Gauhati University Question Papers
COST AND MANAGEMENT ACCOUNTING (May-June’ 2016)
Full Marks: 80
Time Allowed: 3 hours
GROUP – A (COST ACCOUNTING)
Marks: 40
Answer either in English or Assamese
The figures in the margin indicate full marks for the questions
ANSWER ALL THE QUESTIONS AS DIRECTED
1. (a) Answer the following as directed: 1x6=6
a) All costs are controllable. (Write True or False)
Ans: False
b) Variable cost varies (Choose the correct option)
a. In proportion to volume of production.
b. Not in proportion to volume of production.
c. In proportion to administrative overheads.
d. Not in proportion to distribution overheads.
c) Bin card shows (Choose the correct option)
a. Works in process inventory and value of stores.
b. Quantity of stores.
c. Both value and quantity of stores.
d. Value of waster material.
d) Recording of employees’ attendance in and out of the factory or department is known as time-keeping. (Write True or False)
Ans: True
e) Salary of salesmen is (Choose the correct option)
a. An example of fixed overhead.
b. An example of variable overhead.
c. A case of controllable direct cost.
d. A case of uncontrollable indirect cost.
f) Departmentalisation of items of cost is known as primary distribution. (Write True or False)
Ans: True
(b) Answer any two questions of the following: 2x2=4
a) Give two examples of semi-variable cost.
Ans: Semi-variable costs are those which are partly fixed and partly variable. For example, telephone expenses included a fixed portion of annual charge plus variable charge according to calls; thus total telephone expenses are semi-variable. Other examples of such costs are depreciation, repairs and maintenance of building and plant etc.
b) Write the objectives of Cost Accounting.
Ans: The main objectives/functions of cost accounting are:
1) Ascertain Cost: To ascertain the cost of product or a services reveled and enable measurement of profit by proper valuation of inventory.
2) Analyse Costs: To analysis costs or to classify the expenses under different heads of accounts viz. material, labour, expenses etc.
3) Allocate and Apportion the Costs: To allocate or charge the direct expenses or specific costs such as Raw Material, Labour to particular product, contract or process and to distribute common expenses to each product, contract or process on a suitable basis.
c) Write the time rate system of wages.
Ans: Time Rate System: In this system, a worker is paid on the basis of attendance for the day or according to the hours of the day, regardless of the output. This system is also known as time work, day work, day age rate or day rate. The wage rate of the day worker may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed in the concern. There are two variants of this system, each differing only in so far as the fixation of the time rate is concerned.
(c) Answer any two questions of the following: 5x2=10
i. Write the classification of cost.
Ans: Cost classification is the process of grouping costs according to their common characteristics. It is the placement of like items together according to their common characteristics. A suitable classification of costs is of vital importance in order to identify the cost with cost centers or cost units. Costs may be classified according to their nature, i.e. material, labour and expenses and a number of other characteristics. The important ways of classification are:
a) By Nature or Element or Analytical Classification
According to this classification, the costs are divided into three categories i.e. Materials, Labour and Expenses. There can be further sub classification of each element; for example, material into raw material components, and spare parts, consumable stores, packing material etc. This classification is important as it helps to find out the total cost, how such total cost is constituted and valuation of work in progress.
b) By Functions
According to this classification costs are divided as follows:
Manufacturing and Production Cost: This is the total of costs involved in manufacture, construction and fabrication of units of production.
Commercial Cost: This is the total of costs incurred in the operation of a business undertaking other than the cost of manufacturing and production. Commercial cost may further be sub-divided into (a) administrative cost and (b) selling and distribution cost.
c) As Direct and Indirect
According to this classification, total cost is divided into direct costs and indirect costs.
Direct costs are those which are incurred for and may be conveniently identified with a particular cost centre or cost unit. Materials used and labour employed are common examples of direct costs.
Indirect costs are those cost which are incurred for the benefit of number of cost centers or cost units and cannot be conveniently identified with a particular cost centre or cost unit. Examples of indirect cost include rent of building, management salaries, machinery depreciation etc.
d) By Variability
According to this classification, costs are classified into three groups viz. fixed, variable and semi-variable.
Fixed or period costs are commonly described as those which remain fixed in total amount with increase or decrease in the volume of output or productive activity for a given period of time. Examples of fixed costs are rent, insurance of factory building, factory manager’s salary etc.
Variable or product costs are those which vary in total in direct proportion to the volume of output. Examples are direct material costs, direct labour costs, power, repairs etc. Such costs are known as product costs because they depend on the quantum of output rather than on time.
Semi-variable costs are those which are partly fixed and partly variable. For example, telephone expenses included a fixed portion of annual charge plus variable charge according to calls; thus total telephone expenses are semi-variable. Other examples of such costs are depreciation, repairs and maintenance of building and plant etc.
e) By Controllability
Under this, costs are classified according to whether or not they are influenced by the actions of a given member of the undertaking. On this basis it is classified into two categories:
Controllable costs are those which can be influenced by the action of a specified member of an undertaking, that is to say, costs which are at least partly within the control of management. Generally speaking, all direct costs including direct material, direct labour and some of the overhead expenses are controllable by lower level of management.
ii. What are the different techniques of costing?
Ans: Techniques of Costing: The types and techniques of costing are as follows:
1) Historical Costing: ‘The ascertainment of costs after they have been incurred’ is called Historical costing. Such costs are, therefore, ‘postmortem’ costs as under this method all the expenses incurred on the production are first incurred and them the costs are ascertained.
2) Standard Costing: ‘The preparation and use of standard costs, their comparison with actual costs and the analysis of variance to their causes and points of incidence’ is called standard costing.
3) Here the standards are first set and then they are compared with actual performances. The difference between the standard and the actual is known as the variance. The variances are analyzed to find out their causes and also the points or locations at which they occur.
4) Marginal Costing: Marginal Costing involves the ascertainment of marginal costs and of the effects on profit of changes in volumes or type of output by differentiating between fixed costs and variable costs’. The fixed costs are those which do not change but remain the same, with the increase or decrease in the quantum of production. The variables costs are those which do change proportionately with the change in quantum of production.
5) The marginal costing takes into account only the variable costs to find out ‘marginal costs’. The difference between Sales and Marginal costs is known as ‘Contribution’ and contribution is an aggregate of fixed costs and Profit/Loss. So the fixed costs are deducted from the contribution to find out the profits. Marginal costing is a technique to ascertain the effect on profits. Marginal costing is a technique to ascertain the effect on profit by the change in the volume of output or by the change in the type of output.
iii. What is ABC analysis?
ANS: ABC Analysis: ABC System: In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value.
Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the total value of the inventory.
Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage value may be about 15% of the total value.
Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of the total usage value of the inventory.
The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be followed is that the high value items should be controlled more carefully while items having small value though large in numbers can be controlled periodically.
Advantages of ABC analysis
a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in material.
b. Optimization of Inventory management function: Each class of the inventory gets management attention as per its value and accordingly, manpower is allocated and expenses are incurred to manage it. It ensures that most important items are regularly monitored and closely observed whereas such efforts are expended with for the less important items.
c. Control on high value material: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.
iv. What are under absorption and over absorption?
Ans: Over or under absorption of overheads: Overhead expenses are usually applied to production on the basis of predetermined rates. The pre-determined rate may present estimated or actual cost. The actual overhead cost incurred and overhead applied to the production will seldom be the same. But due to certain reasons the difference between two may arise.
Over absorptions: If the amount applied exceeds, the actual overhead, it is said to be an over absorption of overheads.
Under absorption: If the amount applied is short fall of the actual overhead in production it is said to be the under absorption of overheads. The over or under absorption of overheads may be termed as overhead variance.
Reason of over or under-absorption of overheads: The under or over-absorption of overhead arises due to following reasons:
a) Errors in estimating overheads.
b) Overhead may change due to change in method of production.
c) The seasonal fluctuation in overhead cost in some industries.
d) Under utilization of available capacity, unexpected change in the volume of out put.
e) Valuation of work in progress in wrong process.
Treatment of under and over absorption of overheads
Once the under/over absorption is noticed, the following corrective steps are to be taken to rectify the same.
a) Use of supplementary Rate: The under/over absorption can be rectified by using the supplementary rate. This rate is calculated by dividing the under/over absorbed amount of overheads by the units of the base. The rate so arrived is known to be supplementary rate.
b) Carrying forward to future period: If the amount of under/over absorption of overheads is small, it may be carried forward to the future period hoping that it will be rectified in the future.
c) Writing off to Profit and Loss A/c: Amount of under/over absorption can be written off to Costing Profit and Loss Account and thus not reflected in the total costs.
2. What is Cost Accounting? Explain the differences between Cost Accounting and Financial Accounting. 10
Ans: Meaning of cost accounting: Cost: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of actual expenditure incurred on a given thing.
Costing: The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.
Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.
Cost Accounting and Financial Accounting
Cost accounting is very closely-related to financial accounting. Some authorities on the subject consider cost accounting to be the branch of financial accounting. But it may be said that cost accounts is complementary to financial accounts, i.e., a subject which is necessary to make financial accounts whole or complete. Financial accounts and cost accounts are both similar in certain respects. But in some other respects they differ from one another.
DISTINGUISH BETWEEN FINANCIAL AND COST ACCOUNTING
Basis | Financial Accounting | Cost Accounting |
1. Nature | Financial accounts are maintained on the basis of historical records. | Cost accounts lay emphasis on both historical and predetermined costs. |
2. Use | Financial Accounting is used even by outside entities. | Cost Accounting is used only the management of the concern. |
3. System | Financial Accounting uses the double-entry system for recording financial data. | Cost Accounting does not use the double-entry for collecting cost data. |
4. Scope | Financial Accounting covers all items of income and expenditure whether related to the cost centers or not, | Cost Accounting covers all items related to a cost centre. |
5. Reports | Financial Accounting results are shown P&L A/c and balance sheet. | Cost Accounting results are shown in Cost Sheet/ Coating Profit & Loss A/c/ Reports Contract A/c/ Process A/c. |
6. Period | Financial Accounting is for a specific period. | Cost Accounting concentrates on cost centers and not on period. |
7. Stock Valuation | In financial accounts, stocks are valued at cost or realisable value, whichever is lesser. | In cost accounts stocks are valued at cost. |
8. Analysis of Profit and Cost | In financial accounts, the Profit or Loss of the entire enterprise is disclosed into. | Cost accounts reveal Profit of Loss of different products, departments separately. |
Or
What is a cost sheet? You are also required to prepare a Cost Sheet from the following information: 2+8=10
Mr. Gopal furnishes the following data relating to the manufacture of a standard product for the month of April 2010:
Rs. | |
Raw materials used Direct labour charges Machine hours worked Machine hour rate Administrative overheads Selling overhead Units produced Units sold | 15,000 9,000 900 hours 5 20% on works cost 0.50 per unit 17,100 units 16,000 units at Rs. 4 per unit |
Ans: Cost Sheet: Cost Sheets are statements setting out the costs of a product giving details of all the costs. Presentation of costing information depends upon the method of costing. A cost sheet can be prepared weekly, monthly, quarterly or annually. In a cost sheet besides total expenditure incurred, cost per unit of output in case of each element of cost can be shown in a separate column. The cost sheet should give cost per unit in the previous period for the purposes of comparison.
3. What is labour turnover? What are the costs associated with it? 4+6=10
Ans: Meaning: Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
Causes of Labour turnover: The causes for labour turnover can be broadly classified under three heads.
(1) Personal Causes
(2) Unavoidable Causes
(3) Avoidable Causes
i) Personal Causes: Some of the employees may leave the organization on account of personal reasons as given below:
(a) Circumstances of family.
(b) Retirement on reaching the prescribed age.
(c) Change in material status in case of women employees.
(d) Dislike for the job or place;
(e) Death of the employee.
(f) Employee getting recruited in a better job.
(g) Permanent disability due to accidents.
(h) Involvement of employee in activities of moral turpitude.
ii) Unavoidable Causes: In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence.
(c) Retrenchment of workers by the company on account of shortage of work.
iii) Avoidable Causes: Some of the employees may leave the organization account of the following reasons:
(a) Non availability of promotion opportunities
(b) Dissatisfaction with incentive schemes
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure.
Impact of ‘Labour Turnover’ on a manufacturing organization’s working: The impact of labour turnover on a manufacturing organization’s working is many folds. In fact the labour turnover increases the cost of production in the following ways:
1. Even flow of production is disturbed.
2. Cost of recruitment and training increases.
3. Breakage of tools, wastage of materials increases.
4. Overall production decreases due to the time lost between the leaving and recruitment of new workers.
5. Reduction in sales accounts for loss of contribution and goodwill consequently.
Types of costs associated with labour turnover are:
Preventive costs: These costs are incurred to keep the labour turnover rate at a low level. They include costs of accommodation, transport facilities, medical services, welfare schemes, pension schemes, environment improvement, lighting, heating, air-conditioning etc. The rate of labour turnover is usually low, if a company incurs higher preventive costs.
Replacement costs: These costs arise due to high labour turnover, e.g. cost of advertising, recruitment, selection, training & induction, abnormal breakage and scrap, extra wages & overheads etc., caused as a result of in efficient and inexperienced newly recruited workers.
Or
What do you understand by standard costing? What are the advantages of standard costing? 4+6=10
Ans: Introduction – Standard Costing:
Cost control is a basic objective of cost accountancy. Standard costing is the most powerful system ever invented for cost control. Historical costing or actual costing is nothing but, a record of what happened in the past. It does not provide any ‘Norms’ or ‘Yardsticks’ for cost control. The actual costs lose their relevance after that particular accounting period. But, it is necessary to plan the costs, to determine what should be the cost of a product or service. It the actual costs do not conform to what the costs should be, the reasons for the change should be assessed and appropriate action should be initiated to eliminate the causes.
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:
Ø Pre-determination of standard costs;
Ø Use of standard costs;
Ø Comparison of actual cost with the standard costs;
Ø Find out and analyse reasons for variances;
Ø Reporting to management for proper action to maximize efficiency.
Advantages of standard costing:
a) Cost control: Standard costing is universally recognised as a powerful cost control system. Controlling and reducing costs becomes a systematic practice under standard costing.
b) Elimination of wastage and inefficiency: Wastage and inefficiency in all aspects of the manufacturing process are curtailed, reduced and eliminated over a period of time if standard costing is in continuous operation.
c) Norms: Standard costing provides the norms and yard sticks with which the actual performance can be measured and assessed.
d) Locates sources of inefficiency: It pin points the areas where operational inefficiency exists. It also measures the extent of the inefficiency.
e) Fixing responsibility: Variance analysis can determine the persons responsible for each variance. Shifting or evading responsibility is not easy under this system.
f) Management by exception: The principle of ‘management by exception can be easily followed because problem areas are highlighted by negative variances.
g) Improvement in methods and operations: Standards are set on the basis of systematic study of the methods and operations. As a consequence, cost reduction is possible through improved methods and operations.
h) Guidance for production and pricing policies: Standards are valuable guides to the management in the formulation of pricing policies and production decisions.
i) Planning and Budgeting: Budgetary control is far more effective in conjunction with standard costing. Being predetermined costs on scientific basis, standard costs are also useful in planning the operations.
j) Inventory valuation: Valuation of stocks becomes a simple process by valuing them at standard cost.
GROUP – B
MANAGEMENT ACCOUNTING
Marks: 40
4. (a) Indicate whether the following statements are True or False: 1x6=6
1. Management Accounting composed of those accounting activities which promote efficiency in business operations.
Ans: True
2. Budgetary control is one of the tool and technique of Management Accounting.
Ans: True
3. Current ratio is used to make the analysis of a long-term financial position.
Ans: False, Short term
4. A funds flow statement is good substitute for income statement.
Ans: False
5. Sales + Variable Cost = Fixed Cost ± Profit.
Ans: False, Sales + Variable Cost = Fixed Cost ± Profit/Loss.
6. A budget prepared on the basis of standard or fixed level of activity is termed as fixed budget.
Ans: True
(b) Answer any two questions of the following: 2x2=4
1. Write the scope of Management Accounting?
Ans: Scope of Management Accounting: The field of management accounting is very wide. The main purpose of management accounting is to provide information to the management to perform its functions of planning directing and controlling. Management accounting includes various areas of specialization to render effective service to the management.
a) Financial Accounting.
b) Cost Accounting.
c) Budgeting and Forecasting.
d) Inventory Control.
e) Statistical Analysis.
f) Analysis of Data.
g) Internal Audit.
h) Tax Accounting.
2. Explain any two uses of ratio analysis.
Ans: Ratio analysis helps the various groups in the following manner:
a) To workout the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern.
b) Helpful in analysis of financial statement: Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc.
3. What is meant by funds from operation?
Ans: Trading profits or the profits from operations of the business are the most important and major source of funds. Sales are the main source of inflow of funds into the business as they increase current assets (cash, debtors or bills receivable) but at the same time funds flow out of business for expenses and cost of goods sold. Thus, the net effect of operations will be a source of funds if inflow from sales exceeds the outflow for expenses and cost of goods sold and vice-versa. But it must be remembered that funds from operations do not necessarily mean the profit as shown by the profit and loss account of a firm, because there are many non-fund or non-operating items which may have been either debited or credited to profit and loss account. Funds from operations are calculated after adjusting all these items.
4. What is P/V ratio?
Ans: Profit-Volume Ratio expresses the relationship between contribution and sales. It indicates the relative profitability of diff products, processes and departments. Higher the P/V ratio, more will be the profit and lower the P/V ratio lesser will be the profit. Hence, it should be the aim of every concern to improve the P/V ratio which can be done by increasing selling price, reducing variable cost etc.
(c) Answer any two questions of the following: 5x2=10
1. Write the relationship between Management Accounting and Financial Accounting.
Ans: The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.
The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.
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. Management accounting is totally based on financial accounting.
2. The following liquidity ratios related to two companies:
X Company | Y Company | |
Current ratio Quick ratio | 2.50 1.50 | 3.00 0.85 |
Comment on the liquidity position of the two companies.
3. What are the different types of financial statement?
Ans: Types of Financial statements: A set of financial statements includes (Types):
a) Profit and loss account or income statement: Income statement is one of the financial statements of business enterprises which shows the revenues, expenses, and profits or losses of business enterprises for a particular period of time. Its main aim to show the operating efficiency of the enterprises. Income Statement is sometime called the statement of financial performance because this statement let the users to assess and measure the financial performance of entity from period to period of the same entity or with competitors.
b) Balance sheet or Position statement: Balance Sheet is sometime called statement of financial position. It shows the balance of assets, liabilities and equity at the end of the period of time. Balance sheet is sometime called statement of financial position since it shows the values of net worth of entity.
c) Cash flow statement: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored. A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time.
d) Funds flow statement: The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. Financial statements are not helpful in analysing such situation. Therefore, a statement of the sources and applications of funds is prepared which indicates the utilisation of working capital during an accounting period. This statement is called Funds Flow statement.
e) Schedule and notes to account: The notes to the financial statements are integral part of a company's external financial statements. They are necessary because not all relevant financial information can be communicated through the amounts shown (or not shown) on the face of the financial statements. Generally, the notes are the main method for complying with the full disclosure principle and are also referred to footnote disclosures.
4. State briefly the effects of the following on break-even point and profit-volume ratio:
a) Reduction in variable cost per unit.
b) Increase in total fixed cost.
Ans: a) Reduction in variable cost per unit: It will decreases contribution per unit thereby reduces p/v ratio and increases break even point.
b) Increase in total fixed cost: It does not affect p/v ratio but increases break even point.
5. Find out (a) Current assets, (b) Current liabilities, (c) Liquid assets and (d) Inventory from the following information: 10
Rs. | |
Current ratio Acid-test ratio Working Capital | 2.8 1.5 1,62,000 |
Or
Explain the marginal applications of marginal costing in any four areas of decision making. 10
Ans: 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 and Profit Planning: 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.
It also 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.
2) 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
3) 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.
4) 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. Write notes on the following: 5+5=10
a) Any two tools and techniques of Management Accounting.
Ans: Tools and Techniques Used in Management Accounting
Management accountant supplies information to the management so that latter may be able to discharge all its functions, i.e., planning organization, staffing, direction and control sincerely and faithfully. For doing this, the management accountant uses the following tools and techniques.
a) Financial planning: Financial planning is the act of deciding in advance about the financial activities necessary for the concern to achieve its primary objectives. It includes determining both long term and short term financial objectives of the enterprise, formulating financial policies and developing the financial procedure to achieve the objectives. The role of financial policies cannot be emphasized to achieve the maximum return on the capital employed. Financial policies may relate to the determination of the amount of capital required, sources of funds, govern the determination and distribution of income, act as a guide in the use of debt and equity capital and determination of the optimum level of investment in various assets.
b) Analysis of financial statements: The analysis is an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. The techniques of such analysis are comparative financial statements, trend analysis, funds flow statement and ratio analysis. This analysis results in the presentation of information which will help the business executive, investors and creditors.
c) Historical cost accounting: The historical cost accounting provides past data to the management relating to the cost of each job, process and department so that comparison may be make 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.
b) Break-even chart.
Ans: The break-even chart is a graphical representation of cost-volume profit relationship. It depicts the following:
a) Profitability of the firm at different levels of output.
b) Break-even point - No profit no loss situation.
c) Angle of Incidence: This is the angle at which the total sales line cuts the total cost line. It is shows as angle Θ (theta). If the angle is large, the firm is said to make profits at a high rate and vice versa.
d) Relationship between variable cost, fixed expenses and the contribution.
e) Margin of safety representing the difference between the total sales and the sales at breakeven point.
Different types of Break-even charts
a) Contribution Breakeven Chart: This chart shows contribution earned by, the firm at different levels of activity.
b) Cash Breakeven Chart: In this chart variable costs are assumed to be payable in cash. Besides this the fixed expenses are divided into two groups, viz. (a) those expenses which involve cash outflow e.g. rent, insurance, salaries, etc. and (b) those which do not involve cash outflow. e.g. depreciation.
c) Control Breakeven Chart: Both budgeted and actual cost data are depicted in this chart. This chart is useful in comparing the actual performance of the firm with the budgeted performance for exercising control.
d) Analytical break even chart: This chart shows the break-up of variable expenses into important elements of cost. Viz. direct materials, direct labour, variable overheads, etc. Also the appropriations of profit such as ordinary dividends, preference dividend, reserves, etc. are depicted in this chart.
e) Product wise break even chart: Separate break-even charts for different products can also be prepared to compare the profitability of the products or their contribution.
f) Profit graph: Profit graph is a special type of break-even chart, which shows the profits or loss at different levels of output.
Advantages of break-even chart
a) Information provided by the break-even chart is in a simple form and is clearly understandable even to a layman.
b) The break even chart is very useful to the management for taking managerial decision because the chart clearly shows the cost-volume-profit relationship.
c) The break even chart helps in knowing and analysing the profitability of different products under various circumstances.
Or
You are required to prepare a flexible budget for the production of 7000 units. The expenses for the production of 5000 units in a factory are given below: 10
(per unit) (Rs.) | |
Materials Labour Variable overhead Fixed overhead (Rs. 50,000) Administrative Expenses (10% variable) Selling expenses (20% fixed) Distribution expenses (20% fixed) | 100 10 10 10 10 6 5 |
Total cost of sales | 151 |
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