ACCOUNTING FOR DECISION MAKING- BA4104

UNIT I - FINANCIAL CCOUNTING

INTRODUCTION
Accounting is as old as money itself. Recording of business transaction has become an
important feature.
BOOK-KEEPING
Book-keeping is that branch of knowledge which tells us how to keep a record of business
transactions. The activities of book-keeping include
 Recording in the journal
 Posting to the ledger and
 Balancing of accounts
ACCOUNTING
Accounting is the production of financial records about an organization. The principles of
accountancy are applied to accounting, bookkeeping, and auditing.
Definition of Accounting
According to the American Institute of Certified Public Accountants (AICPA)”Accounting
is the art of recording classifying and summarizing in a significant manner and in terms of money
transactions and events which are of a financial character and interpreting the results thereof”’
American Accounting Association defines accounting as “the process of identifying, measuring
and communicating economic information to permit informed judgments and decision by users of
the information”.
Accountant
An accountant is a practitioner of accountancy or accounting
Objectives of Accounting
➢ To maintain accounting records systematically
➢ To calculate the result of operations
➢ To ascertain the financial position
➢ To communicate the information to users

ACCOUNTING CYCLE
An accounting cycle is a complete sequence of accounting process, that
➢ Begins with the recording of business transactions and
➢ Ends with the preparation of final accounts.
The business activities, starts with recording the day-to-day transactions in the Journal,
Then in ledger where accounts are written up. To prove the accuracy of the work done a statement
called trial balance is prepared. Then trading and profit and loss account is the next step. To
know the financial position of the business concern balance sheet is prepared at the end.

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 JOURNAL

BALANCE
SHEET LEDGER

PROFIT &
LOSS TRIAL
ACCOUNT BALANCE

Accounting Cycle

ACCOUNTING EQUATION
The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business.

INTRODUCTION TO FINANCIAL, COST AND MANAGEMENT ACCOUNTING

Cost Accounting: Cost accounting is that part of accounting which is helpful to calculate the
cost and control the cost. In cost accounting, we deeply study the variable cost, fixed cost,
overheads and capital cost.
Financial Accounting: Financial Accounting is that part of accounting in which we record
the transactions and we make the financial statements. Through making the financial statement, it
provides information of profitability and financial position to the interested parties.

Management accounting: Management accounting is the presentation of accounting

information in such a way to assist management in creation of policy and day to day operation of

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an undertaking.
DISTINCTION BETWEEN FINANCIAL ACCOUNTING, MANAGEMENT ACCOUNTING AND COST ACCOUNTING.
1. Objective
Financial accounting provides the periodical reports to owners, creditors and government.
Management accounting assists the internal management.
Cost accounting is used to determine the cost of a product.
2. Nature
Financial accounting is concerned with historical records. Management
accounting is concerned with future plans and policies. Cost accounting is
based on past and present facts.

3. Subject matter
Financial accounting deals with the business as a whole.
Management accounting is concerned more with impact and effect aspect of costs.
Cost accounting is concerned more with the ascertainment, allocation, distribution and
accounting aspects of costs.
4. Flexibility
In Financial accounting, standards are fixed by external parties.
In Management accounting standards are fixed by management itself.
In cost accounting standards are fixed by management based on the business.
5. Legal compulsion
Financial accounting is statutory for every business. Management
accounting is adopted on voluntary basis.
Cost accounting can be made according to the need of company but some company must audit
their cost accounts under cost audit.
6. Periodicity of reporting
In Financial accounting the period is longer Management
accounting is prepared when it is required. In cost
accounting, accounting is done periodically.
7. Precision
In Financial accounting the transactions are very accurate.
In Management accounting sometimes approximate figures are used.
In cost accounting, both actual transactions record and estimations are used.
8. Unit of accounting
Financial accounting recognizes whole business. Management
accounting provides results of the divisions.
In cost accounting, to find the profit per job or per batch or per service unit is possible.
9. Coverage
Financial accounting covers entire range of business in monetary items.
Management accounting includes both financial accounting as well as cost accounting. It also
embraces tax planning and tax accounting.
Cost accounting does not include financial accounting and has nothing to do with tax
accounting.
10. Publication and audit

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Financial accounting is very essential for the use of public.
 Management accounting is for management only.
Cost accounting is for management and public use.

11. Accounting principles

Financial accounting has principles and conventions.
Management accounting has no such principles.
In Cost accounting procedure are followed.

ENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Golden rules of Accounting
In the double entry system of book-keeping the transactions should be recorded according
to the following rules. Each transaction must have two aspects.
1. Debit aspect
2. Credit aspect
Account Type Rules under double entry system
Personal Account Debit the receiver
Credit the giver
Real Account Debit what comes in
Credit what goes out
Nominal Account Debit all expenses and losses
Credit all incomes and gains

An account is the statement in ledger

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 Accounts

Personal
Impersonal

Proprietor Creditors Debtors Real Nominal

Expenses & Incomes &

Assets Goods
Losses Gains

Journal
The Journal records all business transaction in the order in which the occur. A Journal may,
therefore, be defined as the book of original entry containing a chronological record of the
transaction from which posting to the ledger is made.
Eg: Rajini started business with a capital of Rs.50,000 on Dec 1 2020.
Date Particulars L.F Dr(Rs) Cr(Rs)
2020 Cash A/C Dr 50,000
Dec 1st To Capital A/C 50,000
(started business with a capital)
Ledger
Ledger is the book of main entry and it contains various accounts such as Personal
Accounts, Real Accounts, Nominal Accounts. A Ledger Accounts is nothing but a summary
statement of all transactions relating to a person, asset, expense or income, which have taken
place during a given period of time showing their net effect.

Trial balance

The balances standing in the listed down in the form of a student, showing debit balances in
one column and the credit balances in the other, known as a “Trial Balance”

ASES OF ACCOUNTING
There are three bases of accounting in common usage. Anyone of the following bases
maybe used to finalize accounts.
1. Cash basis (only cash)
2. Accrual or Mercantile basis (All outstanding expenses and prepaid expenses
3. Mixed or Hybrid basis (some items of income are taken on cash basis while most of the expenses
are shown on accrual basis)

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CCOUNTING STANDARDS IN INDIA AND INTERNATIONAL ACCOUNTING STANDARDS
In India, the Accounting Standards Board (ASB) was constituted by the Institute of
Chartered Accountants of India (ICAI) on 21st April 1977, which performs the function of
formulating accounting standards.
Accurate and reliable financial information is the lifeline of commerce and investing.
Presently, there are two sets of accounting standards that are accepted for international use namely,
the U.S.,
1. Generally Accepted Accounting Principles (GAAP) and
2. The International Financial Reporting Standards (IFRS) issued by the London-based
International Accounting Standards Board (IASB).
nerally Accepted Accounting Principles (GAAP)
The common set of accounting principles, standards and procedures that companies use to
compile their financial statements. GAAP are a combination of authoritative standards (set by
policy boards) and simply the commonly accepted ways of recording and reporting accounting
information.
➢ Generally, accepted accounting principles (GAAP) are diverse in nature but based on a few
basic principles as advocated by all GAAP rules.
➢ These principles include consistency, relevance, reliability and comparability. Generally
Accepted Accounting Principles (GAAP) ensures that all companies are on a level playing
field and that the information they present is consistent, relevant, reliable and comparable.
➢ Although U.S. GAAP is only applicable in the U.S., other countries have their own adaptations
that are similar in purpose, although not always in design.
➢ Economic entity assumption. Financial records must be separately maintained for each
economic entity. Economic entities include businesses, governments, school districts, churches,
and other social organizations.
➢ Monetary unit assumption. An economic entity's accounting records include only quantifiable
transactions. Certain economic events that affect a company, such as hiring a new chief
executive officer or
➢ Full disclosure principle. Financial statements normally provide information about a
company's past performance.
➢ Time period assumption. Most businesses exist for long periods of time, so artificial time
periods must be used to report the results of business activity.
➢ Accrual basis accounting. In most cases, GAAP requires the use of accrual basis accounting
rather than cash basis accounting.
➢ Revenue recognition principle. Revenue is earned and recognized upon product delivery or
service completion, without regard to the timing of cash flow
➢ Matching principle. The costs of doing business are recorded in the same period as the
revenue they help to generate.
➢ Cost principle. Assets are recorded at cost, which equals the value exchanged at the time of
their acquisition.
➢ Going concern principle. Unless otherwise noted, financial statements are prepared under the
assumption that the company will remain in business indefinitely.
➢ Relevance, reliability, and consistency. To be useful, financial information must be relevant,
reliable, and prepared in a consistent manner.

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➢ Relevant information helps a decision maker understand a company's past performance,
 present condition, and future outlook
➢ Principle of conservatism. Accountants must use their judgment to record transactions that
require estimation.
➢ Materiality principle. Accountants follow the materiality principle, which states that the
requirements of any accounting principle may be ignored when there is no effect on the users of
financial information.
The International Financial Reporting Standards (IFRS)

➢ IFRS are International Financial Reporting Standards, which are issued by the International
Accounting Standards Board (IASB), a committee comprising of 14members, from nine
different countries, which work together to develop global accounting standards.
➢
CCOUNTING CONCEPTS AND CONVENTIONS
The theory of accounting has, therefore, developed the concept of a "true and fair view".
The true and fair view is applied in ensuring and assessing accounts

CCOUNTING CONCEPTS
1. Entity Concept
For accounting purpose the “business” is treated as a separate entity from the proprietor(s).
For example. If a proprietor invests Rs. 1,00,000/- in the business, it is deemed that the
proprietor has given Rs. 1,00,000/- to the “business” and it is shown as a “liability” in the books of
the business.
2. Dual Aspect Concept
Dual aspect principle is the basis for Double Entry System of book-keeping. Dual aspect
principle is the basis for Double Entry System of book-keeping which is universally used.
All business transactions recorded in accounts have two aspects Receiving benefit and Giving benefit.
For every debit there is an equal and corresponding credit.
The equation is
Assets = Liabilities + Owners Equities
Liabilities= Assets - Capital
Owners’ Equity (Capital) = Assets – Liabilities
3. Going Business Concept (Continuity of Activity)
As per this concept, the business will exist for a long period. The business concern will
continue for a fairly long time, unless and until has entered into a state of liquidation.
4. Money measurement Concept
As per this concept, in accounting everything is recorded in terms of money.
For example: when Sales Manager is not on good terms with Production Manager, the business is bound to
suffer. This fact will not be recorded, because it cannot be measured in terms of money.
5. Cost Concept (Objectivity Concept)
This concept does not recognize the realizable value, the replacement value or the real
worth of an asset. It is a historical record of the transactions of the business entity
For example, if a machine is purchased for Rs. 10,000/- it is recorded in the books at Rs. 10,000/-
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 and even if its market value at the time of the preparation of the final account is Rs. 20,000/- or Rs.
60,000/- the same will not considered.
6. Cost-Attach Concept
This concept is also known as “cost-merge” concept. When a finished good is produced
from the raw material there are certain process and costs which are involved like labor cost, power
and other overhead expenses.
7. Accounting Period Concept
An accounting period is the interval of time at the end of which the income statement and
financial position statement (balance sheet) are prepared to know the results and resources of the
business. Usually a period of 365 days or 52 weeks or 1 year is considered as the accounting
period.(1st April of current year to 31st march of next year(1.4.2019 to 31.3.2020))
8. Accrual Concept
The accrual system is a method whereby revenue and expenses are identified with specific
periods of time like a month, half year or a year.
9. Revenue Realization Concept
According to this concept, revenue is considered as the income earned on the date when it
is realized. Unearned or unrealized revenue should not be taken into account. TPeriod
Matching of Cost and Revenue Concept
10. Verifiable Objective Evidence Concept
According to this concept all accounting transactions should be evidenced and supported
by objective documents.
CCOUNTING CONVENTIONS
2 The most commonly encountered convention is the "historical cost convention".
1. Convention of full disclosure
All accounting statements should be prepared honestly. The statement should disclose
fully all the significant information. Facts, figures and the details which are of material interest to the
owners, investors, creditors etc., must be clearly presented in the financial statements. Convention of
consistency
Consistency is at three levels
➢ Vertical consistency (in the same year in the firm)
➢ Horizontal consistency(between different years)
➢ Dimensional consistency(different firms in the same industry)
2. Convention of Materiality
All important items and facts should be disclosed in accounting statements.
For example, a plastic container for drinking water can be clubbed with general expenses
instead of separately being disclosed as an asset.
3. Convention of conservatism:
Conservatism is a policy of caution or playing safe. Stocks are valued, the usual principle
followed is ‘cost or market price whichever is lower’.

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FINAL ACCOUNTS
Financial statement is mainly divided into two parts as depicted below
1. Balance sheet and related concepts
2. Profit and Loss account and related concepts
Final Accounts

PARTICULARS RS RS PARTICULARS RS RS
To Opening Stock To xxx By Sales xxx
Purchases xxx xxx xxx
Less : Returns outward xxx Less: Returns Inward By xxx
Closing stock xxx
x x x By Gross loss c/d
To Wages To x x x xxx
Freight x x x
To Carriage Inwards To x x x
Power (factory) x x x
To Gross Profit c/d x x x
(Transferred to P&L a/c) To xxx
Gross loss b/d
xxx
Gross profit b/d
To Salaries By Commission earned By xxx x
To Rent & rates To xxxx Rent received xxx x
Stationeries xxxx By Interest received By xxx x
To Postage expenses To xxxx Discount received By Net xxx x
Insurance xxxx Loss xx
To Office expenses To xxxx xxx
Interest paid xxxx
To Bank charges xxxx
To Sundry expenses xxxx
To Commission paid To xxxx
Discount allowed To xxxx
Advertisement xxxx
To Carriage outwards xxxx
To Travelling expenses xxx
To Distribution expenses To
Bad debts xxx
To Depreciation To xxx
repairs
To Net Profit (transferred to
Capital A/c)
Trading & profit and loss a/c Balance sheet

TRADING PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31STDEC 20..

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 Balance Sheet of M/S.Ram& co. as on 31st December 20..

LIABILITIES Rs Rs ASSETS Rs RS

Capital XXX XXX Cash in hand XXX

Add: Net profit Cash at bank XXX
Fixed Assets XXX
Add: Interest on capital XXX XXX Less: Depreciation XXX XXX
Less: Drawing Sundry Debtors XXX
XXX XXX Less: bad debts XXX
Less: Interest on drawing written off XXX
Less :Income tax XXX XXX Less: Provision for XXX
Creditors XXX doubtful debt XXX
Less: Discount on creditors Income XXX XXX Less :Provision for XXX
received in advance Loan XXX discount on debtors
Add: Out standing loan XXX XXX
XXX Goodwill XXX XXX
XXX Less: Written off
XXX
Outstanding Expenses Prepaid expenses
Payment in Advance XXX Outstanding Income XXX
XXX Closing stock XXX
XXX
XXX XXX

BALANCE SHEET EQUATION

An important thing to note about the Balance Sheet is that, the total value of the assets is
always equal to the total value of the liabilities. This is because the liability to the owner - capital,
is always made up of the difference between assets and liabilities. Thus,
Assets = Liabilities + Capital (or) Capital = Assets - Liabilities

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 UNIT-II

ANALYSIS OF FINANCIAL STATEMENTS

1. Analysis of financial statements

2. Financial ratio analysis
3. Cash flow (as per Accounting Standard 3) and
4. Funds flow statement analysis

FINANCIAL STATEMENT ANALYSIS

Financial statement analysis (or financial analysis) is the process of understanding the risk and
profitability of a firm (business, sub-business or project) through analysis of reported financial
information, by using different accounting tools and techniques.

Financial statement analysis consists of

 Reformulating reported financial statements,

 Analysis and adjustments of measurement errors, and
 Financial ratio analysis on the basis of reformulated and adjusted financial statements.

The first two steps are often dropped in practice, meaning that financial ratios are just calculated
on the basis of the reported numbers, perhaps with some adjustments. Financial statement analysis
is the foundation for evaluating and pricing credit risk and for doing fundamental company
valuation.

Objectives of Financial Statement Analysis

Financial Statement Analysis is a very important and effective tool to the management of an
enterprise. The objectives of a Financial Statement Analysis are as follows:
1. To assess the real meaning and significance of financial data as disclosed in the Financial
Statements.
2. To assess the liquidity and short-term solvency position of the enterprise.
3. To assess the long-term solvency position of the enterprise.
4. To assess the present and future profitability of the enterprise.
5. To evaluate the operational efficiency of the enterprise.
Advantages of financial statement analysis

The different advantages of financial statement analysis are listed below:

1. Financial statement analysis provides an idea to the investors about deciding on
investing their funds in a particular company.
2. Financial statement analysis is that regulatory authorities like IASB can ensure the
company following the required accounting standards.
3. Financial statement analysis is helpful to the government agencies in analyzing the
taxation owed to the firm.
4. It helps the company to analyze its own performance over a specific time period.

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Limitations of financial statement analysis
 Financial statements suffer from the following limitations.
1. Financial statements are only interim reports. They are not final because the exact
financial position can be known only when the business is closed.
2. In the balance sheet, assets are recorded at their original costs. Replacement cost
or realizable value of the asset is ignored.
3. Financial statements do not take non-monetary factors such as credit worthiness
and reputation of the management, which influence the financial position of a
concern.
4. Financial statements ignore the changes in the price level. Hence their use is
limited during inflation period.
5. Financial statements are records of past events only. Past can never be a hundred
per cent representative of the future.
6. The balance sheet fails to show how working capital was raised and used during
the year.
Types of financial analysis

There are various types of users like investors, creditors, customers, financial institutions,
employees, potential investors, government and general public analyze the financial reports in different
angles for different purposes. However all kinds of analysis can be classified on the basis of their users
and the method of operations followed in the analysis.

o External Analysis
o Internal Analysis
o Dynamic Analysis
o Static Analysis

Methods or devices are used for analysis of financial statements are as follows.

1. Comparative Statements
2. Common-size Statements
3. Trend Analysis
4. Ratio Analysis

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 5. Funds flow Analysis
6. Cash flow Analysis
7. Cost-volume-profit Analysis

COMPARATIVE STATEMENTS
Under comparative statement, financial statements like balance sheet and income
statement are prepared in comparative form for financial analysis.
The two comparative statements are
❖ Comparative balance sheet and
❖ Comparative income statement

COMPARITIVE BALANCE SHEET

 COMPARATIVE INCOME STATEMENT

In the above comparative income statement the sales has increased by 13.41%
where as cost of goods sold has increased by 10.42% resulting in increase in gross profit
by 17.65%. There is an increase in net profit by Rs.36000.
So it may be stated that the overall profitability of the business is good. 2. Trend Analysis

In trend analysis percentage of each item of statement is calculated in relation to

the same item in the base year. The figure of the base year is taken as 100 and trend
percentages for other years are calculated on the basis of base year.

From the above trend percentages sales have continuously increased in all the years up to 2009.The sales
percentage has increased to 200% in year 2009 as compared to 100% in 2005. So during the five years sales have been
doubled. So the increase in sales is quite satisfactory. TREND PERCENTAGES(BASE YEAR 2005 = 100)
 The percentage of cost of goods sold has also increased from 100% in year 2005
to 150% in year 2009. The net profit percentage has increased to 233.33% in year 2009. In
five years the increase in profit percentage is more than the increase of sales
percentage. It suggests a good control of operating and non operating expenses

COMMON-SIZE STATEMENT

In common-size balance sheet the total assets and liabilities are taken as 100 and each asset
and liability is expressed as a percentage of the total 100. Common-size balancesheet can be
used to compare companies of different sizes.
Following example shows the position of two companies. common-size balance sheet to compare the
COMMON-SIZE BALANC SHEET FOR THE YEAR ENDING 31ST MARCH, 2013

This statement shows that the company xyz ltd. has more own funds then abc ltd. In case of
xyz ltd. out of total investments 64.03% is the proprietor's fund where as it is 60.68% for abc ltd. In analyze the
working capitals of two companies, it shows that abc ltd. is in much better position then the xyz ltd . So this
company's working capital position is better than the xyz ltd
COMMON-SIZE INCOME STATEMENT

In common-size income statement the items in the income statement are shown in relation
to sales. Each item in the statement is expressed as a percentage of sales. An increase or decrease
in sales will directly affect the selling expenses not the administrative and financial expenses. So a
relationship is set between sales and other items to evaluate the operational activities of the
business concern.
COMMON-SIZE INCOME STATEMENT FOR THE YEAR ENDING 31ST MARCH 2010

In the above common-size income statement sales and gross profit have increased in
absolute figures in year 2010 but the percentage of gross profit to sales has decreased in 2010. The
cost of sales as a percentage of sales has decreased the profitability from 43.33% to 36.00%. The
overall profitability has decreased in 2010 due to rise in cost of sales. The management should
take immediate actions to control the cost of sales.
Problem 1: (Comparative statements)

From the following Profit and Loss Account and Balance Sheet of Jayaprakash Industries
Ltd., prepare a comparative income statement and a comparative balance sheet.
Profit and Loss Account for the year ended 30th June

Particulars 1999 2000 Particulars 1999 2000

Rs. Rs. Rs. Rs.
To Cost of goods sold 500 640 By Sales 700 900
To Operating expenses:
Administrative expenses 20 20
Selling expenses 30 40
To Net profit 150 200
700 900 700 900

Balance Sheet as on 30th June

Liabilities 1999 2000 1999 2000
Rs. Rs. Rs. Rs.
Bills payable 50 75 Cash 50 70
Sundry Creditors 150 200 Stock 100 200
15% Debentures 100 150 Land 100 120
10% Preference capital 200 200 Building 250 225
Equity capital 300 300 Plant 200 180
Reserve 200 200 Furniture 100 80
1,100 1,325 1,100 1,325

Solution:
Comparative income statement of Jayaprakashindustries Ltd. for the years ended
30th June 1999 and 2000(Rs.in lakhs)
1999 2000 Increase/ Increase/
Decrease Decrease %
Sales 700 900 +200 +28.57
Cost of goods sold 500 640 +140 +28.00

Gross profit 200 260 +60 +30.00

Operating expenses:
Administrative expenses 20 20
Selling expenses 30 40 +10 +33.33

Total operating expenses 50 60 +10 +20.00

Operating profit 150 200 +50 +33.33

Comparative balance sheet as on June 1999 and 2000

(Rs.in lakhs)
1999 2000 Increse / Increas /
RS. RS. Decrease % Decrease %
Current assets
Cash 50 70 +20 +40
Debtors 300 450 +150 +50
Stock 100 200 +100 +100
Total current assets 450 720 +270 +60
Fixed assets:
Land 100 120 +20 +20
Building 250 225 -25 -10
Plant 200 180 -20 -10
Furniture 100 80 -20 -20
Total fixed assets 650 605 -45 -7
Total assets 1100 1325 +225 +20.45
Current liabilities
Bills payable 50 75 +25 +50
Tax payable 100 150 +50 +50
 Sundry creditors 150 200 +50 +33.33
Total current liabilities 300 425 +125 +42
15% debenture 100 150 +50 +50
Total liabilities 400 575 +175 +44
Capital & reserves:
10% preference capital 200 200
Equity capital 300 30
Reserves 200 250 +50 +25
Shareholders’ funds 700 750 +50 +7

Total liabilities and capital 1100 1325 +225 +20.45

Problem 2: (Common size statements)

On the basis of the data given in problem 1, prepare a common size income statement
and common size balance sheet of jayaprakash industries Ltd.
Answer:
Common size income statement for the year ending 30thjune 1999 and 2000
1999 2000
% %
Sales 100.00 100.00
Cost of goods sold 71.42 71.11

Gross profit 28.58 28.89

Operating expenses:
Administrative expenses 2.86 2.22
Selling expenses 4.29 4.44
Total expenses 7.15 6.66
Operating profit 21.43 22.23
Common size balance sheet as on 30thjune 1999 and 2000
Particulars 1999 (%) 2000 (%)
Assets :
Current assets:
Cash 4.54 5.28
Debtors 27.27 33.96
Stock 9.09 15.09
Total current assets 40.90 54.33
Fixed assets:
Land 9.09 9.06
Building 22.73 16.98
Plant 18.19 13.59
Furniture 9.09 6.04
Total fixed assets 59.10 45.67
Total assets 100.00 100.00
Liabilities 1999% 2000%
Current liabilities:
Bills payable 4.54 5.66
Tax payable 9.09 11.32
Sundry creditors 13.64 15.09
Total current liabilities 27.27 32.07
15% debenture 9.09 11.32
Total liabilities 36.36 43.3
Capital and reserves:
Equity capital 27.28 22.65
Reserves 18.18 18.87
Shareholder’s funds 63.64 56.61
Total liabilities and capital 100.00 100.00
Problem 3: ( Trend analysis)
Calculate the trend percentages from the following figures of Priya Enterprises taking 1995 as the
base and interpret them.
(Rs. in lakhs)

Year Sales Stock Profit before tax

1995 1,881 709 321
1996 2,340 781 435
1997 2,655 816 458
1998 3,021 944 527
1999 3,768 1,154 672
Answer:
Trend percentages (base year 1995 = 100)
Year Sales Stock Profit Before Tax
(Rs.in lakhs) trend % (Rs.in lakhs) trend % (Rs.in lakhs) trend %
1995 1881 100 709 100 321 100
1996 2340 124 781 110 435 136
1997 2655 141 816 115 458 143
1998 3021 161 944 133 527 164
1999 3768 200 1154 162 672 209
Interpretation:
1. Sales have registered a continuous increase in all the years. The percentage in
1999 in 200 as compared to 100 in 1995. The increase in sales is quite
satisfactory.
2. The figures of stock have also increased from 100 to 162.
RATIO ANALYSIS

The ratio analysis is one of the most powerful techniques of financial analysis. With the
help of ratios financial statements can be analyzed more clearly and reasonable decisions can be
taken by the management.

A ratio is an expression of the quantitative relationship between two numbers. A financial

ratio is the relationship between two accounting figure expressed mathematically.

This ratio of current assets and current liabilities can be expressed as in following ways :

i) 2 : 1 ii) 2 iii) 2/1 iv) 2 to 1 0r v) 200%

Ratios provide information about the financial strength, soundness, position and weakness
of a business concern.

Advantages and Limitations of Ratio Analysis

Financial ratio analysis is a useful tool for users of financial statement.

Advantages
1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a
period.
4. It highlights important information in simple form quickly. A user can judge a
company by just looking at few numbers instead of reading the whole financial
statements.
Limitations
Despite usefulness, financial ratio analysis has some disadvantages. Some key
demerits of financial ratio analysis are:

1. Different companies operate in different industries each having different

environmental conditions such as regulation, market structure, etc. Such factors
are so significant that a comparison of two companies from different industries
might be misleading.
2. Financial accounting information is affected by estimates and assumptions.
Accounting standards allow different accounting policies, which impairs
comparability and hence ratio analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are
more concerned about current and future information.
Classification of ratios
The ratios are not only used by financial managers but also used by all other parties
interested in knowing the financial position of the firm for different purposes. In view of
the financial management various ratios can be classified as under:
 Liquidity Ratios
 Long Term Solvency or Leverage Ratios
 Activity Ratios
  Profitability Ratios
Liquidity Ratios

Liquidity means the ability of a concern to meet its current financial obligations as
and when these become due.
 Current Ratio
 Liquid Ratio
 Absolute Liquid Ratio or Cash Position Ratio
Current Ratio:

Current ratio or working capital ratio is the relationship between current assets and
current liabilities.
Current Assets
Current Ratio =
Current liabilities

Liquid Ratio:

Liquid ratio also known as quick or acid test ratio is the relationship between
liquid assets and liquid liabilities.
Liquid Assets
Liquid or Acid Test Ratio = ----------------------------
Liquid liabilities
Absolute Liquid or Cash Ratio:

Absolute liquid ratio is even more rigorous test of liquidity than the liquid ratio..
Absolute liquid assets include cash in hand and at bank and marketable securities or
temporary investments.

Absolute Liquid Assets

Absolute Liquid Ratio =
Current liabilities
Liquidity ratios

A) Liquidity ratios
1. Current ratio = Current assets / Current liabilities
2. Liquid ratio = Liquid assets / Liquid liabilities
3.Absolute Liquid ratip = Absolute Liquid assets /
Liquid liabilities (or) Current liabilities
B) Solvency ratios
Net credit annual sales
1. Debtors turnover ratio/ = -----------------------------------------
Receivables turnover ratio Average trade debtors

Net credit annual purchase

2. Creditors turnover ratio/ = -----------------------------------------
Payable turnover ratio Average trade creditors

Cost of goods sold

3. Inventory turnover ratio/ = ----------------------------------------
Stock turnover ratio Average inventory at cost

Average trade debtors

4. Average collection period = ---------------------------------------
Sales per day

Average trade creditors

5. Average payable period = -------------------------------------
Purchase per day

Long term financial position or test of solvency

A) Capital structure ratios
Outsider funds
1. Debt equity ratio = -------------------------------- x 100
Share-holders funds

Funded debt
2. Funded debt to =------------------------------------------100
capitalization ratio Total Capitalization
Share-holders funds
3. Proprietor ratio/equity ratios =------------------------------------100
Total assets

Total liabilities
4. Solvency ratio/ = ------------------------------x 100
ratio of total liabilities to Total assets
total assets

Fixes assets
5. Fixes assets to net worth ratio = -------------------- x 100
Net worth

6. Fixes assets to total Fixes assets

long term funds/ = --------------------------- x 100
fixed assets ratio Total long term funds

7. Current assets to Current assets

8. proprietors fund = ---------------------------- x 100
Share-holders funds
 B) Coverage ratio (In Times)

9. Interest coverage ratio/ Net profit before interest and tax

Net profit before interest and tax = --------------------- --------------------
Fixed interest charges
Net profit before interest and
income tax
10.Preference dividend coverage ratio = ------------------------------------------
Preference dividend

11. Total coverage/ fixed charges Earnings before interest and tax
coverage ratio =
Total fixed charges
Activity ratios or Asset Management ratio:
Cost of goods sold or sales
1. Fixed asset turnover ratio = ---------------------------------------
Fixed asset
Cost of goods sold or sales
2. Total assets turnover ratio = --------------------------------------
Total assets

Cost of goods sold or sales

3. Working capital turnover ratio = ------------------------------------
Net Working capital

Cost of goods sold or sales

4. Capital turnover ratio = ------------------------------------
Capital employed
5. Debtors turnover ratio
6. Creditors turnover ratio
7. Inventory turnover ratio or stock turnover ratio
Profitability Ratios
A. General profitability ratio
Gross profit
1. Gross profit ratio =--------------------------------100
Net Sales

Net profit
2. Net profit ratio =--------------------------------100
Net Sales
Operating profit
3. Operating profit ratio =---------------------------------100
Net Sales
Operating cost
4. Operating ratio-------------------= 100
 Net Sales

Particular expenses
5. Expenses ratio---------------------------= 100
Net Sales

Cash profit
6. Cash profit ratio-----------------= 100
Net Sales

B. Valuation ratios
Dividend per share
1. Dividend yield ratio = ----------------------------------
Market value per share

Dividend per equity share

2. Dividend payout ratio = ------------------------------------
Earnings per share

Equity share capital + Reserves & surplus

3.Capital gearing ratio =
Preference capital+ Long term debts bearing fixed interest
NOTE:

1. Gross profit = Sales – cost of goods sold

2. Net sales = Gross sales – sales return

3. Operating cost = Cost of goods sold + administration expense - selling and

distribution expenses

4. Operating profit = Net sales - Operating cost

5. Net profit after tax = Net profit- tax paid

6. Gross Capital employed = fixed asset + current asset

7. Average Capital employed = (Opening +Closing Capital employed)/2

8. Net Capital employed = total assets – current liabilities

9. Cost of goods sold = (Opening stock + Purchases+ Direct expenses) –

closing stock

(OR)
 = Sales - Gross profit

10. Average stock = (opening stock + closing stock)/2

11. Net credit sales = Total sales – Cash sales

12. Net credit purchase = Total purchase – Cash purchase

13. Share-holders fund = preference + equity share capital + all reserves

and surpluses

Problem 1:

From the following particulars pertaining to assets and liabilities of a company calculate
(1) Current ratio (2) Liquid ratio (3) Proprietary ratio (4) Debt-Equity ratio (5) Capital
Gearing ratio
Liabilities Rs. Assets Rs.
5,000 Equity shares of
Rs. 100 each 5, 00,000 Land and Building 6 ,00,000
2,000 8% Preference shares of
Rs. 100 each 2, 00,000 Plant and Machinery 500,000
4,000 9% Debentures
Rs. 100 each 4, 00,000 Stock 2,40,000
Reserves 3,00,000 Debtors 2,00,000
Creditors 1, 50, 000 Cash and bank 55,000
Bank overdraft 50,000 Pre-paid expenses 5,000
16, 00,000 16,00,000
Answer:
Current assets
(1) current ratio = -----------------------------
Current liabilities
Current assets = stock + debtors + cash + bank + prepaid expenses
= Rs.2,40,000 + 2,00,000 + 55,000 + 5,000
= Rs.5,00,000
Current liabilities = creditors + bank overdraft
= Rs.1,50,000 + 50,000 + = Rs. 2,00,000
Rs.5,00,000
current ratio =-----------------------= 2.5 : 1
2,00,000

Quick assets
(2) Quick ratio = ---------------------
Quick liabilities
 Quick assets = current assets – (stock + prepaid expenses)
= Rs.5,00,000 –(2,40,000 + 5000)
= Rs.2,55,000

Quick liabilities = current liabilities – overdraft

= Rs . 2,00,000 – 50,000 = Rs. 1,50,000
2,55,000
= ------------- = 1.7 : 1
1,50,000

Proprietors’ funds
(3) Proprietory ratio = ----------------------------------------
Total tangible assets
Proprietors’ funds = equity share capital + preference share capital
+ reserves and surplus
= Rs.5,00,000 + 2,00,000 + 3,00,000
= Rs.10,00,000
Total assets = Rs.16,00,000

10,00,000
= -------------------- = 0.625 : 1
16,00,000
External equities debt
(4) debt-equity ratio = ----------------------------- = -------------
Internal equities equity
Debt = debenture + current liabilities
= 4,00,000 + 2,00,000 = Rs.6,00,000
Equity = proprietors’ funds = Rs.10,00,000

6,00,000
Debt-equity ratio =-------------------= 0.6 : 1
10,00,000

Preference capital + long term debt bearing fixed interest

(5) capital gearing ratio = ----------------------------------------------------------------
Equity share capital + reserves and surplus

2,00,000 + 4,00,000 6,00,000

= = = 0.75 : 1
5,00,000 + 3,00,000 8,00,000
Problem 2:

Current ration 2.5; Working capital Rs.63, 000. Calculate Current assets and Current liabilities.

Answer:
Current assets
(a). Current ratio =--------------------------------= 2.5 : 1
Current liabilities

Current assets - Current liabilities = working capital

2.5 - 1 = 1.5
If working capital is 1.5, current assets are 2.5
If working capital is Rs.63,000,current assets are

63,000
= ------------- *2.5 = Rs.1,05,000
1.5
(b) Current liabilities:
If working capital is 1.5, current assets are 1
If working capital is Rs.63,000,current assets are
63,000
= ------------- *1 = Rs.42,000
1.5
Problem 3:
From the following details find out (a) Current assets (b) Current liabilities
(c) Liquid assets (d) Stock.
Current ratio 2.5
Liquid ratio 1.5
Working Capital Rs. 90,000
Answer:
Current assets
(a). current ratio =-------------------------------= 2.5 : 1
Current liabilities
Current assets - Current liabilities = working capital
2.5 - 1 = 1.5
If working capital is 1.5, current assets are 2.5
If working capital is Rs.90,000,current assets are
90,000
= ------------- *2.5 = Rs.1,50,000
1.5
(b) current liabilities:
If working capital is 1.5, current assets are 1
If working capital is Rs.90,000,current assets are
 90,000
= ------------- *1 = Rs.60,000
1.5
(c) Liquid assets:
Quick assets
quick ratio =----------------------= 1.5 : 1
Quick liabilities

As there is no bank overdraft , quick liabilities = current liabilities

Quick assets
= = 1.5
60,000
Adopting cross multiplication,
quick assets = 60,000 *1.5 = Rs.90,000

(d)stock:
Stock = current assets – quick assets
= Rs.1,50,000 – 90,000 = Rs.60,000
Problem 4:

Determine the value of closing stock from the following details:

Sales Rs. 4, 00,000
G.P. ratio: 10% on sales
Stock velocity = 4 times
Closing stock was Rs. 10,000 in excess of opening stock
Answer:

Stock :
Cost of goods sold
Stock velocity = ---------------------------- = 4
Average stock
Cost of goods sold = sales – gross profit
= Rs.4,00,000 – 40,000
= Rs.3,60,000

Rs.3,60,000
= =4
Average stock
Adopting cross multiplication
4*average stock = Rs.3,60,000
Average stock =Rs.90,000

Average stock =
Opening stock +
closing stock 2 = 90,000

Total stock (90,000 * 2) = Rs.1,80,000

Less: excess of closing stock = Rs. 10,000

Rs.1,70,000

1,70,000
Opening stock = -------------- = Rs.85,000
2
Closing stock = 85,000 + 10,000 = Rs.95,000

Problem 5 :

From the following information, prepare a Balance Sheet. Show the workings.

1. Working capital Rs. 75,000

2. Reserves and surplus 1,00,000
3. Bank overdraft 60,000
4. Current ratio 1.75
5. Liquid ratio 1.15
6. Fixed assets to proprietor’s funds 0.75
7. Long-term liabilities Nil

Answer:
(a) Current assets:
Current assets
Current ratio =-------------------------------= 1.75 : 1
Current liabilities
Working capital = current assets - current liabilities
= 1.75 – 1 = 0.75
If working capital is 0.75,current assets are 1.75
If working capital is 75,000 current assets are

75,000
= ------------- * 1.75 = Rs.1,75,000
0.75
(b) Current liabilities:
If working capital is 0.75,current liabilities = 1
If working capital is 75,000 current liabilities are
 75,000
=--------------* 1 = Rs.1,00,000
0.75
(c) Quick assets:
Quick assets
Quick ratio =-------------------------= 1.5 : 1
Quick liabilities

Quick liabilities = current liabilities – bank overdraft

= Rs . 1,00,000 – 60,000 = Rs. 40,000

Quick assets
= *1.15
40,000
Quick assets = 40,000 * 1.15 = 46,000
(d)Stock:
Stock = current assets – quick assets
= 1,75,000 – 46,000 = 1,29,000
(e) Proprietors’ fund:
Fixed assets
Fixed assets to proprietors’ fund =---------------------------= 0.75 : 1
proprietors’ fund
In the absence of long term loans following equation can be had from the balance sheet.
Total liabilities = total assets
i.e.proprietors’ fund + current liabilities
= Fixed assets + current assets
proprietors’ funds - Fixed assets = current assets – current liabilities
1 - 0.75 = 1,75,000 – 1,00,000
0.75 = 75,0000
proprietors’ funds 1 = 3,00,000
fixed assets 0.75 = 2,25,000
proprietors’ funds = 3,00,000
less: reserves and surplus = 1,00,000
Share capital 2,00,000
Balance sheet as on

Liabilities Rs Assets Rs.

.
Share capital 2,00,000 Fixed assets 2,25,000
Reserves and surplus 1,00,000
Current liabilities Current assets
Bank overdraft 60,000 Stock 1,29,000
Quick liabilities 40,000 Quick assets 46,000
4,00,000 4,00,000
Problem 6:

From the following information prepare a Balance Sheet with as many details as possible:
Gross profit Rs. 80,000 Current assets Rs. 1, 50,000
Gross profit to cost Accounts payable
Of goods sold ratio 1/3 Velocity 90 days
Stock velocity 6 times Bills receivable Rs. 20,000
Opening stock Rs. 36,000 Bills payable Rs.5, 000
Accounts receivable fixed assets
Velocity (year 360days) 72 day

Answer:
Hints: turnover refers to cost of sales
(a) Cost of goods sold:
Gross profit to cost of goods sold=1/3 That is,
If gross profits is 1 cost of goods sold=3
If gross profit is Rs 80,000, cost of goods sold=Rs 2,40,000
(b)Closing stock:
Cost of goods sold
Stock velocity =----------------------------------= 6
Average stock
2,40,000
= =6
Average stock
6* average stock =2,40,000
2,40,000
Average stock = ---------------- = Rs. 40,000
6

Opening stock+ closing stock

Average stock = = 40,000
2

Total stock(40000*2) = 80,000

Less : opening stock = 36,000

Closing stock = 44000

(c) Debtors
Debtors velocity’s or accounts receivable velocity
debtors + bill receivable
= * 360 = 72 days
Sales
Sales = cost of goods sold + gross profit
= 2,40,000 + 80,000 = Rs.3,20,000
 debtors + bill receivable
= * 360 = 72 days
3,20,000
Adopting cross multiplication,
72*3, 20,000
debtors + bill receivable =----------------------= 64,000
360
Less : bills receivable = 20,000

Debtors 44,000

(d) creditors:
Creditors + bills payable
Creditors velocity =----------------------------------------*360 = 90days
Purchases
Calculation of purchases:
Opening stock + purchases – closing stock = cost of goods sold
Rs.36,000 + purchases – Rs.44,000 = Rs. 2,40,000
Purchases = 2,40,000 + 44,000 – 36,000 = Rs.2,48,000
Creditors + bills payable
=
*360 = 90
2,80,000
90 * 2,48,000
Creditors + bills payable = ------------------ = Rs.62,000
360
Less: bills payable = Rs.5,000

Creditors = Rs.57,000

(e) Fixed assets:

Cost of sales
Fixed assets turnover ratio = ----------------- = 8
Fixed assets
2,40,000
= = 8
Fixed assets

8 * fixed assets = 2,40,000

 2,40,000
Fixed assets = --------------- = Rs.30,000
8
Rs.
Total current assets(given) 1,50,000
Less: Rs.
Stock 44,000
Debtors 44,000
Bills receivable 20,000
----------- 1,08,000

Other current assets 42,000

Balance sheet as on ---------

iabilities Rs. Assets Rs.

Capital(bal.fig.) 1,18,000 Fixed assets 30,000
Creditors 57,000 stock 44,000
Bills payable 5,000 debtors 44,000
Bills receivable 20,000
Other current assets 42,000

1,80,000 1,80,000

Problem 7:
With the help of the following ratios regarding Indus Films draw the Balance Sheet of the
Company for the year 1999.
Current ratio 2.5
Liquidity ratio 1.5
Net working capital Rs. 3, 00,000
Stock turnover ratio (cost of sales/closing stock) 6 times
Gross profit ratio 20%
Debt collection period 2 months
Fixed assets turnover ratio (on cost of sales) 2 times
Fixed assets to shareholder’s net worth 0.80
Reserve and Surplus to Capital 0.50
Answer:

(1) Current assets:

Current assets
Current ratio =-----------------------------= 2.5 : 1
Current liabilities
 Working capital = current assets - current liabilities
= 2.5 – 1 = 1.5
If working capital is 1.5,current assets = 1.5
If working capital is 3,00,000 current assets are
3,00,000
= ------------- * 2.5 = Rs.5,00,000
1.5
(2) Current liabilities:
If working capital is 1.5,current liabilities = 1
If working capital is Rs. 3,00,000 current liabilities are
3,00,000
=--------------* 1 = Rs.2,00,000
1.5
(3) Stock:
Quick assets
Quick ratio =-------------------------= 1.5
Quick liabilities
As there is no bank overdraft , quick liabilities = current liabilities

Quick assets
Quick ratio =-------------------------= 1.5
2,00,000
Quick assets = 2,00,000 * 1.5 = Rs.3,00,000
Stock = current assets – quick assets
= Rs.5,00,000 – 3,00,000
= Rs.2,00,000
(4) Cost of goods sold:
Cost of goods sold
Stock turnover ratio =------------------------------= 6
Closing stock
Cost of goods sold
= =6
2 ,00,000
Cost of goods sold = 2,00,000 * 6 = Rs.12,00,000
(5) Sales:
Gross profit ratio 20% on sales
Sales - gross profit = cost of goods sold
Rs. 100 – Rs.20 = Rs.80
If cost of goods sold is Rs.80 , sales = Rs.100
If cost of goods sold is Rs.12,00,000 , sales
 12,00,000
=-----------------* 100 =Rs.15,00,000
80
(6) Debtors:
Debtors + bills receivable
Debtors turnover ratio =--------------------------------------* 12 = 2
Credit sales
There are no bills receivable .hence ,debtors turnover ratio:
Debtors
=----------------* 12 = 2months
15,00,000
By cross multiplication,

2 * 15,00,000
Debtors =---------------------= Rs.2,50,00
12
(7) Fixed assets:
Fixed assets turnover ratio (on cost of sales)
Cost of sales
= =2
Fixed assets
12,00,000
= =2
Fixed assets
2 * fixed assets = Rs.12,00,000

12,00,000
Fixed asset =------------------= Rs.6,00,000
6
(8)Shareholders’ net worth (or proprietors fund):
Fixed assets to shareholders’ net worth
Fixed assets
= = 0.80
Shareholders’ net worth
6,00,000
= = 0.80
Net worth
0.80 * net worth = 6,00,000
6,00,000
Net worth = -------------- = Rs.7,50,000
0.80
 (9) Reserves and surplus:
Net worth = share capital + reserves and surplus
Reserves and surplus to capital = 0.50 : 1
Net worth = 1+ 0.50 = 1.50
If net worth is 1.5, reserves and surplus = 0.50
If net worth is Rs.7,50,000 , reserves and surplus
7,50,000
= * 0.5
1.5
= 2,50,000
(10) Share capital:

Net worth i.e. share capital + reserves & surplus = 7,50,000

Less: reserves and surplus = 2,50,000

Share capital = 5,00,000

(11)Bank balance:
Rs.
Total current assets 5,00,000
Less: stock 2,00,000
Debtors 2,50,000
------------- 4,50,000

Bank 50,000

Balance sheet as on 31-12-99

Liabilities Rs. Assets Rs.

Share capital 5,00,000 Fixed assets 6,00,000
Reserves & surplus 2,50,000 Stock 2,00,000
Long term loan (bal. fig.) 1,50,000 Debtors 2,50,000
Current liabilities 2,00,000 Bank 50,000
11,00,000 11,00,000
FINANCIAL REPORT

The financial report of a business concern comprises the position statement or

balance sheet and income statement or profit and loss account..
Management and the outsiders like investors, creditors, customers, suppliers,
financial institutions, employees, potential investors, government and general public who
have interests in the affairs of the business take decisions on the basis of these reports.
Objectives of financial reports :
1) It provides reliable information about the assets and liabilities of a business firm.
2) It provides other useful information about changes in assets and liabilities.
3) It provides information that helps in earning potential of the business.
Financial reports comprises of two basic statements
i) Balance Sheet or the position statement and
ii) Profit and Loss account. However it may also include two other statements
iii) A report of changes in owners' account or Retained Earnings and
iv) A report of changes in financial position.

Balance Sheet :
This report shows the resources (assets) the business has and the sources of these
resources (liabilities). The Balance Sheet depicts the financial position of the concern. It is
prepared in a particular date. However there is not a particular sequence of showing
various assets and liabilities.

Profit and Loss Account or Income Statement:

This report is prepared to ascertain the profit or loss made by a business firm at the
end of the period. This report shows the revenues earned and the expenses incurred for
earning that revenues. Excess of revenues over expenses is the profit and the reverse is the
loss of the business concern.

Retained Earnings or changes in owners' equity:

Owners' equity has two elements
i) Paid-up share capital or the initial amount invested by the share holders and
ii) Retained earnings/reserves and surplus representing undistributed profits.

The report of changes in owners' equity shows the beginning balance of owners'
equity account, the reason of increase or decrease and its ending balance.
 Report of changes in financial position:

The balance sheet gives a static view of assets and liabilities of a business concern
at a certain point of time. So another report called report of changes in financial position
is prepared to show the changes in assets and liabilities from end of one period to end of
another point of time. This report shows the movement of funds or working capital during
a particular period. The report of changes in financial position takes any of the two forms:

I. Fund flow statements

II. Cash flow statements

CASH FLOW STATEMENT

Cash flow statement shows the financial position of a business concern on cash
basis. It says the causes of changes in cash position of a business concern between dates
of two balance sheets. This statement focuses on changes of cash only.
Cash flow report can be prepared in horizontal and vertical form. Normally it is prepared
in horizontal form. Assets are shown in the right side and liabilities in the left side.
Assets and liabilities haven been shown on permanency basis
Cash Flow Statement comprises of following activities:
1. Operating Activities
2. Investing Activities
3. Financing Activities
1. Operating Activities
Operating activities include cash flows from all standard business
operations.
2. Investing Activities
Investing activities include transactions with assets, marketable securities
and credit instruments.
3. Financing Activities
Financing activities on the statement of cash flows are much more defined
in nature. The receipts come from borrowing money or issuing stock.
Difference between Funds Flow Statement and Cash Flow Statement

Basis of
Funds Flow Statement Cash Flow Statement
Difference
1. Basis of Funds flow statement is Cash flow statement is
Analysis based on broader concept based on narrow concept
i.e. working capital. i.e. cash, which is only one
of the elements of working
capital.
2. Source Funds flow statement Cash flow statement stars
tells about the various with the opening balance of
sources from where the cash and reaches to the
funds generated with closing balance of cash by
various uses to which proceeding through sources
they are put. and uses.
3. Usage Funds flow statement is Cash flow statement is
more useful in assessing useful in understanding the
the long-range financial short-term phenomena
strategy. affecting the liquidity of
the business.
4. Schedule of In funds flow statement In cash flow statement
Changes in changes in current assets changes in current assets
Working and current liabilities are and current liabilities are
Capital shown through the shown in the cash flow
schedule of changes in statement itself.
working capital.
5. End Result Funds flow statement Cash flow statement shows
shows the causes of the causes the changes in
changes in net working cash.
capital.
6. Principal of Funds flow statement is In cash flow statement data
Accounting in alignment with the obtained on accrual basis
accrual basis of are converted into cash
accounting. basis.
Advantages of Cash Flow Statement
1. It shows the actual cash position available with the company between the two balance sheet dates
which funds flow and profit and loss account are unable to show. So it is important to make a cash
flow report if one wants to know about the liquidity position of the company.
2. It helps the company in accurately projecting the future liquidity position of the company enabling
it arrange for any shortfall in money by arranging finance in
advance and if there is excess than it can help the company in earning extra return by deploying
excess funds.
3. It acts like a filter and is used by many analyst and investors to judge whether company has prepared
the financial statements properly or not because if there is any discrepancy in the cash position as
shown by balance sheet and the cash flow statement, it means that statements are incorrect.
Disadvantages of Cash Flow Statement
1. Since it shows only cash position, it is not possible to deduce actual profit and loss of the company by
just looking at this statement.
2. In isolation this is of no use and it requires other financial statements like balance sheet, profit and
loss etc…, and therefore limiting its use.
 Cash flow statement
Direct method cash flow statement

Cash flow from operating activities

Cash receipts from customers
Cash paid to
suppliers and
employees Cash
generated from
operations Income
tax
Cash flow before
extraordinary items
Proceeds from earthquake
disaster settlement
Net cash from operating activities XXX
Cash flow from investing activities
Purchase of fixed assets
Proceeds from
sale of
equipments
Interest
received
Dividend received
Net cash from investing activities XXX
Cash flow from
financial activities
Proceeds from
issuance of share
capital Proceeds
from long term
borrowing
Repayment of long
term borrowing
Interest paid
Dividends paid X
Net cash used in financing activities
Net increase in cash and cash equivalents* XXX
Cash and cash equivalents at the beginning of a period
Cash and cash equivalents at the end of a period XXX
*consists of cash on hand and balance with banks, investment in money
market (short term) investment and effect of exchange rate changes.
 Cash flow statement
Indirect method cash flow statement
Cash flow from operating activities
Net profit before taxation, and extraordinary items
Adjustment for ;
Depreciation
Foreign exchange loss
Interest income
Dividend income
Interest expense
Operating profit before working capital changes
Decrease/(increase) in sundry debtors
Decrease/(increase) in inventories
Increase/(decrease) in sundry creditors
Cash generated from operations
Income tax paid
Cash flow before extraordinary items
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash flow from investing activities
Purchase of fixed assets
Proceeds from sale of equipment
Interest received
Dividend received
Net cash from investing activities
Cash flow financing activities
Proceeds from issuance of share capital
Proceeds from long term borrowing
Repayment of long term borrowing
Interest paid
Dividend paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of a period
Cash and cash equivalents at the end of a period
Problem1

From the following summary of cash a/c prepare cash flow statement according to AS-3 revised
model using direct method.

Cash a/c for the year ended 31st march 2010(Rs. In thousands)
Balance on 1.4.2009 100 Payment of suppliers 4,000
Issue of equity shares 600 Purchase of fixed assets 400
Receipts from customers 5,600 Overhead expenses 400
Sale if fixed assets 200 Wages and salaries 200
Taxation 500
Dividend 100
Repayment of bank loan 600
Balance as on 31.3.2010 300
6,500 6,500

Answer
Cash flow statement for the year ended 31st march 2010(Rs. In thousands)

Particulars Rs’000 Rs’000

1.cash flow from operating activities:
Receipts from customers 5,600
Payment of suppliers (4000)
Overhead expenses (400)
Wages and salaries (200)
Taxation paid (500)
Net cash from in operating activities 500
2.cash flow from investing activities:
Sale if fixed assets
Purchase of fixed assets 200
Net cash from used in operating activities (400) (200)
3.cash flow from financial activities:
Issue of equity shares
Dividend 600
Repayment of bank loan (100)
Net cash from used in financial activities (600) (100)
200
Opening balance of cash 100
Closing balance of cash 300
Problem2 Harish ltd had the following figures on 1st Jan 2008(indirect method)

Fixed assets 3,00,000

Less: depreciation 1,05,000
1,95,000
Bank balance 17,500
Other current assets 1,25,000
Capital (shares Rs.10each) 1,50,000
Current liabilities 50,000

The company made following estimates for the year 2008.

A).the profit would be Rs.27,500 after depreciation of Rs.30,000.
B).the company will pay dividend of Rs.20,000 for the .
C). the company will acquire fixed assets costing Rs.50,000 after selling one machine for
Rs.10,000 costing Rs.25,000 and on which depreciation provided amount of Rs.17,500.
D).the current assets and current liabilities other than bank balance at the end of 2008 are
expected to be Rs.1,47,500 and Rs.1,15,000 respectively.
You are required to prepare a cash flow statement and ascertain the bank balance
of Harish ltd as on 31st December 2008.

Answer

Cash flow statement for the year ended 31.3.2008

Particulars Rs. Rs.
1.Cash flow from operating activities:
Net profit
Adjusted for ; 27,500
Depreciation
Profit on sale of machine 30,000
Increase in current assets (2,500)
Increase in current liabilities (22,500)
Net cash from in operating activities 65,000 97,500
2.cash flow from investing activities:
Purchase of fixed assets
Sale of fixed assets (50,000)
Net cash from used in investing activities 10,000 (40,000)
3.cash flow from financial activities:
Dividend paid (20,000)
Net cash from in financial activities 37,500
Bank balance 17,500
Closing balance 55,000
UND FLOW STATEMENT

The word 'fund' means the working capital of the business concern. Funds flow
report is prepared to analyze the changes in the financial condition of a business firm
between two periods. This report helps the management to know the sources of funds and
their applications. It provides information to the management in policy formulation and
performance appraisal.

Advantages of Fund Flow Statements

A Funds flow statement is prepared to show changes in the assets, liabilities and
equity between two balance sheet dates, it is also called statement of sources and uses of
funds. The advantages of such a financial statement are many fold.
1. Funds flow statement reveals the net result of Business operations done by the
company during the year.
2. In addition to the balance sheet, it serves as an additional reference for many
interested parties like analysts, creditors, suppliers, government to look into
financial position of the company.
3. The Fund Flow Statement shows how the funds were raised from variou sources
and also how those funds were deployed by a company, therefore it is a great tool
for management when it wants to know about where and from what sour ces funds
were raised and also how those funds got utilized into the business.
4. It reveals the causes for the changes in liabilities and assets between the two
balance sheet dates therefore providing a detailed analysis of the balance sheet of
the company.
Disadvantages of Fund Flow Statements
Funds flow statement has many advantages; however it has some disadvantages or
1. Funds Flow statement has to
be used along with balance sheet and profit and loss
account for inference of financial strengths and weakness of a company it cannot be
used alone.
2. Fund Flow Statement does not reveal the cash position of the company, and that is
why company has to prepare cash flow statement in addition to funds flow statement.
3. Funds flow statement only re arranges the data which is there in the books of account
and therefore it lacks originality. In simple words it presents the data in the financial
statements in systematic way and therefore many companies tend to avoid preparing
funds flow statements.
4. Funds flow statement is basically historic in nature, that is it indicates what happened
in the past and it does not co mmunicate anything about the future, only esti mates can
be made based on the past d ata and therefore it cannot be used the management for
taking decision related to future.
FUND FLOW STATEMENT
Statement of schedule of changes in working capital
Previous Current
Particulars Increase Decrease
year year
Current assets:
cash in hand
cash at bank
bills receivable
sundry debtors
temporary investment
stocks/inventories
prepaid expense
accrued income
Total current assets(A)
Current liabilities:
Bills payable
Sundry creditors
Outstanding expenses
Bank overdraft
Short term advance
Dividend payable
Proposed dividend
Provision for taxation
Total current liabilities(B)
Working capital(A-B)
Net increase/ decrease in
Working capital
Funds flow statement (for the year ended)
Sources Rs. Rs.
Funds from operation Xxx Funds lost in operation xxx
Issues of share capital xxx Redemption of preference share
capital
Issues of debenture xxx xxx
Raising of long term loans xxx Redemption of debenture xxx
Receipts from party paid Repayment of long term loans xxx
shares, called up
Purchase of non-
Sales of non- xxx current(fixed)assets
current(fixed)assets
xxx Purchase of long term investment xxx
Non-trading receipts such as Non-trading payment
dividend
Sales of long term investment xxx Payment of dividends xxx
Net decrease in working capital xxx Payment of tax xxx
xxx Net increase in working capital xxx
xxx
xxx
 Funds from operations (adjusted p & l a/c)

Particulars Rs. Particulars Rs

To depreciation & depletion on By opening balance(of p & l a/c) xxx
amortization of fictitious and By transfer from excess provision.
intangible assets, such as: By appreciation in the value of fixed xxx
goodwill, patents, trade mark, xxx assets
preliminary expenses etc., By dividends received xxx
To appropriation of retained By interest on investments xxx
earnings ,such as: transfer to By profit on sale of fixed or non- xxx
general reserve, dividend current assets.
equalization fund, sinking fund xxx By funds from operation(B.F in case xxx
etc., debit side exceeds credit side).
To loss on sale of any non- xxx
current on fixed assets.
To dividend(including interim xxx
dividend).
To proposed dividend(if not xxx
taken as a current liability).
To provision for taxation(if not xxx
taken as a current liability). xxx
To closing balance(of p & l a/c)
To funds lost in operation(B.F in
case credit side exceeds the debit xxx
side).
Problem 1:
From the following prepare a statement showing changes in working capital during 1999.
Balance sheets of sreeganesh ltd ., as on 31st December

Liabilities 1998 (Rs.) 1999(Rs.) Assets 1998(Rs.) 1999(Rs.)

Share capital 6,00,000 6,00,000 Fixed assets 10,00,000 11,20,000
Reserves 50,000 1,80,000 Less: depreciation 3,70,000 4,60,000
Profit and loss a/c 40,000 65,000 6,30,000 6,60,000
Debenture 3,00,000 2,50,000 Stock 2,40,000 3,70,000
Creditors for goods Book debts 2,50,000 2,30,000
Provision for 1,70,000 1,60,000 Cash in hand and at
income tax bank 80,000 60,000
60,000 80,000 Preliminary
expenses 20,000 15,000

12,20,000 13,35,000 12,20,000 13,35,000

Answer:
Statement of changes in working capital
Particulars 1998(Rs.) 1999(Rs.) increase Decrease
Current assets:
Stock 2,40,000 3,70,000 1,30,000 --
Book debts 2,50,000 2,30,000 -- 20,000
Cash in hand & bank 80,000 60,000 -- 20,000
Total current assets(A) 5,70,000 6,60,000

Current liabilities: 1,70,000 1,60,000 10,000 --

Creditors for goods 60,000 80,000 -- 20,000
Provision for tax 2,30,000 2,40,000 1,40,000 60,000
Total current liabilities(B) 3,40,000 4,20,000
Working capital(A-B) 80,000
Increase in working capital 4,20,000 4,20,000
1,40,000 1,40,000
Problem 2:
From the following summarized balance sheets of sri Krishna ltd., prepare a schedule of
changes in working capital and a statement of sources and application of funds.

Liabilities 1998(Rs.) 1999(Rs.) assets 1998(Rs.) 1999(Rs.)

Share capital 4,00,000 5,75,000 Plant 75,000 1,00,000
Creditors 1,06,000 70,000 Stock 1,21,000 1,36,000
Profit & loss a/c 14,000 31,000 Debtors 1,81,000 1,70,000
cash 1,43,000 2,70,000
5,20,000 6,76,000 5,20,000 6,76,000
Answer:
Statement of changes in working capital
Particulars 1998(Rs.) 1999(Rs.) increase Decrease
Current assets:
Stock 1,21,000 1,36,000 15,000 --
debtors 1,81,000 1,70,000 -- 10,000
Cash 1,43,000 2,70,000 1,27,000 --
Total current assets(A) 4,45,000 5,76,000
Current liabilities: 1,06,000 70,000 36,000 --
Creditors 1,06,000 70,000
Total current liabilities(B) 3,39,000 5,06,000 1,78,000 11,000
Working capital(A-B) 1,67,000
Increase in working capital 5,06,000 5,06,000
1,78,000 1,78,000
Statement of sources and application of funds
Sources Rs. Application Rs.
Issue of shares 1,75,000 Purchase of plant 25,000
Funds from 17,000 Increase in working 1,67,000
operations(1) capital
1,92,000 1,92,000

Working
(1) Calculation of funds from operations
Adjusted profit and loss account
Particulars Rs. particulars Rs.
By balance b/d 14,000
To balance c/d 31,000 By funds from 17,000
operation(?)
31,000 31,000
Problem 3

From the following balance sheets of Mr. Sridhar prepare a funds flow statement.
Particulars 30th June 1999 30th June 2000
Cash 5,000 2,300
Debtors 17,500 19,200
Stock 12,500 11,000
Land 10,000 15,000
Building 25,000 27,500
Machinery 40,000 43,000
1,10,000 1,18,000
Creditors 18,000 20,500
Bank loan 15,000 19,500
capital 77,000 78,000
1,10,000 1,18,000

Drawing of Mr. Sridhar during the year was Rs.20,000 depreciation charges on
machinery was Rs.4,000.
Answer
Statement of changes in working capital
Particulars 1999 2000 Increase Decrease
(Rs) (Rs.)
Current assets:
Cash 5,000 2,300 -- 2,700
debtors 17,500 19,200 1,700 --
stock 12,500 11,000 -- 1,500
Total current 35,000 32,500
assets(A)
18,000 20,500 -- 2,500
Current liabilities: 18,000 20,500
Creditors 17,000 12,000 1,700 6,700
Total current 5,000 5,000 --
liabilities(B) 17,000 17,000
Working capital(A- 6,700 6,700
B)
decrease in working
capital

Fund flow statement

Sources Rs. Application Rs.
Bank loan 4,500 Purchase of land 5,000
Funds from 25,000 Purchase of building 2,500
operations(3) Purchase of 7,000
Decrease in 5,000 machinery(1) 20,000
working capital Drawings
34,500 34,500
Working:
(1) Machinery account
Particulars Rs. Particulars Rs.
To balance b/d 40,000 By adjusted p&l 4,000
To cash 7,000 a/c(depreciation)
(purchase)(?) By balance c/d 43,000
47,000 47,000
(2) Capital account
Particulars Rs. Particulars Rs.
To drawings 20,000 By balance b/d 77,000
To balance c/d 78,000 By adjusted p&l
a/c(?) 21,000
(Net profit)
98,000 98,000
(3)Adjusted profit and loss account
Particulars Rs. Particulars Rs.
To machinery 4,000 By funds from 25,000
To net profit(2) 21,000 operations(?)
25,000 25,000

UNIT-III
COST ACCOUNTING
 1. Cost Accounts
2. Classification of manufacturing costs
3. Accounting for manufacturing costs.
Cost Accounting Systems:
4. Job order costing
5 Process costing
6 Activity Based Costing
7 Costing and the value chain
8 Target costing
9 Marginal costing including decision making
10 Budgetary Control & Variance Analysis
11 Standard cost system.

4.1 COST ACCOUNTING

COST ACCOUNTING is the process of collecting information about the costs incurred by a
company's activities, assigning selected costs to products and services and other cost objects, and
evaluating the efficiency of cost usage. It is mostly concerned with developing an understanding of
where a company earns and loses money, and providing input into decisions to generate profits in
the future.
CLASSIFICATION OF COSTS
1. By time (historical, predetermined)
2. By nature of elements (material, labour, overhead)
3. By association (product or period)
4. By traceability (direct, indirect)
5. By changes in activities or volume (fixed, variable, semi-variable)
6. By function (manufacturing, administration, selling, research and development)
7. Controllability (controllable, non controllable)
8. Analytical and decision-making (marginal, uniform, opportunity, sunk, differential etc.
9. Miscellaneous (conversion, traceable, normal, total)

1. Classification on the Basis of Time

Costs can be classified into historical costs and predetermined costs.
a. Historical costs: Historical costs are determined after they are incurred actually.
When production is completed, i.e., products reached their final stage of finished
status, costs are available and on that basis costs are ascertained. Only on the basis
of actual operations, costs are accumulated. Hence they are objective in nature.
b. Predetermined costs: Costs are calculated before they are incurred, i.e., before
the production process is completed.
 Estimated costs: Costs are estimated before goods are produced.. As these
are purely estimates, they lack accuracy.
Standard costs: These costs are also predetermined. But certain factors are
analysed with care before setting up costs. Standard cost is not only a concept of cost but a
technique or method of costing also.
2. Classification by Nature or Elements
Elements of costs may be broadly divided into material, labour and expenses.
a.Direct costs: In general, production is carried on in different cost centres. Costs
which
can be directly identifiable with cost centres, processes or production units are known as direct
costs.
b.Indirect costs: If costs cannot be identifiable with cost centres or cost units, they are termed
as “indirect costs”. These terms should be understood properly, as the same will be applied in
case of materials, labour and wages.
a. Material Costs
Commodities or substances from which products are produced are called materials. They
may be further divided into direct and indirect. The term “direct” means that which can be
identified with and allocated to cost centres and cost units. The term “indirect” means that which
cannot be allocated but can be apportioned to, or absorbed by, cost centers and cost units.
Direct materials:
Direct materials are those materials which enter into and form part of the product, e.g.,
wood in furniture, chemicals in drugs, leather in shoes. Direct materials include:
1. All materials specially purchased or requisitioned for a particular process or job or order.
2. All components are purchased or produced.
3. All materials passing from one process to another.
4. All primary packing materials.
Indirect materials:
Materials which cannot be traced as part of the product are known as indirect materials.
Indirect materials include:
1. Fuel, lubricating oil, grease etc. (for maintenance of plant and machinery)
2. Tools of small value for general use
3. Consumable stores
4. Printing and stationery materials
5. Stores of small value used
b.Labour Costs
Labour costs can also be classified into direct labour and indirect labour.
➢ Direct labour:
Where employees are employed directly in making the product and their work can be easily
identified in the process of conversion of raw materials into finished goods, such labour is called
direct labour. The cost incurred on direct labour is called direct wages. Example: Wages paid to the
driver of a bus in a transport service.
➢ Indirect labour:
Labour employed in the works on factory which is ancillary to production is known as
indirect labour. The cost incurred on indirect labour is called indirect wages. These costs may not
be traced to specific units of output. Example: wages of store keepers, time keepers, supervisors
etc.

c.Expenses Costs
Expenses also can be direct and indirect.
➢ Direct expenses:
Direct expenses do not include direct material cost and direct labour cost. These expenses
are incurred in respect of a specific product. Example: cost of special pattern, drawing or layout;
secret formula, hire charges of machinery to execute an order, consultancy fees to a specific job.
The latest trend in cost accounting is that these expenses are not taken into account. The
terminology of CIMA is also of this view. Generally, direct expenses form a small part of total
cost.
➢ Indirect expenses:
Expenses which cannot be charged to production directly and which are neither indirect
material cost nor indirect wages cost are treated as indirect expenses. Examples: Rent, rates, taxes,
power, insurance, depreciation.
d. Overheads
Overheads include the cost of indirect material, indirect labour and indirect expenses.
Overheads may be classified into:
1. Production or factory overhead: It is the aggregate of indirect material cost, indirect
wages and indirect expenses incurred in respect of manufacturing activity. It commences
with the supply of raw materials and ends with the primary packing of finished goods.
2. Administration overhead: It is the aggregate of indirect material cost, indirect wages and
indirect expenses incurred for policy formulation, control and administration. Example:
Directors’ remuneration.
 3. Selling overhead: It is the cost of creating sales and retaining customers. It is the aggregate
of all indirect material costs, indirect wages and indirect expenses incurred in creating and
stimulating demand for a firm’s products and securing orders. Examp e: advertisement,
publicity expenses.
4. Distribution overhead: It is the aggregate of indirect material cost, indirect wages and
indirect expenses incurred in preparing the packed products for dispatch and making them
available to customers. Example: rates and taxes for finished goods, godown expenses.

3. Association with the Product (Costs in Their Relation to Product)

a. Prime cost: Prime cost is
the aggregate of direct material cost, direct wages and direct
expenses.
b. Conversion cost: Conversion cost is the aggregate of direct wages and factory overhead. It
is the cost incurred in the factory for the conversion of raw materials into finished goods.
c. Product costs: Costs included in inventory values are called product costs. In manufacturing
organizations, raw material costs and cost incurred in the conversion of raw materials into
finished products are called product cost or inventoriable cost. For trading organizations, the
cost of goods purchased, and expenses incurred in bringing them to their existing location
and in saleable condition are product costs. This is shown as asset in the balance sheet till
they are sold off.
d. Period costs: Period costs are costs that are charged against the revenue of a period of time
in which they are incurred. Period costs include selling and distribution costs and
administration costs. Since they are not directly associated with the product, they are not
assigned to the product. They are charged to the period in which they are incurred and are to
be treated as expenses.
e. Direct costs and indirect costs: Already explained in the heading “Direct Materials”.
 f. Joint costs: Joint costs arise when two or more products are processed at the same time or in
a single operation or from a common material. If two or more products are produced from
the same raw materials (e.g., petrol, diesel, kerosene), joint costs are incurred up to the point
of separation.
4. Accounting Period-Wise Classification of Costs
a. Capital expenditure: It may be defined as expenditure which results in the acquisition of
or increase in an asset, or pertains to the extension or enhancement of earning capacity at a
smaller cost. A capital expenditure is intended to benefit future periods. It is classified as a
fixed asset. Example: Costs of acquiring land, building and machinery.
b. Revenue expenditure: This expenditure occurs for the maintenance of assets in working
condition and not intended for increasing the revenue-earning capacity. A revenue
expenditure benefits the current accounting period. It is treated as an exp nse.
5. Behaviour-Wise Classification of Costs
a. Variable Cost
The terminology of CIMA defines variable cost as “a cost which tends to follow (in the
short-term) the level of activity”. Variable costs are also known as marginal costs. Variable costs
vary directly and proportionally with the output. Variable cost per unit is con tant but the total
costs change corresponding to the levels of output. Variable cost is expressed in terms of units
only. Variable costs are synonymous with engineered costs. Example: Materials used to
manufacture a product, wages of workers in a manufacturing process.
 Total variable cost

b. Fixed Cost
The terminology of CIMA defines fixed cost as “the cost which accrues in relation to the
passage of time and which, within certain limits, tends to be unaffected by fluctuations in the level
of activity”.
Fixed costs are those which are not expected to change in total within the current budget
year, irrespective of variations in the volume of activity. Such costs are fixed for a given period
over a relevant range of output, on the assumption that technology and methods of manufacturing
remain unchanged.
For the purpose of cost analysis, fixed costs may be classified as follows:
❖ Committed Costs: These costs cannot be eliminated instantly. These costs are incurred to
maintain basic facilities. Example: Rent, rates, taxes, insurance.
❖ Policy and managed costs:
Policy costs are incurred in enforcing management policies.
Example: Housing scheme for employees. Managed costs are incurred to ensure the operating
existence of the company. Example: Staff services.
❖ Discretionary costs: These are not related to operations. These can be controlled by the
management. These occur at the discretion of the management.
c. Semi-Variable Costs
The terminology of CIMA defines semi-variable cost as “a cost containing both fixed and
variable elements which is thus partly affected by fluctuations in levels of activity” Semi-variable
costs consist of features of both fixed and variable costs. Due to the fixed part of the element, they
do not change in direct proportion to output. Due to the variable part of the element, they tend to
change with volume. Semi-variable costs change in the same direction of output but not in the
same proportion.
d. Step Cost
Step costs remain unchanged (constant) for a given level of output and then increase by a
fixed amount at higher level of output, i.e., from one level of output to another higher level.
Example: Salary of supervisors in a factory.
Depending upon the period up to which an expense can be kept up to a certain level in spite
of increase in activity, the height and width of steps vary. In case, if the steps are small and narrow,
the behaviour of cost is like that of “pure variable cost”. This is called “steps variable cost”. In
case, if the steps are wider, cost is like that of “fixed cost”. This is called “step fixed cost.

e.Relevant Range
A relevant range is said to be a band of activity (volume) in which a specific form of
budgeted sales and cost (expense) relationship will be valid. A fixed cost is regarded as fixed only
in relation to a given relevant range and a given time (budget period). Example: (in the fixed cost
example) A fixed cost level of Rs.1,00,000 may be valid up to a relevant range i.e., production
value of 20,000 CDs per year. Beyond this volume of production, fixed costs would increase as
additional capacity has to be increased.
The below figure shows the behaviour of all three types of costs, viz., fixed costs, variable
cost and semi-variable costs.

Behaviour of costs
6. Functional Classification of Costs
a. Production costs: They are the cost of operating a production department in which manual
and machine operations are performed directly upon any part of product manufactured. This
includes the cost of direct materials, direct labour, direct expenses, primary packing expenses
and all overhead expenses pertaining to production.
b. Administration costs: These expenses include all indirect expenses incurred in formulating
the policy, directing the organization and controlling the operation of a concern. The expenses
relating to selling and distribution, production, development and research functions are not to
be included under this head.
c. Selling and distribution costs: These expenses include all expenses incurred with selling and
distribution functions.
d. Research and development costs: These include the cost of discovering new ideas, processes
or products by research and the cost of implementation of such results on a commercial basis.
e. Preproduction costs: when a new manufacturing unit is started or a new product is launched,
certain expenses are incurred. There would be trial runs. All such costs are called
preproduction costs. They are charged to the cost of future production because they are treated
as deferred revenue expenditure.

7. Costs for Planning and Control

1. Controllable cost
The terminology of CIMA defines controllable cost as “a cost which can be influenced by
the action of specified member of an undertaking”. It refers to those costs which may be regulated
at a specified level of authority (management) within a specified time period. The term
“controllable costs” means variable costs. Cost-control factor depends on time factor and level of
managerial authority. If the time period is sufficiently long, cost can be well controlled. Proper
delegation of authority with responsibility facilitates the task of control of costs.
2. Uncontrollable costs
Uncontrollable cost is defined as the “cost which cannot be influenced by the action of a
specified member of an undertaking”. This cost is not subject to control at any level.
The difference between the terms is important for the purpose of cost control, and
responsibility accounting costs which are not subject to the control of a person should not be
charged to that person. For instance, a foreman should not be charged with the plant superintendent
salary. The foreman should be charged only with such items as usage of materials, direct labour,
and supplies. Further, it must be noted that the distinction between controllable and uncontrollable
cost is not absolute. It is made in relation to a given member of an organization. A cost which is
considered uncontrollable by a manager can be controlled by a higher official. Examples of
uncontrollable cost: rent, salary of staff, depreciation.
3. Budget
A budget is a plan for a future period. It is expressed in monetary terms. The terminology of
CIMA defines a budget as “ a plan quantified in monetary terms, prepared and approved prior to a
defined period of time usually showing planned income to be generated and/or expenditure to be
incurred during that period and the capital to be employed to attain a given objective”. It is also a
tool of control.
4. Standard costs
Standard costs are closely related to budgets, and both are said to be complementary to each
other. It is a basic accounting tool. A standard cost is a predetermined calculation of how much
costs should be under specific working conditions. It is built up from an assessment of the value of
cost elements and correlates technical specifications and quantification of material, labour and
other costs to the prices and/or wage raves expected to apply during the period in which standard
cost is intended to be used. Its main purposes are to provide bases for control through variance
accounting, for valuation of stock, and work-in-progress and in some cases, for fixing selling
prices.

8. Costs for Analytical and Decision-Making Purposes

a. Imputed costs
Imputed costs do not involve actual cash outlay (cash payment). They are not recorded in
the books of accounts. They are not measurable accurately. However, imputed costs are useful
while taking decisions. Imputed costs can be estimated from similar situations. Imputed costs can
be estimated from similar situations outside the organization. Although these are hypothetical
costs, in making comparison, in performance evaluation, in making decision, the inclusion of
imputed costs is inevitable. Examples: Interest on invested capital, rental value of company-owned
building, salaries of owner-directors of sole proprietorship firms.
b. Sunk costs
Sunk cost is invested cost or recorded cost. A sunk cost is one which has been incurred
already and cannot be avoided by decision taken in future. Sunk cost may be defined as “an
expenditure for equipment or productive resources which has no economic relevance to the present
decision-making process”. Sunk cost is a past cost which cannot be taken into account in decision
making. Sunk cost may also be defined as the difference between the purchase price of an asset and
its salvage value. Non-incremental costs (i.e., cost which do not increase) are also, at times, termed
as sunk costs (one specific group of non-incremental costs).

a. Differential costs
Differential costs arise on account of the change in total costs associated with each
alternative. In the language of the AAA committee, “it is the increase or decrease in total costs, or
the changes in the specific elements of cost that results from any variation in operation.”
Differential cost consists of both variable and fixed costs. The differential cost between any two
levels of production is (i) the difference between two marginal costs (variable cost) at these two
levels and (ii) the increase or decrease in fixed costs. A distinction has to be understood between
differential cost and incremental cost. Incremental cost applies to increase in production and
restricted to cost only, whereas differential cost confines to both increase or decrease in output.
Differential cost is of much use in decision-making process, especially in choosing the best
alternative and in ascertaining profit where additional investments are introduced in the business.
b. Opportunity costs
Opportunity costs are the economic resources which have been foregone as the result of
choosing one alternative instead of another. The unique feature of an opportunity cost is that no
cash has changed hands. There is no exchange of economic resources. It results from sacrificing
some action. They are never shown in regular cost accounting records.
c. Postponable costs
These are costs which may be postponed to the future with little or no effect on current
operations. Actually it means deferring the expenditure to some future date. It does not mean that
the cost is avoided and rejected summarily. Example: Repairs and maintenance.
d. Avoidable costs
By choosing one alternative, costs may be saved. That means by avoiding one, and
choosing another, costs can be saved. Example: By not manufacturing a new product, the
appropriate direct material, labour and variable costs can be avoided.
e. Out-of-pocket costs:
Out-of-pocket cost means those elements of cost which warrant cash payment in the period
under consideration. This is helpful in deciding whether a particular venture will at least return the
cash expenditure caused by the expected project. Example: Taxes, insurance premium, salaries of
supervisory staff, etc.
f. Relevant costs
Relevant costs are those expected future costs that differ between alternatives. It is a cost
affected by a decision at hand. Historical costs are irrelevant to a decision. It is reasonable because
it helps to ascertain whether the costs are relevant to a particular decision at the present condition.
In general, variable costs are affected by a decision and so they are considered relevant.
g. Uniform costs
Generally they are not distinct costs as such. According to this, common costing principles
and procedures are being adopted by a number of firms. These costs are mainly intended for inter-
firm comparison.
h. Marginal costs
It is the aggregate of variable costs. It is useful in various ways for the management.
 i. Common costs
Common costs are those costs which are incurred for more than one produce, job territory
or any other specific costing object. The National Association of Accountants defines common
costs as “the cost of services employed in the creation of two or more outputs, which is not
allocable to those outputs on a clearly justified basis”.

9.Other Costs
a. Normal cost: This cost is incurred at a given level of output in the conditions that level of
output is achieved.
b. Traceable cost: This cost can be easily identified with a product or job or process.
c. Total costs: It denotes the sum of all costs in respect of a particular process or unit or job or
department or even the entire organization.

ANUFACTURING COST

Manufacturing cost is the sum of costs of all resources consumed in the process of making a
product. The manufacturing cost is classified into three categories: direct materials cost, direct
labor cost and manufacturing overhead.
Classification of manufacturing cost
i. Direct materials cost
Direct materials are the raw materials that become a part of the finished product.
Manufacturing adds value to raw materials by applying a chain of operations to maintain a
deliverable product. There are many operations that can be applied to raw materials such as
welding, cutting and painting. It is important to differentiate between the direct materials and
indirect materials.
ii. Direct labor cost
The direct labor cost is the cost of workers who can be easily identified with the unit of
production. Types of labor who are considered to be part of the direct labor cost are the assembly
workers on an assembly line.
iii. Manufacturing overhead
Manufacturing overhead is any manufacturing cost that is neither direct materials cost nor
direct labor cost. Manufacturing overhead includes all charges that provide support to
manufacturing.
 iv. Nonmanufacturing Costs
Nonmanufacturing costs refer to any funding that is not directly associated with creating a
product but connect to the actual product in terms of sales.

JOB COSTING

Job costing involves the following accounting activities:

Job costing involves a series of transactions that accumulate the cost of materials, labor, and
overhead to a specific job. Job costing is used to accumulate costs at a small-unit level. For
example, job costing is appropriate for deriving the cost of constructing a custom machine,
designing a software program, or building a small batch of products.

 Materials It accumulates the cost of components and then assigns these costs to a product
or project once the components are used.
 Labor Employees charge their time to specific jobs, which are then assigned to the jobs
based on the labor cost of the employees.
 Overhead It accumulates overhead costs in cost pools, and then allocates these costs to
jobs.

Job costing is an excellent tool for tracing specific costs to individual jobs and examining
them to see if the costs can be reduced in later jobs.

If a job is expected to run for a long period of time, then the cost accountant can
periodically compare the costs accumulated in the bucket for that job to its budget, and give
management advance warning if costs appear to be running ahead of projections. This gives
management time to either get costs under control over the remainder of the project, or possibly to
approach the customer about a billing increase to cover some or all of the cost overrun.
Job Costing Allocation of Materials
In a job costing environment, materials to be used on a product or project first enter the
facility and are stored in the warehouse, after which they are picked from stock and issued to a
specific job. If spoilage or scrap is created, then normal amounts are charged to an overhead cost
pool for later allocation, while abnormal amounts are charged directly to the cost of goods sold.
Once work is completed on a job, the cost of the entire job is shifted from work-in-process
inventory to finished goods inventory. Then, once the goods are sold, the cost of the asset is
removed from the inventory account and shifted into the cost of goods sold, while the company
also records a sale transaction.
Job Costing Allocation of Labor
In a job costing environment, labor may be charged directly to individual jobs, if the labor
is directly traceable to those jobs. All other manufacturing-related labor is recorded in an overhead
cost pool and is then allocated to the various open jobs. The first type of labor is called direct labor,
and the second type is known as indirect labor. When a job is completed, it is then shifted into a
finished goods inventory account.
Job Costing Allocation of Overhead

In a job costing environment, non-direct costs are accumulated into one or more overhead
cost pools, from which you allocate costs to open jobs based upon some measure of cost usage.
The key issues when applying overhead are to consistently charge the same types of costs to
overhead in all reporting periods, and to consistently apply these costs to jobs. Otherwise, it can be
extremely difficult for the cost accountant to explain why overhead cost allocations vary from one
month to the next.

The accumulation of actual costs into overhead pools and their allocation to jobs can be a
time-consuming process that interferes with closing the books on a reporting period. To speed up
the process, an alternative is to allocate standard costs that are based on historical costs. These
standard costs will never be exactly the same as actual costs, but can be easily calculated and
allocated.

COST SHEET

PROCESS COSTING

Process costing is used when there is mass production of similar products, where the costs
associated with individual units of output cannot be differentiated from each other. In other words,
the cost of each product produced is assumed to be the same as the cost of every other product.
Under this concept, costs are accumulated over a fixed period of time, summarized, and then
allocated to all of the units produced during that period of time on a consistent basis. When a
production process contains some mass manufacturing and some customized elements, then a
hybrid costing system is used.
 Examples of the industries where this type of production occurs include oil refining, food
production, and chemical processing. For example, how would you determine the precise cost
required to create one gallon of aviation fuel, when thousands of gallons of the same fuel are
gushing out of a refinery every hour? The cost accounting methodology used for this scenario is
process costing.

Process costing is the only reasonable approach to determining product costs in many
industries. It uses most of the same journal entries found in a job costing environment, so there is
no need to restructure the chart of accounts to any significant degree. This makes it easy to switch
over to a job costing system from a process costing one if the need arises, or to adopt a hybrid
approach that uses portions of both systems.

Types of Process Costing

There are three types of process costing, which are:

a. Weighted average costs This version assumes that all costs, whether from a preceding period or
the current one, are lumped together and assigned to produced units. It is the simplest version to
calculate.

b. Standard costs This version is based on standard costs. Its calculation is similar to weighted
average costing, but standard costs are assigned to production units, rather than actual costs; after
total costs are accumulated based on standard costs, these totals are compared to actual
accumulated costs, and the difference is charged to a variance account.

C .First-in first-out costing (FIFO)FIFO is a more complex calculation that creates layers of costs,
one for any units of production that were started in the previous production period but not
completed, and another layer for any production that is started in the current period.

There is no last in, first out (LIFO) costing method used in process costing, since the
underlying assumption of process costing is that the first unit produced is, in fact, the first unit
used, which is the FIFO concept.

The different calculations are required for different cost accounting needs. The weighted
average method is used in situations where there is no standard costing system, or where the
fluctuations in costs from period to period are so slight that the management team has no need for
the slight improvement in costing accuracy that can be obtained with the FIFO costing method.

Alternatively, process costing that is based on standard costs is required for costing systems
that use standard costs. It is also useful in situations where companies manufacture such a broad
mix of products that they have difficulty accurately assigning actual costs to each type of product;
under the other process costing methodologies, which both use actual costs, there is a strong
chance that costs for different products will become mixed together.
 Finally, FIFO costing is used when there are ongoing and significant changes in product
costs from period to period – to such an extent that the management team needs to know the new
costing levels so that it can re-price products appropriately, determine if there are internal costing
problems requiring resolution, or perhaps to change manager performance-based compensation. In
general, the simplest costing approach is the weighted average method, with FIFO costing being
the most difficult.

Cost Flow in Process Costing

The typical manner in which costs flow in process costing is that direct material costs are
added at the beginning of the process, while all other costs (both direct labor and overhead) are
gradually added over the course of the production process. For example, in a food processing
operation, the direct material (such as a cow) is added at the beginning of the operation, and then
various rendering operations gradually convert the direct material into finished products (such as
steaks).

Direct Costing

Direct costing is a specialized form of cost analysis that only uses variable costs to make
decisions. It does not consider fixed costs, which are assumed to be associated with the time
periods in which they were incurred. The direct costing concept is extremely useful for short-term
decisions, but can lead to harmful results if used for long-term decision making, since it does not
include all costs that may apply to a longer-term decision.

In brief, direct costing is the analysis of incremental costs. Direct costs are most easily
illustrated through examples, such as:

 The costs actually consumed when you manufacture a product

 The incremental increase in costs when you ramp up production
 The costs that disappear when you shut down a production line
 The costs that disappear when you shut down an entire subsidiary
 ACTIVITY-BASED COSTING (ABC)

Activity-based costing (ABC) is a costing methodology that identifies activities in an

organization and assigns the cost of each activity with resources to all products and services
according to the actual consumption by each. This model assigns more indirect costs (overhead)
into direct costs compared to conventional costing.
Definition
CIMA (Chartered Institute of Management Accountants) defines ABC as an approach
to the costing and monitoring of activities which involves tracing resource consumption and
costing final outputs. Resources are assigned to activities, and activities to cost objects based on
consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.

Activity based costing is a method for assigning costs to products, services, projects, tasks,
or acquisitions, based on the activities that go into them and the resources consumed by these
activities.

COSTING AND VALUE CHAIN

Value chain is a strategic tool to measure the importance of the customer's perceived value
is value chain analysis. By enabling companies to determine the strategic advantages and
disadvantages of activities and value-creating processes in the market place, value chain analysis
becomes essential for assessing competitive advantage.

Value analysis or value engineering is one of the most widely used cost reduction
techniques. It can be defined as a technique that yields value improvement.

It investigates into the economic attributes of value. It attempts to reduce cost through

a. Design change,
b. Modification of material specification,
c. Change in the source of supply and so on.

It emphasises on finding new ways of getting equal or better performance from a product at
a lesser cost without affecting its quality, function, utility and reliability.

DEFINITION
Porter's Definition: Porter described the value chain as the internal processes or an activity
a company performs "to design, produce, market, deliver and support its product." He further stated
that "a firm's value chain and the way it performs individual activities are a reflection of its history,
its strategy, its approach of implementing its strategy, and the underlying economics of the
activities themselves."

Support activities are the activities, which support primary activities. They are handled
organisation's staff functions like:

1. Procurement - purchasing of raw materials, supplies and other consumable ill well as assets.
2. Technology Development - know-how, procedures and technological inputs needed in every
value chain activity.
3. Human resource management - selection, promotion and placement, appraisal, rewards;
management development; and labour/employee relations.
4. Firm infrastructure - general management, planning, finance, accounting, legal, government
affairs and quality management.

Competitive advantages and customer value

Competitive advantage with regard to products and services takes two possible forms. The
first one is an offering or differentiation advantage. If customers perceive a product or service as
superior, they become more willing to pay a premium price relative to the price they will have to
pay for competing offerings. The second is a relative low-cost advantage, under which customers
gain when a company’s total costs undercut those of its average competitor.

Internal Cost Analysis:

Organisations use the value chain approach to identify sourcesof profitability and to
understand the cost of their internal processes or activities.
1. Identify the firm's value-creating processes.
 To identify a firms value-creating processes, the firm must de-emphasize its functional
structure. Most large businesses still organise themselves as cost, revenue, profit and investment
centers

c. Determine the portion of the total cost of the product or services attributable to each
value - creating process.

Determine the portion of the total cost of the product or service attributable to each value
creating process. The next step of internal cost analysis is to trace or assign cost and assets to each
value-creating process identified.

d. Identify the cost drivers for each process.

Identify the factor or cost determinants for each value-creating process. By understanding
b» factors drive costs, a firm can assign priorities among its cost improvement initiatives, artier
to determine its relative cost advantage, a firm should also know the cost factors of its
competitors.

e. Identify the links between processes.

While individual value activities are consider* separate and discrete, they are not
necessarily independent. Most activities within a value chain are interdependent. Firms must not
overlook value chain linkages among interdependent activities that may impact their total cost.

As sources of competitive advantage, these relationships or linkages among activities can

be as important as the activities themselves. Such linkages may also offer sustainable competitive
advantage, because their subtle, complex nature makes them difficult for competitors to imitate.

f. Evaluate the opportunities for achieving relative cost advantage.

In many organisations, cost reductions are made across the board (e.g., "eliminate 10 per
cent from everydepartment"). Because these firms do not reduce their costs strategically, this
effort usually fails. More often than not, across-the-board cost reduction misconstrues the
underlying problem. The point is not to become more efficient at insignificant activities, but to T
meet customer demands.

TARGET COSTING
A relatively recent innovation in product planning and design is called target costing. In
the context of the Basic Profit Equation, target costing sets a goal for profits, and solves for the unit
variable cost required to achieve those profits. The design and manufacturing engineers are then
assigned the task of building the product for a unit cost not to exceed the target. This approach
differs from a more traditional product design approach, in which design engineers (possibly with
input from merchandisers) design innovative products, manufacturing engineers then determine
how to make the products, cost accountants then determine the manufacturing costs, and finally,
merchandisers and sales personnel set sales prices. Hence, setting the sales price comes last in the
traditional approach, but it comes first in target costing.

Target costing is a pricing method used by firms. It is defined as "a cost management tool
for reducing the overall cost of a product over its entire life-cycle with the help of production,
engineering, research and design". A target cost is the maximum amount of cost that can be
incurred on a product and with it the firm can still earn the required profit margin from that product
at a particular selling price.

In the traditional cost-plus pricing method, materials, labor and overhead costs are
measured and a desired profit is added to determine the selling price.

Target costing is a pricing method used by firms. It is defined as "a cost management tool
for reducing the overall cost of a product over its entire life-cycle with the help of production,
engineering, research and design".

Target costing is a process of determining the actual cost price of any product or service
after considering the desired profit margin behind the same.

Target Cost = Expected selling price – Desired profit

It helps in completing the product within the set price by changing the process for the same or by
making the existing process more efficient.
 UNIT IV

MARGINAL COSTING

In economics and finance, marginal cost is the change in the total cost that arises when the
quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a
good.
Marginal costing distinguishes between fixed costs and variable costs as convention ally
classified.
The marginal cost of a product –“ is its variable cost”. This is normally taken to be; direct labour,
direct material, direct expenses and the variable part of overheads.

Marginal costing is formally defined as:‘the accounting system in which variable costs are
charged to cost units and the fixed costs of the period are written-off in full against the aggregate
contribution. Its special value is in decision making’.

The term ‘contribution’ mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus
MARGINAL COST = VARIABLE COST OF
DIRECT + LABOUR

DIRECT + MATERIAL

DIRECT + EXPENSE

VARIABLE OVERHEADS

CONTRIBUTION = SALES - MARGINAL COST

COST–VOLUME–PROFIT (CVP)

Definition of 'Cost-Volume Profit Analysis'

A method of cost accounting used in managerial economics. Cost-volume profit analysis is

based upon determining the breakeven point of cost and volume of goods. It can be useful for
managers making short-term economic decisions, and also for general educational purposes.

Cost–volume–profit (CVP), in managerial economics, is a form of cost accounting. It is a

simplified model, useful for elementary instruction and for short-run decisions

The assumptions of the CVP model yield the following linear equations for total costs and total
revenue (sales):

Total costs = Total fixed costs + [ Unit variable cost x Number of units ]
 Total revenue = Sales price x Number of units.

These are linear because of the assumptions of constant costs and prices, and there is no
distinction between units produced and units sold, as these are assumed to be equal. Note that when
such a chart is drawn, the linear CVP model is assumed, often implicitly.

In symbols:

where
 TC = Total costs
 TFC = Total fixed costs
 V = Unit variable cost (variable cost per unit)
 X = Number of units
 TR=s = Total revenue = Sales
 P = (Unit) sales price
Profit is computed as TR-TC; it is a profit if positive, a loss if negative.
The Basic Profit Equation:
Cost-Volume-Profit analysis (CVP) relates the firm’s cost structure to sales volume and
profitability. A formula that facilitates CVP analysis can be easily derived as follows:
⇒ Profit =
Sales – Costs
⇒ Profit =
Sales – (Variable Costs + Fixed Costs)
⇒ Profit + Fixed Costs =
⇒ Profit + Fixed Costs = Sales – Variable Costs
Units Sold x (Unit Sales Price – Unit Variable Cost)
This formula is henceforth called the Basic Profit Equation and is abbreviated:
P + FC = Q x (SP – VC)
Contribution margin is defined as
Sales – Variable Costs
The unit contribution margin is defined as
Unit Sales Price – Unit Variable Cost

Typically, the Basic Profit Equation is used to solve one equation in one unknown, where
the unknown can be any of the elements of the equation. For example, given an understanding of
the firm’s cost structure and an estimate of sales volume for the coming period, the equation
predicts profits for the period. As another example, given the firm’s cost structure, the equation
indicates the required sales volume Q to achieve a targeted level of profits P. If targeted profits are
zero, the equation simplifies to
 Q = FC ÷ Unit Contribution Margin

In this case, Q indicates the required sales volume to break even, and the exercise is called
breakeven analysis.

CPV analysis can be depicted graphically. The graph below shows total revenue (SP x Q) as a
function of sales volume (Q), when the unit sales price (SP) is $12.

The following graph shows the total cost function when fixed costs (FC) are $4,000 and the
variable cost per unit (VC) is $5.
The following graph combines the revenue and cost functions depicted in the previous two graphs
into a single graph.

The intersection of the revenue line and the total cost line indicates the breakeven volume,
which in this example, occurs between 571 and 572 units. To the left of this point, the company
incurs a loss. To the right of this point, the company generates profits. The amount of profit or loss
can be measured as the vertical distance between the revenue line and the total cost line.
Assumptions in CVP Analysis:

The Basic Profit Equation relies on a number of simplifying assumptions.

1. Only one product is sold. However, multiple products can be accommodated by using an
average sales mix and restating Q, SP and VC in terms of a representative bundle of
products. For example, a hot dog vendor might calculate that the “average” customer buys
two hot dogs, one bag of chips, and two-thirds of a beverage. Q is the number of
customers, and SP and VC refer to the sales price and variable cost for this “average”
customer order.

2. If the equation is applied to a manufacturer, beginning inventory is assumed equal to zero,

and production is assumed equal to sales. Relaxing these assumptions requires additional
structure on the equation, including specifying an inventory flow assumption (e.g., FIFO or
LIFO) and the extent to which the matching principle is honored for manufacturing costs.

3. The analysis is confined to the relevant range. In other words, fixed costs remain
unchanged in total, and variable costs remain unchanged per unit, over the range of Q
under consideration.
Problem 1:
Determine the amount of fixed expenses from the following particular 2,

SALES 2,50,000
Direct material 80,000
Direct labour 50,000
Variable Overhead 20,000
Profit 60,000
Solution:
Calculation of fixed expenses:

Marginal cost statement

Rs.
SALES
2,50,000
Less: variable costs:
Direct material 80,000
Direct labour 50,000
Variable overheads 20,000

1,50,000

Contribution 1,00,000
Less: fixed expense(balancing figure) 40,000

Profit 60,000
Problem: 2
Fill in the blanks for each of the following independent situation.

Case No.of Selling Variable Contribution Fixed Profit

units sold price p.u. cost % of margin Rs. cost Rs.
Rs sales
1 15000 ? 90 ? 30000 0
2 2000 160 ? 80000 ? (2000)
3 ? 15 75 ? 25000 50000

Solution:
Case I: Marginal cost statement RS

Sales(15,000 units) 3,00,000(see working)

5 Less: variable cost (bal.fig) 2,70,000

Contribution 30,000
Less: fixed cost (given) 30,000

Profit (given) 0

(a) Working:
Variable cost is 90% of sales
Contribution = sales – variable cost
= Rs. 100 – Rs. 90 = Rs.10
If contribution is Rs. 10, sales = Rs. 100
If contribution is Rs. 30,000, sales = 30,000 x 100 10
= Rs. 3,00,000
Selling price p.u = 3,00,000
15,000
= Rs. 20
Case II : Marginal cost statement
sales (2,000 x 160) = 3,20,000
Less: variable cost (bal.fig) = 2,40,000
Contribution (given) = 80,000
Less: fixed cost (?) = 82,000

Loss (given) 2,000

Percentage of variable cost to sales

= variable cost x 100
Sales
= 2,40,000 x 100
3,20,000
= 75 %
Case III: Marginal cost statement RS

Sales = 3,00,000
Less: variable cost (bal.fig) = 2,25,000

Contribution = 75,000
Less: fixed cost (given) = 25,000

Profit (given) = 50,000

(b) Working:

Variable cost is of sales

Contribution = sales - variable cost
= 100 - 75 = 25 .Rs
If contribution is Rs. 25, sales = Rs. 100

If contribution is Rs. 75,000, sales = 75,000 x100

25
= 3,00,000

No.of.units produced = sales

S.P p.u

= 3,00,000
15
= Rs. 20,000 units
Problem 3:
Given:
Fixed cost Rs.8,000
Break Even Sales (in units) 4000
Sales 7000 units
Selling price per unit

Rs.10

Calculate (a) Variable cost (b) Profit

Solution :

Break even sales = 4000 units

Selling price p.u = Rs. 10
Break even sales (in.pu) = 4,000 x 10
= Rs. 40,000

(a) Calculation of variable cost :

At break even sales profit is NIL
Break even sales =Rs. 40,000
Less: variable cost (bal.fig) = Rs. 32,000
 Contribution = Rs. 8,000
Less: fixed cost = Rs. 8,000

Profit = 0

Variable cost p.u = 32,000

4,000 unit
= Rs. 8
(b) Profit when sales are 7,000 units:

Sales (7,000 units x Rs. 10) = 70,000

Less: variable cost (7,000 x 8) = 56,000

Contribution = 14,000
Less: fixed cost = 8,000

Profit = 6,000

Problem 4:
The cost, volume and profit relationship of a company is described by equal Y = Rs.
3,00,000 + 0.7 X in which X represents sales and Y represents total cost. Find out (a) P.V. ratio (b)
B.E sales (c) Sales volume required to earn a profit of Rs. 60, 000 (d) Sales volume when there is a
loss of Rs. 30, 000.

Solution:
Total cost = fixed cost + variable cost
Or Ynb = 3,00,000 + 0.7X
(where Y = total cot and X =
sales) Variable cost = 0.7 of sales
(ie) variable cost is Rs. 7 when sales = Rs. 10
Contribution = sales – variable cost
= Rs. 10 – Rs. 7 = RS. 3

(a) P.V Ratio = contribution x 100

Sales
= 3 x 100
10
= 30%
(b) B.E sales = fixed cost x 100
P.v ratio
= 3,00,000 x 100
30
= Rs. 10,00,000

(c) Sales required to earn a profit of Rs. 60,000

= fixed cost + profit
P.v Ratio
 = 3,00,000 + 60,000
30%
= 12,00,000

(d) Sales volume at a loss of Rs. 30,000

= fixed cost – loss
P.v Ratio
= 3,00,000 – 30,000
30%
= 2,70,000
30%
= Rs. 9,00,000

Problem 5:
Assuming that the cost structure and selling prices remain the same in periods I and II find
out: 1.p.v ratio 2.BEsales 3. Profit when sales are rs.1,00,000 4.sales required to earn a profit of
rs.20.000 5.magin of safety in II nd period.
Periods Sales (Rs) Profit (Rs)
I 1,20,000 9,000
II 1,40,000 13,000

Solution:
(i) P.v ratio = Contribution X 100
Sales
(OR)
= Changes in profit X 100
Changes in sales

= 13,000 – 9,000 X 100

1,40,000 – 1,20,000

= 4,000 X 100 = 20%

20,000
(ii) To calculate break-even point it is necessary to calculate fixed expenses:

Contribution = sales – P.v ratio

= 1,20,000 x 20
100
= Rs. 24,000

Contribution = 24,000
Less: fixed expenses = 15,000
Profit = 9,000

(ie) fixed expenses Rs. 15,000 p.a

Note: even if you proceed with 2nd period sales, you will get same fixed cost.
 B.E sales = fixed expenses
P.v ratio
= 15,000 X 100
20
= 75,000

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

Contribution = sales x p.v ratio

= 1,00,000 x 20
100
= Rs. 20,000

Contribution = 20,000
Less: fixed expenses = 15,000
Profit = 5,000

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

= fixed expenses + desired profit

P.v ratio
= 15,000 + 20,00
20%
= Rs. 1,75,000
(v) Margin of safety in II period.

= Profit X 100
P.v ratio
= 13,000 X 100
20
= Rs. 65,000

1. DECISION MAKING PROBLEMS OR KEY FACTOR

Problem 6:
P.V ratio is 60% marginal cost is Rs .50 .what is the selling price Per unit.
10. from the following data, which product would you recommend to be manufactured in factory
time being the key factor?

Solution:
P.v ratio is 60%
it means contribution is Rs.60 when sales are Rs.100
variable cost = sales – contribution
= 100 – 60 = 40
If variable cost is Rs.40, selling price is Rs.100
If variable cost is Rs.50, selling price = 50 X 100 = 125
40
Problem 7:

The management of a company finds that while the cost of making a component part is Rs.10, the
same is available in the market at Rs.9 with an assurance of continuous supply.
Give a suggestion whether to make or buy this part. Give also your views in case the
supplier reduces the price from Rs.9 to Rs.8.
The cost information is as follows:
Material 3.50
Direct Labour 4.00
Other Variable expenses 1.00
Fixed expenses 1.50
Total 10.00

Solution:

to take a decision on whether to make or buy the component part, fixed expenses should not be
added to the cost becacuse these will be incurred even if the part is not produced. Thus, additional
cost of the part will be as follow:

Materials = 3.50
Direct labour = 4.00
Other variable expenses = 1.00
Total = 8.50

The company should produce the profit the part if the part is available in the market at Rs.
9.00 because the production of every part will give to the company a contribution of 50
paise(Rs.9.00 – 8.50)
The company should not manufacture the part if it is available in the market at Rs.8 because
additional cost of production the part is 50 paise(Rs.8.50 – 8) more than price at which it is
available in the market.

2. ACCEPT AND REJECT ORDER

Problem 8:

The cost sheet of a product is given below:

Direct Material 5.00
Direct Wages 3.00
Factory Overhead:
Fixed 0.50
Variable 0.50
1.00
Administrative expenses 0.75
Selling or distributive overhead:
Fixed 0.25
Variable 0.50
0.75
10.50
 Selling price per unit is Rs.12.00
The above figures are for an output of 50,000 units. The capacity for the firm is 65,000
units. A foreign customer is desirous of buying 15, 000 units at a price of Rs.10 per unit.
Advise the manufacturer whether the order should be accepted. What will be your advice if
the order were from a local merchant?

Solution:
Per unit 15,000 unit

Selling price 10 1,50,000

Less: marginal cost Rs.
Direct material 5.00
Direct wages 3.00
Variable o/h:
Factory 0.50
Selling &distribution 0.50 9 1,35,000
Contribution 1 15,000
The order from the forein will given an additional contribution of Rs.15,000.hence, the order
should be accepted because additional contribution of Rs.15,000 will increase the profit by this
amount as fixed expenses have already been recovered from the internal market. The order from
the local merchant should not be accepted at a price of Rs.10 which is less than normal price of
Rs.12. This price will affect relationship with other customer and there will be a general tendency
of reduction in the price.

Problem 9:

A company producing 40, 000 units of X product working at 80% capacity receives an
order from a foreign dealer for 10, 000 units at Rs. 50 per units although the local price is Rs.90 per
unit.
Material 20
Labour:
Skilled (fixed) 10
Unskilled labour 10
Variable Overhead 10
Fixed Overhead 20
Total 70 per unit
1) Advise the management whether to accept the order or not.
2) What will be your advice if the order has come from the local merchant?
3) If there is temporary fall in demand what will be minimum price to be charged?
 Solution:

Per unit For 10,000 unit

Selling price 50 5,00,000
Less: variable cost:
Material 20
Unskilled labour 10
Variable overheads 10 40 4,00,000
Contribution 10 1,00,000

(1) The order from foreign customer will given an additional contribution of Rs. 1,00,000.
Hence the order should be accepted because additional contribution of R.1,00,000 will
increase the profit by this amount as fixed costs have already been met in the local
market.

(2) The order from a local merchant should not be accepted at a price of Rs.50 per unit
which is less than the normal price of Rs.90. this price will affect the relationship with
other customer and there will be a general tendency of a reduction in the price.

(3) If there is a temporary fall in demand the selling price should not be reduced below
variable cost. In other words seling price must be equal to variable cost. i.e Rs.40.

3. KEY FACTOR TIME

Problem 10:

From the following data, which product would you recommend to be manufactured in factory time
being the key factor?
Per unit of product A(RS) per unit of product B(RS)
Direct material 24 14
Direct labour @Rs 1per hour 2 3
Variable over head @Rs 2per hour 4 6
Selling price 100 110
Standard time to produce 2 hours 3 hours

Solution:
Product A product B
PERUNIT PERUNIT
Selling price 100 110
Less: marginal cost
Direct material 24 14
Direct labour 2 3
Variable o/h 4 30 6 23
Contribution 70 87
Standard time to produce 2 hours 3 hours

Contribution per hour 70 = Rs.35 87 = Rs.29

2 3
 Contribution per of product A is more than that of product B by Rs.6. therefore, product A is
more profitable and is recommended to be manufactured.

4. ALTERNATIVE METHODS OF PRODUCTION

Problem 11:
Product X can be produced either by machine A or machine B.; machine A can produce
100 units of X per hour and machine B 150 units per hour. Total machine hours available during
the year are 2,500.Taking into account the following data determine the profitable method of
manufacture:
Per Unit of X
Machine A Machine B
10. Marginal Cost 5 6
Selling Cost 9 9
Fixed Cost 2 2

Solution:
PROFITABILITY STATEMENT

Machine A machine B
Selling price per unit 9 9
Less: marginal cost 5 6
Contribution per unit 4 3

Output per hour 100 units 150 units

Contribution per hour Rs.400 Rs.450
Machine hours per year 2,500 2,500
Annual contribution Rs.10,00,000 Rs.11,25,000

ALTERNATIVE COURSE OF ACTION

Problem:12

The costs per unit of the three products, A,B&C of a company are given below:
Products
A (Rs) B (Rs) C (Rs)
Direct material 20 16 18
Direct labor 12 14 12
Variable overheads 8 10 6
Fixed expenses 6 6 4
Profit 46 46 40
18 14 12

Selling price 64 60 52

No. Of units produced 10,000 5,000 8,000

Solution:
(i) Fixed expenses:
Units rate amount
A 10,000 X 6 = 60,000
B5,000 X 6 = 30,000
C 8,000 X 4 = 32,000
Total 1,22,000

(ii) Contribution per unit:

Products
A B C
Selling price 64 60 52
Marginal cost 40 40 36
Contribution per unit 24 20 16

(iii) Total profit if A is given up:

A B C Total
Units 5,000 8,000
Addl units 2,500 4,000
7,50012,000
Contribution 1,50,000 1,92,000 3,42,000
Less: fixed cost 1,22,000
Total profit 2,20,000

(iv) Total profit if B is given up:

A B C TOTAL
Units 10,000 - 8,000
Addl.units 5,000 - 4,000
15,000 12,000
Contribution 3,60,000 - 1,92,000 5,52,000
Less: fixed cost 1,22,000
Total profit 4,30,000

(v) Total profit if C is given up:

A B C TOTAL
Units 10000 5000
ADDLEunits 5000 2500

TOTAL 15000 7500

Contibution 360000 150000 5100000

Less:fixed cost 1,22,000

Total profit 3,88,000
SELECTION OF SUITABLE PRODUCT MIX:

Problem 13:

Following information has been made available from the cost records of united automobiles ltd
manufacturing spare parts.
Direct material per unit
X Rs .8
Y Rs.6
Direct wages
X 24 hours at 25 paise per hour
Y 16 hours at 25 paise per hour
Variable over head 150% of wages
Fixed overhead Rs.750
Selling price:
X Rs.25
Y Rs.20
The directors want to be acquainted with the desirability of adopting any one of the following
alternative sales mixes in the budget for the next period.
a).250 units of X and 250 units of Y
b).400 units of Y only
c).400 units X and 100 units of Y
d).150 units X and 350 units of y
State which of the alternative sales mixes you would recommend to the management.

Solution:
Marginal cost statement
Products
X Y
Direct materials 8 6
Direct wages 6 4
Variables over heads 9 6
Marginal cost 23 16
Contribution 2 4
Selling price 25 20

Selection of sales alternative

(a) 250 units of X and 250 units of Y:

Contribution:
Product X 250 units X 2 = 500
Product Y 250 units X 2 = 1,000
1,500
Less: fixed overheads = 750
Profit = 750
 (b) 400 units of product Y only:
Contribution 400x4 = 1,600
Less: fixed over heads = 750
Profit = 850

(c) 400 units of X and 100 units of Y:

Contribution:
Product X 400 x2 = 800
Product Y 100x4 = 400
1,200
Less: fixed o/h = 750
Profit = 450

(d) 150 units of X and 350 units of Y:

Contribution:
Product X 150x2 = 300
Product Y 350x4 = 1,400
= 1,700
Less: fixed overheads = 750
Profit = 950
Determining optimum level

Problem 14:

A factory engaged in manufacturing plastic buckets is working at 40% capacity and

produces 10, 000 buckets per annum.
The present cost break-up for bucket is as under:
Material Rs.10
Labour Rs.3
Overheads Rs.5 (60 % fixed)
The selling price is Rs.20 per bucket.
If it is decided to work the factory at 50% capacity, the selling price falls by 3%. At 90%
capacity and also calculate the break-even point for the same capacity productions.

Solution:

Statement showing profit at different capacity levels

Capacity levels 50% 90%

Production 12,500 22,500

Per unit Total Per unit Total

Sales 19.40 2,42,500 19.00 4,27,500
Variables costs:
Materials 10.00 1,25,000 9.50 2,13,750
Wages 3.00 37,500 3.00 67,500
Variable over heads 2.00 25,000 2.00 45,000
 Total 15.00 1,87,500 14.50 3,26,250
Contribution 4.40 55,000 4.50 1,01,250
Less: fixed costs 30,000 30,000
Profit 25,000 71,250
At 50% capacity At90% capacity
(i) B.E.P(units) 30,000 30,000
4.40 4.50
= 6,818 = 6,667

(ii) B.E.P (in Rs) = 6,818 x 19.40 = 6,667 x 19

= Rs. 1,32,270 = 1,26,673

For 40% capacity, production in units are 10,000

For 50% capacity, production in units are
= 50 x 10,000 = 12,500 units
40

EVALUATION OF PERFORMANCE

Problem 15.

The management of a company considers that product Y,one of its three main lines,is not as
profitable as the other two with the result that no particular efforts are being made to push its sale.
The selling prices and costs of the products are:

Product Selling Price Direct Material Direct Labour

Rs. Rs. Dept. A Dept.BDept.C

Rs. Rs. Rs.

X 68 10 8 2 2
Y 58 6 2 8 2
Z 64 8 2 2 8
Overhead rates for each department per rupee of direct labour are as follows:
Dept.ADept.BDept.C
Rs. Rs. Rs.
Variable overhead 1.20 0.40 1.00
Fixed overhead 1.20 2.00 1.40

TOTAL 2.40 2.40 2.40

Solution:

Statement showing comparative profitability

RS X RS RS Y RS Z RS
Selling price 68.00 58.00 64.00
Less: marginal cost:
Direct material 10.00 6.00 8.00
Direct labour 12.00 12.00 12.00
Variable over heads:
Dept A 9.60 2.40 2.40
Dept B 0.80 3.20 0.80
Dept C 2.00 2.00 8.00
- --------- 34.40 ------- 25.60 ------- 31.20
Contribution 33.60 32.40 32.80
P/V ratio 49.4% 55.8% 51.25%

UNIT V

BUDGETING & VARIANCE ANALYSIS

VARIANCE ANALYSIS

Variance analysis, in budgeting is a tool of budgetary control by evaluation of performance

by means of variances between budgeted amount, planned amount or standard amount and the
actual amount incurred/sold. Variance analysis can be carried out for both costs and revenues.

Variance analysis is usually associated with explaining the difference (or variance) between
actual costs and the standard costs allowed for the good output. For example, the difference in
materials costs can be divided into a materials price variance and a materials usage variance. The
difference between the actual direct labor costs and the standard direct labor costs can be divided
into a rate variance and an efficiency variance. The difference in manufacturing overhead can be
divided into spending, efficiency, and volume variances. Mix and yield variances can also be
calculated.

Variance analysis helps management to understand the present costs and then to control
future costs.

TERMS USED:

Budget - Planning of all incomes & expenses.

Budgeting - Processing.
Budgetary control - Controlling expenses.
 Kinds of Budget
BUDGET

Time period Condition Capacity Coverage

Long Short Basic Current Fixed Flexible Functional Master
Budget budget budget budget budget budget budget budget

PRODUCTION BUDGET:

Problem 1:Larsen Ltd ,plans to sell 1,10,000 units of a certain product line in the first fiscal
quarter ,1,20,000 units in the second quarter , 1,30,000 units in the third quarter and 1,50,000 in
the fourth quarter and 1,40,000 units in the first quarter of the following year .At the beginning of
the first quarter of the current year ,there are 14,000 units of a product in stock. At the end of each
quarter, the company plans to have an inventory equal to one-fifth of the sales for the next fiscal
quarter.
How many units must be manufactured in each quarter of the current year?

Solution:
Particulars 1st quarter 2nd quarter 3rd quarter 4th quarter
Units units units units

Sales 110000 120000 130000 150000

Add: Desired closing stock 24000 26000 30000 28000
134000 146000 160000 178000
Less: Closing stock 14000 24000 26000 30000
Estimated production
120000 122000 134000 148000

Problem2: From the following data, prepare a production Budget for Bajaj Ltd.
Stocks for the budgeted period
Products As on 1st Jan As on 30th June
R 8,000 10,000
S 9,000 8,000
T 12,000 14,000
Requirements to fulfill Normal loss in
Sales programme production
R 60,000 units 4%
S 50,000 units 2%
T 80,000 units 6%
Solution:
Production budget for 6 months ending 30th June

R S T Total
Particulars (Units) (Units) (Units) (Units)
Budgeted sales 60000 50000 80000 190000
Add: Closing stock 10000 8000 14000 32000
70000 58000 94000 222000
Less: Opening stock 8000 9000 12000 29000
Production after
62000 49000 82000 193000
loss(net)
Add: Loss in production 2583 1000 5234 8817

Production before loss 64583 50000 87234 201817

Calculation of loss of Product R

Total product is assumed as 100

Less: Normal loss (4%) 4

Net production 96

If net production is 96, Gross production is 100,

Then Gross production of Product R = 62000* 100= 64583

96
Calculation of loss of Product S
Total product is assumed as 100
Less: Normal loss (2%) 2

Net production 98

If net production is 98, Gross production is 100

Then Gross production of Product R = 49000* 100

98
= 50000
Calculation of loss of Product T
Total product is assumed as 100
Less: Normal loss (6%) 6

Net production 94

If net production is 94, Gross production is 100:

Then Gross production of Product R = 82000* 100

94
= 87234
Problem 3: Draw a Material Procurement Budget (Quantitative) from the following information:
Estimated Sales of a product 40,000 units .Each unit of the product requires 3 units of
material A and 5 units of material b.
Estimated opening balances at the commencement of the next year:
Finished product 5,000 units
Material A 12,000 units
Material B 20,000 units
Materials on order:
Material A 7,000 units
Material B 11,000 units
The desirable closing balances at the end of the next year:
Finished product 7,000 units
Material A 15,000 units
Material B 25,000 units
Material on order:
Material A 8,000 units
Material B 10,000 units

Solution:
Production budget:
Estimated sales 40000
Add: Desired closing stock 7000
47000
Less: Opening stock 5000
Estimated production 42000

Particulars Material A Material B

Estimated production 126000 210000
(42000*3)
(42000*5)
Add: Desired cl.stock 15000 25000
Materials in order 8000 10000
149000 245000
Less: Opening stock
A (12000+7000) 19000 31000
B (20000+11000)

Estimated purchase 130000 214000

 Problem 4: A company manufactures three products A, B and C. These products require blending
of three different materials P, Q and R. Certain data are as follows:
Products

A B C
Sales price Rs 100 120 140
Sales quantity No 100 200 150

Inventory:
Opening No 100 150 150
Closing No 110 165 55
Material
P Q R
Price per kg Rs 4 6 9
Input: Kg Kg Kg
In product A 4 2 -
B 3 3 2
C 2 1 1
Stock in Hand:
Opening 2, 600 2, 000 1, 200
Closing 3, 120 2, 400 1, 440
Prepare i) Sales budget in rupees
ii) Production budget in quantities
iii) Budget of material usage in quantities
iv) Materials purchase budget in rupees
Solution:

i) Sales budget
Selling Selling
Product Units price Total value
A 100 100 10000
B 120 200 24000
C 140 150 21000
360 450 55000

ii) Production budget in quantities

Particulars A B C
Estimated sales (in units) 100 200 150
Add: cl. Stock 110 165 55
Less: Op. stock 210 365 205
100 150 50
110 215 155
iii) Budget of materials usage (in quantities)
Product Productio P Q R
n units Usage(in Total Usage(in Total Usage(in Total
kg) usage kg) usage kg) usage
A 110 4 440 2 220 - -
B 215 3 645 3 645 2 430
C 155 2 310 1 155 1 155
1395 1020 585

iv) Material purchase budget (in Rupees)

Particulars P Q R
Materials used 1395 1020 585
Add: Cl. Stock 3120 2400 1440
4515 3420 2025
Less: Op. stock 2600 2000 1200
1915 1420 825
Price per kg 4 6 9
7660 8520 7425

Sales Budget
Problem 5: Parker Ltd., manufactures two brands of pen Hero & Zero. The sales department of the
company has three departments in different areas of the country
The sales budget for the year ending 31st December 2008 were: Hero-Department I 3,
00,000; Department II 5, 62,500; Department III 1, 80, 000 and Zero-Department I 4, 00,000;
Department II 6, 00,000; and Department III 20, 000. Sales price are Rs.3 and Rs.1.20 in all
departments.
It is estimated that by forced sales promotion the sale of ‘Zero’ in department I will
increase by 1, 75,000. It is also expected that by increasing production and arranging extensive
advertisement, Department III will be enabled to increase the sale of ‘Zero’ by 50, 000.
It is recognized that the estimated sales by department II represent an unsatisfactory target.
It is a agreed to increase both estimates by 20%.
Prepare a Sales Budget for the year 2009.

Solution:
Sales budget for the year 2009
Hero (Rs.3) Zero (Rs.1.20)
Particulars Total
Qty Rs. Qty Rs.
Department – I 300000 900000 575000 690000 1590000

Department – II 562500 2025000 600000 864000 288900

112500 120000
Department – III 180000 540000 20000 84000
50000 624000

5103000

Problem 6: Gopi& Co. Ltd. Produces two products, Alpha Beta. There are two sales divisions,
North and South. Budgeted sales for the year ended 31st Dec 2006 were as follows:

Division Products Units Price per unit

RS
North Alpha 25, 000 10
Beta 15, 000 5
South Alpha 24, 000 10
Beta 30, 000 5

Actual sales for the said period were:

Product South North

Alpha 28, 000 units @ Rs.10 each 25, 000 units @ Rs.10 each
Beta 18, 000 units @ Rs.5 each 33, 000 units @ Rs.5 each
On the basis of assessments of the salesmen the following are the observations of sales
division for the year ending 31st Dec 2007.

North Zone Alpha Budgeted increase of 40% on 2006 Budget.

Beta Budgeted increase of 10% on 2006 Budget.
South Zone Alpha Budgeted increase of 12% on 2006 Budget.
Beta Budgeted increase of 15% on 2006 Budget.
It was further decided that because of the increased sales campaign in North an additional
sales of 5, 000 units of product will result.
Prepare a sales budget incorporating the above information.
Solution:
Division Units Price Value Units Price Value Units Price Value
product
North
Alpha 38125 10 381250 25000 10 250000 28000 10 280000
Beta 18375 5 91875 15000 5 75000 18000 5 90000
56500 473125 40000 325000 46000 370000
South
Alpha 26880 10 268800 24000 10 240000 25000 10 250000
Beta 34550 5 172500 30000 5 150000 33000 5 165000
61380 441300 54000 390000 58000 415000

Total Alpha 65005 650050 49000 490000 53000 530000

Total Beta 52875 264375 45000 225000 51000 255000
117880 914425 94000 715000 104000 785000

Labor Cost Budget

Problem 7:
The standard cost data for RS Ltd., shows that 2 hours of direct labour are required to produce one
unit of finished product. The standard rate per hour is Rs.5. But it has to be raised to Rs.6 from the
third month of the first quarter of 2008. The budgeted production for the first quarter ending
31/03/08 are as follows:
January 5, 000 units, February 8, 000 units and March 10, 000 units. Prepare labour cost
budget for the first quarter.

Labor cost budget for year ending 2008

Particulars Jan Feb Mar

Budgeted production 5000 8000 10000
(in units)
Labor hour 2 2 2
10000 16000 20000
Standard rate (Rs.5) 5 5 5
Labor cost 50000 80000 120000

Manufacturing overhead Budget

Problem 8:
From the following particular, prepare manufacturing overhead budget for quarter ending
31/12/08 Budgeted output during the quarter 5, 000 units
Fixed overheads Rs. 30,000
Variable overheads Rs. 15, 000 (varying at Rs. 5 p.u)
Semi-variable overheads Rs. 15, 000 (40% fixed 60% varying at Rs. 3 p.u)
Solution:
Manufacturing overhead budget for the year ending 31.12.2008

Particulars Rs. Rs
Fixed overhead 30000
Variable overhead (5000*5) 25000
Semi-variable overhead
Fixed 15000*40/100 6000
Variable5000*3/100 15000 21000
Total manufacturing overhead 76000

Selling overhead Budget

Problem 9:
Prepare a Sales Overhead Budget for the months of January, February and March from the
estimates given below:
Advertisement 2, 500
Salaries of the sales department 5, 000
Expenses of the sales department 1, 500
Counter Salesmen’s Salaries and Dearness Allowance 6, 000
Commission to counter salesmen at 1% on their sales.
Travelling salesmen’s commission at 10% on their sales and Expenses at 5% on their sales
The sales during the period were estimated as follows:
Month Counter sales TravellingSalesmen’s Sales
Rs Rs
January 80, 000 10, 000
February 1, 20, 000 15, 000
March 1, 40, 000 20, 000

Solution:
Particulars Jan feb Mar
Counter sales 80000 120000 140000
Travelling salesman’s
sales 10000 15000 20000
90000 135000 160000

Sales overheads
Commission on counter sales@1% 800 1200 1400
Travelling salesman’s commission@ 10%
on travelling salesman’s sales 1000 1500 2000
Expenses on travelling salesman’s sales @
5% 500 750 1000
Advertisement 2500 2500 2500
Salaries of the sales department 5000 5000 5000
Expenses of sales department 1500 1500 1500
Counter salesman’s sales & dearness
allowances 6000 6000 6000
17300 18450 19400

Problem 10: Prepare a Cash budget for 3 months ending 30th June
Month March April May June
Rs. Rs. Rs. Rs.
Sales 60, 000 70, 000 80, 000 90, 000
Purchases 35, 000 40, 000 55, 000 60, 000
General expenses 5, 000 6, 000 7, 000 8, 000
a. 20% of the sales are on cash basis and the balance on credit
b. 3% of the credit sales are returned by the customers, 2% of the total debtors constitute bad
debts. 50% of the good debtors are collected in the month of sales and the rest in the next
c. Creditors are paid in the month following the month of purchase.
d. No time lag applies to the payment of general expenses ha
e. Salaries of Rs.5, 000 p.m. payable for the month of April & May and Rs.6,000 thereafter
f. Rent of Rs.1, 000 p.m is paid in addition to general expenses
g. Cash in hand estimated on first April Rs.10, 000. This is the minimum desired cash balance
at the end of each month. Any excess balance being put in bank fixed deposits.

Solution:
Cash budget for 3 months ending 30th June

Particulars April May June

Opening balance 10000 10000 10000

Receipts: Case sales 14000 16000 18000

Debtors (working) 49400 57000 64600

Total receipts (A) 73400 83000 92600

Payments: creditors (1 35000 40000 55000

month)

General exp
6000 7000 8000
Salaries
5000 5000 6000
Rent/month
1000 1000 1000
 Add: Case to be 47000 53000 70000
maintained.

Total payments(B)
10000 10000 10000

57000 63000 80000

Excess amt paid in

fixed deposit [A-B] 16400 20000 12600

Flexible Budget
Problem 11:
Draw up a flexible budget for overhead expenses on the basis of the following data
and determine the overhead rates at 70%, 80%, and 90% plant capacity.

At 70% At 80% At 90%

Capacity Capacity Capacity
Rs. Rs. Rs.
Variable Overheads:
Indirect labour _ 12, 000 _
Stores including spares _ 4, 000 _
Semi-variable Overheads
Power
(30% fixed, 70% variable) _ 20, 000 _
Repairs and maintenanc
(60% fixed, 40% variable) _ 2, 000 _
Fixed Over heads
Depreciation _ 11, 000 _
Insurance _ 3, 000 _
Salaries _ 10, 000 _
Total Overheads _ 62, 000 _

Estimated direct labor hours 1, 24, 000 hrs

Working notes:
Direct labour hour ha been calculated as follows:

At 70% capacity = 58,150 = Rs 0.536

Particulars Capacity at Capacity at Capacity at

70% 80% 90%
Variable
overhead 10500 12000 13500
Indirect 3500 4000 4500
labor
Store
Semi-variable 6000 6000 6000
overhead 12250 14000 15750
Power:
Fixed 1200 1200 1200
700 800 900
Variable
11000 11000 11000
Maintenance 10000 10000 10000
3000 3000 3000
Fixed 58150 62000 65850
Variable
Fixed 108500 124000 139500
overhead
0.536 0.500 0.472
Depreciation
Salaries

Insurance
Total
overhead

Estimated
direct labor
hours
Direct labour
hour rate
1,08,500hrs

At 80% capacity = 62,000 = Rs 0.500

1,24,000hrs

At 90% capacity = 65,850 = Rs 0.472

1,39,500hrs
 STANDARD COSTING
Standard costing is the practice of substituting an expected cost for an actual cost in the
accounting records, and then periodically recording variances that are the difference between the
expected and actual costs. This approach represents a simplified alternative to cost layering
systems, such as the FIFO and LIFO methods, where large amounts of historical cost information
must be maintained for items held in stock.
Standard costing involves the creation of estimated (i.e., standard) costs for some or all
activities within a company. The core reason for using standard costs is that there are a number of
applications where it is too time-consuming to collect actual costs, so standard costs are used as a
close approximation to actual costs.
Advantages of Standard Costing
Potential usages are as below:
 Budgeting. A budget is always composed of standard costs, since it would be impossible to
include in it the exact actual cost of an item on the day the budget is finalized.
 Inventory costing. It is extremely easy to print a report showing the period-end inventory
balances (if you are using a perpetual inventory system), multiply it by the standard cost of
each item, and instantly generate an ending inventory valuation. The result does not exactly
match the actual cost of inventory, but it is close.
 Overhead application. If it takes too long to aggregate actual costs into cost pools for
allocation to inventory, then you may use a standard overhead application rate instead, and
adjust this rate every few months to keep it close to actual costs.
 Price formulation. This system may also account for changes in the company’s production
costs at different volume levels, since this may call for the use of longer production runs
that are less expensive.
Problems with Standard Costing
Despite the advantages just noted for some applications of standard costing, there are
substantially more situations where it is not a viable costing system. Some problem areas as
follows:
 Cost-plus contracts. If you have a contract with a customer under which the customer pays
you for your costs incurred, plus a profit (known as a cost-plus contract), then you must use
actual costs, as per the terms of the contract. Standard costing is not allowed.
 Drives inappropriate activities. A number of the variances reported under a standard
costing system will drive management to take incorrect actions to create favorable
variances. For example, they may buy raw materials in larger quantities in order to improve
the purchase price variance, even though this increases the investment in inventory.
 Fast-paced environment. A standard costing system assumes that costs do not change
much in the near term, so that you can rely on standards for a number of months or even a
year, before updating the costs. However, in an environment where product lives are short
or continuous improvement is driving down costs, a standard cost may become out-of-date
within a month or two.
 Slow feedback. A complex system of variance calculations are an integral part of a standard
costing system, which the accounting staff completes at the end of each reporting period. If
 the production department is focused on immediate feedback of problems for instant
correction, the reporting of these variances is much too late to be useful.
 Unit-level information. The variance calculations that typically accompany a standard
costing report are accumulated in aggregate for a company’s entire production department,
and so are unable to provide information about discrepancies at a lower level, such as the
individual work cell, batch, or unit.
 Standard Cost Variances. A variance is the difference between the actual cost incurred
and the standard cost against which it is measured. A variance can also be used to measure
the difference between actual and expected sales. Thus, variance analysis can be used to
review the performance of both revenue and expenses.

There are two basic types of variances from a standard that can arise, which are the rate variance
and the volume variance.
1) Rate variance
A rate variance (which is also known as a price variance) is the difference between the
actual price paid for something and the expected price, multiplied by the actual quantity purchased.
The “rate” variance designation is most commonly applied to the labor rate variance, which
involves the actual cost of direct labor in comparison to the standard cost of direct labor. The rate
variance uses a different designation when applied to the purchase of materials, and may be called
the purchase price variance or the material price variance.
2) Volume variance
A volume variance is the difference between the actual quantity sold or consumed and the
budgeted amount, multiplied by the standard price or cost per unit. If the variance relates to the sale
of goods, it is called the sales volume variance. If it relates to the use of direct materials, it is called
the material yield variance. If the variance relates to the use of direct labor, it is called the labor
efficiency variance. Finally, if the variance relates to the application of overhead, it is called the
overhead efficiency variance.
Thus, variances are based on either changes in cost from the expected amount, or changes
in the quantity from the expected amount. The most common variances that a cost accountant
elects to report on are subdivided within the rate and volume variance categories for direct
materials, direct labor, and overhead. It is also possible to report these variances for revenue.
Standard Cost Creation
At the most basic level, you can create a standard cost simply by calculating the average of
the most recent actual cost for the past few months. In many smaller companies, this is the extent
of the analysis used. However, there are some additional factors to consider, which can
significantly alter the standard cost that you elect to use. They are:
 Equipment age. If a machine is nearing the end of its productive life, it may produce a
higher proportion of scrap than was previously the case.
 Equipment setup speeds. If it takes a long time to setup equipment for a production run, the
cost of the setup, as spread over the units in the production run, is expensive. If a setup
reduction plan is contemplated, this can yield significantly lower overhead costs.
 Labor efficiency changes. If there are production process changes, such as the installation
of new, automated equipment, then this impact the amount of labor required to manufacture
a product.
 Labor rate changes. If you know that employees are about to receive pay raises, either
through a scheduled raise or as mandated by a labor union contract, then incorporate it into
the new standard. This may mean setting an effective date for the new standard that
matches the date when the cost increase is supposed to go into effect.
 Learning curve. As the production staff creates an increasing volume of a product, it
becomes more efficient at doing so. Thus, the standard labor cost should decrease (though
at a declining rate) as production volumes increase.
 Purchasing terms. The purchasing department may be able to significantly alter the price
of a purchased component by switching suppliers, altering contract terms, or by buying in
different quantities.

Any one of the additional factors noted here can have a major impact on a standard
cost, which is why it may be necessary in a larger production environment to spend a
significant amount of time formulating a standard cost.
 Salient features of Computerized Accounting System

Computer information system environment exists when one or more computer(s) of any
type or size is (are) involved in the processing of financial information, including quantitative data,
of significance to the audit, whether those computers are operated by the entity or by a third party.

A computerized accounting environment will therefore have the following salient features:
1. The processing of financial information will be by one or more computers.
2. The computer or computers may be operated by the entity or by a third party.
3. The processing of financial information by the computer is done with the help of one or
more computer software e.g. tally.
4. Computer software includes any program or routine that performs a desired function or set
of functions and the documentation required to describe and maintain that program or
routine.
GNIFICANCE OF COMPUTERIZED ACCOUNTING SYSTEM

With computers becoming extensively used in business today, it is obvious that accounts
which were earlier maintained in a manual form will be gradually replaced with computerized
accounts. The speed with which accounts can be maintained is several fold higher. Basic
difficulties faced like balancing of trial balance, correct posting into the general ledger and
subsidiary ledger is a thing of the past. Today any person maintaining accounts in the computer
does not have to consider that while making say a cash expense entry through the cash payment
screen that the corresponding ledger posting of the expense has been done properly or not.
Similarly the trial balance should automatically tally unless some mistake is made while recording
the opening balances. The only concern that has increased today are concerns for controls, security
and integrity of the computer system as more and more information is stored not in the hard print
but as soft copies inside the computer. Issues like unauthorized access to the data either through the
local area network or through the internet by hacking into the company server are becoming
potential threat to the computer usage.

ODIFICATION AND GROUPING OF ACCOUNTS

Unlike a manual accounting system where account codes are rarely used a computerised
accounting system frequently uses a well defined coding system. However, it should not be
concluded that computerized account must always have account codes. There are many accounting
software available which support a non-coded accounting system. A coded accounting system is
more convenient where there are numerous account heads
In Computerised environment complexity is high. It also to some extent reduces the
possibility of the same account existing in several names due to spelling mistakes or abbreviations
used.
A proper codification requires a systematic grouping of accounts. The major groups or
heads could be Assets, Liabilities, Revenue Receipts, Capital Receipt, Revenue Expenditure,
Capital Expenditure. The sub-groups or minor heads could be "Cash" or "Receivables" or
"Payables" and so on. The grouping and codification is dependent upon the type of organisation
and the extent of sub-division required for reporting on the basis of profit centers or product lines.
Accounting Packages and Consideration for their Selection
 Account can be maintained in a computerized environment even by using a spread sheet
package.
 User will have to use his knowledge and skills of spread sheet software to keep control of the
figures.
 Special spreadsheet controls including physical spreadsheet controls like spreadsheets locked
on a protected shared drive with restricted access and read/write access controls and password-
protected cells and formulas with passwords should be used.
 Spreadsheet software allow grouping of accounts, replication of cell contents, formulas and
macros, pivot tables, calculations and functions which help in the maintenance of the accounts.

Advantages of spreadsheet software as an accounting tool are

1. It is simple to use and easy to understand

2. Most of the common functions like doing calculations, setting formulas, macros, replication of
cell contents, etc can be easily done in a spreadsheet.
3. Grouping and regrouping of accounts can be done.
4. Presentation can be made in various forms including graphical presentations like bar diagram,
histogram, pie-chart, etc.
PREPACKAGED ACCOUNTING SOFTWARES
There are several prepackaged accounting software which are available in the market and
are used extensively for small and medium sized organisations. These software are easy to use,
relatively inexpensive and readily available.
The installation of these software are very simple. An installation diskette or CD is
provided with the software which can be used to install the software on a personal computer. A
network version of this software is also generally available which needs to be installed on the
server and work can be performed from the various workstations or nodes connected to the server.
Along with the software an user manual is provided which guides the user on how to use
the software.
After installation of the software, the user should check the version of the software to
ensure that they have been provided with the latest. The vendor normally provides regular updates
to take care of the changes of law as well as add features to the existing software.
This software normally has a section which provides for the creation of a company. The
name, address, phone numbers and other details of the company like VAT registration number,
PAN and TAN numbers are feeded into the system. The accounting period has to be set by
inserting the first and the last day of the financial year.

Master file screens on any standard prepackaged software

 Company master file
 Accounts master file
 Sub ledger master file
 Customer master file
 Vendor master file
 Product master file
 Division master file

The entry screens differ in look and feel from software to software and from vendor to
vendor.
The basic entry screens are the following
 Cash Receipts and Payment Entry
 Bank Receipts and Payment Entry
 Petty Cash Voucher Entry
 Journal Entry
 Purchase Order, GRN, Bill, Purchase return Entry
 Sales Order, Challan, Invoice, Sales Return Entry
 Debit Notes and Credit Notes Entry
 Cash Sales & Purchase Memos
  Production
 Consumption
 Stock Transfer
Each of the screens are provided with add, modify or delete options. Special options like
the date modification and voucher number modifications are provided in some of the software.
 Cash Book  General Ledger
 Bank Book  Subsidiary Ledger
 Petty Cash Book  Debtors Ledger
 Purchase Book  Creditors Ledger
 Sales Book  Debit Note Register
 Cash Sales Book,  Credit Note Register
 Cash Purchase Book,  Stock Ledger
 Sales Return register  Stock movement register
 Purchase Return register  Production register
 Journal Book  Consumption register

Document printing options like printing of purchase orders, challans and bills, sales order, challans and
invoices, declaration forms and return forms.

 Trial Balance
 Profit and Loss Account
 Balance Sheet

Some of the software provide bank reconciliation options. In the entry screen date of
clearances can be inserted. Reports can thereafter be generated of all uncleared items to make the
BRS report.
There are special reports also provided by some software like the cash, bank maintenance
reports which shows any date on which the cash or bank by mistake had credit balance. There are
also MIS reports like aging of debtors, slow moving and non-moving stock, etc.
 The last section also called the house keeping section of these softwares provides the
system maintenance features. Backup can be taken and restored under the housekeeping section.
Clean-up, fine tuning and re-indexing of the software is part of this section of the software.

Customized Accounting Software

Customized accounting software is one where the software is developed on the basis of
requirement specifications provided by the organisation. The choice of customised accounting
software could be because of the typical nature of the business or else the functionality desired to
be computerised is not available in any of the pre-packaged accounting software.
An organisation desiring to have an integrated software package covering most of the
functional area may have the financial module as part of the entire customized system.
A feasibility study is first made before the decision to develop software is made. The life
cycle of a customized accounting software begins with the organization providing the user
requirements. Based on this user requirement the system analyst prepares a requirement
specification which is given for approval by the user management. Once the requirement
specification is approved, the designing process begins. Development, testing and implementation
are the other components of the system development life cycle.

Accounting Software as Part of Enterprise Resource Planning (ERP)

Larger organisations often go for an ERP package where finance comes as a module. An
ERP is an integrated software package that manages the business process across the entire
enterprise.

Outsourcing of Accounting Function

Recently a growing trend has developed for outsourcing the accounting function to a third
party. The consideration for doing this is to save cost and to utilize the expertise of the outsourced
party. The third party maintains the accounting software and the client data, does the processing
and hands over the report from time to time.

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113
 ANNA UNIVERSITY QUESTION PAPERS

QP 1: M.B.A. DEGREE EXAMINATION, FEBRUARY/ MARCH 2014.

First Semester
DBA 1606 - ACCOUNTING FOR MANAGEMENT
(Regulations 2007/2009)
Time: Three hours Maximum: 100 marks
Answer ALL questions.
PART A- (10 x 2 = 20 marks)

1. What are the accounting conventions?

2. What are the differences between Financial Accounting and Management Accounting?
3. What are the Revenue recognition criteria?
4. What is the need of depreciation?
5. List out the limitations of ratio analysis.
6. What are the utilities of funds flow analysis?
7. Give the classification of manufacturing costs.
8. What is meant by activity based costing?
9. What are the relevant costs for decision making?
10. What is meant by responsibility centers?
PART B - (5 x 16 = 80 marks)

11.(a) Explain in brief the cost based approaches of human resourcesaccounting.

Or
(b) The following trial balance of MisHarini& Company was
taken on31.12.2011. Trial balance as on 31.12.2011
Particulars Debit Credit
Rs. Rs.
Capital 15,000
Bills payable 1,180
Drawings 750
Stock on 1.1.2011 6,920
Bills receivable 1,000
Purchase returns 320
Sales returns 300
Purchases 4,50
0
Sales 8,300
Wages 70
Discount 30
Salaries 200
Prudential Bank Shares 3,000
Insurance 120
Buildings0 3,000
Furniture 700
Sundry debtors 6,000
Sundry creditors 1,300
Cash in hand 470
Bank over draft 900
27,0 27,030
Page
30
114
Prepare trading Alc, profit and loss Alcand balance sheet, taking intoaccount the following facts
(i) The insurance premium of Rs. 120 has been paid for the half yearending 30.06.2011.
(ii) Depreciate buildings and furniture byl0%.
(iii) A sum of Rs. 40 due for wages has not been paid.
(iv) Reserve 10%of the book debts for bad and doubtful debts.
(v) Stock of goods on 31.12.2011 was Rs. 8,000.

12. (a) Explain III brief different depreciation methods and their impact on profit.

Or

Page
115
(b) From the following data about the goods purchased and sold by
HariharaCompany, calculate the cost of goods sold and inventory under LIFO
andFIFO methods. –

Units Rs. per

unit
Opening balance 6 10
0
Purchases: 100 11
100 13
4 15
0
Sales 220

13.(a) Explain the following with examples:

(i) Liquidity ratio.
(ii) Debt collection period.
(iii) Operating ratio:
(iv) ROI.
Or
(b) From the following particulars of MisHarshini Co. Ltd. prepare
cash flow statement:
Balancesheetasat31stDecember
2010 2011 2010 2011
Rs R Rs Rs
s
Share capital 7,00,000 7,40,000 Goodwill 1,00,00 50,0
0 00
Debentures 1,20,000 60,000 Land 2,00,000 3,00,000
Reservefordoubt 7,000 8,000 4,92,0 4,27,000
full Stocks 00
Creditors 1,04,000 1,18,000 Debtors 1,49,000 1,77,0
00
P&LAlc 1,00,000 1,06,000Cash 90,000 78,000

Total 10,31,000 10,32,000 10,31,000 10,32,000

Additional Information :

(i) Dividends paid during the year was Rs. 35,000

(ii) Land was purchase for Rs. 1,00,000.

14.(a)Explain the following:

(i) Standard
costing.
(ii)Process
costing.
(iii)ABC
(iv)Target costing.
Or

Page
(b) From the following information, find out:

116
 (i) Contribution
(ii)BEP in Units
(iii)Margin of safety and
(iv) Profit.
Rs.
Total fixed costs 4,50
0
Total variable costs 7,500
Total sales 15,000
Units sold 5,000
(units)

15. (a) From the following information of Jaya &Co., advise the
managementwhether to accept the special order or not with reasons:
20,000 units of production
(at 60% capacity)
Rs.
Material costs 85,000
Labour costs 1,15,000
Factory overheads :
Variable 1,55,000
Fixed 1,25,000

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117
Selling costs:
Variable 16,500
Fixed 72,500
The special order is received for 10,000 units @ Rs. 187.50 per unit at noselling expenses.
Or
(b) ABC Ltd. produces 10,000 units of a component 'X' in a year, the
coststructure of which is as follows: Direct material- Rs. 10 per unit
Direct labour - Rs. 8 per unit
Totalfactory overhead - Rs. 1,60,000 (20%is variable)

If the same component is available in the market at Rs. 28 per unit,should the
(i)
company make or buy the component 'X'? (8)

(ii) If the company could rent out the factory for Rs. 1,000 per month, what would be your decision?
(8)

QP 2:M.B.A. DEGREE EXAMINATION, AUGUST 2013.

First Semester
DBA 1606 - ACCOUNTING FOR MANAGEMENT
(Regulation 2007/2009)
Time : Three hours Maximum:
100 marks Answer ALL
questions.
PART A - (10 x 2 = 20 marks)
1. Define Financial accounting.
2. What is meant by Management accounting?
3. Define Depreciation.
4. What do you mean by intangible assets?
5. What is a cash flow statement?
6. What is Economic Value Added (EVA)?
7. Define Cost accounting.
8. Describe Job costing.
9. What do you mean by Break-even Point?
10. Define Budgetary Control.
PART B - (5 x 16 = 80 marks)
11. (a) Elucidate on the various accounting conventions and concepts.
Or
(b) From the following prepare the Final Accounts for the year ending 31ST- March 2011.
Rs Rs.
.
Stock 18,000 Cash at Bank 5,000
Purchases 60,000 Drawings 6,000
Wages 8,000 Bills receivables 7,000
Salaries 11,000 Reserve for discount on creditors 550
Rent and Rates 3,000 Discount allowed 54
5
Insurance 2,000 Carriage 2,000
Machinery 30,000 Sales 1,15,0
00
Buildings 40,000 Capital 70,00
0
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118
Sundry Debtors 15,000 Sundry Creditors 21,00
0
Furniture 6,000 Bills Payables 8,43
0
General expenses 1,000 Provision for Doubtful Debt
1,000
Cash in hand 2,000 Discount Received 840
Bad Debts 650 Provision for Discount on 475
Debtors
Outstanding Salaries 1,000
Additional
Information:

Provision for doubtful' debts is to be maintained at 5% on debtors. Provision for

discount on debtors is to be maintained at 2%. Reserve for discount on creditors is
to be maintained at 3%. Depreciate machinery and building @ 10% p.a. and
furniture @ 5% p.a. Stock in hand on31 March 2011 is Rs 24,000.

Page
119
12.(a) Explain the rationale of preparing a Balance Sheet.
Or
(b) Alpha Limited Company purchased on 1StJanuary 2010 a small plant forRs
10,000. On 1st July in the same year, an additional plant was purchased costing Rs
5,000. On 1st October 2012 the plant purchased on1StJanuary 2010 having become
obsolete, is sold off for Rs 6,750. On the
same date, a fresh plant was purchased for Rs 12,000. Depreciation is provided at
10%p.a. on the straight-line method.Prepare Plant Account and Depreciation
Account for three yearsassuming that the accounts are closed on 31st December
every year.

13.{a) Distinguish between Cash flow and Fund Flow Statement.

Or
(b) The Balance Sheets of Hari Ltd. As on 31st December, 2006 and 2007 are given below:
Particulars 31.12.2006 31.12.2007
Share capital 6,00,000 8,00,00
0
Capital reserve 20,000
General reserve 3,40,000 4,00,000
Profit and loss account 1,20,000 1,50,000
Debentures 4,00,000 2,80,00
0
Current liabilities 2,40,000 2,60,00
0
Provision for Income Tax 1,80,000 1 70,000
Proposed dividend 60,000 72,000
Unpaid dividend 8,000
1 9,40,000 21,60,000
Fixed assets : at cost 16,00,000 19,00,000
Less: Depreciation 4,60,000 5,80,000
11,40,000 13,20,000
Trade Investment 2,00,000 1,60,000
Current assets 5,60,000 6,60,00
0
Preliminary expenses 40,000 20,000
19,40,000 21,60,000
During the year 2007, the
company:

(i) Sold one machine for Rs. 50,000 the cost of which was Rs. 1,00,000and the
depreciation provided on it was Rs. 40,000.
(ii) Provide Rs. 1,80,000 as depreciation.
(iii) Redeemed 30% of the Debentures @ Rs. 105.
(iv) Sold some Trade Investments at a profit of Rs.20,000, which was credited to Capital Reserve.
(v) Decided to value stock at cost, whereas previously the practice was to value
stock at cost less 10%. The stock according to books on31.12.2006 was Rs.
1,08,000. The stock on 31.12.2007 was correctly valued at Rs. 20,000 and has been
provided.

You are required to prepare the statement of Sources and Application of Funds
during 2007 showing the changes in the Working Capital.

14.(a) What is Margin of Safety? Enumerate the steps

required to improve the Margin of Safety.
Page
120
 Or
(b) A company selling price per unit is Rs. 9 and Variable Cost is Rs. 6 per unit.
Fixed Costs amount to Rs. 36,000.
Calculate :
(i) Break even point in unit
(ii) Break even point in rupees.

15.(a) "Management Accounting is concerned with accounting information which

is useful to management". Explain.
Or
(b) A company's plant processes 1,50,000kgs of raw material in a month to produce two Products,
viz, 'P' and
'Q'. The cost of raw material isRs.12 per kg.the process costs per month are :
Rs.
Direst materials 90,000
Direct wages 1,20,000
Variable overheads 1,00,000
Fixed overheads 1,00,000

Page
121
 The loss in process is 5% of input and the output ratio of P and Q which emerge
simultaneously is 1 :
2. The selling prices of the two products at the point of split off rate isP Rs. 12 per
kg and Q Rs. 20 per kg.A proposal is available to process P further by mixing it
with other purchased materials. The entire current output of the plant can be so
processed further to obtain a new product’s'. The price per kg.of Sis Rs.15 and each
kg of output of S will require one kilogram of input P. the cost of processing of
Pinto S (including other materials) is Rs. 1,85,000per month.
You are required to prepare a statement showing the monthly profitability
based both on the existing manufacturing operations and on further processing.
Will you recommend further processing?

QP 3:. M.B.A. DEGREE EXAMINATION, FEBRUARYIMARCH 2013.

First Semester
DBA 1606 - ACCOUNTING FOR MANAGEMENT
(Regulation 2007/2009)
Time : Three hours Maximum:
100 marks Answer ALL
questions.
PART A - (10 x 2 = 20 marks)
1. Mention the parties who are interested in Financial Statements.
2. What is meant by Inflation Accounting?
3. Differentiate between Tangible Assets Vs Intangible Assets.
4. Explain the CVP Analysis Concept.
5. Write any four Advantages of Budgetary Control.
6. Define Incremental Analysis.
7. What is Activity Based Costing?
8. What is Responsibility Accounting?
9. Differentiate between Financial Accounting Vs Cost Accounting.
10. What are liquidity ratios?
PART B - (5 x 16 = 80 marks)
11. (a) What is the nature of Accounting? In what ways accounting information is
useful to Creditors, Investors and employees of a business enterprise?
Or
(b) Define Financial Accounting. Explain Accounting Concepts and Conventions in detail.

12. (a) (i) Define Ledger and what is the position of Ledger in Book-Keeping? What is its need?
(ii) Journalise the following transactions and Post
them into Ledger. Date
2012, March 1 Ali commenced business 10,000
with cash
March 2 Paid into Bank 8,000
March 3 Bought goods for cash 500
March 4 Bought furniture for office 400
March 5 Drew from Bank cash for office 1,000
use
March 6 Goods sold to Khan 600
March 7 Bought goods from Ali 400
March 8 Paid Trade Expenses 100
March 9 Paid to Ali on account 400
Page
122
March 10 Received Cash from Khan 600
March 11 Paid Rent 200
March 12 Cash Sales 12,000
Or
(b) (i) What do you understand by Depreciation? Discuss any three main causes of
Depreciation. What are the basic factors to be taken into account while computing
depreciation? (8)
(ii) On 15th January, 2009 a firm purchased a machine costingRs. 15,000. On July
1st it purchased another machine for Rs. 12,000and another machine for Rs.50,000.
It was estimated that the three machines will work only till 31st December 2011.
Scrap value is zero. Create reserve for depreciation account and write up machinery
account and reserve for depreciation account. (8)
13. (a) The summarized Balance Sheet ofXYZLtd as at 31.12.2010 and
2011 are given below: Liabilities 2010 2011 Assets
2010 2011
Rs. Rs. Rs. Rs.
Share Capital 4,50,000 4,50,000 Fixed Assets 4,00,000 3,20,000
General Reserve 3,00,000 3,10,000 Investments 50,000 60,000
Profit and Loss Alc 56,000 68,000 Stock 2,40,000 2,10,000
Creditors 1,68,000 1,34,000 Debtors 2,10,000 4,55,000

Page
123
Provision for 75,000 10,000 Bank 1,49,000 1,97,0
Tax 00
Mortgage Loan 2,70,000
Total 10,49,000 2,42,000 10,49,00012,42,
Total 000

Additional Information:
(i) Investments costing Rs.8,000 were sold during the year 2011 forRs.8,500.
(ii) Provision for Tax made during the year was Rs. 9,.000.
(iii) During the year part of Fixed Assets costing Rs.10,000 was sold Rs.12,000 and
the profit was included in the Profit and Loss Account.
(iv) Dividend paid during the year amounted to Rs. 40,000.Prepare Funds Flow Statement.
Or
(b) What is a Fund Flow Statement? Explain the need, objectives and its significance in managerial
decisions.

14.(a) Explain cost analysis and its types. Discuss its importance in decision-making.
Or
(b) The product of a company passes through three distinct processes to completion.
From the past experience it is ascertained that wastage is incurred in each process
as under: Process A 2% ; Process B 5%;Process C 10%.
The wastage of process A and B is sold at Rs.10 per 100
units and that of process C at Rs.80 per 100 units. Following is the information
regarding the Production of March 2012: .
Process A Process B Process C
Rs. Rs. Rs.
Materials 12,000 8,000 4,000
Direct Labour 16,000 12,000 6,000
Machine Expenses 2,000 2,000 3,000
Other Factory Expenses 3,500 3,800 4,200
20,000 units have been issued to Process A at a cost of Rs. 20,000.The output of each
process has been as under: Process A19,500 Units; Process B 18,800 units; Process C
16,000 units.
There was no stock or Work in progress in any process in the beginning
and at the end of March. Prepare Process Cost Accounts for Process A, B
and C.

15.(a) "Budgeting is a tool of planning and control" - Comment. Explain the merits of budgetary
control.
Or
(b) Discuss the merits and demerits of Responsibility Accounting.

QP 4: M.B.A. DEGREE EXAMINATION,AUGUST 2012.

First Semester
DBA 1606- ACCOUNTING FOR MANAGEMENT
(Regulation 2007/2009)
Time: Three hours Maximum:
100 marks Answer ALL
questions.
Page
124
 PART A - (10 x 2 = 20 marks)
1. What do you mean by financial accounting?
2. Define management accounting.
3. Name any four accounting conventions.
4. What is meant by process costing?
5. What do you mean by Budgetary control?
6. Point out any two application of funds.
7. What is responsibility accounting?
8. Write any four uses of marginal costing.
9. Write a formula for inventory turnover ratio.
10. Define inflation accounting.
PARTB - (5 x 16 = 80 marks)
11. (a) Elucidate the relevant concepts and conventions of accounting.
Or
(b) Following are the balances extracted from the books of Deepak as on31st
December 2008. Prepare final accounts as on the date.
Rs. Rs.
Capital 20,000 Drawings 5,000
Cash on hand 5,000 Cash at Bank 8,000
Buildings 20,000 Machinery 96,000
Stock on 1.1.2008 3,000 Sundry Debtors 8,000

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125
Sundry creditors 6,000 Repairs 400
Commission paid 700 Wages 1,700
Rent and Rates 30 Insurance 300
0 Premium
Purchases 60,000 Sales 5,000
Purchases returns 750 Sales returns 400
Furniture and 1,600 Carriage 200
fixtures
Loan to Ram 1,000 Telephone 250
charges
Discount allowed 50 Salaries 600
Bad Debts 350 Discount earned 100

12.(a) Explain the methods of valuation of inventories.

Or
(b) On 1.1.1999 ABC Ltd; purchased five machines for Rs. 20,000 each.
Depreciation is charged at the rate of 10% p.a. on cost. The accounting year ends on
31st December each year. On 31.3.2000 one machine was sold for Rs. 16,000 and
on 30.9.2001 another machine was sold for
Rs. 15,000. A new machine was purchased on 30.6.2002 for Rs. 24,000.Prepare
machinery account and provision for depreciation account for four years.

13.(a) What is cash flow statement? What are its uses? Also, explain the limitations.
Or
(b) The following are the summarized balanced sheets of X Ltd; as on 3st December 2009 and 2010.
Liabilities Assets
st
31 Dec 31stDec
2009 2010 2009 2010

Redeemable Preference shares 10,000 Fixed Asset 41,000 40,000

Equity shares 40,000 40,000 Less: Depreciation 11,000 15,000
General reserve 2,000 2,000 Debtors 30,000 25,000
Profit and loss alc 1,000 1,200 Stock 20,000 24000
Debentures 6,000 7,000
Creditors 12,000 11,000 Prepaid expenses 300 500
Provision for tax 3,000 4,200 Cash 200 3,500
Proposed dividend 5,000 5,800
Bank Overdraft 12,500 6,800
81,500 88,000 81,500 88,000

You are required to prepare

(i) A statement showing changes in working capital.
(ii) A statement of sources and application of funds.

14.(a) Examine the different methods of costing.

Or
(b) The details given below have been taken from the cost records of an engineering
works in respect of the job no. 303Material Rs. 4,010
Wages: Department A: 60 hours @
Rs. 3 per hour Department B:
40 hours @ Rs. 2 per hour
Department C: 20 hours @ Rs.
5 per hour
The overhead expenses are as follows

Page
Variable: Department A: Rs. 5000
126
 for 5000 hours Department B:
Rs. 3000 for 1500hours
Department C: Rs. 2000 for
500 hours
Fixed expenses Rs., 20,000 for 10,000 working hours. Calculate the cost of the job
No. 303 and the price for the job to give a profit of 25% on the selling prices.

15.(a) Explain the advantages and limitations of budgetary control.

Or
(b) An analysis of digital manufacturing co; Ltd submits the following information:
Cost element Variable cost Fixed
cost (% Sales) (Rs)
Direct Material 33.8
Direct Labour 28.4
Factory Overheads 12.6 1,89,900
Distribution overheads 4.1 58,400
General Administration overheads 1.1
66,700 Budgeted sales are
Rs. 18,50,000. You are required to determine;

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127
(i) The break even sales volume
(ii) Profit at the budgeted sales value
(iii) The profit if actual sales
(1) Drop by 10%
(2) Increase by 5% from budgeted sales.

QP 5 :M.B.A. DEGREE EXAMINATION, FEBRUARY 2012.

First Semester
DBA.1606 - ACCOUNTING FOR MANAGEMENT
(Regulation 2007/2009)
Time: Three hours Maximum:
100 marks Answer ALL
questions.

PART A - (10 x 2 = 20 marks)

1. State and explain two accounting concepts.
2. Distinguish between gross profit and net profit.
3. What do you understand by matching principle?
4. What principle is adopted for pricing of inventories in preparing
an Income statement? 5.Explain the concept of funds.
6. What are liquid ratios?
7. What is meant by activity based costing?
8. What is the meaning of contribution and its use in decision making?
9. Define budgetary control.
10. What criteria are used for evaluating performance of profit centres?

PART B - (5 x 16 = 80 marks)
11.(a) Examine the need for accounting for human resources and the approaches to its valuation.
Or
(b) From the following particulars of Mrs. S prepare a trading and Profit and Loss
Account and Balance Sheet for the year ending 31st March, 2009 :
Trial Balance
Particulars Debit Credit
Rs. Rs.
Capital 7,50,000
Cash 40,000
Buildings 4,00,000
Salary 1,10,000
Rent & Taxes 21,000
Opening stock 1,20,000
Machinery 1,20,000
Drawings 40,0
00
Purchases 5,00,000
Sales 7,50,000
Carriage inwards 5,000
Fuel, Gas 37,0
00
Sundry Debtors 2,50,000
Sundry Creditors 1,20,000
Bills Receivable 53,0
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128
 00
Dividend received 28,000
Loan 60,000
Bad debts 2,000
Advertisement 16,000
Reserves 6,000
17,14,000 17,14,000
Adjustments:
(i) Closing stock Rs. 1,40,000
(ii) Write off Rs. 10,000 depreciation
(iii) Salaries outstanding is Rs. 10,000
(iv) Rs. 1,000 of advertisement relates to the next accounting year
(v) Transfer Rs. 4,000 to reserves.
12. (a) (i)What are intangible assets? Give examples .. (8)
(ii) State the methods of providing depreciation for
tangible fixed assets and intangible assets. (8)

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129
 Or
(b) On July 1, 2007, a company purchased a machine for Rs. 3,90,000 and spent Rs.
10,000 on its installation. It decided to provide depreciation@ 15 % on the written
down value method. On November 30, 2010 the machine was sold for Rs. 1,00,000.
The Company closes its books every
Year on March 3l. Show the. Machinery alcfor the above period giving the value of
the machinery every year and the profit or loss on disposal of the machine.
13. (a) What is the need for analysis of financial statements? What are the types of such analysis?
Or
(b) From the following Balance Sheets of XYZ Ltd. on 31St December, 2008and
2009, you are required to prepare funds flow statement.
Liabilities 2008 2009 Asse 2008 2009
ts
Share capital 1,00,0 1,00,000 Goodwill 12,000 12,00
00 0
General reserve 14,000 18,000 Buildings 40,00 36,000
0
Profit and Loss alc 16,000 13,000 Plant 37,000 36,00
0
Sundry creditors 8,000 5,400 Investment 10,00 11,000
0
Bills payable 1,200 80 Stoc 30,00 23,400
0 k 0
Provision of 16,00 8,000 Bills receivable 2,000 3,20
taxation 0 0
Provision for 400 60 Debtors 18,00 19,000
doubtful 0 0
Debts 6600 15200 Cash 6,600 15,20
0
1,55,600 1,55,800 1,55,60 1,55,800
0
The following additional information has also been given:
(i) Depreciation charged on plant was Rs. 4,000 and on BuildingRs.4,000
(ii) {Provision for taxation of Rs. 19,000 was made during the year 2009
(iii) Interim dividend of Rs. 8,000 was paid during the year 2009.
14. (a) How are costs classified? Briefly describe each of such cost?
Or
(b) The standards for producing 1 unit of a component X is 5 kgs of raw materials
at Rs. 100 per kg. During a month 1,000 units of X was manufactured. 5,300 kgs.of
raw materials was purchased forRs. 5,83,000 and 500 kgs. of the materials
remained in stock unused. Calculate the material variances.
15. (a) Discuss the merits and budgeting as a tool of planning of control.
Or
(b) Discuss the merits and demerits of Responsibility accounting. (16)

QP 6 :MBA DEGREE EXAMINATION ,JANUARY 2012.

FIRST SEMESTER
BA 9206 - ACCOUNTING FOR MANAGEMENT
(Regulation 2009)
Time : Three hours Maximum : 100 Marks
Answer all questions.
Page
130
 PART A-(10 x 2 = 20marks)
1. What is meant by measurement concept?
2. Explain management accounting information.
3. What is profit and loss account?
4. What is a compound journal entry?
5. What are the objectives of financial statements?
6. What does Ratio Analysis mean?
7. What are the function of cost accounting?
8. Definition of standard costing.
9. What is standard costing?
10. What are the uses of accounting software’s?

PART –B (5 x 16 = 80marks)
11. (a) State the functions of accounting. Elaborate in detail.
Or
(b) What are the advantages of Human resource accounting ? Explain.

12. (a) From the following ledger balance prepare Trial Balance.
Opening stock Rs. 30,000; purchase Rs. 3,00,000, Closing stock
Rs. 14,000 debtors Rs.1,20,000, Cash Rs.3,000, Discount
allowed Rs.3,400, Bank Rs. 5,600, creditors

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131
 Rs. 90,000.Sales rs. 4,20,000, Salaries Rs.42,000, Rent Rs.9,000, Postage
Rs. 4,500, Taxes Rs.1,500, Machinery Rs. 1,20,000, Drawings Rs. 20,000,
Capital Rs. 1,52,000, Purchase return Rs. 6,000 sales returns s. 9,000.
Or
(b) From the following balance take out at the close of year ended 31st
December 2002,
prepare a profit & loss account.

Amount Amou
nt
Gross profit 1,02,000 discount (dr.) 1,000
Carriage outwards 5,000 Apprentice Premium (cr.) 3,00
0
Salaries 1,10,000 Printing and Stationeries
500
Rent 2,200 Rates and Taxes 700
Insurance 1,800 Travelling 400
Premium expenses
Bad debts 4,200 Depreciation 12,00
0
Sunday trade 600 Repairs and 5,600
expenses maintenance .

13. (a)Discuss the importance of financial statement.

Or
(a) The Balance sheet of Shriram Ltd., as on 31.12.2008 is as follows:
Liabilities Rs. Assets Rs.
Equity share capital 5,00,000 Land and buildings 6,00,000
Preference capital 2,00,000 Plant and machinery 5,00,000
Reserves and surplus 3,00,000 Stock in trade 2,40,000
Debentures 4,00,000 Sundry debtors 1,95,000
Sundry creditors 1,50,000 Cash in hand 60,000
Bank overhead 50,000 Prepaid expenses 5,000

16,00,000 16,00,00
0

Calculate:
(i) Current Ratio,
(ii) Liquid Ratio,
(iii) debt-enquiry Ratio,
(iv) capital gearing Ratio,
(v) Proprietary Ratio.

14. (a) Describe various methods of cost accounting.

Or
(b) A Ltd manufactures products X and Y. During January 1998 it expects to
sell 10,000 kg of X and 40,000 kg of Y at Rs. 20 and Rs 10 respectively. Direct
materials P,Q and S are mixed in equal proportions to product X and materials
Q,P&S are mixed in the ratio of 3 : 5 : 2 to product Y. There is no loss of weight

Page
in production.
132
 Actual and Budgeted stocks in quantities and costs for the month are as follows:
Opening stock Closing stock Anticipated
cost
(kg) (kg) (per kg) Rs.
Material P- 3,000 2,000 5.5
Q- 2,000 4,000 5.0
R-20,000 6,000 1.0
S-10,000 12,000 3.5
Product X- 2,000 1,000 -
Y-10,000 12,000 -
You are required to prepare
(i) The production budget and
(ii) Materials purchase budget including the expenditure on raw materials for January

15. (a) Explain the accounting software.

Or
(b) How important is an accounting system to business? Explain.

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133
 QP 7 :MBA DEGREE EXAMINATION , MAY/JUNE 2012.
FIRST SEMESTER
BA 9206 - ACCOUNTING FOR MANAGEMENT
(Regulation 2009)
Time : Three hours Maximum : 100 Marks
Answer all questions.
PART A-(10 x 2 = 20marks)

1. What is the position of ledger in book-keeping?

2. What is Inflation Accounting?
3. Define is preferential Allotment.
4. Write Adjustments relating to the company final accounts.
(a) Interest outstanding on Debentures
(b) Preliminary expenses.
5. Write the importance of analysis and interpretation of financial statements.
6. Define
(a) Earnings per share (EPS)
(b) Returns on assets ratio (ROA)
7. Write about activity based costing.
8. What is Idle Time variance?
9. Write the advantages of computerized
accounting system. 10.Write the advantages
of codification.
PART B-(5 x 16=80 marks)
11. (a) What is the nature of accounting? I n what ways accounting information is
used to creditors, Investors and employees of a business enterprise?
Or
(b) Explain the importance of various accounting concepts and conventions.
12. (a) Pally hotels limited offered 1,00,000 Equity of the nominal value of Rs. 10
each for public subscription at Rs.12.
The amounts payable on the shares were on application Rs. 4.50; On allotment (including
premium) Rs
.4.50; On first and final call s. 3.00. The actual subscription was only for
90,000 shares. All money payable for shareholders was received expect from
Sudhaker who had taken 1,000 shares but failed to pay the final call. His
shares were forfeited and Re-issued to prabakar at Rs. 60 each.
Show Journal entries in the books of company in respect of the above (Including cash
transaction)
Or
(b) Write short notes on:
(i) Buy back of securities
(ii) Employees Stock Option
(iii) Statutory books
(iv) Shares allotted on prorate basis.

13.(a) From the following balance sheet, You are required to prepare a funds flow statement.
BALANCE SHEET
Liabilities 31.12.0931.12.10 Assets31.12.0931.12.10
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134
Share capital 10,000 15,000 Fixed assets 10,000 20,000
Provision for tax 2,000 3,000 Current assets 13,000 14,500
Proposed dividend 1,000 1,500
Profit and loss A/c 4,000 6,000
Trade creditors 4,000 6,000
Outstanding Expenses 2,000 3,000

23,000 34,500 23,000 34,500

Additional information:
(i) Dividend paid during 2010 is Rs. 2,000.
(ii) Tac Paid during 2010 is Rs. 2,500.
Or
(b) Explain the sources of funds and applications of funds to be presented in fund flow statement.

14.(a) The sales turnover and profit during two years

were as follows: Year Sales(Rs)
Profit(Rs)
2000 1,40,000 15,000
2001 1,60,000 20,000
You are required to calculate:

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135
 (i) P/v Ratio
(ii) Sales required to earn a profit of Rs. 40,000
(iii) Profit when sales are Rs. 1,20,000.
Or
(b) “cost Accounting is an essential tool of Management”. Give you comments on the statement.

15. (a) Discuss the significance of computerized accounting system.

Or
(b) Explain the importance of prepackaged accounting software’s.

QP 8 :M.B.A. DEGREE EXAMINATION, AUGUST 2011.

First Semester
DBA 1606 - ACCOUNTING FOR MANAGEMENT
(Regulation 2009/2007)
Time: Three hours Maximum:
100 marks Answer ALL
questions.
PART A - (10 x 2 = 20 marks)
1. What are the objectives of accounting?
2. Differentiate financial and cost accounting.
3. What are intangible assets?
4. What are accrued revenues?
5. List some demerits of job order costing ..
6. "Liquidity is necessary but too much of liquidity is harmful" - Comment on this statement.
7. What is standard costing?
8. What is CVP analysis?
9. What are the advantages of zero based budgeting? .
10. What is responsibility accounting?
PARTB - (5 x 16 = 80 marks)
11. (a) Explain in detail the principles of accounting.
Or
(b) The following is the trial balance of Shiva traders on December 2010.
Particulars . Debit Credit
(Rs.) (Rs.)
Cash in hand 1,500
Cash at bank 3,000
Purchases 1,10,000
Returns Inwards 1,500
Wages 20,000
Power and Fuel 8,000
Carriage Outwards 6,000
Carriage Inwards 5,000
Opening Inventory 6,000
Land 10,000
Building 80,000
Page
136
Machinery 30,000
Patents 15,000
Salaries 12,000
Sundry expenses 6,000
Insurance 1,000
Drawings 8,000
Accounts receivable 15,000
Sales 2,50,000
Returns outwards 2,000
Capital 56,000
Accounts payable 30,000
Prepare trading and P and L account for the year ended and balance sheet as on
31st December, 2010. Adjustments to be made are given below:
(i) Closing inventory as on 31st December 2010 is Rs. 20,000.
(ii) Provision for bad and doubtful receivables at 5%on debtors.
(iii) Outstanding salary Rs. 5,000

Page
137
(iv) Outstanding wages Rs. 3,000
(v) Depreciation at 10%on all assets.
12. (a) Write short notes on the following:
(i) Inflation accounting.
(ii) Human Resource Accounting
(iii) Inventory Pricing.
Or
(b) A firm purchases a plant for a sum of Rs.ll,OOO on 1st January,
2000.Installation charges are Rs. 2,000. Plant is estimated to have a scrap value of
Rs. 1,000 at the end of its useful life of 5 years. Prepare a plant account for five
years charging depreciation according to straight line·
Method.
13.(a)Explain the following
with examples: (i)Du Pont
Analysis
(ii)Debt equity Ratio
(iii)Return on Equity
(iv)Return on capital
Employed (v)Dividend
Payout ratio.
Or
(b)Balance of MisRam andsyam enterprises ason Dec. 2009 andDec. 2010 were as follows:
Particulars 31st st
Dec.Particu 31st Dec.31st
Dec.31 lars Dec.
2009 2009 (Rs.) 2009 (Rs.) 2009
(Rs.) (Rs.)
Creditors 80,000 88,000 Cash 20,000 14,000
Shyam'sloa 50,000 0 Debtors 60,000
n
1,00,000
Loan from 80,000 1,00,000 Stock 70,000 50,000
bank
Capital 2,50,000 3,06,000 Machinery 1,60,0001,10,000
Land 80,000 1,00,000
Buildings 70,000
1,20,000
4,60,000 4,94,000 4,60,000
4,94,000
During this year, the machine costing Rs.20,000 (total depreciation written off
Rs.6,000) was sold for Rs. 10,000. The provision for depreciation as on 1st Jan
2010 was Rs.50,000 and on 31st Dec. 2010 wasRs.80,000. Net profit for the year
ended 31st Dec. 2010 amounted to
Rs.90,000. Prepare cash flow statement.
14. (a) Differentiate the following with examples:
(i) Opportunity Cost and Incremental cost
(ii) Controllable and Uncontrollable cost
(iii) Sunk and Committed cost
(iv) Value added and non value added cost.
Or
(b) The following cost data of More Mileage Limited for the month of August
are furnished. Prepare a cost sheet for the month of August, 2003.
Particulars Rs.
Page
138
Sales 77,10,19
0
Stock of Materials :
As on 31.07.2003 32,75,40
1
As on 31.08.2003 37,98,05
7
Work in
Progress: As 15,65,71
on 2
31.08.2003
As on 31.07.2003 14,96,83
2
Finished Goods:
As on 31.07.2003 20,74,12
3
As on 31.08.2003 21,45,67
8
Wages 16,57,10
4
Salaries 5,09,876
Selling Expenses 2,34,567
Purchases 42,67,89
0
Particulars Rs.
Managerial
Remuneration 1,74,962
Power and Fuel 4,32,109
Depreciation on
Plant and Machinery 1,34,678

Page
139
Factory Building 54,106
Office Equipment 21,654
Factory Lighting 15,876
Office Lighting 4,679
Salesman Salaries 43,210
Advertisement 1,46,8
90

15.(a) A firm has 2 products Band C. The particulars of the price per unit, variable
cost per unit and percentage of share in the total sales volume
are given below in
table 1. Table 1.
Product Mix I
Products Selling price Variable cost %of
share
B Rs.40 Rs.16 40%
C Rs.50 Rs.20 60%

The total fixed costs during the year amount to Rs. 1,00,000. The total volume of
sales is Rs.8,00,000. The company wants to drop product B as · it is yielding less
contribution per unit. Instead it wants to add product D, if D is added, the new fixed
cost is likely to be Rs.1,25,000 and the sales volume is likely to increase to Rs.
9,00,000. The new scenario is given in table 2.
Table 2. Product Mix II
Products Selling price Variable cost %of share
C Rs.50 Rs.20 70%
D Rs.60 Rs.24 30%
Do you recommend the change?
Or
(b) A firm has a fixed cost of Rs.50,000; selling price per unit is Rs. 50 and. variable cost per unit is
Rs.25.
Present level of production is 3500 units
(i)Determine break even point in terms of volume and
also volume. (ii)Calculate the margin of safety.
(iii) What is the change in break even point and margin safety if fixed costs
increase from Rs.50,000 to Rs.60,000? (7)

QP 9 : M.B.A. DEGREE EXAMINATION, FEBRUARY 20.11.

First Semester
DBA 160.6 - ACCOUNTING FOR MANAGEMENT
(Regulation 2009/2007)
Time: Three hours Maximum:
10.0.marks Answer ALL
questions.
PART A (10. x 2 = 20 marks)
1. Define Accounting cycle.
2. What is meant by management accounting?
3. Define balance sheet.
4. Differentiate between cost accounting Vs financial accounting (any two differences).

Page
140
5. Write the Human Resource Accounting Functions.
6. What is meant by inflation accounting?
7. Draw a Du Pont Chart.
8. Write the Debt-equity ratio.
9. Describe the responsibility accounting.
10.. Differentiate between cost center and cost unit.
PART B (5 x 16 = 80 marks)
11. (a) Explain accounting concepts (any four) that underline the process of
recording the transactions in the books of accounts.
Or
(b)Journalise the following transactions :
Date Rs.
2010 Jan. 1 Bought goods on credit 200
from Raju
2010 Jan. 2 Goods returned by 25
Murthy
2010 Jan. 3 Paid carriage 50
2010 Jan. 4 Received cash from 500
Govind
2010 Jan. 5 Paid Insurance Charges 50
2010 Jan. 6 Sale of type writer 250

Page
141
2010 Jan. 7 Sold goods to Hari 150
2010 Jan. 8 Commission received in cash200

12. (a) Explain the methods of depreciation:

(i) Straight line method and
(ii) Diminishing balance
method. Also illustrate.
Or
(b) From the following trial balance of Vijaya Lakshmi. Prepare trading and
profit and loss NC and balance sheet for year ended 31st December 2010.
Particulars L. Debit Credit
F.
Sundry Debtors 10,000
Sundry creditors 7,000
Bills payable 15,000
Sales 60,000
Opening stock 6,000
Purchases 37,000
Returns 2,000 1,000
Discount 1,000
Insurance 1,000
Carriage 2,000
Wages 1,500
Salaries 1,500
Octroi 50
0
Advertising 1,000
Furniture 4,000
Postage 500
Cash at Bank 12,000
Drawings 2,000
Loose tools 3,000
Provision for bad 500
debts
Bad debts 40
0
Capital 25,50
0
Petty expenses 600
Buildings 15,000
Free hold property 5,000
Machinery 5,000
1,10,000 1,10,00
0
Adjustments :
(i) Closing stock Rs. 9,000.
(ii) Depreciation on machinery 5% Furniture 10%.
(iii) Interest on capital 6%.
(iv) Outstanding salaries and wages Rs. 500, Rs. 300 respectively.
(v) Written offRs. 300 for further bad debts.
(vi) Creation provision for doubtful debts 5%.
13. (a) Explain:
(i) Gross Profit Margin
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142
eli) Inventory Turnover Ratio
(iii) Current ratio and quick ratio
(iv) Earnings per share (EPS).
Or
(b) Following is the balance sheet and profit and loss Ale of Sidhartha Ltd.for the
year ending Dec. 31, 2009. Balance sheet as on 31StDecember 2009.
Particulars Rs. Particulars Rs.
Share capital Fixed assets 1,10,000
(Rs. 10 shares each) 40,000 Liquid assets 30,000
Reserves and 30,000 Other current 50,000
Surplus assets
Overdraft (short 40,000
term)
Current liabilities 80,000
1,90,000 1,90,000
Profit and Loss NC for the year ending 31st December 2009.
Particulars Rs. Particulars Rs.
To Opening Stock 20,000 By Sales 2,80,000

Page
143
 To purchases 2,20,000 By Closing Stock 30,00
0
To Expenses 30,000
To Net Profit 40,000
3,10,000 3,10,000

You are required to comment on the general financial condition of thecompany

taking into account relevant ratios.
14. (a) What are the different methods of costing? Explain in brief.
Or
(b) Explain Inventory pricing and valuation methodologies with suitable example.
15. (a) Explain the concept of budget? What are its advantages? Explain the
main tool for implementing budgets.
Or
(b) The sales turnover and profit during two years
were as follows: Year Sales
Profit
Rs. Rs.
2009 1,40,000 15,000
2010 1,60,000 20,000
You are required to calculate:
(i) PVratio
(ii) F.C.
(iii) Sales required to each a profit ofRs. 40,000
(iv) Profit when sales are Rs. 1,20,000.

QP 10: ANNA UNIVERSITY OF TECHNOLOGY, COIMBATORE

MBA DEGREE EXAMINATIONS : DEC
10/ JAN 11 FIRST SEMESTER
108390005 – ACCOUNTING FOR MANAGERS
TIME : 3 hours MAX.MARKS : 100
PART –A(10 x 2 = 20 MARKS)
ANSWER ALL QUESTIONS
1. Define management accounting.
2. What are the various types of financial statements?
3. Write a notes on IFRS.
4. What is the significance of operating ratio?
5. What are meant by product costs?
6. What is Activity based costs?
7. What is a master budget?
8. Give the formula to find out contribution value.
9. Define slandered Costing.
10. What are the components of direct materials cost variance(DCMV)?
PART BR(5x12 = 60 MARKS)
ANSWER ALL QUESTIONS
11. Explain the basic accounting concepts and conversations.
12. From the following trial balance and additional information. You are required

Page
144
to prepare a trading account, profit & loss account and balance sheet. Trial balance
as on 31st December, 2009.
Particulars Dr. Amount (Rs.) Cr.Amount(Rs.)
Capital 20000
Sunday debtors 5400
Drawings 1800
Machinery 7000
Sunday creditors 2800
Wages 10000
Purchases 19000
Opening stock 4000
Bank balance 3000
Carriage charges 300
Salaries 400
Rent and taxes 900
Sales 29000

Page
145
 51800 51800
Additional information
1. Closing stock Rs 1200
2. Outstanding rent and taxes Rs 100
3. Charge deprecation on machinery at 10%
4. Wages prepaid Rs 400

13.Balance sheet of ABC on 01.01.08 and 31.02.08 were as follows:

Balance sheet
Liabilities 01.01.08 Rs. 31.12.08 Rs. Assets 01.01.08 Rs. 31.12.08 Rs.
Creditors 40,000 44,000 Cash 10,000 7,000
Mrs.A’s 25,000 -------- Debtors 30,000 50,000
Loan
Loan From 40,000 50,000 Stock 35,000 25,000
Bank
Capital 1,25,000 1,53,000 Machinery 80,000 50,000
Land 40,000 50,000
Building 35,000

2,30,000 2,47,000 2,30,000 2,47,000

During the year a machine costing Rs. 10,000 (accumulated depreciation Rs 3,000)
was sold for Rs 5,000. The provisions for depreciation against machinery as on
01.01.08 was Rs. 25,000 and 31.12.08 Rs. 40,000 Net profit for the year 2008
amounted to Rs. 45,000. You are required flow statement.

14. Explain the advantages and Limitations of ration analysis.

15.ABC Ltd., A newly started company wishes to prepare cash budget from
January. Prepare cash budget for the first six months from the following
estimated revenue and expenses:
Months Total Sales Materials Rs. Wages Rs. Overheads
Rs. Rs. Selling &
distribution
Rs.
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 28,000 14,000 4,600 3,400 900
April 36,000 22,000 4,600 3,500 1,000
May 30,000 20,000 4,000 3,200 900
June 40,000 25,000 5,000 3,600 1,200

Cash balance on 1st January was Rs. 10,000. A new machinery is to be installed at
Rs. 20,000 credit, to be repaid by two installments in March and April.
Sales commission @ 5% on total sales is to be paid within a month following actual sales.
Rs. 10,000 being the amount of 2nd call may be received in March. Share premium amounting

Page
to Rs.
146
2,000 is also obtained with the 2nd call.
Period of credit allowed by suppliers : 2 months
Period of credit allowed to customers
: 1 month
. Delay in payment
of overheads : 1 month
Delay in payment of wages :½
month Assume cash sales to be 50% of total sales.

Due to industrial depression, a plant is running, at present , at 50% of its

16.
capacity. The following details are available.
Cost of production per unit
Direct material Rs. 2

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147
 Direct labour Rs. 1
Variable overhead Rs. 3
Fixed overhead Rs. 2
Rs. 8
Production per month 20,000 units
Total cost of production Rs. 1,60,000
Sale price Rs. 1,40,000
Loss Rs. 20,000
An exporter offers to buy 5,000 units per month at the rate of Rs. 6.50 per unit
and the company hesitates to accept the offer for fear of increasing its operating
losses.
Advise whether the company should accept the offer.

17. Explain the advantages of standard costing techniques.

18. From the following particulars compute

(a) Material cost variance
(b) Material price variance
(c) Material usage variance
Quantity of materials purchased
– 3000 units Value of material
purchased – Rs. 9000
Standard quantity of required per tonne of
output – 30 units Standard rate of materials –Rs.
2.50per unit
Opening stock materials –
nil Closing stock materials
– 500 units Output during
the period- 80 tonnes.
PART – C
19. Compulsory Question
From the following data you are required to present to the management
(i) The marginal cost of products X And Y and the contribution per unit.
(ii) The total contribution and profit resulting from each of the suggested sales mixtures.

Direct materials Rs. Per unit Direct wages Rs. Per

unit
Product X 10.5 Product X 3.00
0
Product Y 8.50 Product Y 2.00
Fixed Rs. 800 selling Price :
expenses(Total)
Variable expenses is Product X 20.00
100% of Direct
wages per product
Product Y 14.50
Suggested sales No.of
mixtures Units Product Y
Product
X
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148
 (a) 100 120
(b) 150 150
(c) 200 100

QP 11: M.B.A. DEGREE EXAMINATION, NOVEMBER/DECEMBER 2010

First Semester
BA 9206 — ACCOUNTING FOR MANAGEMENT
(Regulation 2009)
Time : Three hours Maximum :
100 Marks Answer ALL
questions
PART A — (10 × 2 = 20 Marks)
1. What is book keeping?
2. Define Financial Accounting.
3. What are the uses of balance sheet?
4. Define closing stock.
5. State the meaning of financial statement.
6. What is funds flow statement?
7. What is cost accounting?
8. What is multiple costing?
9. What is material mix variance?
10. What does variance analysis mean?

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149
 PART B — (5 × 16 = 80 Marks)

11. (a) Explain the objectives of Financial Accounting. [Marks

16] (Or)
(b) Explain the advantages of Human Resource Accounting. [Marks 16]

12.(a) From the following balances extracted at the close of the year ended 31st
December 2008, prepare the Profit and Loss Account as at that date.
Rs.
Gross Profit 1,53,000
Carriage Outward 7,500
Salaries 27,500
Discount (Dr.) 1,500
Apprentice Premium (Cr.) 4,500
Rent 3,300
Travelling Expenses 600
Fire Insurance Premium 2,700
Rates and Taxes 1,050
Printing and stationery 750
Trade Expenses 900
Bad debts 6,300 [Marks
16] (Or)
(b) From the following particulars, prepare a balance sheet as at
31stDec 2008. [Marks
16] Rs.
Capital 75,000
Buildings 82,500
Furniture 3,750
Bills Receivable 5,250
Sundry Debtors 30,000
Bills Payable 3,750
Sundry 23,700
Creditors
Machinery 6,750
Loan to 'B' 7,500
Investments 4,500
Cash in Hand 300
Cash at Bank 5,250
Drawings 4,500
Net Profit 58,350
Stock 10,500 [Marks
16]

13.(a) Discuss the importance of Financial Statements. [Marks

16] (Or)
(b) From the following Balance Sheets prepare schedule of changes
in [Marks
16] Working Capital :

Page
Liabilities Dec. 2008 Dec. 2009 Assets Dec. 2008 Dec.

150
 Rs. Rs. Rs. 2009
Rs.
Share Capital 2,00,000 2,50,000 Cash 30,000 47,000
Creditors 70,000 45,000 Debtors 1,20,000 1,15,00
0
Retained 10,000 23,000 Stock 80,000 90,000
Earnings
Land 50,000 66,000
Total 2,80,000 3,18,000 2,80,00 3,18,000
0

14. (a) Explain the differences between Job costing and Process costing.
[Marks
16] (Or)
(b) Explain the advantages of standard costing. [Marks 16]

15. (a) Discuss the significance of Computerized Accounting

System. [Marks
16] (Or)
(b) Explain the advantages of Prepackaged Accounting Software. [Marks 16]

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 QP 12: M.B.A. DEGREE EXAMINATION, AUGUST 2010.
First Semester
DBA 1606 - ACCOUNTING FOR MANAGEMENT
(Regulation 2009/2007)
Time: Three hours Maximum: 100 marks
PART A - (10 x 2 = 20 marks)
1. List down and define any two accounting conventions.
2. Differentiate management accounting from financial accounting.
3. List down the merits of straight line method of providing depreciation.
4. What are the concept of inflation accounting?
5. Differentiate between depreciation and amortization.
6. What do you mean by budgetary control.
7. Give examples for allocation of overheads.
8. Give examples for apportionment of overheads.
9. List down the assumptions on which marginal costing is carried out.
10. Explain the concept of activity based costing.
PART B - (5 x 16 = 80 marks)
11.(a) From the following particulars taken from Raj & co prepare trading, profit
and loss account and balance sheet as on 31-3-2010
S.No Particulars Debit Credi
t
1 Capital 1100
0
2 Bank 500
3 Plant and machinery . 3500
4 Land and building 4200
5 Debtors 1150
6 Cash 250
7 Purchase and sales 2000 7500
8 Purchase return and sales 200 150
return
9 Bills receivable 150
10 Bills payable 200
11 Wages 240
0
12 Salaries 1200
13 Creditors 650
14 Discount 100
15 Stock on 1· 4· 2009 700
16 Furniture 500
17 Carriage inwards 100
18 Carriage outwards 200
19 Advertising 150
20 Travelling Expenses 50
21 Loans 2700
22 Van 5000
23 Telephone 50
Total . 22300 2230
0

Adjustments
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152
(i)Stocks on 31-3-2010 was
valued at Rs.1500 (ii)Wages
outstanding Rs.100
(iii) Salaries prepaid Rs.200
(iv) Provide depreciation on furniture by 10%
Or
(b)List down and explain with hypothetical examples the various ratios that can
be used for carrying out a financial statement analysis.
12. (a) Explain the various accounting concepts.
Or
(b) A firm purchases a plant for a sum of Rs.10000 on 1st January 2010.Installation
charges are Rs.2000. Plant is estimated to have a scrap value of Rs.1000 at the end
of its useful life of five years. You are required to prepare plant account for five
years charging depreciation according to straight line method.
13. (a) The cost details were extracted from ABC Ltd's cost record for the month of January 2010.
Rs.
Stock of raw materials as on 1· 1· 2010 1000
Stock of raw materials as on 31· 1· 2010 800 .

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153
Materials purchased 2500
Direct Wages 1700
Direct expenses 800
Closing Stock of WIP 500
Opening stock of WIP 300
Factory expenses 700
Office and administrative overheads 600
Stock of finished goods as on 1· 1· 2010 500
Stock of finished goods as on 31· 1· 2010 400
Selling and administrative expenses 450
Charge profit 20% on cost of sales, prepare a cost sheet for the above period.
Or
(b) List down the difference between fund flow and cash flow analysis. Briefly
explain the-uses of cash flow analysis.
14. (A) briefly explain the objectives and the advantages of carrying out budgetary control.
Or
(b) The following details are given at 70% production capacity. Prepare a flexible
budget for 50% and 80% production capacity. If the output at full capacity is 10000
units, calculate the total cost and cost per unit.
Variable expenses : Rs.
Materials 1400
Labour 770
Other 210
expenses
500
Fixed
expenses :
Administrative expenses
Salaries 300
Depreciation 200
Semi-Variable expenses:
Selling and distribution expenses (30% 600
fixed)
Repairs and maintenance (40% 400
variable)
15. (a) Cost figures of ABC ltd are given below,
Cost elements Variable Cost(% on Fixed cost
sales) Rs.
Direct Material 33
Direct Labour 22
Factory 12 1500
0
overheads
Administrative 7
4000
0
expenses
Selling and 1 2000
0
distribution
expenses
Expected sales of the year is Rs. 500000. You are required to calculate
(i) PN ratio
(ii) Break even point
(iii) Profit on the expected sales
(iv) Expected sales to earn a profit of Rs. 100000
(v) Margin of safety available
Page
154
 Or
(b) A scooter manufacturer buys certain component at Rs. 26 per unit. If he
manufactures the same product he has to incur a fixed cost of Rs.I0000and variable
cost of Rs.20 per unit. When can the manufacturer make on his own or when can he
buy from outside. When the requirement is 5000units will you advise him to make
or buy.

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155
 QP 13 :M.B.A. DEGREE EXAMINATION, JUNE 2010
First Semester
BA 9206 — ACCOUNTING FOR MANAGEMENT
(Regulation 2009)
Time : Three hours Maximum :
100 Marks Answer ALL
Questions
PART A — (10 × 2 = 20 Marks)

1. Explain GAAP.
2. Explain the Cost Concept.
3. Explain Capital Reserves.
4. What is Corporate Governance?
5. State the limitations of ratio analysis.
6. Give the three components of a cash flow statement.
7. Explain briefly product and period costs.
8. What is activity based management?
9. What is management reporting?
10. Distinguish between custom with per-packaged software.

PART B — (5 × 16 = 80 Marks)
11. (a) Explain the purpose and uses of management accounting systems. [Marks 16]
(Or)
(b) Write an essay on inflation accounting. [Marks 16]
12. (a) The following balance has been extracted from the books of Mr. Ganges
on 31.03.2010. [Marks 16]
Rs. Rs.
Capital 8,00,000 Bad debts 5,000
Drawings 60,000 Sundry creditors 95,000
Machinery (1.4.2009 ) 2,00,000 Sales 12,00,000
Machinery additions (1/7/09) 50,000 Purchase
returns 10,000 Stock on 1.4.2009 1,50,000
Provision for bad and
doubtful debts (1/4/09) 8,000
Purchases 8,20,000 Commission received
16,000 Carriage on purchases
20,000 Sundry debtors
52,000
Furniture and fixtures 2,00,000
Insurance charges
10,000 Carriage on sales 25,000
Salaries 2,10,000 Sundry expenses
8,000 Cash in hand 62,000
Printing and stationery 12,000 Cash
at bank 2,05,000 Rent, rates and taxes
40,000
Page
156
 i) Adjustments
(i) Closing stock Rs. 1,40,000.
(ii) Create provision for bad and doubtful debts at 5% on sundry debtors.
(iii) Provide depreciation of 20% on plant and machinery and 10% on
furniture and fixtures. (iv Insurance paid in advance is Rs. 1,000.
(v) Commission receivable in arrears is Rs. 5,000.
(vi) Salaries payable are Rs. 15,000. Prepare trading account, profit and loss
account and balance sheet for the year ending 31-3-2010.
(Or)
(b) Distinguish between
i) Current assets and fixed assets
ii) Tangible assets and intangible assets
iii) Current liabilities and long-term liabilities
iv) Gross profit and operating profit
v) Nominal, real and personal accounts. [Marks 16]

13.(a) From the following summary of cash account of Y Ltd., prepare cash flow
statement for the year ended March 31 in accordance with AS-3 using direct
method. The company does not have any cash equivalent.
Rs. in '000 Rs. in '000
Opening Balance 50 Payment to 2000
suppliers
Issue of equity 300 Purchase of fixed 200
shares assets

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157
Receipts from 2800 Overhead 200
customers expenses
Sale of fixed assets 100 Wages and salaries 100
Tax 250
Dividends 50
Repayment of 300
bank loan
Closing balance 150
Total 3,25 Total 3,25 [Marks
0 0 16]
(Or)
(b) Assume that there are two firms A and B, each having total assets amounting to
Rs. 4,00,000 and average PAT of 10% on total assets. Firm A has sales of Rs.
4,00,000 whereas firm B has a sales of Rs. 40,00,000.
Determine the Ros of firms A and B. Suppose firm A uses equity capital of Rs. 2 lake and B Rs.
2.5 lake in
financing their total assets, what financi leverag Calcula their Roe. 16
is their al e? te [Marks ]
14. (a) Discuss the following:
(i) Relevant costs
(ii) Incremental costs
(iii) Differential costs
(iv) Sunk costs
(v) Opportunity costs. [Marks 16
]

(Or)
(b) Explain the pros and cons of ABC system. [Marks 16]

15. (a) Explain the significance of computerized accounting system.

[Marks
16] (Or)
(b) Explain the advantages of per-packaged accounting software. [Marks 16]

QP 14 : M.B.A. DEGREE EXAMINATION, FEBRUARY 2010.

First Semester
DBA 1606 -ACCOUNTING FOR MANAGEMENT
(Regulation 2009/2007)
Time: Three hours Maximum:
100 marks Answer ALL
questions.
PART A- (10 x 2 = 20 marks)
1. Define "Management Accounting".
2. Define "Trial Balance".
3. Define "Subsidiary Books".
4. Define "Depreciation".
5. Define "Funds Flow Statement".
6. What is Ratio analysis?
7. Define "Cost Accounting" ..

Page
158
 8. What is Job costing?
9. Define "Responsibility Accounting".
10. Define "Budget".
PART B - (5 x 16 = 80 marks)
11. (a) Explain the accounting concepts in detail.
Or
Factory overhead is 80 percent of wages and administration overhead25% of factory cost.
The value of the executed jobs during 2003 was Rs. 4,10,000. Prepare
(i) Consolidated completed jobs account showing the profit made or loss incurred
on the jobs, and also (ii) consolidated work-in-progress alc.
Or
(b) A product passes through the distinct processes to completion. These processes
are numbered respectively 1, 2 and 3. During the week-end15th January 2005, 500
units are produced. The following information is obtained:
Particulars Process 1 Process 2 Proces
s3
Rs.. Rs. Rs.
Direct 3,000 1,500 1,000
materials
Direct labour 2,500 2,000 2,500
Direct 500 10 500
expenses 0
The overhead expenses for the period were Rs. 1,400 appointed to the processes on the basis of
wages.

Page
159
No work-in-progress or process stocks existed at the end of the week. Prepare process accounts.
12. (a) What is a responsibility centre? Explain the types of responsibilitiescentres.
Or
(b) ITC Ltd. have prepared the budget for the production of 1lakh units of the only
commodity manufactured by them for a costing period as under:
Rs. (lakh)
(i) Raw material 0.75
(ii) Direct labour 0.10
(iii) Direct expenses 2.52

Current ratio 2.9 times

Net sales to inventory 4.6 times
Average collection period 90 days
Fixed assets to net worth 53.2%

Proforma Balance sheet.

Net worth ? Fixed assets
? Long term debt ?
Cash ?
Current debt ? Stock

? Sundry
debtors ?
Or
(b) From the following information relating to Nirma Ltd., prepare fundsflow statement.
(In thousands of rupees)
Liabilities 2003 2004 Assets 2003 200
4
Share capital 300 400 Cash 30 90
Reserve 100 50 Accounts 105 150
receivable
Retained 30 60 Inventories 150 195
earnings
Accounts 45 135 Fixed assets 190 210
payable
475 645 475 645
The company issued bonus shares for Rs. 50,000 and for cash Rs.
50,000.Depreciation written off during the year Rs. 15,000.

14. (a) The following information for the year ended Dec. 31, 2003 is obtained
from the books and records of a factory :
Particulars Completed jobs Work-in-
progress
Rs. Rs.
Raw materials supplied from 90,000 30,000
stores
Wages 1,00,000 40,0
00
Chargeable expo 10,000 4,000
Materials transferred to work- 2,00 2,000
in-progress 0
Materials returned to stores 1,000

12. (a) On 1st Jan. 2001, a lease of premises is purchased for four years forRs.
Page
160
5,00,000 and it is decided to make provision for the replacement ofthe lease by
means of an insurance policy purchased for an annual premium of Rs.
1,20,000.Show the necessary ledger accounts for four years, assuming that the
renewal of the lease costs Rs. 5,00,000 on 1.1.2005.
Or
(b) (i) From the following particulars for the years 2000 and 2001,determine the
value of closing stock at the end of 2001 :
Particulars 2000 2001
Rs. Rs.
Opening stock 20,000 30,00
0
Purchases 1,20,000 1;90,000
Sales 2,00,000 2,40,000
Uniform rate of gross profit may be assumed.
(ii) Arun is a wholesaler in textile goods. On January 1, 2002, he hadstocks of main
varieties A and B valued at Rs. 14,000 andRs. 24,000 respectively. During the six
months ended June 30,
2002, his purchases were Rs. 72,000 and Rs. 1,44,000 respectively. He had taken
for personal and family use one book of variety Accosting Rs. 6,000. On 30th June
his stocks were: A, Rs. 8,000 andB, Rs. 18,000.
Goods were sold by Arun at the retail prices fixed by the manufacturer which yield
24% gross profit on sales. Determine the total sales figures of Arun for the six months.

Page
161
 13. (a) From the following information of a textile company complete proformabalance sheet if its
sales are Rs.
23,00,000.
Sales to net worth 2.3 times
Current debt to net 42
worth %
Total debt to net 75
worth %
(b) The following are the balances of Mr. Hari as on 30th June, 2004 :
Debit balances Rs. Credit Rs.
balances
Cash in hand 54 Sales 98,780
0
Cash at bank 2,630 Returns 500
outwards
Purchases 40,675 Capital 62,000
Returns inwards 680 Sundry 6,300
creditors
Wages 8,480 Rent 9,000
Fuel and power 4,730
Carriage on sales 3,200
Carriage on 2,040
purchases
Stock (1st July, 5,760
2003)
Buildings 32,000
Freehold land 10,000
Machinery 20,000
Patents 7,500
Salaries 15,000
General expenses 3,000
Insurance 5,245
Sundry debtors 14,500
Taking into account the following adjustments prepare the Trading and Profit and
Loss Account and Balance sheet as on 30th June, 2004.
(i) Stock on hand on 30th June, 2004 is Rs. 6800
(ii) Machinery is to be depreciated at the rate of 10% and patents at therate of 20%
(iii) Salaries for the month of June, 2004 amounting to Rs. 1.500 were unpaid
(iv) Insurance includes a premium of Rs. 170 on a policy expiring on31st Dec. 2004.
(v) Bad debts are Rs. 725
(vi) Rent receivable Rs. 1,000.

Rs.
(lakh)
(iv) Works overhead (60% fixed) 2.25
(v) Administrative overheads (80% 0.40
fixed)
(vi) Selling overhead (50% fixed) 0.20
The actual production during the period was only 60,000 units.
Calculate
the revised budgeted cost per unit.

QP 15 :MBA DEGREE EXAMINATION, JANUARY 2008.

BA 1606 - ACCOUNTING FOR MANAGEMENT
Page
162
 PART –A (10*2=20)
1. Define Inflation Accounting.
2. What is HRA?
3. What are financial statements?
4. What is amortization?
5. What are accounting ratios?
6. What is funds flow statement?
7. What is standard costing?
8. What is job costing?
9. What are sunk costs?
10. What is budgetary control?
PART –B (5*16=80)
11. a) Define Accounting. What are its objectives, Branches? Who are the
parties interested in accounting information.
(OR)
a)The following is the Trial Balance of Mr. Viswanathan on 31st December,2006.

Particulars Debit(Rs.) Credit(Rs.)

Page
163
Capital 20,000
Plant and Machinery 25,000
Office furniture and fittings 1,300
Stock on 1.1.2006 24,000
Motor vehicle 6,000
Sundry debtors 22,850
Cash in hand 200
Cash at Bank 3,250
Wages 75,000
Salaries 7,000
Purchases 1,06,750
Sales 2,40,0
00
Bills Receivable 3,600
Bills Payable 2,800
Sundry creditors 26,000
Return inwards 4,650
Provision for doubtful debts 1,250
Drawings 3,500
Return outwards 2,750
Rent 3,000
Factory lighting 400
Insurance 3,150
General expenses 500
Bad debts 1,250
Discount 3,250 1,850
2,94,650 2,94,6
50
The following adjustments are to be effected:
i) Stock on 31stDecember, 2006 Rs.26,000.
ii) Furniture to be depreciated by 5%.
iii) Factory lighting is due for 3 months, but not paid Rs.150.
iv) Write off further bad debts Rs.350.
v) The provision for doubtful debts to be increased to Rs.1,500, and
provision for discount on debts @2% to be made.
vi) During the year, Machinery was purchased for Rs.10,000, but it
was debited to purchases account.
You are required to prepare trading and P&L account and balance sheet as on that date.

12.a ) Discuss various accounting concepts and conventions

which are used in the preparation of Financial statements.
(OR)
b) On 1stJanuary, 2002, a company purchased machinery for RS.58,000 and spends
Rs.2000 on its erecting. On 1stJuly, 2002 an additional machinery costing
Rs.20,000 was purchased. On 1stJuly,2004 the machinery purchased on 1.1.2002
was sold for Rs.28,6000 and on the same date, a new machine was purchased at a
cost of Rs.40,000. Show the machinery account for the first four calendar years
according the WDV Taking the rate of depreciation @10%.

13. a) With the following ratios and further information given

below, prepare a Trading Account and Profit and Loss
Page
164
 account and Balance Sheet of ShriNarain:
i) Gross Profit Ratio 25%
ii) Net Profit to Sales 20%
iii) Stock Turnover Ratio 10
iv) Net profit /Capital 1/5
v) capital to total liabilities ½
vi) Fixed assists/Capital 5/4
vii) Fixed assets / Total current assets 5/7
viii) Fixed assets Rs.10,00,000
ix) Closing stock Rs. 1,00,000.

(Or)

(b) what is cash flow statement? Explain its utility and limitations.
Differentiate it from flow statement.

Page
165
14.(a) Define cost accounting. Classify the costs into different
categories based on various purposes.

(b) The sales turnover and profit during two years were as follows:
Year Sales(Rs.) Profit(Rs.)
2005 1,50,000 20,000
2006 1,70,000 25,000
Calculate : (i) Fixed cost; (ii) p/V ratio; (iii) BEP (iv) Margin of safety for 2006;
(iv) Sales required to earn profit of Rs.40,000; (vi) Profit when sales are Rs.
50,000.

15. (a) A company manufactures automobile accessories and parts.

The direct following are the total costs of processing 1,00,000
units:
Direct material cost Rs. 45
lakhs Direct labour cost
Rs. 8
lakhs Variable factory
overhead Rs. 6 lakhs Fixed
factor overhead Rs. 5
lakhs
The purchase price of the component is Rs. 22. The fixed overhead would continue to be
incurred eve when the component is bought from outside, although there would have
been reduction to the extent of Rs. 2,00,00.
Required:
(i) Should the part be made or bought considering that the present facility
when released following a buying decision would remain idle?
(ii) In case the released capacity can be rented out to another manufacturer for
Rs. 1,50,000 having good demand, what should be the decision?

(OR)
(b) (i) “Budgetary control improves planning aids in coordination and helps in
having comprehensive control”. Elucidate this statement by highlighting its
uses and limitations.
(ii) Explain responsibility accounting as applicable to a BPO.

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**

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