General Studies and Accounting

CIMA defines Budget as “A plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure, and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting”.

It helps the management about its objectives to achieve, how the plans to be adopted, whether individual plans fit in the overall organizational objective.

In CIMA (London) terminology –

“Budgetary control is the establishment of budgets relating to responsibilities of executives to the requirement of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a basis for revision.”

Budgets and Forecasts.

A forecast is a prediction of what is going to happen as a result of a given set of circumstances. A budget is an approved plan of action expressed in figures relating to a specified period of time.

Advantages:

1) It helps the management to plan the functions before the action occurs.

2) There will be good co-ordination and participation between the management.

3) All functional heads are get into responsible to make plans with the plans of other departments.

4) It demands the most economical use of labour, materials, facilities and capital.

5) It helps the management to face the changes in business conditions.

6) It helps to understand the problems of co-workers.

Material Cost Variance Problems - Standard costing

noreply@blogger.com (Unknown) — Fri, 14 Aug 2009 00:48:00 +0000

The standard cost of a compound mixture is as under:

30% of material A at Rs.25 per ton. 70% of material B at Rs.35 per ton.

A standard loss of 10% is expected in production. The following actual cost data is given for the period.

290 tons material A at a cost of Rs.20 per ton.

210 tons material B at a cost of Rs.25 per ton.

The weight produced is 400 ton.

Find Material variances

Actual cost of material used		Stanadard cost material used		Standard cost of material, if it had been used in standard proportions.
290*20 =	5800	290*25 =	7250	30% of 500 * 25 =	3750
210*25 =	5250	210*35 =	7350	70% of 500 * 35 =	12250
	11050		14600		16000

Standard cost of output.


3200/90*400=	14222

Standard cost of output
Standard Mix	Standard rate	Standard cost
30	25	750
70	35	2450
-10	LOSS
90		3200

Material price variance	14600-11050=	3550
Material mix variance	16000-14600=	1400
Material yield variance	14222-16000=	-1778
Material cost variance	14222-11050=	3172

Total Quality Management:

noreply@blogger.com (Unknown) — Wed, 12 Aug 2009 15:37:00 +0000

Total Quality Management:

CIMA has defined TQM as “Continuous improvement in quality, productivity and effectiveness obtained by establishing management responsibility for process as well as output. In TQM, every process has an identified process owner and every person in an entity operates within a process and contributes to its improvement”.

TQM initiates total quality cost programme., they are as follows:

(a) Prevention cost which is incurred in preventing of producing the product that do not conform to specification.

(b) Appraisal cost is incurred for detecting the individual product which do not conform to specification.

(d) External failure cost which is incurred in detecting the non-conforming products after passing to customers.

Backflush Accounting (Backflush costing).

noreply@blogger.com (Unknown) — Wed, 12 Aug 2009 15:36:00 +0000

Backflush Accounting (Backflush costing).

Definition:

CIMA defines it as “cost accounting system, which focuses on the output of an organization and then works back to attribute costs to stock and cost of sales”.

Traditional costing systems use sequential tracking, i.e., costing methods are synchronized with physical sequences of purchases and production.

Backflush costing is the reversal of traditional costing, where traditional costing flow from accounting of inputs to outputs but backflush starts accounting only from outputs and then works back to apply manufacturing costs to units sold and to inventories. In this, cost of inventories are at the time of sale only. Costs are then flushed back through the accounting system. It is attractive for low inventory companies which results from JIT.

It eliminates WIP account. There are reason for justification, they are as follows.

i) To remove incentive for managers to produce for inventory.

ii) To increase the focus of the managers on plant-wide goal rather than on individual sub-unit goals.

Difficulties of Backflush costing:

i) It does not strictly adhere to generally accepted accounting principles of external reporting.

ii) Absence of audit trails leads to critics.

iii) It does not pinpoint the use of resources at each step of the production process.

iv) It is suitable only for JIT production system with virtually no direct material inventory and minimum WIP inventories. It is less feasible otherwise.

Average collection period:

noreply@blogger.com (Unknown) — Tue, 11 Aug 2009 15:46:00 +0000

Average collection period:

It is the average amount of time needed to collect accounts receivable.

Debtors receivables turnover:

noreply@blogger.com (Unknown) — Tue, 11 Aug 2009 15:45:00 +0000

Debtors receivables turnover:

It shows the relationship between credit sales and debtors of a firm.

It is sometimes difficult for the analyst to identify credit sales, average debtors and average bills receivable. Mainly to ascertain opening and closing details to identify average of it feels difficult in certain cases. To avoid difficulty of above cases, the alternative method is to calculate the debtors turnover in terms of the relationship between total sales and closing balance of debtors.

Receivables Turnover Ratio:

noreply@blogger.com (Unknown) — Tue, 11 Aug 2009 15:43:00 +0000

Receivables Turnover Ratio:

It helps to identify how quick the receivables or debtors are converted into cash. It helps to test the liquidity of the debtors of a firm. It is closely related to average collection period.

The liquidity of a firm’s receivables can be examined in two ways:

(1) Debtors receivables turnover;

(2) Average collection period.

Inventory( or Stock) Turnover Ratio:

noreply@blogger.com (Unknown) — Mon, 03 Aug 2009 09:42:00 +0000

Inventory( or Stock) Turnover Ratio:

It is to identify how fast the inventory moves out or sold. It measures the activity/ liquidity of inventory of a firm. It indicates the number of times inventory is replaced during the year. We can compute in two ways. One is the way to calculate dividing the cost of goods sold by the average inventory and the other is replaced by sales instead of cost of goods sold and instead of average inventory take the closing inventory. Average inventory is calculated on the basis are as follows.

Taking from January to January of opening inventory add them and divided by thirteen will be resulted to industry average.

Activity Ratios:

noreply@blogger.com (Unknown) — Mon, 03 Aug 2009 09:41:00 +0000

Activity Ratios:

Activity ratios measure the speed with which various accounts/ assets are converted into sales or cash. They are concerned with measuring the efficiency in asset management.

The efficiency with which assets are used would be reflected in the speed and rapidity with which assets are converted into sales. The greater is the rate of turnover or conversion, the more efficient is the utilization of assets, other things being equal. Turnover is the primary mode for measuring the extent of efficient employment of assets by relating the assets to sales. According to assets, the activity ratio changes. The various types of ratios are as follows.

(1) Inventory Turnover Ratio.

(2) Receivables Turnover Ratio.

(3) Asset Turnover Ratio.

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Price Earnings Ratio:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:36:00 +0000

Price Earnings Ratio:

It is closely related to earnings yield/earnings price ratio.

It is the ratio computed by dividing the market price of shares by EPS.

It measures the amount investors are willing to pay for each rupee of earnings; the higher the ratios, the larger the investors confidence in the firm’s future.

Earnings and Dividend Yield:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:35:00 +0000

Earnings and Dividend Yield:

It is closely related to EPS and DPS. While the EPS and DPS is based on the book value per share, the yield is expressed to terms of the market value per share.

Earnings yield may be defined as the ratio of earnings per share to the market value per ordinary share. Similarly, Dividend yield may be defined by dividing the cash dividends per share by the market value per share.

Dividend Pay-out Ratio:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:34:00 +0000

Dividend Pay-out Ratio:

It measures the proportion of dividends paid to earnings available to shareholders.

It measures the relationship between the earnings belonging to the ordinary shareholders and the dividend paid to them.

It shows what percentage of net profits after taxes and preference dividend is paid out as dividend to the equity-holders.

Dividend Per Share:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:34:00 +0000

Dividend Per Share:

It is the dividends paid to equity shareholders on a per share basis.

DPS is the net distributed profit belonging to the ordinary shareholders divided by the number of ordinary shares outstanding.

Price-to-Book Value Ratio:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:33:00 +0000

Price-to-Book Value Ratio:

It measures the relationship between market price of equity share with book value per share.

Book Value Per Share:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:32:00 +0000

Book Value Per Share:

It represents the equity/claim of the equity shareholder on a per share basis.

It is computed by dividing networth by the number of equity shares outstanding.

Cash Earnings Per Share:

noreply@blogger.com (Unknown) — Sat, 01 Aug 2009 15:29:00 +0000

Cash Earnings Per Share:

It is determined that the cash flow from business operations is divided by the number of equity shares outstanding.

Cash flow from operations added by non cash expenses, such as depreciation, amortization to net profits available to equity owners.

Earnings Per Share:

noreply@blogger.com (Unknown) — Sun, 26 Jul 2009 08:26:00 +0000

Earnings Per Share:

It is the amount that a shareholder get for every shares on the profit available to the equity shareholders on a per share basis.

It is calculated by dividing the profits available to the equity shareholders by the number of outstanding shares.

EPS is most widely used in estimation of firm’s value and performance.

EPS is a measure of profitability of a firm.

It helps to compare with past performance, comparison with other firms and comparing with the industry average.

Return on Ordinary Shareholders’ Equity (Net worth):

noreply@blogger.com (Unknown) — Sun, 26 Jul 2009 08:25:00 +0000

Return on Ordinary Shareholders’ Equity (Net worth):

It measures the return on the total equity funds of ordinary shareholders.

Preference shareholders are also the owners of firm, but equity shareholders are real owners who bears all risk, participate in management and are entitled to all the profits remaining after all outside claims including preference dividends are met in full.

It is calculated by dividing the profits after taxes and preference dividend by the average equity of the ordinary shareholders.

It helps to judge the firm has earned

a satisfactory return for its equity-holders or not.

It helps to compare with past results, inter-firm comparison, comparison with the overall industry average.

Return on Total Shareholders’ Equity:

noreply@blogger.com (Unknown) — Sun, 26 Jul 2009 08:22:00 +0000

Return on Total Shareholders’ Equity:

It is measured by dividing the net profits after taxes(but before preference dividend) by the average total shareholders’ equity.

Shareholders’ equity includes here as follows:

(i) Preference share capital,

(ii) Ordinary shareholders equity consisting of

(a) Equity share capital,

(b) Share premium, and

It helps to compare the relative performance and strength of the firm to other firms.

Return on Shareholders’ Equity:

noreply@blogger.com (Unknown) — Sun, 26 Jul 2009 08:21:00 +0000

Return on Shareholders’ Equity:

The relationship between return and the shareholders’ equity or owners’ funds.

It measures the return on the owners investment in the firm.

The shareholders of a firm fall into 2 categories:

Preference Shareholders,

Equity shareholders.

Preference shareholders will give preference right over dividends first than to the equity shareholders.

Return on shareholders’ equity classified into:

(1) Rate of return on

(i) Total shareholders’ equity,

(ii) Equity of ordinary shareholders.

(2) Earnings per share,

(3) Dividends per share,

(4) Dividend-pay-out ratio,

(5) Dividends and Earnings yield,

(6) Price-earnings ratio,

(7) Cash earnings per share,

(8) Book value per share,

(9) Price-to-book value per share.

Return on capital employed:

noreply@blogger.com (Unknown) — Sat, 25 Jul 2009 01:56:00 +0000

Return on capital employed:

ROCE is the second type of ROI. It is the relationship between the profits and capital employed.

The term capital employed refers to long-term funds supplied by the lenders and owners of the firm.

There are 2 ways. First, non-current liabilities(long-term liabilities) plus owners’ equity.

Alternatively, its equivalent to net working capital plus fixed assets.

Second, it is equal to long-term funds minus investments made outside firm.

It is to estimate how efficient the long-term funds have been used?

If the ratio is higher, the more efficient is the use of capital employed.