheads shall be absorbed to products or services based on actual capacity utilisation. The fixed production overheads and other similar item of fixed costs such as quality control cost shall be absorbed in the production cost on the basis of the normal capacity or actual capacity utilization of the plant, whichever is higher. In case of less production than normal, under-absorption of overheads shall be adjusted with Costing Profit & Loss Account. In case of higher production than normal, the over-absorption of overheads shall also be adjusted with Costing Profit & Loss Account.

Q3) Write an essay on “Depreciation”. Ans 3) Depreciation is the part of the value of fixed assets which is used up in revenue earning process in the current accounting period and recovered from the revenue earned said period. It may also be defined as gradual and permanent diminution in the value of fixed assets due to normal wear and tear, obsolescence of the efflux ion of time, the literal meaning of depreciation is reduction of value. International Accounting Standard(IAS)-4 defined depreciation as – “The allocation of the depreciable amount of an asset over its estimated useful life.” According to Indian Accounting Standard (AS)-6 – “Depreciation is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, efflux ion of time or obsolescence through technology or market changes.” • Nature of Depreciation : There are different concepts as to the nature of depreciation, which are as follows : I) Process of allocation : The unrecoverable part of the cost of fixed assets that left after the end of its lifetime is assumed as the value consumed up between the date of acquisition and the and the date of exhaustion. The object of charging depreciation is to measure the value of the benefits the asset has provided or the services it has rendered during a particular accounting period. It is not meant for measuring the value of an asset at any specific point of time. It is possible to estimate the benefits expected to be received from an asset in each accounting period. The time horizon or the expected useful life period of each fixed asset as well as its salvage value at the end of that period can be anticipated. Depreciation is not charged for raising fund for replacement of asset rather it helps the firms to recover its lost capital and maintain the original capital intact. II) Decline in service potential : By the opinion of Committee on concepts and standards on Depreciation of AICPA in 1957 is “any decline in the service potential of plant and other long term asset should be recognized in the accounts in periods in which such decline occurs.” According to them service potential of assets may decline due to any of the following reasons such as - a) gradual or abrupt physical deterioration. B) Consumption of services and c) economic deterioration. As a result of “obsolescence or change in consumer demand”. In allocation concepts depreciation represents the allocated portion of the total cost of a fixed asset in each accounting period within its life time, whereas in service potential concepts the consumed up portion of the total service receivable

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Management Accounting from a fixed asset in each accounting period within its life time is treated as depreciation. III) Provision for maintenance of capital : Depreciation is also regarded as a means of recovery of capital invested in fixed assets and it is needed for maintaining capital intact. The capital outlay for fixed asset is gradually and continuously used up or consumed in different accounting periods within the life time of the fixed assets. The Financial Accounting Standard Board (FASB) and the American Accounting Association (AAA) of USA gave the recognition to this maintenance of capital concepts of depreciation. The committee on Concepts and Standards-Long lived Assets of AAA directly recognized the capital maintenance concepts. In its opinion “depreciation must be based on current cost of restoring the service potential consumed during the period.” IV) Current cost of service consumed : According to accounting research study (ARS) NO. 3 published by the AICPA sprouse and Mootinz depreciation represent an allocation of current costs and the depreciation charge for a period is the current costs of services consumed is that period. This concept is an improvement over other concepts in the sense that is overcomes the problem of replacement at times of inflation. The main drawback of this concept lies in the difficulty in measurement of current cost or replacement cost of fixed assets. Due to technological development it is difficult to replace the old asset by an exactly similar asset. • Causes of Depreciation : Permanent fall in the value of any fixed asset or depreciation takes place due to the following causes : I) Uses of natural wear and tear : The more an asset is used the fast it loses its value. This loss of value is due to the exhaustion of the potential utility of the asset as a result of continuous use. Careless handling of asset is also responsible for quick loss of its value. II) Wasting asset : Stock of wasting assets gets depleted in a normal process due to extraction or use of the same. The continuous extractions of mineral or oil reduces their stock and ultimately over the time the said stock gets fully exhausted. III) Efflux of time : Assets like leasehold property, patent right, copyright. Etc. get exhausted not due to use but on account of efflux of time. IV) Accident or abnormality : Happening any abnormal event like accident due to natural or any other reasons may cause the assets to lose their value partly or completely and they may become less effective or ineffective. V) Inadequacy : Sometimes an asset, even it has the productive value, may be replaced by another more productive asset. Such ineffectiveness of asset is caused by its inadequacy to cope up with the changed situation. • Characteristic of depreciation : The following are the character tics of depreciation : I) Related to tangible fixed assets Depreciation is charged only on tangible fixed asset like building, plant, furniture etc. It is not provided on current assets or non tangible fixed assets. II) Charge against profit : Depreciation is a charge against profit, it is not allocation of profit. Before ascertaining income depreciation is matched against revenue as a cost. III) Permanent and gradual loss of utility :

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Management Accounting Depreciation indicates permanent and gradual loss of service rendering capacity of fixed assets that cannot be received back. IV) Effective within the working life : At the end of the useful economic life of a fixed asset it is assumed to be fully exhausted with no service rendering capacity. So the value of any fixed asset is charged in each accounting period within its working life. V) Assumption based : Charging of depreciation is always based on a number of assumptions regarding the economic life of fixed assets, stability of market price etc. • Measurement of depreciation : Depreciation must be properly measured. It is an extremely important job of the accountants. I) Cost of asset : Cost price of asset includes its gross value. Cost may be taken as historical value, current market price or replacement cost. In conventional accounting system cost is assumed as historical cost. II) Incidental expense : Legal expenses, commission, inward freight, import duty, carrying cost etc. paid in connection with acquisition of assets are taken as incidental expenses and treated as capitalized cost of assets. III) Other factors : Some factors are consideration for the purpose of measuring of depreciation. (a) Cost of extension or improvement of fixed assets. (b) Replacement cost involved. (c) Efficiency with which the asset is used. (d) Interest expected in case the amount spent for purchase of fixed assets were invested outside the business in securities. (e) Legal restrictions particularly the provisions of Income Tax Act regarding depreciation, etc. • Problems of measurement of depreciation : The problem that may creep on while measuring depreciation are as follows : I) Assessment of working life : It is really difficult to measure the correct assessment of the working life of the asset. Instead of exact working life only the probable useful period may be assumed. Usually such assessment is made on the basis of quality of the assets, past experience and expert’s opinion. II) Unexpected changes : A fixed asset may become obsolete or loses its value due to partial obsolescence if there is any change in customers’ choice or behavior or any new technology is innovated. III) Uneven use : For measuring depreciation on the basis of use of the asset it is required t assess its use properly. There is every possibility that the asset is not use evenly in different accounting periods. Efficiency in use of the asset may also vary. • Methods of depreciations : Methods of depreciation are as follows : I) Methods based on costs allocation concept (a) Time based method (a.i) Fixed installment method. (a.ii) Diminishing balance method. (a.iii) Double declining balance method.

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Management Accounting (a.iv) Sum of the years’ digit method. (b) Use based method (b.i) Working hours method. (b.ii) Production unit method. (b.iii) Mileage method. II) Methods based on capital maintenance concept (a) Sinking fund method. (b) Annuity method. (c) Insurance policy method. III) Other methods (a) Revolution method. (b) Depletion method. Composite or group method. Q7) Explain step-by-step procedure of identifying the direct material cost with the individual cost center. Give the formats of various documents which are prepared in the process. Ans7) Direct material cost indicates that the material which can be identified with the individual cost center and which becomes an integral part of the finished goods. It basically consists of all raw materials, either purchased from outside or manufactured in house. The basic objective of cost accounting i.e ascertainment of cost and control of cost is equally applicable to material cost as well. However, a whole lot of organizational procedures are also involved in the process, which effect the material cost, either directly or indirectly. The movement of direct material cost may involve the following main steps which are as follows : a. Procurement of materials. b. Storing the material till it is required for consumption. c. Issue of the material for consumption. d. (a) Procurement of materials : (b) Though the practices may differ from organization to organization, normally the process of purchasing the materials involves the following stages.

(1) Purchase requisition : (2) It is an indication to the purchase department to purchase certain material. It is issued by storekeeper or by production department. Followings particulars must appear in purchase requisition. (i) Material to be purchased : It should clearly specified with the specific code number. To make it more specific, addition to the description of the material required. (ii) When it is required : Unless the material is required for regular production purposes, purchase requisition should mention the last date by which the material is required. (iii) How much to be purchased : Purchase requisition should mentioned clearly the quantity of the material required. Before deciding the exact quantity this should be remembered of overstocking of material as both these situations involve costs.

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Management Accounting

A standard form of purchase requisition is shown below :

Purchase Requisition From : Department

To : Purchase Department

No

:

Date

:

Please purchase the material stated below.

Sr. No

Description

Code No.

Quantity Required

Signed by :

Quantity on hand

Remarks

Approved by :

For the use of Purchase Department Only Date

P.O. No.

Name Of Supplier

Delivery Date

Remarks

Signed : Purchase Manager (2) Selection of source of supply : Purchase department call the quotations from the prospective suppliers of a certain type of material. Followings types of quotations may be called for : (i) Single Tender. (ii) Limited Tender. (iii) Open tender. (iv) Global tender.

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Management Accounting (3) Purchase order : The contractual obligation in between the supplier and purchase starts from purchase order. It is drawn in favor of the supplier by the purchase department which specifies some facts which are as follows : (i) Material to be supplied. (ii) Quantity to be supplied. (iii) Price and other specific terms (If any). (iv) Cash and trade discount. (v) Instruction in respect of delivery (vi) Guarantee clause. (vii) Escalation clause. (viii) Inspection clause. (ix) Methods of settlement or disputes. (x) Details in respect of letters of credit, import license etc. (xi) Details in respect of interest payable in the event of late payment of dues. Purchase order are distributed on some terms which are as follows : o One to supplier. o One to user department. o One to stores department. o One to accounts/costing department. o One with Purchase department. A Standard Form of Purchase Order is as shown below :

Purchase Order

No : Date : Requisition No :

Date : Please supply the following material on such terms and conditions as stated therein : Description

Code No

Quantity

Rate Rs.

Value Rs.

Delivery Date

Remar ks

Delivery : Goods to be delivered at Extra as applicable Excise Duty Sales Tax Packing Charges Insurance

For -------------------- (Purchasing Company)

Terms of payment

Purchase Manager (4) Receipt and Inspection : After material is received from the supplier, the quantity r

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Management Accounting received actually, is compared with quantity ordered. Excess material received may be dealt with in any of the following ways : (i) Accept all the material received. (ii) Accept the material ordered and return the excess to the supplier. (5) Checking invoice and accounting for purchases : The supplier’s invoice received for the supply of material is subjected to security before a voucher is passed for the same for making the entry in the books of accounts. For this purpose, the supplier’s invoice may be compared along with the following documents. (i) Purchase order. (ii) Goods Received Note. (iii) Inspection Report. (c) Storing and issue of materials : After the material received, inspected and approved the process of storing comes into operation which deals with storing the material in good condition till it is required for use by production departments and issuing the same whenever required. (i) Receipt of material. (ii) Issue of material. (iii) Return of material from production department to stores department. (iv) Transfer of material.

GOODS RECEIVED NOTE No : Date :

S.No Description

Prepared By

Code

Qty. Recd.

Received by

Qty. Accepted

Inspected by

Qty. Rejected

Remarks

Store Keeper

Material Receipt : The material physically received when compared with material ordered as per the purchase order may reveal certain discrepancies which may take any of the following forms : (i) Quantity received in excess. (ii) Quantity received in short. (iii) Quantity received of different quality. Excess quantity received may be retained an accepted. If required it is returned to the supplier with Goods Returned Note which is shown here :

GOODS RETURNED NOTE To :

No : Date : Page 14

Management Accounting

Following material supplied by you vide your D.C No.____________ and invoice No._______________ against our purchase Order No._____________ is being returned to you for the reasons stated below : Description

Quantity

Reasons

(C) Issue of material : Signature The issue of material refers to issue of material from stores department to production department. The material should not be issued from the stores unless a proper authority in writing is produced before the stores department which is in the form of Material Requisition Note which contents are : (i) Number and Date. (ii) Department demanding the material. (iii) Quantity of material demanded. (iv) Signature of authority approving the demand. (v) Signature of the person receiving the material. Material Requisition forms are shown as follows :

MATERIAL REQUISITION SLIP Production/Job Order No.

No.

Bill of Materials No.

Date. Department :

Description

Authorized by

Code

Issued by

Qty

Unit

Received by

Cost (for costing dept. only) Rate per unit Amount Rs.

Entered and valued by

Material is returned back if it is in excess in quantity. So, this is the final stage to complete the procedure. Q11) With the help of a Simple Break Even Chart and Contribution Break Even Chart, Explain the significance and method of calculation of the following terms – a. Contribution b. Profit Volume Ratio c. Break Even Point d. Margin of Safety e. Angle of Incidence. Ans 11) Cost volume profit relationship can expressed in the form of visual like graphs and charts. There are various types of chart and graphs are available. Here is

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Management Accounting a detail of the above terms by the help of break-even chart. This are the followings where the terms are described in short. a) Contribution : The term contribution can be expressed in two ways basically : I ) Sales – Variable Cost II ) Fixed Cost + Profit In the short period, Fixed cost are ineffective due to their stagnant nature, variable cost becomes the most important cost in deciding the profitability. As such, the situation, which generates contribution, is treated as profitable situation. Further, the term contribution plays an important role in a situation where there are more than one product and the profits on individual products cannot be ascertained due to the problems of apportionment of fixed cost to different products. This is due to the fact that marginal costing ignores the fixed costs. b) Profit Volume Ratio : This ratio indicates the contribution earned with respect to one rupees of sales. It is expressed as followings :

In the short run Rs. 10 per unit, variable cost is Rs. 6 Per unit, and fixed cost are Rs. 300, we observe that for 100 and 150 units , P/V ratio work out as followings. 100 Units 150 Units Rs. Rs. Sales --1000 1500 Variable Cost --600 900 ----------------------------------Contribution --400 600 Fixed Cost --300 300 ------------------------------------Profit --100 300 Hence, P / V Ratio is : Contribution ------------------ * 100 = Sales

400 --------------- * 100 1,000 Or i.e

Increase in Profits ------------------------Increase of Sales

*

100

40 % i.e

= =

200 ----------500

600 --------------- * 100 1,500 40 % * 100 =

40 %

The fundamental concept of P/V ratio is that it remains constant remains at all levels of activities, provided per unit sales price and variable cost remains constant. A high P/V ratio indicates that slight increase in sales without corresponding increase in fixed cost will result in higher profits and vice-versa while a low ratio indicates low profitability. So, the basic expression of P/V ratio i.e contribution/sales may lead to other useful conclusions as (a) Sales * P/V Ratio = Contribution (b) Contribution ----------------- = Sales P/V Ratio

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Management Accounting C) Break Even Point : This is a situation of no profit no loss means it is a situation of neutral in business point of view. In this stage contribution is just enough to cover the fixed costs i.e contribution = Fixed Cost. It also means that contribution generated by all sales beyond Break Even point will directly result into profits. As such, it will be intention of every business to reach the Break Even point, as early as possible. It can expressed in two ways such as, (a)

In terms of quantity =

(b)

In term of amount

=

Fixed Costs -------------------------------Contribution per unit Fixed Cost -------------------------------P / V ratio

d) Margin of Safety : These are the sales beyond Break Even Point. A business will looking like smart and profitable when the amount of sales generates profit. As such the soundness of business is indicated by the margin of safety. A high margin of safety indicates that the break even point is much below the actual sales and even if there is reduction in sales, business will still in profits. But a low margin of safety accompanied by high fixed cost and high P/V ratio that indicates more efforts are required to be made for reducing the fixed cost or increasing sales volume. Margin of safety may expressed by the following way : Margin Of Safety

= =

Margin Of Safety

= = =

Sales -

Break Even Sales Fixed Cost Sales -------------------P / V Ratio Sales * P/V Ratio Fixed cost ----------------------------------------------P/V Ratio Contribution Fixed Cost ----------------------------------------------P/V Ratio Profit -----------------------------P/V Ratio

Margin of safety may be expressed as a ratio or as a percentage.

i.e. 100 i.e.

Sales Break Even point --------------------------------------------Sales 1.00.000 60,000 -------------------------------------------

*

100 *

1,00,000 40 % of sales.

100

=

40,000 ------------

*

1,00,000

f) Angle of Incidence : The angle formed by total sales line and total cost line is termed as Angle of Incidence. As the difference between total sales and total costs is in the form of profits, higher the angle of incidence better will be the situation. This is a chart where the contribution is shown more clearly and specifically compared to simple break-even chart. Contribution break-even chats are as follows :

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Management Accounting Contribution break even chart:

TS TC BEP SL Incidence C

= = = =

Total Sales Line Total Cost Line Break Even Point Selected Level Of Activity

=

Contribution

FC VC MOS = Angel a

= Fixed Cost = Variable Cost Margin Of Safety = Angle Of

This is a chart where the COST – VOLUME – PROFIT relationship expressed more clearly and specifically compared to simple break-even chart. Contribution breakeven chats are as follows : Simple break even chart :

TS TC

= = MOS

Point Of Incidence SL =

Total States Line Total Cost Line = Margin Of Safety

FC

= Fixed Cost BEP = Break Even Angel a = Angle

Selected Level Of Activity

The limitation of simple Break Even Chart is that contribution cannot be shown separately. The above Break Even Chart may be prepared i.e Contribution Break Even Chart.

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Management Accounting

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