Calculate and explain the impact of errors on the income statement and the statement of financial position

SOCI	Accounts are closed at the year end. These are incomes and expenses accounts.
SOFP	Ac’s are carried over to next accounting year. These are assets & liabilities accounts.

Distinguish between errors which will be detected by extracting a trial balance and those which will not.

Errors that can be highlighted by preparing a trial balance

Errors that cannot be highlighted by preparing a trial balance

SECTION E PREPARING A TRIAL BALANCE AND ERRORS

1.    Trial balance

a) Explain the purpose of the trial balance.

A trial balance is the summary of all the ledger account balances at a particular point in time. It’s a tool of internal check to ensure that errors are identified before figures are reported in final accounts. An error is likely to exist if debit and credit balanaces do not matches up.

Yet the purpose can be mentioned in points as set out below:

         To reveal the errors before the preparation of final accounts.

         To confirm arithmetical accuracy of the ledger accounts

         To help in locating errors

         To provide a basis for preparing the financial statements

         To ensure that each debit in the books of accounts has a corresponding credit

Sample format

Details	Dr ($)	Cr ($)
Cash	x
Inventory	x
Payables		x
Share Capitals		x
Retained Earnings		x
Other Accounts etc.		x
Total	x	x

Calculation of profit under Marginal costing and Absorption costing

Calculation of profit under Marginal costing and Absorption costing

In marginal costing ,fixed production costs are treated as period cost and are written off as they are incurred.

In absorption costing , fixed production cost are absorbed into the cost of units and are carried forward in inventory to be charged against sales for the next period.

CONTRIBUTION

Contribution:

Contribution is the difference between sales value and the marginal cost of sales.

Contribution towards covering fixed overheads and making profit.

Summary:

If total contribution exceeds fixed cost, a profit is made.

If total contribution exactly equals  fixed costs, no profit and no loss is made. This is known as the Breakeven Point

If total contribution is less than fixed cost, there will be a loss.

Advantage of contribution

The main advantage of contribution is that it allows an easy calculation of profit if sales increase or decrease from a certain level.

Marginal Costing & Absorption Costing

Marginal Costing & Absorption Costing

Marginal cost:

Marginal cost is the cost of a unit of  product or service which would be avoided if that until were not produced or provided.

Principal-1:Period fixed costs are the same for any volume of sales and production.

Principal-2:Profit measurement should be based on an analysis of contribution.

Principal-3:The extra costs incurred in its manufacture are the variable production cost.                            

Marginal costing is an alternative method of accounting for cost and profit, which rejects the Principles of absorbing fixed overheads into unit costs.

Margin of Safety and Formula

Margin of Safety

  Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point.^[3]

margin of safety = (current output - breakeven output)

margin of safety% = (current output - breakeven output)/current output x 100

When dealing with budgets you would instead replace "Current output" with "Budgeted output".

If P/V ratio is given then profit/ PV ratio

Formula:

                Breakeven Point  = Total Fixed Cost/Contribution Per unit

                                                                 = Contribution required to break even/Contribution per unit

                Contribution/sales ratio = Contribution/Sales * 100%

                Required Contribution = Fixed Cost

                Sales Revenue at BEP = required Contribution/(C/S) ratio

·         Required Contribution = Target Profit + fixed cost

                      Required Sales= Required Contribution/Contribution Per unit    

COST VOLUME PROFIT (CVP)

COST VOLUME PROFIT

Cost-volume-profit (CVP) analysis is the study of the interrelationships between costs, volume and profit at various levels of activity.

In currency units (sales proceeds) to reach break-even, one can use the above calculation and multiply by Price, or equivalently use the Contribution Margin Ratio (Unit Contribution Margin over Price) to compute it as: 

R=C, Where R is revenue generated, C is cost incurred i.e. Fixed costs + Variable Costs or Q * P(Price per unit) = TFC + Q * VC(Price per unit), Q * P - Q * VC = TFC, Q * (P - VC) = TFC, or, Break Even Analysis Q = TFC/c/s ratio=Break Even

MATERIAL

MA-2

MATERIAL- NECESSARY THEORY

Chapter: Material

Necessary Theory
  -Average Inventory Held = Order Quantity /2
 -Average Inventory Held = Safety Inventory + Order Quantity /2
- Inventory Holding Cost = Price Per Unit Per Annum x Average Inventory Held
 -Total annual stock holding cost = Average inventory held x inventory holding cost per Kg.
- Average Inventory = Safety Inventory + ½ Reorder Quantity
- Re Order Level = Maximum Usage x Maximum Lead Time
- Minimum Level = Re-Order level – (average usage x average lead time
- Maximum level = Reorder Level + Reorder Quuantity –(Minimum usage x Minimum lead time)
- Buffer Quantity:

Keep a certain amount of inventory in reserve this reserve of inventory is known as Buffer Quantity.

                        Objective of BQ:- To cope with the fluctuation with the demand. In order to obtain bulk               purchase discount.

                So Buffer Quantity = Safety Inventory = Minimum Level of Inventory

    EOQ= Economic Order Quantity = √2CoD/√Ch

Here,

 Co = cost of ordering a consignment from a supplier

 Ch = cost of holding one unit of inventory for one time period

  D    = demand during the time period

1   FIFO rather than LIFO when the material price is falling then:

                                                                                                                

Production Cost will be higher and profit will be lower

     In order to calculate EOQ then the following costs will be needed:

i)                    The cost of storing materials

ii)                   The cost of interest incurred in financing materials

iii)                 The cost of ordering materials

iv)                 The cost of insuring materials

      Holding Cost: Inventory theft, Warehouse rent, interest on inventory, inventory investment are examples of holding cost.
     Perpetual Inventory System is to record every receipt and issue of inventory as they occur. It will ensure that there is a continuous record of the balance of each item of inventory.

FA-1 & MA-1

FA-1

Recording Financial Transactions.

Main Capabilities:

A.  Type of business transactions and documentation.
B.  Duality of transactions and the double entry system.
C.  Banking system and transactions.
D.  Payroll
E.  Ledger Accounts
F.  Cash and Bank.
G.  Sales and credit transactions.
H.  Purchase and credit transactions
I.  Reconciliation.
J.  Preparing the trial balance.


MA-1
Management Information
Main capabilities

A.  Explain the nature and purpose of cost and management accounting.
B.  Identity source documents in a costing systems and correctly code data.
C. Classify costs by nature, behaviour and purpose.
D.  Record costs for material, labour and expenses.
E.  Provide information on actual and expected costs.
F.  Use the spreadsheet system in Microsoft excel.