Presenters:

Chanda Ayub 002Zulqernain 003Kanwal Shaukat 004Zeeshan Raza 005Mubasher Javed 006Mohammed Imran 007

O W N E R S H I PDEBT CONTRACT AND ACCOUNTING

“O ye who believe! When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to

writing let a scribe write down faithfully as between the parties; let not the scribe refuse to write: as Allah has taught him, so let him write. Let him who incurs the liability dictate, but let him fear his Lord Allah, and not

diminish aught of what he owes. If the party liable is mentally deficient, or weak or unable himself to dictate, let his guardian dictate faithfully. And get two witnesses, out of your own men, and if there are not two men,

then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her. The witnesses should not refuse when they are called on (for evidence). Disdain not to reduce to

writing (your contract) for a future period, whether it be small or big: it is juster in the sight of Allah, more suitable as evidence, and more

convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves there is no blame on

you if ye reduce it not to writing. But take witnesses whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If ye

do (such harm), it would be wickedness in you. So fear Allah; for it is Allah that teaches you. And Allah is well acquainted with all things”.

)Surah Al-Baqarah:282)

Presentation

Some Key Concepts

Cost BehaviorFixed CostVariable CostMixed cost

Number of Calls

Mo

nth

ly L

ine

ren

t o

f T

elep

ho

ne

Bill

Total Fixed Cost A fixed cost is a cost whose total amount remains

constant as the activity level changes. For Example monthly line rent of PTCL bill is fixed

and does not change when you make more local calls.

Number of Calls

Cal

l Ch

arg

es in

aT

elep

ho

ne

Bill

Total Variable CostA variable cost is a cost whose total amount

varies in direct proportion to changes in the activity level. For example total Call charges of PTCL bill is based on how many calls you

made.

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges

level within the relevant range. of activity.

Total fixed cost remains thesame even when the activity Fixed cost per unit goes

Fixed level changes within the down as activity level goes up. relevant range.

Variable vs. Fixed Cost

Mixed Costs

Part of a mixed cost changes with volume or usage

Part is fixed over a particular period

Contain both variable and fixed components

Fixed Cost

over a period

Variable

Cost per Unit

Number of units or Activity

To

tal

Co

st

X

Y

A mixed cost has both fixed and variablecomponents. Some portion of it is fixed and some is

variable.

A mixed cost has both fixed and variablecomponents. Some portion of it is fixed and some is

variable.

Mixed Costs

Total mixed cost

Mixed Costs

For planning and control purposes, mixed costs must be divided into their variable and fixed componentsThese components can then be grouped with

other variable and fixed costs for analysis

Mixed Costs

1. Engineering method

2. Scatter diagram method

3. High-low method

4. Statistical method

Multiple approaches are often used because the results yielded by these

methods are likely to differ.

Four methods are used to separate mixed costs into variable and fixed components

Identifies a linear relationship between activity level and cost by analyzing the

highest and lowest volumes in an accounting period and their related costs

Is a common, simple methodSomewhat crude since it uses only the

high and low data to predict cost behavior

High Low Method

The High-Low Method

1. Calculate the variable cost per unit or activity base

2. Calculate the total fixed costs3. Calculate the formula to estimate

the total costs within the relevant range

Three steps:

“Illustration”

Step 1

Calculate the variable cost per activity base Select the periods of highest and lowest

activity within the accounting period Find the difference between the highest and

lowest amounts for both machine hours and their related electricity costs.

Step 1: Calculate variable cost per machine hour

The High-LowMethod Illustrated (cont’d)

Hours Machinein Difference

Costin Difference Hour Machineper Cost Variable

Hours Machine 400

$1,100

(MH)Hour Machineper $2.75

The variable cost per machine hour will be used to calculate total fixed costs in Step 2 and total cost per month in Step 3.

The High-Low Method Illustrated

Step 2: Calculate the total fixed costs

Select the information from the month with either the highest or lowest volume

Costs Variable Total Costs Total Costs Fixed Total

The High-Low Method IllustratedDecember

Total Costs = $24,700 Total Variable Costs = 6,450 MH x $2.75 per MH

August Total Costs = $23,600 Total Variable Costs = 6,050 MH x $2.75 per MH

MH)per $2.75 (6,450 $24,700 Costs Fixed Total

MH)per $2.75 (6,050 $23,600 Costs Fixed Total

$6,962.50

$6,962.50

You can check your answer by recalculating total fixed costs using the month with the lowest activity.

The total fixed costs in Step 2 will be used to calculate total cost per month in Step 3.

The High-Low Method Illustrated

Step 3: Calculate the formula to estimate the total costs within the relevant range

Costs Variable Total Costs Fixed Total Month per Costs Total

Hour Machineper $2.75 $6,962.50 Month per Costs Total

From Step 2 From Step 1

x No. of units

The High Low Method Can be represented as Follows:

Y = a + b xY = Total costa = Fixed Costb = Variable costx = Number of units or activity

Quick Quizz

Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?

a. $0.08 per unit

b. $0.10 per unit

c. $0.12 per unit

d. $0.125 per unit

Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?

a. $0.08 per unit

b. $0.10 per unit

c. $0.12 per unit

d. $0.125 per unit

Quick Quizz

Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?

a. $0.08 per unit

b. $0.10 per unit

c. $0.12 per unit

d. $0.125 per unit

Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?

a. $0.08 per unit

b. $0.10 per unit

c. $0.12 per unit

d. $0.125 per unit $4,000 ÷ 40,000 units = $0.10 per unit

Units Cost

High level 120,000 14,000$

Low level 80,000 10,000

Change 40,000 4,000$

Advantages of High Low Method

Useful For Estimating Total Cost.Very simple to apply.Provide precise Mathematical equation.Reflects greatest possible variation in the

activity.Can be applicable where cost and activity

shows linear relation.

Disadvantages of High Low method

Very Limited.Focus only on two points.Periods with high and low data tends to

be unusual.Less accurate as compared to other

methods

Evaluation

Though High Low Method is easy to use and very simple to apply but it has some limitations that restricts it to measure accurately. So, a manager who choose to use the high low method should do so with full awareness of its limitations.

True Or False

A company has increased its level of activity, its fixed cost per unit would increase. ( False)

Highly low method utilizes only two data points. (True)