Gauhati University Solved Papers
MANAGEMENT ACCOUNTING Solved Papers (May-June’ 2018)
(MAJOR)
Full Marks: 80
Time Allowed: 3 hours
Answer either in English or Assamese
The figures in the margin indicate full marks
for the questions
1. (a) State whether the following statements are correct or incorrect:
1. Financial Accounting is the base of Management Accounting.
Ans: True
2. Contribution is the difference between the sales and the total cost.
Ans: False, Contribution = Sales – variable cost
3. Zero-base budgeting was first used in America.
Ans: True, it was developed in 1969 at Texas.
4. In order to control costs, a concern may use either budgetary control or standard costing but not both of these techniques.
Ans: False
5. Flexible budgets change with the level of activity.
Ans: True
(b) Fill in the blanks
with appropriate word(s):
1. Management Accounting is concerned with internal reporting.
2. In marginal costing, stock of finished goods is valued at their variable cost only.
3. P.V. Ratio can be improved by increasing selling price.
4. Standard cost is a predetermined cost.
5. Idle time variance is: idle time x standard labour rate.
2. Answer the following questions: 2x5=10
a) State two limitations of Financial Accounting.
Ans: limitations of financial accounting are discussed as follows:
1. Historical Nature. Financial accounting is historical in nature in the sense that it is a record of all those transactions which have taken place in the business during a particular period of time. The impact of future uncertainties has no place in financial accounting. As management needs information for future planning, financial accounting can only give information about what has happened and not about what will happen.
2. Provides Information about the Concern as a Whole. In financial accounting, information is recorded for the whole concern. The information is not recorded product – wise, process – wise, department – wise or any other line of activity. It is essential to record information activity – wise so as to be helpful for cost determination and cost control purposes.
b) Define ‘Marginal cost’.
Ans: 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]
c) Mention two assumptions of break-even
analysis.
Ans: The assumptions in break-even 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
d) What is ‘budget-manual’?
Ans: Budget Manual: A budget manual is a
document which tells out the duties and also responsibilities of various
executives concerns with the budgets. It specifies the relation among various
functionaries.
e) Give the formula of Labour Efficiency
Variance.
Ans: Total Labour efficiency variance (TLEV) = SR (SH – AH) [Actual hours including idle time]
Labour Efficiency/Time Variance (LEV/LTV) = SR (SH – AH) [Actual Hours deducting idle time]
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3. Answer the following questions: 5x4=20
(a) Explain the relationship between Financial
Accounting and Management Accounting.
(b) What is Profit-Volume Ratio? Describe its
importance.
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
= Contribution / 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.
Or
A firm
provides you the following information:
|
Variable
cost per unit Fixed
expenses Selling
price per unit |
Rs. 15 Rs.
54,000 Rs. 20 |
What
should be the new selling price per unit, if the break-even point is to be
brought down to 6,000 units?
(c) Discuss the objectives of budgetary
control.
Ans: 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.
(d) Write a note on ‘Performance budgeting’?
Ans: Performance Budgeting
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.
The main features of performance budgeting are as follows:
a. It helps the management to
regulate its each and every activity according to predetermined standards of
performance, targets and objectives.
b. It is not only an estimate of
future needs but goes beyond that and- includes functions, programmes, activity
schemes and time schedules to help effective and economic allocation for the
programmes.
c. It lays great stress on the
management of organisational structural and overall policy, personnel,
financial, etc. from traditional to dynamic one.
d. It is not merely a projection
of trends and targets but planning the business from grass root level to top
level on rational thinking and forecasting.
Or
Explain
‘Controllable variance’ and ‘Un-controllable variance’.
4. “Management Accounting is concerned with
information which is useful to management.” Explain the statement highlighting
the nature of information referred to. 10
Ans: Management Accounting: Meaning and
Definitions:
The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.
In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.
Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.
According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.
From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.
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 taken 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.
7. Increase in Efficiency. The purpose of using accounting information is to increase efficiency of the concern. The efficiency can be achieved by setting up goals for each department or section. The performance appraisal will enable the management to pin point efficient and inefficient spots. An effort is make the staff cost – conscious. Everyone will try to control cost on one’s own part.
8. Supplies Information and not Decision. The management accountant supplies information to the management. The decisions are to be taken by the top management. The information is classified in the manner in which it is required by the management. Management accountant is only to guide and not to supply decisions. The data is to be used by management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.
9. Concerned with Forecasting. The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.
From the above discussion we can say that Management Accounting is
mainly concerned with presentation of accounting information is such a way that
is useful to management in decision making.
Or
Discuss Management Accounting as a tool of
planning and exercising control. 10
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.
Functions
of Management Accounting
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.
5. The
expenses budgeted for production of 10,000 units in a factory are furnished
below: 10
|
Particulars |
Rs. per
unit |
|
Material
Labour Variable
overheads Fixed
overheads (Rs. 1,00,000) Variable
expenses (direct) Selling
expenses (10% fixed) Distribution
expenses (20% fixed) Management
expenses (Rs. 50,000) |
70 25 20 10 5 13 7 5 |
|
Total |
155 |
Assuming
that management expenses are rigid for all levels of production, prepare a
flexible budget for the production of 8,000 units and 6,000 units.
Or
Describe the essential steps for adoption of a
budgetary control system. 10
Ans: Essentials Factors for the Success of
Budgetary Control
There are certain steps which are necessary
for the successful implementation of a budgetary control system. They are as
follows:
1.
Organization
for Budgetary Control: The proper organization is essential for the
successful preparation, maintenance and administration of budgets. A budgetary
committee is formed which comprises the departmental heads of various
departments. All the functional heads of various departments are entrusted with
the responsibility of ensuring proper implementation of their respective
departmental budgets. This has been shown in the following chart.
2. Budget Centres: A budget
centre is that part of the organization for which the budget is prepared. A
budget centre may be a department, section of a department or any other part of
the department. The establishment of budget centres is essential for covering
all parts of the organization. The budget centres are also necessary for cost
control purposes. The appraisal of performance of different parts of the
organization becomes easy when different centres are established.
3. Budget Manual: A budget
manual is a document which tells out the duties and also responsibilities of
various executives concerns with the budgets. It specifies the relation among
various functionaries. A budget manual covers the following:
1) A budget
manual clearly defines the objectives of budgetary control system. It also
gives the benefits and principles of this system.
2) The duties
and responsibilities of various persons dealing with preparation and execution
of budgets are also given in a budget manual. It enables the management to know
of persons dealing with various aspects of budgets and clarify their duties and
responsibilities.
3) It gives
information about the sanctioning authorities of various budgets. The financial
powers of different managers are given in the manual for enabling the spending
of amount on various expenses.
4) A proper
table for budgets including the sending of performance reports is drawn so that
every work starts in time and a systematic control is exercised.
5) The
specimen forms and number of copies to be used for preparing budget reports
will also be stated. Budget centres involved should be clearly stated.
6) The length
of various budget periods and control points be clearly given.
7) The
procedure to be followed in the entire system should be clearly stated.
8) A method
of accounting to be used for various expenditures should also be stated in the
manual.
4. Budget Officers: The chief
executive who is at the top of the organization appoints some person as budget
officer. The budget officer is empowered to scrutinize the budgets prepared by
different functional heads and to make changes in them, if the situation so
demands. The actual performance of department is communicated to the budget
officer. He determines the deviation in the budgets and takes necessary steps
to rectify the deficiencies.
5. Budget Committee: In small
scale concerns, the accountant is made responsible for preparation and
implementation of budgets. In large scale concerns a committee known as budget
committee is formed. The heads of all departments are made members of this committee.
The committee is responsible for preparation and execution of budgets. The
members of this committee put up the case of their respective departments and
help the committee to take collective discussions. The budget office acts as
coordinator of this committee.
6. Budget Period: A budget
period is the length of time for which a budget is prepared. The budget period
depends upon a number of factors. It may be different for different industries
or even it may be different in the same industry or business.
7. Determination of Key Factors: The
budgets are prepared for all functional areas. These budgets are
inter-departmental and inter-related. A proper coordination amount different
budget is necessary for making the budgetary control a success. The constraints
on some budgets may have an effect on other budgets too. A factor which
influences all other budgets is known as Key Factor or Principal Factor. There
may be a limitation on the quality of goods a concern may sell. In this case,
sales will be a key factor and all other budgets will be prepared by keeping in
view the amount of goods the concern will be able to sell. The raw material
supply may be limited; so production, sales and cash budgets will be decided
according to raw materials budget. Similarly, plant capacity may be key factor
if the supply of other factor is easily available.
6. Explain the importance of the following in
relation to marginal costing. 5+5=10
a) Contribution.
b) Margin of safety.
Advantages
of contribution:
a)
It helps in fixation of selling price.
b)
It assists in determining the breakeven 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.
b) Margin of safety: The
positive difference between the sales volume and the break even volume is known
as the margin of safety. The larger the difference, the safer the organization
is from a loss making situation. It can be calculated either in cash or in
units.
Margin of Safety can be derived as follows:
Margin
of Safety = Actual Sales – Break even Sales or,
Margin
of Safety (in cash) = Profit / P/V Ratio
Margin
of Safety (in units) = Profit / Contribution Per unit
Or
A company
has annual fixed cost of Rs. 1, 40,000. In 2017 sales amounted to Rs. 6, 00,000
as compared with Rs. 4, 50,000 in 2016. The profit in 2017 was Rs. 42,000
higher than in 2016.
a) Find
the break-even sales of the company.
b) If
there is reduction is selling price in 2018 by 10% and the company desires to
earn the same amount of profit as in 2017, what would be the required sales
volume? 4+6=10
7. What is Variance Analysis? Explain its
significance for managerial decision making purpose. 4+6=10
Ans: Variance analysis is the
process of analysing variance by sub-dividing the total variance in such a way
that management can assign responsibility for off standard performance. It,
thus, involves the measurement of the deviation of actual performance from the
intended performance. That is, variance analysis is a tool to measure performances
and based on the principle of management by exception. In variance analysis,
the attention of management is drawn not only to the monetary value of
unfavourable and favourable managerial performance but also to the
responsibility and causes for the same. After the standard costs have been
fixed, the next stage in the operation of standard costing is to ascertain the
actual cost of each element and compare them with the standard already set.
Computation and analysis of variances is the main objective of standard
costing. Actual cost and the standard cost is known as the ‘cost variance’.
As per I.C.M.A, Variance Analysis is “the resolution into
constituent parts and explanation of variances”. The definition indicates two
aspects-resolutions into constituent parts is the first aspect which is nothing
but subdivision of the total cost variance. Explanation of variance includes
the probing and inquiry for causes and responsible persons”.
UTILITY OF
VARIANCES ANALYSIS
a.
Variances are analysed to find out the causes
or circumstances leading to it so that management can exercise proper control.
Variance analysis sub divides the total variance based on difference
contributory causes. This gives a clear picture of the different reasons for
the overall variance.
b.
The sub division of variance establishes and
highlights the interrelationship between different variances.
c.
Variance analysis ‘explains’ the causes for
each variance. It paves way for fixing responsibility for all variances.
d.
It highlights all inefficient performances and
the extent of inefficiency.
e.
It is a powerful tool leading to cost control.
Analysis of variances is helpful in controlling the performance and achieving
the profits that have been planned.
f.
It enables the top management to practice
‘management by exception’ by focusing on the problem areas. It helps the
management to concentrate only on operations and segments of an enterprise
where deviations are there from targeted performance.
g.
It segregates variance into controllable and
uncontrollable, thereby indicating where action is warranted. This division of
variance into controllable and uncontrollable is extremely important because
the attention of the management is drawn particularly towards controllable
variance.
h.
It acts as the basis for profit planning.
i.
By revealing each and every deviation, along
with the causes, variance analysis creates and nurtures ‘cost consciousnesses
among the employees.
Or
A
furniture company uses sun mica tops for tables. It provides you the following
data: 10
|
Standard
quantity of sun mica per table 4 sq. ft. Standard
price per sq. ft. of sun mica Rs. 5 Actual
production of table = 1,000 numbers Sun mica
actually used = 4,300 sq. ft. |
Actual
purchase price of sun mica per sq. ft. Rs. 5.50.
Calculate:
a) Material
cost variance.
b) Material
price variance.
c)
Material usage variance.
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