UNIFORM COSTING AND

INTER-FIRM COMPARISON

THEORY AND ILLUSTRATIONS

OUTLINE
Page
No. Topic 1
A. UNIFORM COSTING

Meaning
2
2. Need and Objectives
Essential Pre-requisites For Success
038 5 33
3.
2
4. Advantages
3
. Limitations
6 Areas of Uniformity
7. Uniform Cost Manual
INTER-FIRM COMPARISON 5
B.

8. Meaning and Objectives

9.
10.
11.
Pre-requisites
Ratios For Inter-Firm Comparison
Advantages
YAN wvARD
12. Limitations
13. Simple Practical Problems

A. UNIFORM COSTING

1. MEANING
Uniform Costing is not a distinct method ofcosting. In fact when several undertakings start using the
samecosting principles and/ or practices, they are said to be following uniform costing. The basic
idea behind uniform costing is that the different concerns in an industry should adopt a common
method ofcosting and apply uniformly the same principles and techniques for better cost comparison
andcommon good. It has been defined by the Institute of Cost and Works Accountants of England as
"The use by several undertaking ofthe same costing principles andor practices". Thus when a
number of undertakings, whether under the same
management or not, decide to follow one set of
accepted costing principles especially in matters where there can be two opinions-they are said to
be following uniform costing.
 Cost Accounting III-

(TYBAF: SEM-R
NEED AND OBJECTIVES
2
The principles and methods
of compilation, analysis,
apportionment and absorption of overheac
differ from one concern to the other in the same
industry, but if a
adopted by all, it helps mutually in cost control and cost reduction. Itcommon or uniform pattern
makes inter firm
easy and, of course, one ofthe aims of compariso
uniform costing is to introduce inter-firm comparison.
uniform costing is comparatively easy among concerns Use -
The main objectives of Uniform manufacturing.the same of
type product-
Costing are as follows:-
1. To facilitate the
comparison of costs andperformances of different units in the same
an objective basis. industry or-
2. To eliminate unhealthy competition among the different units of an industry.
3. To improve production capacity
level and labour efficiency by comparing the production costs
of different units with each other.
4. To provide relevant cost information/data to the Government for fixing and regulating prices of
the products.
5. To bring standardisation and uniformity in theoperation of participating units.
6. To reduce costs of production, administration, selling and distribution, and to exercise control on
fixed costs.

3. ESSENTIAL PRE-REQUISITES FOR SUCCESS

A great deal of spade work is required to be done before the introduction of uniform costing in an
industry. Its introduction helps the firms to submit reliable cost data to price fixing bodies to determine
the average cost and fixing the fair selling prices of various products. It serves as a pre-requisite to
 essential requisites for its
cost audit. A successful system of uniform costing requires the following
installation:
1. The firms in the industry should be willing to share /furnish relevant data /information.
2. There should be a spirit of co-operation and mutual trust among the participating firms.
3 There should be frequent mutual exchange of ideas, methods used, special achievements, research
and know-how etc.
with the smaller
4. Bigger firms shouldtäke the lead towards sharing their experience and know-how
firms to enable the latter to improve their performance.
5. Uniformity must be established with regard to following points
(a) Size ofthe various units covered by uniform costing
(b) Production methods.

(c) Accounting methods, principles and procedures used.

4. ADVANTAGES

I. The management of an individual firm/ unit is saved from the exercise of developing and
introducing an individual costing system.
dificulties and
. A costing system devised by mutual consultation and after considering the
Circumstances prevailing in different firms may be readily adopted and _uccessfully implementea.
to identity
3. A comparison of cost figures of various firms of the system will facilitate the firms
their weak and strong points besides controlling costs.
datu
4. Standing of the firms in the industry would be known by making a comparison of its cost
with others.
5. Research.and development benefits of bigger firms may be made available to smaller firms.

6. It helps Trade Associations in negotiating with the Government for any assistance or concession
in the matters of taxation, export subsidies, duties and price determination etc.
 Cost Accounting - I11 (TYBAF: SEM-)
2

NEED AND OBJECTIVES

2.
analysis, apportionment and absorption of overheads
The prineiples and methods of compilation, but if a common or uniform pattern is
other in the same industry,
differ from one concern to the reduction. It makes inter firm comparison
all, it helps mutually in cost control and cost
adopted by is to introduce inter-firm comparison. Use of
one ofthe aims ofuniform costing
easy and, ofcourse, concerns manufacturing-the same type of products,
uniform costing is comparatively casy among
are as follows:
The main objectives of Uniform Costing
. Tofacilitate the comparison of costs and performances of
different units in the same industry on
an objective basis.
the different units of an industry.
2. To eliminate unhealthy competition among
labour efficiency by comparing the production costs
3. To improve production capacity level and
of different units with each other.
4. To provide relevant cost information/data to the Government for fixing and regulating prices of
the products.
5. To bring standardisation and uniformity in the operation of participating units.
6. Toreducecosts of production, administration, selling and distribution, and to exercise control on

fixed costs.

ESSENTIAL PRE-REQUISITES FOR SUCCESS

3.
A great deal of spade work is required tobe done before the introduction of uniform costing in an
industry, Its introduction helps the firms to submit reliable cost data to prioe fixing bodies to determine
the average cost and fixing the fair selling prices of various products. It serves as a pre-requisite to
cost audit. A successful system ofuniform costing requires the following essential requisites for its
installation:
1. The firms in the industry shouldbe willing to share /furnish relevant data /information.
2. There should be a spirit ofco-operation and mutual trust among the participating firms.
3. There should be frequent mutual exchange olfideas, methods used, special achievements, research
and know-how etc.
4. Biggerfirms shouldtake the lead towards sharing their experience and know-howwith the smaller
firms to enable the latter to improve their performance.
5. Uniformity must be established with regard to following points
(a) Size of the various units covered by uniform costing.
(b) Production methods.
(c) Accounting methods, principles and procedures used.

ADVANTAGES
. The management of an individual firm/ unit is saved from the exercise of
introducing an individual costing system. developing and

2. A costing system devised by mutual consultation and after

circumstances prevailing in different firms considering the ditriculties and
be
may readily adopted and uccessfully implemented.
3. A comparison of cost
figures of various firms of the system will facilitate the firms to identify
their weak and strong points besides
4.
controlling costs.
Standing of the firms in the industry would be known by
with others. making a comparison of its cost data
5. Research.and development benefits of
bigger firms may be made available to smaller firms.
6. It helps Trade Associations in
negotiating with the Government for any assistance or concession
in the matters of taxation, export subsidies, duties and
price determination ete.
 3
Uniform Costing and Inmer-firm Comparison
7. Unhealthy competition is avoided among the firms in the same industry in framing pricing policies
and submitting tenders.

8. Prices fixed on the basis of uniform costing åre representative of the whole industry.
It facilitates the reduction of labour turnover, as a uniform wage system is the precondition of a
9
uniform costing system.
in the
comparative assessment of the performance of two firms
same
10. It provides a basis for the
industry but in different sectors.
11.It will facilitate the development/introduction ofinformation system.
12.Optimum achievement ofefficiency may be attempted by utilising the experience ofother
concerns

in the system.
13. Services of cost consultants or experts may be available jointly to each firm in the industry by
sharing their experiences and expenses.
14. It helps the Government in regulating the prices ofessential commodities such as bread, sugar,
cement, steel etc.

5. LIMITATIONS

1. Due to the different circumstances in which firms operate,

it is difficult to have uniform standards,
methods and procedures of costing: This renders the adoption of uniform costing difficult.
their cost and other data.
2. of a uniform costing system requires various firms to disclose
Adoption
Some of the firms do not like this and are thus hesitate to use this costing system.
size firms and
3. Small firms feel that uniform costing system is meant only for large and medium
thus they cannot afford it.
monopolistic tendencies resulting in artificially
4. The useof this system of costing may lead to
raised higher prices and curtailing supplies.

6. AREAS OF UNIFORMITY
is to be established before the introduction of
The points in respect of which uniformity required
uniform costing in an industry are as below:
where uniform costing is to be introduced: The size
1. Uniformityin the size of various units Units
uniform costing should be more or less the same.
of units which are to be brought under Since the
a number ofcategories according to
their size.
differing in size should be classified in based their
its size, the classification ofunits on
cost structure in an organisation is influenced by
size would make the cost statements ofthese units more comparable.

2. Uniformity in the production method : All

units in an industry should use uniform methods of
production.
and procedures: In fact, the uniformity
3. Uniformity in the accounting method, principles
should be achieved in respect of following:
where costs are to be measured.
(a) Identifying stages of production
should be used.
(b) Same methods of valuing inventory
(c) Cost unit.

(d) Classification of costs and its components,

(e) Identifying methods of pricing material issues.
(f) Methods of remunerating and providing incentives to labour.
(g) Basis ofallocation and apportionment of overheads.
(h) Basis of distribution and redistribution of overheads.
) Methods of depreciation.
G) Treatment of notional expenses
 Cost Accounting - I(TYBAF: SEM-niforn
(k) Treatment of material losses.
(1) Allocation/apportionment ofjointcosts
(m) Preparation of cst statements, reports and their submission schedule

7 UNIFORM COST MANUAL

(1) Meaning
Uniform Cost Manual is a written document, which mayy be in the form of a booklet or bulletin
containing the principles, methods and pocedures for the ascertainment and control of cost
umitorm costing. It is necessary for the successfiul operationofuniform costing system. Such a manu 5, Pres
provide guidelines to the participating firms to organise their cost accounting system on a uniform
basis.
(2) Features
The following are the salient features ofa uniform cost manual.
.It inchudes statement of objectives and purpose of the system, scope of the system,
and extent of co-operation necessary.
advantage
2. It contains the general principles of accounting, nature coding, terminology to be 6. Mise
classification and deseription of accounts. This section also includes details of stockfollowed
labour and overhead cost collection and control. contro
3. Essential cost data and various ratios to be
computed for comparison of performance and efficienc
in the operation ofthe participating units.
4. Mode. format and time for presenting cost data and reports to the management.
5. It provides necessary guidelines about the treatment of
scrap. by-product, etc. depreciation, interest on capital, wastage
It is th
3) Contents
It cons=
The following are the main and sub-headings for a typical uniform cost manual. and ov
1. Introduction
impro
Statement of objectives and the unifor
purpose of the system
Scope of the system An in
weak
Advantage to be derived from the system manag
Educating the management, executives and cost accountants to has se-
The extent of appreciate the system efficie
2. Organization
cooperation desired manu

Organization for developing and operating the system

Stages in
which the system is to be
introduced 9
Management of the central coordinating organizations Thef
3. Accounting System
1.
General accounting principles
Accounting terminology
Account headings
Code structure
Accounting period
Method of reconciliation between financial
4. Cost Accounting System accounts and cost accounts

Cost unit 2.

Classification of cost centers

Methods of cost accounting
 Uniform Costing and Inter-firm Comparison 5

.Material accounting
Labour accounting
Items to beexcluded from cost
Allocation, apportionment, re-appointment and absorption of manufacturing overhead
Accounting ofselling and distribution overhead
Accounting of administration overhead
.Accounting of research and development expenses
Method of book-keeping
5. Presentation of information
Forms and contents of reports and statements
Periodicity of reports
Cost statements
Cost and other financial ratios
Supplementary information
6. Miscellaneous

B. INTER-FIRM COMPARISON

8. MEANING AND OBJECTIVES

It is the technique of evaluating the performance, efficiency, costs and profits offirms in an industry.
It consists of voluntary exchange of information/data concerning costs, prices, profits, productivity
and overall efficiency among firms engaged in similar type of operations for the purpose of bringing
improvement in efficiency and indicating the weaknesses. Such a comparison will be possible where
uniform costing is in operation.
An inter-firm comparison indicates the efficiency of pro uction and selling, adequacy of profits,
weak spots in the organisation, etc. and thus requires an immediate suitable action from the firm's
management. Inter-firm comparison mayenable the management to challenge the standards which it
has set for itself and to improve upon them in the light of the current information gathered from more
efficient units. Such a comparison may be suitable in industries such as pharmaceuticals, cycle
manufacturing, etc.

9. PRE-REQUISITES
The following pre-requisites should be considered while installing a system ofinter-firm comparison:
1. Centre for Inter-firm Comparison
For collection and analysing data received from member units for doing a comparative study and
for dissemination of the results of study a Central body is necessary. The functions of such a body
may be:
(a) Collection of data and information from its members:
(b) Dissemination ofresults to its members:
(c) Undertaking research and development for common and individual benefit of its members;
(d) Organising training programmes and publishing magazines.
2. Membership
Another requirement for the success of inter-firm comparison is that firms of different sizes
should become members of the Centre entrusted with the task of carrying out inter-firm comparin
 Cost Accounting - l l (TYBAF: SEM-

3. Nature of information to be collected

useful to the manageme
yet the following information,
Although there is no limit to information,inter
collected by the center for
firm comparison.
is in general
structures.
a. Information regarding costs and cost
b. Rawmaterial consumption
etc.
c. Stock of raw material, wastage of materials
utilisation.
d. Labour efficieney and labour
e. Machine utilisation and machine efficiency
f. Capital employed and return on capital
g Liquidity oftheorganisation.
h. Reserve and appropriation of profit.
i. Creditors and debtors.

j. Methods of production and téchnical aspects.

4. Method of Collection and presentation of information
The centre collects information at fixed intervals in a prescribed form from its members. Sometime
a questionnaire is sent to each member, the replies of the questionnaire received by the Centre
constitute the information/data. The information is generally collected at the end ofthe year as i(t
is mostly related with final accounts and Balance Sheet. The information supplied by firms i sS
generally in the form ofratios and not in absolute figures. The information collected as abovei
Stored and presented to its members in the form ofa report. Such reports are not madeavailabl
to non-members.

10. RATIOSFOR INTER-FIRM COMPARISON

The Center for Inter-firm comparison Ltd., a body established by the British Institute of Management ca
and the British Productivity council uses the pyramid structure of Ratios for inter-firm comparison ap
as shown in the following Exhibit. be
n
1.Operating Profit/
Operating Assets a

(C

2. Operating Profit/ 3. Sales/

Sales Operating Assets
(
Ra
4. Production 5. Selling and 6. Administration 10. Sales/ 11. Sales/
Cost/Sales Distribution Cost/ Cost/ Current Assets Fixed Assets
Sales Sales

7. Direct Material 8. Direct Labour 9. Other 16. Sales/ 17. Sales 18. Sales
Cost/ Cost/ Production Cost/
Sales Value of Land and Plant and Other Fixed
Sales Value Sales Value
Production Building Machinery Assets
of Production of Production

12. Cost of Sales/ 13. Cost of Sales/ 14. Cost of Sales

Material Stock Work in Progress
15. Cost of Sales
Finished Goods Debttors 3.
9.
YBAF: SEM- Uniform Costing and Inter-firm Comparison
the managemen, The ratios are shown in order ofimportance, the most important (return on capital) being at thetop
of the pyramid. Operating profit to operating assets ratio shows the return on capital employed
which is an indicator ofoverall performance. Return on capital employed depends upon two factors,
namely. profit margin and productivity of capital. Profit margin is indicated by the operating protit
to sales ratio and the productivity ofcapital is indicated by the sales to operating asset ratio which is
known as the turnover ratio as it shows the number oftimes capital employed is covered by sales.
Profit margin can be analysed by the following ratios
(a) Production cost of sales to sales.
(b) Selling and distribution cost to sales.
(c) Administration cost to sales.
The following ratios show the production efficiency:
(a) Direct material cost to sales value of production.
(b) Direct labour cost to sales value of production.
(c) Other production cost to sales value of production.
bers. Sometime Productivity of capital can be further analyzed by the following supplementary ratios:
d by the Centre (a) Sales to current assets
iof the year as it (b) Sales to fixed assets
lied by firms is Sales to current assets is further analyzed by the help of the following turnover ratios:
ected as above is (a) Cost of sales to material stocks
made available
(b) Cost of sales to work-in-progress
(c) Cost of sales to finished goods
(d) Sales to debtors
Usually, profit margin and its secondary ratios are expressed in percentagewhile productivity of
as a proportion (that is in the form of a/b). It must be
of Management capital and other turnover ratios are expressedcan be presented, it is preferable to select key rations
that although many other ratios
rm comparison, appreciated
because a large number of ratios tend to obscure the vision. Following are the ratios other than those
included in the pyramid of ratios, that can be used for inter-firm comparison.
(a) Value added to sales
b) Value added per employee
(c) Value added to operating assets
(d) Advertising cost to sales
sl (e) Number of indirect workers to number of direct workers
Assets f) Number of supervisors to number of workers
Ratios are presented in the form of a comparative chart as show in exhibit below.
11. Sales Ratios Firm Industry
Fixed Assets ABC. Average
Return on Assetss
1. Operating Profit/Operating Assets (%)
Profit Margin to Sales and Turnover of Assets
2. Operating Profit / Sales (%)
18. Sales/ 3. Sales/Operating Assets (Times peryear)
Other Fixed Operating Costs (as a Percentage of Sales)
Assets
Production Cost
5. Selling and Distribution Cost.
Administration Cost: Production Costs
(as a Percentage of Sales Value of Production)
Cost of Sales 7. Direct Material Cost
Debtors 8. Direct Labour Cost
9. Other Production Cost
 Cost Accounting -
JI (TYBAF: SEM-VJniform
General Asset Utilisation (Sales per rupee of the asset)
10. Current Assets Particula
11. Fixed Assets
Current Asset Utilisation
Asset) Sales
(Cost of Sales/Sales per Rupee of the Less C
12. Materials Stock
13. Work-in-Progress
Gross
14. Finished Goods ess: O
15. Debtors et Prom
Fixed Asset Utilisation (Sales per rupee of the asset) ess T

16. Building Profit a

17. Plant and Machinery ess:
18. Other Fixed Assets Retain
19. Per Rupee Sales
20. Per Rupee of Operating Assets
ou are-
21. Per Employee
1) Prop
pn capi
atio.
11. ADVANTAGES olutia
The main advantages of inter-firm comparison are:
No
1) P
1. Such a comparison gives an overall view of the industry as a wholeto its members the present
position ofthe industry, progress made during the past and the future ofthe Indus try.
2. It helps a concern in knowing its strengths or weaknesses in relation to others so that remedia
measures may be taken.
3. It ensures an unbiased specialized reporting on particular problems ofthe concern.
4. It develops cost consciousness among members of the industry. (2) C
5. It helps Government in effecting price regulation
6.
Itis helps
thus
to improve thetoquality
the
of products manufactured and to reduce the cost ofproduction. t
advantageous industry as well as to the society.

12. LIMITATIONS
13)|
The following the limitations in the
are
implementation of a scheme of inter-firm comparison:
1. Top management feels that secrecy will be lost.
2. Middle management is usually not 4)
convinced with the utility of such a comparison.
3. In the absence of a suitable cost
accounting system, the figures supplied may not reliable for the
purpose of comparison.
4. Suitable basis of comparison may not be available.

13. SIMPLE PRACTICAL PROBLEMS

5)
llustration 1: (Two
The
Companies)
summarised final accounts of two
companies are as follows:
Balance Sheet
j6)
Liabilities
XLtd.YLtd, Assets XLtd YLtd.
Share Capital 88,000
Reserves
88,000| Fixed Assets
42,900 35,200 Current Assets 1,21,000D 96,800 7
8 %Debentures 22,000 22,000 Less Current Liabilities 1,25,400| 1,03,400
93,500 55,000
1,52,900 1,45,200
1,52,9001,45,200
 Uniform Costing and Inter-firm Comparison 9
Revenue Statement for the Year
Particulars XLtd. Y Ltd.

Sales
Less: Cost of Sales 3,30,000| 2,64,000
2,37,600 1,98,000
Gross Profit
Less Operating Expenses 92,400 66,000
63,800 44,000
Net Profit before Tax
Less Tax 28,600 22,000
** ** 12,100 9,240
Profit after Tax
Less Dividend
* ' * '*
16,500 12,760
* ** * *
8,800 6,600
Retained Earning 7,700 6,160
You arerequired to calculate the following ratios & comment.
(1) Proprietory ratio. (2) Capital gearing ratio. (3) Gross profit ratio.
on capital employed ratio. (6) Return on
(4) Operating ratio. (5) Return
proprietors' equity ratio. (7) Expenses ratio. (8) Net profit
ratio.
Solution:

No. Ratio X Ltd. YLtd.

(1) Proprietory Ratio
Proprietors Fundsx 100 88,000+ 42,900
x 100 88,000+35,200 100
Total Assets 1,21,000+1,25,4000 96,800+1,03,400
PFx100 1,30,900
2,46,400
x 100 = 53% 1,23,200 x100
2,00,200
Note: TA = FA + CA or CE + CL 62%
(2) Capital Gearing Ratio
Capital Entitled to Fixed Interest/
Dividend 22,000 22,000
Capital not so Entitled 88,000+ 42,9000 88,000+ 35,200
PC BF 22,000 0.17:1 22,000 = 0.18:1
EF 1,30,900 1,23,200
(3) Gross Profit Ratio
Gross Profit, 100 x 100 92,400 x 100 28%|= 66,000 x 100 = 25%
Sales 3,30,000 2,64,000
(4) Operating Ratio
COGS+ OE 100
2,37,600+ 63,800
100 1,98,000+44,000x 100
Sales 3,30,000 2,64,000
3,01,400 2,42,000X
100 100
3,30,000 2,64,000
91.33% = 91.67%

(5) Return on Capital Employed Ratio

PBIT 28,600 22,000X 100
100 100
Capital Employed 1,52,900 1,45,200
18.71% = 15.15%

(6) Return on Proprietors Equity Ratio|

N.P.A.T 16,500 12,760
x 100 100 x 100
Proprietors Equity (Fund) 1,30,900 1,23,200
12.61% =10.36%
(7) Expenses Ratio
COGS 2,37,600 1,98,000 x 100
(a) 100 X 100 72% 75%
Sales 3,30,000 2,64,000
 1II (TYBAF: SEM-V
Cost Accounting Uniform Costing and Inter-firm Comp-
-

10
44,000 x100 Interpretation
63,800x100 2,64,000 (1) A Ltd.: Current Ratio
OEx100
(6) Sales 3,30,000
16.67%
(CR) of 2.5:1 o0
pay each ? 1 of its current liabilities
19.33% (LR) of 0.56: 1 of A Ltd. indicates tk
of its quick liabilities. This is less tha
Net Profit Ratio 22,000
(8) 100 liquidity/solvency in the short term;
28,600 x 100
2,64,000 cannot meet its current liabilities
N.P.B. x100 3,30,000
= 8.33% turnover.
Sales 8.67% (2) B Ltd.: Current Ratio (CR) of 1.5
to pay each? 1 of its current liabilit
Comments: As compared to the 1.18:1 of B Ltd. indicates that 1
solvency or financial stability.
more dependence on
the test of long term liabilities. This is better than the sta
(1) Proprietory Ratio is is slightly lower; indicating
X Ltd.'s ratio of 53% indicating solvency solvency in the short term; its im
standard Ratio of 70%, Ltd.'s ratio of 62% is satisfactory,
under-capitalisation. Y comfortably meet its current liabil
outside funds or immediato li
stability. ratio is the lower of the
gearing twd (3) Conclusion: As Jid
Ratio in both cases is low. Y Ltd.'s Capital shareholders. deal with B Ltd. because of its b
(2) Capital Gearing over-capitalisation and low rate of return to Equity
possible its 3: (Comparision with I
indicating is higherfor X Ltd., indicating better lustration
which is the main test of profitability
(3) Gross Profit Ratio to Y Ltd.
From the following particulars of In
efficiency in operations as compared and profitability. The ratio Is almoSt tne company's strengths and weaknees
test of operational efficiency
(4) Operating Ratio is the
same for both X Ltd. indicating their equal efficiency.
the capital of company is
ImperialChemicals
Employed Ratio, is the test of how productively
(5) Return on Capital more productively than Y Ltd. Liabilities
to have employed its capital
being employed. X Ltd. appears the test of the Profit Earning Capacity of Equity Share Capital
Ratio is
(6) Return on Proprietors Equity (orof Fund)X Ltd. indicates a prosperous company. 10% Preference Share Capital
concern. The higher ratio in case
of used up by various items of expenditure. While Retained Farninae
(7) Expenses Ratios show the portion
revenue
indicated
activities as by its lower ratio of COGS to Sales, Long-term Debt
X Ltd. is more efficient in its main ratio
its overall operational costs as indicated by its lower Sundry Creditors
Ltd. is more efficient in controlling
operational expenses. Outstanding Expenses
Ltd. Other Current Liabilities
Net Profit Ratio is the main test of profitability
and operational eficiency. NPR of X Is
(8)
slightly better than.the NPR of Y Ltd.
while Y Ltd. is more solvent/stable.
(9) On the whole, X Ltd., is more profitable
Statement of
Ilustration 2: (Comparing Two Companies)
on credit to A Ltd. or B Ltd Particulars
Mr. Desai requests to advise him whether he should supply goods
youdata
The relevant financial relating to the companies for the year ended 30th June, 2002 are a Net Sales

under:
Less Cost of Goods sold
Selling Expenses
Particulars ALtd. B Ltd.
Administrative Expenses
Interest
Stock 8,00,000 1,00,000 Earnings before Tax
Debtors 1,70,000| 1,40,000 Less: Income Tax
Cash 30,000 60,000 Net Income
Trade Creditors . .
3,00,000| 1,60,000
Bank Overdraft 40,000 30,000 Dividend paid to Equity Shareh
Creditors for Expenses 60,000 10,000 Financial Ratios of Industry f
S
Solution (1) Current ratio 2.2 to 1 (2)
Mr. Desai, being a supplier would be interested in the short term solvency of the companies. Let us (4) Income before taxI sales
therefore calculate the short-term solvency ratios of A Ltd. & B Ltd. Solution :
Ratio Formula A Ltd. B Ltd Ratios
Current Assets 10,00,000 3,00,000 No
(i) Current Ratio Current Ratio
Current Liabilities 4,00,000 2,00,000 (1)
Current Assets
2.5:1 1.5 Current Liabilities

(ii) Liquid Ratio

Quick Assets 2,00,000 2,00,000
Quick Liabilities 3,60,000 1,70,000 Ratio
Turnover
0.56:1 1.18:1 (2)| Stock
Cost of Goods Sold

Closing Stock
Uniform Costing and Imer-firm Comparison 11

Interpretation
(1) A Ltd.: Current Ratio (CR) of 2.5:1 of A Ltd. indicates that 2.5 of current assets are available to
payeach1 of its current liabilities. This is better than the standard CR of 2: 1. Liquid Hatio
(LR) of 0.56: 1 of A Ltd. indicates that only 7 0.56 of quick assets is available to meet each
of its quick liabilities. This is less than the standard LR of 1 1. Thus, while A Ltd. enjoys good
liquidity/solvency in the short term; its immediate, day-to-day liquidity is unsatisfactory. A Ltd.
cannot meet its current liabilities without selling its stocks. Its liquidity depends on its stock
turnover.
(2) B Ltd.: Current Ratio (CR) of 1.5:1 of B Ltd. indicates that1.5 of current assets are available
to pay each 1 of its current liabilities. This is less than the standard CR of 2:1. Liquid Ratio of
1.18:1 of B Ltd. indicates that 1.18 of quick assets are available to meeteach 1 of its quick
liabilities. This is betterthan the standard LR of 1:1.Thus, while B Ltd. enjoys average liquidity/
solvency in the short term; its immediate, day-to-day liquidity is quite satisfactory. B Ltd. can
comfortably meet its current liabilities without selling its stocks.
(3) Conclusion: As immediate liquidity is moreimportant for a creditor, Mr. Desai should prefer to
deal with B Ltd. because of its better Liquid ratio.
lustration 3: (Comparision with Industry Ratios)
From the following particulars of Imperial Chemicals Ltd. and its industry averages assess the
company's strengths and weakneesses in terms of liquidity, solvency and profitability.
Imperial Chemicals Ltd. Balance Sheet as on 31st December, 2013

Assets
Liabilities
Equity Share Capital 2,00,000 Plant&Machinery 3,02,000
10% Preference Share Capital 80,000 Stock 1,21,600
Retained Earnings 54,800 Debtors 72,000
Long-term Debt 68,000| Cash 24,600
Sundry Creditors 63,000
Outstanding Expenses 2,400
Other Current Liabilities 52,000
5,20,200 5,20,200
Statement of Profit for the year ended December 31, 2013

Particulars
Net Sales 4,80,000
Less Cost of Goods sold 3,05,000
62,000
Selling Expenses
Administrative Expenses 39,600
5800 4,12,400
Interest
* * * ***

Eanings before Tax 67,600

Less : Income Tax 33,800

Net Income
3,800
12,000
Dividend paid to Equity Shareholders * * * ** ***

Financial Ratios of Industry for 2013

(1) Current ratio - 2.2 to 1 (2) Stock turnover 2.8 times (3) Collection period 56 days
Return shareholders equity 10.9%.
(4) Income before tax/sales 11.9% (5) on

Solution

No Ratios Company Industry

(1) Current Ratio
1,21,600+ 72,000 + 24,600
Current Assets 63,000 + 2,400 + 52,000
Current Liabilities
2.2:1
1.86:1
(2) Stock Turnover Ratio
Cost of Goods Soid 3,05,000
2.51 times 2.8 times
Closing Stock 1,21,600
 Cost Accounting - III (TYBAF: SEM-
12
Uniform Costing and Inter-firm Compar
(3 Collection Period
Debtors x 365
72,000x 365 = 55 days 56 days
E
4,80,0000
Credit Sales
(before Tax) Ratio
(4) Net Profit
Net Profit (before Tax x 100 67,600x100 = 14.08%
4,80,000 u 11.9%
No. Topic
Sales 14.
(5) Return on Shareholders Equity Theory Questions
Net Profit (after Tax) 33,800 x 100 15. Objective Questions
X 100 2,00,000+80,000+54,800
Preference Reserves 15.1
Equity + +
10.9% Mutiple Choice Ques
= 10.1% 15.2 Fill in the Blanks
15.3 Match the
Comments: Following
(1) Liquidity & Short-term Solvency 15.4 State Whether Truec
(a) Company's Current Ratio (CR) and Stock Turnover Ratio (STR) are lower than the industry
respective ratios. Lower CR shows unsatisfactory liquidity/solvency. Lower STR indicate 15.5 Check Your Answers
that (i) stock is sold out at a slow speed; (ii) working capital requirement is more; (ii) ther 16. Practical Problems with
may be slow-moving or obsolete stocks. Debtors collection period is marginally better than
16.1 Practical Probiems
the industry's collection period.
16.2 Solutions
(b) Main component of Current Asset other than debtors is stock. [Company's debtorsare as pe
industrial standard]. Current Ratio can, therefore be improved by reducing stock. This w
also improve stock turnover.
(2) Profitability Company's Net Profit Ratio is betterthan industrial Ratio. This indicates () good 14. THEORY QUESTIONS
control over costs. (i) good increase in net worth and (ii) good capacity to face recession
However, Return on shareholders' Equity (Proprietors Fund) is lower than the industries Define Uniform costing. What are the
Ratio. This indicates (i) profit ratios are below industry averages (less profit) is earned on eaci
system?
rupee of sales (ii) turnover ratios are below industry averages (less profit is earned on each
rupee of asset employed) (i) slighty less scope to attract fresh tunds from shareholders. Thirte a shortnote on unifomcostin
may be due to adverse Debt-Equity Ratio. |(3) State the essential pre-requisites for
lustration 4: (Industry Standards) (4) What are the requisites for installatic
The actual ratios of a company compared to the industry standard are given comment
pach ratio and indicate in one or two sentence the nature of action to be takenbelow.
by the company. o (5) Explain in brief the advantages and
(6) A firm of printers is contemplating joir
Ratio IndustryStandard Actual for the Company Association but the Managing Dirct
the scheme. Prepare a report to the
() Current Ratio 2.2 2.7
(i) Debtors' turnover ratio 6
is likely to gain.
8
Write notes points which unifc
(ii) Stock turnover ratio 10 3 (7) on on
(iv) Net profit ratio 5% 2.40%
(4v) Total debtfo total assets 7.50% 40% (8) Enumerate the points on which unifor
Solution:
(ICWA, adapted (9) Explain, what do you understand b-
(i) Current Ratio: Normal value is 2. Here the company's position is
above the normal value is required to be establish=
industry standard. This may also be due to excessive stock, vide comments against (ii). thé uniformity
(ii) Debtor's Turnover Ratio : The industry standard indicates an average collection period of tw Write short notes on Unifom ost
months, while for the company it is only 1, months. The Company's (10)
pPosition is better. Write a short note on 'Inter Fim Cc
(i)Stock Turnover Ratio: The stock is moving very slowly. Obviously there is excessive stock in(11) (12) What is meant by "Inter-fim Conpa
the company. Perhaps this has boosted up the current ratio. The sales volume has to be a system of inter-fim comparison.
considerably increased and stock level brought down. of an i
(iv)Net Profit Ratio : Here the company's performance is very unsatisfactory (13) What are the pre-requisites
overall position in the industry. This calls for steps to get better sales compared to the (14) Discuss the role of rauosinter-firm c
realization and reduction of
the cost of production. (15) Write four limitations
(v) Total Debt to Total Assets : The percentage is disproportionately
a larger proportion of debt in the capital structure. Too
high in the company indicating
high a debt component means too higha
risk for equity shareholder.
YBAF: SEM.
Uniform Costing and Inter-firm Comparison 13
56days EXERCISES
11.9% OUTLINE
No. Topic Page
14. Theory Questions
13
00 15. Objective Questions
14
10.9% 15.1 Multiple Choice Questions 14
15.2 Fill in the Blanks 14
15.3 Match the Following Columns 14
an the industry 15.4 State Whether True or False 14
STR indicates 15.5 Check Your Answers 15
more; (in) than
ther 16. Practical Problems with Solutions
ally better 15
16.1 Practical Problems 15
tors are as 16.2 Solutions 16
pe
stock. This wil
icates (i) good 14. THEORY QUESTIONS
ace recession
the industries
arned on eac (1) Define Uniform costing. What are the essential requisites for the installation of a uniform costing
med on each system? [Ans.: Para 1, 3]
sholders. This (2) Write a short note on uniform costing. [Ans.: Para 1, 2]
(3) State the essential pre-requisites for the installation of uniform costing system in an industry?
[Ans.: Para 3]
(4) What are the requisites for installation of a Uniform Costing System? [Ans.: Para 3]
Comment on
(5) Explain in brief the advantages and limitations of uniform costing. [Ans.: Para 4, 5]
e company.
(6) A firm of printers is contemplating joining the uniform costing system being operated by its Trade
e Company Association but the Managing Dirctor is doubtful about the advantages of becoming involved in
the scheme. Prepare a report to the Managing Director describing the advantages that the firm
is likely to gain. [Ans.: Para 4]
(7) Write notes on points on which uniformity is essential before introducing uniform costing.
[Ans.: Para 6]
%
(8) Enumerate the points on which uniformity is essential before introducing uniform costing system?
[Ans.: Para 6]
VA, adapted (9) Explain, what do you understand by uniform costing? Discuss the points in respect of which
mal value the uniformity is required to be established before introduction of uniform costing in an industry.
nst (ii). [Ans.: Para 1, 6]
Uniform Cost Manual. [Ans.: Para 7]
period of tw (10) Write short notes on
etter. (11) Write a short note on 'Inter Firm Comparison' [Ans.: Para 8]
ssive stock i (12) What is meant by 'Inter-irm comparison'? Describe the requisites to be considered whie instlling
to be a system of inter-firm comparison. [Ans.: Para 8, 9]
ne has
(13) What are the pre-requisites of an inter firm comparison system? [Ans.: Para 9]
pared to the (14) Discuss the role of ratios in inter-firm comparison. [Ans.: Para 11]
d reduction (15) Write four limitations of inter-firm compaison. [Ans.: Para 12]
any indicating
anstoo high
 14 Cost Accounting -
Ill (TYBAF: SEM-
Uniform Costing and lnter-firm
15. OBJECTIVES QUESTIONNS Comparis=
15.5
CHECK YOUR ANSWERS
15.1
15.1 MULTIPLE CHOICEQUESTIONS 1. )2.
1. The use by several undertakings of the same costing principles and/or practices (b) 3. (b)
(a) Unit costing (b) Uniform costing 15.2 (1) Uniform costing (2) Control (3)
(c) Standard costing (d) Differential costing 15.3 A: (1) (e), (2)- (d), (3)
-
U
2. Uniform Costing helps an individual firm in 15.4 False 1,2, 3, 4, 5, 6, (g). (4) -(=
7, 8, 9, 10
(a) ascertainment of cost (b) cost control and cost reduction
(c) allocation of costs (d) apportionment of costs 16. PRACTICAL PROBLEMS
3. Inter-firm comparison is one of the aims of
(a) Unit costing (b) Uniform costing
(c) Standard costing 16.1 PRACTICAL PROBLEMS
(d) Marginal costing
4. Inter-firm comparison is
a.1 (Two Companies): The summarised
(a) a method of costing
.(b) a method of allocation of overheads
c) a technique of evaluating the pertormance of firms in an industry
(d) related to marginal costing
Liabilitiess XLtd.
15.2 FILL IN THE BLANKS Share Capital 88,000
Reserves 42,900|
1. The use by several undertakings of the same costing principles and/or practices is known a8% Debentures
22,000
2. Unifom costing helps an individual firm in cost.
1,52,900 T
(control/ ascertainment)
3. Inter-firm comparison is one of the aims of. (standard costing/ uniform costing). Revenue
4. Inter-firm comparison is a. (method / technique) of costing.
Particulars
15.3 MATCH THE FOLLOWING cOLUMNS
Sales
LA1 cOLUMNA COLUMN B Less Cost of Sales
1. The use by several undertakings of Gross Profit
(a) Technique of evaluation
Less: Operating Expenses
the same costing principles and/or (b) Standard costing
practices
Net Profit before Tax
(c) Allocation of costs
2. Uniform costing helps an individual
Less Tax
(d) Cost control and cost reduction
firm in Profit after Tax
(e) Uniform costing Less Dividend
3. One of the aims of uniform costing is () Unit costing
4. Inter-firm comparison is g) Inter-firm comparison Retained Earning
(h) Method of costing You are required to calculate the followi
(i) Ascertainment of cost (1) Proprietory ratio
(3) Gross profit ratio
15.4 STATE WHETHER TRUE OR FALSE (5) Returm on capital employed ratio
(7) Expenses ratio
1. Uniform costing is a distinct method of costing.
Q.2 (Industry Average) : The summar-
relevant details
2. Uniform cost accounting is used by creditors to evaluate crédit-worthiness. given below with other
3. Debit and credit are basic concepts used in Uniform Cost Baland
Accounting.
4. Accrual is one of the fundamental assumptions of Uniform Cost Accounting.
5. Uniform costing is a comprehensive term which jncludes cost
accounting. Liabilities
6. Uniform costing, costing, cost accounting and cost accountancy mean one and the same Equity Capital
thing|Reserves & SurplusS
7. Uniform cost accounting is a branch of unit costing.
8. Uniform cost accounting is mainly meant to provide cost information to the shareholders. |Sundry Creditors
9. Uniform costing may be used in educational institutions like schools to ascertain cost of
uniforms
10.A profitable business concern does not need uniform costing.
Uniform Costing and Inter-firm Comparison 15
15.5 CHECK YOUR ANSWERS
15.1
1. ()2 (6)3 ) 4 . )
15.2 (1) Uniform costing (2) Control (3) Uniform costing (4) Technique
15.3 A:(1)- (@), (2)- (d), (3) - (g). (4)- (a)
15.4 False:1,2,3, 4, 5, 6,7, 8, 9, 10
16. PRACTICAL PROBLEMS WITH SOLUTIONS
16.1 PRACTICAL PROBLEMS
a.1 (Two Companies): The summarised final accounts oftwo companies are as follows
Balance Sheet
Liabilities XLtd. YLtd. Assets XLtd. Y Ltd.
Share Capital 88,000 88,000 Fixed Assets 1,21,000 96,800
Reserves 42,900| 35,200 Current Assets 1,25,400 1,03,400
8% Debentures 22,000 22,000 Less Current Liabilities 93,500 55,000
1.52,9001,45,200 1,52,900 1,45,200
Revenue Statement for the Year
Particulars XLtd. Y Ltd.
Sales ****" ** '* **
3,30,000 2,64,000
Less: Cost of Sales 2,37,600 | 1,98,000
Gross Profit " *** *** ***
92,400 66,000
63,800 44,000
Less:Operating Expenses
Net Profit before Tax 28,600 22,000
12,100 9,240
Less:Tax
Profit after Tax *** *** *** **' ***
16,500 12,760
Less: Dividend 8,800 6,600
Retained Earning * ***** 7,700 6,160
You are required to calculate the following ratios & comment.
(1) Proprietory ratio (2) Capital gearing ratio
(4) Operating ratio
(3) Gross profit ratio equity ratio
(5) Return on capital employed ratio (6) Return on proprietors
(7) Expenses ratio (8) Net profit ratio
Balance Sheet of R.K. Enterprise as on 31-3-2012 is
Q.2 (Industry Average): The summarised
given below with otherrelevant details
31-3-2012
Balance Sheet as on
Liabilities Assets
ing Equity Capital 40,00,000 Fixed Assets (Net) 28,00,0000
Reserves & Surplus 6,00,000 Cash 2,40,000
Sundry Creditors 14,00,000 Debtors 18,60,000
Inventories 11,00,000
rm 60,00,000
60,00,000
 Cost Accounting - III (TYBAF: SEM-
16
Uniform Costing and Inte-
Other information: 52,00,0o EXpenses Ratio
Sales COGS
Less Cost of Production of Goods Sold 36.00.00 d)Salec X100
16,00,000
Less: Seling & Administration 12.50.00 ()O.E
a X100
3.50.000 Sales
Net Profit
The current industry average of important ratios is given below:
(8) Net Profit Ratio
Current ratio 2.1
Liquid ratio
1. 4 N.P.B.T. 100
8.0 Sales
Debtors Turnover
Inventory Turnover (Sales/inventory) 10.2
Net Profit/Sales 9% Comments
Sales/Total Assets (1) Proprietory Ratiois
Calculate the above ratio for R. K. Enterprises, compare the same with the industry average and Ratio of 70%, X Ltd.'
comment briefly. (ICWA-Inter, adapted or under-capitalisatio
ital Gearing Ra-
16.2 SOLUTIONS sible o
Solution 1:
Y Ltd.
No Ratio X Lid.
(1) Proprietory Ratio

Proprietors Fundsx 100 88,000+42,900 88,000+35,200 100 being empio

Total Assets 1,21,000+1,25,400X10096,800+1,03,400 (6) Return on Proprie
concern. The highe
PF
TA 100 1,30,900 x 100 =
53% 1,23,200 x 100 =
62% (7) Expenses Ratioss
2,46,400 2,00,200 more effic
Ltd. is more efficier
Note: TA = FA + CA or CE + CL
operational expens
Capital Gearing Ratio
(2) (8) Net Profit Ratio i
Capital.Entitled to Fixed Interest/ slightly better than
22,000 22,000
Dividend (9) On the whole, X
Capital not so Entitled 88,000 + 42,900 88,000 + 35,200
Solution 2
PC + BF 22,000 22,000 The firm's performanc
1,30,900 0 . 1 7 : 1 1,23,200 0.18:1
EF
(3) Gross Profit Ratio
Gross Profitx 100 X
GP
100
92,400
x 100 28%
66,000
x 100 () Current Ratio
Sales S 3,30,000 2,64,000
=
25 i) Liquid Ratio
(ii) Debtor's Turnove
(4) Operating Ratio
(iv) Inventory Tumow
COGS+OE x 100
Sales
2.37,600+63,800
3,30,000
100 1,98,000+44,000x100 (v) Net Profit/sales
(vi) Sales/Total Asse
2,64,000

3,01,400 x100
3,30,000
2,42,000 100
2,64,000
X
Overall sales haveto
profitability. The turna
= 91.33% = 91.67% increase in sales, ther
(5) Return on Capital Employed Ratio
PBIT 28,600
100 x 100 22,000 x 100
Capital Employed 1,52,900 1,45,200
18.71% 15.15%
(6) Return on Proprietors Equity Ratio
N.P.A.T 16,500
x 100 1,30,900 * 100 12,760 x 100
Proprietors Equity (Fund) 1,23,200
= 12.61% 10.36%
Uniform Costing and Inter-firm Comparison
(7) Expenses Ratlo
COGS 2,37,600 1,98,000
(a) 100 x 100 =72% x 100 75%
Sales 3,30,000 2,64,000
O.E. 63,800 44,000 100
100 x 100
(D) Sales 3,30,000 2,64,000
= 19.33% 16.67%

(8) Net Profit Ratio

N.P.B. x100 28,600

X 100 22,000x 100
Sales 3,30,000 2,64,000
= 8.67% 8.33%
Comments
(1) Proprietory Ratio is the test of long term solvency or financial stability. As compared tothestandard
Ratio of 70%, X Ltd.'s ratio of 53% is slightly lower;, indicàting more dependence on outside funds
or under-capitalisation. Y Ltd's ratio of 62% is satisfactory, indicating solvency & stability.
2) Capital Gearing Ratio in both cases is low. Y Ltd:s Capital gearing ratio isthe lower of the two
indicating possible over-capitalisation and low rate of return to Equity shareholders.
(3) Gross Profit Ratio which is the main test of profitability is higher for X Ltd., indicating its better
efficiency in operations as compared to Y Ltd.
(4) Operating Ratio is the test of operational and profitability. The ratio is, almost the
eficiency
same for both X Ltd. indicating their equal efficiency.
(5) Return on Capital Employed Ratio, is the test of how
being employed. X Ltd. appears to have employed its capital more productively than Y Ltd.
company is
productively the capital of
(6) Return on Proprietors Equity (or Fund) Ratio is the of the
test Earning Capacity of a
Proft
concern. The higher ratio in case of X Ltd. indicates a prosperous company.
(7) Expenses Ratios show the portion of revenue used up by variousitems of expenditure. While
X Ltd. is more efficient in its main activities as indicated by its lower ratio of COGS to Sales, Y
Ltd. is more efficient in controlling its overall operational costs as indicated by its lower ratio of
operational expenses.
NPR of X Ltd. is
(8) Net Profit Ratio is the main test of profitability and operational efficiency.
slightly better than the NPR of Y Ltd.
solvent/stable.
(9) On the whole, X Ltd, is more profitable while Y Ltd. is more
Solution 2
The firm's performance is given below along with the industry average

Performance of Comments in brief

Industry Average
R.K. Enterprises
(i) Current Ratio 2.1 2.3 Satisfactory
i) Liquid Ratio 1.4 1.5 do
(ii) Debtor's Turnover 8.0 2.8 Far below industry average
(iv) Inventory Turnover 10.2 4.7 do
9% 6.7 Poor profitability
(v) Net Profit/Sales (%)
2 0.86 Poor utilisation of assets
(vi) Sales/Total Assets
Overall sales have to increase substantially. This will lead to better utilisation of assets and higher
inventories are not satisfactory. Along with
profitability.The turnover ratios relating to debtors and
increase in sales, there must be speedier movement of inventory and quicker realisation of receivables.