Difference between fixed overheads and variable overhead

 1.F- fix overheads remains fixed in total

V- total variable overheads vary in direct proportion to the volume of output.

2. F- fix overheads does not vary with output 

V- variable overheads vary with output.

3.F-fixed overheads are uncontrollable.

V-variable overheads are controllkable.

4. Fixed cost per unit decreases with increase in output 

V-variable cost per unit remains constant with increase or decrease in output. 

5.F-rent insurance salary of office staff are the examples of fix overheads 

V-power consumption, salesman commission, indirect material, heating  and lighting are the examples of variable overheads.

Collection of Overheads

 

The process accounting of overheads starts with process of collection of overheads and their grouping together on the basis of common characteristics and specific objectives i classification of overheads. systematic classification and scientific codification are the pre-requisite to the collection of overhead.

Source document used for collection of overhead costs:-

1.Store Requisition - The indirect materials such as lubricating oil, dusters, furnace oil, brooms, cotton waste, grease, wipers, soaps and detergent, brushes, disinfectants, repairs and maintenance of stores, general tools, can be ascertained from store requisition

2. Invoices:- the indirect expenses such as rent, rates, taxes, insurance etc are incurred for other services availed can be verified from invoices.

3.Wages Analysis Book:- the indirect wages such as wages of foreman, sweepers, Inspector, Watchmen,Repair gang, Maintenance workers, Shop supervisor etc can be taken from the wages analysis book.

4.Cash book:- the various types of indirect expenses incurred for factory, office and administration,selling and distribution activities of sizeable amount in cash get recorded in the main  cash book. All such expenses can be collected from the cash book.

5. Petty cash book:- the different types of indirect expenses incurred for factory, office and administration, selling and distribution activity of minor amount in cash get recorded in the analytical petty cash book. All such as expenses of small amount can be collected from the petty cash book.

6. Journal Proper:- the various types of overheads which do not result in current cash outlay and requires some accounting adjustments can be obtained from journal proper. e.g outstanding overhead expenses, prepaid expenses etc.

7. Other Registers :- depreciation on plant can be obtained from plant and machinery register, Repairs to premises can be obtained from land and buildings Register, maintenance on furniture can be obtained from furniture, fixture and fitting register. 

8. Special reports:- generally, there is a practice to prepare a special report periodically regarding normal and abnormal items of overheads i e. normal and abnormal Weste, scrap, spoilage detectives,ideal time, overtime, night shift allowance etc. from the special reports.

Cost Audit

 Cost audit -Definition 

Smith and Day:-Cost audit mean "detailed checking of Costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of accounting".

The Institute of Cost and Works  Accountant of India "cost audit can be defined as verification of the correctness of cost accounts and adherence of the cost accounting principles, plans and procedures."

Objectives of Cost Audit 

The basic objectives of cost audit and follow:-

1. To verify the arithmetical accuracy of cost accountancy entries in the books of accounts.

2. To find out whether cost accounts have been properly  maintained according to the principals of Costing employed in the industry concerned.

3. To detect the errors of principals of cost accountancy. 

4. To detect the frauds that are made in cost records, which might have committed intentionally or otherwise.

5. To verify the total cost of each product, process and job for seeing that they are accurately ascertained.

6. To help management to find out  inefficiencies in the use of man, machine and material. 

7. To verify the adequacy of the books of accounts and record relating to cost.

8. To find out whether each item of expenditure involved into the relevant components of the goods manufactured or produced has been properly incurred or not.

9. To value accurately the value of working progress and closing stock. 

10. To advise the management for the adoption of alternative course of action

11. To verify that the cost statement are properly drawn up as per records.

12. To report to appropriate authority as to the state of cost affairs of the company.

Advantages of Cost Audit 

1. Cost audit provides reliable cost data for managerial decision. 

2. It helps the management in finding out the correct cost of production. 

3. It helps the management to regulate production.

4. It helps in obtaining licences for expansion or diversification of the various product-lines of the business.

5. It is a basis for inter divisional performance. 

6. It reduces the cost of production through plugging loop holes relating to wastage of material, labour and overheads. 

7. It helps in comparing actual results with budgeted and points out the areas where management action is more essential. 

8. It ensure that the cost accounts have been maintained in accordance with the principles of costing employed in the particular industry.

9. It can stop the capital erosion by constant watch on the better plant utilisation discontinuing sick lines and elimination of wastage.

Dr Sucheta Dalvi

HOD of Commerce 

Tikaram Jagannath College, khadki 

Cost centre and Cost Unit

 

Cost Centre and Cost Unit 

The organisation is divided into small parts or sections to ascertain cost.   Each small section is treated as a call centre of which cost is ascertained. A cost centre is defined by CIMA, London as "a location, person, or item of equipment for which costs may be ascertained and used for the purpose of control'.

It may be a division, department, job or job order, a single product or a bunch of products, it may be a person also.

Cost centres are primarily of two types 

a) Personal call centres -which consist of a person or a group of persons 

b)  Impersonal cost centres- which consist of a location or an item of equipment or a group of equipment

From the functional point of view cost centres may be of the following two types:

1) Production cost centres:-  these are those cost centres where actual production work takes place.

 for example weaving department in a textile mill a shop in a steel mill, a cane-crushing shop in a sugar mill etc 

2) Service call centre:- cost centres that are ancillary to and render services to production are known as service cost centres. e g  powerhouse, tool room, store department, repairs and maintenance shop, canteen etc 

A cost accountant sets up cost centres to enable him to ascertain the cost he needs to know. A cost centre is charged with all the costs that relate to it, for example, if the machine is a cost centre, it will be charged with the cost of power, light, depreciation and its share of rent etc  The purpose of ascertaining the cost of a cost centre is to control the cost. The person in charge of a cost centre is held responsible for the control of the cost of that particular cost centre.

Cost Unit

A cost unit is defined by CIMA London as a unit of product or service in relation to which cost or asserting ascertain for example in a sugar mail the cost per turn off sugar in a textile male the cost per metre of cloth maybe ascertain does a tonne of sugar and meter of cloth are cost units in short cost unit is unit of measurement of cost 

Broadly cost units may be of two types as explain below 

Units of production -for example a ream of paper, a turn off Steel a meter of cable etc

Units of service- for example passenger miles, cinema seats, consulting hours etc a few more example of cost units in various industries are as follows 

Cement- Tonne

Chemicals:- Tonnes, kilogram, litre, gallon etc

Bricks -1000 bricks or 500 bricks

Soft drink- a crate of 24 bottles or 12 bottles

Hospital - bed per day or patient 

Interior decoration-each job 

Electricity- kilowatt hours 

Transport passenger- kilometre or tonne kilometre 

Printing press- 1000 copies 

Building construction each building or flat 

Hotel- room per day 

Education -cost per student

Petroleum- barrel or Tonne or  litre

What is Floating Stock?

 

What Is Floating Stock?

Floating stock is the number of shares available for trading of a particular stock. Low float stocks are those with a low number of shares. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares.

Closely-held shares are those owned by insiders, major shareholders, and employees. Restricted stock refers to insider shares that cannot be traded because of a temporary restriction, such as the lock-up period after an initial public offering (IPO).

A stock with a small float will generally be more volatile than a stock with a large float. This is because, with fewer shares available, it may be harder to find a buyer or seller. This results in larger spreads and often lower volume.

Understanding Floating Stock

A company may have a large number of shares outstanding, but limited floating stock. For example, assume a company has 50 million shares outstanding. Of that 50 million shares, large institutions own 35 million shares, management and insiders own 5 million, and the employee stock ownership plan (ESOP) holds 2 million shares. Floating stock is therefore only 8 million shares (50 million shares minus 42 million shares), or 16% of the outstanding shares.

The amount of a company’s floating stock may rise or fall over time. This can occur for a variety of reasons. For example, a company may sell additional shares to raise more capital, which then increases the floating stock. If restricted or closely-held shares become available, then the floating stock will also increase.

On the flip side, if a company decides to implement a share buyback, then the number of outstanding shares will decrease. In this case, the floating shares as a percentage of outstanding stock will also go down. 

 A stock split will increase floating shares, while a reverse stock split decreases float.

Why Floating Stock Is Important

A company's float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. Low float is typically an impediment to active trading. This lack of trading activity can make it difficult for investors to enter or exit positions in stocks that have limited float.

Institutional investors will often avoid trading in companies with smaller floats because there are fewer shares to trade, thus leading to limited liquidity and wider bid-ask spreads. Instead, institutional investors (such as mutual funds, pension funds, and insurance companies) that buy large blocks of stock will look to invest in companies with a larger float. If they invest in companies with a big float, their large purchases will not impact the share price as much.

Special Considerations

A company is not responsible for how shares within the float are traded by the public—this is a function of the secondary market. Therefore, shares that are purchased, sold, or even shorted by investors do not affect the float because these actions do not represent a change in the number of shares available for trade. They simply represent a redistribution of shares. Similarly, the creation and trading of options on a stock do not affect the float.

Example of Floating Stock

As of September 2023, General Electric (GE) had 1.088 billion shares outstanding.

1

 Of this, 0.20% were held by insiders and 75.81% were held by large institutions.

2

 Therefore, a total of 76% or 830 million shares were likely not available for public trading. The floating stock is therefore about 260 million shares (1.088 billion - 830 million).

It is important to note that institutions don't hold a stock forever. The institutional ownership number will change regularly, although not always by a significant percentage. Falling institutional ownership coupled with a falling share price could signal that institutions are dumping the shares. Increasing institutional ownership shows that institutions are accumulating shares.

Is Floating Stock Good or Bad?

Stock float isn't good or bad, but it can affect an investor's decisions. The amount of floating stock a company has—the shares made available to trade—can affect the liquidity of that stock. Stocks with a smaller float tend to have high volatility, while stocks with a larger float tend to have lower volatility. Some investors may prefer stocks with higher float, because it's easier to enter and exit positions for these stocks.

What Is Stock Flotation?

Stock flotation is when a company issues new shares to the public. It can help the company raise capital. The opposite of stock flotation is a float shrink, such as with stock buybacks: fewer shares are available to trade.

Capital Gain tax treatment on shares

We all know that income from salary, rental income and business income is taxable. But what about income from the sale or purchase of shares? Many homemakers and retired people spend their time gainfully buying and selling shares but are unsure how this income is taxed. Income/loss from the sale of equity shares is covered under the head ‘Capital Gains’.

Under the head ‘Capital Gains’, income is further classified into:

 (i) Long-term capital gains

(ii) Short-term capital gains

This classification is made according to the holding period of the shares. Holding period means the duration for which the investment is held starting from the date of acquisition till the date of sale or transfer. 

It should be noted that the holding periods of shares and securities are different for different classes of capital assets. For income tax purposes, holding periods of listed equity shares and equity mutual funds is different from the holding period of debt mutual funds. Their taxability is also different.

In this article, we will cover the tax implications on the listed securities like listed equity shares, bonds, bonds and debentures listed on a recognized Indian stock exchange, units of UTI and Zero-coupon bonds. 

Taxation of Gains from Equity Shares

Short-Term Capital Gains (STCG)

If equity shares listed on a stock exchange are sold within 12 months of purchase, the seller may make a short-term capital gain (STCG)  or incur a short-term capital loss (STCL). The seller makes short-term capital gains when shares are sold at a price higher than the purchase price. Short-term capital gains are taxable at 15%. 

Calculation of short-term capital gain = Sale price minus Expenses on Sale minus the Purchase price 

Let's take a look at an example of STCG tax:

In October 2015, Kunal Dalvi paid Rs.38,750 for 250 shares of a publicly traded firm at a price of Rs.155 a share. He sold them for Rs.192 a share after 5 months for Rs.48,000. Let's see how much money he makes in the short run.

Full sales value - Rs.48,000

Brokerage at 0.5% - Rs.240

Purchase price - Rs.38,750

 

Therefore short-term capital gain made by Kunal will be: Rs.48,000 - (Rs.38,750+ Rs.240) = Rs.9,010

What if your tax slab rate is 10% or 20% or 30%?  

A special rate of tax of 15% is applicable to short-term capital gains, irrespective of your tax slab. 

Long-Term Capital Gains (LTCG)

If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL). 

Before the introduction of Budget 2018, the long-term capital gain made on the sale of equity shares or equity-oriented units of mutual funds was exempt from tax, i.e. no tax was payable on gains from the sale of long-term equity investments. 

The Financial Budget of 2018 took away this exemption. Henceforth, if a seller makes a long-term capital gain of more than Rs.1 lakh on the sale of equity shares or equity-oriented units of a mutual fund, the gain made will attract a long-term capital gains tax of 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller. These provisions will apply to transfers made on or after 1 April 2018. 

Also, this new provision was introduced prospectively, i.e. gains starting from the 1st of Feb 2018 will only be considered for taxation. This is known as the ‘grandfathering rule’. Any long-term gains from the equity instruments purchased before the 31st of January 2018 will be calculated according to this ‘grandfathering rule’. 

Example: Atul purchased shares for Rs.100 on 30th September 2017 and sold them for Rs.120 on 31st December 2018. The stock value was Rs.110 as of 31st January 2018. Out of the capital gains of Rs.20 (i.e. 120-100), Rs.10 (i.e. 110-100) is not taxable. Rest Rs.10 is taxable as capital gains at 10% without indexation.

The following table demonstrates the nature of a long-term capital gain tax on shares and other securities. 

Particulars Tax rate

STT-paid sales of listed shares on recognized stock exchanges and MFs 10% on amounts over Rs 1 lakh

STT is paid on the sale of shares, bonds, debentures, and other listed securities. 10%

Sale of debt-oriented MFs With indexation - 20%

Without indexation - 10%

Loss From Equity Shares

Short-Term Capital Loss (STCL)

Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short term or long-term capital gains made during these eight years. 

It is worth noting that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an income tax return is a must for carrying forward these losses.    

Long-Term Capital Loss (LTCL)

Long-term capital loss from equity shares until Budget 2018 was considered a dead loss – It could neither be adjusted nor carried forward. This is because long-term capital gains from listed equity shares were exempt. Similarly, their losses were neither allowed to be set off nor carried forward.

After the Budget 2018 has amended the law to tax such gains made more than Rs 1 lakh at 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds, etc., would be carried out forward.

Long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set off and carried forward in accordance with existing provisions of the Act. Therefore, the long-term capital loss can be set off against any other long-term capital gain. Please note that you cannot set off long-term capital loss against short-term capital gains. 

Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains. To set off and carry forward these losses, a person has to file the return within the due date. 

Securities Transaction Tax (STT)

STT is applicable on all equity shares sold or bought on a stock exchange. The above tax implications are only applicable to shares listed on a stock exchange. Any sale/purchase on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.

Grandfathering clause

A grandfathering clause is a provision that states that an old rule will continue to apply to some existing instances while a new rule will apply to all future cases. Individuals who are not subject to the new rule are said to have grandfather rights, acquired rights, or have been grandfathered in.

Long-term capital gains (LTCG) on the transfer of listed equity shares and equity-oriented mutual fund schemes were tax-free until the 2017-18 fiscal year.

The Finance Act, 2018 reinstated the LTCG tax on the sale of listed shares and equity-oriented mutual fund schemes with effect from April 1, 2018, i.e. the fiscal year 2018-19, with a grandfathering clause.

While the LTCG was reintroduced on 1st February 2018, the CBDT (Central Board of Direct Taxes) grandfathered gains up to 31st January 2018, i.e. no tax would be paid on gains accrued until 31st January 2018.

Grandfathering Clause Formula

The acquisition cost is calculated as follows:

Value I is the fair market value (FMV) as of January 31, 2018, or the actual selling price, whichever is lower.

Value II equals Value I or the actual purchase price, whichever is greater.

Long-Term Capital Gain = Sales Value - Acquisition Cost (as calculated above)

Tax responsibility = In a year, LTCG of Rs 1 lakh is tax-free. Thus, after subtracting Rs 1 lakh from the total tax gain, the tax burden will be 10% (plus applicable surcharge and cess).

Share Sale as Business Income

Certain taxpayers treat gains or losses from the sale of shares as ‘income from a business, while others treat it as ‘Capital gains’. Whether your gains/losses from the sale of shares should be treated as business income or be taxed under capital gains has been a matter of much debate. 

In case of significant share trading activity (e.g. if you are a day trader with lots of activity or regularly trade in Futures and Options), your income is usually classified as income from the business. In such a case, you are required to file an ITR-3, and your income from share trading is shown under ‘income from business & profession’.

Calculation of Income From Business

When you treat the sale of shares as business income, you can reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year and, consequently, charged at tax slab rates. 

Calculation of Income From Capital Gains

If you treat your income as capital gains, expenses incurred on such transfer are allowed for deduction. Also, long-term gains from equity above Rs 1 lakh annually are taxable, while short-term gains are taxed at 15%

Bombay Stock Exchange

The Role of the Bombay Stock Exchange in India's Financial Landscape

Introduction

The stock exchange is a marketplace where securities like stocks, bonds, and other financial instruments are traded between buyers and sellers. It provides a platform for companies to raise capital by selling their securities to the public and for investors to buy and sell these securities to potentially earn a profit.

 In India, there are two primary stock exchanges - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). BSE is the oldest stock exchange in Asia, founded in 1875. It is located in Mumbai and has a market capitalisation of over $3.5 trillion as of February 2023. In addition, the BSE has over 5,500 listed companies and is one of the world's top stock exchanges in terms of the number of listed entities.

 The BSE offers various trading platforms, including the BSE Sensex, which is India's benchmark stock market index. The BSE Sensex comprises 30 of the largest and most actively traded stocks on the BSE. Thus, the BSE has played a crucial role in India's economic growth by providing a platform for companies to raise capital and for investors to participate in the country's growth story.

What is Bombay Stock Exchange?

The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia and one of the largest in the world, located in Mumbai, India. Established in 1875, the BSE provides a platform for trading various financial instruments, including stocks, derivatives, and currencies.

 The BSE Sensex, comprising 30 of the largest and most actively traded stocks on the BSE, is India's benchmark stock market index. The BSE has a significant impact on the Indian economy and is considered a barometer of the country's economic performance.

Over the years, the BSE has evolved and introduced various products and services, including equity, debt, and currency trading, mutual funds, and investment banking. It is known for its robust technology infrastructure, efficient trading mechanisms, and high level of transparency and accountability.

The BSE has played a vital role in the development of India's financial market and continues to be a key player in driving the country's economic growth. It has been instrumental in attracting both domestic and foreign investors, making it an essential institution in India's financial landscape.

How does Bombay Stock Exchange work? 

The Bombay Stock Exchange (BSE) is an electronic exchange that provides a platform for trading various financial instruments, including stocks, derivatives, and currencies.

The BSE operates on a principle of price-time priority, where orders are executed based on the best available price and time of order placement. The exchange uses a sophisticated trading platform and order-matching system to ensure that orders are executed quickly and accurately.

Moreover, the BSE has a regulatory framework that ensures transparency and fairness in trading activities. Listed companies must comply with stringent disclosure requirements, and the exchange regularly monitors trading activities to prevent market abuse and insider trading.

Investors can access the BSE through brokerage firms or online trading platforms. They can place orders to buy or sell securities, which are executed by the exchange based on prevailing market condition