MANAGEMENT ACCOUNTING

CA 1

Name : Swarnarik Chatterjee

Roll No. : 23405018005
College Id : 18234030771
Subject : Management Accounting CA 1
1. Answer all questions:
i) Margin of safety is referred to as
Answer : (b) Excess of actual sales over break even sales
ii) Break even point arises, when
Answer : (d) All of the above
iii) A company sells a single product for Rs.28 per unit. If variable costs are 65% of sales
and fixed costs total Rs.9,800, the break-even point will be
Answer : (d) 1,000 units
iv) Sales Rs.1,80,000, profit Rs.20,000, variable cost 60%, P/V ratio will be
Answer : (b) 40%
v) Selling price and variable cost per unit are Rs.20 and Rs.12 respectively. Total fixed
cost is Rs.30,000. The BEP sales in unit will be
Answer : (d) 3750

2. Answer all questions:

a) Define Management Accounting. State the techniques used in management
accounting for decision making
Answer
Management accounting (also known as cost accounting or management accounting) is a
branch of accounting that is concerned with the identification, measurement, analysis, and
interpretation of accounting information so that it can be used to help managers make
informed operational decisions.
1. Margin analysis
Margin analysis is primarily concerned with the incremental benefits of optimizing production.
Margin analysis is one of the most fundamental and essential techniques in managerial
accounting. It includes the calculation of the breakeven point that determines the optimal
sales mix for the company’s products.
2. Constraint analysis
The analysis of the production lines of a business identifies principal bottlenecks, the
inefficiencies created by these bottlenecks, and their impact on the company’s ability to
generate revenues and profits.
3. Capital budgeting
Capital budgeting is concerned with the analysis of information required to make the
necessary decisions related to capital expenditures. In capital budgeting analysis,
managerial accountants calculate the net present value (NPV) and the internal rate of return
(IRR) to help managers to decide on new capital budgeting decisions.
4. Inventory valuation and product costing
Inventory valuation involves the identification and analysis of the actual costs associated
with the company’s products and inventory. The process generally implies the calculation
and allocation of overhead charges, as well as the assessment of the direct costs related to
the cost of goods sold (COGS).
5. Trend analysis and forecasting
Trend analysis and forecasting are primarily concerned with the identification of patterns and
trends of product costs, as well as with recognition of unusual variances from the forecasted
values and the reasons for such variances.

b) Discuss in brief BEP analysis

Answer
Break-even analysis entails calculating and examining the margin of safety for an entity
based on the revenues collected and associated costs. In other words, the analysis shows
how many sales it takes to pay for the cost of doing business. Analyzing different price levels
relating to various levels of demand, the break-even analysis determines what level of sales
are necessary to cover the company's total fixed costs. A demand-side analysis would give a
seller significant insight into selling capabilities.

3. ABC Ltd furnished the following information

Particular 2010-11 2011-12

Sales 2,00,000 2,50,000
Profit 30,000 50,000

You are required to find out:

i. P/V ratio
ii. BEP
iii. Total variable cost for 2010-11 and 2011-12
iv. Sales required to earn a profit of Rs.60,000
v. Profit/Loss when sales are Rs.1,00,000
vi. MOS when profit is Rs.80,000

Answer :

i) P/V ratio = (Difference in Profit ÷ Difference in Sales) × 100

Therefore,
(Rs 20,000 ÷ Rs 50,000) × 100 = 40%
As,
Contribution = Fixed Cost + Profit
 Fixed Cost = Contribution – Profit
Therefore,

In Rs
Contribution in 2010-11(2,00,000 × 40%) 80,000
Less : Profit 30,000
Fixed Cost 50,000

ii) Break-even point = (Fixed Cost ÷ P/V Ratio) = Rs 50,000 ÷ 40% = Rs 1,25,000

iii) P/V Ratio = 40%

Variable cost ratio = 100% - 40% = 60%

For 2010-11,

Total Variable Cost = Total Sales × Variable cost ratio = 2,00,000 × 60%
= 1,20,000

For 2011-12,

Total Variable Cost = Total Sales × Variable cost ratio = 2,50,000 × 60%
= 1,50,000

So, the Total Variable Cost will be Rs 1,20,000 and Rs 1,50,000 for the years
2010-11 and 2011-12 respectively.

iv) Calculation of Sales to earn profit of Rs 60,000,

(Fixed Cost + Desired Profit) ÷ P/V Ratio = (50,000 + 60,000) ÷ 40%

= Rs 2,75,000

So, the Sales must be Rs 2,75,000 when desired profit is Rs 60,000.

v) Calculation of Profit/Loss when Sales are Rs 1,00,000,

Profit = Contribution – Fixed Cost

= (Sales × P/V Ratio) – Fixed Cost
= (Rs 1,00,000 × 40%) – Rs 50,000
= Rs 40,000 – Rs 50,000
= - Rs 10,000 (Loss)

So, there will be a Loss of Rs 10,000 if Sales are Rs 1,00,000.

vi) Calculation of Margin of Safety (MOS) when Profit is 80,000,

= Profit ÷ P/V Ratio = Rs 80,000 ÷ 40% = Rs 2,00,000

So, the Margin of Safety will be Rs 2,00,000 if the profit is Rs 80,000.