ICWA Coaching

Cost structure refers to the types and relative proportions of fixed and variable costs that a business incurs. The concept can be defined in smaller units, such as by product, service, product line, customer, division, or geographic region. Cost structure is used as a tool to determine prices, if you are using a cost-based pricing strategy, as well as to highlight areas in which costs might potentially be reduced or at least subjected to better control. Thus, the cost structure concept is a management accounting concept; it has no applicability to financial accounting.

To define a cost structure, you need to define every cost incurred in relation to a cost object. The following bullet points highlight key elements of the cost structures of various cost objects:

i. Product cost structure:

• Fixed costs. Direct labor, manufacturing overhead
• Variable costs. Direct materials, commissions, production supplies, piece rate wages

ii. Service cost structure:

• Fixed costs. Administrative overhead
• Variable costs. Staff wages, bonuses, payroll taxes, travel and entertainment

• Product line cost structure
  • Fixed costs. Administrative overhead, manufacturing overhead, direct labor
  • Variable costs. Direct materials, commissions, production supplies
• Customer cost structure
  • Fixed costs. Administrative overhead for customer service, warranty claims
  • Variable costs. Costs of products and services sold to the customer, product returns, credits taken, early payment discounts taken

Some of the preceding costs can be difficult to define, so you may need to implement an activity-based costing project to more closely assign costs to the cost structure of the cost object in question.

You can alter the competitive posture of a business by altering its cost structure, not only in total, but between its fixed and variable cost components. For example, you could outsource the functions of a department to a supplier who is willing to bill the company based on usage levels. By doing so, you are eliminating a fixed cost in favor of a variable cost, which means that the company now has a lower break even point, so that it can still earn a profit at lower sales levels.

A knowledge of the capacity levels associated with the existing fixed cost structure can also allow a business to increase its profits by lowering prices sufficiently to maximize the utilization of a fixed cost item. For example, if a company has spent $100,000 on a high-capacity automated machine and it is currently only being utilized 10% of the time, a reasonable action would be to obtain more work to increase the amount of cash earned from that machine, even at prices that might normally be considered low. This type of pricing behavior is only possible if you have a detailed knowledge of the cost structure of a business.

I. Multiple Choice Questions:

1. Which of these is/are recurring (indirect expenses)?

(a) Transit insurance and freight

(b) Octroi

(c) Advertisement

(d) Godown rent and insurance

2.X sends out goods to Y, costing Rs.1,50,000. Goods are to be sold at +33 1/3% of sale. The consignor asked consignee to pay an advance for an amount equivalent to 60% of sales value. The amount of advance will be

(a) 1,20,000

(b) 1,35,000

(c) 1,50,000

(d) None

3.Goods of the invoice value of Rs.2,40,000 sent outto consignee at 20% profit on cost the loading amount will be

(a) 40,000

(b) 48,000

(c) 50,000

(d) None

4.X of Mumbai sends out certain goods at cost +25%. Invoice value of the goods is Rs 2,00,000. 4/5^thof the goods were sold by consignee at Rs 1,76,000. Commission 2% upto invoice value and 10% of any surplus above invoice. The amount of commission will be.

(a) 4800

(b) 5200

(c) 3200

(d) 1600

II. Fill in the blanks:

1. The person who sends the goods for sale on fixed commission basis is ______.

2.When the consignor sends goods to consignee he prepares a ________.

3.Delcredere commission is allowed to cover the risk of _________.

4.Where goods are sent on consignment, credit is given to _______ in the books of consignor.

5.Stock reserve is created to adjust ___________.

6.Extra commission given to the consignee, for making him responsible for bad debts this extra commission is known as __________.

III. True or false:

1.Goods sent on consignment account is of the nature  of real account

2.Goods valued at invoice price refers to valued at lower price than its original cost

3.Balance in consignment account shows profit and loss on consignment

4.Profit and loss on consignment is retained / borne by consignor

5.The details contained in account sales are unsold stock left with the consignee

IV. Practical Questions:

Q.1 From the following particulars ascertains the value of unsold stock on Consignment.

Goods sent (1,000 kgs.) Rs. 20,000.

Consignor’s expenses Rs. 4,000.

Consignees non-recurring expenses Rs. 3,000.

Sold (800 kgs.) Rs. 40,000.

Loss due to natural wastage (100 kgs).

Q.2Mr. X, the consignor, consigned goods to Mr. Y 100 Radio sets valued Rs. 50,000. This was made by adding 25% on cost. Mr. X paid Rs. 5,000 for freight and insurance.

Mr. Y received all goods in good condition. He incurred Rs. 4,000 for freight and miscellaneous expenses and Rs. 3,000 for godown rent. He sold 60 sets for Rs. 50,000. Show the necessary ledger account in the books of Mr. X assuming that Mr. Y was entitled to an ordinary Commission of 10% on sales and 5% Del Credere Commission on sales. He also reported that Rs. 1,000 were provide bad.

With effective from 1st April, 2017, no person shall receive an amount ofRs 2 Lakh or more; (A) in aggregate from a person in a day (or)(B) in respect of a single transaction (or)(C) in respect of transactions relating to one event or occasion from a person.

A.Single Person: Cash Receipt of Rs 2 lakh or more, from asingle person in a day is not allowed even if the amount has been paid through multiple transactions during the day which are below Rs 2 lakh. For example: Mr Viratbuys a gold chain worth Rs 2 Lakh and pays the amount by cash to Mr Sonesh on a single day in 4 equal installments of Rs 50,000 each. As Mr Sonesh accepted cash worth Rs 2 Lakh from a single person and in a single day, section 269ST is applicable in this case. Sonesh has to pay a penalty of Rs 2 Lakh.

B. Single Transaction:
Cash receipts of Rs 2 Lakh or more which are related to a single transaction are prohibited.For example: Mr Kejriwal goes through a medical surgery and the hospital charges him a bill of Rs 4 Lakh. Kejriwal clears the bill in 4 installments of Rs 1 Lakh each on four different dates. Here, the cashreceipts got by hospital are less than Rs 2 Lakh and have been received on different dates. Whether this transaction violates section 269ST? – Yes. Hospital has to pay the penalty. Because, they received the payments with respect to single bill / transaction. So, splitting of payments over several days is prohibited.

C. Single Event / Occasion:
Cash transactions or cash receipts related to a single event or occasion, can not be more than Rs 2 Lakh. For example: Nagachaitanya gets married to Samantha. On their wedding occasion, their relatives gifted Cash amount worth Rs 10 Lakh on different dates. Even if we assume that each person has gifted cash worth less than Rs 2 Lakh, are these receipts come under the purview of Section 269ST? Is penalty applicable? Yes, penalty can be levied. Here, marriage is a ‘single occasion’ and cash gifts worth Rs 2 Lakh or morecan not be received from relatives and other persons.

Almost every business uses computers to complete daily tasks. From making contact with clients to inputting data for reports, computers allow businesses a more efficient way to manage affairs when compared to traditional paper and manila folders. Businesses use a variety of different types of computers such as desktops, laptops, servers, smartphones and tablets, depending on their needs. With computers, employees are able to work anytime, anywhere.

1. Communication:

Communication is key when gaining and maintaining clients and other important contacts. Computers give businesses access to email, instant messaging and custom customer contact systems. Computerized phone systems allow for automated support during off hours and a virtual operator can quickly direct callers to the correct department for faster support.

2. Marketing:

Computers allow businesses to create websites, stunning ads and complete marketing campaigns. Marketing videos can be edited and custom ads created in-house with the use of specialized software. Businesses can completely develop and manage websites with their own servers or connect remotely to a third-party business to upload their latest content such as articles, product images and blog posts.

3. Accounting:

Accounting without computers presents a high risk for human error. Accounting software allows businesses to simply input their financial data and instantly see gains and losses. All necessary tax reports are available the moment the data is entered. Using computers for invoicing, managing expenses and calculating payroll is vital for ensuring financial data is as accurate as possible.

4. Storage:

Instead of filing cabinets, businesses are able to store millions of files using computers and servers. Data can be stored centrally for easy access from multiple computers or stored locally for individual use. Computerized storage saves space and provides a far more efficient organization strategy. With encryption, passwords and replace keys, data remains secure.

5. Documents and Reports:

Most businesses have some sort of productivity software which typically includes a word processor and spreadsheet application. These two programs allow businesses to create reports, memos, tutorials and even colorful ads for company events. Spreadsheet applications give businesses the chance to organize, manage and calculate both numeric and alphabetic data. With charts and graphs, reporting becomes visual instead of text-based.

6. Education:

Businesses use computers to help educate employees on software, company policy, standard procedures and safety. Instead of hiring teachers, computers can be used to educate employees at their own pace or through an online webinar with live questions and answers. This form of education fits the busy schedules of businesses without sacrificing the quality of the education.

7. Research:

From learning more about the competition to discovering what customers really want, research isn't as difficult as it once was, thanks to computers. Search engines, forums, social networks and industry specific websites provide businesses with a wealth of information and research data.

1. Meaning and Definition of Entrepreneur:

What are the four stages of formation of a company?

There are four stages in the formation of a company:

STAGE I- Promotion of a company

STAGE II- Registration and incorporation of a company

STAGE III- Raising of capital

STAGE IV- Commencement of business

What do you mean by ‘promotion of a company’ and ‘promoter’?

Promotion of a Company:

Promotion is the first stage in the formation of a company. Certain persons who wish to carry on some business come together to form a company.

These persons are known as promoters.

• ‘Promotion’ means the   preliminary steps   undertaken by   the promoters to bring a Company into existence.

It refers to all those steps which are taken from the time of having an idea of starting a company to the time of actual starting of a company.

Meaning Of Promoter:

• Promoter’ means a person who thinks of forming a Company and actually brings it into
• He takes all the effective steps to incorporate
• A person, who was not associated with the initial formation of the Company but subsequently helps in floating its capital, will also be regarded as
• Persons assisting the promoters by acting in a professional capacity are not promoters. However, if he goes further than this, like, introducing his clients to a person who may be interested in purchasing the shares in the proposed Company would be regarded as
• “A person who originates a scheme for the formation of the company, has the Memorandum and Articles prepared, executed and registered, and finds the first Directors, settles the terms of preliminary contracts and prospectus (if any), and makes arrangements for advertising and circulating the prospectus and placing the capital, is a

The relationship between the promoter and the company starts from the day the work of floating the company starts and continues up to the time the Directors take into their hands what remains to be done in the way of forming the company. Thus, the status of a promoter is generally terminated when the BOD has been formed and the Board starts governing the company.

Meaning & Features Of Consignment

Meaning: Consignment means the transaction of sending goods by one person (called CONSIGNOR) to another (called CONSIGNEE) who is to sell those goods on behalf of the Ist person.

Features

• The relation between consignor and consignee is that of principal and agent.
• Only the possession and not ownership is transferred to
• Risk of goods remains with Consignor and not with the
• Only movable property is subject matter of the
• Consignment goods are dispatched on the basis that the goods will be sold on behalf of, at the expense and at the risk of the consignor.
• Consignor sends Pro-forma Invoice and not Sales
• Consignee sends Account Sales (which contains information as to Sales, Expenses, Commission, Advance, and Balance due).
• The Profit or Loss on consignment belongs to Consignor and not Consignee.

Introduction

• A firm invests a part of its permanent capital in fixed assets and keeps a part of it for working capital e., for meeting the day to day requirements.
• We will hardly find a firm which does not require any amount of working capital for its normal operations. The requirement of working capital varies from firm to firm depending upon the nature of business, production policy, market conditions, seasonality of operations, conditions of supply
• Working capital to a company is like the blood to human body. It is the most vital ingredient of a
• Working capital management if carried out effectively, efficiently and consistently, will assure the health of an

Meaning of Working Capital :

Working capital is defined as the excess of current assets over current liabilities.

Current assets are those assets which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operations of the business. They are cash or near cash resources. These include:

• Cash and Bank Balances
• Receivables
• Inventory
  • Raw materials, stores and spares
  • Work – in - progress
  • Finished goods
• Prepaid expenses
• Short-term advances
• Temporary investments

The value represented by these assets circulates among several items. Cash is used to buy raw – materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold, accounts receivables are created. The collection of accounts receivable brings cash into the firm. The cycle starts again. Current liabilities are the debts of the firms that have to be paid during the current accounting period or within a year.

These include:

• Creditors for goods
• Outstanding expenses e., expenses due but not paid.
• Short – term
• Advances received against
• Taxes and dividends payable
• Other liabilities maturing within a

Working capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business.

Gross and Net Working Capital

Generally the Working capital has its significance in two perspectives – ‘Gross working capital’ and ‘Net Working capital’.

Gross Working capital: The gross working capital refers to investment in all the current assets. The total of investments in all current assets is known as gross working capital.

Net Working Capital:

• It is the excess of current assets over current This is, as a matter of fact, the most commonly accepted definition. Some people define it as only the difference between current assets and current liabilities.
• It is that portion of a firm’s current assets which is financed by long – term

Need for Working Capital

The basic objective of financial management is to maximize shareholders’ wealth. This is possible only when the company earns sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However, sales do not convert into cash instantaneously. There is always a time gap between the sale of goods and receipt of cash. Working capital is required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to sustain the sales since it may not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold.

Permanent and Temporary Working Capital:

Working capital can be divided into two categories on the basis of time:

1. Permanent Working Capital
2. Temporary or Variable Working

Permanent working capital represents the assets required on continuing basis over the entire year, whereas temporary working capital represents additional assets required at different items during the operation of the year.

Permanent working capital: This refers to that minimum amount of investment in all current assets, which is required at all times to carry out minimum level business activities. In other words, it represents the current assets required on a continuing basis over the entire year. Tandon Committee has referred to this type of working capital as “Hard Core current basis”.

The following are the characteristics of this type of working capital:

1. Amount of permanent working capital remains in the business in one form or This is particularly important from the point of view of financing. The suppliers of such working capital should not expect its return during the life-term of the firm.
2. It also grows with the size of the In other words, greater the size of the business, greater is the amount of such working capital and vice versa.

Permanent working capital is permanently needed for the business and therefore, it should preferably be financed out of long – term funds.

Temporary working capital: It refers to that part of total working capital which is required by a business over and above permanent working capital. It is also called variable working capital. Since the volume of temporary working capital keeps on fluctuating from time to time. In other words, it represents additional currents assets required at different times during the operating year. For example, extra inventory has to be maintained to support sales during peak sales period. Similarly, receivable also increase and must be financed during period of high sales. On the other hand investment in inventories, receivables, etc., will decrease in periods of depression. Temporary working capital is generally financed from short – term sources of finance such as bank credit.

Permanent working capital is fixed over a period of time, while temporary working capital is fluctuating. The permanent working capital is increasing over a period of time with increase in the level of business activity. This happens in case of a growing company. Hence, the permanent working capital line is not horizontal with the base line.