Categories
Activity based costing MANAGEMENT ACCOUNTING

Revision question on activity based costing (ABC)

Revision question on activity based costing (ABC)

(A)     XX glass limited has been in operation for the past seven years and manufactures shower doors. Since its establishment, the company has used a traditional overhead absorption costing system. However, the managing director, Peter Kenny, is considering making a change. read more

Categories
ACCA F5 MANAGEMENT ACCOUNTING

Net Profit Ratio – meaning and formula.

Net Profit Ratio - meaning and formula.

Net profit is a good indicator of the efficiency of a firm. The net profit ratio or net profit margin ratio is determined by relating net income after taxes to net sales. Net profit here is the balance of profit and loss account which is arrived at after considering all non-operating incomes such as interest on investments, dividends received, etc. And non-operating expenses like loss on the sale of investments, provisions for contingent liabilities, etc. read more

Categories
MANAGEMENT ACCOUNTING ACCA F5 ACCA F8 ACCA P2

Financial Leverage Ratio – meaning and formula.

Financial Leverage Ratio - meaning and formula.

Financial leverage results from the presence of fixed financial charges in the firm’s income stream. These fixed charges do not vary with the earnings before interest and tax (EBIT) or operating profits. They have to be paid regardless of the amount of earnings before interest and taxes available to pay them. After paying them, the operating profits (EBIT) belong to the ordinary shareholders. Financial leverage is concerned with the effects of changes in earnings before interest and taxes on the earnings available to equity holders. It is defined as the ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on the firm’s earning per share. Financial leverage and trading on equity are synonymous terms. The EBIT is calculated by adding back the interest (interest on loan capital + interest on long term loans + interest on other loans) and taxes to the amount of net profit. Financial leverage ratio is calculated by dividing EBIT by EBT (earnings before tax). Neither a very high leverage nor a very low leverage represents a sound picture. (EBIT ÷ EBT). read more

Categories
MANAGEMENT ACCOUNTING ACCA F5 COST ACCOUNTING

5 Limitation of process costing.

Cash flow from financing activities - meaning.

Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also. read more