2017 Management Accounting Solved Question Papers, Gauhati University Solved Papers B.Com

 Gauhati University Solved Papers
MANAGEMENT ACCOUNTING Solved Papers (May-June’ 2017)
(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 provides decision to the management.

Ans: False

2) Marginal cost comprises prime cost plus variable overhead.

Ans: True

3) A budget is a plan of action for a future period.

Ans: True

4) Standard Costing is a method of cost ascertainment.

Ans: False, it is a technique of cost control. Unit costing is a technique of cost ascertainment

5) Budgetary Control starts with budgeting and ends with control.

Ans: True

(b) Fill in the blanks with appropriate words:                 1x5=5

1) Management Accountant is required to submit feedback to the management on different aspects of a business.

2) P/V ratio is also known as contribution ratio.

3) A budget which consolidates the organisation’s overall plan is called master budget.

4) Standard costing _____ the variations of actual costs from standard costs.

5) Material usage variance = Material mix variance + Material yield variance.

(c) Answer the following questions:              2x5=10

1) Mention two 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. 

2) Mention two 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) Mention any two 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.

4) Indicate the industries where Standard Costing system is suitably applied.

Ans: Standard costing is suitable for Process industries where the method of production and nature of output are the same. Also it is suitable for industries that produce homogenous products.

5) Explain variance analysis.

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’.

2. Answer the following questions:           5x4=20

1) Why is the Management accounting a separate discipline other than Cost Accounting?

Ans:

2) Explain the role of computer in management decision making process.

Ans:

Or

What is meant by the term ‘Cost-Volume-Profit Analysis’?

Ans: Cost-Volume-Profit Analysis

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.

 Also Read Management Accounting Solved Papers Gauhati University

Management Accounting Solved Papers' 2012

Management Accounting Solved Papers' 2013

3) What is meant by Zero-Based Budget?

Ans: Zero Based Budgeting: ZBB is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’.

Zero – base budgeting is so called because it requires each budget to be prepared and justified from zero, instead of simple using last year’s budget as a base. In Zero Based budgeting no reference is made to previous level expenditure. Zero based budgeting is completely indifferent to whether total budget is increasing or decreasing. 

‘Zero base budgeting’ was originally developed by Peter A. Pyher at Texas Instruments. Peter A. Pyher has defined ZBB as “an operating, planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why we should spend any money at all”.

CIMA has defined it “as a method of budgeting whereby all activities are revaluated each time a budget is set."

The major benefits of the use of zero base budgeting can be the following:

a)      Zero base budgeting examines all existing and new programmes and activities. It also makes the managers analyse their functions, establish priorities and rank them. This exercise helps in identifying inefficient or obsolete functions within the area of responsibility. In this way resources are allocated from low priority programmes to high priority programmes.

b)      This system facilitates identification of duplication of efforts among organisational units. Such inefficient activities are eliminated and some other activities are merged. 

Or

Define ‘fixed budget’ and ‘flexible budget’.

Ans: Fixed budget: A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for each level of alternative production levels or volumes. According to ICWA London ‘Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.”

Fixed budget is usually prepared before the beginning of the financial year. This type of budget is not going to highlight the cost variance due to the difference in the levels of activity. Fixed budgets are suitable under static conditions.

Flexible budget: Flexible Budget: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.

According to ICMA, England defined Flexible Budget is a budget which is designed to change in accordance with the level of activity actually attained.”

According to the principles that guide the preparation of the flexible budget a series of fixed budgets are drawn for different levels of activity. A flexible budget often shows the budgeted expenses against each item of cost corresponding to the different levels of activity. This budget has come into use for solving the problems caused by the application of the fixed budget.

4) What is material cost variance? What rate its different components?

Ans:

3. Describe the uses of accounting information for managerial decision making purposes.             10

Ans:

Or

“Management Accounting is an integral part of the system of management control.” Explain the various constituents of management control and point out the functions of Management Accountant in relation thereto.      10

Ans:

4. What is meant by Budgetary Control? What are the essentials for success of a Budgetary Control System?       10

Ans: Essentials of Effective Budgeting:

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:

c)       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.

d)      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.

e)      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.

f)       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.

g)      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.

h)      Adequate Accounting System: There is close relationship between budgeting and accounting. For the preparation of budgets, one has to depend on the accounting department for reliable historical data which primarily forms the basis for many estimates. The accounting system should be so designed so as to set up accounts in terms of areas of managerial responsibility. In other words, responsibility accounting is essential for successful budgetary control.

i)        Constant Vigilance: Reports comparing budget and actual results should be promptly prepared and special attention focused on significant exceptions i.e. figures that are significantly different from those expected.

j)        Maximum Profit: The ultimate object of realizing the maximum profit should always be kept uppermost.

k)      Cost of the System: The budget system should not cost more than it is worth. Since it is not practicable to calculate exactly what a budget system is worth, it only implies a caution against adding expensive refinements unless their value clearly justifies them.

l)        Integration with Standard Costing System: Where standard costing system is also used, it should be completely integrated with the budget programme, in respect of both budget preparation and variance analysis.

Or

A company is expecting to have Rs. 25,000 cash in hand on 1^st April, 2016 and it required you to prepare cash budget for three months, April to June, 2016. The following information is supplied to you:

Months	Sales (Rs.)	Purchases (Rs.)	Wages (Rs.)	Expenses (Rs.)
February March April May June	70,000 80,000 92,000 1,00,000 1,20,000	40,000 50,000 52,000 60,000 55,000	8,000 8,000 9,000 10,000 12,000	6,000 7,000 7,000 8,000 9,000

Other information:

a) Period of credit allowed by suppliers is two months.

b) 25% of sales is for cash and the period of credit allowed to customers for credit sales is one month.

c) Delay in payment of wages and expenses is one month.

d) Income tax Rs. 25,000 is to be paid in June, 2016.

5. “The technique of Marginal Costing can be a valuable aid to the management.” Discuss.     10

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

A company sold in two successive periods 7,000 units and 9,000 units and has incurred a loss of Rs. 10,000 and earned a profit of Rs. 10,000 respectively. The selling price per unit is Rs. 100. You are required to calculate:    10

1) P.V. ratio.

2) The amount of fixed cost.

3) Sales at break-even point.

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

6. Explain the concept of “Standard Cost” and “Standard Costing” and outline the primary objects of Standard Costing.10

Ans: Standard Cost: Standard cost is predetermined cost or forecast estimate of cost. I.C.M.A. Terminology defines Standard Cost as, “a predetermined cost, which is calculated from management standards of efficient operations and the relevant necessary expenditure. It may be used as a basis for price-fixing and for cost control through variance analysis”. The other names for standard costs are predetermined costs, budgeted costs, projected costs, model costs, measured costs, specifications costs etc. Standard cost is a predetermined estimate of cost to manufacture a single unit or a number of units of a product during a future period. Actual costs are compared with these standard costs.

Standard Costing: Standard Costing is defined by I.C.M.A. Terminology as, “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence”. Standard costing is a method of ascertaining the costs whereby statistics are prepared to show:

(a)    The standard cost

(b)   The actual cost

(c)    The difference between these costs, which is termed the variance” says Wheldon. Thus the technique of standard cost study comprises of:

Ø  Pre-determination of standard costs;

Ø  Use of standard costs;

Ø  Comparison of actual cost with the standard costs;

Ø  Find out and analyse reasons for variances;

Ø  Reporting to management for proper action to maximize efficiency.

Objectives of Standard Costing:

1. Cost Control: The most important objective of standard cost is to help the management in cost control. It can be used as a yardstick against which actual costs can be compared to measure efficiency. The management can make comparison of actual costs with the standard costs at periodic intervals and take corrective action to maintain control over costs.

2. Management by Exception: The second objective of standard cost is to help the management in exercising control over the costs through the principle of exception. Standard cost helps to prescribe standards and the attention of the management is drawn only when the actual performance is deviated from the prescribed standards. It concentrates its attention on variations only.

3. Develops Cost Conscious Attitude: Another objective of standard cost is to make the entire organisation cost conscious. It makes the employees to recognise the importance of efficient operations so that costs can be reduced by joint efforts.

4. Fixation of Prices: To help the management in formulating production policy and helps in fixing the price quotations as well as in submitting tenders of various products. This can be done with accuracy with standard cost than the actual costs. It also helps in formulating production policies. Standard costs remove the reflection of abnormal price fluctuations in production planning.

5. Fixing Prices and Formulating Policies: Another object of standard cost is to help the management in determining prices and formulating production policies. It also helps the management in the areas of profit planning, product-pricing and inventory pricing etc.

Or

The standard cost for a product is:

Time: 10 hours per unit Cost: Rs. 5 per hour Actual performance was: Production = 1,000 units Hours taken – 10,400 hours. Idle time – 400 hours. Payment made – Rs. 56,160 @ Rs. 5.20 per hour.

From the above particulars, you are required to calculate:

a) Labour rate variance.

b) Labour efficiency variance.

c) Idle time variance.

d) Labour cost variance.

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