Standard Costing - Labour Variances - CA Final AMA

Labour Variances

Labour Cost Variance
Labour Cost Variance = Standard Cost – Actual Cost
 Or
Labour Cost Variance = [(SH x SR) – (AH x AR)]

Labour Cost Variance = Labour Rate variance + Labour Ideal Time Variance + Labour Efficiency Variance 

Labour Rate Variance
Labour Rate Variance = Standard Cost of Actual Time – Actual Cost
Or
Labour Rate variance = [(SR – AR) x AH]
Or
Labour Rate Variance = [(SR x AR) – (AR x AH)]

Ideal Time Variance
Ideal Time Variance = Standard Rate per Hour x Ideal Hour

Labour Efficiency Variance
Labour Efficiency Variance = Standard Cost of Standard Time for Actual Production – Standard Cost of Actual Time
Or
Labour Efficiency Variance = [(SH – AH) x SR]
Or
Labour Efficiency Variance = [(SH x SR) – (AH x SR)]

Labour Efficiency Variance = Labour Mix Variance + Labour Yield Variance

Labour Mix Variance (Gang Variance)
Labour Mix Variance = Standard Cost of Actual Time worked in Standard Proportion – Standard Cost of Actual Time Worked
Or
Labour Mix Variance = [(RSH – AH)] x SR]
Or
Labour Mix Variance = [(RSH x SR) – (AH x SR)]

Labour Yield Variance (Sub – Efficiency Variance)    
Labour Yield variance = Standard Cost of Standard Time for Actual Production – Standard Cost of Actual Time worked in Standard Production
Or
Labour Yield Variance = [(SH – RSH) x SR]
Or
Labour Yield Variance = [(SH x SR) – (RSH x SR)]



Where,
SH = Standard Hours (Expected Time for Actual Output)
SR = Standard Rate
AH = Actual Hour
AR = Actual Rate
RSH = Actual Time worked in Proportion of Standard Time


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Standard Costing – Material Variances - CA Final AMA

Material Variances

Material Cost Variance
Material Cost Variance = Standard Cost – Actual Cost
 Or
Material Cost Variance = [(SQ x SP) – (AQ x AP)]

Material Cost Variance = Material Price variance + Material Usages Variance

Material Price Variance
Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
Or
Material Price variance = [(SP – AP) x AQ]
Or
Material Price Variance = [(SP x AQ) – (AP x AQ)]

Material Usages Variance
Material Usages Variance = Standard Cost of Standard Quantity for Actual Production – Standard Cost of Actual Quantity
Or
Material Usage Variance = [(SQ – AQ) x SP]
Or
Material Usage Variance = [(SQ x SP) – (AQ x SP)]

Material Usages Variance = Material Mix Variance + Material Yield Variance
Material Mix Variance
Material Mix Variance = Standard Cost of Actual Quantity in Standard Proportion – Standard Cost of Actual Quantity
Or
Material Mix Variance = [(RSQ – AQ)] x SP]
Or
Material Mix Variance = [(RSQ x SP) – (AQ x SP)]

Material Yield Variance  
Material Yield variance = Standard Cost of Standard Quantity for Actual Production – Standard Cost of Actual Production – Standard Cost of Actual Quantity in Standard Production
Or
Material Yield Variance = [(SQ – RSQ) x SP]
Or
Material Yield Variance = [(SQ x SP) – (RSQ x SP)]

Where,
SQ = Standard Quantity
SP = Standard Price
AQ = Actual Quantity
AP = Actual Price
RSQ = Actual Quantity in Proportion of Standard Quantity

Import Points to be considered in Material Variances
I. Material Price Variance is calculated at point of consumption unless otherwise mentioned in question to be calculated at the point of purchase. In such case Actual Quantity Purchased should be taken.
II. When opening stock is given in question then FIFO method should be used for stock while calculating variance at point of consumption.
III. Opening stock should be taken at standard price unless otherwise mentioned in question.
IV. In Batch Costing Input per Batch is equal for both Standard Quantity and Actual Quantity i.e.  Standard Quantity = Actual Quantity.
V. If there is Work in Progress (WIP) then equivalent quantity of material used should be taken. In case of FIFO method cost for stock should be taken for remaining material to be used.
 

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Portfolio Management - CA Final SFM

Portfolio Management is concerned with effective management of Investment in securities selection & reshuffling of securities to optimize returns to suite the objectives of an investor.

Objectives of Portfolio Management

Security/Safety of Principal amount

Stability of Income

Capital Growth

Marketability

Liquidity

Diversification

Favorable Tax Status

Basic Formulas in Standard Deviation

S. No.	Name of Formula	Formula		Remarks
1.	Standard Deviation (Based on Historical Data)	σx =	√ (∑d2x)/n	Where d2x = (X – Average Return) Average Return = (∑x1 + x2 + ……….xn)/n
2.	Standard Deviation (Based on Probable Data)	σx =	√ (∑Pd2x)	Where, P is probability
3.	Variance	=	σ2
4.	Coefficient of Variation	=	σ E(R) Or          σ          .    Average Return	In words, Standard Deviation Expected Return Or Standard Deviation Average return
5.	Range	=	Highest Return – Lowest Expected Return
Selection of Best Portfolio Lower Standard Deviation, Variation, Coefficient of Variance and Range will have lower Risk. Security with Higher Return at same level of Risk (Standard Deviation). Security with lower Risk (Standard Deviation) with same level of Return. Security with different risk (Standard Deviation and Return then security with lower coefficient of Variation will be preferred.

Return of Portfolio

E(R_P) = E(R_A) x W_A + E(R_B) x W_B + ………

Where,

E(R_P) = Expected Return From Portfolio

E(R_A) = Expected Return from Security A

W_A = Weight of Security of A

When 2 Securities in Portfolio

σ_P = √(σ_A² w_A² + σ_B² w_B² + 2 σ_Aσ_Bw_Aw_B x r)                     

or

σ_P = √(σ_A² w_A² + σ_B² w_B² + 2 w_Aw_B x COV_(A,B))

When 3 Securities in Portfolio

σ_P = √(σ_A² w_A² + σ_B² w_B² + σ_C² w_C² + 2 σ_Aσ_Bw_Aw_B x r + + 2 σ_Aσ_Cw_Aw_C x r + + 2 σ_Cσ_Bw_Cw_B x r)                      

or

σ_P = √(σ² w_A² + σ² w_B² + 2 w_Aw_B x COV_(A,B) + 2 w_Bw_C x COV_(B,C) + 2 w_Aw_c x COV_(A,c) )

r_(A,B) = COV_(A,B)/ σ_Aσ_B

COV_(A,B) = (∑d_A x d_B)/n      or   ∑d_A x d_B x P

If r = 1, then

σ_P = σ_Aw_A + σ_Bw_B  

If r = -1, then

σ_P = σ_Aw_A - σ_Bw_B

Beta of Security (Sensitivity of Portfolio Means Beta of Portfolio)

β = (Change in security Return)/(Change in Market Return)

or

β = (COV_(S,M))/ σ_M² 

or

β = r_(S,M) x (σ_S/ σ_M)

Beta of Portfolio

β_P = β_AW_A + β_BW_­B + ………………..

Overall Beta/Beta of Firm/Assets

If No Tax

β_o = β_E x [E/(E + D)] + β_D x [D/(E + D)]

If nothing is mentioned about β_D then β_D = 0

If Tax

β_o = β_E x [E/{E + D(1- tax rate)}] + β _D[{D(1 – tax rate)}/{E + D(1 – tax rate)}]

β_o = β_E x [E/{E + D(1- tax rate)}] + 0

β_E = β_o x [E + D(1-tax rate)/E

Where,

β_o = Overall Beta   = β_U (Beta Unlevered)

β_E = Beta of Equity = β_L (Beta Levered)

β_D = Beta of Debt

E = Equity

D = Debt

 

SML (Security Market Line) Equation

R_e = R_f + β(R_m – R_f)

Sharp Ratio (Market Risk Premium)

Sharp Ratio = (R_P – R_f)/σ_P

Alpha

Alpha = E(R) – CAPM

If Alpha is positive then stock is undervalued and if alpha is negative then stock is overvalued and if Alpha = 0 then fairly valued.

Characteristic Line (CL)

Y = a + bx

Y= Return from Stock

A = Intersect

B = Beta

X = return from stock if return from market is zero

Capital Market Line (CML)

σ_P = σ_Mw_m + σ_Rfw_Rf

E(R_P) = R_f + σ_P[(R_m – R_F)/ σ_m)

W_m = σ_P/ σ_m

Arbitrage Pricing Theory (APT)

E(R_P) = R_f + β₁(R_m – R_f) + β₂(R_m – R_f) + β₃(R_m – R_f) + …………………

Where,

β₁ = Beta of factor 1

β₂ = Beta of Factor 2

β₃ = Beta of factor 3

If Factor Risk Premium or (R_m – R_f) is not defined then ,

FRP = (Actual Value – Expected Value)

R_M or R_S = [(Dividend + Capital Gain)*100]/Initial Investment

Weight of Security when r is other than 1 & -1

W_A = (σ_B² – COV_(A,B))/ σ_A²  + σ_B² – 2 COV_(A,B)

W_B = 1 - W_A

If Investment amount is specified then weighted average should be taken.

Total Risk (σ_S²) = Systematic Risk (β_S² x σ_m²) + Unsystematic Risk (Random Error)

r² = (Systematic Risk)/(Total Risk)

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Option Valuation - CA Final SFM

Binomial Model

Formula	Remarks
VOC = P x Cu + (1 – P) x Cd                            R	Where, R = 1 + Rf Cu = Call Upside Gain Cd =  Call Downside Gain Pu = Put Upside Gain Pd =  Put Downside Gain d = ds  (expected downside price divided by spot price)        s u = us  (expected upside price divided by spot price)        s
VOC = P x Pu + (1 – P) x Pd                            R
P = R – d        U – d
Value of American Option  =  Max of Discounted Value or Intrinsic Value

Put Call Parity Theory (PCPT)

Spot Price + Value of Put = Value of Call + Present Value of Exercise/Strike Price

PCPT is the relationship between European Call and Put Option on the same stock, the maturity period and EP is same.

The PCPT equation is made to prevent arbitrage profit. If LHS ≠ RHS, then there would arise arbitrage profit.

LHS Þ SP + VOP    (Protective Put – S⁺, P⁺)

RHS Þ VOC + PV of EP   (Fiduciary Call – C⁺, ZCB⁺)

Risk Neutral Valuation

The Price of an option is independent of the risk preference of Investor Called risk-neutral valuation.

Black Scholes Model

Formula	Remarks
European Call Option = SP x N (d1) – PV of EP x N (d2)	Where, Ln = Natural Log SP = Spot Price EP = Exercise Price R= Rate of Interest T = time
d1 = ln (SP) + (r + .5 σ2) x t               EP………………..                         σ√t
d2 = d1 -  σ√t
Assumption of Block Scholes Model European options are considered. No Transaction Costs. Short Term interest rates are known and constant. Stocks don’t pay dividend. Stock Price Movement is similar to random walk. Stock returns are normally distributed over a period of time. Variance of return is constant over the life of an option.

    

When Probability distribution or probable market price is given for market price of share on expiration then value of option will be calculated as follows: -

Value of Option = (AMP –EP) x Probability + (AMP – EP) x Probability + ……………….. (.i.e. we should check individually)

Future/(1 + R_f) = Spot Price + PV of Storage – PV of Convince Yield

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Valuation in Merger & Acquisitions - CA Final SFM

Analysis of Format of P&L

Particulars	Amount
Sales Less: - Operating Cost (Excluding Depreciation)	XXX (XXX)
EBITDA	XXX
Less: - Depreciation & Amortization	(XXX)
EBIT	XXX
Less: - Interest Cost (Non – Operating Expenses) Add: - Non – Operating Income	(XXX) XXX
PBT	XXX
Less: - Tax	(XXX)
PAT	XXX
Less : - Preference Dividend	(XXX)
Profit for Equity Shareholders	XXX

Abnormal item should be ignored for the purpose of valuation.

Income/Expenses: -

Operating: - Related to Business

Non – Operating: -

Normal: - Projection is Possible

Abnormal: - Projection is not possible

EBITDA is treated as proxy cash flow since it is not impacted by depreciation & amortization.

Enterprise Value  

Enterprise Value (EV) stands for theoretical takeover price of a co.

EV = Market Capitalization + Net Debt

Net Debt = Total Debt – Cash & Cash Equivalent

EV = Market Capitalization + Debt – Cash & Cash Equivalent

EBITDA Multiple = EV/EBITDA

Sales Multiple = EV/Sales

EBIT Multiple = EV/EBIT

Value of Firm/Enterprise

Based on Capitalization Method/Earning Capitalization Method

Value of Firm/Enterprise = [Future Maintainable Profit]/[Capitalization Rate]

For Calculating Future Maintainable profit only operating income and expenditure should be considered. If any new income from business operation is anticipated or any reduction in Business Income or any operating Expenses is anticipated then such anticipated items should be considered while calculating FMP.

Value of Firm Based on Dividend Discount Model

Value of Firm = D₁/(K_e – g)

Value of Firm Based on Earning Growth Model (EGM)

Value of Firm = E₁/(K_e – g)

Value of Firm Based on Chop – Shop Method

Step I: - Identify the firm’s various business segments and calculate the average capitalization ratios for firms in those industries.

Step II: - Calculate a theoretical market value based upon each average capitalization Ratios.

Theoretical Market Value = (Sales/Assets/Income) x Capitalization Rate

Step III: - Average the Theoretical Market Values to determine the “Chop –Shop” Value of the Firm.

Value of Firm Based on Free Cash flow Approach

Free Cash Flow to Firm (FCFF): - It is the free cash flow left after meeting operating and capital expenditure needs.

Free Cash Flow to Equity (FCFE): - It is the free cash flow left after meeting operating and capital expenditure needs and debt obligations (Principal and Interest).

Steps for Free Cash Flow Valuation

Step I: - Determine free cash flows

Free Cash Flows to Firm (FCFF) = No PAT + Depreciation & Amortization – (Capital Expenditure + Working Capital Investment)

Step II: - Estimate a suitable Discount Rate for Acquisition.

For FCFF Discount Rate would be WACC.

For FCFE Discount Rate would be cost of Equity.

Step III: - Calculate Present Value of Cash Flows.

Value of Company = PV of Cash Flows during the forecast period + PV of Terminal Value

Terminal Value = Sum of realisable of various Assets based on capital employed.

Terminal Value Based on Earning Multiple

Terminal Value = Last Year Profit x P/E Multiple

Terminal Value Based on Free Cash Flows (Growing Perpetuity)

Terminal Value = [(Last Year Cash Flow) x (1+ g)]/(K_e – g)

Terminal Value Based on Free Cash Flow (Stable Perpetuity)

Terminal Value = (Free Cash Flow)/Discount Rate 

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Mergers, Acquisitions & Restructuring - CA Final SFM

Acquisition: - An acquisition is when both the acquiring and acquired companies are still left standing as separate entities at the end of the transaction.

Merger: - A merger results in the legal dissolution of one of the companies.

Consolidation: - A consolidation dissolves both the parties and creates a new one into which the previous entities are merged.

Types of Merger

Horizontal Merger: - The two companies which have merged are in the same the Industries.

Vertical Merger: - This happens when two companies that have ‘buyer – seller’ relationship (or potential buyer – seller relationship) come together.

Conglomerate Merger: - Such merger involves firms engaged in unrelated type of business operation.

Congeneric Merger: - In these mergers, the acquired and the target companies are related through basic technologies, production process or market.

Reverse Merger: - Such merger involves acquisition of a public (Shell Company) by a private company.

Reasons for Mergers and Acquisitions

Synergistic operating economic: - synergy may be defined as

V_(AB) > V_(A) + V_(B)

The difference between the combined value and the stand value of target and Acquire is attributable to synergy.

Net gain is the value of synergy – premium paid

Premium Paid = Price paid over the market value + other costs of integration.

Diversification: - In case of merger between two unrelated companies would lead to reduction in business risk.

Taxation: - The provision of set off and carry forward of losses as per Income Tax Act may be another strong reason for merger and acquisition.

Growth: - The Acquiring Company avoids delays such attached with purchasing of building, site, and setting up of the plant and hiring personal etc.

Consolidation of Production Capacities and increasing market power: - Due to reduced competition marketing power increases and also the production capacities are increased by combined of two or more plants.

Exchange/Swap Ratio

If Deals is based on EPS then,

Swap Ratio = (EPS of Target) / (EPS of Acquirer)

If Deals is based on MPS then,

Swap Ratio = (MPS of Target) / (MPS of Target)

If Deal is based on Book Value per Share (BVPS) then,

Swap Ratio = (BVPS of Target) / (BVPS of Acquirer)

Note: -

If Deal is based on EPS then there would be no Gain/Loss to shareholders of both companies in earning them. It means if Deal happens in any other ration other than EPS then one party would gain and another party will lose in term. The above concept is applicable only when there 100% stocks deal. Both parties can gain in terms of market value terms.

Minimum and Maximum Exchange Ratio

Minimum Exchange Ratio is the minimum Expectation of Target to get amount or share so that there would be no loss to target in terms of EPS or MPS.

Maximum Exchange Ratio is the ability of acquirer to pay to target company that amount which would do not results to lose in the value of EPS or MPS term.

S. No.	Formula
1.	Maximum Exchange Ratio in Terms of EPS	EPSold =	Earning of Acquirer + Earning of Target + Synergy Gain No. of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
2.	Maximum Exchange Ratio in Terms of MPS	MPSold =	Market Value of Acquirer + Market Value of Target + Synergy  Gain No. of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
3.	Minimum Exchange Ratio in Terms of EPS	EPSold =	(Earning of Acquirer + Earning of Target + Synergy Gain)  x ER No. of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
4.	Minimum Exchange Ratio in Terms of MPS	MPSold =	(Market Value of Acquirer + Market Value of Target + Synergy  Gain)  x ER No. of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)

Free Float Capital

Shares Held by Public is known as free float shares.

Free Float Market Capitalization = Free Float Shares X Share Price

Non – Free Float Capital

Shares held by promoter are known as non- free float shares.

Non- free Float Market Capitalization = Share Held by Promoters X Share Price

Total Market Capitalization = Free Float Market Capitalization + Non Free Float Market Capitalization

Accretion – Dilution Analysis

If Post Acquisition EPS increase we call deal is Accretive.

If Post Acquisition EPS decrease we call deal is dilutive.

If a high P/E Ratio Acquires a low P/E Ratio by issue of shares then Deal would be Accretive (increase in EPS) for Acquirer and dilutive (decrease in EPS) for target.

Value of Acquisition = Post Acquisition – Pre Acquisition Value of Merged Entity

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