Spring/Feb 2012 BBA Semester-III BB0012: Management Accounting Assignment Set-I Q1.

Accounting is a sub-system of MIS. Substantiate this statement. Management accountant role is critical in an organizational setup because of its different subfields 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 decision-making. 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.
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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
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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.

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Q2. Following is the Balance Sheet of Jai Kishore Ltd. Calculate the following ratios: (1) Current Ratio (2) Debt Equity Ratio (3) Stock Turnover Ratio (4) Liquidity Ratio (10 Marks) BALANCE SHEET LIABILITIES Share capital: Equity 1,00,000 Share capital 1,00,000 Preference Share Capital Reserves 1,00,000 Debentures 2,00,000 Sundry Creditors Bills Payable Total 1,00,000 50,000 6,50,000 ASSETS Fixed Assets

2,50,000

Stock Sundry Debtors Bank balance Total

2,50,000 1,00,000 50,000 6,50,000

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