“Develop success from failures. Discouragement and failure are two of the surest stepping stones to success.”
Costing and Estimate
Unit - 1
INTRODUCTION
Indian federation costing system: the federation costing system often referred to as ‘FCS’ was enforced by the British federation of master printers in 19113 and was made applicable to all members of the federation. The federation constituted a committee to formulate a standard system of costing for its members in order to eliminate unhealthy competition among the member printers and to give a high status to the printing industry. The costing system proposed by the federation was initiated by Mr. Arthur C. Robbert, the auditor of the federation.
The Indian printers followed the British federation costing system without much modifications. They followed the some forms and proformas which were used by the printer in British with the inception of all India federation of master printers for the same purpose in India, these proformas have been revised from time to time but the basic principles have remained unchanged.
To-day we have large number of local printers associations almost in all the big towns e.g. Bombay master print association west Bengal printers association, Karnataka printers association etc. the all India federation of master printers looks after the interest of the printers at all India level, whereas the local associations deal with the local problem of the member printers.
Importance of costing and estimating in the printing industry/Principles of federation costing system:
Definition cost, price and Profit
Definition of cost: it is the sum total of all liabilities, that is, expenses actually incurred in the production of a job or in rendering a service.
Profit: it is a reward for the rise some by an entrepreneur in organizing and running a business. A businessman will organize and run a business only when there is a reasonable return in the business against the risk borne by him. This is also called “profit”.
Price: price is a remuneration against which a businessman is prepared to sell an article or a service to a customers. It is usually in terms of monthly.
P = C + PT
P = price, C = cost, PT = profit.
Cost is fact because it is total expenditure incurred.
Profit is opinion because it depends upon the individual judgement.
Price is policy because it is being used as a tool in the competition.
Difference between costing and estimating and their relationship
Relation between costing and estimating:-
Costing indicates actual hour of work whereas estimating indicated anticipated hours of work done.
Different between costing & estimating:
Estimating
costing
1
It is a forecast.
It indicates actual and factual cost of the product.
2
A planning
Analysis of working plan.
3
Done before job is undertaken.
Done after the job has been Completed.
4
It helps the printers in getting the job and also educates the customer.
It educates the Printers
6
It enables the customer to know which process of printing is used, to select the press and to select quantity of paper.
Costing enables the printers to plan his future job intelligently.
7
Estimating is primarily concerned with the determination of selling price job.
Primarily concerned with the determination of hourly rate of various machine operation and operatives.
8
It helps the printers in competition.
It helps to monitor budgetory control, elimination of waste and in efficiency and achieving higher productivity.
ESTIMATE
Definition of estimate: it is the technique of assessing the sale price of a job or a service scientifically. In other words, it is forecast. It is only a probability or hypotheses and not anything, actual or factual. Estimating is also primarily concerned with the manufacturing processes involving a large number of item of expenditure.
Estimating is also termed as advance costing or standard costing. Advance costing means, costing done before the job has been undertaken.
Some steps of estimating:
Purpose and function of estimating: it is the estimating is essential from both printer as well as customer’s point of view. The following step in the estimating.
Customer’ point of view:-
Fixes cost, variable cost and total cost and unit cost and their inter-relationship:-
The all expenditure divided into two categories.
Fixed cost would be incurred even if no copies were printed finally. For ex- expenditure has to be incurred on activities (1) and (5) even for providing rough proofs of the job.
The is 14,000 for used @30,000 but the unit fixed cot decrease with every increased in output because in that case, it is divided among the number of copies printed. The unit fixed cost increase with every decrease in output is shown graphically.
Variable cost are also referred to as product costs and these remains constant per unit of output.
Unit cost = total fixed cost + total variable cost / no. of copies produced.
How to estimation:-
Unit – 2
COST ANALYSIS:
Classification of cost: The different bases of cost classification are:
1. By time (Historical, Pre-determined).
2. By nature or elements (Material, Labour and Overhead).
3. By degree of traceability to the product (Direct, Indirect).
4. Association with the product (Product, Period).
5. By Changes in activity or volume (Fixed, Variable, Semi-variable).
6. By function (Manufacturing, Administrative, Selling, Research and development, Preproduction).
7. Relationship with accounting period (Capital, Revenue).
8. Controllability (Controllable, Non-controllable).
9. Cost for analytical and decision-making purposes (Opportunity, Sunk, Differential,
Joint, Common, Imputed, Out-of-pocket, Marginal, Uniform, Replacement).
10. Others (Conversion, Traceable, Normal, Avoidable, Unavoidable, Total).
Classification based on Time
i. Historical Costs: These expenses are determined after the fact. Such expenses are only available once the production of a given item has been completed. They are objective and verifiable through reference to actual operations.
ii. Pre-determined Costs: These costs are calculated in advance based on a specification of all cost-influencing factors. Such fees may include:
a. Estimated costs: Costs are estimated prior to the production of items; naturally, these are less precise than standards.
b. Standard costs: This is a specific notion and method. This strategy entails: • establishing established criteria for each element of cost and each product; • comparing actual to standard to identify deviations; • pinpointing the causes of such deviations and taking corrective action; and • implementing corrective measures. Obviously, standard costs, though pre-determined, are arrived with much greater care than estimated costs.
Classification by Nature or Elements
There are three broad elements of costs:
(1) Material: The substance from which the product is made is known as material. It can be direct as well as indirect.
Direct material: It refers to those materials which become a major part of the finished product and can be easily traceable to the units. Direct materials include:
(i) All materials specifically purchased for a particular job/process
(ii) All material acquired, and latter requisitioned from stores
(iii) Components purchased or produced.
(iv) Primary packing materials like cartoons and boxes
(v) Material passing from one process to another
Indirect material: All material that is used for purposes ancillary to production and which can be conveniently assigned to specific physical units is termed as indirect materials. Examples, oil, grease, consumable stores, printing, and stationary material etc.
(2) Labour: Labour cost can be classified into direct labour and indirect labour.
Direct labour: It is defined as the wages paid to workers who are engaged in the production process whose time can be conveniently and economically traceable to units of products. For example, wages paid to compositors in a printing press, to workers in the foundry in cast iron works etc.
Indirect labour: Labour employed for the purpose of carrying tasks incidental to goods or services provided, is indirect labour. It cannot be practically traced to specific units of output. Examples, wages of store-keepers, foreman, time-keepers, supervisors, inspectors etc.
(3) Expenses: Expenses may be direct or indirect.
Direct expenses: These expenses are incurred on a specific cost unit and identifiable with the cost unit. Examples are cost of special layout, design or drawings, hiring of a particular tool or equipment for a job; fees paid to consultants in connection with a job etc.
Indirect expenses: These are expenses which cannot be directly, conveniently and wholly allocated to cost centre or cost units. Examples are rent, rates and taxes, insurance, power, lighting and heating, depreciation etc.
It is to be noted that the term overheads has a wider meaning than the term indirect expenses. Overheads include the cost of indirect material, indirect labour and indirect expenses. Overheads may be classified as
(a) Production or manufacturing overheads, (b) administration overheads, (c) selling overheads, and (d) distribution overheads.
The various elements of cost can be illustrated by the following chart
Total expenditure may therefore be analysed as follows:
Materials cost = Direct materials cost + Indirect materials cost
+ + +
Labour cost = Direct labour cost + Indirect labour cost
Expenses = Direct expenses + Indirect expenses
________________ ___________________ ___________________
Total cost = Direct cost/prime cost + Overhead cost
Classification by Degree of Traceability to the Products
Cost can be distinguished as direct and indirect.
Direct Costs: The direct costs are those which can be easily traceable to a product or costing unit or cost center or some specific activity, e.g. cost of wood for making furniture. It is also called traceable cost.
Indirect Costs: The indirect costs are difficult to trace to a single product or it is uneconomic to do so. They are common to several products, e.g. salary of a factory manager. It is also called common costs.
Costs may be direct or indirect with respect to a particular division or department. For example, all the costs incurred in the Power House are indirect as far as the main product is concerned but as regards the Power House itself, the fuel cost or supervisory salaries are direct. It is necessary to know the purpose for which cost is being ascertained and whether it is being associated with a product, department or some activity.
Direct cost can be allocated directly to costing unit or cost center. Whereas In-direct costs have to be apportioned to different products, if appropriate measurement techniques are not available. These may involve some formula or base which may not be totally correct or exact.
Classification by association with the Product
Cost can be classified as product costs and period costs.
Product Costs: Product costs are those which are traceable to the product and included in inventory values.
In a manufacturing concern it comprises the cost of direct materials, direct labour and manufacturing overheads. Product cost is a full factory cost. Product costs are used for valuing inventories which are shown in the balance sheet as asset till they are sold. The product cost of goods sold is transferred to the cost of goods sold account.
Period Costs: Period costs are incurred on the basis of time such as rent, salaries, etc., include many selling and administrative costs essential to keep the business running. Though they are necessary to generate revenue, they are not associated with production, therefore, they cannot be assigned to a product.
They are charged to the period in which they are incurred and are treated as expenses.
Selling and administrative costs are treated as period costs for the following reasons:
(i) Most of these expenses are fixed in nature.
(ii) It is difficult to apportion these costs to products equitably.
(iii) It is difficult to determine the relationship between such cost and the product.
(iv) The benefits accruing from these expenses cannot be easily established.
The net income of a concern is influenced by both product and period costs. Product costs are included in the cost of the product and do not affect income till the product is sold. Period costs are charged to the period in which they are incurred.
Consider a retailer who acquires goods for resale without changing their basic form. The only product cost is therefore the purchase cost of the goods. Any unsold goods are held as inventory, valued at the lower of purchase cost and net realisable value and included as an asset in the statement of financial position. As the goods are sold, their cost becomes an expense in the form of 'cost of goods sold'. A retailer will also incur a variety of selling and administration expenses. Such costs are period costs because they are deducted from revenue without ever being regarded as part of the value of inventory.
Now consider a manufacturing firm in which direct materials are transformed into saleable goods with the help of direct labour and factory overheads. All these costs are product costs because they are allocated to the value of inventory until the goods are sold. As with the retailer, selling and administration expenses are regarded as period costs.
Classification by Changes in Activity or Volume
Costs can be classified as fixed, variable and semi-variable cost.
Fixed Costs: The Chartered Institute of Management Accountants, London, defines fixed cost as
“The cost which is incurred for a period, and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover)”.
These costs are incurred so that physical and human facilities necessary for business operations, can be provided. These costs arise due to contractual obligations and management decisions.
They arise with the passage of time and not with production and are expressed in terms of time.
Examples are rent, property taxes, insurance, supervisors’ salaries etc.
It is wrong to say that fixed costs never change. These costs may vary depending on the circumstances. The term fixed refers to non-variability related to the relevant range. Fixed cost can be classified into the following categories for the purpose of analysis:
(a) Committed Costs: These costs are incurred to maintain certain facilities and cannot be quickly eliminated. The management has little or no discretion in this cost, e.g., rent, insurance etc.
(b) Policy and Managed Costs: Policy costs are incurred for implementing particular management policies such as executive development, housing, etc. Such costs are often discretionary. Managed costs are incurred to ensure the operating existence of the company e.g., staff services.
(c) Discretionary Costs: These are not related to the operations and can be controlled by the management. These costs result from special policy decisions, new research etc., and can be eliminated or reduced to a desirable level at the discretion of the management.
(d) Step Costs: Such costs are constant for a given level of output and then increase by a fixed amount at a higher level of output.
Variable Cost: Variable costs are those costs that vary directly and proportionately with the output e.g. direct materials, and direct labour. It should be kept in mind that the variable cost per unit is constant but the total cost changes corresponding to the levels of output. It is always expressed in terms of units, not in terms of time.
Management decisions can influence cost behaviour patterns. The concept of variability is relative. If the conditions upon which variability was determined change, the variability will have to be determined again.
Semi-fixed (Semi-Variable) costs: Such costs contain fixed and variable elements. Because of the variable element, they fluctuate with volume and because of the fixed element; they do not change in direct proportion to output. Semi-variable costs change in the same direction as that of the output but not in the same proportion. Depreciation is an example; for two shifts working the total depreciation may be only 50% more than that for single shift working. They may change with comparatively small changes in output but not in the same proportion.
Functional Classification of Costs
A company performs a number of functions. Functional costs may be classified as follows:
(a) Manufacturing/production Costs: It is the cost of operating the manufacturing division of an undertaking. It includes the cost of direct materials, direct labour, direct expenses, packing (primary) cost and all overhead expenses relating to production.
(b) Administration Costs: They are indirect and covers all expenditure incurred in formulating the policy, directing the organization and controlling the operation of a concern, which is not related to research, development, production, distribution or selling functions.
(c) Selling and Distribution Cost: Selling cost is the cost of seeking to create and stimulate demand e.g. advertisements, market research etc. Distribution cost is the expenditure incurred which begins with making the package produced available for dispatch and ends with making the reconditioned packages available for re-use e.g. warehousing, cartage etc. It includes expenditure incurred in transporting articles to central or local storage. Expenditure incurred in moving articles to and from prospective customers as in the case of goods on sale or return basis is also distribution cost.
(d) Research and Development Costs: They include the cost of discovering new ideas, process, Products by experiment and implementing such results on a commercial basis.
(e) Pre-production Cost: When a new factory is started or when a new product is introduced, certain expenses are incurred. There are trial runs. Such costs are termed as pre-production costs and treated as deferred revenue expenditure. They are charged to the cost of future production.
Element of cost: cost has been defined as the sum total of all expenses incurred in the production of a job. The element of cost mean the contituents of cost. That is, of what the cot is made of. In other word, the element of cost are the broad classification or the heads under which various item of expenditure incurred in the production are classified.
Labour
Material & outworks
Expenses or overheads
DCL
IDCL
DCM & O
IDCM & O
DCE
DDE
IDDE
Note: material & outwork and expenses/overheads have also been designed accordingly.
Labour is a remuneration.
This labour is paid to the workers only.
The workers must be directly engaged in the production processes.
These are only those services of worker which can be measured in term of money.
According to the above analysis: wages paid to the plate maker or a camera operator is a labour. On the other hand, the salary paid to a manager or a supervisor is not a labour.
The wages paid to a plate maker and salary paid to a manager both are remunerations.
Plate maker is a worker, while the manager is not a worker.
Plate maker is actually engaged in the production, while a manager simply supervises or controls the production.
The work of plate make can be measured in term of money that is, a time rate or work rate can be found out for evaluating the work done by the plate maker.
Outwork:- it is work or a part of the work contracted by the printer but got executed by him from the outside agencies for and on behalf of his customer mainly because the ‘facilities’ or the same are not available in his own premises. Ex: designing, block making, scanning.
Stages of federation costing system: the terms “stages of federation costing system” means the different steps at which the federation costing system can be enforced. The scale of business varies from trade to trade. In the printing industry, this scale varies from a one man show to a very large organization employing thousand of people. Each step of the federation costing system is, suitable for application in a particular size of the press.
According the federation costing system, three section divided.
In small scale presses, the number of employee is upto ten only while in the medium and large scale presses, the number of employs upto 100 and above 100 respectively. These have been further sub-divided into two group each for ease in the proper implementation of the recommendations of the federation costing system.
The federation costing system has recommended certain forms and proformas for use in presses depending upto their size and scale of business. These proformas help the management of the press to perform its various activities efficiently, scientifically and correctly. A small scale press can neither efforts to use all the forms and proformas recommended by the federation costing system nor it is desirable.
Stages of federation costing system
Small scale presses
Stage 1
stage 2
One man show
more than one & upto 10 employee standard
Bazaar rates or standard rates as the local printers association for
standard hourly rates as Fixed by local printers association different operation & process
Work instruction ticket
work instruction sheet.
Estimate form
Delivery sheet
Delivery sheet Plus Cost sheet
Invoice
Medium scale presses
Stage 3
stages 4
(a) More than 10 & upto 30 employees
(a) more than 50 & upto 100 employees.
(b) Own rates
(b) own rates for different operations
(c) Work instruction ticket
(d) Estimate form
(e) Delivery sheet
(f) Invoice
(g) Cost sheet
(h) Summary of expenses
(i) Statement of expenses
(j) Daily docket
(k) Recorded cost of production
(l) Calculation of hourly by rates
Plus
Statement of budgeted and recorded cost of production
Large scale presses
Stage 5
stage 6
(a) More than 100 & upto 500 employees
(a) more than 500 employees
(b) Own hourly rates for each & every Operation & machine
(b) own hourly rates for each & every operation, operative and machine.
(m) Statement of budgeted and recorded Cost of production
(m) Statement of budgeted and recorded cost of production
(n) Indent (Requistions)
(o) Daily delivery sheet
(o) daily delivery sheet.
(p) Daily sales record
(p) daily sales record
(q) Stock record
(q) stock record
Investigation of cost sheets at intervals to find out most economical jobs suited to the press and to create balanced flow of work.
Industries:
There are three types of industries:
Foundations of costing system: on what basis costing depends found of actual cost scientific calculation.
Aim of object of costing:
Types of costing system: two types
Planning pre-press press post-press dispatch.
Advantage:
Foundation of costing system:
Production department is direct charged. Ex: production department.
The non-productive department expenses will be beared by productive department.
Direct chargeable hour: direct operations, printing, pre-press.
Indirect chargeable hour: indirect chargeable hours, non-productive hours, travelling.
Fixed cost: press, press, platemaking.
Variable cost: varies in proportion to output.
Total cost: fixed cost + variable cost.
Fixed cost & variable cost: the cost of any publication is the total of all expenses incurred in its production including the expenditure on activities performed by the specialists. In some of the printing jobs, some activities may not be got executed through the specialists in order to reduce the overall cost of production.
Definition of costing: costing is the technique of finding out the actual cost of production of a job a service scientifically, in other words, it is a method of finding out the actual cost of production in accordance with some scientific principles of costing. In order to organize and run a business, a reasonable profit over and above the actual cost must be recovered. It is therefore, essential to know the actual cost of production of a job. The role of costing it is used principle to all calculation are easy.
Purpose and function of costing: the purpose and function of costing means the role of costing, planning, organizing, and executive manufacturing processes.
Typesetting
Designing
processing
printing
binding
Plate making
It is noticed that the actual cost of typesetting has crossed the estimated cost of typesetting, the cost in the other department for ex: processing, plate making, printing etc.
The cost of production of all future jobs can be controlled by analysis the cost records of previous jobs.
The cost of production has to be increased in a controlled manner in order to produce better quality product. This phenomenon is also known as “cost control”.
A mathmatical and scientific routing of costing helps in maintaining all these controls.
A reasonable price has to be based on a correct anticipated cost and on a reasonable margin of profit.
Hourly rate = Direct department expenses + indirect department expenses
-----------------------------------------------------------------------------------
Directly chargeable hours
Breakeven analysis: Though many believes that there is no difference in CVP analysis and Break even analysis and they refer to same concept others believe that CVP is a broader term and include Break even analysis But if we carefully observe concepts used in them we can say that Break-even analysis is a actually a method to apply the CVP analysis in decision making process by including many more related concepts into it.
Breakeven point:
Break-even point is production and sales level where there will be no profit and loss i.e. total cost (TC) is equal to total sales revenue (S)
Or Sales = Total Fixed Cost + Total Variable cost & Profit = 0
Break-even Point can be calculated both in units and Rs. When calculated in Terms of Rs. It is also referred as Break even sales.
Let us calculate Break-even point for the given set of data we used in CVP analysis above
Particulars
Year 1
Year 2
Change
Production
5000 units
8000 units
3000 units
Sales @5 per unit
25000
40000
15000
Variable cost @ 3 per Unit
24000
9000
Contribution @2 per unit
10000
16000
6000
Fixed cost
4000
0
Profit
12000
Breakeven point (in units) = BEP = Fixed costs
Contribution per unit
So For given set of values Break Even Point = (4000/2) = 2000 units
We can Cross check this by simple calculations
Suppose we produce 2000 units and selling price is 5 per unit so total sales 10000
Variable cost @ 3 per unit will be (2000 *3) = 6000 so contribution will be 4000 and fixed cost given is 4000 so profit will be 0
3. Break even Point (in Rs.) = BES = Fixed cost X Sales per unit
Or BEP in units * Selling Price per unit or Fixed Cost
P/v ratio
In our example BES = 2000 * 5 = 10000 Rs. Or 4000/40% = 10000 Rs.
Lets see few other related concepts which further help in decision making
Break Even Point With Desired Profits: BEP with DP (in units)
Since no business entity would like to settle at Break-even point, their main objective of existence is to earn profit for shareholders or owners so it makes sense to calculate particular level of units to be produced and sold to earn desired profits.
4. BEP with DP (in units) = Fixed cost + Desired profit
And following the same concept which we discussed for BEP in Rs., BEP with desired profit in Rs can also be calculated in similar manner
5. BEP with DP (In Rs) = BES with DP = Fixed cost + Desired profit x Sales per unit
Or BEP with DP in units * Selling Price per unit
Or Fixed Cost + Desired Profit
P/V ratio
Let us assume in our example shareholders have given a target of Rs. 24000 Profit to be earned
So BEP with DP in Units = (4000 + 24000)/2 = 14000 units
BEP with DP in Rs. = 14000 *5 = Rs.70000 or (4000 + 24000)/40% = Rs. 70000
This can be verified with following calculations
14000 units
Sales @5 per Unit
70000
Variable cost Per unit @3 per unit
42000
Contribution @2 Per unit
28000
Fixed Cost
So it can be clearly observed that by producing and selling 14000 units. The revenue will be
Rs. 70000 and a profit of Rs 24,000 is expected be achieved.
Margin of Safety (MOS):
Margin of safety is the difference between actual sales and Break even sales. It can be expressed in absolute terms or as a % of Actual sales
6. MOS (Absolute) = Actual Sales – Break Even Sales
MOS Can also be calculated with following Formula
MOS = Profit/P/V ratio
7. MOS (%) = MOS/ Actual sales
So in our example, if we calculate Margin of Safety for 2nd year it will be
MOS (Absolute) Actual Sales- BES = 40000-10000 = Rs 30000
MOS = 12000/40% = Rs.30000
MOS (%) = MOS/Actual Sales = 30000/40000 = 0.75 or 75%
Let us see with few more examples that with the minimal information given how we can calculate all these components which will help in decision making process to a great extent
Example 3 Homemakers Pvt Ltd. gives you following data
Amount in Rs.
Sales 500000 units
15,00,000
4,50,000
3,00,000
You need to find BEP, MOS
Solution:
Since all marginal costing concepts revolve around contribution and P/V ratio lets first calculate that
Contribution = Fixed Cost + Profit
= 4,50,000 + 3,00,000 = 7,50,000
P/V Ratio = (Contribution/Sales)*100
= (7,50,000/15,00,000)*100 = 50%
BEP in Rs (In Sales) = Fixed Cost / P/V ratio
= 4,50,000/50% = 9,00,000
BEP in Units = BEP in sales/ Selling Price per unit
= 9,00,000/3 = 3,00,000 units
(Note: Selling price per unit = sales/ no of units = 15,00,000/5,00,000 = 3 per unit)
Margin of Safety (in Rs.) = Actual sales – Break even sales
= 15,00,000 - 9,00,000 = Rs. 600000
Margin of safety (in %) = MOS/ Actual Sales
= 6,00,000/15,00,000 = .0.4 or 40%
Angle of Incidence
The angle which the Total Sales Line makes with the Total Cost Line is known as the Angle of Incidence.
The angle indicates the profit-earning capacity of the company over the break-even point. A large angle of incidence indicates a high margin of profit and a mall angle of incidence indicates earning of low margin of profit.
Let us see with a few more examples that with the minimal information given how we can calculate all these components which will help in the decision-making process to a great extent.
Example 4 Mrs Anju is running a business named “AHAAR” for supplying packed foods to nearby offices. She supplied you the following information and ask for answers to few questions.
Sales
20,00,000
30,00,000
2,00,000
4,00,000
Answer the following:
1. P/V ratio
2. Variable cost for year 1
3. Fixed Cost
4. BEP
5. Sales to earn a Profit of Rs 6,00,000
6. Profit When sales are 50,00,000
7. MOS for a Profit of 6,00,000
1. P/V ratio = (Change in Profit/ Change in Sales)*100
= (2,00,000/10,00,000)*100 = 20%
2. Variable cost in 1st year = Sales - Contribution
Contribution in year 1 = Sales *P/V ratio
= 20,00,000* 20% = 4,00,000
Therefore Variable cost = 20,00,000 - 4,00,000 = 16,00,000
3. Fixed Cost = Contribution – Profit
= 4,00,000 – 2,00,000 = Rs 2,00,000
4. BEP = FC/ P/V ratio
= 2,00,000/20 % = 10,00,000
5. Sales to earn a profit of 6,00,000
BEP with DP = (FC +DP)/ P/V ratio
= (2,00,000 + 6,00,000)/20%
= Rs. 40,00,000
6. Profit when sales are 50,00,000
Contribution = Sales * P/V ratio
= 50,00,000*20%
= 10,00,000
Profit = Contribution – fixed cost
= 10,00,000 – 2,00,000 = Rs. 8,00,000
7. MOS for a profit of 6,00,000MOS = Profit/ P/V ratio
= 6,00,000/20%
= 30,00,000
Cost-Volume-Profit Analysis: Cost-Volume-Profit (CVP) analysis is the systematic study of relationship between cost of the product, volume of activity and the resultant profit. Since all these three factors are interrelated so, it’s very important to study their relationship and how a change in one can effect the other as well. For e.g. Cost of the product will provide the base on which selling price will be determined and accordingly profit will be calculated. If we change selling price it might impact volume of sales and volume of production and thereby will impact the cost.
So CVP analysis is very important technique used in managerial decision making and achieving the desired results.
Assumptions in CVP Analysis:
1. Any Changes in the levels of revenues (Sales) and costs arise only because of changes in the number units produced and sold – for example, the number of Cars produced and sold by Maruti Suzuki or the number of Passengers travelling in a bus.
2. Total costs can always be separated into two elements or parts i.e a fixed element which does not change with the level of output and a variable element which changes with level of output.
3. Selling price per unit, variable cost per unit, and total fixed costs are known and constant.
(Mind it, Total sales and total variable cost will keep changing with level of output).
4. It is assumed that company is either selling a single product or that the proportion of different products will remain constant as the level of total units sold changes i.e. sales mix remains constant.
Before we proceed further, let us briefly discuss various concepts & symbols used in marginal costing and CVP analysis.
Total Fixed cost (TFC):
It remains constant or same at all levels of output.
Total Variable Cost (TVC):
It will be 0 at zero level of activity and increases proportionately with the volume of activity.
Total Cost (TC):
It is a combination of Fixed cost and variable cost so it will start from the level of fixed cost and keep increasing following the variable cost.
Total Sales (S): It represents the total amount received as revenue by selling the goods produced.
Profit (P): It represents the difference between Total sales and Total Cost.
Basic equation:
Total sales = Total Fixed Cost + Total variable Cost + Total Profit
TS = FC +VC + P
Contribution (C): When only Variable cost is subtracted from Sales the resultant figure is called Contribution. Since in Marginal costing it is assumed that fixed cost will remain same at least in short run for all levels of production activity. So, contribution is an important concept to help in decision making in marginal costing.
Contribution =Total Sales – Total Variable Cost
OR Contribution=Fixed Cost + Profit
Standard Marginal Cost Statement (Simplified)
Amount (Rs.)
Sales (S)
XXX
Less Variable cost (VC)
Contribution (C)
Less Fixed Cost (FC)
Profit (P)
Concepts Used in Marginal costing for Decision Making
1. Profit Volume (P/V) Ratio:
This ratio helps in knowing the profitability of the operations of a business. It establishes the relationship between Contribution and sales. Since Fixed cost do not change with the level of output so any increase in contribution will leads to increase in profit.
So Profitability of the different Goods produced by a company can be ascertained by comparing their P/V ratio. Higher the P/V ratio higher the profit of that particular product and vice-versa. P/V ratio is also known as Contribution Margin Ratio or Contribution to Sales Ratio.
P/V Ratio = Contribution X 100
Or Contribution per unit X 100
Sales per unit
Or Change in contribution X 100
Change in sales
Or Change in profit X 100
Let us see how all of these formulas will give same result for a given set of information.
Example 2 Khushi Enterprises shares with you their cost data for 2 years
Lets check P/V ratio with all Formulas mentioned above
P/V Ratio = Contribution X 100 For Year 1 (10000/25000)*100 = 40%
Or Contribution per unit X 100 For year 1 (2/5)*100 = 40%
Or Change in contribution X 100 (6000/15000)*100 = 40 %
Or Change in profit X 100 (6000/15000)*100 = 40%
So, that’s the benefit of this formula that as per given information we can use any of its version still getting same answer.
Forms and spicemens: the perofrmas recommended by the federation costing system has been two groups. Forms and spicemens.
Forms:
Specimens:
UNIT - 4
JOB ESTIMATION
Use of computer: an estimator should modernize his working procedure. Now-a-day computer are being used in every work of life. Therefore, he should, know how to use computer to assist him in estimating with the use of computers, an estimator can avoid lot of filling work. He can store all sort of information in floppies and retrieve the information as when required.
Computer aided estimating (CAE) is talk of the day, an estimator should know the application of computer to the estimating function. The use of computer will have a great impact on his job and his client.
Making of estimate of complete jobs:
Therefore, followed these step for making estimate of job.
Computer aided estimating software:
The direct interaction with a computer give quotation on a specific produces. Yet, many companies are to as confident of the accuracy of their quotations. In this way, computer aided cost estimating is a total that many be able to help you.
This software speedup mathematical calculations today’s computer aided cost estimating system used day by day. It provide a history of companable quotes at the touch of a button.
The many advantage of computer aided cost estimating system are accuracy of cot estimates. The companies used this software in order to run-their company profitable.
Enterprises Resources Planning (ERP):
Global organisations are becoming more complex every day. Organizations strive to increase their efficiency and agility in order to meet customer expectations and operate in a highly competitive environment. Unprecedented levels of competition are a result of globalisation. Shortened life cycles, necessitate continuous design improvement, manufacturing flexibility, extremely effective logistics management, better supply chain management, quicker access to accurate information from both inside the organisation and from the entire supply chain outside, other issues call for successful corporations and industry best practices. Enterprise Resource Planning (ERP) systems are a popular choice among businesses to increase their competitiveness since they can fundamentally alter how business is conducted. While implementing enterprise resource planning, the entire organization is considered as a system and the departments as its subsystems.
Introduction:
An Enterprise Resource Planning (ERP) system consists of integrated sets of comprehensive software used to manage and integrate all of the business processes within an organisation. These sets often comprise a collection of established business applications and tools for financial and cost accounting, sales and distribution, materials management, human resource management, production planning with computer-integrated manufacturing, supply chain, and customer information. ERP systems are flexible information systems that combine information and information-based operations across and within functional areas of a company.
Finance needs an ERP in order to quickly close the books. ERP is required by sales to manage all client orders. To timely deliver the appropriate goods and services to consumers, logistics requires ERP software that functions well. ERP is necessary for accounts payable to rapidly and accurately pay vendors. Management requires real-time access to data regarding business performance in order to make sound decisions. Further, the ERP system is crucial for keeping accurate financial records, that is why banks and shareholders rely on the data and analysis it provides.
1.1 Evolution of Enterprise Resource Planning
The evolution of ERP has progressed through a number of stages. Figure 9.1 shows the evolution stages of resource planning system development with respect to time.
Organizations began using inventory control packages for automation systems in the 1960s. Material Requirement Planning (MRP) came into the picture in the 1970s to plan the necessary parts and products for the management and manufacturing of goods. Material requirement plan holds information regarding the capacity required to achieve the expected output rate. MRP-II, however, was utilized in the 1980s to enhance the production process. It included new elements human resource, shop floor, engineering, finance, and distribution. Extending these ideas, Enterprise Resource Planning (ERP) systems were able to integrate business activities across an enterprise in the 1990s. ERP vendors added new features including data warehousing, advanced planner and optimizer (APO), supply chain management, and customer relationship management (CRM) in the 2000s, which led to an Expanded ERP (E-ERP). E-ERP is an advancement in the field of ERP that uses Internet and World Wide Web (WWW) technology to streamline an organization's operations online.
Because ERP-II is a web-friendly application, it solves the problem of having different multiple office locations.
Numerous fields of industries covered by ERP are financial accounting, asset management and portfolio management of finance industry, recruitment and compensation management, training and development of human resource management industry, production planning, quality management sales and distribution etc.
Before an ERP system, each department maintained their own database. Employees in one department were unaware of what happened in the other departments. After the ERP system, databases from various departments are maintained by an ERP system. It maintains a log of every database in the system. Employees from one department in this situation know information about employees from the other departments. Some vendors of ERP are Baan, JD Edwards, Oracle, PeopleSoft, SAP, Net Suite, Sage 300, In for etc.
Fig 9.2 Different database interaction before and after ERP5
1.2 Benefits of Enterprise Resource Planning
The most important benefit of ERP is business integration with different modules of organization. Some other benefits of ERP are:
● ERP is powerful, flexible and easily accessible GUI technology.
● ERP systems improve resource allocation for efficient utilization.
● Work centre loopholes can be identified and equipment maintenance can be planned more effectively.
● Client-server architecture facilitates interaction between modules using ERP.
● It assists in removing unnecessary or non-value-added operations.
● It serves as the engine of the business concept. In this role, information is saved, updated, retrieved, and managed.
● The system has regained the trust of the workforce, which has improved departmental collaboration and communication.
2.2 Functional Module of ERP
Organizations are deploying Enterprise Resource Planning systems to optimize their internal business processes and to facilitate the flow of data between multiple functional divisions, such as inventories, procurement, manufacturing, accounting, etc. The multiple operational modules of the ERP programme take care of each functional department. Some of the functional modules in the ERP are as follows:
● Production Planning Module: The Material Resource Planning system, which was utilized by businesses for their manufacturing needs, has evolved into the Enterprise Resource Planning system. ERP is more reliable software for production planning because it uses production data and sales forecasting to maximise the use of manufacturing capacity, material resources, and part availability.
● Purchasing Module: This module helps to streamline the acquisition of necessary raw materials. It is integrated with the production planning and inventory control modules, as well as frequently with supply chain management software. This module automates the supplier evaluation and identification procedure. It is utilised for purchasing management and automation.
● Inventory Control Module: This module supports the management of the company's product and resource inventories. It aids in managing product replenishment and keeping the product stock levels at a healthy level. The inventory control module keeps track of the inventory stock that is present at several sites, including the warehouse, office, and shops. The inventory of raw materials needed for product planning can be managed using the module. It enables the business to schedule upcoming production and maintain a supply of products in case demand drops below a crucial level.
● Sales Modules: The tasks related to sales, customer orders, billing, and product shipping are handled by this module. The company's e-commerce websites are integrated with it, and many vendors include an ecommerce store as part of this section.
● Accounting and Finance Modules: An organization's essential functions are accounting and finance. To gather the financial information for the general ledger and other financial statements of the organisation, this module communicates with the other functional modules.
● Manufacturing Module: This module includes product designing, bills of material, cost management, workflow, etc.
Each of the aforementioned functional modules for ERP software have a crucial function. Depending on their needs, the organisations can decide whether to adopt all of the modules or just a few. The modules that are both technically and financially feasible for the companies are chosen. These modules integrate many functional areas to streamline communication throughout the organisation. All of these functional modules are connected to the enterprise resource management system. The functional components of ERP software aidin cost reduction, operational efficiency, and profit maximisation. In the business world, ERP would provide a single database including all of the information for the software modules listed in Table 9.1.
Table 9.1: ERP software module with database information
Software module
Database information
Manufacturing
Engineering, Bills of Material, Scheduling, Capacity, Workflow Management, Quality Control, Cost Management, Manufacturing Process, Manufacturing Projects, Manufacturing Flow
Supply Chain Management
Inventory, Order Entry, Purchasing, Product, Configurator, Supply Chain Planning, Supplier, Scheduling
Financials
General Ledger, Cash Management, Accounts Payable, Accounts Receivable, Fixed Assets
Project
Costing, Billing, Time and Expense, Activity Management
Human Resources
Human Resources, Payroll, Training, Time & Attendance, Benefits
Customer Relationship Management
Sales and Marketing, Commissions, Service, Customer Contact and Call Centre support
Data ware house and Various Self-Service interfaces for Customers, Suppliers, and Employees
2.3 ERP Implementation
The ERP implementation process refers to the process of implementing it to automate business activities. From the very beginning, it involves a number of stages and steps, including project implementation planning, analysis, design, implementation, transition, and operations.
1. During the pre-evaluation phase, potential ERP vendors are evaluated based on the needs of the organisation. ERP programs that don't fit the needs of the business are discontinued.
2. During the phase of package evaluation, the chosen package is assessed in comparison to the needs of several departments.
3. Managers from various departments participate in a thorough analysis of the requirements. The list of all the functionalities needed to support effective processes throughout the organisation is made possible by requirement analysis.
4. A thorough project plan is created based on the examination of requirements and functionalities. Senior management team members and ERP specialists are involved in finalized designs. Important project participants identified in several departments, and special arrangements made to address contingencies.
5. Following completion of the planning, business process re-engineering occurs. Many employees’ job responsibilities will change as a result of ERP implementation. Employees will therefore be given new tasks and duties. Restructuring processes and integrating them with ERP systems are required.
6. Staff and management need to receive sufficient training after implementation and integration so they can put what they've learned into practice. Employees will receive hands-on training from consultants in using the ERP technologies.
7. At last, the tools that are applied are tested carefully. Problems that surfaced during the testing process are resolved, and necessary adjustments are made. An essential part of an implementation strategy is the choice of implementation methodology. The most common implementation process is the "big bang" strategy, in which the complete system is implemented throughout the organisation on a predetermined deadline. Manual or archaic systems are abandoned as everyone switches to the new one.
2.4 ERP Implementation Challenges
The success of an organisation is dependent on the competence and expertise of its employees, as well as their familiarity with the system and how to properly operate it. While implementing ERP, following challenges can happened:
2.5 Factors Affecting ERP Implementation Process
To successfully adopt ERP, firms must understand and comprehend several critical success elements to establish an effective fundamental approach. Some of the factors affecting ERP process are:
System's efficiency will decrease and its lifespan will be decreased without a maintenance schedule of ERP. To maintain efficiency some of key points are:
Estimation and consideration for:
So it is rush work which is done in emergency without any planning, printer’s change on their own ways because it has no time for that job. (if we have work for 1 week regularly, and if someone comes to the organization for urgent work he must be charged extra and he is bound to pay extra).
UNIT - 5
LEGAL ASPECT
Terms and condition of trade:
Nature of publication length of notice
Weekly three months
Fortnightly 3 months
Monthly and bi-monthly 3 months
Quarterly 6 months
Imprint: the printer can put the printers imprint line on all jobs at such places as may be decide. (A printer’s or publisher’s name or address and other details in a book or other publication).
TENDER & JOB SPECIFICATIONS
Tender: it refers to the process where by government and financial institutions invite bids for large projects that must be submitted within a finite deadline.
Tender document: a tender is usually publically announced to suppliers for the needs of services and products. The tender document contains the necessary application papers and informs of additional information that the suppliers must deliver in order to apply for the tender and enter the selection process.
It consist of the following documents: a cover letter, an invitation to tender the form of the tender the terms and conditions of the contract a bill of quantities, the specification, the quality requirements, the evaluation criteria and the tender return label, other additional documents vary.
Common practice has shown that applicant must pre-quality before being given the tender documents.
Technical bids: a technical bids is where the technical goods availability is given the priority and then followed by the price bidding process. Here the suppliers with the most goods availability is considered by the buyer for the further bidding.
Financial bid: it is indication of willingness to buy or sell goods or services or to undertake a task, at a specific price and within a specific time frame.
ETHICS
Definition of Ethics: a “right attitude about your work is called ethics. Or work ethics is a value based on hard work and diligence.
How to follow the law is defines the ethics.
Ethics as an employee:
Advantage of ethics:
Important of good work ethics:
Be open and accept the changes that will surely come show positive idea. Be happy.
Combining work ethics with professional skills invite success to a celebration.
Types of ethics: two types.
Objectives of ethics:
Difference between laws and ethics:
Basis for compensation law ethics
Body of miles that governs the philosophy that guides
Whole society and the actions of people about the basic
Its individual members. Human conduct.
Professional norms.
Writing.
Citizen. People to decide what is right or wrong and how act.
Legal protection of business:
Organizational policies:
It is the responsibility of management to gives the equal opportunity to every employee organization in achieving goals and increased the performance of employees.