Category: Financial Accounting

Standard costing

It is a predetermined cost, as it is determined in advance what should be the cost of production. When standard cost is used for the purpose of cost control it is known as standard costing. Now the question arises what is standard cost? Standard cost means cost based on the technical estimate of material, labour, overhead for a specific period of time under specific working condition. Continue reading “Meaning of standard costing”

meaning of Differential costing

It is the change in cost, due to change in the output or change in sale. It may be increase or decrease in cost. For example present cost is 300000 if work is done by labour and if the work is done by machines the expected cost is 200000 so the differential cost is 100000 so the management has to decide regarding the replacement of labour by machines as it will increase profit by 100000.

Differential costing —– in this fixed cost is considered. It also helps in taking managerial decisions. It is ascertained on the basis of absorption costing as well as marginal cost.

Marginal costing———in this fixed cost is not added to get marginal cost of the product. It is calculated on the basis of contribution. It also helps in knowing the key factor, contribution, p/v ratio. It is also helpful in accounting records.

The following are the 4 applications of marginal costing:

1. Cost control: in marginal costing there is fixed cost as well as variable cost . fixed cost is controlled by top management and variable cost is controlled by lower management. Sometimes there are the cases when profit decreases even when sale increases in such situations marginal cost helps the concern in finding out the reasons. Continue reading “Applications of marginal costing”

In the last article, we have done the objectives of profit volume ratio, today we will discuss the concepts of the same. There are four concepts in profit volume or p/v ratio:

 1)      Contribution: contribution is the difference between sale and marginal cost i.e.

Contribution= sale – marginal cost

it is also calculated by contribution= fixed expenses+ profit

it is different from profit as it include fixed cost and profit and it is based on the marginal cost concept while profit does not include fixed cost and it is based on common cost concept. Continue reading “4 Concepts of profit volume ratio”

Profit volume ratio (also commonly known as P/v ratio) is the extension of the marginal costing. It is a very important tool in the hands of policy maker to maximize their profit. It checks the relationship of cost and profit to the volume of business to maximize profit.

Business faces different situations like boom, depression, competition etc, in such cases the profit also changes. In such situations p/v ratio helps the management. In narrow sense it helps in finding breakeven point and in broader sense it helps in profit, cost and sale at different level of output. Continue reading “Profit volume ratio or cost volume profit analysis ratio or break even ratio”

Meaning of Marginal cost

Chartered Institute of Management Accounting (CIMA) defines the term marginal cost that it excludes fixed overhead cost entirely from cost of production but charged against ‘fund’ which arises out of excess of selling price over total variable cost.

So it is the amount at any given volume of output by which total cost is changed if the volume of output is increased or decreased by one unit. Continue reading “Features, advantages and disadvantages of marginal cost”

Subsidiary company

Last time we have discussed the meaning and types of holding company. Today we will discuss another type pf company that is subsidiary company. The company whose shares have been acquired is subsidiary company. A company can be subsidiary of another company if following conditions fulfilled.

1)      A company can be subsidiary of another company if other company controls the composition of the board of directors.

2)      If a company acquires more than the 50% equity shares of any other company.

3)      Also there is the case when it becomes the subsidiary of another company which itself is a subsidiary of a third company. For example: if R is the subsidiary of Y and Y is subsidiary of X than R would subsidiary of both Y and X.

There is a wholly owned subsidiary company which means when a holding company acquires 100% shares of subsidiary company.

Holding company

A company which acquires more than 50% equity shares of any other company in order to control the composition of its board of directors, it is called holding company. Holding company’s main aim is to eliminate the competition, to achieve the economies of production and to obtain the economies of management. Continue reading “Types of holding companies”

Purchase consideration:

As per section 14 it is the price paid by Transferee Company to the transferor company for the purchase of its business.

Methods of purchase consideration:

 There are different methods of purchase consideration depending upon the terms and conditions settled between the transferor company. Continue reading “4 Methods of purchase consideration”

Valuation of shares

Generally shares of the company are valued at the following cases:

1)      At the time of the assessment by income tax authority.

2)      At the time of the raising loans.

3)      At the time of the paying court fee.

4)      At the time of the valuing the assets of the company.

5)      At the time of the purchase and sale of the shares in private company. Continue reading “3 Methods of valuation of shares”