ROCE - Management Accounting for LDCE

ROCE     -     Management Accounting for LDCE

·         Full form is Return On Capital Employed

 

·         It is most important Ratio among all the Financial Ratios

 

·         ROCE = Return /Capital Employed  x 100

 

·         Expressed in Percentage.  Example  Return is 200 rupees against the capital 2000 rupees employed. ROCE is 200/2000 x 100 = 10 %. 

 

·         Return = Net Profit + or - Non Trading adjustments + Interest on Long term debts + Provision for tax - Interest/Dividend from non trade investments

 

·         Capital Employed = Equity share capital + Reserves & Surpluses + Preference share capital + Debentures & other long term loan - Misc Expenditure & loss - Non trade investments.

 

ROCE in Indian Railways

 

·         Para 511 of Indian Railway Finance & Administrate Code mentions Return on Capital.

 

·         Return on Capital = Percentage of Revenue Surplus/Net Receipts to Capital at charge and Investments from Capital Fund.

 

·         Revenue Surplus/Net Receipts = Total Revenue Receipts - Total Revenue Expenditure

 

·         Since element of Dividends is not there (from 2017-18 onwards due to merger of Railway Budget with General Budget), the Net Receipts and the Revenue Surplus are one and same.

 

·         Total Revenue Receipts = Gross Earnings (X, Y & Z) minus  Suspense

 

·         Total Revenue Expenditure = Gross Working Expenses ( OWE + Appropriation to DRF & Pension Fund) minus Suspense.

****

Indian Railways Vs Government of India

Indian Railway Accounts:  What is common with the Govt of India Accounts

1.       Classification of Government Accounts i.e., Consolidated Fund of India, Contingency Fund of India and Public Account of India.

2.       Voted and Charged Expenditure

3.       Audit authority of Financial transactions - CAG - Comptroller & Auditor General of India

4.       Funds voted by Parliament

5.       Appropriation Accounts presented to Parliament

6.       Budget

7.        Account Current

8.       Exchequer Control

9.       Ways & Means

10.   GFR - General Financial Rules

11.    Demands for Grants

12.   Major Heads & Minor Heads (Classification of Expenditure and Earnings)

Indian Railways: what is unique in comparing other Depts in Govt of India

1.       Maintenance of Accounts by Dept itself ( in Other Depts - by CAG)

2.       Operation of Minus Debit and Minus Credit

3.       Keeping the accounts of the railways on a commercial basis outside the regular government account.  Thus maintaining Two sets of Accounts.

4.       Link Heads ( i.e., Demands Payable, Traffic, Labour & Demands Recoverable)  connecting Commercial Accounts with Government Accounts.

5.       Preparation of Profit & Loss Account and Balance Sheet

6.       Separate Codes and Manuals

&&&

Marginal Costing for LDCE

Marginal Costing

·         Total cost + Profit  = Sales   

  

·         Total Cost = Variable Cost   +  Fixed Cost  

·         So, Variable Cost + Fixed Cost + Profit  = Sales

·         Sales = Variable Cost + (Fixed Cost + Profit)

·         Contribution = (Fixed Cost + Profit)

·         Sales - Variable Cost = Contribution

·         I.e., S - V = (F + P)

or

·         S - V = C

or

·         C = S - V

·         Contribution = Sales - Variable Cost

·         Contribution = (Fixed Cost + Profit)

·         (Fixed Cost + Profit) = Sales - Variable Cost

·         Profit Volume Ratio (PV Ratio) = Contribution / Sales

·         BEP - Break Even Point = Where No Profit or No loss.

·         BEP - Break Even Point = Fixed Cost / P V Ratio

Problem:

Sales - Rs. 100,  Variable Cost - Rs. 80,  Fixed cost - Rs. 10.   Find the Sales at Break Even Point

Answer:

Contribution = Sales - Variable Cost

C = Rs. 100 - Rs. 80 = Rs. 20

PV Ratio = Contribution / Sales = Rs. 20/ Rs.100  = 0.20

BEP = Fixed Cost / PV Ratio

BEP Sales = Rs.10 /0.20  = Rs. 50

To Prove:

If Sales is Rs. 100,  Variable Cost is Rs. 80

If Sales is Rs. 50, Variable Cost is ?   = 50/100 x 80  = Rs. 40

Contribution = Sales - Variable Cost   Rs. 50 - Rs. 40 = Rs. 10

In Break Even Point, Contribution equals Fixed Cost.  Here too Contribution (Rs. 10) and Fixed Cost (Rs.10) are equal. That means No Profit or No loss at Sales Rs. 50.

***

Flow chart of IRFC - Indian Railway Finance Corporation

Click for PDF of IRFC Flow chart

Flow Chart of IRFC

Flow Chart of Government Accounts classification

Download Flow chart PDF