Management Accounting solved Question Paper 2022
Dibrugarh University BCOM 5th SEM
5 SEM TDC DSE COM (CBCS) 501 (GR-I)
2022 (Nov / Dec)
COMMERCE
(Discipline Specific Elective)
(For
Honours / Non-Honours)
Paper:
DSE-501 (Group-I)
(Management Accounting)
Full
Marks: 80
Pass
Marks: 32
Time: 3 hours
The
figures in the margin indicate full marks for the questions.
1. (a) Write True or False: 1x4=4
(1) In management
accounting, only those figures are used which can be measured in monetary
terms.
Ans: False.
(2) Depreciation of
machinery is a source of funds.
Ans: False.
(3) The difference between
actual cost and standard cost is known as differential cost.
Ans: False, Variance cost
(4) A system of budgetary
control cannot be used in a business where standard costing is in use.
Ans: False
(b) Fill in the blanks: 1x4=4
(1) Management accounting
is based on _______ information.
Ans: Non-financial
(2) Issue of equity shares
is a cash flow from _______ activities.
Ans: Financing
(3) _______ budget is a
summary of all functional budgets.
Ans: Master
(4) Margin of safety can
be improved by reducing the _______ cost.
Ans: Fixed
2.
Write short notes on any four of the following: 4x4=16
(a)
Tools of Management Accounting.
Ans: Management accountant supplies information to the management so
that latter may be able to discharge all its functions, i.e., planning
organization, staffing, direction and control sincerely and faithfully. For
doing this, the management accountant uses the following tools and techniques.
a)
Financial planning: Financial planning
is the act of deciding in advance about the financial activities necessary for
the concern to achieve its primary objectives. It includes determining both
long term and short term financial objectives of the enterprise, formulating
financial policies and developing the financial procedure to achieve the
objectives. The role of financial policies cannot be emphasized to achieve the
maximum return on the capital employed. Financial policies may relate to the
determination of the amount of capital required, sources of funds, govern the
determination and distribution of income, act as a guide in the use of debt and
equity capital and determination of the optimum level of investment in various
assets.
b)
Analysis of financial statements: The
analysis is an attempt to determine the significance and meaning of the
financial statement data so that a forecast may be made of the prospects for
future earnings, ability to pay interest and debt maturities and profitability
of a sound dividend policy. The techniques of such analysis are comparative
financial statements, trend analysis, funds flow statement and ratio analysis.
This analysis results in the presentation of information which will help the business
executive, investors and creditors.
c)
Historical cost accounting: The
historical cost accounting provides past data to the management relating to the
cost of each job, process and department so that comparison may be made with
the standard costs. Such comparison may be helpful to the management for cost
control and for future planning.
d) Standard costing: Standard costing is the establishment of standard costs under most
efficient operating conditions, comparison of actual with the standard,
calculation and analysis of variance, in order to know the reasons and to
pinpoint the responsibility and to take remedial action so that adverse things
may not happen again. This aspect is necessary to have cost control.
(b) Operating Activities.
Ans: Operating
activities are the principal revenue generating activities of the business. These
are cash flows from regular course of operations such as manufacturing, trading
etc. All activities that are not investing or financing activities are included
under operating activities.
Examples
of Operating Activities:
Ø Cash
receipts from the sale of goods and rendering of services. (Source)
Ø Cash
payments to suppliers of goods and services. (application)
Ø Cash
receipts from royalties, fees, commission and other revenue. (Source)
Ø Cash
payments to and on behalf of employees for wages, etc. (application)
Ø Cash
payments and refunds of income taxes. (application)
Under
indirect method cash flow from operating activities is calculated with the help
of net profit before tax and extraordinary items. Non-cash and non-operating
expenses and losses are added and non-cash and non-operating incomes are
deducted from net profit before tax and extraordinary items to find net cash
flow from operating activities before working capital change. After this
changes in working capital is adjusted and payment of taxes during the year is
deducted to find cash flow from operating activities.
(c) Profit-volume Graph.
Ans: PROFIT
VOLUME CHART OR [P/V CHART]
It shows the amount of profit or
loss at different levels of output. When the output is zero, total loss will be
equal to fixed costs. The fixed costs are recovered gradually when the volume
of output is increased. When the output reaches the Break-even point, the whole
fixed costs are recovered. The firm incurs no loss or earns no profit.
Thereafter, the firm makes a profit and the amount of profit increases with the
increase in sales volume.
CONSTRUCTION OF P/V CHART
The same data used for drawing a
Break even chart may be used for constructing a P/V chart. The following steps
may be followed for constructing a P/V chart.
1. Sales or units of output are
plotted along the X axis
2. The Y axis is used for marking
fixed costs losses and profits
3. Points of Profits or losses are
marked at different levels of sales and these points are joined to get the
profit or loss line.
4. The point where the profit or
loss line intersects the X axis is marked as the Breakeven point.
5. The angle at the BEP measures
the angle of incidence.
6. The distance between BEP and
actual sales on the X axis measures the margin of safety.
(d) Product Budget.
Ans: Production budget is usually prepared on the basis of sales
budget. But it also takes into account the stock levels desired to be
maintained. The estimated output of business firm during a budget period will
be forecast in production budget. The production budget determines the level of
activity of the produce business and facilities planning of production so as to
maximum efficiency. The production budget is prepared by the chief executives
of the production department. While preparing the production budget, the
factors like estimated sales, availability of raw materials, plant capacity,
availability of labour, budgeted stock requirements etc. are carefully considered.
(e) Contribution.
Ans: Contribution is the excess of sales over
marginal cost. It is not purely profit. It is the profit before recovery of
fixed assets. Fixed costs are first met out of contribution and only the
remaining amount is regarded as profit. Contribution is an index of
profitability. It has a fixed relationship with sales. Larger the sales more
will be the contribution and vice versa. Contribution = Sales – Marginal cost
or Fixed cost + profit.
Advantages of contribution:
a) It helps in fixation of selling
price.
b) It assists in determining the
breakeven point.
c) It helps the management in
selection of suitable product mix.
d) It helps the management in
taking make or buy decision.
e) It helps in taking decision
regarding adding a new product.
3. Define Management Accounting. Discuss its
functions and limitations. 4+5+5=14
Ans: The term management accounting
refers to accounting for the management. Management accounting provides
necessary information to assist the management in the creation of policy and in
the day-to-day operations. It enables the management to discharge all its
functions i.e. planning, organization, staffing, direction and control
efficiently with the help of accounting information.
In the words of R.N.
Anthony “Management accounting is concerned with accounting information that is
useful to management”.
Anglo American Council of
Productivity defines management accounting as “Management accounting is the
presentation of accounting information is such a way as to assist management in
the creation of policy and in the day-to-day operations of an undertaking”.
According to T.G. Rose
“Management accounting is the adaptation and analysis of accounting
information, and its diagnosis and explanation in such a way as to assist
management”.
From the above
explanations, it is clear that management accounting is that form of accounting
which enables a business to be conducted more efficiently.
Functions of Management Accounting:
Main objective of
management accounting is to help the management in performing its functions
efficiently. The major functions of management are planning, organizing,
directing and controlling. Management accounting helps the management in
performing these functions effectively. Management accounting helps the
management is two ways:
I.
Providing necessary accounting information to management
II.
Helps in various activities and tasks performed by the management.
I. Providing necessary accounting information to management:
(a) Measuring: For helping the
management in measuring the work efficiency in different areas it is done on
the past and present incidents with context to the future. In standard costing
and budgetary any control, standard and actual performance is compared to find
out efficiency.
(b) Recording: In management accounting
both the quantitative and qualitative types of data are included and this
accounting is done on the basis of assumptions and even those items which
cannot be expressed financially are included in management accounting.
(c) Analysis: The work of management
accounting is to collect and analyze the fact related to the managerial
problems and then present them in clear and simple way.
(d) Reporting: For the use of management
various reports are prepared. Generally, two types of reports are prepared:
a.
Regular Reports
b.
Special Reports.
II. Helping in Managerial
works and Activities:
The main functions of
management are planning, organizing, staffing, directing and controlling.
Management accounting provides information to the various levels of managers to
fulfill the above mentioned responsibilities properly and effectively. It is
helpful in various management functions as under: -
(a) Planning: Through management
accounting forecasts regarding the sales, purchases, production etc. can be
obtained, which helps in making justifiable plans. The tools of management
accounting like standard costing, cost -volume-profit analysis etc. are of
great managerial costing, help in planning.
(b) Organizing: In management accounting
whole organization is divided into various departments, on the basis of work or
production, and then detailed information is prepared to simplify the thing.
The budgetary control and establishing cost centre techniques of management
accounting helps which result in efficient management.
(c) Staffing: Merit rating and job
evaluation are two important functions to be performed for staffing. Generally,
only those employs are useful for the organization, whose value of work done by
them is more than the value paid to them. Thus by doing cost-benefit analysis
management accounting is useful in staffing functions.
(d) Directing: For proper directing, the
essentials are co-ordination, leadership, communications and motivation. In all
these tasks management accounting is of great help. By analyzing the financial
and non-financial motivational factors, management accounting can be an asset
to find out the best motivational factor.
(e) Co-ordination: The targets of
different departments are communicated to them and their performance is
reported to the management from time to time. This continual reporting helps
the management in coordinating various activities to improve the overall
performance.
Limitations of
Management Accounting:
Management accounting, being
comparatively a new discipline, suffers from certain limitations, which limit
its effectiveness. These limitations are as follows:
1.
Limitations of basic records: Management accounting derives its
information from financial accounting, cost accounting and other records. The
strength and weakness of the management accounting, therefore, depends upon the
strength and weakness of these basic records. In other words, their limitations
are also the limitations of management accounting.
2.
Persistent efforts: The conclusions draw by the
management accountant are not executed automatically. He has to convince people
at all levels. In other words, he must be an efficient salesman in selling his
ideas.
3.
Management accounting is only a tool:
Management accounting cannot replace the management. Management accountant is
only an adviser to the management. The decision regarding implementing his
advice is to be taken by the management. There is always a temptation to take
an easy course of arriving at decision by intuition rather than going by the
advice of the management accountant.
4.
Wide scope: Management accounting has a very wide
scope incorporating many disciplines. It considers both monetary as well as
non-monetary factors. This all brings inexactness and subjectivity in the
conclusions obtained through it.
5.
Top-heavy structure: The installation of management
accounting system requires heavy costs on account of an elaborate organization
and numerous rules and regulations. It can, therefore, be adopted only by big
concerns.
Or
Discuss the various tools and techniques of
Management Accounting. 14
Ans: Management accountant supplies information to the management so
that latter may be able to discharge all its functions, i.e., planning
organization, staffing, direction and control sincerely and faithfully. For
doing this, the management accountant uses the following tools and techniques.
a) Financial planning: Financial planning is the act of deciding in advance about the
financial activities necessary for the concern to achieve its primary
objectives. It includes determining both long term and short term financial
objectives of the enterprise, formulating financial policies and developing the
financial procedure to achieve the objectives. The role of financial policies
cannot be emphasized to achieve the maximum return on the capital employed.
Financial policies may relate to the determination of the amount of capital
required, sources of funds, govern the determination and distribution of
income, act as a guide in the use of debt and equity capital and determination
of the optimum level of investment in various assets.
b) Analysis of financial statements: The
analysis is an attempt to determine the significance and meaning of the
financial statement data so that a forecast may be made of the prospects for
future earnings, ability to pay interest and debt maturities and profitability
of a sound dividend policy. The techniques of such analysis are comparative
financial statements, trend analysis, funds flow statement and ratio analysis.
This analysis results in the presentation of information which will help the
business executive, investors and creditors.
c) Historical cost
accounting: The historical cost accounting provides
past data to the management relating to the cost of each job, process and
department so that comparison may be made with the standard costs. Such
comparison may be helpful to the management for cost control and for future
planning.
d) Standard costing: Standard costing is
the establishment of standard costs under most efficient operating conditions,
comparison of actual with the standard, calculation and analysis of variance,
in order to know the reasons and to pinpoint the responsibility and to take
remedial action so that adverse things may not happen again. This aspect is
necessary to have cost control.
e) Budgetary control: The management
accountant uses the total of budgetary control for planning and control of the
various activities of the business. Budgetary control is an important technique
of directing business operations in a desired direction, i.e. achieve a satisfactory
return on investment.
f) Marginal costing: The management
accountant uses the technique of marginal costing, differential costing and
break even analysis for cost control, decision-making and profit maximization.
g) Funds flow statement: The management
accountant uses the technique of funds flow statement in order to analyze the
changes in the financial position of a business enterprise between two dates.
It tells wherefrom the funds are coming in the business and how these are being
used in the business. It helps a lot in financial analysis and control, future
guidance and comparative studies.
h) Cash flow statement: A funds flow
statement based on increase or decrease in working capital is very useful in
long-range financial planning. It is quite possible that these may be
sufficient working capital as revealed by the funds flow statement and still
the company may be unable to meet its current liabilities as and when they fall
due. It may be due to an accumulation of investments and an increase in trade
debtors. In such a situation, a cash flow statement is more useful because it
gives detailed information of cash inflow and outflow. Cash flow statement is
an important tool of cash control because it summarizes sources of cash inflow
and uses of cash outflows of a firm during a particular period of time, say a
month or a year. It is very useful tool for liquidity analysis of the
enterprise.
i) Decision making: Whenever there are
different alternatives of doing a particular work, it becomes necessary to
select the best out of all alternatives. This requires decision on the part of
the management. The management accounting helps the management through the
techniques of marginal costing, capital budgeting, differential costing to
select the best alternative which will maximize the profits of the business.
j) Revaluation accounting: The
management accountant through this technique assures the maintenance and
preservation of the capital of the enterprise. It brings into account the
impact of changes in the prices on the preparation of the financial statements.
k) Statistical and graphical techniques:
The management accountant uses various statistical and graphical techniques in
order to make the information more meaningful and presentation of the same in
such form so that it may help the management in decision-making. The techniques
used are Master Chart, Chart of sales and Earnings, Investment chart, Linear
Programming, Statistical Quality control, etc.
l) Communication (or Reporting): The
success for failure of the management is dependent on the fact, whether
requisite information is provided to the management in right form at the right
time so as to enable them to carry out the functions of planning controlling
and decision-making effectively. The management accountant will prepare the
necessary reports for providing information to the different levels of
management by proper selection of data to be presented, organization of data
and selecting the appropriate method of reporting.
4. (a) (1) Explain the objects of Cash Flow
Statement. 7
Ans: A Cash Flow
Statement is similar to the Funds Flow Statement, but while preparing funds
flow statement all the current assets and current liabilities are taken into
consideration. But in a cash flow statement only sources and applications of
cash are taken into consideration, even liquid asset like Debtors and Bills
Receivables are ignored.
A Cash Flow Statement is a statement,
which summarises the resources of cash available to finance the activities of a
business enterprise and the uses for which such resources have been used during
a particular period of time. Any transaction, which increases the amount of
cash, is a source of cash and any transaction, which decreases the amount of
cash, is an application of cash.
Simply, Cash Flow is a statement which
analyses the reasons for changes in balance of cash in hand and at bank between
two accounting period. It shows the inflows and outflows of cash.
Objectives
of Cash Flow Statement:
The Cash Flow Statement is prepared
because of number of merits, which are offered by it. Such merits are also
termed as its objectives. The important objectives are as follows:
1)
To
Help the Management in Making Future Financial Policies:
Cash Flow statement is very helpful to the management. The management can make
its future financial policies and is in a position to know about surplus or
deficit of cash.
2)
Helpful
in Declaring Dividends etc.: Cash Flow Statement is very helpful
in declaring dividends etc. This statement can supply necessary information to
understand the liquidity.
3)
Cash
Flow Statement is Different than Cash Budget: Cash
budget is prepared with the help of inflow and outflow of cash. If there is any
variation, the same can be corrected.
4)
Helpful
in devising the cash requirement:
Cash flow statement is helpful in devising the cash requirement for
repayment of liabilities and replacement of fixed assets.
5)
Helpful
in finding reasons for the difference: Cash Flow Statement is also helpful in
finding reasons for the difference between profits/losses earned during the
period and the availability of cash whether cash is in surplus or deficit.
6)
Helpful
in predicting sickness of the business: Cash flow is helpful in predicting sickness
of the business. A sound cash position is a true indicator of sound financial
position.
7) Supply
Necessary Information to the Users: A Cash Flow Statement supplies various
information relating to inflows and outflows of cash to the users of accounting
information in the following ways:
(i) To assess the ability of a firm to pay its
obligations as soon as it becomes due;
(ii) To analyze and interpret the various
transactions for future courses of action;
(iii) To see the cash generation ability of a
firm;
(iv) To ascertain the cash and cash equivalent
at the end of the period.
8) Helps the Management to
Ascertain Cash Planning: No
doubt a cash flow statement helps the management to prepare its cash planning
for the future and thereby avoid any unnecessary trouble
(2) Distinguish between Cash Flow Statement
and Fund Flow Statement. 7
Ans: Difference between Funds Flow Statement and Cash Flow Statement:
|
Basis of Difference |
Funds Flow Statement |
Cash Flow Statement |
|
Basis of Analysis |
Funds
flow statement is based on broader concept i.e. working capital. |
Cash
flow statement is based on narrow concept i.e. cash, which is only one of the
elements of working capital. |
|
Objective |
The
object funds flow statement is to disclose the magnitude, direction and
causes of changes in working capital. |
The
object of cash flow is to disclose the magnitude, direction and causes of
changes in cash and cash equivalents. |
|
Source |
Funds
flow statement tells about the various sources from where the funds generated
with various uses to which they are put. |
Cash
flow statement starts with the opening balance of cash and reaches to the
closing balance of cash by proceeding through sources and uses. |
|
Usefulness |
Funds
flow statement is more useful in assessing the long-term financial position. |
Cash
flow statement is more useful in assessing the short-term financial position
of the business. |
|
Schedule of
Changes in Working Capital |
In
funds flow statement changes in current assets and current liabilities are
shown through the schedule of changes in working capital. |
In
cash flow statement changes in current assets and current liabilities are
shown in the cash flow statement. |
|
Causes |
Funds
flow statement shows the causes of changes in net working capital. |
Cash
flow statement shows the causes of changes in cash. |
|
Principal of
Accounting |
Funds
flow statement is based on the accrual basis of accounting. |
In
cash flow statement, data are obtained on accrual basis which are converted
into cash basis. |
|
Compulsion |
There
is no prescribed form for preparation of Funds flow statement. |
Cash
flow statement is compulsory to be prepared in prescribed proforma as given
in AS – 3. |
|
Relationship |
Funds
flow statement can be prepared from the cash flow statement under indirect
method. |
But
a cash flow statement cannot be prepared from funds flow statement. |
|
Financial Health |
Sound
fund position does not necessarily mean sound cash position. |
But
sound cash position is always followed by sound fund position. |
Or
(b) The following are the balance taken from
the books of a limited company as on 31st March, 2021 and 2022:
|
Credit
Balance |
2021 Rs. |
2022 Rs. |
Debit
Balance |
2021 Rs. |
2022 Rs. |
|
Share Capital |
2,00,000 |
2,60,000 |
Cash at Bank |
2,480 |
2,700 |
|
Sundry Creditor |
39,500 |
41,135 |
Debtors |
85,000 |
72,000 |
|
Bills Payable |
33,780 |
11,252 |
Advances |
2,500 |
1,000 |
|
Bank Overdraft |
59,510 |
- |
Stock |
1,11,000 |
97,000 |
|
Provision for Tax |
40,000 |
50,000 |
Land &
Building |
1,49,000 |
1,45,000 |
|
Reserves |
50,000 |
50,000 |
Machinery &
Plant |
1,12,500 |
1,16,000 |
|
Surplus |
39,690 |
41,220 |
Goodwill |
- |
20,180 |
|
|
4,62,480 |
4,53,880 |
|
4,62,480 |
4,53,880 |
Additional Information:
(1) During the year ended
31st March, 2022, dividend was paid Rs. 18,000.
(2) Income tax paid during
the year 2021-22 Rs. 25,000.
(3) The net profit for the
year before tax was Rs. 62,530.
Prepare Cash Flow
Statement by indirect method. 14
Ans: This Question is not completed due to shortage of time. You can refer my video of cash flow statement here:
5. “Marginal costing is a very useful
technique to management for cost control, profit planning and decision making.”
Explain. 14
Ans: Marginal Costing: It is the
technique of costing in which only marginal costs or variable are charged to
output or production. The cost of the output includes only variable costs.
Fixed costs are not charged to output. These are regarded as ‘Period Costs’.
These are incurred for a period. Therefore, these fixed costs are directly
transferred to Costing Profit and Loss Account.
According to
CIMA, marginal costing is “the ascertainment, by differentiating between fixed
and variable costs, of marginal costs and of the effect on profit of changes in
volume or type of output. Under marginal costing, it is assumed that all costs
can be classified into fixed and variable costs. Fixed costs remain constant
irrespective of the volume of output. Variable costs change in direct proportion
with the volume of output. The variable or marginal cost per unit remains
constant at all levels of output.”
Thus, Marginal costing is defined as the ascertainment of marginal
cost and of the ‘effect on profit of changes in volume or type of output by differentiating
between fixed costs and variable costs. Marginal costing is mainly concerned
with providing information to management to assist in decision making and to
exercise control. Marginal costing is also known as ‘variable costing’ or ‘out
of pocket costing’.
“Marginal Costing” is a valuable aid to
Management:
Marginal costing
and Beak even analysis are very useful to management. The important uses of
marginal costing and Break Even analysis are the following:
1)
Cost
control: Marginal
costing divides total cost into fixed and variable cost. Fixed Cost can be
controlled by the Top management to a limited extent and Variable costs can be
controlled by the lower level of management. Marginal costing by concentrating
all efforts on the variable costs can control total cost.
2)
Profit
Planning: It
helps in short-term profit planning by making a study of relationship between
cost, volume and Profits, both in terms of quantity and graphs. An analysis of
contribution made by each product provides a basis for profit-planning in an
organisation with wide range of products.
3)
Fixation
of selling price:
Generally, prices are determined by demand and supply of products and services.
But under special market conditions marginal costing is helpful in deciding the
prices at which management should sell. When marginal cost is applied to
fixation of selling price, it should be remembered that the price cannot be
less than marginal cost. But under the following situation, a company shall
sell its products below the marginal cost:
Ø
To maintain production and to keep
employees occupied during a trade depression.
Ø
To prevent loss of future orders.
Ø
To dispose of perishable goods.
Ø
To eliminate competition of weaker
rivals.
Ø
To introduce a new product.
Ø
To help in selling a co-joined product
which is making substantial profit?
Ø
To explore foreign market
4)
Make or Buy: Marginal costing helps the management in
deciding whether to make a component part within the factory or to buy it from
an outside supplier. Here, the decision is taken by comparing the marginal cost
of producing the component part with the price quoted by the supplier. If the
marginal cost is below the supplier’s price, it is profitable to produce the
component within the factory. Whereas if the supplier’s price is less than the
marginal cost of producing the component, then it is profitable to buy the
component from outside.
5)
Closing down of a department or discontinuing
a product: The firm that has
several departments or products may be faced with this situation, where
one department or product shows a net loss. Should this product or
department be eliminated? In marginal costing, so far as a department or
product is giving a positive contribution then that department or product shall
not be discontinued. If that department or product is discontinued the
overall profit is decreased.
6)
Selection of a Product/ sales mix: The marginal costing technique is useful for
deciding the optimum product/sales
mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce
maximum units of that product which shows
the highest P/V ratio so as to maximize profits.
7)
Evaluation
of Performance:
The different products and divisions have different profit earning
potentialities. The Performance of each product and division can be brought out
by means of Marginal cost analysis, and improvement can be made where
necessary.
8)
Limiting Factor: When a limiting factor restricts the
output, a contribution analysis based on the limiting factor can help
maximizing profit. For example, if machine availability is the limiting factor,
then machine hour utilisation by each product shall be ascertained and
contribution shall be expressed as so many rupees per machine hour utilized.
Then, emphasis is given on the product which gives highest contribution.
9)
Helpful in taking Key Managerial
Decisions: In addition to above, the following are the
important areas where managerial problems are simplified by the use of marginal
costing:
Ø Analysis of Effect of change in Price.
Ø Maintaining a desired level of profit.
Ø Alternative methods of production.
Ø Diversification of products.
Ø
Alternative
course of action etc.
Or
The following are the details of profit and
loss data relating to a manufacturing business:
|
|
Rs. |
|
Sales Cost of Goods
Sold: Variable 40,000 Fixed 10,000 |
1,00,000 50,000 |
|
Gross
Profit |
50,000 |
|
Selling and
Administrative Cost: Variable 10,000 Fixed 5,000 |
15,000 |
|
Net Profit |
35,000 |
From the above data,
calculate –
(1) profit-volume ratio;
(2) break-even point;
(3) profit for the sales
volume of Rs. 1,60,000 and Rs. 70,000.
Would it be profitable to
reduce the selling price by 10% if it leads to an increase in sales by 30%? 2+3+4+5=14
6. (a) What do you mean by cash budget? What
are its advantages? Explain the limitations of budgetary control. 4+4+6=14
Ans: A cash budget is a budget or plan
of expected cash receipts and disbursements during the period. These cash
inflows and outflows include revenues collected, expenses paid, and loans
receipts and payments. In other words, a cash budget is an estimated projection
of the company's cash position in the future.
Management usually
develops the cash budget after the sales, purchases, and capital expenditures
budgets are already made. These budgets need to be made before the cash budget
in order to accurately estimate how cash will be affected during the period.
For example, management needs to know a sales estimate before it can predict
how much cash will be collected during the period. Management uses the cash
budget to manage the cash flows of a company. In other words, management must
make sure the company has enough cash to pay its bills when they come due.
Chartered Institute of Management Accountant (CIMA)
defines cash budgets as a short-term fiscal plan expressed in money which is
prepared in advance. It helps to determine the cash-inflow and cash-outflow of
the business.
Advantages of Cash Budget:
Cash
budget is an important tool in the hands of financial management for the
planning and control of the working capital to ensure the solvency of the firm. The importance of cash budget
may be summarised as follow:
(1)
Helpful in Planning. Cash
budget helps planning for the most efficient use of cash. It points out cash
surplus or deficiency at selected point of time and enables the management to
arrange for the deficiency before time or to plan for investing the surplus
money as profitable as possible without any threat to the liquidity.
(2)
Forecasting the Future needs. Cash
budget forecasts the future needs of funds, its time and the amount well in
advance. It, thus, helps planning for raising the funds through the most
profitable sources at reasonable terms and costs.
(3)
Maintenance of Ample Cash Balance. Cash
is the basis of liquidity of the enterprise. Cash budget helps in maintaining
the liquidity. It suggests adequate cash balance for expected requirements and
a fair margin for the contingencies.
(4)
Controlling Cash Expenditure. Cash
budget acts as a controlling device. The expenses of various departments in the
firm can best be controlled so as not to exceed the budgeted limit.
(5)
Evaluation of Performance. Cash
budget acts as a standard for evaluating the financial performance.
(6)
Testing the Influence of proposed Expansion Programme. Cash budget forecasts the inflows from a
proposed expansion or investment programme and testify its impact on cash
position.
(7)
Sound Dividend Policy. Cash
budget plans for cash dividend to shareholders, consistent with the liquid
position of the firm. It helps in following a sound consistent dividend policy.
(8)
Basis of Long-term Planning and Co-ordination. Cash budget helps in co-coordinating the
various finance functions, such as sales, credit, investment, working capital
etc. it is an important basis of long term financial planning and helpful in
the study of long term financing with respect to probable amount, timing, forms
of security and methods of repayment.
Limitations of Budgetary Control System:
The list of advantages
given above is impressive, but a budget is not a cure all for organisational
ills. Budgetary control system suffers from certain limitations and those using
the system should be fully aware of them.
1. The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science.
Absolute accuracy, therefore, is not possible in forecasting and budgeting. The
strength or weakness of the budgetary control system depends to a large extent,
on the accuracy with which estimates are made. Thus, while using the system,
the fact that budget is based on estimates must be kept in view.
2. Danger of rigidity: Budgets are
considered as rigid document. Too much emphasis on budgets may affect
day-to-day operations and ignores the dynamic state of organization
functioning.
3. Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of
management. ‘The budget should be regarded not as a master, but as a servant.’
Sometimes it is believed that introduction of a budget programme alone is
sufficient to ensure its success. Execution of a budget will not occur
automatically. It is necessary that the entire organisation must participate
enthusiastically in the programme for the realisation of the budgetary goals.
4. False Sense of Security: Mere
budgeting cannot lead to profitability. Budgets cannot be executed
automatically. It may create a false sense of security that everything has been
taken care of in the budgets.
5. Lack of coordination: Staff
co-operation is usually not available during budgetary control exercise.
6. Expensive Technique: The installation and operation of a budgetary control system is a
costly affair as it requires the employment of specialized staff and involves
other expenditure which small concerns may find difficult to incur. However, it
is essential that the cost of introducing and operating a budgetary control
system should not exceed the benefits derived there from.
Or
(b) From the following
estimates of B. C. Ltd., prepare a sales overhead budget: 14
|
Advertisement Expenses of the
Sales Department Salaries of the
Sales Department Counter salesmen’s
salary and dearness allowance |
Rs. 5,000 Rs. 4,000 Rs. 9,000 Rs. 12,000 |
Counter salesmen are
allowed commission @ 2% on their sales
Travelling salesmen are
allowed commission and expenses @ 10% and 5% on their sales respectively.
The estimated sales during
the period were as under:
|
Area |
Counter Sales (Rs.
) |
Sales by
Travelling Salesmen (Rs. ) |
|
I |
1,60,000 |
20,000 |
|
II |
2,25,000 |
28,000 |
|
III |
2,70,000 |
45,000 |
***
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