2015 Management Accounting Solved Question Papers, Gauhati University Solved Papers B.Com

 Gauhati University Solved Papers
MANAGEMENT ACCOUNTING Solved Papers (May-June’ 2015)
(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 True or False:     1x5=5

1) Management Accounting deals only with that information which useful to the management.

Ans: True

2) Profit volume ratio can be improved by reducing the fixed cost.

Ans: False

3) Financial Accounting is the base of Management Accounting.

Ans: False

4) Flexible Budgets change with the change in level of activity.

Ans: True

5) Control in Standard Costing is achieved by variance analysis.

Ans: True

(b) Fill in the blank with appropriate word/words:             1x5=5

1) Excess of contribution over fixed cost is known as _____.

Ans: Profit

2) A budget which consolidates the organisations overall plan is called _____ budget.

Ans: Master Budget

3) Management Accounting is the accounting for _____ management.

Ans: Internal part of

4) Standard cost is a _____ cost.

Ans: Predetermined cost

5) Profit volume ratio is also known as _____ ratio.

Ans: Contribution

(c) Write brief answers to the following in about 50 words each:                            2x5=10

1) What are the purposes of standard costing?

Ans: Objective and purpose of standard costing:

a) Cost control

b) Management by exception

c) Fixation of selling prices

d) Formulation of policies

e) Management planning

2) Mention and explain any two of the objectives of Management Accounting.

Ans: Objectives of Management Accounting: 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) What are the features of Marginal Costing?

Ans: The main Features (Characteristics) of Marginal Costing are as follows:

1. Cost Classification: The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm.

2. Managerial Decisions: 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 etc.

3. Inventory Valuation: Under marginal costing, inventory for profit measurement is valued at marginal cost only.

4) Explain 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.

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.

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.

d)      Motivation: A budget is a useful device for motivating managers to perform in line with the company objectives.

e)      Control: Control is necessary to ensure that plans and objectives as laid down in the budgets are being achieved. C

5) What are the components of material cost variance?

Ans:

 Also Read Management Accounting Solved Papers Gauhati University

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2. Write short notes on any four of the following:              5x4=20

a) Nature of Management Accounting.

Ans: 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.

b) Meaning of marginal cost and marginal costing.

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]

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’.

c)  Five advantages of standard costing.

Ans: Advantages of standard costing:

a. Cost control: Standard costing is universally recognised as a powerful cost control system. Controlling and reducing costs becomes a systematic practice under standard costing.

b. Elimination of wastage and inefficiency: Wastage and inefficiency in all aspects of the manufacturing process are curtailed, reduced and eliminated over a period of time if standard costing is in continuous operation.

c. Norms: Standard costing provides the norms and yard sticks with which the actual performance can be measured and assessed.

d. Locates sources of inefficiency: It pin points the areas where operational inefficiency exists. It also measures the extent of the inefficiency.

e. Fixing responsibility: Variance analysis can determine the persons responsible for each variance. Shifting or evading responsibility is not easy under this system.

d)  Characteristics of good budgeting.

Ans: A budgetary control system can prove successful only when certain conditions and attitudes exist, absence of which will negate to a large extent the value of a budget system in any business. Such conditions and attitudes which are essential for effective budgeting are as follows:

a)      Support of Top Management: If the budget system is to be successful, it must be fully supported by every member of the management and the impetus and direction must come from the very top management. No control system can be effective unless the organisation is convinced that the top management considers the system to be import.

b)      Participation by Responsible Executives: Those entrusted with the performance of the budgets should participate in the process of setting the budget figures. This will ensure proper implementation of budget programmes.

c)       Reasonable Goals: The budget figures should be realistic and represent reasonably attainable goals. The responsible executives should agree that the budget goals are reasonable and attainable.

d)      Clearly Defined Organisation: In order to derive maximum benefits from the budget system, well defined responsibility centers should be built up within the organisation. The controllable costs for each responsibility centres should be separately shown.

e)      Continuous Budget Education: The best way to ensure the active interest of the responsible supervisors is continuous budget education in respect of objectives, potentials & techniques of budgeting. This may be accomplished through written manuals, meetings etc., whereby preparation of budgets, actual results achieved etc., may be discussed.

e)  Features of marginal costing.

Ans: The main Features (Characteristics) of Marginal Costing are as follows:

1. Cost Classification: The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm.

2. Managerial Decisions: 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 etc.

3. Inventory Valuation: Under marginal costing, inventory for profit measurement is valued at marginal cost only.

4. Price Determination: Prices are determined on the basis of marginal cost by adding contribution which is the excess of selling price over variable costs of sales.

5. Contribution: Marginal costing technique makes use of Contribution for taking various decisions. Contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments.

f)   Distinction between budget and standard.

Ans: Budgetary Control and Standard Costing: Both standard costing and budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standards, comparing actual performance with the predetermined standards and taking corrective measures, where necessary. Thus, although both are useful tools to the management in controlling costs, they differ in the following respects:

Budgetary Control	Standard Costing
Budgetary control deals with the operations of a department of business as a whole.	Standard costing is applied to manufacturing of a product, process or processes or providing a service.
It is extensive in its application, as it deals with the operation of department or business as a Whole.	It is intensive, as it is applied to manufacturing of a product or providing a service.
Budgets are prepared for sales, production, cash etc.	It is determined by classifying recording and allocating expenses to cost unit.
It is a part of financial account, a projection of all financial accounts.	It is a part of cost account, a projection of all cost accounts.
Control is exercised by taking into account budgets and actual. Variances are not revealed through accounts.	Variances are revealed through difference accounts.

3. Why is Management Accounting treated as a separate discipline other than Financial Accounting?               10

Ans:

Or

Explain the role of computer in managerial decision making process.                  10

Ans:

4. Following are the information obtained from the books of Assam Ltd.:               2x5=10

Fixed cost Sales Variable cost

Rs. 1,60,000 Rs. 100 per unit Rs. 90 per unit

Calculate:

a) P/V ratio.

b) Break even sale.

c)  Break even units.

d)  Sales to earn a profit of Rs. 40,000.

e)  Profit when sales are Rs. 20,00,000.

f) Explain the uses of Marginal Costing by Management in decision making process.

Ans: 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.

5. From the following particulars, compute (a) Labour Cost Variance, (b) Labour Rate Variance, (c) Labour Efficiency Variance, (d) Idle time variance and (e) Managerial uses of such Variances:                 2x5=10

Standard hours Standard wage rate Actual hours Actual wage rate Time lost due to machine breakdown is 300 hours.

5,000 Rs. 4 per hour 6,000 Rs. 3.50 per hour

Or

Explain the factors which are considered in establishment of standard cost.       10

Ans: Introduction of Standard Costing System in an Establishment: Introducing standard costing in any establishment requires the fulfillment of following preliminaries:

a)      Establishment of cost centers: A cost centre is a location, person or item of equipment for which costs may be ascertained and used for the purpose of cost control. The cost centers divide an entire organisation into convenient parts for costing purpose. The nature of production and operations, the organisational structure, etc. influence the process of establishing cost centres. No hard and fast rule can be laid down in this regard. Establishment of the cost centres is essential for pin pointing responsibility for variances.

b)      Classification and codification of accounts: The need for quick collection and analysis of cost information necessitates classification and codification. Accounts are to be classified according to different items of expenses under suitable headings. Each of the headings is to be given a separate code number. The codes and symbols used in the process facilitate introduction of computerization.

c)       Determining the types of standards and their basis: Standards can be classified into two broad categories on the basis of the length of use:

i.       Current standards: These are standards which are related to current conditions, particularly of the budget period. They are for short-term use and are more suitable for control purpose. They are also more amenable for combining with budgeting.

ii.      Basic standards: These are long-term standards; some of them intended to be in use for even decades. They are helpful for planning long-term operations and growth. There can be significant difference in the standards set depending on the base used for them. The following are the different bases for setting standard, whether they are current standards for short-term or basic standards for long-term use.

Ø  Ideal standards: These standards reflect the best performance in every aspect. They are like 100 marks in a paper for students taking up examinations. What is possible under ideal circumstances in all aspects is reflected in these standards. They are impractical and unattainable in practice. There utility for control purpose is negligible.

 

Ø  Past performance based standards: The actual performance attained in the past may be taken as basis and the same may be retained as standard. Such standards do not provide any incentive or challenge to the employees. They are too easy to attain. Their value from cost control point of view is minimal.

 

Ø  Normal standard: It is defined as “the average standard which, it is anticipated can be attained over a future period of time, preferably long enough to cover one trade cycle”. They are average standard reflecting the average performance over a complete trade cycle which may take three to five years. For a specific period, say a budget period, their relevance is negligible.

 

Ø  Attainable high performance standards: They are based on what can be achieved with reasonable hard work and efforts. They are based on the current conditions and capability of the workers. These standards are considered to be of great practical value because they provide sufficient incentive and challenge to the workers to attain them. Any variances from such standard are really significant because the standard which is attainable with effort is not attained.

d)      Determining the expected level of activity: Capacity of operation or level of activity expected over a future period is vital in fixing current or short-term standards. When the activity level is decided on the basis of sales or production, whichever is the limiting factor; all standard can be developed with the activity level as the focal point. The purchase of material, usage of material, labour hours to be worked, etc. are solely governed by the planned level of activity.

e)      Setting standards: Standards may be either too strict or too liberal because they may be based on theoretical maximum efficiency attainable good performance or average past performance. Setting standards may also be called developing standards or establishment of standard cost because as a consequence of setting standards for various aspects, standard cost can be computed.

Material quantity standards: The following procedure is usually followed for setting material quantity standards.

(a)   Standardization of products: Detailed specifications, blueprints, norms for normal wastage etc., of products along with their designs are settled.

(b)   Product classification: Detailed classified list of products to be manufactured are prepared.

(c)    Standardization of material: Specifications, quality, etc., of materials to be used in the standard products are settled.

(d)   Preparation of bill of materials: A bill of material for each product or part showing description and quantity of each material to be used is prepared.

(e)    Test runs: Sample or test runs under regulated conditions may be useful in setting quantity standards in a precise manner.

Labour quantity standards: The following are the steps involved in setting labour quantity standards:

(a)   Standardization of products: Detailed specifications, blueprints, norms for normal wastage etc., of products along with their designs are settled.

(b)   Product classification: Detailed classified list of products to be manufactured are prepared.

(c)    Standardization of methods: Selection of proper machines to use proper sequence and method of operations.

(d)   Manufacturing layout: A plan of operation for each product listing the operations to be performed is prepared.

(e)    Time and motion study is conducted for selecting the best way of completing the job.

(f)     The operator is given training to perform the job or operations in the best possible manner.

6. A company is expected to have Rs. 47,500 cash in hand on 1^st April, 2015. From the following information, prepare a cash budget for the three months from April, 2015 to June, 2015.          10

Months	Sales (Rs.)	Purchases (Rs.)	Wages & Other Expenses (Rs.)
February March April May June	90,000 1,00,000 1,20,000 1,35,000 1,40,000	45,000 48,000 55,000 60,000 63,500	27,000 28,000 30,000 32,000 33,000

Other information:

1) Period of credit allowed by suppliers is 2 months.

2) 30% of sales is for cash and period of credit allowed to customers is 1 month.

3) Delay in payment of wages and other expenses is 1 month.

4) Income tax of Rs. 37,500 is due to be paid in June, 2015.

5) Plant has been ordered to be received and paid in May, 2015 for replacement of old one in the same month. The new plant under order will cost Rs. 90,000, while the resale value of old one has been agreed upon and to be received for Rs. 17,500

Or

“Budgetary Control improves planning, aids in co-ordination and helps in having comprehensive control.” – Explain in relation to application of Budgetary Control.        10

Ans: Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.

According to Brown and Howard “Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.

Wheldon characterizes budgetary control as planning in advance of the various functions of a business so that the business as a whole is controlled.

I.C.M.A. define budgetary control as “the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual actions the objectives of that policy or to provide a basis for its revision”.

Applications 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.

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