1. From the following information relating to Palani Bros Ltd.

, you are required

to find out
(a)P / V ratio (b) Break even point (c) profit (d) Margin of safety (e) Volume of sales
to earn profit of Rs.6,000
Total fixed costs Rs.4,500
Total variable costs Rs.7,500
Total sales Rs.15,000

ANSWER:
(A) P/V RATIO = Contribution/Sales * 100
Contribution = Sales - Variable cost
= 15,000 - 7,500
= Rs 7,500
Thus,
P/V RATIO = 7,500 / 15,000 * 100
= 50%

(B) B.E.P = Fixed cost / P/V Ratio

= 4,500/50%
= Rs 9,000

(c) Profit = Contribution - Fixed cost

= 7,500 - 4,500
= Rs 3,000

(d) M.O.S = profit/p/v ratio

= 3,000/50%
= Rs 6,000

(e) Volume of sales to earn a profit of Rs 6,000

Required sales = Fixed cost + desired profit / P/V ratio
= 4,500 + 6,000 / 50%
= Rs 21,000

2. From the following information, calculate

a. Break Even point
b. No. of units that must be sold to earn profit of rs.60,000 per year
c. No. of units that must be sold to earn a net income of 10% on sales.
Sales price = Rs.20 per unit
Variable cost = Rs.14 per unit
Fixed cost = Rs.79, 200

Answer:
Contribution per unit = Sales price per unit - variable cost per unit
= 20 - 14
= Rs 6
P/V ratio = contribution/sales * 100
= 6/20 * 100
= 30%
B. E.P (in units) = Fixed cost / Contribution per unit
= 79,200 / 6
= 13,200 units

No. of units that must be sold to earn profit of rs.60,000 per year
Required sales = F.C + Desired profit / P/V ratio
= 79,200 + 60,000 / 30%
= Rs 4,64,000
No. Of units = Required sales / selling price per unit
= 4,64,000 / 20
= 23,200 units

No. of units that must be sold to earn a net income of 10% on sales.
Let x be the number of units
Selling price = F.C + V.C + Profit
20x = 79,200 + 14x + 2x
20x - 16x = 79,200
X = 79,200/4
X = 19,800 units

Proof:
Sales = 19,800 * 20 = 3,96,000
- V.C 19,800*14 = 2,77,200
Contribution 19,800*6 = 1,18,800
- F.C = 79,200
Profit = 39,600

Profit as of % of sales = 39,600/3,96,000 * 100 = 10%

3. A factory‟s data are as follows:

Fixed expenses Rs.4, 00,000
Variable cost per unit Rs.20
Selling Rs.30
Calculate the Break-even point. Find out the new break even point if the selling price
is reduced to Rs 15.

Answer:
Contribution per unit = sales per unit - v.c per unit
= 30 - 20
= Rs 10
B.E.P (in units) = Fixed expenses/contribution per unit
= 4,00,000/10
= 40,000 units

New contribution when S.P is Rs 15 = 15 - 10 = Rs 5

B.E.P = 4,00,000/5 = 80,000 UNITS
4.

Answer:
M. O.S = 40% of sales
M.O.S = 40/100 * 50,00,000
= Rs 20,00,000
B.E.P = Actual sales - M.O.S
= 50,00,000 - 20,00,000
= rs 30,00,000
B.E.P = Fixed cost / P/V Ratio
30,00,000 = F.C/50%
F.C = Rs 15,00,000

Contribution = Sales * P/V Ratio

= 50,00,000 * 50%
= Rs 25,00,000

Profit = Contribution - Fixed cost

= 25,00,000 - 15,00,000
= Rs 10,00,000

V.c = Sales - Contribution

= 50,00,000 - 25,00,000
= Rs 25,00,000
Labour cost = 25% * 25,00,000
= Rs 6,25,000

When labour efficiency is decreased by 5%

6,25,000 * 100/95
Rs 6,57,895

Increase in labour cost = 6,57,895 - 6,25,000

= Rs 32,895
New V.C = 25,00,000 + 32,895
= Rs 25,32,895
Contribution = Sales - V.C
= 50,00,000 - 25,32,895
= Rs 24,67,105
Profit = Contribution - F.C
= 24,67,105 - 15,00,000
= Rs 9,67,105

New P/V ratio = 24,67,105/50,00,000 * 100

 = 49.34%
B.E.P = F.C/P/V ratio
= 15,00,000/49.34%
= Rs 30,40,129

5.

Answer:
Product A Rs Rs
Selling price 75
- Direct material 30
- Direct wages 7.50
- Variable O.H 7.50
------- 45
Contribution 30

Product B Rs Rs
Selling price 48
- Direct material 30
- Direct wages 1
- Variable O.H 1
------- 32
Contribution 16

PROFITABILITY = CONTRIBUTION / KEY FACTOR

Or
= CONTRIBUTION / LABOUR HOURS
Product A = 30/15 hours = Rs 2 per hour
Product B = 16/2 hours = Rs 8 per hour

Product B is preferred during labour shortage

 MANAGEMENT ACCOUNTING
TYPE - SPECIAL ORDER DECISION
Abba Ltd has a production capacity of 4000 units. It is currently operating at 75%
capacity and sells its products at Rs.18 per unit. The cost of the product is given
below:
Rs.(Per Unit)
Direct Materials
5
Direct Labour 2
Manufacturing overhead (40% variable) 5
Marketing costs(50% variable) 4
TOTAL
16
The company has received a special order for 500 units at Rs.14 per unit. The
additional 500 units can be produced using the available idle capacity. The special
order price will not have any impact on the regular marker of Abba Ltd. But the
additional units will require a special packing at a cost of re.1 per unit. Should the
order be accepted? What will be the impact on the company‟s current profit?

Answer:
1 2 3 4 5 6
Particulars Revenue Incremental Cost Incremental Net
Revenue cost incremental
revenue
(3-5)
Current 54,000 - 33,000 - -

Total if 61,000 7,000 39,000 6,000 1,000

proposal
accepted

If the order is accepted it will yield an additional profit of Rs.1000. The operating
profit of the company will also go up by Rs.1000. So, we can accept the order.

Working note:
Based on S.P
Present capacity 75% of 4,000 units = 3,000 units
3000 units for 18 per unit = Rs 54,000

3000 units for 18 per unit = Rs 54,000

500 units for 14 per unit = Rs 7,000
Total = Rs 61,000

Based on cost
Direct materials -5
Direct labour - 2
Manufacturing O.H (40% variable) - 2
Marketing cost (50% variable) - 2
Total - Rs 11
3000 units at 11 per unit = Rs 33,000

3000 units at 11 per unit = Rs 33,000

500 units at Rs 12 per unit = Rs 6,000

Special order cost

Direct materials -5
Direct labour - 2
Manufacturing O.H (40% variable) - 2
Marketing cost (50% variable) - 2
Packaging -1
Total - Rs 12

BUDGET
On The Basis Of Time
1) Long Period Budget:
Budget relating to period of say 5 to 10 years are called long period budget. Examples
are capital expenditure budget, R&D budget.
2) Short Period Budget:
It relates to a period of usually one year. Examples are cash budget, production
budget, working capital budget, etc..
3) Current Budget:
They are meant for a very short period of a quarter or a month.

On The Basis Of Flexibility

1) Fixed Budget:
It is a budget designed to remain unchanged irrespective of the
level of activity actually attained.
2) Flexible Budget:
According to C.I.M.A, London, flexible budget is “a budget which, by recognizing
the difference between fixed, semi-variable and variable cost is desired to change in
relation to the of activity achieved.

On The Basis Of Functions

Operating Budgets
These relate to the operating activity of an organisation, like, sales, purchase etc. It
includes the following:
1)Sales Budget:
It gives the sales to be achieved during the period, in terms of division, type of
products, quantity of each product and sales value. It is prepared by the sales
manager.
2)Production Budget:
It is an estimate of goods that must be produced during the budget period, in terms of
division, type of product and quantity of each type. It is prepared by the production
manager.

3)Production Cost Budget:

It gives the total cost to be incurred for production during the budget period. Since
production includes material, labour and overheads, the budget is divided accordingly
in to material cost budget, labour cost budget and overhead cost budget.
4)Materials Budget:
This budget deals with only direct material requirement. Indirect materials are
included in factory overheads budget. It gives an estimate of the materials required for
production and an estimate of raw materials to be purchased.
5)Labour Budget:
It gives an estimation of the different classes of labour required
for each department, than pay rate, and the hours to be spent.
6)Overhead Budgets:
It shows the details of overhead expenses likely to be incurred during the budget
period, in terms of factory overhead, administration overhead, selling and distribution
overhead.
7)Research and Development Budget:
It gives details of the cost to be recurred in research and development likely to
undertaken by the organisation during the budget period.

Financial Budget
1) Cash Budget:
It gives an estimate of receipts and payment of cash during the budget period. It is
generally prepared for a year on a monthly basis for better control over inflows and
outflows.
2) Capital Expenditure Budget:
This budget shows the estimate expenditure on long terms assets, i.e. fixed assets,
during the budget period. It is prepared by the finance manager or capital expenditure
committee.
3) Working Capital Budget:
It gives an estimation of the working capital requirement during the budget period.
Working capital needs can be forecasted either by using,
(a) Operating cycle method.(or)
(b) Percentage of sales method. (or)
(c) Current assets and current liabilities method.

Master Budget
According to C.I.M.A, London, master budget is “ a summary budget, incorporating
its component functional budget, which is finally approved, adopted and employed”.
It gives an overall view of the expenses and income, profit and financial position in
the form of projected profit and loss account and balance sheet
 HOMEWORK

1.