MANAGEMENT ACCOUNTING SHORT ANSWERS-QUICK REVISION NOTES UNIT I INTRODUCTION TO MANAGEMENT ACCOUNTING 1) Define Management Accounting. According to I.C.M.A...

"Management accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in day-to-day operations of an undertaking" 2) List out the features of management accounting 1. Providing of financial information 2. Cause and effect analysis 3. Use of special techniques and concepts 4. Decision making 5. No fixed conventions 6. Achievement of objectives 7. Improving Efficiency 8. Forecasting 9. Providing of information and not decisions 3) What are the objectives of management accounting? 1. Presentation of data 2. Aid of planning and forecasting 3. Help in organising 4. Decision making 5. Effective control 6. Communication of management policies 7. Incorporation of non-financial information 8. Co-ordination 9. Motivating employes 4) What are the advantages of management accounting? 1. Increase in efficiency 2. Effective planning 3. Performance evaluation 4. Profit maximisation 5. Reliability 6. Elimination of wastages 7. Effective communication 8. Employee Morale 9. Control and co-ordination 5) What are the tools and techniques in management accounting? 1. Financial policy and Accounting
1

2. Analysis of financial statement 3. Historical cost accounting 4. Budgetary control 5. Standard Costing 6. Marginal costing 7. Other tools of management accounting are:a. Decision accounting b. Revaluation accounting c. Control accounting 8. Management information system 6) Mention the scope of management accounting. 1. Financial accounting 2. Cost accounting 3. Budgeting and forecasting 4. Inventory control 5. Statistical Analysis 6. Analysis of data 7. Internal audit 8. Tax accounting 9. Methods and Procedures 7) What are the limitations of management accounting? 1. Dependence for basic records 2. Personal Bias 3. Management accounting is only a tool 4. Management accounting provides only data 5. Broad based scope 6. Resistance to change 7. Costly to Install 8. Evolutionary stage 8) Differentiate between Management Accounting and Financial Accounting.
FINANCIAL ACCOUNTING PRIMARY USERS External( investors, government authorities, creditors) Help investors, creditors, and others make investment, credit, and other decisions Delayed or historical MANAGEMENT ACCOUNTING Internal(Managers of business, employees) Help managers plan and control business operations

PURPOSE OF INFORMATIO N TIMELINES

Current and future oriented 2

RESTRICTIONS

Follows GAAP

GAAP does not apply, but information should be restricted to strategic and operational needs More subjective and judgmental, valid, relevant and accurate Disaggregated information to support local decisions Concern about how reports will affect employees behaviour Usually approximate but relevant and flexibleExcept for few companies, it is not mandatory Is a mean to the end Segment reporting is the primary emphasis.

NATURE OF INFORMATION SCOPE

Objective, auditable, reliable, consistent and precise Highly aggregated information about the overall organisation Concern about adequacy of disclosure Must be accurate and timelyCompulsory under company law Is an end in itself It is primarily concerned with reporting for the company as a whole.

BEHAVIOURAL I MPLICATIONS FEATURES

SEGMENTS OF ORGANISATI ON

9. Differentiate between Cost Accounting and management accounting.

Cost Accounting Cost accounting deals with ascertainment , allocation , apportionment accounting aspect of costs Cost accounting provides a base for management accounting Cost accounting does not include financial accounting , tax planning and tax accounting

Management Accounting Management accounting deals with the effect and impact of costs on the business.

management accounting is derived from cost accounting and financial accounting. Management accounting includes financial and cost accounting , tax accounting and tax planning.
3

Cost accounting is concerned with short term planning Cost accounting merely assists the management with functioning Cost accounting can be installed with management accounting

Management accounting is concerned with short range and long range planning. Management accounting assists and evaluates the management performance. management accounting can not be installed without cost and financial accounting.

UNIT II FINANCIAL STATEMENT ANALYSIS

1. What do you mean by financial statements? American Institute of Certified Public Accountants says Financial statements are prepared for the purpose of presenting a periodical a review or report on the progress by the management and deal with a )the status of investments in the business and b)the results achieved during the period under review. Financial statements are affected by three factors i.e., recorded facts, accounting conventions and personal Judgements. Thus, the financial statements represent two statements-(i) Profit and Loss Account or Income Statement and (ii) Balance Sheet. 2. What are the features of ideal financial statements? Financial statements, to serve the purposes of different users, have to be well prepared and presented. The following qualities are recognized as essential for ideal financial statements: a) Clarity b) Intelligibility c) Objectivity d) Emphasis on materiality e) Precision and brevity f) Systematic classification of heads and items g) Consistency 3. What do you mean by Financial Statement Analysis? The process of reviewing and evaluating a company's financial statements (such as the balance sheet or profit and loss statement), thereby gaining an understanding of the financial health of the company and enabling more effective decision making. Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers and other interested parties. 4. Who are the users of financial statements?
4

Financial statement satisfy the information requirements of a wide cross-section of the society representing corporate managers, executives, bankers, creditors, Suppliers, Researchers, Stock Exchange, financiers, shareholders , investors, laborers, Trade unions, consumers, Tax authorities and government institution. 5. List out the different types of final statements analysis? Types of Financial Statements analysis On the basis of information used: On the basis of modus operandi of analysis: Horizontal analysis Internal analysis External analysis Vertical analysis

1. Horizontal analysis: When financial analysis is done for number of years, it is known as horizontal analysis. Such analysis sets a trend wherein the figures of various years are compared with one standard year known as base year. Based on the trend prevailing it is possible to make decision and form a rational judgment about the progress of the business. This type of analysis is also known as dynamic analysis as it measures the change of position of the business over a number of years. 2. Vertical analysis: When analysis is made for data covering one year's period, it is known as vertical analysis. This type is also known as static analysis as it measures the state of affairs of the business as on given period of time. This type of analysis is useful in comparing the performance of several firms belonging to the same industry or various departments belonging to the same company. 3. External analysis: Such type of analysis is made by outsiders who have no access to the books of accounts. They constitute investors, creditors, credit agencies and government agencies. As they dont have access to the books of accounts they have to depend on the published accounts for the purpose of analysis. However, government regulation requiring auditing of accounts has made published accounts more reliable and dependable. As compared to internal analysis, external analysis is not done in detail and hence it serves limited purpose. 4. Internal analysis: It is done by those parties in the business who have access to books of account. Such parties can be designated as accountant or financial analyst. Some times it can also be done by employees to know the performance of the business. Internal analysis is done in more detail when compared to external analysis. 6. What is the difference between Analysis and Interpretation? To interpret means to put meaning of a statement in simple term for the benefit of a person whereas Analysis is described as critical examination of financial transaction effected during a definite period of time.
5

7. What are the tools of financial statement analysis? Ratio Analysis Cash Flow analysis Funds flow analysis Comparative statementanalysis Common size statement analysis Networking capital analysis Trend Analysis 8. What is Trend Analysis? What are the advantages? Trend analysis is employed when it is required to analyze the trend of data shown in a series of financial statements of several successive years. The trend obtained by such an analysis is expressed as percentages. Trend percentage analysis moves in one direction either upwards or downwards, progression or regression. This method involves the calculation of percentages relationship that each statement bears to the same item in the base year. The base year maybe any one of the periods involved in the analysis but the earliest period id mostly taken as the base year. The trend percentage statement is an analytical device for condensing the absolutely rupee data by comparative statements. Advantages of Trend Analysis: 1. Trend analysis indicate the increase or decrease in an accounted item along with the magnitude of change in percentage which is more effective than absolute data. 2. The trend analysis facilitates an efficient comparative study of the financial performance of a business enterprise over a period of time. 9. What are Common Size Statements? What are its uses? It facilitates the comparison of two or more business entities with a common base. In case of balance sheet, Total assets or liabilities or capital can be taken as a common base. These statements are called Common Measurement or Component Percentage or 100 percent statements. Since each statement is reduced to the total of 100 and each individual component of the statement is represented as a % of the total of 100 which invariably serves as the base. Thus the statement prepared to bring out the ratio of each asset of liability to the total of the balance sheet and the ratio of each item of expense or revenues to net sales known as the Common Size statements. Use of common size statement: 1. Common size analysis reveals the sources of capital and all other sources of funds and the distribution or use or application of the total funds in the assets of a business enterprise. 2. Comparison of common size statements over a number of years will clearly indicate the changing proportions of the various components of assets, liabilities, costs, net sales and profits. 3. Comparison of common size statements of 2 or more enterprises in the same industry or that of an enterprise with the industry as a whole will assist corporate evaluation and ranking.
6

10. What is a Comparative Financial Statement? Mention its uses. Comparative financial statement is statement of the financial position of a business so designed as to facilitate comparison of different accounting variables for drawing useful inferences. Financial statements of two or more business enterprises may be compared over period of years. This is known as inter-firm comparison Financial statements of particular business enterprise maybe compared over two periods of years. This is known as inter-period comparison Uses of comparative statement: 1. These statements are very useful to the financial analysts because they indicate the direction of the movement of the financial position and performance over the years. 2. These statements can also be used to compare the position of the firm every month or every quarter. They can be prepared to facilitate comparison with the financial position of other firms in the same industry or with the average performance of the entire industry. Such comparisons facilitate identification of trouble spots in a companys working and taking corrective measures. 3. Comparative statements present a review of the past activities and their cumulative effect on the financial position of the concern. 11. List out the Steps of financial statement analysis framework 1. 2. 3. 4. 5. 6. State the objective and context Gather data Process the data Analyze and interpret the data Report the conclusions or recommendations Update the analysis UNIT III RATIO ANALYSIS
1. What is a ratio?

Ratios express the relationship between two number as well as accounting figures. It shows the process of computing and presenting the relationship between items of the financial statement. The ratio can be expressed in 3 terms: 1. Simple or pure ratio. 2. Percentage. 3. Rate.
2. What is Ratio Analysis?

Ratio analysis is a tool of financial analysis used to interpret the financial statements so that the strengths & weaknesses of a firm as well as its historical performance & current financial condition can be determined. Ratios are used for comparison with related facts. Comparison
7

involves i) trends ratio, comparison of ratios of a firm over time. ii) inter-firm comparison, iii) comparison of items within a single years financial statement of a firm & iv) comparison with standards or plans. Ratios can be classified into 4 broad groups:1. Liquidity Ratio 2. Leverage Ratio 3. Activity Ratio 4. Profitability Ratio
3. What are the uses and limitations of Ratio Analysis?

Uses of ratio Analysis:

1. Simplifies financial statements: 2. Facilitates inter-firm comparison 3. . Helps in planning 4. Makes inter-firm comparison possible 5. Help in investment decisions:

Limitations of Ratio Analysis: 1. Based only on the information of financial statements 2. Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. Several other factors like market conditions, management policies, etc. may affect the future operations are ignored fir comparison. 3. Ratios are only indicators. They cannot be taken as final regarding good or bad financial position of the business. 4. A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company 5. They are not well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 6. A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 7. Personal bias: Ratios have to interpreted and different people may interpret the same ratio in different way. 8. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.
4. What is Liquidity Ratio? 8

It analyse the short term and immediate financial position of the business organization and it also indicates the relationship between current assets and current liabilities. For e.g. Current Ratio, Liquid Ratio, Quick Ratio.
5.

What do you mean by Leverage Ratio?

It shows the relationship between debts and own funds in financing the assets of the business. It includes debt equity ratio, capital gearing ratio and proprietary ratio. It also helps in knowing the solvency of the company and so it is known as capital structure ratio or solvency ratio.
6.

What is . Activity Ratios?

This ratio shows comparison of sales with different items of income statement and Balance Sheet. It shows the utilization of funds and efficiency of business important activity ratios of stock turnover ratio, debtors turnover ratio etc. This ratios are also known as Turnover Ratios.
7.

What is Profitability Ratio?

It makes comparison of profits with sales and assets of the business profits include gross profit, operating net profit, profit before tax etc. It reflects overall efficiency of business. It includes gross profit ratio, net profit ratio, return on capital employed etc.
8.

What is Coverage Ratio?

It is the relationship between profits of the company and amounts payable to outsider. Out of such profits in the form of dividends, interests, etc. it includes dividend payout ratio, debt ratio etc
9. What do you mean by Liquid Ratio?

Liquid ratio compares the quick assets with the quick liabilities. It is expressed in the form of a pure ratio and it is also known as quick ratio and Acid Ratio.. Quick Assets Quick Ratio --------------------Quick Liabilities Quick Assets include all current assets minus stock and prepaid expenses. Quick Liabilities includes all current liabilities minus advances received and bank overdraft. Significance: The ratio helps to know the immediate short term liabilities and abilities of business to pay the short -term obligations. Standard: Normally, 1:1 is the standard quick ratio which means quick assets must be at least equal to quick liabilities. Limitation : This ratio do not indicate the long term solvency of the business.
10. What is Current Ratio?

This ratio compares the current assets with the current liabilities. It is expressed in the form of pure ratio. Current Assets Current Ratio = ----------------------Current Liabilities Current assets include assets which are circulated and liquidated in cash within one accounting period. E.g. Debtors (net), bills receivables, short term investment, inventories, loose tools etc.. Current Liabilities, any liability which is due to be paid within one accounting period is a current liability. E.g. Creditors, bills payable, outstanding expenses, proposed dividend, bank overdraft etc. Significance: It indicates the strength of working capital and measures short term solvency of the business. It reflects the ability of business to pay its short term liabilities. Standard: Normally, 2:1 is regarded as standard ratio which means current assets must be nearly two times of current liabilities. Limitations: It ignores the components of working capital by considering liquid assets and deferred assets as same. It also ignores the quality of working capital by including dead stock in working capital.
11. What is Proprietary Ratio?

Proprietary Ratio is also known as Net Worth Ratio or Assets Backing Ratio. It compares proprietors funds with total liabilities or total assets. It is expressed in terms of percentage. Proprietors Funds Proprietary Ratio -------------------- x 100 Total Assets Proprietors funds, includes paid up preference share capital paid up Equity Share Capital, Capital Reserve, Revenue Reserve, Security Reserve , Profit & Loss Account minus Accumulated losses and fictitious assets. Total Assets includes Fixed Assets, investments and current assets. Significance - It determines to what extent total assets are financed by proprietors. It also compares proprietors funds with total assets and total liabilities. It also indicated as Total Assets= Total Liabilities, Total Liabilities = Proprietors Funds + Loans +Current Liabilities. Standard - It should be very high or very low. Normally, It should be guided as 65%-75% considered. But, it differs from business to business.
12. What is Debt Equity Ratio?

This ratio compares the long term debts with shareholdersfunds. It is usually expressed as a pure ratio. Debt Equity Ratio Total long term Debt --------------------------shareholders funds
10

Debt includes borrowed funds as secured / Unsecured loans including debentures, interest accrues and due on loans. Shareholder Proprietors funds include paid up share capital, Reserves and surplus minus fictitious assets and accumulated losses. Significance - This is a solvency ratio and it also indicated the proportion of debt and equity in financing the funds of the concerns. It also shows protection cover for long term creditors. The low debt equity ratio is considered as favourable to creditors. It indicates, low ratio means less dependence on long-term debts. Standard - If debts equity ratio is two third then it is considered as satisfactory ratio. It implies that out of three total funds debts would be 2 and Equity would be 1. UNIT IV FUNDS FLOW STATEMENT, CASH FLOW STATEMENT AND BUDGETARY CONTROL
1.

What is Funds Flow Statement?

Fund flow statement shows the sources and uses of funds as well as net change in working capital. It is a financial statement which shows as to how a business entity has obtained its funds and how it has applied or employed its funds between the opening and closing Balance Sheet dates during the particular year or period.
2.

What do you mean by FFO?

Funds from operations is the only internal source of funds. All the non funds items or non operating expenses and non operating incomes should be adjusted in the net profit to ascertain funds from operations. This can be done by preparing an adjusted profit and loss account or by preparing a statement of funds from operations.
3. What are the Uses and Limitations of Funds Flow Statement?

Uses:
1. 2. 3. 4. 5. 6. 7.

Helps in understanding change in the distribution of financial resources between two Balance Sheets. Shows how funds are obtained and used Helps in computation of cost of capital Guides in obtaining funds for future requirements Helps in selection of best investment proposals or to make future capital expenditure decisions. Helps in understanding changes in working capital positions. It explains the consequences of business activities

Limitations 1. They do not serve as original evidence of financial status. 2. Ignores transactions between long term assets and liabilities
11

3. It shows historical data 4. It is summarized presentation of figures and cannot provide information about changes on a continuous basis.
4.

What is Working Capital?

Working Capital means the excess of Current Assets over Current Liabilities. Working Capital is the amount of net Current Assets. It is the investments made by a business organisation in short term Current Assets like Cash, Debtors, Bills receivable etc. Working Capital = Current Assets Current Liabilities
5. What is schedule of changes in working capital

Working capital means the excess of current assets over current liabilities. Statement of changes in working capital is prepared to show the changes in the working capital between the two balance sheet dates. This statement is prepared with the help of current liabilities derived from the two balance sheets. As, working capital = current Assets - Current Liabilities So, (i) An increase in current Assets increases working capital (ii) A decrease in current assets decreases, working capital (iii) An increase in current liabilities decrease working capital (iv) A decrease in current liabilities increases working capital The change in the amount of current asset or current liability in the current balance sheet as compared to that of the previous balance sheet either results in increase or decrease in working capital. The difference is recorded for each individual current asset and current liability. In case a current asset in the current period is more than in the previous period, the effect is an increase in working capital and it is recorded in the increase column. But if a current liability in the current period is more than in the previous period, the effect is decrease in working capital and it is recorded in the decrease column or vice versa. The total increase and the total decrease are compared and the difference shows the net increase or net decrease in working capital. 6. How is proposed dividend prepared under Funds Flow Statement

It may be taken as a current liability. In such a case it will appear as one of the items decreasing working capital in the schedule of changes in working capital. It will not be shown as an application of funds when dividend is paid later on. Proposed dividend may simply be taken as an appropriation of profit. In such a case proposed dividend for the current year will be added it to current years profit in order to find out the funds from operation if such amount of dividend has already been charged to profits. Proposed dividend will be shown as an application of funds. 7. How is Provision for taxation prepared under Funds Flow Statement?

Provision of tax: It is an application of funds and as such it appears inthe funds flow statement. Provision for tax may be treated as a current liability. When tax provision is treated as a current
12

liability, it forms a part of the working capital calculations. In that case tax paid will not be treated as an application of funds. The second alternative is to treat provision for tax as a non current liability. In that case the following entries are passed P&L a/c Dr To provision for tax a/c When the assessment is completed and tax is paid the amount of tax paid is debited to provision for tax and is treated as an application andthe following entry is passed Provision for tax a/c Dr. To bank a/c
6.

What is Cash Flow Statement?

Cash flow statement means a statement of showing net changes in the position of cash and cash equivalents. As per as 3, this would include cash in hand and savings, current account balances with banks, demand deposits with banks and cash equivalents. Cash equivalents are defined as short term and highly liquid investments that are readily convertible into cash which are subject to insignificant risk of changes in values. Cash Flow Statement reports the cash receipts and payments classified according to the firms major activities- Operating, Investing and Financing.
7.

What is CFO?

A business generates cash inflows through its normal business operations which is usually the most important and routine sources of cash. It is the internal sources for cash

8.

What area the advantages and disadvantages of Cash Flow Statement?

Advantages: 1. Results in effective Cash Management 2. It is useful for internal financial management. 3. It enables the management to know about the causes of changes in cash position. 4. It helps to know the projected cash inflow and cash outflow. 5. It is certainly a better tool of analysis than the fund flow analysis for short term decisions 6. Helps in preparation of cash budgets Limitations: 1. Discloses inflows and outflows alone but does not reveal working capital or income statement which displays overall financial position 2. It misleads inter-industry and inter firm comparison 3. It cannot be substitute to other statements. For eg. Fund Flow Statement and Balance Sheet.
9. What are Operating activities in cash flow statement?

13

Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. eg (a) cash receipts from the sale of goods and the rendering of services; (b) cash receipts from royalties, fees, commissions and other revenue; (c) cash payments to suppliers for goods and services;
10. What are Investing activities in cash flow statement?

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.eg cash payments to acquire fixed assets (including intangibles). These payments include those relating to (a) capitalised research and development costs and self-constructed fixed assets; (b) cash receipts from disposal of fixed assets (including intangibles) and so on.
11. What are the financial activities in cash flow statement?

Financing activities are activities that result in changes in the size and composition of the owners capital (including preference sharecapital in the case of a company) and borrowings of the enterprise. For eg. (a) cash proceeds from issuing shares or other similar instruments; (b) cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings; and (c) cash repayments of amounts borrowed.
12. What are called non current items .

Investing and financing transactions that do not require any cash inflows or outflows during the reporting period shall be excluded from the cash flow statement. Information about such transactions shall be disclosed in explanatory notes to financial statements. Some investing and financing transactions do not have a direct impact on cash flows of the reporting period although they do affect the structure of the entitys equity, liabilities and assets. Due to this reason such transactions are not reported in the cash flow statement but they are described in explanatory notes to financial statements. Examples of non-cash transactions are: 1. conversion of a part of an entitys debt into equity; 2. acquisition of non-current assets on credit, including finance lease.
13. Difference between Funds Flow Statement and Balance Sheet

Basis difference 1. Meaning

of Funds Flow Statement

Balance Sheet

Funds flow statement is a Balance sheet is a statement of assets, statement if changes in assets, liabilities and capital liabilities and capital accounts.
14

2. Objective

It is prepared to ascertain the Balance sheet is prepared to ascertain sources and application of funds. the financial position of a firm. It is prepared with the help of It is prepared with the help of trial balance sheets of two subsequent balance. dates. Funds Flow Statement provides It provides static view of financial the changes in assets, liabilities affairs. and capital accounts.

3. Preparation

4. Information

14. Difference between Funds Flow Statement and Cash Flow Statement

Basis of Difference 1 . Basis of Analysis

Funds Flow Statement Funds flow statement is based on broader concept i.e. working capital. Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put. Funds flow statement is more useful in assessing the long-range financial strategy. In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital. Funds flow statement shows

Cash Flow Statement Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital. Cash flow statement stars with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses. Cash flow statement is useful in understanding the short-term phenomena affecting the liquidity of the business. In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself. Cash flow statement shows the
15

2 .

Source

3 .

Usage

4 .

Schedule of Changes in Working Capital

End Result

. 6 . Principal of Accounting

the causes of changes in net working capital. Funds flow statement is in alignment with the accrual basis of accounting.

causes the changes in cash. In cash flow statement data obtained on accrual basis are converted into cash basis.

15. What is

budget?

According to ICMA Budget is a financial and /or quantitative statement, prepared and approved prior to a defined Period of time of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.
16. What do

you mean by Budgeting? Budgeting refers to the process of preparing budgets.

17. What is

Budgetary Control? According to ICMA Budgetary Control is defined 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 action the objective of that policy or to provide a base for its revision. 20. . What are the Objectives of Budgetary Control i. Budgeting ensures effective planning by setting up of budgets. ii. Budgets are helpful in coordination of business activities. iii. Effective budgetary control results in cost control and cost reduction. iv. Costs are controlled with the help of budgets and profits targeted are achieved

16

21.. What are the essentials of good budgetary control? 1. Top management support
2. Clearly defined organization structure 3. Effective accounting system 4. Reporting of deviation 5. Motivation to staff 6. Realistic targets 7. Participation of all departments concerned 8. Flexibility

22. What are the advantages and Limitations of Budgetary control Advantages of Budgetary Control 1. Assists Planning:
2. Control. 3. Communicates and Coordinates 4. Delegation of authority 5. Criteria for evaluation 6. Helps in decision making

Limitations of Budgetary Control 1. Based on estimates 2. Conflict of goals: 3. Changing economy cannot predict accuracy 23. How budgets are classified? (A) Classification on the basis of Time: 1.Long-Term Budgets varies between five to ten years .It is prepared by top level management. It is prepared for activities like capital expenditure, Research and development etc. 2. Short-Term Budgets prepared generally for the duration of one year 3. Current Budgets -prepared generally for the duration of months and weeks. These budgets are prepared for the current operations of the business.
17

(B) Classification according to Functions: 1. Functional or Subsidiary Budgets Budget relate to various functions of the concern, commonly prepared budgets are Purchase Budget, Cash Budget Production Budget, Sales Budget and Materials budget 2. Master Budgets - It is a budget which summarizes all the functional budgets. It is prepared to co-ordinate the activities of various functional departments. (C) Classification on the basis of Capacity: 1. Fixed Budgets -A fixed budget is designed to remain unchanged irrespective of the level of activity actually attained. 2. Flexible Budgets- A flexible budget is a budget which is designed to change in accordance with the various level of activity actually attained. The flexible budget also called as Variable Budget or Sliding Scale Budget, takes fixed, variable and semi fixed manufacturing costs into account. 24. What is Zero based budgeting Zero Base Budget starts program from the scratch. A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a zero base and every function within an organization are analyzed for its needs and costs. The basic process flow under zero-base budgeting is: 1. 2. 3. 4. Identify business objectives Create and evaluate alternative methods for accomplishing each objective Evaluate alternative funding levels, depending on planned performance levels Set priorities

25. What is budget manual? This document:

charts the organization details the budget procedures contains account codes for items of expenditure and revenue timetables the process clearly defines the responsibility of persons involved in the budgeting system.

26 What is Budget period?

18

It is the length of the period for which budge is prepared. 27. Define budget committee This may consist of senior members of the organisation, e.g. departmental heads and executives (with the managing director as chairman). Every part of the organisation should be represented on the committee, so there should be a representative from sales, production, marketing and so on. Functions of the budget committee include: Coordination of the preparation of budgets, including the issue of a manual Issuing of timetables for preparation of budgets Provision of information to assist budget preparations Comparison of actual results with budget and investigation of variances. 28. What are the steps in budgetary control? 1. Establishment of Budgets: Budgets are prepared for each division and are well co-ordinated with each other to prepare the master budget of a firm. 2. Measurement of Actual Performance: The actual results are measured to compare with the budgets. 3. Comaprison of Variances: The actual results after comparing with standards, deviations are work out known as variances. 4. Analysis of causes of Variation: The deviations between budgeted and actual results are studied and analysed help in taking the right action in right time. 29. What is Cash Budget? Cash budget is a forecast or expected cash receipts and payments for a future period. It consists of estimates of cash receipts, estimate of cash disbursements and cash balance over various time intervals. Seasonal factors must be taken into account while preparing cash budget. It is generally prepared for 1 year and then divided into monthly cash budgets.

UNIT V MARGINAL COSTING 1. Define Marginal Costing

Marginal costing is defined by I.C.M.A, as the ascertainment of marginal costs and of the effect on profit of changes in volume of type of output by differentiating between fixed costs and
19

variable costs. 2. Define Marginal Cost.

Marginal cost is the additional cost of producing an additional unit of a product. Marginal cost is defined by I.C.M.A, London as the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. In practice, this is measured by the total variable costs attributable to one unit. 3. .Define Absorption costing Absorption costing is defined by I.C.M.A England as the practice of charging all costs, both fixed and variable to operations, processes or products. 3. What are the uses of Marginal Costing? 1. It helps in cost control 2. Simple and easy to operate 3. It eliminates varying charge per unit: 4. It helps in short-term profit planning by break-even charts and profit graphs. 5. It prevents the illogical carry-forwards in stock-valuation of some proportion of current years fixed overhead. 6. It helps to ascertain Accurate Overhead Recovery Rate 7. Helps to yield Maximum return to the business 4. Difference between Marginal costing and Absorption Costing
Absorption Costing Fixed costs included in Product Cost FC not treated as period cost closing/opening stock values Under/over absorption of costs Complies with Financial Accounting standard Marginal Costing Fixed costs not included in Product Cost FC treated as period cost No under/over absorption of costs Does not comply with Financial Accounting standards

5. What is Cost volume Profit Analysis? Breakeven analysis examines the short run relationship between changes in volume and changes in total sales revenue, expenses and net profit. It is also known as C-V-P analysis (Cost Volume Profit Analysis). C-V-P analysis is an important tool in terms of short-term planning and decision making. Short run decisions where C-V-P is used include choice of sales mix, pricing policy etc. 6. What is Margin of Safety?
20

Margin of safety is the difference between actual sales and break even sales. It shows the amount by which sales can drop before a loss will be incurred. Margin of safety is calculated in rupees, units or even in percentage form. Margin of Safety = Actual sales Break even sales Profit P (or) = _______________ = ___ P/V Ratio P/V Margin of safety ratio: Margin of safety is expressed as a ratio. It is the ratio of margin of safety to actual sales. Margin of safety Margin of safety ratio = ________________ x 100 Actual Sales 7. What is contribution? Marginal costing is the concept of contribution. Contribution is defined as the difference between the selling price of one unit of output and the variable cost of producing this extra unit of output. Contribution per unit = selling price - variable cost per unit Total contribution would be the same as the contribution per unit, but with each component would be multiplied by the level of output. The formula for this is as follows: Total contribution = total revenue - total variable cost 8. What is P/V ratio? .Mention its significance. The Profit Volume Ratio (PV Ratio) is the relationship between Contribution and Sales Value. It is also termed as Contribution to Sales Ratio. A high P/V ratio indicates high profitability and low P/V ratio indicates low profitability. This ratio helps in comparison of profitability of various products. Advantages of P/V ratio: i. It helps in determining the break-even point ii. It helps in determining profit at various sales levels. iii. It helps to find out the sales volume to earn a desired quantum of profit. iv. It helps to determine relative profitability of different products, processes and departments. . Formula for P/V (Profit Volume Ratio)
21

Contribution P/V Ratio = _____________ Sales

C x100 S = ___ x100

Contribution = Sales- Variable Cost (OR) Fixed Cost +Profit When two periods profit and sales are given, the P/V Ratio is calculated as Change in profit P/V = ________________ Change in sales P/V Ratio is generally expressed as a percentage. 9. What is angle of incidence? It is the angle between total sales line and total cost line drawn in the case of break even chart. It provides useful information about the rate at which profits are being made. The larger the angle of incidence, the higher the rate of profit and vice versa. 10. What is Break Even Point? The Break Even Point is the point or a business situation at which there is neither a profit nor a loss to the firm. In other words, at this point, the total contribution equals fixed costs. Break Even Point (in Units) = Fixed Cost ---------------------Contribution per unit Fixed Cost ---------------------P/V Ratio

Break Even Point (in volume ) =

11. What is Break Even Chart? The break-even chart is a graphical representation of cost-volume profit relationship. It depicts the following: (1) Profitability of the firm at different levels of output. (2) Break-even point No profit no loss situation. (3) Angle of Incidence: This is the angle at which the total sales line cuts the total cost line. It is shows as angle (theta). If the angle is large, the firm is said to make profits at a high rate and vice versa. (4) Relationship between variable cost, fixed expenses and the contribution. (5) Margin of safety representing the difference between the total sales and the sales at breakeven point.
22

12. What are the assumptions of Break Even Chart. 1. Fixed cost remains constant 2. Variable cost fluctuates per unit 3. All costs are divided into fixed and variable 4. Selling price remains constant 13. What are the advantages and imitations of Break Even Charts? Advantages 1. Provides detailed and clear information 2. Profitability of products and business can be known 3. Effect of change in cost and selling price can be demonstrated 4. Cost control can be exercised 5. Helps in fixing selling price Disadvantages 1. Based on false assumptions- fixed cost does not remain always constant, variable cost always do not vary proportionately 2. Chart provides only limited information 14. What are the types or forms break even chart prepared? 1. Traditional Break Even Point 2. Contribution Break Even Point 3. Cash Break Even Point 15.What are the different methods of Break Even Analysis? 1. Algebraic method 2. Graphical Method

23