Management Accounting Solved Question Paper 2022 [Dibrugarh University B.Com 5th Sem (CBCS Pattern)]

Management Accounting solved Question Paper 2022
Dibrugarh University BCOM 5th SEM

5 SEM TDC DSE COM (CBCS) 501 (GR-I)

2022 (Nov / Dec)

COMMERCE (Discipline Specific Elective)

(For Honours / Non-Honours)

Paper: DSE-501 (Group-I)

(Management Accounting)

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) In management accounting, only those figures are used which can be measured in monetary terms.

Ans: False.

(2) Depreciation of machinery is a source of funds.

Ans: False.

(3) The difference between actual cost and standard cost is known as differential cost.

Ans: False, Variance cost

(4) A system of budgetary control cannot be used in a business where standard costing is in use.

Ans: False

(b) Fill in the blanks:                       1x4=4

(1) Management accounting is based on _______ information.

Ans: Non-financial

(2) Issue of equity shares is a cash flow from _______ activities.

Ans: Financing

(3) _______ budget is a summary of all functional budgets.

Ans: Master

(4) Margin of safety can be improved by reducing the _______ cost.

Ans: Fixed

2. Write short notes on any four of the following:            4x4=16

(a) Tools of Management Accounting.

Ans: 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.

(b) Operating Activities.

Ans: 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.

(c) Profit-volume Graph.

Ans: PROFIT VOLUME CHART OR [P/V CHART]

It shows the amount of profit or loss at different levels of output. When the output is zero, total loss will be equal to fixed costs. The fixed costs are recovered gradually when the volume of output is increased. When the output reaches the Break-even point, the whole fixed costs are recovered. The firm incurs no loss or earns no profit. Thereafter, the firm makes a profit and the amount of profit increases with the increase in sales volume.

CONSTRUCTION OF P/V CHART

The same data used for drawing a Break even chart may be used for constructing a P/V chart. The following steps may be followed for constructing a P/V chart.

1. Sales or units of output are plotted along the X axis

2. The Y axis is used for marking fixed costs losses and profits

3. Points of Profits or losses are marked at different levels of sales and these points are joined to get the profit or loss line.

4. The point where the profit or loss line intersects the X axis is marked as the Breakeven point.

5. The angle at the BEP measures the angle of incidence.

6. The distance between BEP and actual sales on the X axis measures the margin of safety.

(d) Product Budget.

Ans: 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.

(e) Contribution.

Ans: 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.

c) It helps the management in selection of suitable product mix.

d) It helps the management in taking make or buy decision.

e) It helps in taking decision regarding adding a new product.

3. Define Management Accounting. Discuss its functions and limitations.             4+5+5=14

Ans: The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.

In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.

Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.

According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.

From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.

Functions of Management Accounting:

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.

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.

5. Top-heavy structure: The installation of management accounting system requires heavy costs on account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only by big concerns.

Or

Discuss the various tools and techniques of Management Accounting.   14

Ans: 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. (a) (1) Explain the objects of Cash Flow Statement.                     7

Ans: 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.

Objectives of Cash Flow Statement:

The Cash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its objectives. The important objectives are as follows:

1)    To Help the Management in Making Future Financial Policies: Cash Flow statement is very helpful to the management. The management can make its future financial policies and is in a position to know about surplus or deficit of cash.

2)    Helpful in Declaring Dividends etc.: Cash Flow Statement is very helpful in declaring dividends etc. This statement can supply necessary information to understand the liquidity.

3)    Cash Flow Statement is Different than Cash Budget: Cash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the same can be corrected.

4)    Helpful in devising the cash requirement:  Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets.

5)    Helpful in finding reasons for the difference:  Cash Flow Statement is also helpful in finding reasons for the difference between profits/losses earned during the period and the availability of cash whether cash is in surplus or deficit.

6)    Helpful in predicting sickness of the business:  Cash flow is helpful in predicting sickness of the business. A sound cash position is a true indicator of sound financial position.

7)    Supply Necessary Information to the Users: A Cash Flow Statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

(i) To assess the ability of a firm to pay its obligations as soon as it becomes due;

(ii) To analyze and interpret the various transactions for future courses of action;

(iii) To see the cash generation ability of a firm;

(iv) To ascertain the cash and cash equivalent at the end of the period.

8) Helps the Management to Ascertain Cash Planning: No doubt a cash flow statement helps the management to prepare its cash planning for the future and thereby avoid any unnecessary trouble

(2) Distinguish between Cash Flow Statement and Fund Flow Statement.             7

Ans: Difference between Funds Flow Statement and Cash Flow Statement:

Basis of Difference

Funds Flow Statement

Cash Flow Statement

Basis of Analysis

Funds flow statement is based on broader concept i.e. working capital.

Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital.

Objective

The object funds flow statement is to disclose the magnitude, direction and causes of changes in working capital.

The object of cash flow is to disclose the magnitude, direction and causes of changes in cash and cash equivalents.

Source

Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.

Cash flow statement starts with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses.

Usefulness

Funds flow statement is more useful in assessing the long-term financial position.

Cash flow statement is more useful in assessing the short-term financial position of the business.

Schedule of Changes in Working Capital

In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital.

In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement.

Causes

Funds flow statement shows the causes of changes in net working capital.

Cash flow statement shows the causes of changes in cash.

Principal of Accounting

Funds flow statement is based on the accrual basis of accounting.

In cash flow statement, data are obtained on accrual basis which are converted into cash basis.

Compulsion

There is no prescribed form for preparation of Funds flow statement.

Cash flow statement is compulsory to be prepared in prescribed proforma as given in AS – 3.

Relationship

Funds flow statement can be prepared from the cash flow statement under indirect method.

But a cash flow statement cannot be prepared from funds flow statement.

Financial Health

Sound fund position does not necessarily mean sound cash position.

But sound cash position is always followed by sound fund position.

Or

(b) The following are the balance taken from the books of a limited company as on 31st March, 2021 and 2022:

Credit Balance

2021

Rs.

2022

Rs.

Debit Balance

2021

Rs.

2022

Rs.

Share Capital

2,00,000

2,60,000

Cash at Bank

2,480

2,700

Sundry Creditor

39,500

41,135

Debtors

85,000

72,000

Bills Payable

33,780

11,252

Advances

2,500

1,000

Bank Overdraft

59,510

-

Stock

1,11,000

97,000

Provision for Tax

40,000

50,000

Land & Building

1,49,000

1,45,000

Reserves

50,000

50,000

Machinery & Plant

1,12,500

1,16,000

Surplus

39,690

41,220

Goodwill

-

20,180

 

4,62,480

4,53,880

 

4,62,480

4,53,880

Additional Information:

(1) During the year ended 31st March, 2022, dividend was paid Rs. 18,000.

(2) Income tax paid during the year 2021-22 Rs. 25,000.

(3) The net profit for the year before tax was Rs. 62,530.

Prepare Cash Flow Statement by indirect method.                                           14

5. “Marginal costing is a very useful technique to management for cost control, profit planning and decision making.” Explain.                                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’.

 “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

The following are the details of profit and loss data relating to a manufacturing business:

 

Rs.

Sales

Cost of Goods Sold:

Variable 40,000

Fixed        10,000

1,00,000

 

 

50,000

Gross Profit

50,000

Selling and Administrative Cost:

Variable 10,000

Fixed         5,000

 

 

15,000

Net Profit

35,000

From the above data, calculate –

(1) profit-volume ratio;

(2) break-even point;

(3) profit for the sales volume of Rs. 1,60,000 and Rs. 70,000.

Would it be profitable to reduce the selling price by 10% if it leads to an increase in sales by 30%? 2+3+4+5=14

6. (a) What do you mean by cash budget? What are its advantages? Explain the limitations of budgetary control. 4+4+6=14

Ans: A cash budget is a budget or plan of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payments. In other words, a cash budget is an estimated projection of the company's cash position in the future.

Management usually develops the cash budget after the sales, purchases, and capital expenditures budgets are already made. These budgets need to be made before the cash budget in order to accurately estimate how cash will be affected during the period. For example, management needs to know a sales estimate before it can predict how much cash will be collected during the period. Management uses the cash budget to manage the cash flows of a company. In other words, management must make sure the company has enough cash to pay its bills when they come due.

Chartered Institute of Management Accountant (CIMA) defines cash budgets as a short-term fiscal plan expressed in money which is prepared in advance. It helps to determine the cash-inflow and cash-outflow of the business.

Advantages of Cash Budget:

Cash budget is an important tool in the hands of financial management for the planning and control of the working capital to ensure the solvency of the firm.  The importance of cash budget may be summarised as follow:

(1) Helpful in Planning. Cash budget helps planning for the most efficient use of cash. It points out cash surplus or deficiency at selected point of time and enables the management to arrange for the deficiency before time or to plan for investing the surplus money as profitable as possible without any threat to the liquidity. 

(2) Forecasting the Future needs. Cash budget forecasts the future needs of funds, its time and the amount well in advance. It, thus, helps planning for raising the funds through the most profitable sources at reasonable terms and costs. 

(3) Maintenance of Ample Cash Balance. Cash is the basis of liquidity of the enterprise. Cash budget helps in maintaining the liquidity. It suggests adequate cash balance for expected requirements and a fair margin for the contingencies. 

(4) Controlling Cash Expenditure. Cash budget acts as a controlling device. The expenses of various departments in the firm can best be controlled so as not to exceed the budgeted limit. 

(5) Evaluation of Performance. Cash budget acts as a standard for evaluating the financial performance. 

(6) Testing the Influence of proposed Expansion Programme. Cash budget forecasts the inflows from a proposed expansion or investment programme and testify its impact on cash position.

(7) Sound Dividend Policy. Cash budget plans for cash dividend to shareholders, consistent with the liquid position of the firm. It helps in following a sound consistent dividend policy. 

(8) Basis of Long-term Planning and Co-ordination. Cash budget helps in co-coordinating the various finance functions, such as sales, credit, investment, working capital etc. it is an important basis of long term financial planning and helpful in the study of long term financing with respect to probable amount, timing, forms of security and methods of repayment.

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.

1. 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.

2. 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.

3. 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.

4. 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.

5. Lack of coordination: Staff co-operation is usually not available during budgetary control exercise.

6. Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialized staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived there from.

Or

(b) From the following estimates of B. C. Ltd., prepare a sales overhead budget: 14

Advertisement

Expenses of the Sales Department

Salaries of the Sales Department

Counter salesmen’s salary and dearness allowance 

Rs. 5,000

Rs. 4,000

Rs. 9,000

Rs. 12,000

Counter salesmen are allowed commission @ 2% on their sales

Travelling salesmen are allowed commission and expenses @ 10% and 5% on their sales respectively.

The estimated sales during the period were as under:

Area

Counter Sales (Rs. )

Sales by Travelling Salesmen (Rs. )

I

1,60,000

20,000

II

2,25,000

28,000

III

2,70,000

45,000

***

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