BCOE 142 MANAGEMENT ACCOUNTING Solved Assignment 2023 – 2024 [IGNOU Solved Assignment 2023 - 24]

BCOE 142 MANAGEMENT ACCOUNTING Solved Assignment 2023 – 24
IGNOU Solved Assignment 2023 - 24

BCOMG SIXTH SEMESTER TUTOR MARKED ASSIGNMENT

COURSE CODE: BCOE-142

COURSE TITLE: MANAGEMENT ACCOUNTING

ASSIGNMENT CODE: BCOE-142/TMA/2023-24

COVERAGE: ALL BLOCKS

Maximum Marks: 100

Note: Attempt all the questions.

Last Date of Submission: 15^th October 2024

In this Post you will get BCOE 142 MANAGEMENT ACCOUNTING Solved Assignment 2023 – 2024 which is a very important subject in IGNOU BCOMG 2nd Semeter. In order to Secure Handsome Marks in IGNOU BCOMG Solved Assignment 2023 - 24 simply note down the solved assignment and submit it before 15th October 2024.

BCOE 142 MANAGEMENT ACCOUNTING Solved Assignment 2023 – 2024

Section – A

1) What are the roles performed by Management Accounting in an organization? (10)

Ans: Role of Management Accounting in an organization

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:

Providing necessary accounting information to management

Helps in various activities and tasks performed by the management.

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:

- Regular Reports

- Special Reports.

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.

2) With the help of the given information calculate the following ratios:               (10)

i) Operating Ratio.

ii) Current Ratio.

iii) Stock Turnover Ratio.

iv) Debt Equity Ratio.

	Rs.
Equity share capital 9% Preference Share capital 12% Debentures General Reserve Sales Opening Stock Purchases Wages Closing Stock Selling and Distribution Expenses Other Current Assets Current Liabilities	2,50,000 2,00,000 1,20,000 20,000 4,00,000 24,000 2,50,000 15,000 26,000 3,000 1,00,000 75,000

Ans: Coming Soon

3) What is budgeting? What are the advantages and limitations of budgeting? (10)

Ans: Budgeting refers to the process of preparing the budgets. It involves a detailed study of business environment clearly grasping the management objectives, the available resources of the enterprise and capacity of the enterprise.

Budgeting is defined by J. Batty as under: “The entire process of preparing the budgets is known as budgeting”.

Thus budgeting is a process of making the budget plans. Preparation of budgets or budgeting is a planning function and their implementation is a control function. ‘Budgetary control’ starts with budgeting and ends with control.

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 some Advantages of Budgetary Control:

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.

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.

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.

Performance evaluation: It provides a yardstick for measuring and evaluating the performance of individuals and their departments.

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.

Standard Costing and Variance analysis: It creates suitable conditions for the implementation of standard costing system in a business organization. It reveals the deviations to management from the budgeted figures after making a comparison with actual figures.

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.

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.

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.

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.

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.

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.

4) Give a comparative account of standard costing and budgeting.           (10)

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

(a)   The standard cost

(b)  The actual cost

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

- Pre-determination of standard costs;

- Use of standard costs;

- Comparison of actual cost with the standard costs;

- Find out and analyse reasons for variances;

- Reporting to management for proper action to maximize efficiency.

Meaning of Budgeting: Budgeting refers to the process of preparing the budgets. It involves a detailed study of business environment clearly grasping the management objectives, the available resources of the enterprise and capacity of the enterprise.

Budgeting is defined by J. Batty as under: “The entire process of preparing the budgets is known as budgeting”.

Thus budgeting is a process of making the budget plans. Preparation of budgets or budgeting is a planning function and their implementation is a control function. ‘Budgetary control’ starts with budgeting and ends with control.

Difference between Standard Costing and Budgetary control

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

Standard Costing	Budgetary Control
Standard costing is applied to manufacturing of a product, process or processes or providing a service.	Budgetary control deals with the operations of a department of business as a whole.
It is intensive, as it is applied to manufacturing of a product or providing a service.	It is extensive in its application, as it deals with the operation of department or business as a Whole.
It is determined by classifying recording and allocating expenses to cost unit.	Budgets are prepared for sales, production, cash etc.
It is a part of cost account, a projection of all cost accounts.	It is a part of financial account, a projection of all financial accounts.
Variances are revealed through difference accounts.	Control is exercised by taking into account budgets and actual. Variances are not revealed through accounts.
It cannot be applied in parts.	Budgeting can be applied in parts.
It is not expensive because it relates to only elements of cost.	It is more expensive and broad in nature, as it relates to production, sales, finance etc.
This system cannot be operated without budgets.	Budgets can be operated with standards.

5) “Cost volume profit analysis and break-even point analysis are same”. Comment.  (10)

Ans: Break even analysis: The study of cost-volume-profit analysis is often referred to as “Break even analysis “and the two terms are used interchangeably by many. This is why break even analysis is a known form of cost-volume-profit analysis. The term break even analysis is used in two sense – narrow sense and broad sense. In its broad sense, break even analysis refers to the study of relationship between cost, volume and profit. In its narrow sense, it refers to a technique of determining that level of operations where total revenue equal total expenses i.e., breakeven point.

Cost-Volume-Profit Analysis: Cost-Volume-Profit analysis is analysis of three variables i.e., cost, volume and profit which explores the relationship existing amongst costs, revenue, activity levels and the resulting profit. It aims at measuring variations of profits and costs with volume, which is significant for business profit planning.

CVP analysis makes use of principles of marginal costing. It is an important tool of planning for making short term decisions.  The following are the basic decision making indicators in Marginal Costing:

(a) Profit Volume Ratio (PV Ratio) / Contribution Margin ratio

(b) Break Even Point (BEP)

(c) Margin of Safety (MOS)

(d) Indifference Point or Cost Break Even Point

(e) Shut-down Point

Assumptions in CVP analysis

The assumptions in CVP analysis are the same as that under marginal costing.

a) Cost can be classified into fixed and variable components.

b) Total fixed cost remains 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.

Break-even Point:

Break Even Point is the level of sales required to reach a position of no profit, no loss. At Break Even Point, the contribution is just sufficient to cover the fixed cost.  The organisation starts earning profit when the sales cross the Break Even Point.  Break Even Point can be calculated either in terms of units or in terms of cash or in terms of capacity utilization. It can be calculated as follows:

- BEP in units = Fixed Cost / Contribution per unit

- BEP in cash = Fixed Cost / P.V. Ratio

- BEP in terms of capacity utilization = (BEP in units / Total capacity) x 100

BCOE 142 MANAGEMENT ACCOUNTING Solved Assignment 2023 – 2024

Section – B

6) The Following information related to the operating performance of three divisions of a company for the year 2021.

	Division
	A	B	C
Contribution (Rs.)	50,000	50,000	50,000
Investment (Rs.)	4,00,000	5,00,000	6,00,000
Sales (Rs.)	24,00,000	20,00,000	16,00,000
No. of employees	22,500	12,000	10,500

You are required to evaluate the performance using Rate of Return on Investment (ROI) and Residual Income (RI) criteria. (6)

Ans: Coming Soon

7) What are the different techniques of cost management? Explain.  (6)

Ans: Different Tools and Techniques Used in Management Accounting for Cost Management:

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) 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.

b) 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.

c) 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.

d) 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.

e) 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.

f) 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.

g) 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.

8) “Balance sheet is a statement of assets and liabilities or sources and uses of capital or both”. Comment. (6)

Ans: Coming Soon

9) What is a sales Budget? How is it prepared? (6)

Ans: Meaning of 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.

Preparation of sales budget

Preparation of sales budget is one of the most important elements of the sales planning process. Generally, three basic budgets are developed, the sales budget, the selling expense budget and the sales department administrative budget. Mostly sales organisations have their own specified procedures, formats and timetables for developing the sales budget. While all sales budgets relate to the sales forecast, the steps taken in systematic preparation of budget can be identified in the following sequence:

Review and Analysis of Marketing Environment: Generally, companies prepare sales budget on the principle of bottom up planning with each echelon. To prepare a tentative budget of revenue and expenses, depending on the organisational structure of the sales department, each departmental head is asked to predict their sales volume and expenses for the coming period and their contribution of overhead

Communicating Overall Objectives: Sales executives at the top level must communicate their sales goals and objectives to the marketing department and argue effectively for an equitable share of funds.

Setting a Preliminary Plan for Allocation of Resources and Selling Efforts to Different Activities: Particularly products, customers and territories, so that revisions can be made in this initial sales budget. The sales manager must emphasize that the budgets should be as realistic as possible at each stages of its development, so that it can maximise its favourable impact on the firm.

Selling the Sales Budget to Top Management: The top sales and marketing executive must visualise that every budget proposal they are presenting to the top management must remain in competition with proposal submitted by the heads of other divisions. Each and every division- usually demands for an increased allocation of funds.

10) Elucidate the steps followed in Target Costing.          (6)

Ans: Steps in Target Costing: Target Costing is viewed as integral part of the design and introduction of new products. It is part of an overall Profit Management Process, rather than simply a tool for cost Reduction and Cost Management.

Step 1: Customer product Design Specification: The customer requirements as to the functionality and quality of the product is of prime importance.

Step 2: Market - Target Selling Price: The Target Selling Price is determined using various sales forecasting techniques.

Step 3: Market - Target Production Volume: Target Volumes are also significant in computation of unit costs particularly Capacity Related Costs and Fixed Costs. Product Costs are dependent upon the production levels over the life cycle of the product.

Step 4: Profitability - Target Profit Margin: Since profitability is Critical for survival, a Target Profit Margin is established for all new products.

Step 5: Setting Target Costs: The difference between the Target Selling Price and Target Profit Margin indicates the “Allowable Cost” for the product. Ideally, the Allowable Cost becomes the “Target Cost for the product”.

Step 6: Computing Current Costs: The “Current Costs” for producing the new product should be estimated. The estimation of Current Cost is based on existing technologies and components, taking into account the functionalities and quality requirements of the new product.

Step 7: Setting Cost Reduction Targets: The difference between Current Cost and Target Cost indicates the required cost reduction. This amount may be divided into two constituents namely - a) Target Cost - Reduction Objective and b) Strategic Cost - Reduction Challenge.

Step 8: Identifying Cost Reduction Opportunities: After the Product-Level Target Cost is set, a series of analytical activities, commence to translate the cost challenge into reality. These activities continue from the design stage until the point when the new product goes into production.

BCOE 142 MANAGEMENT ACCOUNTING Solved Assignment 2023 – 2024

Section – C

11) Distinguish between the following:                 (10)

(a) Cost Accounting and Management Accounting.

Ans: Cost accounting and Management accounting are two modern branches of accounting. Both the systems involve presentation of accounting data for the purpose of decision making and control of day-to-day activities. Cost accounting is concerned not only with cost ascertainment, but also cost control and managerial decision making.

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	Cost accounting	Management accounting
a)   Purpose	The main objective of cost accounting is to ascertain and control the cost of products or services.	The function of management accounting is to provide information to management for efficiently performing the functions of planning, directing, and controlling.
b)   Emphasis	Cost accounting is based on both historical and present data.	Management according deals with future projections on the basis of historical and present cost data.
c)    Principles	Established procedures and practices are followed in cost accounting.	No such prescribed practices are followed in Management accounting.
d)   Data	Cost accounting uses only quantitative information.	Management accounting uses both qualitative and quantitative information.
e)    Scope	Cost accounting is concerned mainly with cost ascertainment and control.	Management accounting includes, financial accounting, cost accounting, budgeting, tax planning and reporting to management.
f)     Status	The Status of cost accountants comes after management accountant.	Management accountant is senior in position to cost accountant.

(b) Cost Control and Cost Reduction.

Ans: Both Cost Reduction and Cost Control are efficient tools of management but their concepts and procedure are widely different. The differences are summarised below:

Cost Control	Cost Reduction
(a) Cost Control represents efforts made towards achieving target or goal.	(a) Cost Reduction represents the achievement in reduction of cost.
(b) The process of Cost Control is to set up a target, ascertain the actual performance and compare it with the target, investigate the variances, and take remedial measures.	(b) Cost Reduction is not concern with maintenance of performance according to standard.
(c) Cost Control assumes the existence of standards or norms which are not challenged.	(c) Cost Reduction assumes the existence of concealed potential savings in standards or norms which are therefore subjected to a constant challenge with a view to improvement by bringing out savings.
(d) Cost Control is a preventive function. Costs are optimized before they are incurred.	(d) Cost Reduction is a corrective function. It operates even when an efficient cost control system exists. There is room for reduction in the achieved costs under controlled conditions.
(e) Cost Control lacks dynamic approach.	(e) Cost Reduction is a continuous process of analysis by various methods of all the factors affecting costs, efforts and functions in an organization.

(c) Reserve and Reserve Fund.

Ans: Coming Soon

(d) Statement Cost and Estimated Cost.

Ans: Estimates are predetermined costs which are based on historical data and are often not very scientifically determined.  They usually compiled from loosely gathered information and therefore, they are unsafe to use them as a tool for measuring performance.  Standard costs are a predetermined cost which aims at what the cost should be rather then what it will be.  Both the standard costs and estimated costs are used to determine price in advance and their purpose is to control cost.  But, there are certain differences between these two costs as stated below:

The following are some of the important differences between standard cost and estimated cost:

Basis	Standard Cost	Estimated Cost
a.      Emphasis	Standard cost emphasizes as what the cost ‘should   be’ in a given set of situations.	Estimated cost emphasizes on what the cost ‘will be’.
b.       Basis for calculation	Standard costs are planned costs which are determined by technical experts after considering   levels of efficiency and production.	Estimated costs are determined by taking into consideration the historical data as the basis and adjusting it to future trends.
c.       Efficiency measurement	It is used as a devise for measuring efficiency	It cannot be used as a devise to determine efficiency.  It only determines expected costs.
d.       Cost control	Standard costs serve the purpose of cost control	Estimated costs do not serve the purpose of cost control.
e.       Part of cost accounting	Standard costing is part of cost accounting process	Estimated costs are statistical in nature and may not become a part of accounting.
f.        Technique of cost accounting	It is a technique developed and recognised by management and academicians.	It is just an estimate and not a technique
g.       Applicability	It can be used where standard costing is in operation	It may be used in any concern operating on a historical cost system.

12) Write short notes on the following:                (10)

(a) Trend Analysis.

Ans: Trend Analysis: Trend analysis is an important tool of horizontal financial analysis. This is helpful in making a comparative study of the financial statements over several years. Under these method trend percentages are calculated for each item of the financial statements taking the figure of base year as 100. Normally the starting year is taken as the base year. The trend percentages show the relationship of each item with its preceding year’s percentages.

Objectives of trend analysis:

Identify long-term financial patterns: Trend analysis involves examining financial data over multiple periods to identify long-term patterns, tendencies, and changes in performance indicators, providing insights into the company's historical performance trajectory.

Forecast future performance based on historical data: By analyzing historical trends, stakeholders can make informed predictions about future performance, allowing for better decision-making and strategic planning.

Pinpoint areas for improvement or concern through historical trends analysis: Trend analysis helps in identifying areas of strength and weakness within the company's financial performance, enabling stakeholders to focus on areas that require improvement or further investigation.

Merits of Trend analysis:

a) Trend percentages can be presented in the form of Index Numbers showing relative change in the financial statements during a certain period.

b) Trend analysis will exhibit the direction to which the concern is proceeding.

c) The trend ratio may be compared with the industry, in order to know the strong or weak points of a concern.

Demerits of Common Size Statements:

a) These are calculated only for major items instead of calculating for all items in the financial statements.

b) Trend values will also be misleading if there are frequent changes in accounting policies.

c) Since trend percentage are based on financial statements, therefore qualitative elements of the business are ignored.

(b) Cash Budget.

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.

Features of Cash Budget

a) The cash-budget period is broken down into periods, mainly in months.

b) The cash-budget is always in columnar form i.e. column showing each month

c) Payments and receipts of cash are identified in different heading and showing total for each month.

d) The surplus of total cash payment over receipts or of receipts over payment for each month is shown.

e) The running balances of cash, which would be determined by taken the balance at the end of the previous month and adjusting it for either deficit or surplus of receipts over payments for current month, is identified.

(c) Responsibility Accounting.

Ans: Responsibility accounting is a system used in management accounting for control of costs. It is used along with other systems like budgetary control and standard costing. The organization is divided into different centers called “responsibility centers” and each centre is assigned to a responsible person.

According to Eric. L. Kohler “Responsibility Accounting is the classification, management maintenance, review and appraisal of accounts serving the purpose of providing information on the quality and standards of performance attained by persons to whom authority has been assigned.”

Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.

Features of Responsibility Accounting

It is a control system used by top management for monitoring and controlling operations of a business.

It is based on clearly defined functions and responsibilities assigned to executives.

The organization is divided into meaningful segments called responsibility centres.

Costs and revenues of each centre and responsibility of them are fixed on the individuals.

There is continuous reporting of information relating to each centre and appropriate corrective actions are taken wherever necessary.

It is used along with budgetary and standard costing system

(d) Transfer Pricing.

Ans: A Transfer Price is that notional value at which goods and services are transferred between divisions in a decentralised organisation. Transfer prices are normally set for intermediate products, which are goods, and services that are supplied by the selling division to the buying division. In large organisations, each division is treated as a ‘profit center’ as a part and parcel of decentralization. Their profitability is measured by fixation of ‘transfer price’ for inter divisional transfers.

The transfer price can have impact on the division’s performance and hence lot of care is to be taken in fixation of the same. The following factors should be taken into consideration before fixing the transfer prices.

(1) Transfer price should help in the accurate measurement of divisional performance.

(2) It should motivate the divisional managers to maximize the profitability of their divisions.

(3) Autonomy and authority of a division should be ensured.

(4) Transfer Price should allow ‘Goal Congruence’ which means that the objectives of divisional manager’s match with those of the organisation.

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