---
Debtors
30,000 50,000
Loans From
Bank
40,000
50,000
Stock
35,000 25,000
Capital 1,25,000 1,53,000 Machinery 80,000 55,000
Land 40,000 50,000
Building
35,000 60,000
-------------------------------------------------------------------------
2,30,000 2,47,000
2,30,000 2,47,000
-------------------------------------------------------------------------
---------------------------------------------------------------------------------
During the year, a machine costing rs.10,000 (accumulated
depreciation rs.3,000) was sold for rs.5,000. The provision for depreciation
against machinery as on 1-1-2011 was rs.25,000 and on 31-12-2011 it was
rs.40,000. Net profit for the year 2011 amounted to rs.45,000. Prepare cash
flow statement.
Calculation of Cash From Operations
Rs.
Net Profit For The Year 2011
45,000
Add: Addition To Provision For Depreciation
18,000
Loss Of Sale Of Machinery
2,000
---------
Funds From Operations
65,000
Add:
Decrease
In
Stock
10,000
Increase In Creditors
4,000
--------
79,000
Less: Increase In Debtors
20,000
Decrease In Bills Payable
25,000
-------- 45,000
--------
Cash From Operations
34,000
173
Capital A/C
To Drawings
17,000
By Balance B/D
1,25,000
(Balancing Figure)
To Balance C/D
1,53,000
By Net Profit For
The Year
45,000
1,70,000
1,70,000
Machinery A/C
To Balance B/D
1,05,000
By Bank Sale
5,000
(80000 + 25000)
By Provision For Dep. 3,000
By P&L A/C – Loss 2,000
By Balance C/D
95,000
( 5 5 0 0 0 + 4 0 0 0 0 )
1,05,000
1,05,000
Provision For Depreciation A/C
To Machinery A/C 3,000
By Balance B/D 25,000
(Dep. On Machinery
Sold)
By P&L A/C
To Balance C/D
40,000
Dep. For The Current
Year
18,000
43,000 43,000
Cash Flow Statement
Cash As On 1-1-2011 10,000
Add: Inflows
Cash Outflows:
Cash From
Operations
34,000
Drawings
17,000
Loan From Bank
10,000
Purchase Of Land
10,000
Sale Of Machinery 5,000
Purchase Of Building 25,000
Cash As On
31-12-2011
7,000
59,000 59,000
174
3.1.3.12 Summary
A funds flow statement officially called as statement of changes in
financial position, provides information about an enterprise’s investing
and financing activities during the accounting period. Though there
are many concepts of funds, the working capital concept of funds has
been used in this lesson. Flow of funds results only when there is a cross
transaction i.e. Only when a transaction involves a fixed asset or liability
and a current asset or liability. The main sources of funds are: funds from
operations, issue of shares and debentures and sale of non-current assets.
The main uses of funds are repayment of long-term liabilities including
redemption of preference shares and debentures, purchase of non-current
assets and payment of dividends. Funds flow statement helps the financial
analyst in having a more detailed analysis and understanding of changes
in the distribution of sources between two balance sheet dates. In addition
to funds flow statement concerns are also preparing cash flow statement
which is the outcome of cash flow analysis. Cash flow analysis is based on
the movement of cash and bank balances and the cash flow statement is a
statement depicting changes in cash position from one period to another
period.
3.1.3.13 Key Words
Working Capital: working capital is that part of capital used for the
purposes of day-to-day operations of a business.
Fund: fund refers to the long term capital used for financing current assets.
It can be ascertained by finding the difference between current assets and
current liabilities.
Flow of funds: flow refers to transactions which change the size of fund in
an organisation. The flow transactions are divided into uses and sources.
While the former refers to those transactions which reduce the funds, the
latter increases the size of fund.
Cash: cash refers to cash and bank balances.
Cash Flow: cash flow refers to the actual movement of cash in and out of
an organisation.
175
3.1.3.14 Self Assessment Questions
1. What do you mean by working capital concept of funds?
2. Explain the significance of funds flow analysis and cash flow
analysis.
3. Distinguish between schedule of changes in working capital and
funds flow statement.
4. Distinguish between cash flow analysis and funds flow analysis.
5. Shyam and company has the following information for the year
ending
31st march 2012:sales rs.5,000, depreciation rs. 450, other operating
expenses rs.4,100
You are required to:
Ֆ Estimate The Amount Of Funds Generated During The Year.
Ֆ If The Amount Of Depreciation Increases To Rs.9,000 What
Would Be Its Effect On Funds Generated During The Year.
Ֆ Under What Circumstances Can The Funds From Operation Be
Zero?
6. From the following balance sheets of damodar ltd. As on 31st december
2010 and 2011 you are required to prepare:
Ֆ A Schedule Of Changes In Working Capital
Ֆ A Funds Flow Statement
Assets
2010
2011
Goodwill
12,000
12,000
Building
40,000
36,000
Plant
37,000
36,000
Investments
10,000
11,000
Stock
30,000
23,400
Bills receivable
2,000 3,200
Debtors
18,000
19,000
Cash at bank
6,600
15,200
1,55,600 1,55,800
Liabilities
2010
2011
Share capital
1,00,000 1,00,000
General reserve
14,000
18,000
Creditors
8,000
5,400
Bills payable
1,200
800
176
Provision for taxation
16,000 18,000
Provision for doubtful debts
400 600
Profit & loss a/c
16,000 13,000
1,55,600 1,55,800
Additional information:
Ֆ Depreciation charged on plant was rs.4,000 And on building
Rs.4,000.
Ֆ Provision for taxation rs.19,000.
Ֆ Interim dividend of rs.8,000 Was paid during the year 2011.
7. The financial position of subhulakshmi ltd. On 1-1-2011 and 31-122011
Was as follows:
Liabilities
2010 2011 Assets
2010 2011
Rs. Rs.
Rs. Rs.
Current Liabilities 72,000 82,000 Cash
8,000 7,200
Loan From Rosary
40,000 Debtors
70,000 76,800
Ltd.
Stock
50,000 44,000
Loan From Gayatri 60,000 50,000 Land
40,000 60,000
Ltd.
Buildings 1,00,00 1,10,000
Capital & Reserves 2,96,000 2,98,000 Machinery 1,60,00 1,72,000
4,28,000 4,70,000
4,28,000 4,70,000
During the year rs.52,000 were paid as dividends. The provision for
Depreciation against machinery as on 1-1-2011 was rs.54,000 and on 31-
12-2011 was rs.72,000. Prepare a cash flow statement.
3.1.3.15 Key To Self Assessment Questions (For Problems Only)
Q.No.5: (I) Rs.900; (Ii) Rs.900; (Iii) When Other Operating Expenses
Are Increased To Rs.5,000 Or Sales Decreased To Rs.4,100 Without Any
Decrease In Other Operating Expenses.
Q.No.6: Increase In Working Capital Rs.5,000; Funds From Operations
Rs.17,000.
Q.No.7: Funds From Operations Rs.72,000; Cash From Operations
Rs.81,200.
177
3.1.3.16 Case Analysis
Given below are the balance sheets of bharathy ltd. For a period of three
years as at 31st march each.
Rs. In lakhs
2010
2011
2012
Liabilities
Share capital in equity shares of rs.10
Each
30 35
35
General reserve
10
15
18
Surplus
5
8
9
13% debentures
10
5
10
Bank credit
5
10 15
Trade creditors
10 12 15
Income tax provision
8
11 14
Proposed dividend
6
10.5 14
84
106.5 130
Assets
Plant and machinery
45
55
70
Investments
10
15
20
Stock
12
15
15
Debtors
14
15
12
Cash and bank
3
6.5
13
84
106.5
130
Other Details:
Ֆ Depreciation provided in the books:
Ֆ 2009-10: Rs.6 Lakhs; 2010-11: rs.8 Lakhs; 2011-12: rs.10 Lakhs
Ֆ A part of the debentures was converted into equity at par in
september 2010.
Ֆ There was no sale of fixed assets during the period.
As you are the management accountant of the concern, the management
seeks your advice on the liquidity position of the company. Analyse the
case and advice the management using funds flow analysis.
178
Hint:
Ֆ Calculate funds from operations.
Ֆ Prepare schedule of changes in working capital.
Ֆ Prepare funds flow statement.
Ֆ Calculate current ratio and liquidity ratio.
Based on the above workings suitable advice may be given to the
management.
----
179
180
CHAPTER– IV: Management Accounting
Lesson 4.1: Marginal Costing
4.1.1 Introduction
Marginal costing is a technique of costing. This technique of
costing uses the concept `marginal cost’. Marginal cost is the change in
the total cost of production as a result of change in the production by one
unit. Thus marginal cost is nothing but variable cost. In marginal costing
technique only variable costs are considered while calculating the cost
of the product, while fixed costs are charged against the revenue of the
period. The revenue arising from the excess of sales over variable costs
is known as `contribution’. Using contribution as a vital tool, marginal
costing helps to a great extent in the managerial decision making process.
This unit deals with the various aspects of marginal costing.
4.1.2
Know the meaning of marginal cost.
Understand the various elements of marginal costing technique.
Appreciate the importance of marginal costing as a decision Ֆ
making tool.
Realise the advantages and disadvantages of marginal costing.
Apply Marginal Costing Technique under appropriate situations.
4.1.3 Contents of concepts:
4.1.3.1 Various Elements Of Marginal Costing
4.1.3.2 Benefits Of Marginal Costing
4.1.3.3 Application Of Marginal Costing
4.1.3.4 Limitations Of Marginal Costing
4.1.3.5 Additional Illustrations
4.1.3.6 Summary
4.1.3.7 Key Words
4.1.3.8 Self Assessment Questions
4.1.3.9 Key To Self Assessment Questions
181
4.1.3.10 Case Analysis
4.1.3.1 Various Elements Of Marginal Costing
According to the institute of cost and management accountants
(icma), london, marginal cost is `the amount at any given volume of output
by which aggregate costs are changed if the volume of output is increased
or decreased by one unit’. Thus marginal cost is the added cost of an extra
unit of output.
Mc = Direct Material + Direct Labour + Other Variable Costs
= Total Cost – Fixed Cost.
Contribution
The difference between selling price and variable cost (or marginal
cost) is known as `contribution’ or `gross margin’. It may be considered as
some sort of fund from out of which all fixed costs are met. The difference
between contribution and fixed cost represents either profit or loss, as the
case may be. Contribution is calculated thus:
Contribution =
Selling Price – Variable Cost
=
Fixed Cost + Profit Or – Loss
It is clear from the above equation that profit arises only when contribution
exceeds fixed costs. In other terms, the point of ‘no profit no loss’ will be at
a level where contribution is equal to fixed costs.
Marginal cost equation
The algebraic expression of contribution is known as marginal cost
equation. It can be expressed thus:
S – V
=
F + P
S – V
=
C
C
=
F + P And In Case Of Loss
C
=
F – L
Where:
S
=
Sales
V
=
Variable Cost
C
=
Contribution
F
=
Fixed Cost
182
P
=
Profit
L
=
Loss
Profit Volume Ratio (P/V Ratio)
The profitability of business operations can be found out by
calculating the p/v ratio. It shows the relationship between contribution and
sales and is usually expressed in percentage. It is also known as `marginal-
income ratio’, `contribution-sales ratio’ or `variable-profit ratio’. P/v ratio
thus is the ratio of contribution to sales, and is calculated thus:
Contribution
P/V Ratio = ----------------- X 100
Sales
C S – V F + P
= --- or --------- or --------
S
S
S
Variable Costs
= 1 - ---------------------
Sales
The ratio can also be shown by comparing the change in contribution to
change in sales, or change in profit to change in sales. Any increase in
contribution, obviously, would mean increase in profit, as fixed expenses
are assumed to be constant at all levels of production.
Change In Contribution
P/V Ratio = -------------------------------
Change In Sales
Change In Profit
= ------------------------
Change In Sales
The importance of p/v ratio lies in its use for evaluating the
profitability of alternative products, proposals or schemes. A higher ratio
shows greater profitability. Management should, therefore, try to increase
p/v ratio by widening the gap between the selling price and the variable
costs. This can be achieved by increasing sale price, reducing variable costs
or switching over to more profitable products.
183
Break-Even or Cost-Volume-Profit Analysis
Break-even analysis is a specific method of presenting and studying
the inner relationship between costs, volume and profits. (hence, the name
c-v-p analysis). It is an important tool of financial analysis whereby the
impact on profit of the changes in volume, price, costs and mix can