Entrepreneurship
Entrepreneurship
Entrepreneurship
SIXTEEN
IInnddian
Costing and
Pricing
Osre hsoldew
Thschapter addresses two key areas related to an economic transaction viz, cost of the
alue ol productand determination of its selling price and also explains the terms related to these Chapter Checklist
asbew Çoncepts. " Unit of Sale
" Unit Cost
l dren. Unit of Sale " Unit Price
In on This can be defined as the measure of unit in which the products are sold. So, unir of "Gross Profit
fvalue ale for apples will be kilograms. "Break-even Analysis
given
Tounderstand this further, a list of businesses with their respective unit of sale is
sirable below:
Business Item belng sold/servlced Unlt of sale
The above table hold goods if the business is dealing in one product only. But, for a
for example, 'Big-Bazaar' where one can buy rice,
to pay
busines dealing in multiple products, say 5litres ofoil and 2 t-shirts,
umilk, t-shirts, etc., and suppose a customer buys 2 kg of rice, 'number of customers' and
in the the unit of sale for Big-Bazaar will be
an instance,
hen in such
sale. Similarly, for a restaurant, the unit of salewill be 'diner and for a
ndlvidual unit of
tionIs Deauty parlour, it will again be a 'customer.
management tool that is required to understand the economics of the
Unt of sale is a for tracking progress over a number of
years
esare
ess in an easy and standardised way and
and taking corrective actions, when necessary.
206 Allin one Entrepreneurship Clas J
t0 produce, store and scll one unit of sale of a particular gross profit or gross profit margin. This the w factivir
product or service. But, itshould be remembered hat unit repreents
busines's profit from selling a product before he che relaL
EXAM Practice
Very Short Answer Type Questions [1 Mark]
termed as what?
l. The measure ofunit in which products are sold is
sold.
Ans Unit of sale is the measure of unit in which the products are
Z. Whatis defined as the cost incurred by acompony to produce one unit of sale2
Ans Unit cost can be defined as the cost incurred by a company to produce, store and sell
of sale of aparticular product or service. It refers to the variable cost of production
3. The price at which one unit of sale is sold is referred to as what?
Ans Unit price is the price at which one unit of sale is sold.
4. Which term is used todenote the excess of price over cost?
Ans Excess of unit price over unit cost is known as the unit gross profit.
So, Gross Profit Per Unit = Unit Price - Unit Cost.
5. Which term is used to denote the output at which total revenue equals total cost?
Ans Break-even point is the level of output, at which total revenue is equal to total cost,.
704
TC yet to
60 Total sales
Total cost
50
()s0 B
40 BEP
30
usiness
mberof 20
10
ed to as 10 20 30 40
80 60 0X
Sales ()
point at whlch sales equals costs.
In the above graph, 'B' is the break-even
212 Allin one Entrepreneurship
Ali
17. Explain the concept of unit of sale, unit cost' and unit price.
Ans Unit of sale Refer to Ans. no. 1.
Unit cost Refer to Ans. no. 2.
Unlt prlce Refer to Ans. no. 3.
18. Fixed Expenses =Quantity Sold x Gross Profit Per Unit. How?
Ans We know that at break-even level, Total Revenue =Total Cost.
iLe. (Quantity Sold x Unit Price) =(Quantity Sold x Unit Cost) +Fixed Expenses
or Quantity Sold X (Unit Price - Unit Cost) =Fixed Expenses.
or Quantity Soldx Gross Profit Per Unit = Fixed Expenses.
20. Afoctory is engaged in manufocturing coolers. The following information is avallable to you
Sales =2,50,000
Direct labour cost (for 100 units) =25,000
Direct materialcost (for 100 units) =62,500
Direct expenses (for 100 units) = 12,500
Fixed cost =75,000
Alinone Costing and Pricing 213
Calculate
(0 Varlable cost per unlt
(U) Total cost
(I) Break-even polnt
Are dctual sales exceeding the sales requlred to break-pven2 If ves, then what values ore exhibited by
CBSE 2013
the business In achleving those sales?
AnS (() Varlable Cost =Dircct Labour Cost + Dlrect Material Cost + Direct Expenscs
=25000 +62,500 +12,500= 1,00,000
Variable Cost Per Unit = Variable Cost 100 000 =l000 per unit
Number of Units 100
(ii) Total Cost Flxed Cost + Variable Cost =75000 +100 000 = 1,75,000
(iii) Break-even Polnt = Fixed Cost
P/V Ratio
P/V Ratio= Sales -Varlable Cost 2,50,000-1,00,000 =06
Sales 2,50,000
26. Abeouty parlour had varying number of customers during 5 weeks. This informatlon and
of sale' and the unit price' Int the
HOTS weekly billing are in the following table. What are the unlt
the cost ofgoods sold or voriable cost is 60% of the sale price, calculatethe unlt cost this coaue
margin' per unit of sales. and the pa
Number of Total amount Average amount blled
CBSE TN
Weeks
Customers blled () ()per customer
Week 1 10 1,000 100
Week 2 17 1,445 85
Week 3 13 923 71
Week 4 22 5,082 231
Week 5 18 3,150 175
Total 80 11,600
Ans Unit of sale in this case is 'customer'.
Total Billed Amount 11,600
Unit Price =
Number of Customers 80
=145
Unit Cost =60% of Unit Price =60% of 145 =87
Gross Margin Per Unit of Sale =Unit Price - Unit Cost =145 -87 =58
27. Number of people who took their meals and the total billing for each of the 5 weeks s nt
HOTS following table. What are the unit of sale' and the unit price' in this case? If the variable cost öS
of the sale price, calculate the unit cost' and the gross margin' per unit of sale. CBSE T
Weeks Number of people Total amount Average amount
taking meals blled () blled ()
Week 1 120 18,000 150
Week 2 60 12,300 205
Week 3 70 10,220 146
Week 4 80 17,680 221
Week 5 90 21,600 240
Total 420 79,800
Ans Unit of sale in the above example will be 'diners', ie. people buying the
meals.
Unit Price = Total Billed Amount 79,800
Number of Diners 420
=190
Unit Cost =50% of Unit Price =50% of 190
Gross Profit Per Unit =Unit Price -Unit Cost =190 =95
-95 =95
Costing and Pricing 217
ALiaDne
28. D0vi| has opened a restauront whlch serves Chlnese food. His flxed expenses per month are (z0,00
During the month of August his total sales revenue wOs also 20.000. Dvi| thinks that he nos
achleved the break-even level. Is he correct In his approoch?
Ans No, Divij is not correct in his approach because at brcak-even level, profits should be equal to
fxed expenses and not sales.
29. Rovi ls the owner of an umbrella manufacturing unt. During the month of June, in antcipation of
increase in demand, he produced 500 umbrellas. Total cost of production for umbrellos wos
e50,000. Out of the above, 10,000 were fixed expenses.
Find out the varlable expenses and unlt cost per umbrella.
Ans Variable Expenses =Total Expenses - Fixed Expenses
= 50,000-10,000 =40,000
Unit cost is cost per unit of the variable cost.
40,000
So, unit cost of umbrella = =80
500
CHAPTER
EIGHTEEN
hos
to
oth
Working Capital
en
be and Inventory
Management
Ous
nks
elng Meaning of Capital
For starting up a new venture and also for efticient running of the present business or
it gowth and expansion plans, a business needs funds. These funds are termed as capital. Chapter Checklist
6 apital is money invested in business to generate income.
him Product B" Service B " Meaning of Capital
Service C
" Working Capital
ness B
Process
Service A" Product C " Inventory Control and
EconomicOrder Quantity
TANGIBLER " Pareto's Principle
the Process A Process
RESOUFRCES
" ABC Analysls of Inventory
Product A Process A Process C Control
Present " Economic Order Quanity
(value extraction) (EOQ)
" Re-Order Quantity (ROQ)
They
first
hem
Working Capital
Money needed fund the normal
to
Operating Cycle or Cash
Conversion Cycle (CCC)
operations of the business is known as workingday-to-day The duraion berween bunng
It refers to that pan of capital. the rr D
total capital,
required for holding current assets or it maywhich is receiving cash from he cusstomer is knowWn
detined as excess of aurrent assets
also be Cash Conersion Cyde. During the time
liabilities. over urrent raw material into end product.varnous requred
apenses
salary, etc are to be paid. Once the end produt i
(Working Capital =Current Assets be sold and monev received from customers
-Curent Liabilities] The Cash Conversion Crcke is the
() Current assets These are che Arm's purchase of inventory and thelengch of
apected to ger converted intoasset which ar
cash ot cash arounts meivables CCC represents che
receipt of
cquivalents within a period of one year. rm's cash remains tied up in the operationsnumbe
of tbe b
of .
Investment in current assets heips in day-to-day Different products will have iferent
operations of the business. They provide operating yls of a trading concem operaaing orde T
liquidity to the business. and a
Eampls of curreat asets in order of liquidiy
concern is explained below: TARuho y Co
are.
1. In a Trading Concern
(a) Cash in hand/Cash at
b) Marketable securiies
bank The operating cyde willindude the length of ime alkn
() Prozurement of goods
(c) Bills receivables () Realisaion of sales revenue
(d) Debtors
(e) Finished goods inventory
() Work-in-progress
(g) Raw materials
(b) Prepaid erpenses
(i) Current liabilities These refer to those liabiliies Deotors
g00ds
which are payable within a period of one year.
Examples of current liabilities are:
(a) Bills payable aies
(b) Creditors
(c) Oustanding expenses Operating Cycle or Cash
(d) Advances received from customers, etc.
Conversion Cycle for Trading Business
2. In a Manufacturing
Types of Working Capital Company
Operating yde is the length of time nerded o Comgke
There are rwo types of working capiral which are as the following
follows: () Conversion of cash
() Gross Working Capital (GWC) It refers to into raw materials.
investment in all the current assets aken ()Conversion of raw
togecher, iLe. materials into Debiors
ABC Analysis of
(r) Obsolescence Due to advancement of technology,
certain items may not be used and their value and Inventory Contro
ABC (Always Better Control) Examp
demand boch falls. So, this aspect of inventory analon ysis can
inventory control. It is based
ABC analysis, a company reviewsitsParetoS
management should also be kept in vicew by an
inventorPyincape
Categor
effective control system. all SKUs in three categories, called 'A!.
Atypical breakdown might look like this 'B and
Pareto's Principle 'A' inventory 10-20% of the items in
A
This principle was propounded by Vilfredo Pareto, account for 70-80% of the total value termu at qu C
an Italian economist, who studied land ownership in Italy of
in the early 1900's and found that roughly 20% of the 'B' inventory 15-259% of the items in items. Total
account for 10-20% of the total value terms of
population held title to about 80% of the land. For this of The
reason, Pareto's Principle is often referred to as the
"80/20 rule.
'C inventory 65-75% of the items in
account for 5-10% of the total value of terma of qua
inventory. cons
So, Pareto's principle basically states that 'A relatively Based on the above information it can be inveconclntoruyded. of
handful of things will generate the bulk of the results or
vital few, trivial many. The value of Parero's Principle in
inventory'A' is outstandingly importan,
average important and inventory invento'
valu
Suggested Pollcy Guldelines for 'A', 'B', and 'C classes of Inventory
(A) Items (High Consumption Value) (B) Items (Moderate Consumption Value) (C) Items (Low Consumption Vaue
Very strict consumption control Moderate control Loose control
The
Novery low safety stock Low safety stock High safety stock carrying
Phased delivery (Weekly) Once in three months Once in 6 months Larger
Weekly control report Monthly control report Quarterly report
Smalle
Maximum follow up Periodic follow up Exceptional
As many sources as possible Two or more reliable Two reliable Note (
Accurate forecasts Estimates on past data Rough estimate
Central purchasing/storage Combination purchasing Decentralised
Maximum efforts to control lead time Moderate Minimumn clerlcal etforts Ecor
To be handled by Sr. officers Middle level Can be delegated Eco
most e
Note 'A' class items are closely monitored because of high value involved (70-80%). ABC analysis helps in an eficient and efecie order s.
inventory control. level. T
EO
factors:
1. Ord
The
stoc
Working Capital and Inventory 231
Management
Example () Cost of placing an order
Number
Percentage Percentage (0) Cost of transportation
of total Value of total
Cagory ofteme number of items value
(i) Cost of receiving goods
10% 70000 70%
(iv) Cost of inspecting goods
100
20% 20000
There is an inverse relationship berween order size and
200 20%
700 70% 10000 10%
ordering cost.
Larger the order size Lower the ordering 00sts because
1000 100 100000 100 of fewer orders.
Totl
Theabove.schedule is represented graphically: Smaller the order size because
Higher theof ordering costs
more orders
consumption
100% C items
2.Carrylng Costs
The term carrying costs refer to the costs incurred in
of 90% maintaining a given level of inventory. These costs
8 tems
value
include:
0
total ()Cost of storage space,
of (i) Cost of handling materials,
Parcentage (i)Cost of insurance,
(i) Cost of deterioration or obsolescence,
(o) Cost of store staff, and
X (v) Interest on funds invested in purchasing the stock.
10 % 30 % 100 %
Percentage of Total Quantity Assumptions of EOQ
There is positive relationship berween order size and The computation of EOQ is based on the following
arying cost: assumptions:
Larger the order slze Higher the carrying costs because of () Prior knowledge of annualusage of inventory
high average inventory. (i) Constant rate of usage
Smailer the order size Lower the carrying costs because of (i) Constant ordering costs
low average inventory. (ip) Constant carrying costs
Note () There is an inverse relation between ordering costs and (u) Zero lead-time/delivery period
corrying costs.
() Average Inventory is half of econonmic order quantity. Determination of EOQ
EOQ can be determined wich the help of the following
Economic Order Quantity (EOQ) formla:
Economic Order Quantity is the quantity which EOQ =, where
most economial to order. It is the quaniy for which
order should be placed when the stock reaches re-order P=Cost of placing one order or ordering cost per order
lsvl. Therefore, it is also referred to as re-order quantity. D= Annual demand for the inventory
EOQ is determined afrer considering the following
actors: C=Inventory carrying cost per unit.
1. Orderlng Costs At EOQ level, ordering costs are equal to carrying costs
These costs refer to the cost incurred for acquiring
and their sum is the least possible cost likely to be incurred
on placing an order.
tock. These costs incdude:
232 All in one
Entrepreneurbip
at the rate of
Example 1. Annual quantity of jeans sold by a shop is 1200Inventory 100/-
ol placing an order and receiving goods is 500/- per
annum. What is the Economic Order Quantity (EOQ) for
order.
the shopkeeper? holding cOstperis pie30.o
Sol. Here, D 1,200: P-500 and C= 30
So, 2x Px D=1200,000
This divided by 30 = 40000
Square root of whlch is =200
So, the EOQ 0s 200 jeans.
Annual Consumption
Number of Orders Placed =
EOQ
Also find the number of orders placed, ordering cost and carrying cost at the level of EOQ
1200
=6 orders
200
. Ordering cost =6x 500 = 3,000
Average inventory =200 x =100 units
2
. Carrying cost =100 x 30 = 3,000
So, it can be observed that at EOQ, ordering cost and carrying cost are the same.
20. Net working capital can be negative or pos/tive, but gross working copltal is always positive. Wny?
HOTSAns Net working capital is basically the difference between current assets and current liabilities.
current assets are more than current liablities, Net working capital will be positive. If On the
other hand, current liabilities are more than current assets, workíng capital will be negative.
But, gross working capital is the sum of current assets only, therefore it is always positive.
21. There is a positive relationship between order slze and carrying cost. Why?
Ans Larger the order size, higher the carrying cost because of high average inventory. Smaller tae
order size, lower the carrying cost because of low average inventory.
22. There is an inverse relationship between order slze and ordering cost. Why?
Ans Larger the order size, lower the ordering costs because of fewer orders. Smaller the order size,
higher the ordering costs because of more orders.
23. What are the costs incurred for acquiring stock referred to as? Give examples of such costs.
Ans The costs incurred for acquiring stock are referred to as 'ordering costs. These costs include:
(i) Cost of placing an order.
(ii) Cost of transportation.
(iii) Cost of receiving goods.
(iv) Cost of inspecting goods.
24. The computotion of EOQ is based on certain assumptions. What are they?
Ans The assumptions are as follows:
(i) Prior knowledge of annual usage of nventory.
(iü)) Constant rate of usage.
(itl) Constant ordering and carrying costs.
(iv) Zero lead time.