Management Accounting Solved Question Papers 2019 [Gauhati University Solved Papers BCOM 5th SEM]

The figures in the margin indicate full marks for the questions.

1. (a) State whether the following statements are true or false: 1x5=5 

(i) In Management Accounting only those figures are used which can be measured in monetary terms.

Ans: False

(ii) In Management Accounting no emphasis is given to actual figures.

Ans: False

(iii) Fixed overhead is viewed as a product cost and is charged to product.

Ans: False, Fixed overheads are period cost

(iv) A flexible budget consists of a series of budgets for different levels of activity.

Ans: False

(v) Standard costing does not help in measuring efficiency.

Ans: False

(b) Fill in the blanks with appropriate word(s): 1x5=5

(i) Cost control is not possible in financial Accounting.

(ii) Contribution to Sales is called p/v ratio.

(iii) The excess of Actual Sales over sales at B.E.P is called margin of safety.

(iv) Budgetary control is a system of controlling cost.

(v) The difference between Actual Cost and Standard Cost is known as variance.

2. Answer the following questions: 2x5=10

(a) State two limitations of Management Accounting.

Ans: Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows:

1. Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting, therefore, depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting.

2. Persistent efforts. The conclusions draws by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.

(b) Define “Marginal Costing".

Ans: Marginal Costing: It is the technique of costing in which only marginal costs or variable are charged to output or production. The cost of the output includes only variable costs .Fixed costs are not charged to output. These are regarded as ‘Period Costs’. These are incurred for a period. Therefore, these fixed costs are directly transferred to Costing Profit and Loss Account.

(c) Mention two objectives of Budgetary Control.

Ans: The following are the objectives of a budgetary control system:

a)      Planning: A budget provides a detailed plan of action for a business over definite period of time. Detailed plans relating to production, sales, raw material requirements, labour needs, advertising and sales promotion performance, research and development activities, capital additions etc., are drawn up. By planning many problems are anticipated long before they arise and solutions can be sought through careful study. Thus most business emergencies can be avoided by planning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for the anticipated conditions.

b)      Co-ordination: Budgeting aids managers in co-coordinating their efforts so that objectives of the organisation as a whole harmonise with the objectives of its divisions. Effective planning and organisation contributes a lot in achieving coordination. There should be coordination in the budgets of various departments. For example, the budget of sales should be in coordination with the budget of production. Similarly, production budget should be prepared in co-ordination with the purchase budget, and so on.

(d) What is “Key Factor”?

Ans: All the factors which are limited in supply are called key or limiting factor. There may be a limitation on the quality of goods a concern may sell. In this case, sales will be a key factor. Similarly, raw material, finance, number of workers may be key factor.

(e) State two advantages of Standard Costing.

Ans: 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.

3. Answer the following questions: 5x4=20

(a) Explain briefly 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: Financial Accounting deals with financial aspects by preparation of Profit and Loss Account and Balance Sheet. Management accounting rearranges and uses the financial statements. Therefore it is closely related and connected with financial accounting.

b)      Cost Accounting: Cost accounting is an essential part of management accounting. Cost accounting, through its various techniques, reveals efficiency of various divisions, departments and products. Management accounting makes use of all this data by focusing it towards managerial decisions.

c)       Budgeting and Forecasting: Budgeting is setting targets by estimating expenditure and revenue for a given period. Forecasting is prediction of what will happen as a result of a given set of circumstances. Targets are fixed for various departments and responsibility is pinpointed for achieving the targets. Actual results are compared with preset targets and performance is evaluated.

d)      Inventory Control: This includes, planning, coordinating and control of inventory from the time of acquisition to the stage of disposal. This is done through various techniques of inventory control like stock levels, ABC and VED analysis physical stock verification, etc.

e)      Statistical Analysis: In order to make the information more useful statistical tools are applied. These tools include charts, graphs, diagrams index numbers, etc. For the purpose of forecasting, other tools such as time series regression analysis and sampling techniques are used.

(b) What is B.E.P (Break Even Point)? Describe its importance.

Ans: 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

Importance of Break-even point

a) The break-even point is very useful to the management for taking managerial decision such as fixation of selling price, production levels etc.

c) The break-even point helps in knowing and analysing the profitability of different products under various circumstances.

d) It is very useful for forecasting.

e) It is a managerial tool for control of costs as it shows the relative importance of fixed cost in total cost.

Or

From the following information, calculate

(i) P. V. Ratio

(ii) Break Even Sales and M

(iii) Ascertain how much the value of sales is to be increased to reach Break Even Sales.

Sales Rs. 80,000

Fixed cost Rs. 36,000

Variable cost Rs. 54,000

(c) Briefly explain the advantages of “Zero Based Budgeting".

Ans: Zero Based Budgeting (ZBB) is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’.

The major benefits of the use of zero base budgeting can be the following:

a)      Zero base budgeting examines all existing and new programmes and activities. It also makes the managers analyse their functions, establish priorities and rank them. This exercise helps in identifying inefficient or obsolete functions within the area of responsibility. In this way resources are allocated from low priority programmes to high priority programmes.

b)      This system facilitates identification of duplication of efforts among organisational units. Such inefficient activities are eliminated and some other activities are merged. 

c)       All expenditures, under this system are critically reviewed and justified and all operations activities are evaluated in greater detail in terms of their cost- effectiveness and cost-benefits. This requires managers to find alternative ways of performing their activities which may result in more efficient procedures. 

d)      ZBB promotes the tendency to initiate studies and improvements during the period of operation as the persons at the helm of affairs know that the process would be exercised next year and their knowledge and training would enhance efficiency and cost-effectiveness. 

(d) Differentiate between “Fixed Budget" and “Flexible Budget”.

Ans: Difference between Fixed Budget and Flexible Budget

	Fixed Budget	Flexible Budget
1.	It does not change with actual volume of activity achieved. Thus it is known as rigid or inflexible budget.	It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.
2.	It operates on one level of activity and under one set of conditions. It assumes that there will be no change in the prevailing conditions, which is unrealistic.	It consists of various budgets for different levels of activity.
3.	Here as all costs like - fixed, variable and semi-variable are related to only one level of activity. So variance analysis does not give useful information.	Here analysis of variance provides useful information as each cost is analysed according to its behaviour.
4.	If the budgeted and actual activity levels differ significantly, then the aspects like cost ascertainment and price fixation do not give a correct picture.	Flexible budgeting at different levels of activity facilitates the ascertainment of cost, fixation of selling price and tendering of quotations.
5.	Comparison of actual performance with budgeted targets will be meaningless specially when there is a difference between the two activity levels.	It provides a meaningful basis of comparison of the actual performance with the budgeted targets.

Or

Explain in brief the Managerial use of Variance Analysis.

Ans: Managerial use of variance analysis

a.       Variances are analysed to find out the causes or circumstances leading to it so that management can exercise proper control. Variance analysis sub divides the total variance based on difference contributory causes. This gives a clear picture of the different reasons for the overall variance.

b.      It enables the top management to practice ‘management by exception’ by focusing on the problem areas. It helps the management to concentrate only on operations and segments of an enterprise where deviations are there from targeted performance.

c.       It segregates variance into controllable and uncontrollable, thereby indicating where action is warranted. This division of variance into controllable and uncontrollable is extremely important because the attention of the management is drawn particularly towards controllable variance.

d.      It acts as the basis for profit planning.

e.      By revealing each and every deviation, along with the causes, variance analysis creates and nurtures ‘cost consciousnesses among the employees.

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4. “Management Accounting is the presentation of accounting information in such a way as to assist the management in the creation of policy and in the day to day operation of the undertaking”. Explain the statement. 10

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

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

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

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

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

Characteristics or Nature of management accounting

The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics of management accounting:

1.          Providing Accounting Information. Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.

2.          Cause and Effect Analysis. Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss Management accounting goes a step further. The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studies. So the study of cause and effect relationship is possible in management accounting.

3.          Use of Special Techniques and Concepts. Management accounting uses special techniques and concepts to make accounting date more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.

4.          Taking Important Decisions. Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The historical date is studies to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.

5.          Achieving of Objectives. In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical date is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be taken at once. All this is possible with the help of budgetary control and standard costing.

6.          No Fixed Norms Followed. In financial accounting certain rules are followed for preparing different accounting books. On the other hand, no specific rules are followed in management accounting. Though the tools of management accounting are the same but their use differs from concern to concern. The analysis of data depends upon the person using it. The deriving of conclusion also depends upon the intelligence of the management accountant. Every concern uses the figures in its own way. The presentation of figures will be in the way which suits the concern most. So every concern has its own rules and by – rules for analyzing the data.

7.          Increase in Efficiency. The purpose of using accounting information is to increase efficiency of the concern. The efficiency can be achieved by setting up goals for each department or section. The performance appraisal will enable the management to pin point efficient and inefficient spots. An effort is make the staff cost – conscious. Everyone will try to control cost on one’s own part.

8.          Supplies Information and not Decision. The management accountant supplies information to the management. The decisions are to be taken by the top management. The information is classified in the manner in which it is required by the management. Management accountant is only to guide and not to supply decisions. The data is to be used by management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.

9.          Concerned with Forecasting. The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

From the above discussion we can say that Management Accounting is mainly concerned with presentation of accounting information is such a way that is useful to management in decision making.

Or

“The managerial objectives of accounting are to provide data to management in planning, decision making, co-ordinating and controlling operations”. Discuss.  10

Ans: Objectives of Management Accounting

The primary objective is to enable the management to maximize profits or minimize losses. The fundamental objective of management accounting is to assist management in their functions. The other main objectives are:

1)      Planning and policy formulation: Planning is one of the primary functions of management. It involves forecasting on the basis of available information. The main objective of management accounting is to supply the necessary data to the management for formulating plans for the future. The management accountant prepares statements of past results and gives estimations for the future which helps the management in planning and policy formulation.

2)      Controlling: Controlling performance various unit in an organisation is one the main function of management. The actual performance of every unit is compared with pre-determined objectives to find the deviations and take corrective steps to improve the performance of various units. The management is able to control performance of each and every individual with the help of management accounting devices such as standard costing, budgetary control etc.

3)      Help in the interpretation process: The main object of management accounting is to present financial information to the management in easily understandable manner. He can use diagrams, graphs and charts to present the data in a precise manner.

4)      Helps in decision making: Management has to take many strategic decisions. Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives.

5)      Reporting: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This facilitates management to take proper and timely decisions. It presents the different alternative plans before the management in a comparative manner.

6)      Motivating: Management accounting helps the management in selecting best alternatives of doing the things. Targets are laid down for the employees and authority is delegated amongst the employees. Delegation increases the job satisfaction of employees and encourages them to look forward. So it serves as a motivational devise.

7)      Helps in organizing: Organisation is related to the establishment of relationship amongst different individuals in the concern. It also includes the delegation of authority and fixing of responsibility. Management accounting is connected with the establishment of cost centres, preparation of budgets, preparation of cost control accounts and fixing of responsibility.

8)      Coordinating operations: It provides tools which are helpful in coordinating the activities of different sections. Co-ordination is done through functional budgeting.

From the above discussion we can say that the main objective of management accounting is to provide data to help the management in planning, decision-making, coordinating and controlling operations.

5. “Marginal Costing technique is a valuable aid to management in taking many managerial decisions”. Explain the statement with reference to Managerial Application of Marginal Costing.  10

Ans: “Marginal Costing” is a valuable aid to Management

Marginal costing and Beak even analysis are very useful to management. The important uses of marginal costing and Break Even analysis are the following:

1)      Cost control: Marginal costing divides total cost into fixed and variable cost. Fixed Cost can be controlled by the Top management to a limited extent and Variable costs can be controlled by the lower level of management. Marginal costing by concentrating all efforts on the variable costs can control total cost.

2)      Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs. An analysis of contribution made by each product provides a basis for profit-planning in an organisation with wide range of products.

3)      Fixation of selling price: Generally prices are determined by demand and supply of products and services. But under special market conditions marginal costing is helpful in deciding the prices at which management should sell. When marginal cost is applied to fixation of selling price, it should be remembered that the price cannot be less than marginal cost. But under the following situation, a company shall sell its products below the marginal cost:

Ø  To maintain production and to keep employees occupied during a trade depression.

Ø  To prevent loss of future orders.

Ø  To dispose of perishable goods.

Ø  To eliminate competition of weaker rivals.

Ø  To introduce a new product.

Ø  To help in selling a co-joined product which is making substantial profit?

Ø  To explore foreign market

4)      Make or Buy: Marginal costing helps the management in deciding whether to make a component part within the factory or to buy it from an outside supplier. Here, the decision is taken by comparing the marginal cost of producing the component part with the price quoted by the supplier. If the marginal cost is below the supplier’s price, it is profitable to produce the component within the factory. Whereas if the supplier’s price is less than the marginal cost of producing the component, then it is profitable to buy the component from outside.

5)      Closing down of a department or discontinuing a product: The firm that has several departments or products may be faced with this situation, where one department or product shows a net loss. Should this product or department be eliminated? In marginal costing, so far as a department or product is giving a positive contribution then that department or product shall not be discontinued. If that department or product is discontinued the overall profit is decreased.

6)      Selection of a Product/ sales mix: The marginal costing technique is useful for deciding the optimum product/sales mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce maximum units of that product which shows the highest P/V ratio so as to maximize profits.

7)      Evaluation of Performance: The different products and divisions have different profit earning potentialities. The Performance of each product and division can be brought out by means of Marginal cost analysis, and improvement can be made where necessary.

8)      Limiting Factor: When a limiting factor restricts the output, a contribution analysis based on the limiting factor can help maximizing profit. For example, if machine availability is the limiting factor, then machine hour utilisation by each product shall be ascertained and contribution shall be expressed as so many rupees per machine hour utilized. Then, emphasis is given on the product which gives highest contribution.

9)      Helpful in taking Key Managerial Decisions: In addition to above, the following are the important areas where managerial problems are simplified by the use of marginal costing :

Ø  Analysis of Effect of change in Price.

Ø  Maintaining a desired level of profit.

Ø  Alternative methods of production.

Ø  Diversification of products.

Ø  Alternative course of action etc.

Or

You are given the following data: 2+2+2+2+2=10

Assuming that the cost structure and selling price remain unchanged in the two years, calculate:

(i) P. V. Ratio

(ii) Break Even Point (in sales)

(iii) Profit when sales are Rs. 1, 00,000

(iv) Sales required to earn a profit of Rs. 20,000

(v) Margin of safety in 2018.

6. What do you understand by the term “Budget”? Briefly explain the requisites for a successful Budgetary Control system. 3+7=10

Ans: Budget: A budget is the monetary and / or quantitative expression of business plans and policies to be pursued in the future period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control or business enterprises.

I.C.M.A. defines a budget as “A financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.

Essentials of Effective Budgetary control system

A budgetary control system can prove successful only when certain conditions and attitudes exist, absence of which will negate to a large extent the value of a budget system in any business. Such conditions and attitudes which are essential for effective budgeting are as follows:

a)    Support of Top Management: If the budget system is to be successful, it must be fully supported by every member of the management and the impetus and direction must come from the very top management. No control system can be effective unless the organisation is convinced that the top management considers the system to be import.

b)   Participation by Responsible Executives: Those entrusted with the performance of the budgets should participate in the process of setting the budget figures. This will ensure proper implementation of budget programmes.

c)    Reasonable Goals: The budget figures should be realistic and represent reasonably attainable goals. The responsible executives should agree that the budget goals are reasonable and attainable.

d)   Clearly Defined Organisation: In order to derive maximum benefits from the budget system, well defined responsibility centers should be built up within the organisation. The controllable costs for each responsibility centres should be separately shown.

e)   Continuous Budget Education: The best way to ensure the active interest of the responsible supervisors is continuous budget education in respect of objectives, potentials & techniques of budgeting. This may be accomplished through written manuals, meetings etc., whereby preparation of budgets, actual results achieved etc., may be discussed.

f)     Adequate Accounting System: There is close relationship between budgeting and accounting. For the preparation of budgets, one has to depend on the accounting department for reliable historical data which primarily forms the basis for many estimates. The accounting system should be so designed so as to set up accounts in terms of areas of managerial responsibility. In other words, responsibility accounting is essential for successful budgetary control.

g)    Constant Vigilance: Reports comparing budget and actual results should be promptly prepared and special attention focused on significant exceptions i.e. figures that are significantly different from those expected.

h)   Maximum Profit: The ultimate object of realizing the maximum profit should always be kept uppermost.

i)      Cost of the System: The budget system should not cost more than it is worth. Since it is not practicable to calculate exactly what a budget system is worth, it only implies a caution against adding expensive refinements unless their value clearly justifies them.

j)     Integration with Standard Costing System: Where standard costing system is also used, it should be completely integrated with the budget programme, in respect of both budget preparation and variance analysis.

Or

From the following data, forecast the cash position at the end of April, May and June 2018 of an organisation:   10

Months	Sales(Rs.)	Purchases(Rs.)	Wage(Rs.)	Sundry Expenses (Rs.)
February March April May June	1,20,000 1,30,000 70,000 1,16,000 85,000	80,000 78,000 1,00,000 1,03,000 80,000	10,000 12,000 8,000 10,000 8,000	7,000 9,000 5,000 10,000 6,000

Further information:

(i) 10% of sales is realised in the month of sale and the balance is realised equally in two subsequent months.

(ii) Creditors allow a credit of one month.

(iii) 20% of the wages of a month remains as arrear which is paid in the following month.

(iv) Sundry expenses are paid in the month itself.

(v) Income tax Rs. 20,000 and dividends Rs. 12,000 are payable in June.

(vi) Cash in hand as on 1st April, 2018 was Rs. 40,000.

7. What is the meaning and importance of Standard Costing? Discuss the preliminary steps for establishing a system of Standard Costing. 2+2+6=10

Ans: 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.

Importance 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.

Introduction of Standard Costing System in an Establishment

Introducing standard costing in any establishment requires the fulfilment of following preliminaries:

a)      Establishment of cost centers: A cost centre is a location, person or item of equipment for which costs may be ascertained and used for the purpose of cost control. The cost centers divide an entire organisation into convenient parts for costing purpose. The nature of production and operations, the organisational structure, etc. influence the process of establishing cost centres. No hard and fast rule can be laid down in this regard. Establishment of the cost centres is essential for pin pointing responsibility for variances.

b)      Classification and codification of accounts: The need for quick collection and analysis of cost information necessitates classification and codification. Accounts are to be classified according to different items of expenses under suitable headings. Each of the headings is to be given a separate code number. The codes and symbols used in the process facilitate introduction of computerization.

c)       Determining the types of standards and their basis: Standards can be classified into two broad categories on the basis of the length of use:

i.       Current standards: These are standards which are related to current conditions, particularly of the budget period. They are for short-term use and are more suitable for control purpose. They are also more amenable for combining with budgeting.

ii.      Basic standards: These are long-term standards; some of them intended to be in use for even decades. They are helpful for planning long-term operations and growth. There can be significant difference in the standards set depending on the base used for them. The following are the different bases for setting standard, whether they are current standards for short-term or basic standards for long-term use.

Ø Ideal standards: These standards reflect the best performance in every aspect. They are like 100 marks in a paper for students taking up examinations. What is possible under ideal circumstances in all aspects is reflected in these standards. They are impractical and unattainable in practice. There utility for control purpose is negligible.

 

Ø Past performance based standards: The actual performance attained in the past may be taken as basis and the same may be retained as standard. Such standards do not provide any incentive or challenge to the employees. They are too easy to attain. Their value from cost control point of view is minimal.

 

Ø Normal standard: It is defined as “the average standard which, it is anticipated can be attained over a future period of time, preferably long enough to cover one trade cycle”. They are average standard reflecting the average performance over a complete trade cycle which may take three to five years. For a specific period, say a budget period, their relevance is negligible.

 

Ø Attainable high performance standards: They are based on what can be achieved with reasonable hard work and efforts. They are based on the current conditions and capability of the workers. These standards are considered to be of great practical value because they provide sufficient incentive and challenge to the workers to attain them. Any variances from such standard are really significant because the standard which is attainable with effort is not attained.

d)      Determining the expected level of activity: Capacity of operation or level of activity expected over a future period is vital in fixing current or short-term standards. When the activity level is decided on the basis of sales or production, whichever is the limiting factor; all standard can be developed with the activity level as the focal point. The purchase of material, usage of material, labour hours to be worked, etc. are solely governed by the planned level of activity.

e)      Setting standards: Standards may be either too strict or too liberal because they may be based on theoretical maximum efficiency attainable good performance or average past performance. Setting standards may also be called developing standards or establishment of standard cost because as a consequence of setting standards for various aspects, standard cost can be computed.

Or

The standard time and rate for unit component “A” are given below:    3+3+4=10

Standard hours per unit      15

Standard rate     Rs. 4 per hour

The actual data and related information are as under:

Actual production    1,000 units +

Actual hours    15,300 hours

Actual rate     Rs. 3.90 per hour

Calculate:

(i) Labour cost variance

(ii) Labour efficiency variance and

(iii) Labour rate variance.      

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