Management Accounting
solved Question Paper 2021
Gauhati University BCOM 5th
SEM CBCS Pattern
COMMERCE (Honours
Elective)
Paper: COM-HE-5016
(Management Accounting)
Full Marks: 80
Time: 3 hours
The figures in the margin
indicate full marks for the questions.
1. (a) State whether the following statements are ‘true’ or ‘false’: 1x5=5
(1) Management accounting is concerned with
the future.
Ans: True
(2) Financial Statements are the end products
of accounting process.
Ans: True
(3) Flexible budget changes with the change
in level of activity.
Ans: True
(4) When actual cost is greater than standard
cost, then variance is favourable.
Ans: False
(5) Profit-Volume ratio is also known as
contribution ratio.
Ans: True
(b)
Fill in the blanks with appropriate word/words: 1x5=5
(1) Management accounting deals only with
that information which is useful to the _______.
Ans: Management
(2) Two elements of a current ratio are
current assets and _______.
Ans: Current liabilities
(3) Budgetary control is a system of
controlling _______.
Ans: Cost and performance
(4) The difference between actual cost and
standard cost is known as _______.
Ans: Variance
(5) In marginal costing, only _______ costs
are charged to production.
Ans: Variable cost or product cost
(c) Write brief answers to the following questions: 2x5=10
(1) Write two advantages of management accounting.
Ans: The advantages of management accounting are summarized below:
a) Helps in Decision Making: Management accounting helps in decision
making such as pricing, make or buy, acceptance of additional orders, selection
of suitable product mix etc. These important decisions are taken with the help
of marginal costing technique.
b) Helps in Planning: Planning includes profit planning, preparation
of budgets, programmes of capital investment and financing. Management
accounting assists in planning through budgetary control, capital budgeting and
cost-volume-profit analysis.
(2) Mention two limitations of ratio analysis.
Ans: In spite of many advantages, there are certain limitations of
the ratio analysis techniques. The following are the main limitations of
accounting ratios:
a) Limited Comparability: Different firms apply different accounting
policies. Therefore, the ratio of one firm cannot always be compared with the
ratio of other firm.
b) False Results: Accounting ratios are based on data drawn from
accounting records. In case that data is correct, then only the ratios will be
correct. For example, valuation of stock is based on very high price, the
profits of the concern will be inflated and it will indicate a wrong financial
position. The data therefore must be absolutely correct.
(3) Write the meaning of budgetary control.
Ans: Budgetary control
is the process of preparation of budgets for various activities and comparing
the budgeted figures for arriving at deviations if any, which are to be
eliminated in future. Thus budget is a means and budgetary control is the end
result. Budgetary control is a continuous process which helps in planning and
coordination. It also provides a method of control.
According
to Brown and Howard “Budgetary control is a system of coordinating costs which
includes the preparation of budgets, coordinating the work of departments and
establishing responsibilities, comparing the actual performance with the
budgeted and acting upon results to achieve maximum profitability”.
(4) Write the meaning of variance analysis.
Ans:
Variance analysis is the process of analysing variance by sub-dividing the
total variance in such a way that management can assign responsibility for off
standard performance. It, thus, involves the measurement of the deviation of
actual performance from the intended performance. That is, variance analysis is
a tool to measure performances and based on the principle of management by
exception. In variance analysis, the attention of management is drawn not only
to the monetary value of unfavourable and favourable managerial performance but
also to the responsibility and causes for the same. After the standard costs
have been fixed, the next stage in the operation of standard costing is to
ascertain the actual cost of each element and compare them with the standard
already set. Computation and analysis of variances is the main objective of
standard costing. Actual cost and the standard cost is known as the ‘cost
variance’.
(5) Write two basic characteristics of marginal costing.
Ans: The main Features
(Characteristics) of Marginal Costing are as follows:
1. Cost Classification: The
marginal costing technique makes a sharp distinction between variable costs and
fixed costs. It is the variable cost on the basis of which production and sales
policies are designed by a firm.
2. Managerial Decisions: It
is a technique of analysis and presentation of costs which help management in
taking many managerial decisions such as make or buy decision, selling price
decisions etc.
2. Answer the following questions: (any four) 5x4=20
(1) Briefly explain 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.
1.
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.
2.
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.
3.
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.
4.
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.
5. 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.
(2) Explain the significance of liquidity ratios.
Ans: Liquidity Ratios: These ratios show relationship between
current assets and current liabilities of the business enterprise. Example: Current Ratio, Liquid Ratio.
1.
Significance of Current ratio: Current ratio shows the short-term financial
position of the business. This ratio measures the ability of the business to
pay its current liabilities. The ideal current ratio is supposed to be 2:1. In
case, if this ratio is less than 2:1, the short-term financial position is not
supposed to be very sound and in case, if it is more than 2:1, it indicates
idleness of working capital.
2. Significance of liquid ratio: Liquid
ratio is calculated to work out the liquidity of a business. This ratio
measures the ability of the business to pay its current liabilities in a real
way. The ideal liquid ratio is supposed to be 1:1. In case, this ratio is less
than 1:1, it shows a very weak short-term financial position and in case, it is
more than 1:1, it shows a better short-term financial position.
(3) State the characteristics of good budgeting.
Ans: A budget is a blue print of a plan expressed in
quantitative terms. Budgeting is technique for
formulating budgets. Budgetary Control, on the other hand, refers to
the principles, procedures and practices of achieving given
objectives through budgets. Here are some Advantages of Budgetary
Control:
a) Maximization of Profit: The
budgetary control aims at the maximization of profits of the enterprise.
To achieve this aim, a proper planning and co-ordination of different functions
is undertaken. There is proper control over various capital and revenue
expenditures. The resources are put to the best possible use.
b) Efficiency: It enables the management to conduct its business activities in an
efficient manner. Effective utilization of scarce resources, i.e. men,
material, machinery, methods and money - is made possible.
c) Specific Aims: The plans,
policies and goals are decided by the top management. All efforts are
put together to reach the common goal of the organization. Every department is
given a target to be achieved. The efforts are directed towards achieving
come specific aims. If there is no definite aim then the efforts will
be wasted in pursuing different aims.
d) Performance evaluation: It provides a yardstick for measuring and evaluating the
performance of individuals and their departments.
e) Economy: The planning of expenditure
will be systematic and there will be economy in spending. The finances will be
put to optimum use. The benefits derived for the concern will ultimately extend
to industry and then to national economy. The national resources will be used
economically and wastage will be eliminated.
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(4) Mention five managerial uses of ratio analysis.
Ans:
(5) Explain the assumptions of marginal costing.
Ans: Assumptions in Marginal Costing
1. All costs can be classified into fixed and variable elements.
Semi variable costs are also segregated into fixed and variable elements.
2. The total variable costs change in direct proportion with units
of output. It follows a linear relation with volume of output and sales.
3. The total fixed costs remain constant at all levels of output.
These are incurred for a period and have no relation with output.
4. Only variable costs are treated as product costs and are charged
to output, product, process or operation
5. Fixed costs are treated as ‘Period costs’ and are directly
transferred to Costing Profit and Loss Account.
6. The closing stock is also valued at marginal cost and not at
total cost.
7. The relative profitability of product or department is based on
the contribution it gives and not based on the profit.
8. It is also assumed that the selling price per unit remains the
same i.e., any number of units can be sold at the current market price.
9. The product or sales mix remains constant over a period of time.
(6) Briefly explain any five 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.
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.
3. Explain different tools and techniques of management
accounting in the areas of decision-making. 10
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.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
Or
Explain the functions of management accounting. 10
Ans: 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.
4. Answer either Q. Nos. (a) and (b) or Q. No. (c):
(a) The following information of a company is
given below:
Current Ratio = 2.8
Acid-test Ratio = 1.5
Working Capital = Rs. 1,62,000
Find out:
(1) Current Assets;
(2) Current Liabilities; and
(3) Liquid Assets.
(b) How is the common size statement different from
comparative statement?
(c) What is the meaning of financial statement analysis?
Describe briefly the techniques of financial statement analysis. 2+8=10
5. The expenses budgeted for productions of
10,000 units in a factory are furnished below:
|
|
Per Unit (Rs.) |
|
Materials Labour
Variable
overhead Fixed
overheads (Rs. 1,00,000) Variable
expenses (Direct) Selling
expenses (10% fixed) Distribution
expenses (20% fixed) Administrative
expenses (Rs. 50,000) |
70 25 20 10 5 13 7 5 |
|
Total
cost of sales per unit |
155 |
Assume that administrative expenses are fixed
for all levels of production. Prepare a flexible budget for production of
(a) 8,000 units, and (b) 6,000 units. 10
Or
State the factors which are considered in establishment
of standard cost. 10
Ans: Introducing standard costing in any establishment requires the
fulfillment of following preliminaries:
a. Establishment of cost centers;
b. Classification and codification of accounts;
c. Determining the types of standards and their basis;
d. Determining the expected level of activity;
e. Setting standards
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.
- 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. Their utility for control purpose is negligible.
- 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.
- 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.
- 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.
Material quantity standards: The following procedure is usually
followed for setting material quantity standards.
(a) Standardization of products: Detailed specifications,
blueprints, norms for normal wastage etc., of products along with their designs
are settled.
(b) Product classification: Detailed classified list of
products to be manufactured are prepared.
(c) Standardization of material: Specifications, quality, etc.,
of materials to be used in the standard products are settled.
(d) Preparation of bill of materials: A bill of material for
each product or part showing description and quantity of each material to be
used is prepared.
(e) Test runs: Sample or test runs under regulated conditions
may be useful in setting quantity standards in a precise manner.
Labour quantity standards: The following are the steps involved
in setting labour quantity standards:
(a) Standardization of products: Detailed specifications,
blueprints, norms for normal wastage etc., of products along with their designs
are settled.
(b) Product classification: Detailed classified list of
products to be manufactured are prepared.
(c) Standardization of methods: Selection of proper machines to
use proper sequence and method of operations.
(d) Manufacturing layout: A plan of operation for each product
listing the operations to be performed is prepared.
(e) Time and motion study is conducted for selecting the best
way of completing the job.
(f) The operator is given training to perform the job or
operations in the best possible manner.
6. Following are the information obtained
from the books of Asian Ltd: 2x5=10
Fixed Cost = Rs. 1,60,000
Sales = Rs. 100 per unit.
Variable cost = Rs. 90 per unit.
Calculate:
(a) P/V ratio;
(b) Break-even sales;
(c) Break-even units;
(d) Sales to earn a profit of Rs. 40,000;
(e) Profit when sales are Rs. 20,00,000.
Or
Explain the uses of marginal costing by management in
decision-making process. 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:
- To maintain production and to
keep employees occupied during a trade depression.
- To prevent loss of future
orders.
- To dispose of perishable
goods.
- To eliminate competition of
weaker rivals.
- To introduce a new product.
- To help in selling a co-joined
product which is making substantial profit?
- 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:
- Analysis of Effect of change in Price.
- Maintaining a desired level of profit.
- Alternative methods of production.
- Diversification of products.
- Alternative course of action etc.
***
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