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Saturday, November 17, 2018

Management Accounting Solved Papers: November' 2014

2014 ( November)
( General / Speciality)
Course : 503
( Management Accounting )
The figures in the margin indicate full marks for the questions.                                                                       
1.    (a) Write True or False.                          1x4=4
1)      Profit changes in the same proportion of the changes in contribution.                            False
2)      A system of budgetary control cannot be used in an organization where standard costing is in use.   False
3)      Cash Flow Statement is a statement of sources and application of cash during a particular period of time.      True
4)      In management accounting, only those figures are used which can be measured in monetary terms.                        False
(b) Fill in the blanks:        1x4=4

a)      P/V ratio exhibits the percentage of contribution included in Sales.
b)      Repayment of borrowing causes cash Outflow.
c)       Accounting information is analysed and interpreted to make it useful.
d)      Master budget is a summary of all functional budget.
2. Write short notes on any four of the following:                           4x4=16


a)      Absorption costing
Ans: Absorption costing
As the name suggests, absorption costing is the method of costing in which the entire cost of manufacturing a product or providing a service is absorbed in it. In contrast to the variable costing (Activity based costing) method, it includes both fixed and variable costs for absorption in addition to the direct costs. As all the costs incurred are absorbed, this method is also sometimes referred to as Full absorption costing or Total absorption costing (TAC).
Variable costing is generally used for the managerial decision making whereas as per the Generally Accepted Accounting Principles (GAAP), an organization is bound to use the absorption costing method for financial reporting purposes.
Advantages and Disadvantages of Absorption Costing System
Advantages of Absorption Costing System
1. Absorption costing recognizes fixed costs in product cost. As it is suitable for determining price of the product. The pricing based on absorption costing ensures that all costs are covered.
2. Absorption costing will show correct profit calculation than variable costing in a situation where production is done to have sales in future (e.g. seasonal production and seasonal sales).
Disadvantages of Absorption Costing System
1. Absorption costing is not useful for decision making. It considers fixed manufacturing overhead as product cost which increase the cost of output. As a result, it does not help in accepting specially offered price for the product. Various types of managerial problems relating to decision making can be solved only with the help of variable costing system.
2. Absorption costing is not helpful in control of cost and planning and control functions. It is not useful in fixing the responsibility for incurrence of costs. It is not practical to hold a manager accountable for costs over which he/she has not control.
b)      Zero-base budgeting
Ans: Zero Based Budgeting
ZBB is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’.
Zero – base budgeting is so called because it requires each budget to be prepared and justified from zero, instead of simple using last year’s budget as a base. In Zero Based budgeting no reference is made to previous level expenditure. Zero based budgeting is completely indifferent to whether total budget is increasing or decreasing. 
‘Zero base budgeting’ was originally developed by Peter A. Pyher at Texas Instruments. Peter A. Pyher has defined ZBB as “an operating, planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why we should spend any money at all”.
CIMA has defined it “as a method of budgeting whereby all activities are revaluated each time a budget is set."
c)       Make or buy decision
Ans: 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.

3. (a) “Management Accounting is nothing more than the use of financial information for management purposes.” Explain this statement and clearly distinguish between Financial Accounting and Management Accounting. 4+7=11
Ans: The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.
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, Management Accounting is nothing more than the use of financial information for management purposes.
Difference between Financial Accounting and Management Accounting
Financial accounting
Management accounting
a)      Objectives
The main objective of financial accounting is to supply information in the form of profit and loss account and balance sheet to outside parties like shareholders, creditors, government etc.
The main objective of management accounting is to provide information for the internal use of management.

b)      Performance
Financial accounting is concerned with the overall performance of the business.
Management accounting is concerned with the departments or divisions. It report about the performance and profitability of each of them.

c)       Data
Financial accounting is mainly concerned with the recording of past events.
Management accounting is concerned with future plans and policies.
d)      Nature
Financial accounting is based on measurement.
Management accounting is based on judgment.
e)      Accuracy
Accuracy is an important factor in financial accounting.
Approximations are widely used in management accounting.
f)       Legal Compulsion
Financial accounting is compulsory for all joint stock companies.
Management accounting is optional.

g)      Monetary transactions
Financial accounting records only those transactions which can be expressed in terms of money.
Management accounting records not only monetary transactions but also non- monetary events.
h)      Control
Financial accounting will not reveal whether plans are properly implemented.
Management accounting will reveal the deviations of actual performance from plans. It will also indicate the causes for such deviations.
i)        Stock Valuation
In cost accounts stocks are valued at cost.
In financial accounts, stocks are valued at cost or realisable value, whichever is lesser.

j)        Analysis of Profit and Cost
Cost accounts reveal Profit of Loss of different products, departments separately.
In financial accounts, the Profit or Loss of the entire enterprise is disclosed into.
(b) Explain the role of management accountant in a business enterprise.                    11
Ans: Role of Management Accountant
For efficient and effective management of an enterprise management needs financial information in understandable form. The management accountant being principle officer in charge of account of the company plays a significant role in providing relevant financial information needed for day to day as well as strategic decision. The role of management accountant in this direction includes:
a)      Planning for control: Management accountant establishes relationship between various sub-ordinates and maintains an integrated plan for the control of operation.
b)      Reporting: Management accountant measures performance against given plans and standards. The results of operations are interpreted to all levels of management. This function will include installation of accounting and costing system and recording of actual performance so as to find out deviations, if any.
c)       Evaluating: He should evaluate various policies and programmes. The effectiveness of planning and procedures to attain the objectives of the organization will depend upon the caliber of the management accountant.
d)      Administration of Tax: Management accounting is expected to report to government agencies as required under different laws and to supervise all matters relating to taxes.
e)      Appraisal of External Effects: He is to assess the effects of various economic and fiscal policies of the government and also to evaluate the impact of other external factors on the attainment of organizational objects.
f)       Protection of Assets: The protection of business assets is another function assigned to the management accountant. This function is performed through the maintenance of internal control, auditing and assuring proper insurance coverage of assets.
4. (a) The following are the Condensed Balance Sheet of P Ltd. at the end of 2012 and 2013 :     
Capital and Liabilities
2012 (Rs.)
2013 (Rs.)

Equity Share Capital

Reserve and Surplus

6% Debenture

Sundry Creditors

Outstanding Expenses

Provision for Depreciation

Provision for Income Tax

Proposed Dividend

Provision for Bad Debts


2012 (Rs.)
2013 (Rs.)
Land and Building
Plant and Machinery
Debenture Issue Expenses
Preliminary Expenses
Bills Receivable
Cash in Hand and at bank

Additional Information :
a)      Income tax paid in 2013 was Rs. 35,000.
b)      An old machinery was sold for Rs. 44,000 the cost and written down value of which were Rs. 60,000 and Rs. 40,000 respectively.
c)       Bonus share at 2 for every 3 equity shares were issued out of accumulated reserve and surplus.
d)      Out of the proposed dividend for 2012, only Rs. 30,000 was paid in 2013, and in addition to that in interim dividend for Rs. 25,000 was paid in the same year.
Prepare a Fund Flow Statement and Statement of Change in Working Capital of the company for the year that ended on 31st December, 2013.                     12
(b) Discuss briefly the classification of activities as prescribed in AS-3 for preparation of Cash Flow Statement and give three examples of each such class of activities.
Ans: Cash Flow Statement:
A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.
A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.
Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.
The revised Accounting Standard [ AS-3] has made the following classification in respect of cash flows.
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
1. Cash flow from operating activities: These are cash flows from regular course of operations. The operations of a firm include manufacturing, trading, rendering of services etc. Examples of cash flows from operating activities are:
a. Cash sales
b. Cash received from debtors on account of credit sales
c. Cash purchase of goods
d. Cash paid to suppliers on account of credit purchases
e. Wages paid to employees and staff
f. Cash operating expenses
g. Income from investing activities
2. Cash from investing activities: The investing activities of a business include purchase and sale of fixed assets like land buildings, equipments, machinery etc. Acquisition or disposal of companies also comes under investing activities. These are separately discloses in cash flow statement. E.g.
a. Cash payments to acquire fixed assets
b. Cash receipts from disposal of fixed assets
c. Cash payments to acquire shares, debt instruments or warrants
d. Cash receipts from disposal of shares
e. Cash advances and loans made to third parties
3. Cash flows from financing activities: The financing activities of a firm include issuing or redemption of share capital, issue and redemption of debentures , raising and repayment of long term loans etc. these are items changing the owners equity and debt capital during an accounting year. Dividends paid to shareholders also come under financing activities. E.g.
a. Cash proceeds from issuing shares or other similar instruments
b. Cash proceeds from issuing debentures, loans, notes , bonds and other short or long term borrowings and
c. Cash repayments of amounts borrowed such as redemption of debentures, bonds, preference shares.
5. (a) (i) A company produces a single product which sells of Rs. 20 per unit. The variable cost is Rs. 15 per unit and the fixed overhead for the year is Rs. 6,30,000. You are required to calculate:
(1) the sales value needed to earn a profit of 10% on sales;
(2)the sales price per unit to bring the BEP down to 120000 units.                                                            3+4=7
(ii) The ratio variable cost of sales in given to be 70%. The break-even point occurs at 60% of capacity sales. Find the capacity sales when fixed costs are Rs. 1,50,000 and also determine profit at 80% sales.               2+2=4
(b) Define marginal costing and discuss its contributions to the management in decision-making.             5+6=11
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” is a valuable aid to Management
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:
a)      To maintain production and to keep employees occupied during a trade depression.
b)      To prevent loss of future orders.
c)       To dispose of perishable goods.
d)      To eliminate competition of weaker rivals.
e)      To introduce a new product.
f)       To help in selling a co-joined product which is making substantial profit?
g)      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.
6. (a) From the following information relating to 1987 and conditions expected to prevail in 1988, prepare a budget for 1988. Assume the rate of depreciation as 10%                                                   11
Sales – Rs. 1,00,000 (40000 units)
Raw Materials – Rs. 53,000
Wages – Rs. 11,000
Variable Overheads – Rs. 16,000
Fixed Overheads – Rs. 10,000
Sales – Rs. 1,50,000 (60000 units)
Raw Materials – 5% price increase
Wages :
10% increase in wage rates
5% increase in productivity
Additional Plant :
One lathe – Rs. 25,000
One drill – Rs. 12,000
(b) Explain the objects and limitations of budgetary control.                      5+6=11
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”.
Objectives of Budgetary Control:
The following are the objectives of a budgetary control system:
a)      Planning: A budget provides a detailed plan of action for a business over definite period of time. Detailed plans relating to production, sales, raw material requirements, labour needs, advertising and sales promotion performance, research and development activities, capital additions etc., are drawn up. By planning many problems are anticipated long before they arise and solutions can be sought through careful study. Thus most business emergencies can be avoided by planning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for the anticipated conditions.
b)      Co-ordination: Budgeting aids managers in co-coordinating their efforts so that objectives of the organisation as a whole harmonise with the objectives of its divisions. Effective planning and organisation contributes a lot in achieving coordination. There should be coordination in the budgets of various departments. For example, the budget of sales should be in coordination with the budget of production. Similarly, production budget should be prepared in co-ordination with the purchase budget, and so on.
c)       Communication: A budget is a communication device. The approved budget copies are distributed to all management personnel who provide not only adequate understanding and knowledge of the programmes and policies to be followed but also gives knowledge about the restrictions to be adhered to. It is not the budget itself that facilitates communication, but the vital information is communicated in the act of preparing budgets and participation of all responsible individuals in this act.
d)      Motivation: A budget is a useful device for motivating managers to perform in line with the company objectives. If individuals have actively participated in the preparation of budgets, it act as a strong motivating force to achieve the targets.
e)      Control: Control is necessary to ensure that plans and objectives as laid down in the budgets are being achieved. Control, as applied to budgeting, is a systematized effort to keep the management informed of whether planned performance is being achieved or not. For this purpose, a comparison is made between plans and actual performance. The difference between the two is reported to the management for taking corrective action.
f)       Performance Evaluation: A budget provides a useful means of informing managers how well they are performing in meeting targets they have previously helped to set. In many companies, there is a practice of rewarding employees on the basis of their achieving the budget targets or promotion of a manager may be linked to his budget achievement record.
Limitations of Budgetary Control System:
The list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.
a)      The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.
b)      Danger of rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organization functioning.
c)       Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. ‘The budget should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.
d)      False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets.
e)      Lack of coordination: Staff co-operation is usually not available during budgetary control exercise.
f)       Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialized staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived there from.
7. (a) The standard material required to manufacture one unit of product X is 10 kg and the standard price per kg of material is Rs. 2.50. The cost accounts records however reveal that 11500 kg. of materials costing Rs. 27,600 were used for manufacturing 1000 units of product X. Calculate material variances.             11 Out of Syllabus
(b) Write a not on the advantages and application of standard costing. 6+5=11 Out of Syllabus

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