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Management Accounting Solved Papers: November' 2013

Management Accounting Question Paper: Nov’ 2013 (New Course)
1. (a) write true or false:               1x4=4
(i)      At break-even point, the company earns only a marginal profit.                      False
(ii)    Depreciation of machinery is a source of funds.                                                        True
(iii)   The different between actual cost and standard cost is known as differential cost.                  Variance
(iv)  Budgetary control is a system of controlling cost.                                                      True
(b) Fill in the blanks:                        1x4=4
(i)      Standard cost is the Predetermined cost.
(ii)    In marginal costing system, fixed cost is considered as Period cost.
(iii)   Income from investment is a cash flow from Investing activities.
(iv)  A budget manual spells out Duties and Responsibilities of various executives concerned with budget.
2. Write short notes on :               4x4=16

(i) Limitation of Management Account
Ans: Limitations of Management Accounting: Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows:
1. Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting, therefore, depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting.
2. Persistent efforts. The conclusions draws by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.
3. Management accounting is only a tool: Management accounting cannot replace the management. Management accountant is only an adviser to the management. The decision regarding implementing his advice is to be taken by the management. There is always a temptation to take an easy course of arriving at decision by intuition rather than going by the advice of the management accountant.
4. Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it.

(ii)    Responsibility Accounting
Ans: Responsibility accounting is a system used in management accounting for control of costs. It is used along with other systems like budgetary control and standard costing. The organization is divided into different centers called “responsibility centers” and each centre is assigned to a responsible person.
According to Eric. L. Kohler “ Responsibility Accounting is the classification, management maintenance, review and appraisal of accounts serving the purpose of providing information on the quality and standards of performance attained by persons to whom authority has been assigned.”
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Features of Responsibility Accounting
1. It is a control system used by top management for monitoring and controlling operations of a business.
2. It is based on clearly defined functions and responsibilities assigned to executives.
3. The organization is divided into meaningful segments called responsibility centres.
4. Costs and revenues of each centre and responsibility of them are fixed on the individuals.
(iii)   Break-even Analysis or Cost-volume-profit analysis
Ans: Cost-Volume-Profit analysis is analysis of three variables i.e., cost, volume and profit which  explores the relationship existing amongst costs, revenue, activity levels and the resulting  profit. It aims at measuring variations of profits and costs with volume, which is significant for business profit planning.
CVP analysis makes use of principles of marginal costing. It is an important tool of planning for making short term decisions.  The following are the basic decision making indicators in Marginal Costing:
(a) Profit Volume Ratio (PV Ratio) / Contribution Margin ratio
(b) Break Even Point (BEP)
(c) Margin of Safety (MOS)
(d) Indifference Point or Cost Break Even Point
(e) Shut-down Point
Assumptions in CVP analysis
The assumptions in CVP analysis are the same as that under marginal costing.
a)      Cost can be classified into fixed and variable components.
b)      Total fixed cost remain constant at all levels of output
c)       The variable cost change in direct proportion with the volume of output
d)      The product mix remains constant
e)      The selling price per unit remains the same at all the levels of sales
f)       There is synchronization of output and sales, i.e, what ever output is produced , the same is sold during that period.
(iv)  Variance Analysis: Out of Syllabus
3. (a) “Management Account has been evolved to meet the need of management.” Explain this statement.
Ans: The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.
In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.
Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.
According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.
From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.
The primary objective is to enable the management to maximize profits or minimize losses. The fundamental objective of management accounting is to assist management in their functions. The other main objectives are:
1)      Planning and policy formulation: planning is one of the primary functions of management. It involves forecasting on the basis of available information.
2)      Help in the interpretation process: The main object is to present financial information. The financial information must be presented in easily understandable manner.
3)      Helps in decision making: Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives.
4)      Controlling: The actual results are compared with pre determined objectives. The management is able to control performance of each and every individual with the help of management accounting devices.
5)      Reporting: This facilitates management to take proper and timely decisions. It presents the different alternative plans before the management in a comparative manner.
6)      Motivating: Delegation increases the job satisfaction of employees and encourages them to look forward. so it serves as a motivational devise.
7)      Helps in organizing: “Return on capital employed” is one of the tools if management accounting. All these aspects are helpful in setting up effective and efficient organization.
8)      Coordinating operations: It provides tools which are helpful in coordinating the activities of different sections.
From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.
Or
(b) Discuss, in detail, the functions of Management Accounting.
Ans: Management Accounting: Meaning and Definitions:
The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.
In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.
Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.
According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.
From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.
Functions of Management Accounting
Main objective of management accounting is to help the management in performing its functions efficiently. The major functions of management are planning, organizing, directing and controlling. Management accounting helps the management in performing these functions effectively. Management accounting helps the management is two ways:
I. Providing necessary accounting information to management
II. Helps in various activities and tasks performed by the management.
I. Providing necessary accounting information to management:
(a) Measuring: For helping the management in measuring the work efficiency in different areas it is done on the past and present incidents with context to the future. In standard costing and budgetary any control, standard and actual performance is compared to find out efficiency.
(b) Recording: In management accounting both the quantitative and qualitative types of data are included and this accounting is done on the basis of assumptions and even those items which cannot be expressed financially are included in management accounting.
(c) Analysis: The work of management accounting is to collect and analyze the fact related to the managerial problems and then present them in clear and simple way.
(d) Reporting: For the use of management various reports are prepared. Generally two types of reports are prepared:-
a. Regular Reports
b. Special Reports.
II. Helping in Managerial works and Activities:
The main functions of management are planning, organizing, staffing, directing and controlling. Management accounting provides information to the various levels of managers to fulfill the above mentioned responsibilities properly and effectively. It is helpful in various management functions as under:-
(a) Planning: Through management accounting forecasts regarding the sales, purchases, production etc. can be obtained, which helps in making justifiable plans. The tools of management accounting like standard costing, cost -volume-profit analysis etc. are of great managerial costing, help in planning.
(b) Organizing: In management accounting whole organization is divided into various departments, on the basis of work or production, and then detailed information is prepared to simplify the thing. The budgetary control and establishing cost centre techniques of management accounting helps which result in efficient management.
(c) Staffing: Merit rating and job evaluation are two important functions to be performed for staffing. Generally only those employs are useful for the organization, whose value of work done by them is more than the value paid to them. Thus by doing cost-benefit analysis management accounting is useful in staffing functions.
(d) Directing: For proper directing, the essentials are co-ordination, leadership, communications and motivation. In all these tasks management accounting is of great help. By analyzing the financial and non financial motivational factors, management accounting can be an asset to find out the best motivational factor.
(e) Co-ordination: The targets of different departments are communicated to them and their performance is reported to the management from time to time. This continual reporting helps the management in coordinating various activities to improve the overall performance.
4. (a) The following information is given by Bharat Ltd:                 Visit our YouTube channel for solution
Profit: Rs. 12000
Fixed Cost: Rs. 24000
Marginal of Safety: Rs. 30000
You are required to calculate the following:
(i)      Profit volume ratio
(ii)    Break even sales and actual sales
(iii)   Sales to earn a profit of 10% on sales.
(iv)  New break-even point, if variable cost is to be increased by 25%.
Or
(b) “ Marginal costing is a very useful technique to management for cost control, profit planning and decision making.” Explain.
Ans: Marginal Costing: It is the technique of costing in which only marginal costs or variable are charged to output or production. The cost of the output includes only variable costs .Fixed costs are not charged to output. These are regarded as ‘Period Costs’. These are incurred for a period. Therefore, these fixed costs are directly transferred to Costing Profit and Loss Account.
According to CIMA, marginal costing is “the ascertainment, by differentiating between fixed and variable costs, of marginal costs and of the effect on profit of changes in volume or type of output. Under marginal costing, it is assumed that all costs can be classified into fixed and variable costs. Fixed costs remain constant irrespective of the volume of output. Variable costs change in direct proportion with the volume of output. The variable or marginal cost per unit remains constant at all levels of output.”
Thus, Marginal costing is defined as the ascertainment of marginal cost and of the ‘effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs. Marginal costing is mainly concerned with providing information to management to assist in decision making and to exercise control. Marginal costing is also known as ‘variable costing’ or ‘out of pocket costing’.
Marginal costing and Beak even analysis are very useful to management. The important uses of marginal costing and Break Even analysis are the following:
1)      Cost control: Marginal costing divides total cost into fixed and variable cost. Fixed Cost can be controlled by the Top management to a limited extent and Variable costs can be controlled by the lower level of management. Marginal costing by concentrating all efforts on the variable costs can control total cost.
2)      Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs. An analysis of contribution made by each product provides a basis for profit-planning in an organisation with wide range of products.
3)      Fixation of selling price: Generally prices are determined by demand and supply of products and services. But under special market conditions marginal costing is helpful in deciding the prices at which management should sell. When marginal cost is applied to fixation of selling price, it should be remembered that the price cannot be less than marginal cost. But under the following situation, a company shall sell its products below the marginal cost:
Ø  To maintain production and to keep employees occupied during a trade depression.
Ø  To prevent loss of future orders.
Ø  To dispose of perishable goods.
Ø  To eliminate competition of weaker rivals.
Ø  To introduce a new product.
Ø  To help in selling a co-joined product which is making substantial profit?
Ø  To explore foreign market
4)      Make or Buy: Marginal costing helps the management in deciding whether to make a component part within the factory or to buy it from an outside supplier. Here, the decision is taken by comparing the marginal cost of producing the component part with the price quoted by the supplier. If the marginal cost is below the supplier’s price, it is profitable to produce the component within the factory. Whereas if the supplier’s price is less than the marginal cost of producing the component, then it is profitable to buy the component from outside.
5)      Closing down of a department or discontinuing a product: The firm that has several departments or products may be faced with this situation, where one department or product shows a net loss. Should this product or department be eliminated? In marginal costing, so far as a department or product is giving a positive contribution then that department or product shall not be discontinued. If that department or product is discontinued the overall profit is decreased.
6)      Selection of a Product/ sales mix: The marginal costing technique is useful for deciding the optimum product/sales mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce maximum units of that product which shows the highest P/V ratio so as to maximize profits.
7)      Evaluation of Performance: The different products and divisions have different profit earning potentialities. The Performance of each product and division can be brought out by means of Marginal cost analysis, and improvement can be made where necessary.
8)      Limiting Factor: When a limiting factor restricts the output, a contribution analysis based on the limiting factor can help maximizing profit. For example, if machine availability is the limiting factor, then machine hour utilisation by each product shall be ascertained and contribution shall be expressed as so many rupees per machine hour utilized. Then, emphasis is given on the product which gives highest contribution.
9)      Helpful in taking Key Managerial Decisions: In addition to above, the following are the important areas where managerial problems are simplified by the use of marginal costing :
Ø  Analysis of Effect of change in Price.
Ø  Maintaining a desired level of profit.
Ø  Alternative methods of production.
Ø  Diversification of products.
Ø  Alternative course of action etc.

5. (a) The following information of sales has been made available from the accounting records of Gama Engineering Company Ltd. For the last six months of 2011 and for January, 2012 only in respect of product X produced by it. The units sold in different months are as follows:
July, 2011 - 2200
August, 2011 - 2200
September, 2011 - 3400
October, 2011 - 3800
November, 2011 - 5000
December, 2011 - 4600
January, 2012 - 4000
There will be no work-in-progress at the end of any month Finished units equal to half the sales for the next months will be in stock at the end of every month (including June, 2011) Budgeted production and production cost for the year ending December, 2011 are as follows:
Production (units): 44000
Direct material per unit: 10
Direct wages per unit: 4
Total factory overhead apportioned: 88000
It is required to prepare Production budget for the last six months of 2011 and Production cost budget for the same period.
Or
(b) What do you mean by budgetary control? Explain the advantages of this system.
Ans: Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.
According to Brown and Howard “Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.
Wheldon characterizes budgetary control as planning in advance of the various functions of a business so that the business as a whole is controlled.
I.C.M.A. define budgetary control as “the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual actions the objectives of that policy or to provide a basis for its revision”.
Advantages of Budgetary Control:
A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:
a)      Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.
b)      Efficiency: It enables the management to conduct its business activities in an efficient manner. Effective utilization of scarce resources, i.e. men, material, machinery, methods and money - is made possible.
c)       Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
d)      Performance evaluation: It provides a yardstick for measuring and evaluating the performance of individuals and their departments.
e)      Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.
f)       Standard Costing and Variance analysis: It creates suitable conditions for the implementation of standard costing system in a business organization. It reveals the deviations to management from the budgeted figures after making a comparison with actual figures.
g)      Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviation can determined only at the end of the financial period.
h)      Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.
i)        Reduces Costs: In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.
j)        Policy formulation: It helps in the review of current trends and framing of future policies.

6. (a) The standard cost of a channel mixture is as under:                             Out of Syllabus
60 kg of material X at Rs. 20 per kg
40 kg of material Y at 30 per kg
A standard loss of 10% of input is expected in production.
The cost records for a period showed the following usage:
110 kg of material X at Rs. 18 per kg
90 kg of material Y at Rs. 32 per kg
The quantity produced was 182 kg of good products. Calculate the following;
(i)      Material Cost Variance
(ii)    Material Price Variance
(iii)   Material Usage Variance
(iv)  Material Mix Variance
(v)    Material Yield Variance
Or
(b) What is standard costing? How does it help in keeping control over cost? Point out its limitations.
7. (a) The balance Sheet of good Luck Co. Ltd as on 01.01.2012 and 31.12.2012 were as follows:
Liabilities
1.1.2012
31.12.2012
Assets
1.1.2012
31.12.2012
Share Capital
Long-term Debts 
Retained Earnings
Accumulated Depreciation
Sundry Creditor
50000
14000
28000
21000
2000
5300
13000
37000
25000
21000
Cash
Account Receivables
Inventories
Other Current Assets
Fixed Assets
20000
24000
31000
8000
50000
25000
27000
32000
7000
58000
133000
149000
133000
149000
Additional information:
(i)      Fixed Assets costing Rs. 12000 were purchased during 2012 for cash
(ii)    Fixed Assets (original cost Rs. 4000, accumulated depreciation Rs. 15000) were sold at book value
(iii)   Depreciation for the year 2012 amounted to Rs. 5500, which has been debited to Profit & Loss A/C
(iv)  During 2012 dividend paid 3000
(v)    You are required to prepare Cash Flow Statement as per AS-3 (Revised). 
Or
(b) What is Funds Flow Statement? Explain its managerial use.
Ans: Meaning of funds flow statement:
The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. Financial statements are not helpful in analysing such situation. Therefore, a statement of the sources and applications of funds is prepared which indicates the utilisation of working capital during an accounting period. This statement is called Funds Flow statement.
In popular sense the term ‘fund’ is used to denote excess of current assets over current liabilities.
According to R.N. Anthony, “Fund Flow is a statement prepared to indicate the increase in cash resources and the utilization of such resources of a business during the accounting period.”
According to Smith Brown, “Fund Flow is prepared in summary form to indicate changes occurring in items of financial condition between two different balance sheet dates.”
From the above discussion, it is clear that the fund flow statement is statement summarising the significant financial change which have occurred between the beginning and the end of a company’s accounting period.
Importance of Funds Flow Statement
A funds flow statement is an essential tool for the financial analysis and is of primary importance to the financial management. The basic purpose of funds flow statement is to reveal the changes in the working capital on two balance sheet dates. It also describes the source from which additional working capital has been financed and the uses to which working capital has been applied. By making use of projected funds flow statement the management can come to know the adequacy or inadequacy of working capital even in advance. One can plan the intermediate and long term financing of the firm, repayment of long term debts, expansion of the business, allocation of resources etc. The significance of funds flow statement are explained as follows:
(1) Analysis of Financial Position: Funds flow statement is useful for long term financial analysis. Such analysis is of great help to management, shareholders, creditors, brokers etc. It helps in answering the following questions:
(i) Where have the profits gone?
(ii)  How was it possible to distribute dividends in absence of or in excess of current income for the period?
(iii) How was the sale proceeds of plant and machinery used?
(iv) How was the sale proceeds of plant and machinery used?
(v) How were the debts retired?
(vi) What became to the proceeds of share issue or debenture issue?
(vii) How was the increase in working capital financed?
(viii) Where did the profits go?
Though it is not easy to find the definite answers to such questions because funds derived from a particular source are rarely used for a particular purpose. However, certain useful assumptions can often be made and reasonable conclusions are usually not difficult to arrive at.
(2) Evaluation of the Firm's Financing: One of the important use of this statement is that it evaluates the firm' financing capacity. The analysis of sources of funds reveals how the firm's financed its development projects in the past i.e., from internal sources or from external sources. It also reveals the rate of growth of the firm.
(3) Test of Adequacy: The funds flow statement analysis helps the management to test whether the working capital has been effectively used on not and whether the working capital level is adequate or inadequate for the requirement of business.
(4) An Instrument for Allocation of Resources: In modern large scale business, available funds are always short for expansion programmes and there is always a problem of allocation of resources. Funds flow statement helps management to take policy decisions and to decide about the financing policies and capital expenditure programmes for future.
(5) Guide for investors: The funds flow statement analysis helps the investors to decide whether the company has managed funds properly or not. It indicates the financial soundness of a company which helps the investor to decide whether to invest money in the company or not.
(6) A tool for Measuring credit worthiness: Funds flow statement indicates the credit worthiness of a company which helps the lenders to decide whether to lend money to the company or not.
(7) Future Guide: A projected funds flow statement can be prepared and resources can be properly allocated after an analysis of the present state of affairs. The optimal utilisation of available funds is necessary for the overall growth of the enterprise. A projected funds flow statement gives a clear cut direction to the management in this regard.
(8) It helps in lending or borrowing operations and policies: Lending institution, such as Banks, IFS, IDBI etc. also requires the funds flow statement besides the financial statements in order to know the credit worthiness of the concern and also its ability to convert assets into cash for making the payments at the scheduled time.

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