[Management Accounting
Solved Question Paper 2021 (CBCS Pattern), Management Accounting Solved Question Papers, Dibrugarh University Solved Question Papers, 2021, B.Com 5th Sem]
(Held in January/February, 2022)
Paper: DSE-501 (Group-I)
(Accounting and Finance)
Full Marks: 80
Pass Marks: 32
Time: 3 hours.
The figures in the margin
indicate full marks for the questions
1. (a) Write True or False: 1x4=4
(1) Management accounting is concerned with
accounting information that is useful to the management. True
(2) Cash flow statement is useful for short-term financial analysis. True
(3) Managerial Cost = Total Cost – Variable
Cost. False
(4) Budgetary control is a system of
controlling cost. True
(b) Fill in the blanks: 1x4=4
(1) Intuitive
decisions limit the usefulness of management accounting.
(2) Income tax refund is an inflow of cash.
(3) Fixed cost per unit decreases when volume of
production increases.
(4) Flexible budget is a capacity budget.
2.
Write short notes on any four of the following: 4x4=16
(a)
Limitations of management accounting.
Ans:
Limitations of Management Accounting
Management accounting, being comparatively a new discipline,
suffers from certain limitations, which limit its effectiveness. These
limitations are as follows:
1. Limitations of basic records: Management accounting derives its
information from financial accounting, cost accounting and other records. The
strength and weakness of the management accounting, therefore, depends upon the
strength and weakness of these basic records. In other words, their limitations
are also the limitations of management accounting.
2. Persistent efforts. The conclusions draw by the management
accountant are not executed automatically. He has to convince people at all
levels. In other words, he must be an efficient salesman in selling his ideas.
3. Management accounting is only a tool: Management accounting
cannot replace the management. Management accountant is only an adviser to the
management. The decision regarding implementing his advice is to be taken by
the management. There is always a temptation to take an easy course of arriving
at decision by intuition rather than going by the advice of the management
accountant.
4. Wide scope: Management accounting has a very wide scope
incorporating many disciplines. It considers both monetary as well as
non-monetary factors. This all brings inexactness and subjectivity in the
conclusions obtained through it.
(b)
Funds from operation.
Ans: Funds from Operations or
Trading Profits: Trading profits or the profits from operations of the
business are the most important and major source of funds. Sales are the main
source of inflow of funds into the business as they increase current assets
(cash, debtors or bills receivable) but at the same time funds flow out of
business for expenses and cost of goods sold. Thus, the net effect of
operations will be a source of funds if inflow from sales exceeds the outflow
for expenses and cost of goods sold and vice-versa. But it must be remembered
that funds from operations do not necessarily mean the profit as shown by the
profit and loss account of a firm, because there are many non-fund or
non-operating items which may have been either debited or credited to profit
and loss account. The examples of such items on the debit side of a profit and
loss account are: Amortization of fictitious and intangible assets such as goodwill,
Preliminary expenses and Discount on issue of shares and debentures written
off; Appropriation of Retained Earnings, such as Transfers to Reserves, etc.,
Depreciation and depletion; Loss on sale of fixed assets; Payment of dividend,
etc. The non-fund items are those which may be operational expenses but they do
not affect funds of the business, e.g. for depreciation charged to profit and
loss account, funds really do not move out of business. Non-operating items are
those which although may result in the outflow of funds but are not related to
the trading operations of the business, such as loss on sale of machinery or
payment of dividends.
(c)
Profit-volume ratio.
Ans: 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
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.
(d)
Differential cost.
Ans: Differential costing is concerned with the effect on costs and
revenues if a certain course of action is undertaken. An accountant uses the
term differential cost to describe the same costs that an economist calls
incremental cost. Differential costs may be defined as the increases or
decreases in total cost, or the change in specific elements of costs, that result
from a variation in operations. Incremental costs have been defined as the
additional costs of a change in the level or nature of activity. Any cost that
changes as a result of a contemplated decision is a differential cost or
incremental cost relating to that decision. Differential costing eliminates the
residual costs which are the same under each alternative, and therefore
irrelevant to the analysis.
(e)
Zero-based budgeting.
Ans: ZBB is defined as ‘a method of budgeting which requires each
cost element to be specifically justified, as though the activities to which
the budget relates were being undertaken for the first time. Without approval,
the budget allowance is zero’.
Zero – base budgeting is so called because it requires
each budget to be prepared and justified from zero, instead of simple using
last year’s budget as a base. In Zero Based budgeting no reference is made to
previous level expenditure. Zero based budgeting is completely indifferent to
whether total budget is increasing or decreasing.
‘Zero base budgeting’ was originally developed by
Peter A. Pyher at Texas Instruments. Peter A. Pyher has defined ZBB as “an
operating, planning and budgeting process which requires each manager to
justify his entire budget request in detail from scratch (hence zero base) and
shifts the burden of proof to each manager to justify why we should spend any
money at all”.
CIMA has defined it “as a method of budgeting whereby
all activities are revaluated each time a budget is set."
Management Accounting | |
Chapter Wise Notes | Chapter Wise MCQs |
1. Introduction to Management Accounting 5. Budget and Budgetary Control Also Read: | |
Management Accounting Important Questions for Upcoming Exams (Dibrugarh University) | |
Management Accounting Solved Papers: 2013 2014 2015 2016 2017 2018 2019 | |
Management Accounting Question Papers: 2013 2014 2015 2016 2017 2018 2019 | |
3.
(a) “Management accounting is nothing more than the use of financial
information for management purposes.” Explain this statement and clearly
distinguish between Financial Accounting and Management Accounting. 6+8=14
Ans: 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.
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”.
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.
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.
4. 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.
From the above explanations, Management Accounting is
nothing more than the use of financial information for management purposes.
Difference between Financial
Accounting and Management Accounting
|
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 reports about the performance and profitability of each of
them. |
|
c)
Data |
Financial accounting is mainly concerned with the recording of
past events. |
Management accounting is concerned with future plans and policies. |
|
d)
Nature |
Financial accounting is based on measurement. |
Management accounting is based on judgment. |
|
e)
Accuracy |
Accuracy is an important factor in financial accounting. |
Approximations are widely used in management accounting. |
|
f)
Legal Compulsion |
Financial accounting is compulsory for all joint stock companies. |
Management accounting is optional. |
|
g)
Monetary transactions |
Financial accounting records only those transactions which can be
expressed in terms of money. |
Management accounting records not only monetary transactions but
also non- monetary events. |
Or
(b)
Discuss, in detail, the functions of management accounting. 14
Ans: Functions of Management Accounting: Main objective of
management accounting is to help the management in performing its functions
efficiently. The major functions of management are planning, organizing,
directing and controlling. Management accounting helps the management in
performing these functions effectively. Management accounting helps the
management is two ways:
I. Providing necessary accounting information to
management
II. Helps in various activities and tasks performed by
the management.
I. Providing
necessary accounting information to management:
(a) Measuring: For helping the management in measuring the work efficiency in
different areas it is done on the past and present incidents with context to
the future. In standard costing and budgetary any control, standard and actual
performance is compared to find out efficiency.
(b) Recording: In management accounting both the quantitative and qualitative
types of data are included and this accounting is done on the basis of
assumptions and even those items which cannot be expressed financially are
included in management accounting.
(c) Analysis: The work of management accounting is to collect and analyze the
fact related to the managerial problems and then present them in clear and
simple way.
(d) Reporting: For the use of management various reports are prepared. Generally,
two types of reports are prepared:
a. Regular Reports
b. Special Reports.
II. Helping in Managerial works and Activities:
The main functions of management are planning,
organizing, staffing, directing and controlling. Management accounting provides
information to the various levels of managers to fulfill the above mentioned
responsibilities properly and effectively. It is helpful in various management
functions as under:
(a) Planning: Through management accounting forecasts regarding the sales,
purchases, production etc. can be obtained, which helps in making justifiable
plans. The tools of management accounting like standard costing, cost
-volume-profit analysis etc. are of great managerial costing, help in planning.
(b) Organizing: In management accounting whole organization is divided into various
departments, on the basis of work or production, and then detailed information
is prepared to simplify the thing. The budgetary control and establishing cost
centre techniques of management accounting helps which result in efficient
management.
(c) Staffing: Merit rating and job evaluation are two important functions to be
performed for staffing. Generally, only those employs are useful for the
organization, whose value of work done by them is more than the value paid to
them. Thus by doing cost-benefit analysis management accounting is useful in
staffing functions.
(d) Directing: For proper directing, the essentials are co-ordination, leadership,
communications and motivation. In all these tasks management accounting is of
great help. By analyzing the financial and non-financial motivational factors,
management accounting can be an asset to find out the best motivational factor.
(e)
Co-ordination: The targets of different departments
are communicated to them and their performance is reported to the management
from time to time. This continual reporting helps the management in
coordinating various activities to improve the overall performance.
4. (a) From the following
Balance Sheets of X Ltd. Co. for the years 2019-20 and 2020-21, make out:
(1) schedule of changes in
the working capital;
(2) statement of sources
and application of fund: 7+7=14
|
Capital and Liabilities |
31-03-2020 (Rs.) |
31-03-2021 (Rs.) |
|
Equity Share Capital 8% Redeemable Preference
Share Capital Reserve General Reserve Profit and Loss A/c Proposed Dividends Sundry Creditors Bills Payable Expenses Due Provision for Taxation |
3,00,000 1,50,000 - 40,000 30,000 42,000 25,000 20,000 30,000 40,000 |
4,00,000 1,00,000 20,000 50,000 48,000 50,000 47,000 16,000 36,000 50,000 |
|
|
6,77,000 |
8,17,000 |
|
Assets |
31-03-2020 (Rs.) |
31-03-2021 (Rs.) |
|
Goodwill Plant Land Investment Sundry Debtors Stock-in-Trade Bills Receivable Cash in Hand Cash at Bank Preliminary Expenses |
1,00,000 80,000 2,00,000 20,000 1,40,000 77,000 20,000 15,000 10,000 15,000 |
80,000 2,00,000 1,70,000 30,000 1,70,000 1,09,000 30,000 10,000 8,000 10,000 |
|
|
6,77,000 |
8,17,000 |
Additional Information:
(1) A machine has been sold for Rs. 10,000. The
written-down value of the machine was Rs. 12,000. Depreciation of Rs. 10,000 is
charged on plant in 2020-21.
(2) A piece of land has been sold out in 2020-21 and
profit on sale has been credited to capital reserve.
(3) The investment in trade investment Rs. 3,000 is
received by way of dividends including Rs. 1,000 from pre-acquisition which
have been credited to Investment A/c.
(4) An interim dividend of Rs. 20,000 has been paid in
2020-21.
Ans: Solution of this question will
be available on our Youtube channel very soon
Or
(b)
What is cash flow statement? How is it prepared? Distinguish between a Cash
Flow Statement and a Cashbook. 3+7+4=14
Ans: Cash Flow
Statement:
A Cash Flow Statement is similar to the Funds Flow Statement, but
while preparing funds flow statement all the current assets and current
liabilities are taken into consideration. But in a cash flow statement only
sources and applications of cash are taken into consideration, even liquid
asset like Debtors and Bills Receivables are ignored.
A Cash Flow Statement is a statement, which summarises the resources
of cash available to finance the activities of a business enterprise and the
uses for which such resources have been used during a particular period of
time. Any transaction, which increases the amount of cash, is a source of cash
and any transaction, which decreases the amount of cash, is an application of
cash.
Simply, Cash Flow is a statement which analyses the reasons for
changes in balance of cash in hand and at bank between two accounting period.
It shows the inflows and outflows of cash.
Preparation
of Cash flow statement/Various activities under cash flow statement (AS-3)
Cash flow statement is a statement which shows
the movement of cash and cash equivalents over a particular period of time. It
comprised of three sections: Operating activities, investing activities and
financing activities. There are two methods of preparing cash flow statement: the
direct method preferred by FASB and indirect method preferred by most
businesses because of its simplicity. The difference between the two methods
lies in the operating section only. Investing and financing activities
calculation are same under both the methods.
A)
Section one: Cash flow from operating activities: Operating
activities are the principal revenue generating activities of the business.
These are cash flows from regular course of operations such as manufacturing,
trading etc. All activities that are not investing or financing activities are
included under operating activities.
Examples of Operating Activities:
Ø Cash
receipts from the sale of goods and rendering of services. (Source)
Ø Cash
payments to suppliers of goods and services. (application)
Ø Cash
receipts from royalties, fees, commission and other revenue. (Source)
Ø Cash
payments to and on behalf of employees for wages, etc. (application)
Ø Cash
payments and refunds of income taxes. (application)
Under indirect method cash flow from operating
activities is calculated with the help of net profit before tax and
extraordinary items. Non-cash and non-operating expenses and losses are added
and non-cash and non-operating incomes are deducted from net profit before tax
and extraordinary items to find net cash flow from operating activities before
working capital change. After this changes in working capital is adjusted and
payment of taxes during the year is deducted to find cash flow from operating
activities.
B) Section two:
Cash from investing activities: The investing activities of a business
include all cash flow arises due to acquisition and disposal of long term
assets (whether tangible and intangible) and investments. Acquisition or
disposal of companies also comes under investing activities. These are
separately disclosed in cash flow statement.
Examples of Investing Activities:
Ø Cash
payments to acquire long term fixed assets (tangible and intangible) and
investments. (application)
Ø Cash
receipts from the disposal of long term fixed assets (including intangibles)
and investments. (Source)
Ø Cash
payments for purchase or of shares, warrants, or debt instruments of other
enterprises and interest in joint ventures. (application)
Ø Cash
receipts from sale of shares, warrants, debt instruments of other enterprises
and interest in joint ventures. (source)
Ø Cash
receipts from repayments of advances and loans made to third parties. (source)
All the sources of cash from investing
activities are added and all the applications of cash in investing activities
are deducted to find net cash flow from investing activities.
C) Section three:
Cash flows from financing activities: Financing
activities are the activities which results in changes in the size and
composition of the owner’s capital and borrowings of the enterprises from other
sources. The financing activities of a firm include issuing or redemption of
share capital, issue and redemption of debentures, raising and repayment of
long term loans etc. Dividends and Interest paid are also come under financing
activities. 2
Examples of Financing Activities:
(Sources and applications of cash flow)
Ø Cash
proceeds from the issue of shares or other similar instruments. (source)
Ø Cash
proceeds from the issue of debentures, loans, bonds and other short term
borrowings. (source)
Ø Buy-back
of equity shares. (application)
Ø Cash
repayments of the amounts borrowed including redemption of debentures.
(application)
Ø Payments
of dividends and interest on borrowings. (application)
All the sources of cash from financing
activities are added and all the applications of cash in financing activities
are deducted to find net cash flow from financing activities.
Last
section – Bottom line: All the cash flows from three sections
are added to find net cash flow during the year. Thereafter opening balance of
cash and cash equivalent s are added with this amount and the resulting amount
will be the closing balance of cash and cash equivalents. Here cash and cash
equivalents means:
Cash:
Cash comprises cash on hand and demand deposits with banks.
Cash
Equivalents: Cash Equivalents are short-term, highly liquid
investments that are readily convertible cash. Examples of cash equivalents
are: (a) treasury bills, (b) commercial paper, (c) money market funds and (d)
Investments in preference shares and redeemable within three months. (2018)
Format of
Cash Flow Statement under Indirect Method
|
Particulars |
Amount |
|
A. Cash Flow from
operating activities: Net
Surplus before tax and extraordinary items Add:
Non-operating/non-cash expenses Less:
Non-operating/non-cash income |
++++++++ ++++++++ ------------ |
|
Net cash flow from operating activities before change in W.C Effect
of change in working capital: Increase
in current assets Decrease
in current assets Increase
in Current Liabilities Decrease
in current liabilities |
++++++++ ----------- +++++++ +++++++ ---------- |
|
Less: Payment of taxes
net of tax refund |
+++++++ ----------- |
|
1. Cash Flow from operating activities B. Cash Flow from
Investing activities: Sources
of cash
Applications
of cash |
+++/--- ++++++ --------- |
|
2. Cash flow from investing activities C. Cash Flow from
Financing activities: Sources
of cash
Applications
of cash |
+++/---- ++++++ --------- |
|
3.
Cash flow from Financing activities |
+++/--- |
|
D. Cash Flow during the
year (1 + 2 + 3) Add:
Opening balance of cash & cash equivalent |
++++/---- +++++++ |
|
Closing balance of cash
& cash equivalent |
+++++++ |
Difference between Cash
flow statement and Cash Book:
|
Basis |
Cash Flow Statement |
Cash Book |
|
Meaning |
It means inflows and outflows of cash and
cash equivalents. |
It is a book of prime or original entry
where every transaction is recorded first. |
|
Objective |
It is prepared to explain to management
the sources of cash and its uses during a particular period of time. |
It is prepared to record the receipts and
payments for the accounting year. |
|
Coverage |
It summarises effect of specific cash
transactions into three categories operating, investing and financing
activities of an enterprise during a period in prescribed format. |
Each and every transaction is recorded in
cash book in chronological order. |
|
Technique of
analysis |
It is a technique of past analysis. |
It is a technique of future financial
forecasting. |
|
Period |
It is prepared at the end of the
accounting year. |
It is prepared during the accounting year. |
|
Nature |
It is a statement. |
It is a journal. |
5. (a) From the following
data, calculate: 3+3+4+4=14
(1)
profit-volume ratio;
(2)
fixed cost;
(3)
sales at break-even point;
(4)
sales required to earn a profit of Rs. 20,000:
|
|
Sales (Rs.) |
Profit (Rs.) |
|
Period – I Period – II |
1,00,000 1,20,000 |
15,000 23,000 |
Ans: Solution of this question will
be available on our Youtube channel very soon
Or
(b)
What do you mean by marginal costing? Discuss its usefulness and limitations. 2+7+5=14
Ans: Marginal Costing:
It is
the technique of costing in which only marginal costs or variable are charged
to output or production. The cost of the output includes only variable costs.
Fixed costs are not charged to output. These are regarded as ‘Period Costs’.
These are incurred for a period. Therefore, these fixed costs are directly
transferred to Costing Profit and Loss Account.
According
to CIMA, marginal costing is “the ascertainment, by differentiating between
fixed and variable costs, of marginal costs and of the effect on profit of
changes in volume or type of output. Under marginal costing, it is assumed that
all costs can be classified into fixed and variable costs. Fixed costs remain
constant irrespective of the volume of output. Variable costs change in direct
proportion with the volume of output. The variable or marginal cost per unit
remains constant at all levels of output.”
Thus, Marginal costing is defined as the ascertainment
of marginal cost and of the ‘effect on profit of changes in volume or type of
output by differentiating between fixed costs and variable costs. Marginal
costing is mainly concerned with providing information to management to assist
in decision making and to exercise control. Marginal costing is also known as
‘variable costing’ or ‘out of pocket costing’.
Advantages
of Marginal Costing
a)
Simple and Easy: It is very
simple to understand and easy to operate.
b)
Helpful in Cost control:
Marginal costing divides total cost into fixed and variable cost. Marginal
costing by concentrating all efforts on the variable costs can control total
cost.
c)
Profit Planning: It helps in
short-term profit planning by making a study of relationship between cost,
volume and Profits, both in terms of quantity and graphs.
d)
Evaluation of Performance: The
different products and divisions have different profit earning potentialities.
Marginal cost analysis is very useful for evaluating the performance of each
sector.
e)
Helpful in Decision Making: It
is a technique of analysis and presentation of costs which help management in
taking many managerial decisions such as make or buy decision, selling price
decisions, Key or limiting factor, Selection of suitable Product mix etc.
f)
Production Planning: It helps
the management in Production planning. The effect of alternative production
policy can be readily available and decision can be taken that would yield the
maximum return to Business.
g)
It removes the complexities of
under-absorption of overheads.
h)
The distinction between product
cost and period cost helps easy understanding of marginal cost statements.
Disadvantages of Marginal Costing
a)
It is based on an unrealistic
assumption that all costs can be segregated into fixed and variable costs. In
the long term sales price, fixed cost and variable cost per unit may vary.
b)
All costs are not divisible into fixed
and variable. There are certain costs which are semi-variable in nature. The
separation of costs into fixed and variable is difficult and sometimes gives
misleading results.
c)
Under marginal costing, stocks and
work in progress are understated. The exclusion of fixed costs from Stock
Valuation affects profit, and true and fair view of financial affairs of an
organization.
d)
Marginal cost data becomes unrealistic in case
of highly fluctuating levels of production, e.g., in case of seasonal factories.
e)
It can correctly assess the
profitability on a short-term basis only, but for long term it is not
effective.
f)
It does not provide any effective
yardstick for evaluation of performance.
g)
Contribution of marginal costing is
not a foolproof indicator of profitability.
h)
Marginal cost, if confused with total
cost while fixing selling price may lead to a disaster.
6. (a) A manufacturing
company manufactures two Products X and Y. An estimate of the number of units
expected to be sold in the first seven months of 2020 is given below:
|
Months |
Product – X (Units) |
Product – Y (Units) |
|
January February March April May June July |
500 600 800 1,000 1,200 1,200 1,000 |
1,400 1,400 1,200 1,000 800 800 900 |
It is anticipated that:
(1) There will be no
work-in-progress at the end of month.
(2) Finished units equal
to half of the anticipated sales for the next month will be in stock at the end
of each month (including December 2019).
The budgeted
production and production cost for the year ending 31st December,
2020 are as follows:
|
|
Product – X |
Product – Y |
|
Production Direct Material Direct Wages Other Manufacturing
Expenses (apportion able to each type of product) |
11,000 units Rs. 12 per unit Rs. 5 per unit Rs. 33,000 |
12,000 units Rs. 19 per unit Rs. 7 per unit Rs. 48,000 |
You are required to prepare:
(1) a product budget showing number of unit to be
manufactured each month;
(2) a summarized production cost budget for six months’
period from January to June 2020. 8+6=14
Ans: Asked in 2017 Exam. Available
on Our YouTube Channel
Or
(b) Define the term
‘budget’ and ‘budgetary control’. Explain in detail the classification of
budgets according to:
(1) time;
(2) functions;
(3) flexibility. 2½+2½+9=14
Ans: Meaning and
Definition of Budget and Budgetary Control:
Budget: A
budget is the monetary and / or quantitative expression of business plans and
policies to be pursued in the future period of time. Budgeting is preparing
budgets and other procedures for planning, coordination and control or business
enterprises.
I.C.M.A. defines a budget as “A financial and / or quantitative
statement, prepared prior to a defined period of time, of the policy to be
pursued during that period for the purpose of attaining a given objective”.
Budgetary
control is the process of preparation of budgets for
various activities and comparing the budgeted figures for arriving at
deviations if any, which are to be eliminated in future. Thus budget is a means
and budgetary control is the end result. Budgetary control is a continuous
process which helps in planning and coordination. It also provides a method of
control.
According to Brown and Howard “Budgetary control is a system of
coordinating costs which includes the preparation of budgets, coordinating the
work of departments and establishing responsibilities, comparing the actual
performance with the budgeted and acting upon results to achieve maximum
profitability”.
Wheldon characterizes budgetary control as planning in advance of
the various functions of a business so that the business as a whole is controlled.
I.C.M.A. define budgetary control as “the establishment of
budgets, relating the responsibilities of executives to the requirements of a
policy, and the continuous comparison of actual with budgeted results either to
secure by individual actions the objectives of that policy or to provide a
basis for its revision”.
Types of Budgets
As
budgets serve different purposes, different types of budgets have been
developed. The following are the different classification of budgets developed
on the basis of time, functions, and flexibility or capacity.
(A) Classification on the basis of Time:
1.
Long-term budgets
2.
Short-term budgets
3.
Current budgets
(B) Classification according to functions:
1.
Functional or subsidiary budgets
2.
Master budgets
(C) Classification on the basis of flexibility:
1.
Fixed budgets.
2.
Flexible budgets
(A)
Classification on the basis of time
1. Long-term budgets: Long-term budgets
are prepared for a longer period varies between five to ten years. It is
usually developed by the top level management. These budgets summarise the
general plan of operations and its expected consequences. Long-term budgets are
prepared for important activities like composition of its capital expenditure,
new product development and research, long-term finance etc.
2. Short-term budgets: These budgets are
usually prepared for a period of one year. Sometimes they may be prepared for
shorter period as for quarterly or half yearly. The scope of budgeting activity
may vary considerably among different organization.
3. Current budgets: Current budgets
are prepared for the current operations of the business. The planning period of
a budget generally in months or weeks. As per ICMA London, “Current budget is a
budget which is established for use over a short period of time and related to
current conditions.”
(b)
Classification on the basis of function
1. Functional budget: The functional
budget is one which relates to any of the functions of an organization. The
number of functional budgets depends upon the size and nature of business. The
following are the commonly used:
(i)
Sales budget
(ii)
Purchase budget
(iii)
Production budget
(iv)
Selling and distribution cost budget
(v)
Labour cost budget
(vi)
Cash budget
(vii)
Capital expenditure budget
Sales Budget
Sales
budget is one of the important functional budgets. Sales estimate is the
commencement of budgeting may be both made in quantitative or in value terms.
Sales budget is primarily concerned with forecasting of what products will be
sold in what quantities and at what prices during the budget period. Sales
budget is prepared by the sales executives taking into account number of
relevant and influencing factors such as: Analysis of past sales, key factors,
market conditions, production capacity, government restrictions, competitor’s
strength and weakness, advertisement, publicity and sales promotion, pricing
policy, consumer behaviour, nature of business, types of product, company
objectives, salesmen’s report, marketing research’s reports, and product life
cycle.
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.
Cost of
production Budget
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 breaks 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.
2. Master Budget
When
the functional budgets have been completed, the budget committee will prepare a
master budget for the target of the concern. Accordingly, a budget which is
prepared incorporating the summaries of all functional budgets. It comprises of
budgeted profit and loss account, budgeted balance sheet, budgeted production,
sales and costs. The ICMA England defines a Master Budget as ‘the summary
budget incorporating its functional budgets, which is finally approved, adopted
and employed’. The master budget represents the activities of a business during
a profit plan. This budget is also helpful in coordinating activities of
various functional departments.
(C)
Classification on the basis of flexibility
1. 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.
2. 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.
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