Management Accounting Solved Papers: November' 2019 | Dibrugarh University | B.Com 5th Sem

1) Management Accounting includes the development of a suitable system of internal audit for internal control.                                True

2) According to AS-5, cash flows for a period can be classified into three categories of cash inflow and cash outflow.                False, AS-3

3) Selling price is not based on marginal cost plus contribution.                   False

4) Long-term budgets should be prepared for control purposes.           False, Planning

(b) Fill in the blanks:                    1x4=4

1) Intuitive decision limits the usefulness of Management Accounting.

2) Budgeting may be said to be the act of Building Budgets.

3) Selling goods above the marginal cost can be followed only in a short period.

4) Income tax refund is an Inflow of cash.

2. Write short notes on any four of the following:             4x4=16

a) Zero-base budgeting.

Ans: 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."

b) Overhead.

Ans: Meaning of overheads: Aggregate of all expenses relating to indirect material cost, indirect labour cost and indirect expenses is known as Overhead. Accordingly, all expenses other than direct material cost, direct wages and direct expenses are referred to as overhead.

According to Wheldon, Overhead may be defined as "the cost of indirect material, indirect labour and such other expenses including services as cannot conveniently be charged to a specific unit."

Blocker and WeItmer define overhead as follows: "Overhead costs are operating cost of a business enterprise which cannot be traced directly to a particular unit of output. Further such costs are invisible or unaccountable."

c) Tools of Management Accounting.

Ans: Tools of 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.

a)      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.

b)      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.

c)       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.

d)      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.

d) Performance budgeting.

Ans: Performance Budgeting had its origin in U.S.A. after the Second World War. It tries to rectify some of the traditional budget. In the traditional budget amount are earmarked for the objects of expenditure such as salaries, travel, office expenses, grant in aid etc. In such system of budgeting the money concept was given more prominence i.e. estimating or projecting rupee value for the various accounting heads or classification of revenue and cost. Such system of budgeting was more popularly used in government departments and many business enterprises. But is such system of budgeting control of performance in terms of physical units or the related costs cannot be achieved.

Performance oriented budgets are established in such a manner that each item of expenditure related to a specific responsibility center is closely linked with the performance of that center. The basic issue involved in the fixation of performance budgets is that of developing work programmes and performance expectation by assigned responsibility, necessary for the attainments of goals and objectives of the enterprise, it involves establishment of well defined centers of responsibilities, establishment for each responsibility  center – a programme of target performance in physical units, forecasting the amount of expenditure required to meet the physical plan laid down and evaluation of performance.

e) Make-or-buy decision.

Ans: Sometimes a concern has to decide whether a certain product or a component should be made in the factory itself (having unused production facilities) or bought from outside from a firm which specialises in it. In taking such a ‘make or buy’ decision, the technique of marginal costing is of immense help. While deciding to ‘make or buy’ a distinction must be made between fixed cost variable cost, and the variable cost of manufacturing it should be compared with the price at which this component or product can be bought from outside. It is advisable to make than to buy if the variable (marginal) cost of the product or component is lower than the purchase price. But if the purchase price is lower than the marginal cost, it would be better to buy than to make itself. However, this decision is based upon the assumptions that fixed expenses do not increase and production facilities cannot be employed more profitably. Further, the irregularity of supply from outside, disclosure of business secrets and non-availability of surplus capacity, etc. may force a concern to make rather than to buy.

f) Differential cost.

Differential costing is concerned with the effect on costs and revenues if a certain course of action is undertaken. An accountant uses the term differential cost to describe the same costs that an economist calls incremental cost. Differential costs may be defined as the increases or decreases in total cost, or the change in specific elements of costs, that result from a variation in operations. Incremental costs have been defined as the additional costs of a change in the level or nature of activity. Any cost that changes as a result of a contemplated decision is a differential cost or incremental cost relating to that decision. Differential costing eliminates the residual costs which are the same under each alternative, and therefore irrelevant to the analysis.

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.   6+8=14

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”.

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.

From the above explanations, it is clear that management accounting is simply the use of accounting information for managerial purposes.

Difference between Financial Accounting and Management Accounting

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.

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	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.

Or

(b) Discuss, in detail, the functions of Management Accounting.          14

Management Accounting
Chapter Wise Notes	Chapter Wise MCQs
1. Introduction to Management Accounting 2. Funds Flow Statement 3. Cash Flow Statement 4. Marginal Costing 5. Budget and Budgetary Control Also Read: 6. Standard Costing and Variance analysis 7. Ratio Analysis	Management Accounting MCQs Marginal and Absorption Costing Budget and Budgetary Control Standard Costing Ratio Analysis Cash Flow Statement Funds Flow Statement Financial Statement and Financial Statements Analysis
Management Accounting Important Questions for Upcoming Exams (Dibrugarh University)
Management Accounting Solved Papers: 2013  2014 2015  2016 2017 2018 2019
Management Accounting Question Papers: 2013 2014 2015 2016 2017 2018 2019

Ans: 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) From the following Balance Sheets of X Ltd. Co. as on 31^st March, 2016 and 2017, prepare a Statement of Cash Flow as per AS-3:             14

Balance Sheets

Additional Information:

1)Dividend paid during the year Rs. 18,000.

2)Investment costing Rs. 5,000 was sold at a profit of 40%.

3)Fixed Assets costing Rs. 10,000 (provision for depreciation Rs. 4,000) were sold for Rs. 8,500.

4)Additional debentures amount to Rs. 50,000 were issued at par on 1^st August, 2016. Interest on Debenture has been paid regularly.

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Or

(b) Define the term ‘fund flow’. What are the purposes of preparing Funds Flow Statement? Write four limitations of Funds Flow Statement.                  2+8+4=14

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/Purpose 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.

Limitations of Funds Flow Statement

In spite of various uses of funds flow statement, it has the following limitations

1)      Historical: This statement only shows how the company has performed in the previous year and does not give much clarity of current and future costs of the company. Hence, realistic comparison of the profit position of the company is not shown. Also, projected fund flow statement is also not very accurate.

2)      Static: A fund flow statement takes into consideration two particular time periods for the purpose of analysis of working capital. Hence, it cannot depict continuous changes. Also, it does not take into consideration noncash items in the company which, in actual accounting, play an important role in many companies.

3)      Incomplete statement: This statement does not show the reasons behind changes in working capital. It only presents the changes in working capital in the form of statement.

4)      Non original statement:  It is not an original statement but simply re-arrangement of financial data over two accounting periods. It is due to this reason many companies avoid preparation of funds flow statement.

5)      Not a substitute: Since this statement only gives an idea of changes in working capital of the company, it cannot be used as a substitute of income statement or a balance sheet. It is only a supplement to them.

5. (a) Prepare a cash budget of six months up to December 31 from the information given below:      14

Cash balance on July 1 was expected to be Rs. 75,000.

Months	Sales	Material	Wages	Overhead
				Production	Administration	Selling	Distribution	R & D
April	50000	20000	5000	2200	1500	800	400	500
May	60000	30000	5600	2400	1450	850	450	500
June	40000	20000	4000	2500	1520	750	350	600
July	50000	30000	4200	2300	1480	850	450	600
August	60000	35000	4600	2600	1510	950	550	700
September	70000	40000	5000	2700	1540	1000	600	700
October	80000	45000	5200	2900	1560	1025	625	800
November	90000	50000	5400	3000	1570	1075	675	800
December	100000	55000	5800	3200	1600	1150	750	800

Expected capital expenditure:

1)Plant and Machinery to be installed in August at a cost of Rs. 20,000 will be payable on September 1.

2)Extension to research and development department amounting to Rs. 5,000 will be completed on August 1 payable Rs. 1,000 per month from completion date.

3)Under a hire-purchase agreement, Rs. 2,000 is to be paid each month.

4)A sales commission of 5% on sales is to be paid within the month following actual sales.

5)Period of credit allowed by suppliers 3 months, period of credit allowed to customer 2 months. Delay in payment of overheads 1 month. Delay in payment of wages 1/8 month.

6)Tax of Rs. 50,000 is due for payment on October 1. Preference share dividend of 10% on capital of Rs. 1, 00,000 is to be paid on November 1.

7)10% calls on ordinary share capital of Rs. 2,00,000 is due on July 1 and September 1.

8)Cash sales of Rs. 1,000 per month are expected no commission payable.

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Or

(b) Explain the meaning and objectives of sales budget. Distinguish between sales budgets and production budgets. 7+7=14

Ans: Sales Budget

Sales budget is one of the important functional budgets. Sales estimate is the commencement of budgeting may be both made in quantitative or in value terms. Sales budget is primarily concerned with forecasting of what products will be sold in what quantities and at what prices during the budget period. Sales budget is prepared by the sales executives taking into account number of relevant and influencing factors such as: Analysis of past sales, key factors, market conditions, production capacity, government restrictions, competitor’s strength and weakness, advertisement, publicity and sales promotion, pricing policy, consumer behaviour, nature of business, types of product, company objectives, salesmen’s report, marketing research’s reports, and product life cycle.

Objectives of Sales budget:

a) To assist in preparation of various operating budgets like production budget.

b) To help the management in knowing the weak areas of sales.

c) To know the potential sales value of various products which helps the management is taking decision regarding elimination of least sale product.

d) To help in formulation of marketing strategy by forecasting the detailed breakdown of sales on the basis of products, territories and customers.

e) To establish coordination between sales and expenses this helps the sales executives to restrict the expenses on sales.

Production Budget

Production budget is usually prepared on the basis of sales budget. But it also takes into account the stock levels desired to be maintained. The estimated output of business firm during a budget period will be forecast in production budget. The production budget determines the level of activity of the produce business and facilities planning of production so as to maximum efficiency. The production budget is prepared by the chief executives of the production department. While preparing the production budget, the factors like estimated sales, availability of raw materials, plant capacity, availability of labour, budgeted stock requirements etc. are carefully considered.

Difference between Sales Budget and Production Budget

a) A sales Budget is a schedule, which shows expected sales in both units and sales rupees for the coming period. Whereas a production budget determines only the quantity to be produced in coming period.

b) A sales Budget is not prepared on the basis of production budget. But a production budget is prepared on the basis of sales budget.

c) Stock levels are not shown in sales budget. But, a production budget takes into account the stock levels desired to be maintained.

d) Sales budget is prepared by the sales executives. Whereas, production budget is prepared by the chief executives of the production department.

e) Estimated selling price is shown in sales budget. Whereas, production budget helps in calculating production cost for estimated level of production.

6. (a) “Marginal costing is a very useful technique to management for cost control, profit planning and decision making.” Explain.      14

Ans: “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:

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.

Or

(b) From the following information, calculate (1) P/V ratio, (2) Break-even point and (3) Margin of safety, (4) If the selling price is reduced to Rs. 90 by how much is the margin of safety reduced?  3+3+4+4=14

	(Rs.)
Total sales Selling price per unit Variable cost per unit Fixed cost	3,60,000 100 50 1,00,000

Solution: Follow our YouTube Channel

(OLD COURSE)

Full Marks: 80

Pass Marks: 32

Time: 3 hours

1. (a) Write True or False:                             1x4=4

1) Management Accounting deals with the effect and impact of cost on the business.        False

2) Goods sold on credit in the source of fund.         False

3) P/V ratio exhibits the percentage of contribution included in fixed cost and profits.        False

4) Idle Time Variance = Idle time x Actual Rate.      False, standard labour rate

(b) Fill in the blanks:                    1x4=4

1) Cash Flow Statement is useful for short term financial planning.

2) Marginal costing is the aggregate of prime cost plus variable overhead.

3) Budgetary control is a controlling function.

4) Standard cost is a predetermined cost.

2. Write short notes on any four of the following:                             4x4=16

a) Fund from operation.

Ans: Funds From Operations or Trading Profits: Trading profits or the profits from operations of the business are the most important and major source of funds. Sales are the main source of inflow of funds into the business as they increase current assets (cash, debtors or bills receivable) but at the same time funds flow out of business for expenses and cost of goods sold. Thus, the net effect of operations will be a source of funds if inflow from sales exceeds the outflow for expenses and cost of goods sold and vice-versa. But it must be remembered that funds from operations do not necessarily mean the profit as shown by the profit and loss account of a firm, because there are many non-fund or non-operating items which may have been either debited or credited to profit and loss account. The examples of such items on the debit side of a profit and loss account are: Amortization of fictitious and intangible assets such as goodwill, Preliminary expenses and Discount on issue of shares and debentures written off; Appropriation of Retained Earnings, such as Transfers to Reserves, etc., Depreciation and depletion; Loss on sale of fixed assets; Payment of dividend, etc. The non-fund items are those which may be operational expenses but they do not affect funds of the business, e.g. for depreciation charged to profit and loss account, funds really do not move out of business. Non-operating items are those which although may result in the outflow of funds but are not related to the trading operations of the business, such as loss on sale of machinery or payment of dividends.

b) Deferential costing.

c) Performance budgeting.

Ans: Performance Budgeting had its origin in U.S.A. after the Second World War. It tries to rectify some of the traditional budget. In the traditional budget amount are earmarked for the objects of expenditure such as salaries, travel, office expenses, grant in aid etc. In such system of budgeting the money concept was given more prominence i.e. estimating or projecting rupee value for the various accounting heads or classification of revenue and cost. Such system of budgeting was more popularly used in government departments and many business enterprises. But is such system of budgeting control of performance in terms of physical units or the related costs cannot be achieved.

Performance oriented budgets are established in such a manner that each item of expenditure related to a specific responsibility center is closely linked with the performance of that center. The basic issue involved in the fixation of performance budgets is that of developing work programmes and performance expectation by assigned responsibility, necessary for the attainments of goals and objectives of the enterprise, it involves establishment of well defined centers of responsibilities, establishment for each responsibility  center – a programme of target performance in physical units, forecasting the amount of expenditure required to meet the physical plan laid down and evaluation of performance.

d) Cost-volume-profit relationship.

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, whatever output is produced , the same is sold during that period.

e) Production budget.

Ans: Production budget is usually prepared on the basis of sales budget. But it also takes into account the stock levels desired to be maintained. The estimated output of business firm during a budget period will be forecast in production budget. The production budget determines the level of activity of the produce business and facilities planning of production so as to maximum efficiency. The production budget is prepared by the chief executives of the production department. While preparing the production budget, the factors like estimated sales, availability of raw materials, plant capacity, availability of labour, budgeted stock requirements etc. are carefully considered.

3. (a) Define Management Accounting. Discuss the scope of Management Accounting. 3+9=12

Ans: Management Accounting: 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.

Scope of Management Accounting

The field of management accounting is very wide. The main purpose of management accounting is to provide information to the management to perform its functions of planning directing and controlling. Management accounting includes various areas of specialization to render effective service to the management.

a)      Financial Accounting: Financial Accounting deals with financial aspects by preparation of Profit and Loss Account and Balance Sheet. Management accounting rearranges and uses the financial statements. Therefore it is closely related and connected with financial accounting.

b)      Cost Accounting: Cost accounting is an essential part of management accounting. Cost accounting, through its various techniques, reveals efficiency of various divisions, departments and products. Management accounting makes use of all this data by focusing it towards managerial decisions.

c)       Budgeting and Forecasting: Budgeting is setting targets by estimating expenditure and revenue for a given period. Forecasting is prediction of what will happen as a result of a given set of circumstances. Targets are fixed for various departments and responsibility is pinpointed for achieving the targets. Actual results are compared with preset targets and performance is evaluated.

d)      Inventory Control: This includes, planning, coordinating and control of inventory from the time of acquisition to the stage of disposal. This is done through various techniques of inventory control like stock levels, ABC and VED analysis physical stock verification, etc.

e)      Statistical Analysis: In order to make the information more useful statistical tools are applied. These tools include charts, graphs, diagrams index numbers, etc. For the purpose of forecasting, other tools such as time series regression analysis and sampling techniques are used.

f)       Analysis of Data: Financial statements are analysed and compared with past statements, compared with those of other firms and with standards set. The analysis and interpretation results in drawing reports and presentation to the management.

g)      Internal Audit: Internal audit helps the management in fixing individual responsibility for internal control.

h)      Tax Accounting: Tax liability is ascertained from income statements. Knowledge of tax provisions helps the management in meeting the tax liabilities and complying with other legislations like Sales tax, Companies Act and MRTP Act.

i)        Methods and Procedures: In includes keeping of efficient system for data processing and effective reporting of required data in time.

Or

(b) “Management Accounting has been evolved to meet the need of management.” Explain this statement.         12

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. The main objective of management accounting is to supply the necessary data to the management for formulating plans for the future. the management accountant prepares statements of past results and gives estimations for the future which helps the management in planning and policy formulation.

2)      Controlling: Controlling performance various unit in an organisation is one the main function of management. The actual performance of every unit is compared with pre determined objectives to find the deviations and take corrective steps to improve the performance of various units. The management is able to control performance of each and every individual with the help of management accounting devices such as standard costing, budgetary control etc.

3)      Help in the interpretation process: The main object of management accounting is to present financial information to the management in easily understandable manner. He can use diagrams, graphs and charts to present the data in a precise manner.

4)      Helps in decision making: Management has to take many strategic decisions. Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives.

5)      Reporting: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This facilitates management to take proper and timely decisions. It presents the different alternative plans before the management in a comparative manner.

6)      Motivating: Management accounting helps the management in selecting best alternatives of doing the things. Targets are laid down for the employees and authority is delegated amongst the employees. Delegation increases the job satisfaction of employees and encourages them to look forward. So it serves as a motivational devise.

7)      Helps in organizing: Organisation is related to the establishment of relationship amongst different individuals in the concern. It also includes the delegation of authority and fixing of responsibility. Management accounting is connected with the establishment of cost centres, preparation of budgets, preparation of cost control accounts and fixing of responsibility.

8)      Coordinating operations: It provides tools which are helpful in coordinating the activities of different sections. Co-ordination is done through functional budgeting.

From the above discussion we can say that the main objective of management accounting is to provide data to help the management in planning, decision-making, coordinating and controlling operations.

4. (a) From the following Comparative Balance Sheets of X Ltd. as on June 30, 2017 and June 30, 2018, you are required to prepare:-      5+6=11

1) A statement of changes in working capital;

2) A funds flow statement;

Balance Sheets

Liabilities	2017 Rs.	2018 Rs.	Assets	2017 Rs.	2018 Rs.
Share Capital Reserve Fund Profit & Loss A/c Trade Creditors Bank Overdraft Provision for Taxation Provision for Doubtful Debts	1,80,000 28,000 39,000 16,000 12,400 32,000   3,800	2,00,000 36,000 24,000 10,800 2,600 34,000   4,200	Goodwill Building Machinery Investment Inventories Debtors Cash	24,000 80,000 74,000 20,000 60,000 40,000 13,200	20,000 72,000 72,000 22,000 50,800 44,400 30,400
	3,11,200	3,11,600		3,11,200	3,11,600

Additional Information:

1) Depreciation charged on Machinery was Rs. 8,000 and on Building Rs. 8,000.

2) Interim dividend paid on January, 2018 was Rs. 15,000.

3) Provision of Rs. 10,000 was made for taxation during the year ending 30^th June, 2018.

Solution: Follow our YouTube Channel

Or

(b) Define Cash Flow Statement. How does Cash Flow Statement differ from a Funds Flow Statement?   4+7=11

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.

Difference between Funds Flow Statement and Cash Flow Statement

Basis of Difference	Funds Flow Statement	Cash Flow Statement
Basis of Analysis	Funds flow statement is based on broader concept i.e. working capital.	Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital.
Objective	The object funds flow statement is to disclose the magnitude, direction and causes of changes in working capital.	The object of cash flow is to disclose the magnitude, direction and causes of changes in cash and cash equivalents.
Source	Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.	Cash flow statement starts with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses.
Usefulness	Funds flow statement is more useful in assessing the long-term financial position.	Cash flow statement is more useful in assessing the short-term financial position of the business.
Schedule of Changes in Working Capital	In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital.	In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement.
Causes	Funds flow statement shows the causes of changes in net working capital.	Cash flow statement shows the causes of changes in cash.
Principal of Accounting	Funds flow statement is based on the accrual basis of accounting.	In cash flow statement, data are obtained on accrual basis which are converted into cash basis.
Compulsion	There is no prescribed form for preparation of Funds flow statement.	Cash flow statement is compulsory to be prepared in prescribed proforma as given in AS – 3.
Relationship	Funds flow statement can be prepared from the cash flow statement under indirect method.	But a cash flow statement cannot be prepared from funds flow statement.
Financial Health	Sound fund position does not necessarily mean sound cash position.	But sound cash position is always followed by sound fund position.

5. (a) The following data are available in a manufacturing company for the period of a year:

	(Rs. in lakhs)
Fixed Expenses: Wages and salaries Rent, rates and taxes Depreciation Sundry administrative expenses Semi-variable expenses (at 30% of capacity): Maintenance and repairs Indirect labour Sales department salaries, etc. Sundry administrative expenses Variable expenses (at 50% of capacity) Materials Labour Other expenses	9.5 6.6 7.4 6.5   3.5 7.8 3.8 2.8   21.7 20.4 7.9
	98.0

Assume that the fixed expenses remain constant for all levels of production; semi-variable expenses remain constant between 45% and 65% of capacity, increasing by 10% between 65% and 80% capacity and by 20% between 80% and 100% capacity.

	(Rs. in lakhs)
50% capacity 60% capacity 75% capacity 90% capacity 100% capacity	100 120 150 180 200

Prepare the flexible budgets for the year and forecast the profit at 60%, 70%, 90% and 100% capacity.        11

Or

(b) What do you understand by the terms ‘budget’ and ‘budgetary control’? Discuss the benefits of budgetary control. (2+3)+6=11

Ans: Budget: A budget is the monetary and / or quantitative expression of business plans and policies to be pursued in the future period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control or business enterprises.

I.C.M.A. defines a budget as “A financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.

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) “Marginal costing is essentially a technique of cost analysis and cost presentation.” Discuss the statement with reference to the application, merits and limitation of marginal costing.                   3+3+3+2=11

Ans: Meaning of Marginal Cost and Marginal Costing

Marginal Cost: The term Marginal cost means the additional cost incurred for producing an additional unit of output. It is the addition made to total cost when the output is increased by one unit. Marginal cost of nth unit = Total cost of nth unit- total cost of n-1 unit. E.g. When 100 units are produced, the total cost is Rs. 5000.When the output is increased by one unit, i.e, 101 units, total cost is Rs.5040.Then marginal cost of 101th unit is Rs. 40[5040-5000]

Marginal cost is also equal to the total variable cost of production or it is the aggregate of prime cost and variable overheads. The chartered Institute of Management Accountants [CIMA] England defines Marginal as “the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit.

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.

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.

Applications of Marginal 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.

Or

(b) The sales turnover and profit during two years were as follows:

You are required to calculate:-

1) P/V ratio;

2) Sales required to earn a profit of Rs. 40,000;

3) Profit when sales are Rs. 1,20,000.                                 3+4+4=11

Solution: Follow our YouTube Channel

7. (a) Define standard costing. How does it help in keeping control over cost? Point out its limitations.    2+6+3=11

Or

(b) From the following data, calculate MCV, MPV, MUV and MMV:    3+3+3+2=11

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