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Spring 2011(Feb-July)

Bachelor of Business Administration - BBA Semester 3 Subject Code BB0012 Subject Name Management Accounting 4 Credits (Book ID: B0093) Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions. Q.1 Explain why management accountant role is critical in an organizational setup? [10 Marks] Answer: Management accountant role is critical in an organizational setup because of its different sub-fields like Book Keeping Financial Accounting Management Accounting and Cost Accounting Social Responsibility Accounting Evolution of management accounting is associated with the advent of industrial capitalism. Industrial revolution of the 18th century caused a need for development of accounting as a tool for industrial management. Prior to industrial revolution, Josiah Wedgwood talked about use of costing techniques as a guide to management decisions. Advent of large scale production, corporatisation of business and competitive market scenario caused the development of cost accounting as a separate subject which has been further refined to aid managerial decisions through management accounting. This new role of accounting belongs to the 20th century. Management accounting shifted the focus of accounting from record keeping and preparation of financial statements to processing of accounting data to aid management decision making. Management accounting is concerned with generation of data, processing data relevant for managerial decision-making and communication thereof. For a detailed framework Communication of information and feedback is part of Management Information System (MIS). The purpose of book keeping and financial accounting is record keeping, summarizing financial data and presentation of financial data to various users to aid economic decisions.

Available data are designed and communicated in a general manner, which needs to be processed further, and filtered to generate information relevant to decisionmaking. Similarly cost accounting generates cost data which needs further processing to generate information relevant to decision-making. Book keeping, financial accounting and cost accounting are essentially historical by nature as they process and communicate past data whereas managerial decisions involve understanding future situations. So past data needs to be processed in the light of expectation e.g., about future demand, inflation, tax policy, etc. Information communication to management and feedback system is an important aspect of management accounting. MIS is considered a total complex in which data\are generated, processed and refined to produce the information needed at all levels of the organization. The purpose of MIS is to determine and provide, as efficiently, effectively and economically as possible, what management needs to know. It should facilitate the accomplishment of objectives, prevent failures in reaching objectives and correct conditions, which hamper the fulfillment of objectives. Accordingly, accounting system is a sub-system of MIS. The following steps are generally followed in designing MIS. Setting the objectives and identifying various strategies to attain the objectives. Evaluation of Strategy : Evaluation of various strategies involve data support. For example, whether to purchase materials from local suppliers A, B, C and D or to import involves preparation of comparative cost structure, data relating to reliability of the supplier, quality of the raw material, etc. MIS evolves a system which provider necessary data support to aid evaluation of strategies. Choosing Best Strategy : Choice may be linked to various criteria, which consider both short run and long run situation. Translating strategies into plans. Establishing control mechanism for execution of plans. Installation of management accounting system (channels of communication) which links generation of data relevant for management decisions and accepts as well as responds to feedback. With the advent of computer, speed of data processing is very high. Also in a computerized MIS it is possible to have on line two-way data communication. Cost analysis is an important aspect of management accounting. It involves identification of various cost elements, classification of costs into fixed and variable elements and identifying relevant costs in a decision-making situation. Production and pricing decisions are exclusively dependent on cost analysis. Indirect expenses cannot be linked to any product. Such expenses are analyzed and apportioned to various production departments on the basis of suitable bases.

Overheads are also linked to cost drivers and apportioned to products on the basis of activity based costing. Indirect expenses are technically called overheads. So overhead analysis is an important aspect of accumulation of cost information and identification of relevant costs. Production carried is on the basis of a in out job order. In a job order major portion of costs are directly related to jobs. Jobs also have to share overheads. Pricing of job depends on directly related costs and applicable overheads. As jobs are customer-specific, often the market rates are not available. Possibility of getting job order depends on proper costing and inclusion of a reasonable profit margin. Often a company loses a tender because of over pricing the job order. On the other hand, processes are carried out in sequence products of one process are passed on to the next process and final product comes out of the end process. It may not be necessary to complete all the processes since intermediate goods market exists. Proper cost analysis can be very helpful in decision-making whether or not to continue with a process. It also helps to find out the overall cost of a product that emerges at the end process with break-up of costs at each process. This helps to identify the efficiency or inefficiency of each process. The essence of management accounting lies in its use to management. Therefore it is essential to know the functions of management first, so as to understand how management accounting can function in order to serve the management. The functions of management are: a) formulating a business plan, b) fixing of the responsibility at various levels in the implementation of the plan, c) organizing which comprises arranging the scarce resources of the enterprise in a manner designed to achieve the goals of the plan, d) controlling performance which means checking actual results with planned results and instituting corrective action in case of deviation from planned results Special Features of Management Accounting a) The emphasis of management accounting is on the future, while that of financial accounting is on the past. The technique of budget utilizes accounting data to project future operations and to plan for future profits. Budget and Standard Costing together facilitate management not only in formulating the plan, but also in controlling its implementation. b) The information provided by financial accounting is of general nature. However, in cost accounting the information is more detailed and specific pertaining to products, departments, territories, etc. But still for management purposes the information is not readily usable. Management accountant has to select relevant

data and present the statement in such a manner that it facilitates the management to take a correct decision. c) The pattern and behaviour of the costs is the very basis for control. The division of costs into fixed, variable and semi-variable is so important in all matters of managerial decisions, such as decisions to make or buy, pricing in export markets and further processing of by-products. d) The emphasis in management accounting is to establish the relationship between cause and effect of any activity. This is not the case with financial accounting. Financial accounting merely reveals the gross income, net income and financial position. In management accounting with the help of ratio analysis one can explain the causes for the rise or fall in income and this would enable management to take remedial measures where necessary. e) According to Horngren, accounting system provides information for (1) managerial use in planning and control, (2) strategic planning, and (3) external reporting to shareholders and other groups. While the emphasis of financial accounting is on external reporting, the emphasis of management accounting is on internal reporting to management. It is for this reason that management accounting is also called Internal Accounting. From the above discussion it is clear that management accounting is concerned with the internal requirements of the organisation and aiding the management in its efforts to improve the efficiency of the business and it is critical in an organizational setup.

Q.2 From the following data of Jagdish Company prepare (a) a statement of source and uses of working capital (funds) (b) a schedule of changes in working capital Assets Cash Short-term investment Debtors Stock Long Investment Machinery Building Land 2008 1,26,000 42,400 60,000 38,000 term 28,000 2,00,000 2,40,000 14,000 2007 1,14,000 20,000 50,000 28,000 44,000 1,40,000 80,000 14,000

Total 7,48,400 Liabilities and Equity Accumulated 1,10,000 depreciation Creditors 40,000 Bills Payable 20,000 Secured loans 2,00,000 Share capital 2,20,000 Share premium 24,000 Reserves and 1,34,400 surplus Total 7,48,400 Income statement Sales Cost of goods sold Gross Profit Less Operating expenses: Depreciation machinery 20,000 Depreciation building 32,000 Other expenses 40,000 Net profit from operation Gain on sale on long-term investment Total Loss on sale of machinery Net Profit 2,40,000 1,34,600 1,05,200 92,000

4,90,000 60,000 30,000 10,000 1,00,000 1,60,000 Nil 1,30,000 4,90,000

13,200 4,800 18,000 2,000 16,000

Adjustments: 1) Machinery worth Rs.70000 was purchased and worth Rs.10000 was sold during the year [Accumulated depreciation on machinery is Rs.18000 after adjusting depreciation on machinery sold]. Proceeds from the sale of machinery were Rs.6000 2) Dividends paid during the year Rs.11600 [ 10 Marks] Answer: a) A statement of source and uses of working capital (funds) Adjusted Profit and Loss Account: To By Depreciation machinery & 92000 Sales of goods 105200 building Net profit from operation 13200 Gain on sale on long-term 4800 investment Loss on sale of machinery 2000 sale of machinery 6000 Dividends paid For completed assignment visit

b) Schedule of changes in Working Capital: Particulars Assets Cash Short-term investment Debtors Stock Long term Investment Machinery Building Land Total Liabilities and Equity Previous Year 2007 1,14,000 20,000 50,000 28,000 44,000 1,40,000 80,000 14,000 4,90,000 Current Year 2008 1,26,000 42,400 60,000 38,000 28,000 2,00,000 2,40,000 14,000 7,48,400 Increase 12000 22400 10000 10000 60000 160000 0 258400 Decrease


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Q.3 Explain why cash flow statement is more beneficial than funds flow statement [10 Marks] Answer: Cash flow statement is more beneficial than funds flow statement due to following differences: 1 Cash Flow Statement Cash flow statement takes into consideration only the changes in cash position between two balance sheet Fund Flow Statement Fund flow statement is concerned with changes in working capital position between two balance sheet dates.

Cash from operation is calculated Fund from operation is calculated only by actual receipt and by Adjusted Profit and Loss payment Account

of Income and Expenses 3 It is more useful to management as a tool of financial analysis 4 5 It is not more useful than cash flow statement

Sound fund position does not Whether there is inflow of cash necessarily mean sound cash there position will be definitely be inflow of funds Increase in current liabilities or Increase in current liabilities or decrease in current assets will decrease in current assets will mean decrease in working capital increase in cash and vice versa

Funds Flow Analysis is an important tool for management accountant. It reveals the changes in working capital position, the sources from which the working capital was obtained and the purpose for which it was used. It also reveals the changes that have taken place behind the Balance Sheet. Cash Flow Statement identifies the sources and application of cash. It is prepared on the basis of actual or estimated data. It depicts the changes in the cash position from one period to another. A projected cash flow or a cash budget will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to pay bank loans and to pay dividends to the shareholders.

Q.4 Explain step cost, fixed, variable, and semi-fixed costs. [10 Marks] Answer: Cost: For an average man cost means what he actually pays to obtain the desired article, i.e., the price paid for something. In management terminology it refers to expenditure and not the price. In cost accounting cost is the amount of resources given up in exchange for goods or services. The Official Terminology of Management Accounting published by the Institute of Cost and Management Accountants [ICMA] London in 1982 defines the term cost as the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity. According to this definition cost may be the actual expenditure or notional charges. Notional charges are those which do not involve cash outlays. They are not entered in the books of account. But they are important for decisionmaking. Some examples of such charges are cost of land, capital and other resources owned and supplied free of charge by the proprietor of the business. The concept of cost is not something definite. It has a wide variety of meaning. The term cost is to be used with an adjective or phrase that will convey the exact meaning intended e.g., prime, direct, indirect, fixed, variable etc. Step Costs : A step cost remains constant for given volume of output and at a higher level For completed assignment visit