Gauhati University Solved Papers
MANAGEMENT ACCOUNTING Solved Papers (May-June’ 2013)
(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 is an integral
part of management.
Ans: True
2) In modern business management
accounting is compulsory.
Ans: False, it is normally used by big
organisation
3) Marginal cost is the aggregate the
prime cost plus variable cost.
Ans: True
4) Functional budgets are prepared by the
Budget Committee of the business.
Ans: True
5) Idle time variance is always
unfavourable.
Ans: True
(b) Fill in the
blank with appropriate
word/words: 1x5=5
1) In marginal costing only _____ costs
are charged to production.
Ans: Variable cost
2) If contribution is greater than fixed
costs, the excess is known as _____.
Ans: Profit
3) Flexible budget changes with the
change in _____.
Ans: the level of activity
4) The difference between actual cost and
standard cost is known as _____.
Ans: Variance
5) Standard cost is a _____ cost.
Ans: Predetermined cost
(c) Write brief
answers to the following in about 50 words
each: 2x5=10
1) Write the
meaning of Budgetary Control.
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.
2) Write two
advantages of Management Accounting.
Ans: The advantages of management accounting are summarized below:
a) Helps in Decision Making: Management accounting helps in decision making such as pricing, make or buy, acceptance of additional orders, selection of suitable product mix etc. These important decisions are taken with the help of marginal costing technique.
b) Helps in Planning: Planning includes profit planning, preparation of budgets, programmes of capital investment and financing. Management accounting assists in planning through budgetary control, capital budgeting and cost-volume-profit analysis.
3) Write two
characteristics 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.
4) Meaning
of 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’.
5) Write two
points of distinctions between fixed budget and Flexible budget.
Ans: Difference
between Fixed Budget and Flexible Budget
|
|
Fixed Budget |
Flexible Budget |
|
1. |
It does not change with actual volume of activity achieved. Thus
it is known as rigid or inflexible budget. |
It can be recasted on the basis of activity level to be
achieved. Thus it is not rigid. |
|
2. |
It operates on one level of activity and under one set of
conditions. It assumes that there will be no change in the prevailing
conditions, which is unrealistic. |
It consists of various budgets for different levels of activity. |
2. Write short
notes on any four of the following: 5x4=20
1) Five points of
differences between Financial Accounting and Management Accounting.
Ans: 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. |
2) Cost-volume-profit
analysis.
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.
3) Five
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.
4) Production
budget.
Ans: 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.
After preparation of production budget, this budget is prepared.
Production cost budgets show the cost of the production determined in the
production budget. Cost of production budget is grouped in to material cost
budget, labour cost budget and overhead cost budget. Because it break up the
cost of each product into three main elements material, labour and overheads.
Overheads may be further subdivided in to fixed, variable and semi-fixed
overheads. Therefore separate budgets required for each item.
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.
6) Labour
efficiency variance.
Ans:
Also Read Management Accounting Solved Papers Gauhati University
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Management Accounting Solved Papers' 2013
3. Discuss the
functions of Management
Accounting. 10
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.
Or
Describe the
tools and techniques of Management Accounting needed for managerial
decisions.10
Ans: Tools and
Techniques Used in Management Accounting: Management accountant
supplies information to the management so that latter may be able to discharge
all its functions, i.e., planning organization, staffing, direction and control
sincerely and faithfully. For doing this, the management accountant uses the
following tools and techniques.
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 made 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.
e) Budgetary control: The management accountant uses the total of budgetary control for planning and control of the various activities of the business. Budgetary control is an important technique of directing business operations in a desired direction, i.e. achieve a satisfactory return on investment.
f) Marginal costing: The management accountant uses the technique of marginal costing, differential costing and break even analysis for cost control, decision-making and profit maximization.
g) Funds flow statement: The management accountant uses the technique of funds flow statement in order to analyze the changes in the financial position of a business enterprise between two dates. It tells wherefrom the funds are coming in the business and how these are being used in the business. It helps a lot in financial analysis and control, future guidance and comparative studies.
h) Cash flow statement: A funds flow statement based on increase or decrease in working capital is very useful in long-range financial planning. It is quite possible that these may be sufficient working capital as revealed by the funds flow statement and still the company may be unable to meet its current liabilities as and when they fall due. It may be due to an accumulation of investments and an increase in trade debtors. In such a situation, a cash flow statement is more useful because it gives detailed information of cash inflow and outflow. Cash flow statement is an important tool of cash control because it summarizes sources of cash inflow and uses of cash outflows of a firm during a particular period of time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise.
i) Decision making: Whenever there are different alternatives of doing a particular work, it becomes necessary to select the best out of all alternatives. This requires decision on the part of the management. The management accounting helps the management through the techniques of marginal costing, capital budgeting, differential costing to select the best alternative which will maximize the profits of the business.
j) Revaluation accounting: The management accountant through this technique assures the maintenance and preservation of the capital of the enterprise. It brings into account the impact of changes in the prices on the preparation of the financial statements.
k) Statistical and graphical techniques: The management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such form so that it may help the management in decision-making. The techniques used are Master Chart, Chart of sales and Earnings, Investment chart, Linear Programming, Statistical Quality control, etc.
l) Communication (or Reporting): The success for failure of the management is dependent on the fact, whether requisite information is provided to the management in right form at the right time so as to enable them to carry out the functions of planning controlling and decision-making effectively. The management accountant will prepare the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organization of data and selecting the appropriate method of reporting.
4. Use Me
Cosmetics Ltd. furnished the following data:
|
Sales (in Rs.) |
Profits (in
Rs.) |
|
|
Year 2011 Year 2012 |
60,000 70,000 |
4,000 6,500 |
You are required
to calculate:
1) P/V Ratio.
2) Breakeven
point.
3) Profit
when sales are Rs. 90,000.
4) Sales
required to earn a profit of 6,000.
5) Margin of
safety in the year 2012. 10
Or
Explain the following term in relation to
Marginal
costing: 10
1) Contribution.
2) Margin of Safety.
3) P/V Ratio.
4) Break even chart.
Ans: 1) Contribution: Contribution is the excess of sales over
marginal cost. It is not purely profit. It is the profit before recovery of fixed
assets. Fixed costs are first met out of contribution and only the remaining
amount is regarded as profit. Contribution is an index of profitability. It has
a fixed relationship with sales. Larger the sales more will be the contribution
and vice versa. Contribution = Sales – Marginal cost or Fixed cost + profit.
Advantages
of contribution:
a)
It helps in fixation of selling price.
b)
It assists in determining the breakeven point.
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
3) Profit/Volume Ratio: 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
4) Break-even chart: The break-even chart is a graphical representation of cost-volume profit relationship. It depicts the following:
a) Profitability of the firm at different levels of output.
b) Break-even point - No profit no loss situation.
c) Angle of Incidence: This is the angle at which the total sales line cuts the total cost line. It is shows as angle Θ (theta). If the angle is large, the firm is said to make profits at a high rate and vice versa.
d) Relationship between variable cost, fixed expenses and the contribution.
e) Margin of safety representing the difference between the total sales and the sales at breakeven point.
5. A company is expecting to have Rs. 25,000
in cash in hand on 1st April 2013 and it requires you to
prepare cash budget for the three months, April 2013 to June 2013. The company furnished
the following information to you:
|
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:
1) Period of credit allowed by supplier is two
months;
2) 25% of total sales is for cash and the
period of credit allowed to customers for credit sales is one month;
3) Delay in payment of wages and expenses
is one month;
4) Income tax Rs. 25,000 is to be
paid in June, 2013 10
Or
State the
advantages and limitations of budgetary control in a
business. 10
Ans: 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.
Limitations of
Budgetary Control System:
The list of advantages given above is
impressive, but a budget is not a cure all for organisational ills. Budgetary
control system suffers from certain limitations and those using the system
should be fully aware of them.
a) The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.
b) Danger of rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organization functioning.
c) Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. ‘The budget should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.
d) False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets.
e) Lack of coordination: Staff co-operation is usually not available during budgetary control exercise.
6. Assam Ltd. uses standard costing and
furnished you the following
information: 10
|
Standard materials for 700 units of finished
product Price of materials Actual output Opening Stock Purchased 3,00,000 kg for Closing stock |
1,000 kg Rs. 1 per kg 2,10,000 units NIL Rs. 2,70,000 20,000 kg |
Calculate:
a) Direct Material Cost variance.
b) Direct Material Price variance.
c) Direct Material usage variance.
d) Significance of those variances.
Or
Explain the
factors considered in establishment of Standard
Costs. 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.
***
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