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ICAI Financial Accounting notes with PDF downloads.
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High/Low and Linear Regression Analysis Overview
The total costs associated with a business are the SUM of fixed costs and variable costs i,e. the total cost is semi-variable in nature.
Y=a+bx
where:
y= total cost in a period
a= the fixed costs in the period
b= the variable cost per unit of output or unit of activity
x= the number of output or the volume of activity in the period.
Methods for constructing Total cost function
The total cost function can be used to estimate costs associated with different levels of activities. Its useful for forecasting and decision making.
There are two methods for constructing the total cost function equation.
High/Low analysis;
can be used to estimate fixed costs and variable costs per unit, whenever:
The following circumstances are to be considered:
Step 1: Take activity level and cost for:
Step 2: Calculate variable cost per unit (b) as:
difference in total cost (highest minus lowest) divide by difference in no. of units (highest minus lowest).
Step 3: Now for fixed cost (a) put the variable cost per unit into one of the cost expressions (mostly high level).
Step 4: Construct total cost function for any activity level:
Total cost=a+bx
For Example:
Step 1
Highest level 7,000 (units) costs $38,800
Lowest level 4,500 (units) costs $30,400
Step 2: Difference
Therefore: variable cost per unit= 8400/2500 = $ 3.36
Step 3: Cost expressions: Total cost of 7,000 units
Fixed cost + variable cost= 38,800
Fixed cost + 7,000 x 3.36= 38,800
Fixed cost + 23,520= 38,800
Fixed cost=38,800–23,520=15,280
Step 4: Construct total cost function
Total cost=a+bx= 15,280+ 3.36x
Step 1: Take activity level and cost for:
Step 2: Make adjustment for the step in fixed cost:
Now calculate variable cost per unit (b) as:
difference in total cost (highest minus lowest) divide by difference in no. of units (highest minus lowest).
Step 3: Now for fixed cost (a) put the variable cost per unit into one of the cost expressions (mostly high level).
Step 4: Construct total cost function for any activity level:
Total cost=a+bx
For Example:
Step 1
Highest level 7,000 (units) costs $ 38,800
Lowest level 4,500 (units) costs $ 30,400
Step 2: Make an adjustment for step in fixed cost. For example fixed costs increase by $3,000 when the activity level exceeds or equals 10,000 units.
Add the increase in cost in lowest activity level.
Therefore: variable cost per unit= 5400/2500 = $ 2.16
Step 3: Cost expressions: Total cost of 7,000 units
Fixed cost + variable cost= 38,800
Fixed cost + 7,000 x 2.16= 38,800
Fixed cost + 15,120= 38,800
Fixed cost=38,800–15,120=23,680
Step 4: Construct total cost function (un-adjusted levels):
Total cost=a+bx= 23,680+ 2.16x
Total cost=a+bx=(23,680-3,000)+2.16x
Total cost=a+bx= 20,680+2.16x
When there is a percentage change after a particular level, this means there are TWO levels which share same fixed cost.
Step 1: Take activity level and cost for (3 levels):
Step 2: Choose the pair which is on the same side as the step.
Now calculate variable cost per unit (b) as:
difference in total cost divide by difference in no. of units.
Step 3: Now for fixed cost (a) put the variable cost per unit into one of the cost expressions (mostly high level).
Step 4: Construct total cost function for any activity level:
Total cost=a+bx
For Example:
Step 1
Step 2: Pair with same percentage change. (assume a 10% increase in fixed costs when the activity level exceeds or equals 5,500 units)
Therefore: variable cost per unit= 3800/1500 = $ 2.53
Step 3: Cost expressions: Total cost of 7,000 units
Fixed cost + variable cost= 38,800
Fixed cost + 7,000 x 2.53= 38,800
Fixed cost + 17,710= 38,800
Fixed cost=38,800–17,710=21,090
Step 4: Construct total cost function (un-adjusted levels):
Total cost=a+bx= 21,090+ 2.53x
Total cost=a+bx=(21,090 x 100/110)+2.53x
Total cost=a+bx= 19,173+2.53x
In summary, linear regression is a better technique then high/low analysis because;
Formula:
Line of best fit (y=a+bx) can be constructed by calculating values for “a” and “b” using:
a = ∑y – b∑x
n n
b= ∑xy – ∑x ∑y
n∑x2 – (∑x)2
where:
x = units
y = costs
Enter the values into the line of best fit (y=a+bx) and solve for b and then a .
The following table should be used for calculating values of “x” and “y”
Table
X | Y | X2 | XY |
Classification of cost Overview:
Introduction to cost and management accounting
ALL organizations needs to know:
Types of organizations
Manufacturing organizations
Types of costing systems they use:
Types of costing systems they use:
Any activity for which a separate measurement of costs is needed.
For Example
A unit of product or service for which costs are determined.
For Example
The cost incurred by a company to produce + store + sell one unit of a particular product.
Unit cost includes ALL fixed and variable costs involved in production.
Material costs are the costs of any material items purchased with the intention of using them in fairly short term future.
For example
The costs that are incurred in manufacturing finished products up to the time goods are completed.
Includes:
Includes:
Administrative costs
Cost of providing administrative services to entity, usually includes;
Selling and Distribution costs
The costs incurred in marketing and selling good or services to customers and costs of delivering the goods.
The costs of after-sales services such as customer support services are usually included in these costs.
They usually include;
Finance costs
These are the costs that are involved in financing the organization, e.g : Loan interest Bank O/D
* Some costs might be partly production, partly administration and selling & distribution e,g: salaries of managing director, building rental costs.
In such case costs are divided/ apportioned between function s on fair basis.
Costs that can be traced in FULL to a cost unit i,e. A direct cost can be attributed in its entirety to the cost of an item that is being produced.
The following are direct costs:
Direct Material
All the materials that are used directly in manufacturing a product or providing service.
Direct materials includes both raw materials and components.
Direct Labour
These are specific costs associated with labour-time spent directly on production of goods or services.
Direct Expenses
Expenses that can be attributed directly in full to a cost unit i,e. that have been incurred in full in making a unit of product/service .
* In manufacturing type organization direct expenses are not common.
Indirect Material
Indirect material are any materials that are used/consumed that cannot be attributed in full to the item. They are treated as overhead costs, maybe classified as production overheads, administration overheads, selling and distribution overheads.
For e.g. indirect production material includes some items of cleaning materials and any materials used by staff not engaged in production.
Indirect Labour
They mainly consists of the costs of indirect labour employees (who do not work directly on items that are produced) but may be necessary so that production takes place.
All employees in administration and marketing department including management are indirect labour.
Indirect Expenses
Many costs incurred cannot be directly linked to cost units e.g. Rental costs of factory.
In manufacturing company all costs of administration and selling & distribution are treated as indirect overheads.
Product Cost
Period Cost
Cost Behavior definition:
Cost Classification by behaviour;
These costs remain fixed/same in total during a period no matter how many units are produced and regardless the volume or scale of a activity.
However, the cost per unit falls because the cost is being spread over a greater number of units.
Semi-Variable cost
Stepped cost
IAS 2 Inventories
IAS 7 Statements of cash flows
IAS 7 Statement of cash flows – Revisited
IAS 8 Accounting policies, changes in accounting estimates, and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share – Revisited
IAS 37 Provisions, contingent liabilities and contingent assets
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 7 Financial instruments: disclosures
IFRS 10 Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement
IFRS 15 Revenues from contracts with customers
IAS 17 VS IFRS 16 Lease – Differences
IAS 17 Leases Overview
IAS 17 full text prescribe, for lessees and lessors, the appropriate accounting policies and IAS 17 disclosures to apply in relation to finance and operating leases.
Key IAS 17 Leases Definition
The following IAS 17 guide explains the IAS 17 standard with IAS 17 journal entries.
Asset Debit
Finance Lease Credit
Subsequent Measurement:
Finance charge Debit
Finance lease Debit
Cash/Bank Credit
Dep. Expense Debit
Acc. depreciation Credit
Subsequent Measurement:
Cash/Bank Debit
Net Investment Credit
Net Investment Debit
Finance Income Credit
Subsequent measurement:
A finance lease gives rise to two types of income:
Initial Measurement
Lease receivable Debit
Sales Credit (lower of fair value or Present of Lease payments)
Lease Receivable Debit
Inventory (Asset) Credit
Income Statement Debit
Cash/Bank Credit
Asset Debit
Inventory Credit
Sale and Lease Back
For Lessee
Sale of Asset
Lease back of Asset
Purchase of Asset
Leased the Asset
Sale and Lease Back
For Lessee
Sale of Asset
Lease Back of Asset
Purchase of Asset
Subsequent measurement:
Lease Back of Asset
IAS 17 pdf (IAS 17 download)
The above IAS 17 summary is the most simplified. Moreover, Click here to Download IAS 17 leases pdf