Sanxiv

Accountancy

Company

A company is the voluntary association of person formed under the legal procedure for undertaking business scheme. It is also known as the artificial person created by law as well as terminated by law. Company have distinct entity from its member or, owners.

According to the company act 2063- “A company refers to any company formed and registered in this act.”

According to L.H. Haney- “A joint stock company is a voluntary associations of persons for profit whose capital is divided into transferrable shares and ownership is required for its membership.”

Some characteristics of the company is given as follows:

Artificial body: the company is the artificial in nature, but they do every work as a natural person. It has separate legal entities from its member. It can purchase and sell its properties in its own name. It also incur expenditure and received income in its own name. It can sue others and be sued by others in its name. Though it is not a natural person, acts like human being. Thus, it is called artificial person.

Created by law: The Company is established carried on and even liquidated under the legal formalities. It requires to prepare the various documents and apply to the office of company’s register for the certificate of incorporation.

Limited liability: the liability of shareholders in company is limited to the face of the shares allotted to them. The shareholders are not liable to pay excess amount except due of their holding even if the business properties are insufficient to pay the claims of creditors.

Democratic management: A company run and managed in democratic manner. It is established by the shareholders and work themselves. It is managed by board of directors who are elected to representative of shareholders. Thus, a company is a democratic organization running under democratic practices.

Perpetual succession: the company has distinct legal identity and existence separate from its shareholders. There is distinction between the ownership and management of company. It is owned by the board of directors. The company goes on continuing in spite of the death, incapability lunacy and insolvency of its shareholders. Thus the company has got permanent life by the legal procedure.

Classification of company.

There are various types of companies formed and established as per the requirement. It can be shown as graphical representation.

Private company: A company which is established with the certain privileges under company act

2063 is called public company. It restricts the right of their members transfer their shares, limits the number of members to not more than fifty and prohibits any invitation to the public to subscribe for any of its shares. This types of company uses the word ‘private limited’ at the end of the name.

Privileges of private company

• It can be established by a single person.
• It doesn’t need to issue the prospectus at the time of issue of share.
• It can refuse the transfer of share from one people to another people.
• It is not requires to keep and maintain index of members.
• It is not necessary to get the certificate of the commencement of the business before starting business.
• It doesn’t requires to hold statutory meeting.

Privileges of public company

• It needs at least seven members and maximum not limited.
• It is free to invite the people to purchase its share and debenture.
• It must issue prospectus.
• It allows the members to transfer their share freely.
• It must hold a statutory meeting.
• It must obtain the certificate of commencement before starting business activities.
• It must be publish financial statement.

Document of the company.

In the process of formation or in corporation of a company, a numbers of documents should be prepared and presented to the registrar company. Following are the main document to be prepared by the company:

Memorandum of association

It is the most important document of a company. It defines the object and the power of a company and the company’s relationship with the outside world. It sets out the constitution of a company. Thus, it is the charter of the company and provides the foundation on which the structure of the company is built. It enables the persons who deal with the company to know its permitted range to activities.

It should contains the following information:

• Full name of the company.
• Address of the registered office of the company and place of its information.
• Objectives of the company.
• Activities directed at achieving the objective of the company.
• Authorized capital of the company including the details of types of shares, their numbers and denominations.
• The number of shares to be taken up by the promoters as per promised by them.
• Currently issued numbers of shares.
• Restriction if any transferability of shares.
• Other necessary details.

Share

Share is the unit part of the authorized capital. In the companies the share have a fixed rate. In other words, the total capital of company is divided into smaller number of units which is known as share. There are mainly two types of share:

• Preference share
• Equity share

After the payment of debenture the share which take priority is known as preference share.

The people who invest in this type of share is called preference shareholder. The collected amount from the preference shareholder is known as preference share capital. These share have a fixed rate. It can be convert one type to another, for this they have legal authority. They aren’t take any kinds of risk that’s why they haven’t voting right to elect the board of director.

Equity shares are those shares who gets priority after preference share. The investors who invest in this type of share is known equity shareholders and the amount collected from those shareholders is known as equity share capital. They haven’t a fixed rate of dividend. These share are also not convertible. The investors who invest in this type of share are the real owner of the company. They elect the board of director.

The difference between preference share and equity share:

[[PASTING TABLES IS NOT SUPPORTED]]

Some features of equity shares:

• It is one of the permanent sources of capital.
• It is easily transferred from one person to another person.
• It has voting right in management and control of company.
• It is known as ownership capital of company.
• It receives surplus profit after payment of interest on debenture and dividend on preference share.
• It is risk bearing share of company.

Importance of equity share

• Importance to the shareholders:

• Voting right to the shareholder.
• Receipt of higher dividend in case of high profit.
• Easy transferability of shares.

• Importance to the company

• Benefit of permanent capital.
• No need to pay dividend in case of loss in company.
• Election of directors among shareholders.

The following journal entry for the issue of share:

Issue of share for cash on lump sum basis

• If share issues at par

Bank a/c …. Dr.

To, share capital a/c

(being issue of ….. share @ rs. …. Each in lump sum basis)

• Issue of share at premium

Bank a/c ….. Dr.

To, share capital a/c

To, share premium a/c

( being issue of …… share @ Rs. ….. each in lump sum basis )

• Issue of share at discount

Bank a/c … Dr.

Discount on issue of share a/c …… Dr.

To, share capital a/c

(being issue of ……. Share @ rs. … each at discount in lump sum basis )

Issue of share on instalment basis

• When share issued at par.

For the receiving share application money:

Bank a/c ….. dr.

To, share application a/c

(being share application money received)

For the transferring share application money to share capital a/c

Share application a/c … dr

To, share capital a/c

(being share application money transferred to share capital a/c)

For the making allotment money due

Share allotment a/c dr.

To, share capital a/c

(being share application money due.)

For receiving share allotment money

Bank a/c dr

To, share allotment a/c

(being share allotment money due)

For the making first and final call

Share f/f call a/c dr

To share capital a/c

(being share f/f call money due)

For the receiving share f/f call money

Bank a/c dr

To, share f/f call a/c

(being share f/f call money received)

When share issue at premium and the premium money include with the allotment

• When the share application money received:

Bank a/c Dr.

To, share application a/c

(being share application money received)

• When share application money transferred to share capital a/c

Share application a/c Dr.

To, share capital a/c

(being share application money transferred to share capital a/c)

• When share allotment money due.

Share allotment a/c Dr.

To, share capital a/c

To, share premium a/c

(being share allotment money due including premium)

• When share allotment money due.

Bank a/c Dr.

To, share capital a/c

(being share allotment money due including premium)

• When share first and final call money due

Share f/f call a/c Dr.

To, share capital a/c

(being share first and final call money due)

• When share first and final call money received

Bank a/c Dr.

To, share first and final call a/c

(being share first and final call money received)

When share issue at discount in discount money exclude in allotment

• When share application money received

Bank a/c Dr.

To, share application a/c

(being share application money received.)

• When share application money transferred to share capital account.

Share application a/c Dr.

To, share capital a/c

(being share application money transferred to share capital a/c)

• When share allotment money due

Bank a/c Dr.

Discount on issue of share a/c Dr.

To, share capital a/c

(being share allotment money due excluding discount)

• When share allotment money received.

Bank a/c Dr.

To, share allotment a/c

(being share allotment money due excluding discount)

• When share first and final call money due

Share f/f call a/c Dr.

To, share capital a/c

(being share f/f call money due)

• When share f/f call money received

Bank a/c Dr.

To, share f/f call a/c

( being share first and final call money received)

When share issue at par and some share of allotment and f/f call money not received.

• When share application money received

Bank a/c Dr.

To, share application a/c

( being share application money received)

• Share application a/c Dr.

To, share capital a/c

( being share application money transferred to share capital a/c)

• When share allotment money due.

Share allotment a/c Dr.

Discount on issue of share a/c Dr.

To, share capital a/c

(being share allotment money due excluding discount)

• When share allotment money received

Bank a/c Dr. (par value – discount – calls in arrear)

Calls in arrear a/c Dr.

To, share allotment a/c (par value – calls in arrear )

( being share allotment money received excluding discount except ……. Shares)

• When share first and final call money due

Share f/f call money a/c Dr.

To, share capital a/c

(being share f/f call money due)

• When share f/f call money received except some shares

Bank a/c Dr. (par value – discount)

Calls in arrear a/c Dr.

To, share f/f call a/c

(being share first and final call money received except n numbers of share)

The following journal entry at the time of issue of debenture:]

• If the issue of debenture at par and redeemable at par.

Bank a/c dr. (par value)

To, debenture a/c (par value)

(Being ……………debenture of rs. ……. Each were issued at par and redeemable at par.)

• If issue of debenture at premium and redeemable at par:

Bank a/c dr. (Par value + issue premium)

To, debenture a/c (par value)

To, debenture premium a/c (issue premium)

(being ………debenture of rs. ….. each were issued at premium and redeemable at par.)

• If issue of debenture at discount and redeemable at par:

Bank a/c ……..dr (par value – discount)

Discount on issue of debenture a/c (issue discount)

To, debenture a/c (par value)

(being ….. debenture of rs. …. Each were issued at discount and redeemable at par.)

• If issue of debenture of at par and redeemable at discount :

Bank a/c dr. (par value)

To, debenture a/c (par value)

(being ………. Debenture of rs. ……each were issued at par and redeemable at discount)

• If issue of debenture at par and redeemable at premium:

Bank a/c ….dr. (par value)

Loss on issue of debenture a/c dr. (repayable premium)

To, debenture a/c (par value)

To, premium on red. On debenture a/c (repayable premium)

(being …….. debenture of rs. …… each were issued at par and redeemable at premium)

• If issue of debenture at discount and redeemable at discount:

Bank a/c ….dr. ( par value – issue discount )

Discount on issue of debenture a/c (issue discount)

To, debenture a/c (par value)

( being ……. Debenture of rs. …. Each were issued at discount and redeemable at discount)

• If issue of debenture at premium and redeemable at premium:

Bank a/c dr. (par value +issue premium )

Loss on red. Of debenture a/c (repayable premium)

To, debenture a/c ( par value)

To, debenture premium ( issue premium)

To, premium on red. On debenture a/c (repayable premium)

( being ……. Debenture of rs. ….. each were issued at premium and redeemable at premium)

• If issue of debenture at discount and redeemable at premium:

Bank a/c dr (par – issue discount)

Loss on issue of debenture a/c .. dr. ( repayable premium)

Discount on red. Of debenture a/c (issue discount )

To, debenture a/c (par value)

To, debenture premium ( repayable premium)

( being …….. debenture issue of rs.. ….. each were issued at discount and redeemable at premium)

• If issue of debenture at premium and redeemable at discount:

Bank a/c dr. (par value+ premium)

To, debenture a/c ( par value)

To, debenture premium a/c ( issue premium)

(being ……. Debenture of rs. Each were issued at premium and redeemable at discount )

The following journal entry for the redemption of :

• If issue of share at par or, premium or, discount but redeemable at par:

Debenture a/c …Dr.

To, bank a/c

(being ……. Debenture of rs …… each were redeemed at par)

• If issue of debenture at par, premium or, discount but redeemable at premium:

Debenture a/c ….. Dr. (par value)

Loss on redemption of debenture a/c Dr. (repayable premium)

To, bank a/c (par + repayable premium)

(being ….. debenture of rs …. Each were redeemed at premium of rs …. Each)

• If issue of debenture at par or, premium or, discount but redeemable at discount:

Entry for shares when more than one group is given:

Working note:

[[PASTING TABLES IS NOT SUPPORTED]]

At the time of application money received:

Bank a/c –Dr. (A)

To, share capital a/c (A)

(Being share application money received)

At the time of share application money t/f to share capital a/c:

Share application a/c –Dr. (A)

To, share capital a/c (B)

To, share allotment a/c (c)

To, share f/f call a/c (d)

To, bank a/c (E)

(Being share application money t/f to share capital a/c and balance of advance were adjusted and refunded)

Issue of share other than cash:

1. If the asset only purchased from vendor:

Assets a/c –DR

Goodwill a/c –DR (balancing figure)

To, vendor a/c (purchase price)

To, capital reserve a/c (balancing figure)

(Being asset purchase from vendor)

1. If the asset and liability both purchased from vendor:

Asset a/c –DR

Goodwill a/c -DR (balancing figure)

To, sundry liability a/c

To, vendor a/c (purchase price)

To, capital reserve a/c (balancing figure)

(Being asset and liability purchase from vendor.)

B. I If the purchase price discharged or paid by issuing share to the vendor:

I) If share were issued to vendor at par:

Vendor a/c –DR (purchase price)

To, share capital a/c

(Being …. Of Rs… each share were issued to vendor at par)

• If share were issued to vendor at premium:
  1. Vendor a/c –DR

To, share capital a/c

To, share premium a/c

• If share were issued to vendor at discount.

Vendor a/c _DR

Discount on issue of share a/c –DR

To, share capital a/c

(Being …. Share of Rs.. each were issued to vendor after deducting discount)

Working note:

No. of share issued to vendor= purchase / net price per share.

Net price per share= par value + premium –Discount

Purchase price= total asset – total liabilities

Accounting for debenture:

Issue of debenture with redeemable conditions:

1. Issue of debenture at par and redeemable at par:

Bank a/c—DR

To, debenture a/c

(Being issue of debenture of Rs.. each at par and redeemable at par.)

1. Issue of debenture at par but redeemable at premium

Bank a/c—DR

Loss on issue of debenture a/c—DR

To, Debenture a/c

To, premium on redemption on debenture a/c

(Being issue of debenture at par and redeemable at premium)

1. Issue of debenture at par but redeemable at discount

Bank a/c—DR

To, debenture a/c

(Being issue of debenture at par but redeemable at premium)

1. Issue of debenture at discount and redeemable at par.

Bank a/c –Dr

Discount on issue of debenture a/c –DR

To, debenture a/c

(Being issue of debenture at discount and redeemable at par)

1. Issue of debenture at discount but redeemable at premium

Bank a/c –Dr

Discount on issue of debenture a/c –Dr

Loss on issue of debenture a/c –Dr

To, debenture a/c

To, premium on red. Of debenture a/c

(Being issue of debenture at discount but redeemable at premium)

1. Issue of debenture at discount and redeemable at discount

Bank a/c –Dr

Discount on issue of debenture a/c –Dr

To, debenture a/c

(Being issue of debenture at discount and redeemable at discount)

Redemption of debenture:

If debenture redeemed at par

• For the making the amount due for redemption

Debenture a/c—Dr

To, debenture holder a/c

(Being amount due for redemption of debenture)

• For making payment of debenture holders

Debenture holder a/c –Dr

To, bank a/c

(Being amount paid to debenture holder)

If the debenture are redeemed at premium

• For the making amount due to debenture holder

Debenture a/c –Dr

Premium on redemption of debenture a/c –Dr

To, debenture holder a/c

(Being amount due for redemption of debenture)

• For making payment to debenture holder

Debenture holder a/c –Dr

To, bank a/c

(Being amount paid to debenture holders)

If the debenture are redeemed at discount

• For making the amount due to debenture holder

Debenture a/c –DR

To, debenture holder a/c

To, discount on redemption of debenture a/c

(Being amount due to debenture holder)’

• For making payment to debenture holders

Debenture holder a/c –Dr

To, bank a/c

(Being amount paid to debenture holder)

Redemption of debenture by conversion:

• If the debenture are redeemed at par but share or new debenture issued at par, premium or discount.

• For making amount due for redemption

Debenture a/c—Dr

To, debenture holder a/c

(Being amount due to debenture holder)

• For issues of share or new debenture to debenture holder:

• At par

Debenture holder a/c –DR

To, share capital a/c

(Being issue of …. Share of Rs….. each for redemption of debenture)

• At premium

Debenture holder a/c –Dr

To, share capital a/c

To, share premium a/c

(Being issue of …. Share of rs… each at premium for the redemption of debenture)

• At discount

Debenture holder a/c –Dr

Discount on issue of share a/c –Dr

To, share capital a/c

(Being issue of ….. share of Rs… each at discount for redemption of debenture)

• If the debenture were redeemed at premium issued at par , premium or discount

• For making amount due to debenture holder:

Debenture holder a/c—Dr

Premium on redemption of debenture a/c –Dr

To, debenture holder a/c

(Being amount due to debenture holder)

• For issue of share or new debenture to debenture holder

• At par

Debenture holder a/c—Dr

To, share capital a/c

(Being … share of Rs… each were issued at par for redemption of debenture)

• At premium

Debenture holder a/c –Dr

To, share capital a/c

To, share premium a/c

(Being issue …… share of rs.. each at premium for redemption of debenture)

• At discount

Debenture holder a/c –Dr

Discount on issue of debenture a/c

To, share capital a/c

(Being issue of …… share of rs.. each at discount for redemption of debenture)

c) If the debenture are redeemed at discount but issue at par, premium or discount:

I) For making amount due to debenture holder

Debenture a/c—Dr

To, discount on redemption of debenture a/c

To, debenture holder a/c

(being amount due to debenture holder a/c)

• For issue of share or new debenture to debenture holder

• At par

Debenture holder a/c—Dr

To, share capital a/c

(Being … share of rs.. each were issue for redemption of debenture)

• At premium

Debenture holder a/c –Dr

To, share capital a/c

To, share premium a/c

(Being issue ……share of rs.. each at premium for redemption of debenture)

• At discount

Debenture holder a/c ---Dr

Discount on issue of share a/c –Dr

To, share capital a/c

(Being issue ….. share or rs.. each at discount for redemption of debenture)

Working note:

No of share issued = Amount payable to debenture holder/ net price per share

Net price per share= par value + premium – Discount

Ratio Analysis

• 
  
  • liquidity ratio

Current ratio = current asset / current liabilities

Liquid ratio= quick asset /current liabilities

• 
  
  • leverage ratio/ solvency ratio / capital structure ratio

• debt equity ratio= long term debt / share holder fund

Long term debt= debenture , bank loan, secured loan, mortgage loan, bond, terms loan

Share holder fund = equity share capital, preference share capital, share premium, reserve and surplus + general reserve + p/l a/c + retained earning + any fund+ share forfeiture a/c

• discount on issue of share – underwriting commission – preliminary expenses.

• Debt to total capital ratio = long term debt / total capital

Total capital = long term debt + share holder fund

• 
  
  • turnover ratio / activity ratio / efficiency ratio

• inventory turnover ratio = cost of goods sold / average inventory

cost of goods sold = net sales – gross profit

or, opening stock+ purchase of raw material+ carriage inward + wages + factory expenses – closing stock

Average inventory =opening stock + closing stock / 2

• debtor turnover ratio = credit sales / average debtor

credit sales = total sales – cash sales

average debtor = opening debtor + closing debtor / 2

• average collection period/ debt collection period = days / month in a year/ debtor turnover ratio

or, ACP= days in a year * average debtor/ credit sales

or, ACP= average debtor/ credit sales per day

• fixed asset turnover ratio = net sales / fixed asset

fixed assets = total asset- depreciation – current asset

net sales = sales – sales return

• total asset turnover ratio = net sales/ total asset

total asset= current asset + fixed asset

• capital employed turnover ratio = sales/ capital employed

capital employed = share holder fund + long term debt

or, capital employed = total asset – current liabilities

• 
  
  • profitability ratio

• gross profit margin = gross profit / net sales *100

gross profit= sales –cost of goods sold

net sales= sales – sales return

• net profit margin = net profit after tax/ net sales *100

net profit after tax= net profit before tax – tax

• return on asset = net profit after tax+ interest / total asset *100
• return on shareholder equity =net profit after tax/share holder’s equity *100
• return on common shareholder’s equity = net profit after tax – preference dividend / common shareholder’s fund *100

common shareholder’s equity= shareholder’s equity – preference dividend

• return on capital employed = net profit after tax + interest / capital employed *100
• earning per share = net profit after tax – preference dividend / number of equity share
• dividend per share = total dividend paid to equity share holder/ no. of equity shares
[[PASTING TABLES IS NOT SUPPORTED]]

Adjusted profit and loss a/c

[[PASTING TABLES IS NOT SUPPORTED]]

While preparing necessary ledgers, the following point should be kept in mind:

• The ledger is opened on the basis of balance shown in balance sheet.
• The balance shown in balance sheet are closing balance of that accounting period.
• The closing balance of last year become opening balance of current year.
• The item of asset always show debit balance whereas items of liability always show credit balance.
• The opening balance Of asset is written in debit side whereas the closing balance of asset is written in credit side.
• The opening balance of liability is written in credit side whereas the closing balance of liability is written in debit side.
• The balancing figure of credit side of tangible long term asset indicate either depreciation or loss on sales or sales and balancing figure on debit side indicate purchase or gain on sales of fixed asset.
• The balancing figure on credit side of intangible fixed asset means writing off of such asset and is shown in adjusted p/l a/c.

Preparation of funds flow statement:

It is the last step under funds flow statement. It is prepared after the preparation of schedule changes in working capital and calculation of funds flow statement.

The specimen of funds flow statement under T-form is shown below:

[[PASTING TABLES IS NOT SUPPORTED]]

Format of cash flow statement

Cash flow statement under direct method

Calculation of Cash flow from operating activities

[[PASTING TABLES IS NOT SUPPORTED]]

According to the International Accounting Standard 7 (revised 1992), different term are defined in following way:

1. Cash: It comprises cash on hand and demand deposit.
2. Cash equivalent: These are short term, highly liquid investment that are readily convertible to known amount of cash and which are subject to an insignificant risk of change in value.
3. Cash flow: Inflow and outflow of cash and cash equivalent.
4. Operating activities: They are the principle revenue producing activities of the enterprise and other activities that are not investing and financing activities.
5. Investing activities are the acquisition and disposal of long term asset and other investment not included in cash equivalents.
6. Financing activities: they are that activities that result in change in the size and composition of the equity capital and borrowing of the enterprises.

Bin card

Bin card is the document used by storekeeper to keep quantitative record of receipt and issuing of materials in a store. Generally, bin means a space, rack, container or shelf where the goods are stored by storekeeper. Similarly, card means document containing quantitative information of the materials kept in a bin. Bin card in very valuable document which provides information relating to the physical quantity of material. It shows the quantity receipt, issues and balance at the particular point of time. It help the storekeeper to maintain control over physical quantity of materials.

Bin card is useful due to the following reasons:

• It provides the continuous record of each bin and helps the storekeeper to control over material in the store.
• It helps to know the information of stock position of every item by reference to bin card at any time.
• It gives the ideas of the receipts, issues and balances of materials.
• It makes the storekeeper responsible for the reporting of the materials to the concerned parties.

Format of the Bin card:

Bin Card

Description…….. Bin no: …. Maximum level……………..

Code No: …….. Location Code…… Minimum level……………..

Store ledger folio….. Re-order level………………

Re-order quantity………..

[[PASTING TABLES IS NOT SUPPORTED]]

Advantages of FIFO method:

• Simple to operate.
• Logical system.
• Suitable for slow moving material.
• Suitable at the time of falls price.

Disadvantages of FIFO method:

• Complicated method.
• Chances of clerical errors.
• Doesn’t reflect current economic values.
• Treatment of return as purchases.
• Not suitable for suitability quotation.

Advantages of LIFO method:

• Based on actual cost.
• Simple.
• Ensure the principle of current price level.
• Suitable for determining cost of production.
• No profit no loss.

Disadvantages of LIFO method:

• Stock valuation isn’t reasonable.
• Complicated.
• Difficulty in comparison.
• Unacceptable by tax authorities.

• Re-order level = maximum stock level + (Normal consumption * normal lead time/ re-order time)

Or, ROL= maximum consumption* maximum lead time / Re-order level.

• Maximum stock level = re-order level + re-order quantity – (minimum consumption * minimum lead time)
• Minimum stock level = re-order level –( normal consumption * normal lead time)

Normal usage/ Consumption= (maximum usage + minimum usage)/2

Normal lead time = (maximum lead time+ minimum lead time)/2

• Average stock = minimum + ½ (ROQ)

Or, (minimum stock level + maximum stock level)/2

• Re-order quantity = maximum stock level – Re-order level +(minimum consumption *minimum lead time)
• Economic Order Quantity = square root of 2 A O/ C

Where, A = annual requirement

O = ordering cost per order

C= carrying cost per unit.

From EOQ assumption:

Total ordering cost = total carrying cost.

Now,

Total ordering cost= number of order * ordering cost per order.

= annual requirement / order size * ordering cost per order.

Symbolically:

Total ordering cost= A/Q *O= AO/Q

Illustration:

Given,

Storage and other expenses/carrying cost = 20 % of average inventory.

Economic Order Quantity (EOQ) = 5oo kg.

Yearly demand of material = 10000 kg.

Material cost per unit = Rs.50

Ordering cost per unit =?

We have,

EOQ = square root of 2Ao/c

Or, 500 = square root of 2*10000*o/10 ( c = 20 % of 50 =10)

Squaring both side,

Or, (500*500) = 2*1000*o

Or, 250000=2000*o

Or, O=250/2

Thus, o= Rs.125

Again, total cost at EOQ= AO/Q + QC/2

0r, =10000*125/500 + 500*10/2

Or, =2500+2500

Thus, total cost at EOQ= 5000

System of wages payment

• Total wages under piece rate system =total unit produces * wages rate per unit

Let, see an illustration:

Given, standard output per hour= 2 units

Standard output per week = 40*2 =80

Total output during a year= no. of week in year * standard output per week. =50*80 =4000

Wages rate per unit= 20 per unit.

Total wages under pieces rate system=?

We have,

Total wages under pieces rate system= total unit produced*wages rate per unit.

Or, =4000*20

Thus, total wages= Rs.80000

• Total wages under time rate system= time taken * time rate.

Let, see an example:

Wages rate per hour= Rs.40

Standard time per unit=0.25

Weekly working hours= 40 hours

Total working weeks in a year= 50 weeks

Required: total wages under time rate system.

Solution:

Wages rate per unit= 40

Standard time per unit- 0.25 hour = 15 minute.

Standard time per unit= 60/15 = 4 units

Wages rate per hour= 4* 40 =160 (wages rate per unit* unit produced in an hour)

Working hour in a week =40

Working weeks in years= 50

Total working hour in a week = 50*40 (working weeks in a year * working hour in a week)

Total wages=?

We have,

Total wages= total working hour in a year * time rate

Or, =2000*160

Thus, total wages = 320000

Accounting for Overhead

“Overhead cost is expenditure on labour, material or service which cannot be economically identified with a specific saleable cost per unit.” – CIMA

Overhead can be defined as the indirect expenditure incurred by a firm on different heads other than material, direct labour and direct expenses which cannot be identified with a specific cost per unit. –Pinnacle publication

“Cost sheet is a document which provides for the assembly of the detailed cost of a cost centre or cost unit.” –CIMA London

A small detail:

Direct material + Direct Labour + Direct expenses = prime cost

Prime cost+ factory OH= factory Overheads

Factory OH + Office and Administrative OH = cost of production.

Cost of production + Selling and Distribution OH= total Cost/ Cost of sales

Cost of sales + profit/loss= sales

Adjustment of stock in Cost sheet:

Opening stock of raw material + Direct material + closing stock of raw material = cost of raw material consumed + Direct Labour + Direct expenses = prime cost

Prime cost+ factory OH + opening stock of work-in-progress – closing stock of work in progress = factory Overheads

Factory OH + Office and Administrative OH = cost of production.

Cost of production + opening stock of finished goods –closing stock of finished goods = cost of goods sold + Selling and Distribution OH= total Cost/ Cost of sales

Cost of sales + profit/loss= sales

# Closing stock of finished goods = opening stock of finished goods + production unit – sales

#cost of production per unit / cost per unit = cost of production / production unit

Preparation of Tender sheet or statement of quotation per for ……..

• Percentage of factory overhead on the basis of direct wages/labour

= factory overhead/direct wages *100

• Percentage of office and administrative overhead on the basis of factory cost/work cost

= office and admin. Overhead/factory cost *100

• Percentage of selling and distribution overhead on the basis of factory cost/ work cost

=selling and distribution overhead/ factory cost*100

Calculation of profit

Percentage of profit on total cost or cost of sales = profit %/total cost*100

Percentage of profit on sales = profit %/sales*100

Profit = cost of sales * given profit %/(100 – given profit %)

Cost reconciliation statement

[[PASTING TABLES IS NOT SUPPORTED]]