DECEMBER 2021 P/ID 77504/PMBD/

PMB1D/PMBSD
Time : Three hours Maximum : 100 marks
PART A — (5 × 6 = 30 marks)
Answer any FIVE questions.

1. Explain the Origin of management accounting.

2. What are the uses of balance sheet?

Below are some of the uses and importance of a balance sheet:

1. To Determine If Working Capital is Enough

The balance sheet is used to determine if the business has enough working capital
to sustain its operation.

Working capital is the difference of current assets less current liabilities. It

measures if the company still has enough current resources after deducting its due
loan or obligations. If the result of computation is positive, that means the
company is still doing okay. On the other hand, if the computation becomes
negative, that means the company is in trouble. There’s a high risk of bankruptcy
or inability to continue operating.

2. To Know the Business Net Worth

In simple terms, net worth is the amount the investor/owner owns from the company
after deducting all the liabilities.

3. To See If The Company Can Sustain Future Operation

To do this, look at the value of its non-current assets such as property, plant
and equipment. If the total is higher than the current assets, it means the company
has plans to sustain future operations. On the other hand, if the amount is already
lower than the current assets, it can be an indication of inability to sustain
future operation.

4. To Identify If There’s Possible Issuance of Dividend

Most business owners/investors are interested to know if when will they receive
returns from their investment. Such returns can be in the form of Dividends.
Dividends are issued if the company is profiting and has high amount of retained
earning.

The balance sheet shows the balance of retained earnings. By looking at it, you can
determine if the company has enough retained earnings or not.

Aside from the ones listed above, there are many other uses of balance sheet and it
is really important for business owners to learn how to interpret it or have
someone to interpret it for them.

3. What are the advantages of NPV Method?

Advantages of Net Present Value (NPV) –

The net present value of a project in business guides the finance team for making
wise decisions. Let us now go through the numerous benefits it has for the company,
in the long run:

Simple to Use: The net present value method is easy to apply to a real business
project if the cash flows and discount rate are known.
Provides Time Value of Money: This method takes into consideration the effect of
inflation on the future profitability of the project, thus estimating the time
value of money.
Customization: In NPV, the discount rate can be adjusted according to the risk
prevailing in the industry, along with various other factors, to obtain an
appropriate output.
Determines Investment Value: The earnings throughout the project’s life span can be
acquired by using the NPV method, which facilitates the company to know the future
value of a specific investment.
Comparable: It facilitates the comparison of values generated in the future, by two
or more similar projects to find out the most feasible option.
Comprehensive Method: It finds the present value of a project by examining the
effect of various factors like risk, cash outflows, and inflows.
Measures Profitability: It is one of the most proficient methods of determining the
actual profitability of a project in its lifetime.
Identifies Risk: In the absence of NPV, the managers would fail to estimate the
risk of loss or meagre profitability in case of a long-lived project. It is
otherwise possible by identifying the project with negative or zero NPV.
Reinvestment Assumption: The net present value is quite logical since, here the
cash flows are not expected to be reinvested in the financial market, as done in
the internal rate of return.
The obvious advantage of the net present value method is that it takes into account
the basic idea that a future dollar is worth less than a dollar today. In every
period, the cash flows are discounted by another period of capital cost.

4. What is sales budget explain briefly

A sales budget is a financial plan that estimates a company’s total revenue in a

specific time period. It focuses on two things—the number of products sold and the
price at which they are sold—to predict how the company will perform.

The sales budget, a type of operating budget, is a forecast of the expected units a
company intends to sell over a period of time and the revenue it should generate
from it. It is the basis for preparing the income statement for the business. The
management prepares a sales budget based on its business environment, overall
economic condition, the intensity of competition in the market, production
capacity, available funds, etc.

A sales budget acts as a yardstick for evaluating the company’s performance. It

serves as a reminder for meeting the plans and targets. Also, if the company’s
actual performance is not on par with the budgeted figures, the company can take
corrective action in time.

The sales budget is the base on which other budgets are prepared in an
organization. Hence, it should be prepared with the utmost care and precision. For
example, the sales budget will help prepare the production budget as production
will depend on the planned sales quantity. Similarly, budgets such as the purchase
budget or budget for the HR department will be directly dependent on the quantity
the company intends to sell. In case the sales budget forecasts fail to meet
expectations, it can be disastrous for the company. This will be so when it had
made purchases accordingly or hired extra manpower to meet the sales figures. In
the opposite case, with low budgetary forecasts, the company will face a shortage
of material and manpower, which will lead to loss of sales opportunities.

5. What are the managerial uses of budgets?

6. Explain the concept of cost of goods manufactured

7. What is direct costing? Explain briefly.

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

The examples show that direct costs can vary based upon the level of analysis. For
example, if you are reviewing the direct cost of a single product, the only direct
cost may be the materials used in its construction. However, if you are
contemplating shutting down an entire company, the direct costs are all costs
incurred by that company – including all of its production and administrative
costs. The main point to remember is that a direct cost is any cost that changes as
the result of either a decision or a change in volume.

8. Define forecast, state its importance.

A systematic attempt to probe the future by inference from known facts.

forecasting becomes an integral part of the planning process, especially, strategic
planning which is long-range in nature.

Lyndall Unrwick defined forecasting as it is involved to some extent in every

conceivable business decision. The man who starts a business is making an
assessment of future demand for its products. The man who determines a production
programme for the next six months or twelve months is usually also basing it on
some calculation of future demand. The man, who engages staff, and particularly
Young staff, usually have an eye to future organizational requirements.

Business forecasting refers to a systematic analysis of past and present conditions

with the aim of drawing inferences about the future course of events.

forecasting becomes an integral part of the planning process, especially, strategic

planning which is long-range in nature.

Lyndall Unrwick defined forecasting as it is involved to some extent in every

conceivable business decision. The man who starts a business is making an
assessment of future demand for its products. The man who determines a production
programme for the next six months or twelve months is usually also basing it on
some calculation of future demand. The man, who engages staff, and particularly
Young staff, usually have an eye to future organizational requirements.

Business forecasting refers to a systematic analysis of past and present conditions

with the aim of drawing inferences about the future course of events.

PART B — (5 × 10 = 50 marks)
Answer any FIVE questions.

9. Explain the characteristic features of management

accounting.

1. Selective Nature
Management accounting selects only few information out of much information provided
by the financial accounting system. The reason is that all the financial accounting
information are not necessary to management.

2. More Emphasis on Future

There is no meaning of collection of historical data. The management accounting
attempts to highlight upon what should have been. In this aspect, the use of
standard costing, cost variances and budgetary control emphasizes to highlight upon
the futuristic nature of management accounting.

3. Provides only information but no decision

The financial accounting information is presented in the different basis and in
different manner which helps the management for proper planning and take quality
decisions. It is up to the intelligence of management executives to take valid
decision out of available information.

4. The Problem of Choice

An attempt is made to solve the managerial problems. For which, a comparative
analysis of various available alternatives are taken into account and only that
alternative is normally selected which seems to be more attractive and profitable.
For example, Capital Budgeting techniques.

5. Study Causes and Effects Relationship

Under financial accounting system, profit and loss account is prepared to know the
quantum of profit earned or loss suffered. It does not disclose the reasons for
such quantum of profit earned or loss suffered. But, under management accounting
system, it study the cause and effects relationship prevailing between the
variables which affect business activity and profitability through analysis.
6. Importance to Elements of Costs
The total cost is divided into fixed, variable and semi-valuable under management
accounting system. Moreover, it highlights the nature and characteristics of each
such costs with reference to varying production levels.

7. Not bounded by the Rules of Financial Accounting

Management accounting never follows the rules of financial accounting. But, it is
concerned with the information which are highly useful to the management for
decision making and control purposes.

8. Recognition of Non-monetary Variables

Non-monetary variables such as efficiency of employees, labour turnover, policy of
management, organization culture, market conditions and consumers or customer
behavior are taken into account before taking a decision by the management. Under
these circumstances, the management consider the monetary information for
supporting their decisions.

9. It modifies, analyses and interprets data

The financial accounting information are modified, analyzed and interpreted with
new dimensions. In this way, data help the management to take the line of action
towards control of destiny of an undertaking.

10. No Specific Rules and Conventions

Financial Accounting System has rules and conventions to record the business
transactions in the books of accounts. But, there is no such rules and conventions
to the management accounting. Moreover, the tools and techniques applied by the
management are varying from one period to another and one concern to another.

The conclusions derived from the application of a technique depend on the

intelligence and experience of the management executives.

11. Achievement of Objectives

Management accounting fixes the standard for various business activities on the
basis of the historical information provided by the financial accounting. Actual
performance is recorded to compare the actual with standard. If there is any
deviations, corrective action can be taken by the management to achieve the
objectives.

12. Improving Efficiency

The management can fix the target for each department or division through budgetary
control system. The actual performance is compared with that of targets. The
deviations are find out and classified into two categories i.e.

Positive deviations and

Negative deviations.
If positive deviations, the concerned department is appreciated. If negative
deviations, causes are find out to give ideas for improving the efficiency of the
relevant department. In this way, the efficiency of employees is improved in the
organization as a whole.

10. What are the Advantages and limitations of

marginal costing?

Several advantages are associated with marginal costing, including:

(1) Knowledge of cost classification: Fixed costs are more or less uncontrollable
and variable cost are always controllable. The cost data needed for decision-making
and profit planning are made readily available for the management.
(2) Simple operation: Marginal costing is simple to operate because it avoids the
complexities of apportionment of fixed costs, which is really arbitrary.
(3) No danger of over and under charges of overheads: In this cost control
technique, the risk of over- and under-allocating overheads is minimized.
(4) Relationship of fixed and variable costs: Fixed costs are related to time with
no reference to output, while variable costs are always associated with output.
Thus, an increase in output will reflect how much extra funds will be available for
additional output.
(5) Knowledge of minimum output: Marginal costing can indicate the minimum output
required to equate fixed and variable cost. This point is known as the break-even
point (BEP), where costs and revenues are always equal.
(6) Knowledge of desired profit: Once the BEP is known, it is easy to work out the
minimum output for the desired profit.
(7) Knowledge of expansion: Once the BEP is known, it is simple to calculate
expansion possibilities.
(8) Knowledge of loss: When the BEP, output, and sales targets are not achieved,
there is a risk of loss.

Limitations of Marginal Costing

Marginal costing suffers from the following limitations:
(1) Incorrect assumptions for classification of expenses: It is assumed that the
expenses are grouped as fixed and variable, while certain expenses (e.g., employee
bonuses) are purely caused by management decisions and have no reference to output
or time.
(2) Marginal costing does not give due attention to the time factor: There are
cases where the marginal cost of two outputs is the same, yet one takes twice the
time to produce as the other. However, in reality, jobs that take more time are
more costly.
(3) Not applicable to all industries: Marginal costing cannot be applied suitably
in certain industries, including ship building and contracts.
(4) Fixed expenses are controllable: Marginal costing ignores the fact that fixed
costs are always controllable. The technique of budgetary control can be helpful in
controlling the amount of fixed overheads.
(5) Lack of calculation: Marginal costing does not provide any standard for
performance evaluation. A system of budgetary control and standard costing gives
more effective control compared to marginal costing.
(6) Wrong basis of stock and work-in-progress: Under marginal costing, stock and
work-in-progress are valued based on the marginal cost, and fixed costs are taken
into account. Thus, these expenses are a lesser charge.
(7) Limited output: The study of marginal costing is suitable only to a limited
extent. There is every possibility that beyond a specific limit of output, fixed
expenses will show an unusual jump.
(8) Various factors affect production cost: The BEP is affected by fixed and
variable costs under marginal costing. However, other factors may affect output,
including the efficiency of men and machinery, plant capacity, and technical
capabilities.

11. State the significance of accounting ratios in the

analysis of financial statements.

12. Discuss the factors affecting capital expenditure

decisions.
Factors influencing capital expenditure decisions
1. Availability of Funds
All the projects are not requiring the same level of investments. Some projects
require huge amount and having high profitability. If the company does not have
adequate funds, such projects may be given up.

2. Minimum Rate of Return on Investment

Every management expects a minimum rate of return or cut-off rate on capital
investment. It refers to the point of below which a project would not be accepted.

3. Future Earnings
The future earnings may be uniform or fluctuating. Even though, the company expects
guaranteed future earnings in total which affects the choice of a project.

4. Quantum of Profit Expected

It is necessary to assess the quantum of profit expected on implementation of
selected project. Here, the term profit refers to realized amount of projects as
per the accounting records.

5. Cash Inflows
The term cash inflows refers to profit after tax but before depreciation. The
reason is that recording of depreciation is a book entry and there is no actual
cash outflow. Hence, depreciation amount is included in the cash inflow.

6. Legal Compulsions
The management should consider the legal provisions while-selecting a project. In
the case of leather and chemical industries, there are number of legal provisions
created to protect environment pollution. Now, the management gives much importance
to legal provisions rather than cost and profit.

7. Ranking of the Capital Investment Proposal

Sometimes, a company has two or more profitable projects in hand. If there is only
one profitable project out of many and huge amount is available in the hands of
management, there is no need of ranking of capital investment proposal. Ranking is
necessary if there is many profitable projects in hand and limited funds is
available in the hands of management.

8. Degree of Risk and Uncertainty

Every proposal involves certain risk and uncertainty due to economic conditions,
competition, demand and supply conditions, consumer preferences etc. The degree of
risk and uncertainty affects the profitability of the project. Hence, degree of
risk and uncertainty of the project is taken into consideration for selection.

9. Urgency
A project may be selected immediately due to emergency or urgency. The reason is
that such immediate selection saves the life of the company i.e. survival of a
company is the primary importance than other factors.

10. Research and Development Projects

Research and Development project is highly required for technology based
industries. The reason is that there is a lot of changes made within short period
in technology. The research and development project gives more benefits in the long
run. Hence, profitability is getting less importance and survival of business is
getting much importance in the case of research and development project.

11. Obsolescence
The replacement of existing fixed assets is compulsory since there is an
obsolescence of plant and machinery.
12. Competitors Activities
Every company should watch the activities of the competitors. The company should
take a decision by considering the activities of the competitors. If so, the
company can withstand in competition by implementing new projects.

13. Intangible Factors

Goodwill of the company, industries relations, safety and welfare of the employees
are considered while selecting a project instead of considering profit alone. These
factors are also high responsible for selection of any project.

13. The comparative balance sheets of Thiru Vetrivel

for the two year were as follows: Prepare Funds
Flow statement.
Liabilities 1997

1998

Assets 1997

1998

Loan from wife ––– 20,000 Cash 11,000 15,000

Bill payable 12,000 8,000 Debtors 40,000 35,000
Creditors 25,000 52,000 Stock 25,000 30,000
Bank Over
draft 43,000 60,000
Machinery
20,000 14,000
Capital 66,000 34,000 Buildings 50,000 80,000

1,46,000 1,74,000 1,46,000 1,74,000

14. From the following profit and loss a/c of Kannan

Co. Ltd prepare the common size profit and loss
a/c.
Profit and Loss a/c
Particulars Paticulars
To Material cost 6,00,000 By Sales 18,50,000
To Conversion cost 5.00,000
To Administrative
and Distribution
exp
4,50,000
To Net profit c/d 3,00,000
18,50,000 18,50,000
15. From the following information, Calculate:
(a) Gross profit ratio
(b) Operating ratio
(c) Operating profit ratio
(d) Net profit ratio
Sales 6,00,000; Cost of goods sold 4,00,000;
Operating expenses 1,20,000; Non-operating
income 12,000 and Non-operating expenses 4,000.

16. From the following balances of X Limited, you are

required to calculate:
(a) Current Ratio
(b) Liquid Ratio
(c) Debt Equity Ratio
Liabilities 1989 1990 Assets 1989 1990
Rs. Rs. Rs. Rs.
Equity Capital 400 400 Plant 400 410
Pref. Share
Capital
300 300 Building 400 370
[P.T.O.]
P/ID 77504/PMBD/
PMB1D/PMBSD
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Liabilities 1989 1990 Assets 1989 1990
Rs. Rs. Rs. Rs.
Reserves 200 245 Stock 200 300
8% Debentures 100 150 Cash 100 140
Bills Payable 50 75 Debtors 200 300
Creditors 250 350
Total 1,300 1,520 Total 1,300 1,520

PART C — (1 × 20 = 20 marks)

Compulsory

17. For production of 10,000 Electrical Automatic

Irons the following budgeted expenses:
Per
Unit
Direct material 60
Direct Labour 30
Variable overheads 25
Fixed overhead (Rs. 1,50,000) 15
Variable expenses (Direct) 5
Selling expenses(10% fixed 15
P/ID 77504/PMBD/
PMB1D/PMBSD
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Per
Unit
Administration expenses (Rs. 50,000
rigid for all of production)
5
Distribution expenses(20% fixed) 5
Total cost of sale per unit 160
Prepare a Budget for production of 6,000, 7,000
and 8,000 irons showing distinctly Marginal cost
and Total cost.
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