Managerial Accounting

Important Formulas
Direct Material
+Direct Labour
+Direct Expenses
Prime Cost
+Variable Production Overheads
Total Variable Production (Marginal) Cost
+Fixed Production Overheads
Total Production (Absorption) Cost
+Non-production Overheads
 Administrative
 Sales and Distribution
 Marketing
Total Cost

High-low Method:
o Variable Cost per unit (VCPU) =
Cost at high level of Activity – Cost at low level of Activity
High level of Activity−Low level of Activity
o Fixed Cost = Total cost at an activity level−( VCPU∗Activity level )
o Total Cost = Fixed Cost + Total Variable Cost
Cost Behavior:
 o Variable Cost (VC)

Total Total
Cost Cost

Level of Activity Level of Activity

Per Unit Total

o Fixed Cost (FC)

Total Total
Cost Cost

Level of Activity Level of Activity

Per Unit Total

o Stepped Fixed Cost

 Total Cost

Level of Activity

o Semi-Variable Cost

Total
Cost

Level of Activity
 Accounting for Materials
Order Quantity
 Average Inventory = 2
+ Buffer Inventory

 Annual Holding Cost =

Holding Cost per unit of Inventory∗Average Inventory
Expected Annual Demand
 Number of Orders = Order Quantity
 Annual Ordering Cost = Cost of placing an order∗Number of Orders
 Annual Purchase Cost
+Annual Holding Cost
+Annual Ordering Cost
Annual Material Cost
 Re-order Level = Maximum Usage∗Maximum Lead Time
 Economic Order Quantity (EOQ) =
√ 2∗Annual Demand∗Order Cost
Holding Cost per unit
Total Cost

Holding Cost
Annual Cost

EOQ

 Economic Batch Quantity (EBQ) =

√
2∗Cost of settingup one Batch∗Annual Demand
Re-order Quantity
(
Holding cost per unit∗ 1−
Annual Demand
)
Production Rate
 Minimum Inventory Level =
Reorder Level−( Average Usage∗Average Lead Time )
  Maximum Inventory Level =
Reorder level + Reorder Quantity−( Minimum Usage∗Minimum Lead Time )
 Closing Inventory = Opening Inventory + Receipts−Issues

Accounting for Labour

 Total Wages
 Time related system = (Total hours worked * Basic
rate per hour) + (Overtime hours worked * Overtime
premium per hour)
 Output related system = Units produced * Rate per
unit
 Bonus
Time allowed−Time taken
 Halsey = 2
∗Time rate
Time taken
 Rowan = Time allowed
∗Time saved∗Time rate
 Accounting for Overheads
 Indirect Material
+Indirect Labour
+Indirect Expenses
Total Overheads
Budgeted Production Overheads
 Overhead Absorption Rate (OAR) = Budgeted total of Absorption basis
 Overheads Absorbed = Actual level of Activity * OAR
 Overheads Absorbed
+Under-absorbed / -(Over-absorbed)
Actual Overheads
 Under-absorbed Overheads:

Ab
so
rb
ed Actual Overheads
Under-absorbed
Co
st Budgeted Overheads
Budgeted Activity
Actual Activity

Activity Level

 Over-absorbed Overheads:
 Ab
so
rb Over-absorbed

ed Actual Overheads
Co
st Budgeted Overheads
Budgeted Activity
Actual Activity

Activity Level

Absorption and Marginal Costing

 Statement of Profit and loss:
 Absorption Costing:
$ $
Sale
s x
Less: Cost of Sales
Opening
Inventory x
Variable cost of Production x
Fixed cost of Production x
(-) Closing
Inventory (x)
(x)
Standard Profit x
(Under)/Over absorption (x)/x
Gross
Profit x
Less: Non-production
cost (x)
Net Profit/loss x

 Marginal Costing:
$ $
Sale
s x
Less: Cost of Sales
Opening
Inventory x
Variable cost of Production x
(-) Closing
Inventory (x)
(x)
x
Less: Other variable cost (x)
Contribution x
Less: Fixed Costs (x)
Net Profit/loss x

 If,
Inventory level↑, AC Profit > MC Profit
Inventory level↓, AC Profit < MC Profit
 Inventory level↔, AC Profit = MC Profit

 Absorption costing profit

+ (Opening Inventory – Closing Inventory) * OAR
Marginal costing profit

Job, Batch and Process Costing

Input∗100−Wastage rate
 Output = 100
 Cost per unit
Total productioncost of batch
 Batch = Number of units∈batch
Net cost of Inputs
 Process = Expected outputs
Total cost of inputs−Scrap value of normal loss
 Average = Input units−Normal loss units
 Cost of Conversion = Direct labour + Production Overheads
 Process cost = Direct material + Cost of conversion
 Net Realizable Value = Final sales value – Further
processing cost
 Profit = Net Realizable Value – Pre-separation cost
Total cost
 Cost per service unit = Number of service units used

Break-even Analysis
 Total Cost = FC + VC
 Contribution Margin (CM) = Sales price – VC
 CM
 CM Ratio = Sales price
∗100

Changes∈Profit
= Changes∈Sales
∗100

 Total Contribution = CM per unit * Sales Price

 Profit = Total Contribution – Fixed Cost
 Sales = Total Cost + Profit
FC + Desired Profit
 Required Sales = CM
 Break Even Point (BEP)
FC
 Volume = CM
 Sales = BEP (Volume) * Sales Price
FC
= CM Ratio

= Sales * BEP Ratio

 BEP Ratio = 100 – MS Ratio
 Margin of Safety (MS) = Sales – BEP (Sales)
Profit
= CM Ratio
MS
 MS Ratio = Sales ∗100
 Net Income = MS * CM Ratio
 FC = BEP Sales * CM Ratio
A
m
ou
nt

Activity Level Sales Total

FixedCost
Cost
 Statistical Techniques
Least squares regression analysis:
The equation of a straight line is: y = a + bx
Where, y = Dependent variable
a = Intercept (on y-axis)
b = Gradient
x = Independent Variable
n ∑ xy−∑ x ∑ y
and b = n ∑ x 2− ( ∑ x )
2

where, n = Number of pairs of data

and a = y−b x

= ∑n
y b∑ x
−
n

The correlation co-efficient:

The Pearsonian correlation co-efficiency,
n ∑ xy−∑ x ∑ y
r=
√ {n ∑ x – (∑ x ) }{n ∑ y −(∑ y ) }
2 2 2 2

r must always be between +1 and –1.

If r = +1, there is perfect positive correlation.
If r = +1, there is no correlation.
If r = +1, there is perfect negative correlation.
Negative Positive
-1 0 +1
Time series analysis:
 Seasonal Variation
 Additive model = Trend + Seasonal Variation
 Multiplicative model = Trend * Seasonal Variation
 Variation = Actual sales – Trend
Variation
 Rate of Variation = Trend ∗100
Index Numbers: P = Base year price 0

 Simple Index P = Current year price 1

P
 Price = P 10 ∗100 Q = Base year quantity
0

Q
 Quantity = Q10 ∗100 Q = Current year quantity
1

'
This yea r s value
 Chain Base Index = '
Last yea r s value
∗100

 Weighted Price Index

∑ ( Priceindex∗Quantity )
 Quantity Weighting = ∑ Quantity
∑ (Price index∗Value)
 Cost Weighting = ∑ Value
 Value = Price * Number of Units
 Laspeyre Index numbers
∑ (P Q )
 Price index = ∑ (P Q ¿ )∗100 ¿ 1 0

0 0

∑ (Q P ¿ )
 Quantity index = ∑ (Q P ¿ )∗100 ¿ ¿ 1 0

0 0

 Paasche Index numbers

∑ (P Q )
 Price index = ∑ (P Q ¿ )∗100 ¿ 1 1

0 1

∑ (Q P ¿ )
 Quantity index = ∑ (Q P ¿ )∗100 ¿ ¿ 1 1

0 1

Budgeting
 Forecast Sales
− Opening inventory of finished goods
+ Closing inventory of finished goods
Budgeted Production
 Material Usage Budget = Budgeted Production * Quantity
required for production per unit
 Material Usage Budget
− Opening inventory of Raw materials
+ Closing inventory of Raw materials
Material purchase budget
 Labour Budget = Budgeted Production * Direct labour hour
per unit * Direct labour rate per hour
 Overheads Budget = Variable Overheads + Fixed Overheads
Budgeted Output
 Standard hour = Budgeted Production Hours

Capital Budgeting
 Future Value (FV) II = Initial Investment
 Simple Interest = II + (II*r*n) AC = Annual Cashflow
r
 Compounding = PV * (1 + m )m*n r = Interest rate
1
 Discount Factor (DF) = ( 1+ r )n
n = Time (Years)

 Present Value (PV) = FV * DF m = Yearly

 Effective Interest Rate (EIR) = ( )

m
r
1+ −1
m
 Pay Back Period (PBP) A = Last full year
II
 Constant Annual Flow = AC C = Remainder at A
C
 Uneven Cashflow = A+
D
D = Cashflow after A
AAP
 Average Rate of Return (ARR) = AI
 Average Annual Profit (AAP) = ∑
Profit
n
II + Scrap Value
 Average Investment (AI) = 2

 Net Present Value (NPV) = ( Cashflow

∑ ( 1+r )n −II )
 Internal Rate of Return (IRR) =
NPV of LDR
LDR + ∗(HDR−LDR )
NPV of LDR−NPV of HDR
−n
1−( 1+r )
 Annuity Factor (AF) = r
 PV of Annuity = Cashflow * AF
1
 Perpetuity Factor (PF) = r
 PV of Perpetuity = Cashflow * PF
Annual Inflow
 IRR of Perpetuity = Initial Investment ∗100
 Advanced Annuity = Cashflow * (1 + AF)
 Advanced Perpetuity = Cashflow * (1 + PF)
 Delayed Annuity/Perpetuity:
Discount the annuity as usual, whenever the cashflow starts.
And discount the answer back to T0.
Standard Costing
 Standard Margin = Standard contribution per unit/Standard
profit per unit
 Sales volume variance = (Actual quantity sold – Budgeted
quantity sold) * Standard Margin
 Sales price variance = (Actual price – Budgeted price) * Actual
quantity sold
 Total Sales Variance = Sales volume variance + Sales price
variance
 Material price variance = (Actual price – Standard price) *
Actual quantity bought
 Material usage variance = (Actual quantity used – Standard
quantity used for actual production) * Standard price
 Total Material Variance = Material price variance + Material
usage variance
 Labour rate variance = (Actual rate – Standard rate) *Actual
hours worked
 Labour efficiency variance = (Actual hours worked – Standard
hours for actual output) * Standard rate
 Total labour variance = Labour rate variance + Labour
efficiency variance
 Variable overhead efficiency variance = (Actual hours worked
– Standard hours for actual output) * Standard rate
 Variable overhead expenditure variance = (Actual rate –
Standard rate) * Actual hours worked
 Total Variable overhead variance = Variable overhead
efficiency variance + Variable overhead expenditure variance
 Fixed overhead expenditure variance = Actual expenditure –
Budgeted expenditure
 Fixed overhead volume variance = Fixed overhead capacity
variance + Fixed overhead efficiency variance
 Fixed overhead capacity variance = (Actual hours worked *
OAR) – Budgeted expenditure
 Fixed overhead efficiency variance = (Standard hours for
actual output – Actual hours worked) *OAR
 Total fixed overhead variance = Fixed overhead expenditure
variance + Fixed overhead volume variance
 Total variance = Total material variance + Total labour
variance + Total variable overhead variance + Total fixed
overhead variance
Margin
 Mark-up = ( 1−Margin )
Markup
 Margin = ( 1+ Markup )
Cost
 Sales = ( 1−Margin )
 Performance Measurement Techniques
 Revenue
− Cost of Sales (COS)
− Production Overheads (PO)
Gross Profit (GP)
− Non-production Overheads (NPO)
Operating Profit (OP)
− Interest
− Tax
Net Profit (NP)
GP
 Gross Margin = Revenue
∗100
OP
 Return on Sales (ROS) = Revenue ∗100
 Capital Employed (CE) = Total asset – Current liability
= Non-current liability + Total equity
Revenue
 Asset turnover = CE
∗100
OP
 Return on Capital Employed (ROCE) = CE
∗100

= ROS * Asset turnover

Inventory
 Inventory Days (ID) = cos
∗365
Receivables
 Receivables Collection Period (RCP) = Credit Sales
∗365
Payables
 Payables Collection Period (PCP) = Credit Purchase
∗365
 Cash Conversion Cycle (CCC) = ID + RCP – PCP
Current asset
 Current Ratio = Current liability
Current asset−inventory
 Quick Ratio = Current liability
WorkingCapital
 Working Capital Ratio = Current liability
Equity
 Equity-Asset Ratio = Total Asset−Fictitious asset
External liabilities
 Liabilities-Asset Ratio = Total Asset−Fictitious asset
 Debt = Non-current liability
 Equity = Ordinary Shareholder’s funds
Debt
 Capital Gearing/Leverage = Equity ∗100
Debt
= Equity+ Debt
∗100

OP
 Income Gearing/Income Cover = Finace Cost
∗100
Actual hours worked
 Capacity Ratio (CR) = Budgeted hours ∗100
Standard hours for actual output
 Efficiency Ratio (ER) = Actual hours worked
∗100

 Profit-Volume Ratio (PVR)/Activity Ratio (AR)

Standard hours for actual output
= Budgeted hours
∗100

= CR*ER
Idle hours
 Idle time Ratio = Total hours
∗100
Number of leavers requiring replacement
 Labour turnover Ratio = Average number of employees
∗100
Controllable Profit
 Return on Investment (ROI) = Controllable CE ∗100
 Notional Interest on Capital (NIC) = CE*Notional cost of
Capital (Interest rate)
 Residual Income (RI) = Controllable Profit – NIC
 Controllable profit/loss statement:
$ $
Sales
External x
Internal x
x
Controllable divisional Variable cost (x)
Controllable divisional Fixed cost (x)
Controllable divisional Profit x
Other traceable divisional Variable cost (x)
Other traceable divisional Fixed cost (x)
Traceable divisional Profit x
Apportioned head office cost (x)
Net Profit x

Contract costing steps:

1. Determine the total sales value of the contract.
2. Compute the total expected costs to complete the
contract.
3. Calculate the overall expected profit on the contract. If
there is a loss anticipated, then the whole loss is
recognized immediately.
4. Calculate the cumulative attributable profit based on
either:
¿
o Value of work certified ¿ date Contract price
∗Overall expected profit
 o
Costsincurred ¿ date ¿ completion ¿∗Overall expected profit
Total expected costs ¿
Value for Money (VFM):
Standard Input
 Economy = Actual Input ∗100
Actual Output
 Efficiency = Actual Input
∗100
Actual Output
 Effectiveness = Standard Output ∗100