COST ACCOUNTING NOTES SACHIN EDUCATION HUB pdf

P/V ratio (Profit-Volume ratio) measures contribution as a proportion of sales: P/V ratio = (Contribution/Sales) × 100. It indicates contribution per rupee of sales; a higher P/V ratio generally means better profitability.

Ways to improve P/V ratio (any two):

1. Increase selling price (without increasing variable cost proportionately).
2. Reduce variable cost per unit by better purchasing, reducing wastage, improving efficiency, or using cheaper materials. (Also, improving product mix towards higher contribution products increases overall P/V ratio.)

Hence, P/V ratio is useful for profit planning and comparison.

Overtime is work beyond normal hours. The overtime premium (extra over normal wages) is treated as: (i) General workload: charged to factory overhead and spread over production. (ii) Specific urgent job: charged directly to that job because it was incurred to complete that job.

Reasons for difference between cost profit and financial profit can be explained under three headings:

A) Items only in financial accounts (financial-only incomes/expenses)

• Income tax, penalties, donations
• Interest received/dividend received
• Profit/loss on sale of fixed assets
• Abnormal losses like loss by fire/flood These affect financial profit but are not included in cost accounts.

B) Items only in cost accounts (notional/imputed costs)

• Notional rent for owned premises
• Notional interest on capital employed
• Imputed salary for proprietor/owner-manager These are included in cost accounts for better decision-making but do not involve cash outflow, so they do not appear in financial books.

C) Items with different treatment/valuation in cost vs financial accounts

1. Stock/WIP valuation differences due to overhead absorption or standard costing.
2. Depreciation differences due to different methods/rates.
3. Over/under absorption of overheads in cost accounts (absorbed vs actual).
4. Provisions and purely financial adjustments in financial books.

Thus, because the objectives and methods differ, reconciliation is required to relate both profits logically.