Friday, November 29, 2019

Management Accounting Solved Papers: November' 2018


2018 (November)
COMMERCE (General/Speciality)
Course: 503 (Management Accounting)
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
Time: 3 hours


CONCEPT OF FLEXIBLE BUDGET WITH SOLVED QUESTION PAPERS 
CONCEPT OF CASH BUDGET WITH SOLVED QUESTION PAPERS
1. (a) Write True or False:                              1x4=4
1)         Management accounting provides decision to the management.                    False, Information
2)         In marginal costing, the problem of over and under absorption of overhead is avoided.       True
3)         Machinery sold for cash is an application of fund.                    False, source
4)         Cash flow statement is useful for short-term financial analysis.        True
(b) Fill in the blanks:                          1x4=4

1)         Decrease in creditor is outflow of cash.
2)         Budgetary control is a system of controlling cost.
3)         Management Accounting is based on accounting information.
4)         Purchase of plant will mean decrease in working capital.
2. Write short notes on (any four):                                          4x4=16
a) Limitation of Management Accounting.
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.
b) Break-even point.
Ans: Break-even Point:
Break Even Point is the level of sales required to reach a position of no profit, no loss. At Break Even Point, the contribution is just sufficient to cover the fixed cost.  The organisation starts earning profit when the sales cross the Break Even Point.  Break Even Point can be calculated either in terms of units or in terms of cash or in terms of capacity utilization. It can be calculated as follows:
BEP in units = Fixed Cost / Contribution per unit
BEP in cash = Fixed Cost / P.V. Ratio
BEP in terms of capacity utilization = (BEP in units / Total capacity) x 100
c) Funds flow statement.
Ans: 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.
d) Profit-volume ratio.
Ans: Profit-Volume Ratio expresses the relationship between contribution and sales. It indicates the relative profitability of diff products, processes and departments. Higher the P/V ratio, more will be the profit and lower the P/V ratio lesser will be the profit. Hence, it should be the aim of every concern to improve the P/V ratio which can be done by increasing selling price, reducing variable cost etc.
It can be calculated as follows:
P/V ratio = (S – VC)/ S  X 100
= Cont / Sales X 100
= Change in profit or loss / Change in sales
Uses of P/V Ratio:
1. To compute the variable costs for any volume of sales.
2. To measure the efficiency or to choose a most profitable line. The overall profitability of the firm can be improved by increasing the sales/output of a product giving a higher PV ratio.
3. To determine break-even point and the level of output required to earn a desired profit.
4. To decide more profitable sales-mix.
e) Contribution.
Ans: Contribution is the excess of sales over marginal cost. It is not purely profit. It is the profit before recovery of fixed assets. Fixed costs are first met out of contribution and only the remaining amount is regarded as profit. Contribution is an index of profitability. It has a fixed relationship with sales. Larger the sales more will be the contribution and vice versa. Contribution = Sales – Marginal cost or Fixed cost + profit.
Advantages of contribution:
a) It helps in fixation of selling price.
b) It assists in determining the break even point.
c) It helps the management in selection of suitable product mix.
d) It helps the management in taking make or buy decision.
e) It helps in taking decision regarding adding a new product.

3. (a) What do you mean by Management Accounting? How does management accounting differ from cost accounting? 4+10=14
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.
Difference between Cost accounting and Management Accounting
Cost accounting and Management accounting are two modern branches of accounting. Both the systems involve presentation of accounting data for the purpose of decision making and control of day-to-day activities. Cost accounting is concerned not only with cost ascertainment, but also cost control and managerial decision making.
Management accounting makes use of the cost accounting concepts, techniques and data. The functions of cost accounting and management accounting are complimentary. In cost accounting the emphasis is on cost determination while management accounting considers both the cost and revenue. Though it appears that there is overlapping of areas between cost and management accounting, the following are the differences between the two systems.
Basis
Cost accounting
Management accounting
a)   Purpose
The main objective of cost accounting is to ascertain and control the cost of products or services.
The function of management accounting is to provide information to management for efficiently performing the functions of planning, directing, and controlling.
b)   Emphasis
Cost accounting is based on both historical and present data.
Management according deals with future projections on the basis of historical and present cost data.
c)    Principles
Established procedures and practices are followed in cost accounting.
No such prescribed practices are followed in Management accounting.
d)   Data
Cost accounting uses only quantitative information.
Management accounting uses both qualitative and quantitative information.
e)   Scope
Cost accounting is concerned mainly with cost ascertainment and control.
Management accounting includes, financial accounting, cost accounting, budgeting, tax planning and reporting to management.
f)    Status
The Status of cost accountants comes after management accountant.
Management accountant is senior in position to cost accountant.
g)   Tools and techniques
It has standard costing, variable costing, break even analysis etc. as the basic tools and techniques.
Along with these, management accountant has funds and cash flow statements, ratio analysis etc. as his tools and techniques.
h)   Installation
It can be installed without management accounting.
It needs financial and cost accounting as its base for its installation.
Or
(b) Explain the various characteristics of Management Accounting. Discuss the various tools and techniques of management accounting.                            6+8=14
Ans: Characteristics or Nature of management accounting
The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics of management accounting:
1.          Providing Accounting Information. Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.
2.          Cause and Effect Analysis. Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss Management accounting goes a step further. The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studies. So the study of cause and effect relationship is possible in management accounting.
3.          Use of Special Techniques and Concepts. Management accounting uses special techniques and concepts to make accounting date more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.
4.          Taking Important Decisions. Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The historical date is studies to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.
5.          Achieving of Objectives. In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical date is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be take at once. All this is possible with the help of budgetary control and standard costing.
6.          No Fixed Norms Followed. In financial accounting certain rules are followed for preparing different accounting books. On the other hand, no specific rules are followed in management accounting. Though the tools of management accounting are the same but their use differs from concern to concern. The analysis of data depends upon the person using it. The deriving of conclusion also depends upon the intelligence of the management accountant. Every concern uses the figures in its own way. The presentation of figures will be in the way which suits the concern most. So every concern has its own rules and by – rules for analyzing the data.
Tools and Techniques Used in Management Accounting
Management accountant supplies information to the management so that latter may be able to discharge all its functions, i.e., planning organization, staffing, direction and control sincerely and faithfully. For doing this, the management accountant uses the following tools and techniques.
1.       Financial planning: Financial planning is the act of deciding in advance about the financial activities necessary for the concern to achieve its primary objectives. It includes determining both long term and short term financial objectives of the enterprise, formulating financial policies and developing the financial procedure to achieve the objectives. The role of financial policies cannot be emphasized to achieve the maximum return on the capital employed. Financial policies may relate to the determination of the amount of capital required, sources of funds, govern the determination and distribution of income, act as a guide in the use of debt and equity capital and determination of the optimum level of investment in various assets.
2.       Analysis of financial statements: The analysis is an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. The techniques of such analysis are comparative financial statements, trend analysis, funds flow statement and ratio analysis. This analysis results in the presentation of information which will help the business executive, investors and creditors.
3.       Historical cost accounting: The historical cost accounting provides past data to the management relating to the cost of each job, process and department so that comparison may be make with the standard costs. Such comparison may be helpful to the management for cost control and for future planning.
4.       Standard costing: Standard costing is the establishment of standard costs under most efficient operating conditions, comparison of actual with the standard, calculation and analysis of variance, in order to know the reasons and to pinpoint the responsibility and to take remedial action so that adverse things may not happen again. This aspect is necessary to have cost control.
5.       Budgetary control: The management accountant uses the total of budgetary control for planning and control of the various activities of the business. Budgetary control is an important technique of directing business operations in a desired direction, i.e. achieve a satisfactory return on investment.
6.       Marginal costing: The management accountant uses the technique of marginal costing, differential costing and break even analysis for cost control, decision-making and profit maximization.
7.       Funds flow statement: The management accountant uses the technique of funds flow statement in order to analyze the changes in the financial position of a business enterprise between two dates. It tells wherefrom the funds are coming in the business and how these are being used in the business. It helps a lot in financial analysis and control, future guidance and comparative studies.
8.       Cash flow statement: A funds flow statement based on increase or decrease in working capital is very useful in long-range financial planning. It is quite possible that these may be sufficient working capital as revealed by the funds flow statement and still the company may be unable to meet its current liabilities as and when they fall due. It may be due to an accumulation of investments and an increase in trade debtors. In such a situation, a cash flow statement is more useful because it gives detailed information of cash inflow and outflow. Cash flow statement is an important tool of cash control because it summarizes sources of cash inflow and uses of cash outflows of a firm during a particular period of time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise.
9.       Decision making: Whenever there are different alternatives of doing a particular work, it becomes necessary to select the best out of all alternatives. This requires decision on the part of the management. The management accounting helps the management through the techniques of marginal costing, capital budgeting, differential costing to select the best alternative which will maximize the profits of the business.
10.   Revaluation accounting: The management accountant through this technique assures the maintenance and preservation of the capital of the enterprise. It brings into account the impact of changes in the prices on the preparation of the financial statements.
11.   Statistical and graphical techniques: The management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such form so that it may help the management in decision-making. The techniques used are Master Chart, Chart of sales and Earnings, Investment chart, Linear Programming, Statistical Quality control, etc.
12.   Communication (or Reporting): The success for failure of the management is dependent on the fact, whether requisite information is provided to the management in right form at the right time so as to enable them to carry out the functions of planning controlling and decision-making effectively. The management accountant will prepare the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organization of data and selecting the appropriate method of reporting.
4. (a) From the following Balance Sheets of X Ltd. Co. for the years 2014-15 and 2015-16, make out –
1)         Schedule of changes in the working capital;
2)         Statement of sources and application of fund:                                                                                         7+7=14
Capital and Liabilities
31.03.2015
31.03.2016
Equity Share Capital
8% Redeemable Preference Share
Capital Reserve
General Reserve
Profit & Loss A/c
Proposed Dividends
Sundry Creditors
Bills Payable
Expenses Due
Provision for Taxation
3,00,000
1,50,000
-
40,000
30,000
42,000
25,000
20,000
30,000
40,000
4,00,000
1,00,000
20,000
50,000
48,000
50,000
47,000
16,000
36,000
50,000

6,77,000
8,17,000
Assets
31.03.2015
31.03.2016
Goodwill
Plant
Land
Investment
Sundry Debtors
Stock-in-Trade
Bills Receivable
Cash in Hand
Cash at Bank
Preliminary Expenses
1,00,000
80,000
2,00,000
20,000
1,40,000
77,000
20,000
15,000
10,000
15,000
80,000
2,00,000
1,70,000
30,000
1,70,000
1,09,000
30,000
10,000
8,000
10,000

6,77,000
8,17,000
Additional Information:
1)         A machine has been sold for Rs. 10,000. The written down value of the machine was Rs. 12,000. Depreciation of Rs. 10,000 is charged on plant in 2015-16.
2)         A piece of land had been sold out in 2015-16 and profit on sale has been credited to capital reserve.
3)         The investment is trade investment; Rs. 3,000 is received by way of dividends including Rs. 1,000 from pre-acquisition which have been credited to Investment A/c.
4)         An interim dividend of Rs. 20,000 has been paid in 2015-16.
Or
(b) What is Cash Flow Statement? How is it prepared? Distinguish between a Cash Flow Statement and a Cash book. 3+7+4=14
Ans: 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.
Preparation of Cash flow statement/Various activities under cash flow statement (AS-3)
Cash flow statement is a statement which shows the movement of cash and cash equivalents over a particular period of time. It comprised of three sections: Operating activities, investing activities and financing activities. There are two methods of preparing cash flow statement: the direct method preferred by FASB and indirect method preferred by most businesses because of its simplicity. The difference between the two methods lies in the operating section only. Investing and financing activities calculation are same under both the methods.
A) Section one: Cash flow from operating activities: Operating activities are the principal revenue generating activities of the business. These are cash flows from regular course of operations such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities.
Examples of Operating Activities:
Ø  Cash receipts from the sale of goods and rendering of services. (Source)
Ø  Cash payments to suppliers of goods and services. (application)
Ø  Cash receipts from royalties, fees, commission and other revenue. (Source)
Ø  Cash payments to and on behalf of employees for wages, etc. (application)
Ø  Cash payments and refunds of income taxes. (application)
Under indirect method cash flow from operating activities is calculated with the help of net profit before tax and extraordinary items. Non-cash and non-operating expenses and losses are added and non-cash and non-operating incomes are deducted from net profit before tax and extraordinary items to find net cash flow from operating activities before working capital change. After this changes in working capital is adjusted and payment of taxes during the year is deducted to find cash flow from operating activities.
B) Section two: Cash from investing activities: The investing activities of a business include all cash flow arises due to acquisition and disposal of long term assets (whether tangible and intangible) and investments. Acquisition or disposal of companies also comes under investing activities. These are separately discloses in cash flow statement.
Examples of Investing Activities:
Ø  Cash payments to acquire long term fixed assets (tangible and intangible) and investments. (application)
Ø  Cash receipts from the disposal of long term fixed assets (including intangibles) and investments. (Source)
Ø  Cash payments for purchase or of shares, warrants, or debt instruments of other enterprises and interest in joint ventures. (application)
Ø  Cash receipts from sale of shares, warrants, debt instruments of other enterprises and interest in joint ventures. (source)
Ø  Cash receipts from repayments of advances and loans made to third parties. (source)
All the sources of cash from investing activities are added and all the applications of cash in investing activities are deducted to find net cash flow from investing activities.
C) Section three: Cash flows from financing activities: Financing activities are the activities which results in changes in the size and composition of the owner’s capital and borrowings of the enterprises from other sources. 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. Dividends and Interest paid are also come under financing activities. 2
Examples of Financing Activities: (Sources and applications of cash flow)
Ø  Cash proceeds from the issue of shares or other similar instruments. (source)
Ø  Cash proceeds from the issue of debentures, loans, bonds and other short term borrowings. (source)
Ø  Buy-back of equity shares. (application)
Ø  Cash repayments of the amounts borrowed including redemption of debentures. (application)
Ø  Payments of dividends and interest on borrowings. (application)
All the sources of cash from financing activities are added and all the applications of cash in financing activities are deducted to find net cash flow from financing activities.
Last section – Bottom line: All the cash flows from three sections are added to find net cash flow during the year. Thereafter opening balance of cash and cash equivalent s are added with this amount and the resulting amount will be the closing balance of cash and cash equivalents. Here cash and cash equivalents means:
Cash: Cash comprises cash on hand and demand deposits with banks.
Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that are readily convertible cash. Examples of cash equivalents are: (a) treasury bills, (b) commercial paper, (c) money market funds and (d) Investments in preference shares and redeemable within three months.            (2018)
Format of Cash Flow Statement under Indirect Method
Particulars
Amount
A.      Cash Flow from operating activities:
Net Surplus before tax and extraordinary items
Add: Non operating/non-cash expenses
Less: Non operating/non-cash income

++++++++
++++++++
------------
Net cash flow from operating activities before change in W.C
Effect of change in working capital:
Increase in current assets
Decrease in current assets
Increase in Current Liabilities 
Decrease in current liabilities
++++++++

-----------
+++++++
+++++++
----------

Less: Payment of taxes net of tax refund
+++++++
-----------
1. Cash Flow from operating activities
B.      Cash Flow from Investing activities:
Sources of cash                                       
Applications of cash                                
+++/---

++++++
---------
2. Cash flow from investing activities
C.      Cash Flow from Financing activities:
Sources of cash                                       
Applications of cash                           
+++/----

++++++
---------
3. Cash flow from Financing activities
+++/---
D.      Cash Flow during the year (1 + 2 + 3)
Add: Opening balance of cash & cash equivalent
++++/----
+++++++
Closing balance of cash & cash equivalent
+++++++
Difference between Cash flow statement and Cash Book:
Basis
Cash Flow Statement
Cash Budget
Meaning
It means inflows and outflows of cash and cash equivalents.
It is a book of prime or original entry where every transaction is recorded first.
Objective
It is prepared to explain to management the sources of cash and its uses during a particular period of time.
It is prepared to record the receipts and payments for the accounting year.
Coverage
It summarises effect of specific cash transactions into three categories operating, investing and financing activities of an enterprise during a period in prescribed format.
Each and every transaction is recorded in cash book in chronological order.
Technique of analysis
It is a technique of past analysis.
It is a technique of future financial forecasting.
Period
It is prepared at the end of the accounting year.
It is prepared during the accounting year.
Nature
It is a statement.
It is a journal.

5. (a) The following data are available in a manufacturing company for the half-year period ending on 30th September, 2017:

Rs. (in lakhs)
Fixed Expenses:
Wages and salaries                                                                    8.4
Rent, rates and taxes                                                                5.6
Depreciation                                                                               7.0
Sundry administrative expenses                                             8.9

Semi variable expenses:
Maintenance and repairs                                                        2.5
Indirect labour                                                                           9.9
Sales department salaries                                                       2.9
Sundry administrative expenses                                            2.6

Variable expenses @ 50% of capacity
Materials                                                                                  24.0
Labour                                                                                      25.6
Other expenses                                                                        3.8





29.9





17.9




53.4

It is assumed that fixed expenses remain constant for all levels of production; semi variables expenses remain constant between 45% and 65% of capacity, increasing by 10% between 65% and 80% of capacity and 20% between 80% and 100% of capacity.
Sales at the various levels are

Rs. (in lakhs)
60% capacity
75% capacity
90% capacity
100% capacity
100
120
150
170
Prepare a flexible budget for the half-year and forecast at 60%, 75%, 90% of capacity.                                                    14
Or
(b) Define the budgetary control. Explain the objectives and limitations of budgetary control.                                 3+5+6=14
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.
6. (a) The profit volume ratio of X Ltd. Co. is 40% and margin of safety is also 40%. Work out the following if the sales volume is Rs. 1.50 lakhs.                                                                3+3+4+4=14
1)         Break-even point.
2)         Net Profit.
3)         Fixed cost.
4)         Sales required to earn a profit of Rs. 30,000.
Or
(b) Define marginal costing. What are the advantages and disadvantages of marginal costing?                                 3+6+5=14
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’.
Advantages of Marginal Costing
a)      Simple and Easy: It is very simple to understand and easy to operate.
b)      Helpful in Cost control: Marginal costing divides total cost into fixed and variable cost. Marginal costing by concentrating all efforts on the variable costs can control total cost.
c)       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.
d)      Evaluation of Performance: The different products and divisions have different profit earning potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector.
e)      Helpful in Decision Making: It is a technique of analysis and presentation of costs which help management in taking many managerial decisions such as make or buy decision, selling price decisions, Key or limiting factor, Selection of suitable Product mix etc.
f)       Production Planning: It helps the management in Production planning. The effect of alternative production policy can be readily available and decision can be taken that would yield the maximum return to Business.
g)      It removes the complexities of under-absorption of overheads.
h)      The distinction between product cost and period cost helps easy understanding of marginal cost statements.
Disadvantages of Marginal Costing
a)      It is based on an unrealistic assumption that all costs can be segregated into fixed and variable costs. In the long term sales price, fixed cost and variable cost per unit may vary.
b)      All costs are not divisible into fixed and variable. There are certain costs which are semi-variable in nature. The separation of costs into fixed and variable is difficult and sometimes gives misleading results.
c)       Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from Stock Valuation affects profit, and true and fair view of financial affairs of an organization.
d)      Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories.
e)      It can correctly assess the profitability on a short-term basis only, but for long term it is not effective.
f)       It does not provide any effective yardstick for evaluation of performance.
g)      Contribution of marginal costing is not a foolproof indicator of profitability.
h)      Marginal cost, if confused with total cost while fixing selling price may lead to a disaster.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. (a) Write True or False:                                                                                                                                             1x4=4
1)         Publication of Management Accounting Report is not compulsory.                                 True
2)         Contribution is the difference between sales and total cost of sales.             False, sales -vc
3)         Budgeting may be said to be an act of determining costing standards.           False     
4)         Idle Time Variance = Idle Hours x Standard Rate.                     False
(b) Fill in the blanks:                                                                                                                                                        1x4=4
1)         Direct Labour Cost Variance = Standard Cost for actual production x actual Cost of Production.
2)         Goodwill is a non-cash transaction.
3)         Zero-base budgeting was first used by carter.
4)         Accounting is an art of recording financial transactions.
2. Write short notes on (any four):                                                                                                                           4x4=16
a)         Margin of safety.
b)         Zero-base budgeting.
c)          Make or buy decision.
d)         Responsibility accounting.
e)         Material cost variance.
3. (a) Discuss the concept of Management Accounting. How can management accounting be useful to the management? What are its limitations?                                               4+4+4=12
Or
(b) Explain the role of Management Accountant in a business enterprise.                                         12
4. (a) From the following Balance Sheets of Y Ltd. as on 31st December, 2015 and 31st December, 2016, you are required to prepare:
1)         A schedule of changes in working capital;
2)         A fund flow statement:                                                                                                                                       5+6=11
Liabilities
2015
2016
Assets
2015
2016
Share Capital
General Reserve
Profit & Loss A/c
Sundry Creditors
Bills Payable
Provision Taxation
Provision for
 Doubtful Debts
1,00,000
14,000
16,000
8,000
1,200
16,000

400
1,00,000
18,000
13,000
5,400
800
18,000

600
Goodwill
Building
Plant
Investment
Stock
Bills Receivable
Debtors
Cash at Bank
12,000
40,000
37,000
10,000
30,000
2,000
18,000
6,600
12,000
36,000
36,000
11,000
23,400
3,200
19,000
15,200

1,55,600
1,55,800

1,55,600
1,55,800
The following additional information has also given:
1)         Depreciation charged on plant was Rs. 4,000 and on Building Rs. 4,000.
2)         Provision for taxation of Rs. 19,000 was made during the year 2016.
3)         Interim dividend of Rs. 8,000 was paid during the year 2016.
Or
(b) Explain the procedure of preparing a cash flow statement.                                                                               11
5. (a) A company wishes to prepare cash budgets from January. Prepare a cash budget for the first six months from the following estimated revenue and expenditure:                                                                                                                 11
Months
Total Sales
Rs.
Materials
Rs.
Wages
Rs.
Production
Overhead
January
February
March
April
May
June
20,000
22,000
24,000
26,000
28,000
30,000
20,000
14,000
14,000
12,000
12,000
12,000
4,000
4,400
4,600
4,600
4,800
4,800
3,200
3,300
3,300
3,400
3,500
3,600
Cash balance on 1st January was Rs. 20,000. A new machine is to be installed at Rs. 30,000 on credit, to be repaid by two equal installments in March and April.
Sales commission @ 5% on total sales is to be paid within the month following actual sales. Rs. 10,000 being the amount of 2nd call may be received in March. Share premium amounting to Rs. 2,000 is also obtainable with 2nd call:
Period of credit allowed by suppliers – 2 months
Period of credit allowed to customers – 1 month
Delay in payment of overhead – 1 month
Delay in payment wages – 1/2 month
Assume cash sales to be 50% of total sales.
Or
(b) What do you mean by budgetary control? State the objectives and limitations of budgetary control.                   3+4+4=11
6. (a) The following details relating to the product X during the month of March 2017 are available. You are required to compute the material and labour cost variance and also reconcile the standard and the actual cost with the help of such variances.            2+3+3+3=11
Standard cost per unit:
Material – 50 kg @ Rs. 40 per kg
Labour – 400 hours @ Rs. 1 per hour
Actual cost for the month:
Material – 4900 kg @ Rs. 42 per kg
Labour – 39600 hours @ Rs. 1.10 per hour
Or
(b) What do you mean by standard costing? Discuss the usefulness of standard costing.                3+8=11
7. (a) From the following information, calculate –
1)         P/V ratio;
2)         Break-even point;
3)         Margin of safety.
If the selling price is reduced to Rs. 90, by how much is the margin of safety reduced?    2+3+3+3=11

Rs.
Total sales
Selling price (per unit)
Variable cost
Fixed cost
3,00,000
100
40
90,000
Or
(b) Define marginal costing. Discuss its contribution to the management in decision making.   5+6=11

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