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MANAGERIAL ACCOUNTING
B.Com (OU) III-Year Vl-Semester
(Âs Per the Latest 2016-17 Syllabus of B.Com (OU) (CBCsf)
Prepared by
SIA Team of Experts
Reviewed by:
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M.Com.
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The subject “Managerial Accounting” is introduce to explain the students about the use of accounting
concepts and procedures in management activities. Managerial accounting is the presentation of accounting
information in such a way as to assist management in the creation of policy and the day-to-day operation
of an undertaking. It is also known as management accounting.
The important topics discussed in this subject are as follows,
❖ Introduction , Features, Scope, Need and Importance of Managerial Accounting.
❖ Relationship and differences between Management Accounting and other Branches of

Accounting.
❖ Concept of Marginal Costing and Break Even Analysis.
❖ Concept of Make or Buy Decisions.
❖ Concept of Budgets and Budgetary Control.
❖ Concept of Standard Costing and Variance Analysis.
The main objective behind introducing the subject ‘Managerial Accounting’ in B.Com course is to make
students acquire both theoretical and practical knowledge of the above mentioned topics.
ABOUT THE BOOK

The book entitled ‘Managerial Accounting’ is designed for B.Com III-Year Vl-Semester students. The
content provided in this book is strictly as per the latest (2016-17) syllabus prescribed by Osmania
University.
/Every concept is explained in a simple manner with sufficient number of examples so as to facilitate better
understanding and easy learning in a shorter span of time. Keeping in view the examination pattern of
B.Com students, this book provides the following features,
❖ Important Questions are included to help students prepare for Internal and External Assessment.
❖ Every unit is structured into two main sections viz., Short Questions (Part-A) and Essay Questions
(Part-B) with solutions.
❖ List of Important Definitions and Formulae are given.
❖ Three Model Papers are provided in order to help students understand the paper pattern in the end
examination.
An attempt has been made through this book to present theoretical and practical knowledge of
“Managerial Accounting”. This book is especially prepared for undergraduate students.
The table below illustrates the complete idea about the subject, which will be helpful to plan and score
good marks in the end examinations.
Unit No. Unit Name Unit Description
1. Introduction This unit covers the topics: Managerial Accounting: Features -

Objectives - Scope - Functions - Advantages and Limitations -
Relationship between Cost, Management and Financial Accounting.
2. Marginal Costing This unit covers the topics: Meaning - Importance - Marginal Cost
Equation - Difference between Marginal Costing and Absorption
Costing - Application of Marginal Costing - CVP Analysis - Break
Even Analysis: Meaning - Assumptions - Importance - Limitations.
3. Decision Making This unit covers the topics: Make or Buy - Add or Drop Products - Sell
or Process Further - Operate or Shut-down - Special Order Pricing -
Replace or Retain.
4. Budgets and This unit covers the topics: Budget: Meaning - Objectives - Advantages
Budgetary Control and Limitations - Essentials of Budgets - Budgetary Control -
Classification of Budgets - Preparation of Budgets.
5. Standard Costing and This unit covers the topics: Standard Costing: Meaning - Importance -
Variance Analysis Standard Costing and Historical Costing - Steps involved in Standard
Costing.
Variance Analysis: Material variance - Labour variance - Overhead
variance - Sales variance.
It is sincerely hoped that this book will satisfy the expectations of students and at the same time helps
them to score maximum marks in exams.
Suggestions for improvement of the book from our esteemed readers will be highly appreciated and
incorporated in our forthcoming editions.
Managerial Accounting
B.Com lll-Year Vl-Semester (OU)
CONTENTS
Syllabus (As per 2016-17 Curriculum)
List of Important Definitions and Formulae L.1 - L.2
UNIT-WISE SHORT & ESSAY TYPE QUESTIONS WITH SOLUTIONS
Unit No. Unit Name Question Nos. Page Nos.

Topic No. Topic Name
UNIT-I INTRODUCTION 1 -16

Part-A SHORT QUESTIONS WITH SOLUTIONS Q1 - Q10 2-4
Part-B ESSAY QUESTIONS WITH SOLUTIONS Q11 - Q20 5-13

1.1 Managerial Accounting: Definition, Features and Functions Q11 - Q12 5
1.1.1 Scope and Objectives Q13 7
1.1.2 Advantages and Limitations Q14 8
1.2 Relationship between Cost, Management and

Financial Accounting Q15 - Q16 9
1.3 Role and Duties of Management Accountant Q17 - Q18 11
1.4 Tools/Techniques and Installation of Management Accounting Q19 - Q20 12
INTERNAL ASSESSMENT 14-16
UNIT-II MARGINAL COSTING 17-44

2.1 Marginal Costing - Meaning and Importance Q13 - Q15 22
2.1.1 Marginal Cost Equation Q16 24
2.1.2 Differences between Marginal Costing

and Absorption Costing and Application
of Marginal Costing Q17 - Q18 25
2.2 CVP Analysis Q19 - Q20 26
2.3 Break Even Analysis: Meaning, Assumptions,

Importance and Limitations Q21 - Q22 27
2.3.1 Break Even Chart Q23 - Q25 29
2.3.2 Contribution, PA/ Ratio and Margin of Safety Q26 - Q34 31
INTERNAL ASSESSMENT 41 -44

U NIT-111 DECISION MAKING 45-84
Part-A SHORT QUESTIONS WITH SOLUTIONS Q1 - Q7 46 -47
Part-B ESSAY QUESTIONS WITH SOLUTIONS Q8 - Q31 48 -77
3.1 Decision-Making Q8 - Q9 48
3.2 Make or Buy Q10 - Q16 51
3.3 Add or Drop Products Q17 - Q22 58
3.4 Sell or Process Further Q23 - Q24 68
3.5 Operate or Shut-Down Q25 - Q28 69
3.6 Special Order Pricing Q29 73
3.7 Replace or Retain Q30 - Q31 75
EXERCISE PROBLEMS 78 -80
INTERNAL ASSESSMENT 81 -84
UNIT-IV BUDGETS AND BUDGETARY CONTROL 85- 126
Part-A SHORT QUESTIONS WITH SOLUTION^ Q1 - Q13 86 -91
Part-B ESSAY QUESTIONS WITH SOLUTIONS Q14 - Q42 92- 118
4.1 Budget - Meaning, Features, Preparation of Budgets Q14 92
4.2 Budgetary Control - Objectives, Essentials of Budgets Q15 - Q16 93
4.3 Organization of Budgetary Control Q17 - Q18 94
4.4 Classification of Budgets Q19 96
4.4.1 Production Budget Q20 98
4.4.2 Sales Budget Q21 99
4.4.3 Cash Budget Q22 100
4.4.4 Overheads Budget Q23 100
4.4.5 Fixed Budget and Flexible Budget Q24 - Q25 101
4.5 Advantages and Limitations of Budgetary Control Q26 102
4.6 Zero - Based Budgeting Q27 - Q42 103
EXERCISE PROBLEMS 119- 122
INTERNAL ASSESSMENT 123- 126
UNIT-V STANDARD COSTING AND VARIANCE ANALYSIS 127 - 158
5.1 f Standard Costing : Meaning and Importance Q10 - Q11 131
5.1.1 Standard Costing and Historical Costing Q12 132
5.1.2 Steps Involved in Standard Costing Q13 133
5.2 Variance Analysis Q14 - Q15 134
5.2.1 Material Variance Q16 - Q17 135
5.2.2 Labour Variance Q18 137
5.2.3 Overhead Variance Q19 138
5.2.4 Sales Variance Q20 - Q30 140
EXERCISE PROBLEMS 153-155
INTERNAL ASSESSMENT 156-158
IMPORTANT QUESTIONS IQ.1 - IQ.3

. ■ .
MODEL QUESTION PAPERS WITH SOLUTIONS
Model Paper-I MP.1 - MP.2
Model Paper-I I MP.3 - MP.4
Model Paper-Ill MP.5 - MP.6
Syllabus
UNIT-I
INTRODUCTION
Managerial Accounting: Features - Objectives - Scope - Functions - Advantages and Limitations -

Relationship between Cost, Management and Financial Accounting.
UNIT-II
MARGINAL COSTING
«
Meaning - Importance - Marginal Cost Equation - Difference between Marginal Costing and Absorption
Costing - Application of Marginal Costing - CVP Analysis - Break Even Analysis: Meaning - Assumptions
- Importance - Limitations.
UNIT-III
DECISION MAKING
Make or Buy-Add or Drop Products - Sell or Process Further - Operate or Shut-down - Special Order
Pricing - Replace or Retain.
UNIT-IV
BUDGETS AND BUDGETARY CONTROL
Budget: Meaning - Objectives - Advantages and Limitations - Essentials of Budgets - Budgetary

Control - Classification of Budgets - Preparation of Budgets.
X UNIT-V
STANDARD COSTING AND VARIANCE ANALYSIS
Standard Costing: Meaning - Importance - Standard Costing and Historical Costing - Steps involved in
Standard Costing.
Variance Analysis: Material variance - Labour variance - Overhead variance - Sales variance.
LIST OF IMPORTANT DEFINITIONS AND FORMULAE
UNIT -1
1. “Management accounting is concerned with accounting information that is useful to management”.
- R.N. Anthony
2. Budgeting is a process of devising plans and objectives for the enterprise and comparison of actual figures with
budgeted figures.
3. Internal audit evaluates the effectiveness of a company’s internal control. It helps the management to evaluate the
. performance of different departments and if there are any deviations, certain responsibilities can be affixed.
4. Financial accounting refers to the accounting concerned with recording financial data.
5. Cost accounting refers to that branch of accounting which deals with cost incurred in the production of units of an
organization.
UNIT - II
1. The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased
or decreased by one unit is called marginal cost. In this context, a unit may be a single article, a batch of articles, an
order, a stage of production capacity or a department.
2. Sales - Variable cost - Contribution (or) Sales - Variable cost = Fixed cost ± Profit/Loss.
3. According to CIMA official technology, absorption costing is being defined as a principle in which fixed and the
variable cost are allocated to cost units and total overheads are absorbed as per the activity level.
4. The break-even point may be defined as that point of sales volume at which total revenue is equal to total cost. It is
a point of no profit, no loss.
, . . Fixed cost Fixed Cost
(a) Break-even Point m Units =----------------------------------------------------------- — or —---- -—:----------- —
Selling price per unit- Variable cost per unit Contribution per unit
(b) Break-even Point in terms of Money Value =------------------------- x sales

Sales-variable cost
5. The profit/volume ratio, which is also called the contribution ratio or marginal ratio, expresses the relationship
between contribution and sales and can be expressed as under,
Contribution Change in profit or Contribution
x 100 (or) P/V ratio =------- :-------------------- ---------------
Sales Change in sales
6. The excess of actual or budgeted sales over the break-even sales is known as the margin of safety. It is the difference
between actual sales and break-even sales.
Margin of safety = Actual sales - Break-even sales.
UNIT - III
1. Decision making is a process of identification and selection of an action from a number of alternative courses of
action for resolving a problem in the organization.
2. Make or Buy Decision is the first step in process planning. It includes whether the products/services must be made
in the organisation or should be brought from the other manufacturing concern i.e., from the outside party.
3. Operating or shutting do wn of products with reference to marginal costing also referred as closing down or suspending
of activities. A shutdown point is one at which a company experiences not benefit for continuing operations and
shutdown temporarily.
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1
L.2 MANAGERIAL ACCOUNTING
4. When the production capacity of a company is idle or in excess and the consideration by management is to sell
additional products below normal selling prices without affecting regular sales of same product is referred as special
orders or one time orders. Special order is a one time customer order involving a large quantity and a low price.
5. The important decision under decision analysis is to replace or retain plant and equipment, which is need to be done
carefully. There are various differential costs which are important in taking replacing or retaining decisions such as
loss on old equipment’s sales, change in fixed overhead costs, capital investment and associated costs like interest
and rate of return relevant costs to making a change to equipment.
6. A special order is an extra order or an order for an item specially requested by a customer. When the production
capacity of a company is idle or in excess and the consideration by management to sell additional products below
normal selling prices without affecting regular sales of same product is referred as special orders or one time orders.
UNIT - IV
1. A budget is a quantitative expression of a plan of action relating to the future period of time. It represents a written
operational plan of management for the budget period.
2. Budgetary control implies the use of a comprehensive system of budgeting which helps management in carrying
out its functions like planning, coordination and control.
3. Budgeted production is equal to projected sales plus closing inventory of finished goods minus opening stock of
finished good, i.e., units to be produced, (Budget sales + Desired closing inventory - Opening inventory).
4. The sales budget is the most important functional budget. If sales figure is incorrect, practically all functional budgets
and consequently master budget will be affected. It is the keystone ofthe budget structure. The sales budget primarily
forecasts what the concern can reasonably expect to sell both in quantity and value during the budget period.
5. Zero based budgeting is a method of budgeting in which all expenses must be justified for each new period. Zero
base budgeting is a new technique of planning and decision making. It is a very challenging approach.
6. Fixed factory overheads = Total overhead at a capacity - Total variable overheads at that capacity.
Difference in total overheads
Variable office overheads per units = Difference in capacity utilization
8. Fixed selling expenses = Total expenses at a capacity - Total expenses at that capacity.
. .
UNIT - V
1. According to Chartered Institute of Management Accountants (CIMA) “Standard costing is the preparation and
use of standard costs, their comparison with actual costs and analysis of variances into their courses and points of
incidence”.
2. Labour Mix Variance is the portion of labour efficiency variance which is due to difference between actual composition
of labour used and standard composition specified.
3. Material Cost Variance can be computed by using the following formula,
Material cost variance = (SQ x SP) - (AQ * AP)
4. Material price variance can be calculated as,
Material price variance = (SP - AP) x AQ or (SR - AR) x AQ
5. The formula for finding the material yield variance is,
Material yield variance = (AQ -SQ) x SP.
6. Labour Cost Variance = (SH x SR) - (AH x AR)
7. Labour Efficiency Variance = (Standard hours for Actual Output - Actual Hours (AH)) x SR
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UNIT
1 INTRODUCTION
SIA GROUP
\______________ /
C LEARNING OBJECTIVES J
After studying this unit, one would be able to understand,
❖ Managerial Accounting - Its Meaning, Features, Scope, Need, Importance, Objectives and Functions.
❖ Advantages and Limitations of Managerial Accounting.
❖ Relationship between Cost, Management and Financial Accounting.
❖ Differences between Cost, Management and Financial Accounting.
( INTRODUCTION )
Managerial accounting is the presentation of accounting information in such a way as to assist management
in the creation of policy and the day-to-day operation of an undertaking. It is also known as management
accounting. “Management accounting is concerned with accounting information that is useful to management.”
Managerial accounting is very useful for the managers in taking decisions of the internal matters of the
organization. It facilitates in internal reporting. Managerial accounting does not follow any particular set rules
and methods. It basically follows special rules and methods according to the suitability of the management.
Managerial accounting basically provides information on various things like cost, financial gains, specialized
e., non-technical language and so on which is needed by the management for carrying out the business
i.
operations. Managerial accounting is actually much more than numbers which does not need any explanation
and can be clearly and easily understood.
Managerial accounting provides information regarding the objectives achieved or to be achieved. This
information helps to make a performance evaluation of various departments. Managerial accounting makes
use of standard costing, budgetary control, project appraisal and other techniques and concepts which makes
the provided accounting information to be more relevant for decision making.
The process of preparing management reports and accounts that provide accurate and timely financial and
statistical information is required by managers to make day to day and short-term decisions.
. ' jj
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2 MANAGERIAL ACCOUNTING
PART-A
SHORT QUESTIONS WITH SOLUTIONS
Q1. Define the term Managerial Accounting.
Answer : Model Paper-Ill, Q3
Managerial accounting is the presentation of accounting information in such a way as to assist management in the
creation of policy and the day-to-day operation of an undertaking. It is also known as management accounting.
Thus, it relates to the use of accounting data collected with the help of financial accounting and cost accounting for
the purpose of policy formulation, planning, control and decision making by the management. Some leading definitions of
managerial or management accounting are given below,
“Management accounting is concerned with accounting information that is useful to management.”
— R.N. Anthony
“Management accounting is the term used to describe accounting methods, systems and techniques which coupled
with special knowledge and ability, assist management in its task of maximizing profits or minimizing losses. Management
accountancy is the blending together into a coherent whole, financial accounting, cost accountancy and all aspects of
financial management”.
—Batty
Q2. Discuss any four features of managerial accounting.
Answer : Model Paper-ll, Q2
The important features of management accounting are as follows,

1. Facilitates internal Reporting
Managerial accounting is very useful for the managers in taking decisions of the internal matters of the organization.
It facilitates in internal reporting.
2. Offers Useful Information
Managerial accounting gathers information, categorizes it and then provides the data according to the needs of the
management and managers.
3. Uses Cause and Effect Relationship
Managerial accounting makes use of the cause and effect relationship and helps in finding out the reasons for loss
or profit of the business.
4. Follows No Special Methods and Rules
Managerial accounting does not follow any particular set rules and methods. It basically follows special rules and
methods according to the suitability of the management.
5. Dynamic Management
Overall aim of maximizing the value of the objective function in any decision making or planning.
Q3. State the significance of Managerial Accounting.
Answer :
The need and importance of managerial accounting are explained as follows,
1. Managerial accounting basically provides information on various things like cost, financial gains, specialized i.e.,
non-technical language and so on which is needed by the management for carrying out the business operations.
2. Managerial accounting highlights and displays the accounting information in a manner which helps the management
in policy making process.
3. Managerial accounting is actually much more than numbers which does not need any explanation and can be clearly
and easily understood.
4. Managerial accounting is an expansion of the cost accounting concepts. It makes use of those rules and methods
which are used in cost and financial accounting.
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UNIT-1 : Introduction 3
Q4. What are the objectives of Managerial Accounting?
Answer s
Following points highlight the objectives of managerial accounting,

1. Managerial accounting provides information regarding the objectives achieved or to be achieved. This information
helps to make a performance evaluation of various departments.
2. Helps in Organizing
The Management Accountant recommends the use of budgeting, responsibility accounting cost control techniques
and internal financial control.
3. Provides Accounting Information
Managerial accounting gives accounting information to the manager to take and review policy decisions and see
their impact in future.
4. Usage of Special Techniques
Managerial accounting makes use of standard costing, budgetary control, project appraisal and other techniques and
concepts which makes the provided accounting information to be more relevant for decision making.
5. Fixed Guideline, Not Followed
Managerial accounting does not follow any fixed guidelines, the procedures and analysis vary from firm-to-firm as
their requirements are different.
Q5. Explain the differences between cost accounting and financial accounting.
Answer : Model Paper-I, Q1
S.No. Point of Financial Accounting Cost Accounting

Difference
1. Meaning Financial accounting refers to the accounting Cost accounting refers to that branch of
concerned with recording financial data. accounting which deals with cost incurred in the
production of units of an organization.
2. Objective Financial accounting records all the Cost accounting records by the firm in producing
transactions relating to finance. a product or service.
3. Periodicity It is prepared at the end of the financial year. It prepares its report weekly or monthly.
4. Importance It is compulsory to prepare final accounts in It is compulsory to prepare cost accounts only
every organization. in some undertakings.
Z
5. Analysis or It discloses the financial position of the It discloses the profits with regard to each
report company as a whole. process, product or service.
6. Scope In financial accounting, trading account, Cost accounting ascertaining the cost of a
profit and loss account and. balance sheet are product or service.
prepared.
Q6. State the advantages of managerial accounting.
Answer :
The following are the advantages of managerial accounting,
1. Managerial accounting helps the management in policy formulation and in taking decisions about the future activities
of the firm.
2. The business activities are managed better by the application of both budgeting and planning.
3. It facilitates the management in controlling the business operations effectively with the help of techniques like
standard costing and budgetary control.
4. It helps the management in planning and forecasting the firm’s activities.
5. It guides the management in taking adequate actions as per the changing economic environment of business.
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Q7. Explain the role of Management Accountant. Q9. Explain briefly about organization of
management accounting.
Answer :
Management Accountant is held with responsibility to Answer : Model Paper-ll, Q8
provide useful information to different levels of management.
Organisation of management accounting system is
The role of management accountant is explained in detail
based on different factors like nature and size of the business,
below,
policy and philosophy of management etc. The management
1. The management accountant facilitates in framing the accountant operate under direct control of a manager
plans of future by utilizing important information, in medium sized organization. Whereas in large sized
assisting management in achieving future goals, business, he work in co-operation with financial controller
helping in planning the short term budget, Preparing and acts as a coordinator for different departments of an
master budget and present it for approval to top organization. In large sized concern, the position occupied
management. by the management accountant is explained below:
2. The management accountant helps in preparing
performance reports of every responsibility centers,
identify the areas that do not go along with plans
and recognize weak and troubling points, so that top
management can take necessary steps.
3. Management accountant use responsibility accounting
system to represent the design and implementation
of accounting system to have better definition and
consideration.
Management accountant is directly accountable
4. Management accountant use budget and performance to managing director. The activities relating to accounts
reports for the purpose of communication. department are handed over to different persons like financial
5. Both budgets and performance reports motivate the accountant (who prepares final accounts), cost accountant
personnel of the organisation. Budgets encourage (who ascertain costs), budget officer (who integrates
managers in achieving targets and performance departmental budget) and chief auditor (who checks the
reports encourage the personnel. books of accounts).
Q8. Qualities of management accountant Q10. Explain the controller functions.
Answer :
The qualities of management accountant are as
follows, The controller functions are as follows,
1. He/She must possess qualities like leadership, self 1. He should create, manage and control the plans
motivation, team working. which helps in estimating sales, expenses, budgets
2. He/She must have adequate knowledge about different and standards that allows profit planning, capital
branches of study like financial accounting, cost budgeting and financing.
accounting, economics, statistics, law etc. 2. He should prepare accounting policy and procedures
3. He/She must possess knowledge regarding business which also includes submission of operating data
forecast in changing environment of business. and special reports and comparison of performance
with plans and standards. Comparison enables
4. He/She must have the ability to evaluate management
management properly assign responsibility and
on regular basis to determine current position of the
evaluate functional and divisional heads.
business, which helps in knowing success or failure
of the business. 3. He should protect the assets of the business from
5. He/She must possess knowledge of management and external controls, internal auditing and insurance
accounting techniques for the purpose of preparing coverage.
and submitting reports to management. 4. He should design tax policies and procedures to
6. He/She must co-operate with all levels of management manage the reports that are needed by different
and should prepare bias free reports. authorities.
7. He/She must have an analytical mind to view 5. He should be aware of all economic and social forces
outcomes of alternative courses and an understanding and impact of policies and actions of governments
of management structure. affecting business activities.
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1.1 MANAGERIAL ACCOUNTING: DEFINITION, FEATURES AND FUNCTIONS
Q11. Define the term Managerial accounting. Discuss briefly about its features and function.
Answer : Model Paper-I, Q9(a)
Managerial Accounting
creation of policy and the day-to-day operation of an undertaking. It is also called as management accounting.
Thus, it relates to the use of accounting data collected with the help of financial accounting and cost accounting for
the purpose of policy formulation, planning, control and decision making by the management. Some leading definitions of
managerial or management accounting are given below,
“Management accounting is concerned with accounting information that is useful to management.”
-R.N. Anthony
-Batty
Features of Managerial Accounting
Managerial accounting is a scientific discipline which has some principles and concepts whereby management is
provided with accounting information to help make decisions.
The important features of management or managerial accounting are as follows,
1. Facilitates Internal Reporting
Managerial accounting is very useful for the managers in taking decisions of the internal matters of the organization.
It facilitates in internal reporting.
Managerial accounting gathers information, categorizes it and then provides the data according to the needs of the
management and managers.
Managerial accounting makes use of the cause and effect relationship and helps in finding out the reasons for loss
or profit of the business.
4. Organized Activity
Management is not an isolated activity but is essentially a teamwork in formally organized groups.
Managerial accounting does not follow any particular set rules and methods. It basically follows special rules and
methods according to the suitability of the management.
6. Provides Future Information
Managerial accounting basically provides future oriented information which helps in taking decisions to the
management.
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6 MANAGERIAL ACCOUNTIN
7. Maintains Confidentiality (e) Reporting the Data
Managerial accounting allows only the top executives Soon after analysing and interpreting the data,
of the management to go through the financial reports of the should be communicated to the management at differer
business. It is mainly concerned with confidential financial levels in the form of reports. These reports must be prepare
quickly in an efficient way and must be submitted to th
reports.
managers to assists them in coordinating, decision makin
8. Implements on Special Procedures/Methods and controlling the business activities.
Managerial .accounting implements special methods (f) Installation of Sound Accounting System
and concept which are helpful to organization. The methods Installation is another important function o
used in managerial accounting are standard costing, marginal managerial accounting wherein a suitable and effectivi
costing, financial analysis and planning and so on. financial and cost accounting system must be installed ii
accordance with the organizational structure. It also deal
9. Management a Profession
with modifying and remodifying the accounting system oi
Management has now emerged as a profession as the basis of the changes in the economic environment of th<
managers to be effective. business.
Functions of Managerial Accounting (g) Feedback
The feedback basically deals with providing th<
Managerial accounting basically deals with
management with feedback**reports for effective contro
the functions of classification, reporting analysis and
by comparing the actuals with the budgeted activities anc
interpretation of relevant data in order to help the
taking immediate actions by following the technique o:
management in carrying out the business activities effectively
“management by exception”. Information about reaction:
and economically. The following are the important functions
to a product, a person’s performance of a task, etc., which
of managerial accounting,
is used as a basis for improvements.
(a) Recording Transactions
(h) Evaluating the Performance
Even though financial accounting deals with recording It usually provides the management with several
of data is quite essential to consider the estimates and techniques for assessing the management’s performance in
probabilities while recording the transactions as this helps the light of firm’s objectives._________________________
the management in easily carrying out its functions. The
Q12. Elucidate the significance of managerial
management accounting basically deals with classifying
accounting.
the actual records and data into groups and sub-records.
This classification of records would help the management Answer :
in preparing the comprehensive reports. Managerial accounting guides the management at
(b) Validating the Data
every step in order to improve its efficiency. Management
accounting is the best tool for the management to achieve
Managerial accounting also deals with the validation higher profits and efficient operations.
ofthe recorded data. Validation of data helps the management
The need and importance of managerial accounting
decision making by providing reliable and accurate
are explained as follows,
information. Besides this it also provides future data on the
basis of the predetermined level of activity. Basically, the 1. Managerial accounting basically provides information
efficiency ofthe management relies upon the financial data’s on various things like cost, financial gains, specialized
correctness and adequacy. e., non-technical language and so on which is needed
i.
by the management for carrying but the business
(c) Target Costing
operations.
Assisting in the design ofnew product by accumulating 2. Managerial accounting highlights and displays the
the costs of new designs comparing them to target cost levels. accounting information in a manner which helps the
(d) Interpretating the Data management in policy making process.
The raw data i.e., the data which is collected and 3. Managerial accounting is actually much more than
validated cannot be used directly by the management, the numbers which does not need any explanation and
management needs to interpret the recorded data on the can be clearly and easily understood.
basis of their similarities and dissimilarities which would 4. Managerial accounting is an expansion of the cost
help the management in making proper decision. Therefore, accounting concepts. It makes use of those rules
analysis and interpretation are the most important functions and methods which are used in cost and financial
of managerial accounting. accounting.
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5. Managerial accounting is a wider concept which 2. Cost Accounting
consists of almost all the activities of the business. Cost accounting is the process of recording,
6. Management accounting helps small business owners classifying, analyzing, summarizing and allocating cost
to determine the product which need to be set as the associated with a process. It provides the information to
first priority in production process. The staff working measure product costs and performance and controls the
in the organization mainly needs proper system operations of a firm. It helps managerial accounting to deal
along with proper information for the decision making with the effect and impact of cost on business. There is a
process. Thus, the managerial accounting assists the clear idea of the cost types and this helps the management
management in providing so. to plan various business activities.
7. Managerial accounting facilitates the management 3. Financial Management
in taking decisions, controlling, planning profit and Helps in planning and controlling the financial
so on. It also assist in implementation of plans and resources of the firm, so that .they can be effectively and
performance appraisal measurement. profitably utilized. This is done through management
8. There is a need for an accounting system for accounting. Finance and managerial activities are
management. interrelated.
4. Budgeting, Forecasting and Inventory Control
The managerial accounting provides information to
the management and helps it in investigating and Budgeting is a process of devising plans and
studying the problem and taking corrective decision. objectives for the enterprise and comparison of actual
figures with budgeted figures. Forecasting is predicting the
9. Managerial accounting lays greater emphasis future activities. Inventory control is keeping an appropriate
on providing financial information and internal stock of raw materials as this involves large sums and the
employees which helps the managers in achieving costs have to be controlled. Therefore, these three activities
the goal of the organization easily. Therefore, the help managerial accounting to prepare plans for future the
management is being provided with the required activities and inventories.
useful information.
5. Internal Audit
10. Managerial accounting assists the managerial Internal audit evaluates the effectiveness of a
workforce/staff in carrying out various functions company’s internal control. It helps the management to
in an effective manner. Information is collected evaluate the performance of different departments and if
from various sources and is used for the decision there are any deviations, certain responsibilities can be
making process. As, it provides good service to the affixed.
management in various domains, the managerial
6. Interpretation of Data
accounting is thus called as “Accounting for
management or management based accounting”. Financial statements are interpreted which reveals'the
financial position of the firm.
11. Management accounting is integral to the operation
7. Office Services
of pianufacturing firms.
Managerial accounting deals with various office
1.1.1 Scope and Objectives services such as file copying, data processing, communicating
and so on.
Q13. Explain the scope and objectives of managerial
8. Reporting to Management, Statistics
accounting.
Through th'e use of statistics, management is
Answer : Model Paper-Ill, Q9(a)
presenting reports in the form of graphs, diagrams about the
Scope of Managerial Accounting functioning of various activities in an enterprise.
The scope of managerial accounting includes the 9. Tax Accounting
following, Helps the managerial accountant to prepare income
statements and calculate tax liabilities.
1. Financial Accounting
10. Engineering and Electronic Data Processing
Provides historical data which helps management (EDP)
accounting in the preparation of financial reports required by EDP is useful to managerial accounting when
the shareholders, creditors, tax authorities and so on. It helps sometimes operations and processes have to be seen by the
to plan the future courses of action and use the information plant engineer and also when paper work, time and labour
provided in the internal control of operations. have to be reduced.
Objectives of Managerial Accounting

Following points highlight the objectives of managerial accounting,
1. Managerial accounting provides information regarding the objectives achieved or to be achieved. This information
helps to make a performance evaluation of various departments.
2. Provides Accounting Information
Managerial accounting gives accounting information to the manager to take and review policy decisions and see
their impact in future.
3. Usage of Special Techniques
Managerial accounting makes use of standard costing, budgetary control, project appraisal and other techniques and
concepts which makes the provided accounting information to be more relevant for decision making.
4. Fixed Guideline, Not Followed
Managerial accounting does not follow any fixed guidelines, the procedures and analysis vary from firm-to-firm as
their requirements are different.
5. Enhanced Efficiency
Managerial accounting provides information and helps to prevent inefficiency, this is through constant reviewing.
6. Cause and Effect Relationship Analyzed
Managerial accounting when compared to financial accounting goes beyond the preparation of profit and loss account
result, it assesses the reason for profit and loss and the factors responsible for it.
7. Planning and Forecasting
Managerial accounting aids in planning and forecasting where by the management can decide on a course of action.
1.1.2 Advantages and Limitations __________ _______ ___

Q14. Explain the advantages and limitations of managerial accounting.
Answer :
Advantages of Managerial Accounting
The following are the advantages of managerial accounting,
1. Managerial accounting helps the management in policy formulation and in taking decisions about the future activities
of the firm. Both financial and cost accounting information are used in the management accounting.
2. It facilitates the management in controlling the business operations effectively with the help of techniques like
standard costing and budgetary control.
3. £ It helps the management in planning and forecasting the firm’s activities.
4. It guides the management in taking adequate actions as per the changing economic environment of business.
5. It assists the management in coordinating the activities of different departments with the help of techniques like
budgeting, reporting and interpretation. This intum helps in achieving the organizational objectives.
6. It assists the management in organizing the firm’s activities.
7. It facilitates the management in evaluating the financial performance of the business.
8. It also creates employment opportunities for management accountants.
9. Financial accounting, cost accounting, statistics, economics and sociology are the related subjects of management
accounting.
Limitations of Managerial Accounting
Though managerial accounting is advantageous to management it also has certain limitations, which are as follows,
1. As managerial accounting mostly considers the estimates and probabilities instead of actual data, the accuracy of
the data is not ensured/assumed.
2. It acts only as a tool for managers but not as a substitute for management.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. -----__ __
3. The information provided by the managerial accounting is totally dependant on the financial accounts, cost accounts
and other reports.
4. The installation of managerial accounting system is an expensive process which is not suitable for small and medium
scale enterprises.
5. The existing or present accounting staff of the firm often resists the installation of managerial accounting system.
6. As managerial accounting is still in the evolutionary stage it need well developed tools and techniques for modification
and refinement.
7. Managerial accounting is a long term process.
8. As managerial accounting requires the knowledge of the subjects like statistics, law, auditing etc., it is very essential
for the management accountants to have adequate knowledge about all these subjects for resolving the problems
and issues.
1.2 RELATIONSHIP BETWEENjiOST, MANAGEMENT AND FINANCIAL ACCOUNTING
Q15. List out the differences between cost accounting, management accounting and financial accounting.
Answer : Model Paper-ll, Q9(a)
Point of Financial Accounting Cost Accounting Management Accounting

Difference
1. Meaning Financial accounting refers to Cost accounting refers to that “Management accounting
the accounting concerned with branch of accounting which is concerned with accounting
recording financial data. deals with cost incurred in information that is useful to
the production of units of an management.”
organization.
2. Objective Financial accounting records Cost accounting recordsby the Management accounting helps the
all the transactions relating to firm in producing a product or management in designing plans
finance. service. and policies.
3. Periodicity It is prepared at the end of the It prepares its report weekly It provides information when ever
financial year. or monthly. it is required by the management.
4. Importance It is compulsory to prepare final It is compulsory to prepare It is not compulsory.

f accounts in every organization. cost accounts only in some
undertakings.
5. Principles It follows only some accounting It is compulsory to follow all Principles and procedures are
principles and standards., the principles and procedures not followed in management
in cost accounting. accounting.
6. Analysis or It discloses the financial position It discloses the profits with It prepares the budget and tax
report of the company as a whole. regard to each process, product plans from the reports provided
or service. by financial and cost accounting.
7. Nature It mainly deals with the It makes use of the historical It deals with the future plans and
historical data. data provided and outlines it. policies.
8. Scope In financial accounting, trading Cost accounting ascertaining It formulates policies for effective
account, profit and loss account the cost of a product or service. performance of management
and balance sheet are prepared. and covers cost and financial
accounting.
_ SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.

Q16. Define financial accounting, cost accounting and management accounting and explain the relationship
between cost management and financial accounting.
Answer :
Financial Accounting
Financial accounting deals with the preparation of financial statements such as profit and loss account (P & L a/c) and
balance sheet. It helps in communicating the accounting information of the business to its end users such as shareholders,
employees etc. The main objective of financial accounting is to analyse profit or loss position of the business. In order
to accomplish these objectives, it is very essential to maintain a systematic record of business transactions in accounting
books.
Cost Accounting
Cost accounting is the process of accounting of a cost, which involves classification, recording, presentation and
interpretation of the results of monetary transaction, so as to assess the performance and financial position at a given data
and monetary projections of future activities arising from alternative planned courses of action.
Management Accounting
— Batty
Relationship between Cost Accounting and Management Accounting
Following points highlights the relationship between cost and management accounting,
1. The main purpose or objective of cost accounting is to ascertain costs. It mainly provides information to management
for reducing and controlling costs of products and services. Management accounting uses the cost accounting
information to create reports.
2. Management accounting uses cost data or cost accounting concepts to evaluate overall organisational performance
and for decision making.
3. Cost accounting primarily deals with classifying and recording costs and allocation of expenditure, which is used
in management accounting.
4. The information which is supplied by the cost accounting would acts as a management tool for decision-making
and also to optimize the utilization of scarce resources.
5. Thus, both cost and management accounting are considered as complementary in nature, because without well cost
data and cost accounting system, the management accounting system cannot function properly.
6. i? The concept of management accounting is much wider than the concept or function of ascertainment of cost (i.e.,
cost accounting).
Relationship between Financial Accounting and Management Accounting
Following points highlights the relationship between financial accounting and management accounting,
1. Both financial accounting and management accounting deals with reporting and interpretation of accounting
information.
2. Both financial accounting and management accounting provides the accounting information for internal and external
purposes.
3. Both financial and management accounting studies the effects of business transaction^ and economic events.
4. Both financial and management accounting deals with assets, liabilities, receipts, payments, cash in flows and
outflows of the business organization.
5. Both financial and management accounting same rules of accounts.
6. Managerial accounting is more concerned with operational reports which are only distributed within a company
Financial accounting must comply with various accounting standards.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. -
1
1 ,3 ROLE AND DUTIES OF MANAGEMENT ACCOUNTANT

Q17. Explain briefly about the functions of Management Accountant.
Answer :
Management is a set of principles relating to the functions of planning, controlling, reporting. Management
Accountant is known with different terms such as finance director, financial controller, financial manager and controller.
He is the person who is held with the responsibility of doing management accounting work. He gathers information relating
to accounting, cost accounting, economics and statistics and submit it to the management. This information facilitates
management in performing managerial functions and their evaluations effectively. Different techniques of recording,
analysis, interpretation and presentation used by the accountant helps the management in effective planning, decision
making and control. Management accountant should be forward looking, so that he can make economic information and
data useful for management.
Apart from this, functions of controller are as follows,
1. He should create, manage and control the plans which helps in estimating sales, expenses, budgets and standards
that allows profit planning, capital budgeting and financing.
2. He should prepare accounting policy and procedures which also includes submission of operating data and special
reports and comparison of performance with plans and standards. Comparison enables management properly assign
responsibility and evaluate functional and divisional heads.
3. He should protect the assets of the business from external controls, internal auditing and insurance coverage.
4. He should design tax policies and procedures to manage the reports that are needed by different authorities.
5. He should be aware of all economic and social forces and impact of policies and actions of governments affecting
business activities.
6. He is responsible for the installation.
7. He has to design a framework for the management accounting.
Q18. Explain the role of management accountant in an organization. Briefly state the duties of management
accountant.
Answer : Model Paper-ll, Q9(b)
Role of Management Accountant

The role of management accountant is explained below in detail,
1. Planning
Planning can become a management process, concerned with defining goals for a future direction. The Management
Accountant facilitates in,
(a) Framing the plans of future by utilizing important information like type of products to be sold, market condition,
fixation of prices etc.
(b) Assists management in achieving future goals by providing past performance record.
(c) Helps in planning the short term budget for the concern.
(d) Preparing master budget and presents it for approval to top management.
2. Controlling
The Management Accountant helps in,
(a) Preparing performance reports of every responsibility center in order to control the performance-of the organization.
(b) Identify the areas that do not go along with plans and recognize weak and troubling points, so that top management
can take necessary steps.
3. Organizing
Organizing is the function of management which follows planing. Management Accountant use responsibility
accounting system to represent the design and implementation of accounting system to have better definition and
consideration.
-------------------------------- - ---------- ----------- SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
4. Communicating
Management Accountant use budget and performance reports for the purpose of communication.
5. Motivating
Both budgets and performance reports motivate the personnel of the organisation. Budgets encourage managers in
achieving targets and performance reports encourage the personnel.
Duties of Management Accountant
The duties of Management Accountant are as follows,
1. Management Accountant acts as chief accounting officer who is incharge of accounting books, accounting records
and forms relating to the organization.
2. All payrolls and vouchers are audited and properly certified by management accountant.
3. A complete financial report is prepared and submitted to managing director about operations of company for past
quarter and fiscal year to date.
4. Management Accountant is held responsible for preparation, compilation, filing of reports, statements, statistics and
other data which is needed by law or managing director.
5. Collects reports from agents and factory departments for the purpose of recording factory’s general operations or
for controlling its accounts.
6. Manage the Accounting practices of all subsidiary companies.
7. He controls the enforcement and maintenance of classification of accounts and accounting rules and regulations
prescribed by any regulatory body.
8. Cheques for deposit or transfer are sanctioned by management accountant.
9. Management Accountant gives approval for payment of all vouchers, drafts and other bills payable.
10. A budget is prepared by accountant showing future requirements of the factory disclosed by its accounts and
requirements of general manager and other officers.
1.4 TOOLS/TECHNIQUES AND INSTALLATION OF MANAGEMENT ACCOUNTING

- ■■ ■ . .......... .................... . ........ .............. ■ . ..... ... . ■ ........................ ......
Q19. Discuss various tools and techniques of management or managerial accounting.

Answer : Model Paper-I, Q9(b)
Management Accounting use different tools and techniques to operate efficiently. Some of the techniques are,
1. Financial Accounting
It acts as a backbone of management accounting as it provides accounting information to management accountant.
This information is rearranged and used for reporting to management.
2. C.ost Accounting
f
Information relating to cost of production is provided by cost accounting which is used by management accounting
for comparing actual cost with standard cost.
3. Cost Control Techniques
Many cost control techniques like marginal costing, differential costing, budgetary control and standard costing are
used by management accounting to analyze the efficiency of business.
4. Analysis of Financial Statements
The various techniques of analysis and interpretation like comparative financial statements, common size statements,
funds flow statement, cash flow statement and ratio analysis are used by management accounting to focus on the performance
of business.
5. Financial Management
Different techniques of financial management are used by management accounting like degree of trading on equity,
proportion of equity, loan capital and preference share, sources of capital, analyzing alternate investment proposals.
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6. Management Information System
MIS facilitates management accounting by providing useful information. This enables management accounting to
report to all levels of management at appropriate time. As reporting is an essential part of management accounting.
7. Statistical Analysis
In order to effectively utilize financial information and conduct comparative study, many statistical techniques
are used. Some of the techniques used by management accounting are graphs, charts, diagrams, measures of dispersion,
correlation and regression analysis, time series analysis etc.
8. Inflation Accounting
Inflation accounting is used by management accounting to maintain original capital when there is increase in prices.
9. Cash Flow Analysis
The cash flow statement includes all cash inflows and cash outflows of a company that pay for business activities.
Q20. Explain the installation of management or managerial accounting.
Answer s Model Paper-Ill, Q9(b)
The steps involved in the installation of management accounting in an organization are as follows,
(i) Preparation of Organizational Manual
An organizational manual is a book which outlines the duties and responsibilities of the management at the different
hierarchical levels. This manual is prepared by the management accountant and it helps in guiding the organizational
members. It helps the management in delegating the authority and fixation of responsibility to the organizational members.
(ii) Preparation of Printed Forms
The management accounting significantly deals with the development and submission of reports to all the management
levels. They can use the blank printed forms for avoiding repetitions. The forms are adequately filled and submitted to the
respective management.
(iii) Recruitment of Staff
Overall process of attracting, short listing, selecting candidates for jobs. In this step, the staff and clerks should be
recruited and trained in the organization for providing assistance to the management accountant.
(iv) Integration of Cost and Financial Accounting _
The management accounting mostly depends upon the information from cost accounts and financial accounts. Thus,
management accountant has to adopt an integration system to integrate the financial and cost accounting and to support
the management accounting system.
(v) Standard Costing System
Management accountant has to adopt an effective standard costing system for establishing standard cost and for
comparing the actual costs with the standard costs. This in turn helps in identifying the variances and taking immediate
actions for avoiding or reducing them.
(vi) Budgetary Control System
A system of management control in which actual income and spending are compared with planned income and
spending. It is necessary for a firm to introduce a control technique called as budgetary control system along with standard
costing system. Besides acting as a control tool, budgetary control system also acts as a coordination tool for integrating
the budgets of all the departments into a master budget.
(vii) Operation Research Techniques
Due to the rapid changes in the business environment, the business processes are becoming more complex. The
businesses are facing number of challenges and ample of opportunities. In such type of situations, it is very essential for the
firms to adopt an effective operational research technique, which supports the management accountant in problem solving.
--------- ----- -------------- ,------ SIIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
I. Multiple Choice
1. _________ is the presentation of accounting information in such a way as to assist management in the creation
of policy and the day-to-day operation of an undertaking. -[ ]
(a) Cost Accounting (b) Financial Accounting
(c) Management Accounting (d) None of the above
2. According to “Managerial accounting is concerned with accounting information that is useful to

management”. [ ]
(a) R.N Anthony (b) Batty
(c) Both (a) and (b) (d) None of the above
3. _ records all the transactions relating to finance. [ ]
(a) Managerial Accounting (b) Cost Accounting
(c) Financial Accounting (d) None of the above
4. records by the firm in producing a product or service. [ ]

(a) Managerial Accounting (b) Cost Accounting
(c) Financial Accounting (d) None of the above
5. Financial accounting is prepared at the end of the [ 1

(a) Month (b) Calender year
(c) Assessment year (d) Financial year
6. Managerial accounting provides the information whenever it is required by the [ ]

(a) Management (b) Customer
(c) Supplier (d) None of the above
7. Managerial accounting deals with the plans and policies. [ ]

(a) Current (b) Past
9
(c) Future (d) None of the above

8. Principles and procedures are not followed in [ ]
(a) Cost Accounting (b) Managerial Accounting
(c) Financial Accounting (d) Corporate Accounting

9. Financial accounting mainly deals with data. [ ]
(a) Historical (b) Current

10. guider the management every step in order to improve its efficiency. [ 1
(a) Financial Account (b) Managerial Accounting
(c) Cost Accounting (d) Corporate Accounting
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. _____ ——

1
UNIT-1 : Introduction _____ _____ „ 15
II. Fill in the Blanks
1. __________ makes use of cause and effect relationship and helps in finding out the reasons for profit or loss
of the business.
2. Managerial accounting also deals with the validation of the__________.
3. Managerial accounting is a___________ which has some principles and concepts whereby management is
provided with accounting information to help in making decisions.
4. Managerial accounting provides information regarding the objectives_________ .
5. Managerial accounting is a________ process.
6. Managerial accounting acts as a tool for________ but not as a substitute for management.
7. Managerial accounting provides information and helps to prevent__________ _.
8. Managerial accounting aids in__________ where by the management can decide on a course of action.
9. Managerial accounting assists the___________ in organizing the Ann’s activities.
10. Managerial accounting facilitates the management in evaluating the _ _________ of the business.
I. Multiple Choice
1- (c)
2. (a)
3. (c)
4. (b)
5- (d)
6. (a)
7. (c)
8- (b)
9. (a)
*0. (b)

1. Managerial Accounting
2. Recorded data
3. Scientific discipline
4. Achieved
5. Long-term
6. Managers
7. Inefficiency
8. Planning and forecasting
9. Management
10. Financial performance.
15 III. Very Short Questions and Answers
Q1. What is Managerial Accounting?
t or loss Answer :
creation of policy and the day-to-day operation of an undertaking.
Q2. List out the functions of Managerial Accounting.
ment is
Answer :
Following are the function of managerial accounting,
(a) Recording transactions
(b) Validating the data
(c) Interpretating the data
(d) Reporting the data
n. (e) Installation of sound accounting system
(f) Feedback
(g) Evaluating the performance
1
(h) Directing
(i) Controlling
(j) Communicating.
Q3. State the features of Managerial Accounting.
Answer :
1. Facilitates Internal Reporting
5. Provides Future Information
6. Maintains Confidentiality
*7
/. Implements on Special Procedures/Methods.
8. Management is a dynamic function.
9. Management is continuous process.
Q4. ^/Vhat is the nature of Managerial Accounting?
Answer :
Managerial accounting is a scientific discipline which has some principles and concepts whereby management is
provided with accounting information to help make decisions.
Q5. State the limitations of Managerial Accounting.
Answer :
1. As managerial accounting mostly considers the estimates and probabilities instead of actual data, the accuracy of
the data is not ensured/assumed.
2. It acts only as a tool for managers but not as a substitute for management.
3. The information provided by the managerial accounting is totally dependant on the financial accounts, cost accounts
and other reports.
4. The installation of managerial accounting system is an expensive process which is not suitable for small and medium
scale enterprises.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. _____________
fD.
r---------------------- \
UNIT
2 MARGINAL COSTING
SIA GROUP
\>
( LEARNING OBJECTIVES ~)
❖ Meaning, Importance and Applications of Marginal Costing.
❖ Marginal Cost Equation.
❖ Concept, Objectives, Uses, Assumption and Limitations of CVP Analysis.
❖ Meaning, Assumptions, Importance and Limitation of Break Even Analysis.
❖ Differences between Marginal Costing and Absorption Costing.
Decision making is one of the applications of marginal costing. Due to insufficient information provided
by total cost method, firms use marginal costing technique for taking management decisions. Some of the
decision areas where marginal costing technique is used are make or buy decisions, key or limiting factor,
diversification of products, closing down or suspending activities, level of activity planning etc.
Cost Volume Profit (C.V.P) analysis is a technique for studying the relationship between cost, volume and
profit. Profits of an undertaking depend upon a large number of factors. But the most important of these factors
are the cost of manufacture, volume of sales and the selling prices of the products. But the most significant
sipgle factor in profit planning of the average business is the relationship between the volume of business,
costs and profits. The C.V.P relationship is an important tool used for the profit planning.
Break-even analysis refers to the study of relationship between costs, volume and profit at different levels of
sales and production. It is a technique which helps to determine the level of operations where total revenues
equal to total expenses i.e., no profit, no loss situation.
Marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by
one unit, that is, it is the cost of producing one more unit of a good.
PART-A
__________________ SHORT QUESTIONS WITH SOLUTIONS
Q1. State the advantages of marginal costing.
Answer :
Some of the advantages of marginal costing are as follows,
1. The valuation of inventories is done at marginal cost and thus prevents the illogical carry forward of fixed costs of
one period to the next one as part of value of stock.
2. Profit is treated as a function of sales and not of production as profit depends on sales volume and not on production
volume.
3. It facilitates control over variable costs by avoiding arbitrary apportionment or allocation of fixed costs.
4. It helps in short term profit planning, cost control, evaluation of performance and taking correct decisions, keeping in view
_____ the exigencies of the situation._________________________________________________________ __________ ___
Q2. What is BEP?
Answer :
The break-even point may be defined as that point of sales volume at which total revenue is equal to total cost. It
is a point of no profit, no loss. Break even point analysis is a measurement system that calculates the margin of safety. A
business is said to break-even when its total sales are equal to its total costs. At this point contribution i.e., sales minus
variable cost, equals the fixed costs. If production/sales is increased beyond this level, there shall be profit to the organization
and if it is decrease from this level, there shall be a loss to the organization.
Break-even point can be stated in the form of an equation,
Sales revenue at break-even point = Fixed costs + Variable costs.
The following formula is adopted to find BEP:
Fixed Cost
BEP in (units) =
Contribution p.u
Fixed Cost
BEP in (sales)= x Sales.
Contribution
Q3. Calculate B.E.P in terms of sales value and in units from the following particulars.
Fixed factory overhead cost ? 80,000
Fixed selling overhead cost ? 10,000
Variable manufacturing cost per unit ? 8
Variable selling cost per unit ? 4
Selling price ? 30.
Break-even Points in Units

Fixed cost
BEP =-------------------------------------------------------------------
Selling price per unit- Variable cost per unit
_ (80,000 + 10,000) _ 90,000
30 —(8 + 4) “ 30-12
_ 90,000
18
- 5000 units
Break-even Point in Sales or Money Value
= BEP x Selling price
. = 5000 x 30
= 1,50,000
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UNIT-2 : Marginal Costing 19
Q4. P/v Ratio.
Answer :
The profit/volume ratio, which is also called the contribution ratio or marginal ratio, expresses the relationship
between contribution and sales and can be expressed as under,
Contribution
P/V ratio = x 100
Sales
Since, Contribution = Sales - Variable cost = Fixed cost + Profit, P/V ratio can also be expressed as,
Sales-Variable cost . S-V
P/V ratio = i.e.,
Sales s
(or)
Fixed cost + Profit
P/V ratio =
Sales
(or)
Change in profit or Contribution
P/V ratio =----------- —-------- :----- ---------------
Change m sales
Q5. How can P/V ratio be improved?
The P/V Ratio, which establishes relationship between contribution and sales is of vital importance for studying the
profitability of operations of a business. It reveals the effect on profit of changes in the volume. Higher the P/V ratio, more
the profit and lower the P/V ratio, lesser the profit. Every management aims at increasing the P/V ratio. The ratio can be
increased by increasing the contribution i.e., by,
(i) Increasing the selling price per unit
(ii) Reducing direct and variable cost by utilizing men, machines, materials.
(iii) Changing the product mix and selling more profitable products for which the P/V ratio is higher. Switching the
production to more profitable products.
(iv) The concept of P/V ratio is also useful to calculate the break even point.
The formula for the sales volumes required to earn a given profit is,
Fixed Cost + Profit F+P
JsJgJgg —------------------------------------------ —------------------------
f P/V Ratio P/V Ratio
Q6. You are given the following data:
Fixed cost ? 40,000
Break-even point ? 1,00,000
Calculate:
(i) P/V ratio
(ii) Profit when sales are ? 2,00,000.

Answer :
(i) Calculation of P/v Ratio
Fixed cost
BEP=--------------
P/v ratio
40,000
1,00,000 =
P/v ratio
19 20 MANAGERIAL ACCOUNTING
Fixed cost
P/v ratio =------------------------
Break even point
ship
40,000
= —-------= 0.4
1,00,000
P/v ratio =40%
(ii) Calculation of Profit when Sales are ? 200,000
Profit = Sales x p/v ratio - Fixed cost

= 2,00,000 x 40%-40,000
= 80,000 - 40,000
= ? 40,000
Q7. From the following calculate profit when sales are ? 20,000 fixed expenses ? 4,000 and break-even sales
? 10,000.
Fixed cost
— BEP=
P/v ratio
I.Q4 4000
10,000 =
’the P/ v ratio
aore
Fixed cost —
4000
A4
n be P/v ratio =
Break even point 10,000
P/v ratio = 0.4 x 100 = 40%

When sales are 20,000, profit would be,
= 20,000 x 40% - 4000
= 8000 x 4000
= ?4000
Q8. Explain margin of safety.
Answer :
The excess of actual or budgeted sales over the break-even sales is known as the margin of safety, ft is the difference
It represents the amount by which sales revenue can fall before a loss is incurred. As at break-even point there is no
profit no loss, sales beyond the break-even point represent margin of safety because any sales above the break-even point
will give some profit. Thus,
Margin of safety = Actual sales - Break-even sales
Say, actual present sales are ^5,00,000 and the break-even sales are ?4,00,000, then margin of safety is equal to
^1,00,000 i.e., 5,00,000 - 4,00,000.
Margin of safety can also be expressed in percentage. For example if a company can break-even at 60 percent of
the expected sales, then it has a margin of safety of (100 - 60) = 40 percent. In the previous example, margin of safety in
percentage can be calculated as,
1,00,000
x 100 = 20%
5,00,000
TD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD__________ —__ ------- ------- ----------
Q9. Calculate margin of safety when P/V ratio is 40% and profit is ? 35,000.
Answer :
Profit
MoS =-------------
P/v ratio
_ 35,000
0.40
= 87,500
Q10. Explain the term key factors.
“Key factor is the factor at which particular time or over a period, will limit the activities of an undertaking”.
— CIMA Terminology.
A key factor or limiting factor puts a limit on production and profitability of the firm. It is combination of important
facts that is required in order to accomplish one or more desirables.
A key factor, is that factor which puts a limit on production and profit of a business. Usually this limiting factor is
sales. A concern may not be able to sell as much as it can produce. But sometimes a concern can sell all it production but
production is limited due to the shortage of material, labour, plant capacity, or capital.
In such a case, a decision has to be taken regarding the choice of the product whose production is to be increased,
reduced or stopped. Ordinarily, when there is no limiting factor, the choice of the product will be on the basis of the highest
P/V ratio. But when there are scarce or limited resources, selection of the product will be on the basis of contribution per
unit of scarce factor of production.
In a marginal costing method, the profitability of the product is measured with respect to its contribution. The products
with highest contribution or P/V ratio are considered as highly profitable products. The firms which focuses more on the
products having maximum P/V ratio can easily maximize their profits.
Q11. What is angle of incidence?
The angle of incidence is the angle between the sales line and the total cost line formed at the break-even point
where the sales line and the total cost line intersect each other. The angle of incidence indicates the profit earning capacity
of a business. A large angle of incidence indicates a high rate of profit and vice versa. Usually, the angle of incidence and
margin of safety are considered together to indicate the soundness of a business. A large angle of incidence with a high
margin of safety indicates the most favourable position of a business.
This is an angle formed between the total sales line and total cost line at the break even point. It indicates the rate
of profit earned by the business.
Q12. Variable cost per unit = 10
Selling price per unit = 15
Calculate contribution.
Answer :
Contribution = Selling Price per unit - Variable Cost per unit
= 15-10
= 5.
— SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD.

.....
PART-B
ESSAY QUESTIONS WITH SOLUTIONS
2.1 MARGINAL COSTING - MEANING AND IMPORTANCE

Q13. What is marginal costing? Explain its characteristics and assumptions.
Answer :
Marginal Costing
The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased
or decreased by one unit is called marginal cost. In this context, a unit may be a single article, a batch of articles, an order,
a stage of production capacity or a department. It relates to the change in output in the particular circumstances under
consideration. From the above definition of marginal cost, it is clear that the total variable cost is regarded as the total
marginal cost because only variable cost changes with change in output and fixed cost remains the same.
Marginal costing is a principle in which variable costs are considered and used while valuing inventories and cost of
goods sold. Fixed costs are considered as period costs not product costs and are written off against the profit and loss account
in the period they are incurred. There are two important aspects of marginal costing which requires detailed treatment, they
are ascertainment of marginal cost and CVP analysis.
Characteristics of Marginal Costing
Following are the characteristics of marginal costing,
1. It is a technique of analysis and presentation of costs which help management in taking decisions.
2. All elements of cost are classified into variable and fixed components.
3. The variable costs (marginal costs) are regarded as the costs of the products.
4. Fixed costs are treated as period costs and are charged to profit and loss account.
5. The finished goods and work-in-process are valued at marginal costs only.
6. Prices are determined on the basis of marginal cost.
7. Marginal costing techniques makes a sharp distinction between variable cost and fixed cost.
Assumptions of Marginal Costing
Some of the assumptions of marginal costing are as follows,
1. All elements of cost-production, administration and selling and distribution can be segregated into fixed and variable
components.
2. The volume of production is the only factor which influences the cost.
3. Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuates directly in
proportion to changes in the volume of output.
4. The selling price per unit remains constant at all levels of activity.
5. ^fixed costs remain constant for the entire volume of production.
6. Both revenue and cost functions are linear over the range of activity under considerations.____________________
Q14. Explain the importance of marginal cost.
Marginal costing technique plays a significant role in making the following important decisions,
1. Acceptance or Rejection of Orders
Marginal costing helps an organization to take correct decisions i.e., whether to accept or reject orders which are
being offered. This technique helps the organization in identifying it's capacity to produce such orders. On the basis of
which the organization may accept or reject the order.
2. Make or Buy Decisions
Management sometimes may be confronted with the problem of making a choice between manufacturing the
component parts of product or buying them from outside.
Such a problem will arise when the firm has the idle capacity and the technical capacity of manufacturing the
component parts. In arriving at such a make or buy decision, qualitative and quantitative factors relating to the problem
will be taken into consideration. So make or buy decisions very important to marginal cost.
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3. Pricing Decisions various products of the firm. Marginal costing also takes
Although prices are more controlled by market into consideration the limiting factors in terms of their
conditions and other economic factors than by decision of contribution/unit while taking decisions regarding the
the management, yet fixation of selling price is one of the suitable product mix.
most important function of the management. This function 7. Introduction of New Product
is to be performed, Sometimes, it becomes necessary for a concern to
(a) Under normal circumstances introduce a new product to the existing product or products
(b) In times of competitions in order to utilize the idle capacity or to capture a new market
or for other purposes. Product introduction may also be called
(c) In times of trade depression
as product launch.
(d) In accepting additional orders for utilizing idle
The new product must be profitable. In order to decide
capacity
about the profitability of the new product it is assumed that
(e) In exporting and exploring new markets the manufacture of new product will not increase fixed
(!) Quotations in a jobbing undertaking. costs of the concern and if the price realized from the sale
In normal circumstances, the price fixed must cover of such product is more than its variable cost of production,
total costs otherwise profits cannot be earned. It can also be it is worth trying. If this data is presented under absorption
fixed on the basis of marginal cost by adding a high margin to costing method, the decision will be wrong.____________
marginal cost which may be sufficient to contribute towards Q15. Discuss the advantages and disadvantages of
fixed expenses and profits. marginal costing.
4. Drop-down of Product Answer :
If a firm is engaged in producing a wide range of Advantages of Marginal Costing
product in a product line the management needs to take Following are the advantages of Marginal Costing,
certain important decisions with respect to the production 1. The valuation of inventories is done at marginal cost
of all products or to drop those products which are not and thus prevents the illogical carry forward of fixed
contributing towards the firm’s profitability or incurring costs of one period to the next one as part of value of
losses. The decisions regarding dropping out a product or stock.
product line are usually based on the comparative study of
2. Marginal costing makes it easier to determine and
margin of contribution of each product.
control cost of production. Profit is treated as a
Firms usually can take two types of decisions in this function of sales and not of production as profit
respect, depends on sales volume and not on production
(i) Firstly, either to drop the product that incurs loss and volume.
introduce another product which would contribute 3. It facilitates control over variable costs by avoiding
significantly towards the fixed costs. arbitrary apportionment or allocation of fixed costs.
(ii) Secondly, to drop the product and emphasize more on 4. It helps in short term profit planning, cost control,
other product of the firm’s product line which possess evaluation of performance and taking correct decisions,
keeping in view the exigencies of the situation.
greater contribution margin.
Limitations/Disadvantages of Marginal Costing
5. Shut-down Decisions
Some of the limitations of Marginal Costing are as
Marginal costing is usually used in taking decisions
follows,
with respect to continue a plant/unit or to shut down it. The
shutting down of a plant is basically of two types, 1. The separation of expenses into fixed and variable
presents certain technical difficulties and marginal
(a) Temporary shut down
costing technique assumes that all expenses can be
(b) Permanent shut down (or) complete shut down. divided into fixed and variable. In fact, no variable
6. Product Mix Decisions cost is completely variable and no fixed cost is
Decisions regarding product mix are quite important completely fixed. Actually, most of the expenses are
in the firms which are engaged in producing multiple semi-variable and it is difficult to segregate them into
products. One needs to be very careful while taking decisions fixed and variable.
regarding suitable product mix that leads to maximum 2. Time taken for the completion of jobs is not given
profitability. Thus, management must make use of marginal due attention because marginal cost excludes
costing technique in order to serve the purpose of taking fixed expenses which are connected with time.
decisions with respect to determination of most profitable Fixed expenses should be considered if a suitable
product mix, by comparing profitability or contribution of comparison of two jobs is to be made.
- SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD.
3. With the development of technology, fixed expenses 2.1.1 Marginal Cost Equation
have increased and their impact on production is much
Q16. Explain marginal cost equation with an example.
more than that of variable expense. So, a system of
costing which ignores fixed expenses is less effective Answer :
because a significant portion of the cost representing Marginal Cost Equation
fixed expenses is not taken care of. For the sale of convenience, a marginal cost equation
4. It is possible that a concern using marginal costing can be derived as follows,
technique may value work-in-progress and finished Sales - Variable cost = Contribution
stocks at marginal cost. The arguments against
(or)
valuing these items at marginal costs are as follows,
Sales = Variable cost + Contribution
(a) Balance sheet will not exhibit a true and fair
(or)
view because work-in-progress and finished
stock will be shown at marginal costs which do Sales = Variable cost + Fixed cost ± Profit/Loss
not include fixed expenses. Thus, finished stocks (or)
and work-in-progress will be under valued in the Sales - Variable cost = Fixed cost + Profit/Loss
balance sheet.
(or)
(b) In case of loss by fire, full loss on account of
S-V = F ±P
stock destroyed by fire cannot be recovered
from the insurance company because marginal Where,
costing does not take fixed expenses into ‘S’ stands for sales
consideration. ‘V’ stands for variable cost
5. Marginal costing technique does away with the ‘F’ stands for fixed cost
difficulties involved in the apportionment of ‘P’ stands for profit/loss.
overheads because fixed expenses are deducted from
The marginal cost equation is very useful.
total contribution. But the problem of apportionment
of variable costs still arises. Example
From the following information find out the
6. Marginal costing technique is difficult to apply in
amount of profit earned during the year using
contract or ship building industry where the value
the marginal costing technique,
of work-in-progress is high in relation to turnover.
Fixed cost ?2,50,000
If fixed expenses are not included in the valuation of
work-in-progress, losses may occur every year till Variable cost ?10 per unit
the contract is completed, while on completion of the Selling price ?15 per unit
contract there would be huge profits. Output level 75,000
7. £ Cost control can be better achieved with the help Solution :
of other techniques such as budgetary control and
S_v=F+P
standard costing. Marginal costing technique does
not provide any standard for the evaluation of Sales = ?75,000 x 15 = ?11,25,000
performance like standard costing and budgetary Variable cost = 75,000 x 10 = ^7,50,000
control.
Fixed cost = ^2,50,000
8. Marginal costing technique cannot be successfully Profit (P) = ?
applied in cost plus contracts unless a high percentage
25,000-7,50,000
11, = 2,50,000 + P
over the marginal cost is charged from the contracted
to cover the fixed costs and profit. 3,75,000 - 2,50,000 + P
P = 3,75,000-2,50,000
9. Sometimes an order from a new customer is accepted at
- a very low price on the argument that if marginal cost Profit =^1,25,000
is little less than the price of the order it will give some To make profits, contribution must be more than fixed
contribution. This may sometimes lead to a general expenses and to avoid any loss, contribution must be equal
reduction in selling price and thus to losses. to the fixed expenses.
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2.1.2 Differences between Marginal Costing and Absorption Costing and Application of
Marginal Costing __________________________
Q17. Distinguish between marginal costing and absorption costing.
Answer :
Differences between Marginal Costing and Absorption Costing are as follows,
Point Marginal Costing Absorption Costing

1. Definition According to CIMA official technology, marginal According to CIMA official technology,
costing is being defined as a principle in which absorption costing is being defined as a
variable costs are charged to cost units and fixed principle in which fixed and the variable cost
costs are charged to the relevant period which are are allocated to cost units and total overheads
written off in full against the contribution for that are absorbed as per the activity level.
period.
2. Ascertainment In cost ascertainment, only variable cost are used. In cost ascertainment, fixed as well as
of cost variable costs both are used.
3. Profit In this, profit is calculated as the result of the In this, profit is calculated as the result of the
difference of contribution (sales - marginal cost) difference of sales and total cost.
and fixed cost
4. Nature It is sales oriented in nature. It is production oriented in nature.
5. Level of profit In marginal costing, the profit would be less when In absorption costing, the profit would be less
production is high and sales are low. when production is low and sales are high.
6. Costing system It is very easy to use and comprehend. It is difficult to use and comprehend.
7. Reporting It is used for internal reporting, such as reporting It is used for external reporting, such as
management to help in taking effective decisions. reporting to shareholders, tax authorities
and government.
8. Relationship of It effectively establishes the relationship between It fails to establish relationship between cost,
cost, profit & cost, profit and volume. volume and profit.
volume
9. Managerial It is an effective technique of taking managerial It is not much useful in taking managerial
decision making decisions. decisions.
10. Classification of Under marginal costing, costs are divided based on Under absorption costing cost are divided
cost their behaviour i.e., variable or fixed costs. on functional basis i.e., production cost,
administration cost, selling cost and
distribution cost.
Q18. Discuss about the application of marginal costing in decision making.
Answer :
Decision-making
The information provided by the total cost method is not sufficient in solving the management problems. Marginal
costing technique is used in providing assistance to the management in vital decision making especially in dealing with the
problem requiring short term decision where fixed costs are excluded. The following are important areas where managerial
problems are simplified by use of the marginal costing,
(i) Assessment of capital investment plans
(ii) Effect of change in sales price
(iii) Maintaining a desired level of profits
(iv) Alternative methods of production
(v) Alternative courses of action
(vi) Level of activity planning
(vii) Purchasing or leasing
(viii) Choosing a channel of distribution for a product.
..................... SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
(i) Assessment of Capital Investment Plans (viii) Choosing a Channel of Distribution for a
Product
This is an important problem and requires careful
attention of the management. However, a simple problem Selection of channel of distribution for a product
will show how marginal contribution analysis is helpful to is an important decision, afterall it is necessary to choose’
management in decision-making. a proper channel of distribution for a product, since,
channels are revenue generating points. Marginal costing
(ii) Effect of Change in Sales Price
helps management in selecting proper channel in order
Management is confronted with the problem of to cover relevant costs, these distribution costs have their
cut-in price of products from time to time on account of greater impact on cost of sales, therefore they require
competition, expansion program or government regulations. proper attention. The cost of sales of a product depends
It is therefore, necessary to know the effect of a cut-in prices on the selection of type of distribution, channel members,
of the products. and intermediateries. The shorter the distance between the
(iii) Maintaining a Desired Level of Profits factory warehouse and point of disposition, the lesser will
be the variable costs. The greater the inventory holding
Management may be interested in maintaining a capacity of a channel member, the greater will be the profit
desired level of profits, the volume of sales needed to have margin.
a desired level of profit can be ascertained by the marginal
costing techniques. 2.2 CVP ANALYSIS
(iv) Alternative Methods of Production Q19. What is C.V.P. analysis? What are the objectives
and uses of C.V.P. analysis?
When two or more methods of production are
available i.e., machine work or hand work, the marginal cost Answer :
of each method of manufacture should be ascertained. The
Concept of C.V.P Analysis
final decision on the choice of a method depends upon the
method which gives the greatest contribution assuming fixed Cost Volume Profit (C.V.P) analysis is a technique
expenses remaining same, keeping of course, the limiting for studying the relationship between cost, volume and
factor in view. Where, however fixed expenses change, the profit. Profits of an undertaking depend upon a large number
decision will be taken on the basis of profit contributed by of factors. But the most important of these factors are the
each. cost of manufacture, volume of sales and the selling prices
of the products. But the most significant single factor in
(v) Alternative Courses of Action
profit planning of the average business is the relationship
When deciding between alternative courses of action, between the volume of business, costs and profits. The C.V.P
it should be kept in mind that whatever course of action is relationship is an important tool used for the profit planning.
adopted, certain fixed expenses will remain unaffected.
When analyzing C.V.P it is seen that its three
The criterion therefore, which weighs is the effect of components costs, volume and profit are interconnected and
alternative course of action upon the marginal (i.e., variable) dependent on one another. Profit depends upon sales. Selling
co^ts in relation to the revenue obtain ed. The course of action price to a large extent depends upon cost and cost depends
which yields the greatest contribution is the most profitable upon volume of production. In C.V.P analysis an attempt is
to be followed by the management. made to analyze the relationship between variations in cost
(vi) Level of Activity Planning
with variations in volume.
Marginal costing may be of great help to the The C.V.P relationship is of great use to management
management in planning the level of activity. Maximum as it assists in profit planning, cost control and decision
contribution at a particular level of activity will show the making. Cost-volume-profit analysis can be used to answer
position of maximum profitability. questions such as,
(vii) Purchasing or Leasing (a) At what volume of sales will the firm break-even?
Sometimes the management is required to take (b) At what volume of sales will it earn desired profits?
decision whether a particular asset say building is to be (c) How will changes in cost or price effect profits?
purchased or may be taken on lease basis. In this case the
(d) Which product/product mix earn the most profit?
total cost of the two alternatives is to be compared in order
to calculate the annual saving or extra cost involved if the (e) Which product/component should be manufactured
building is purchased as compared to leasing. and which should be bought?'
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. '
UNIT-2 : Marginal Costing
Objectives (Applications) of C.V.P Analysis Limitations of C.V.P Analysis
Following are the objectives of C.V.P analysis, The following are the limitations of CVP analysis,
1. It helps to forecast profit fairly accurately. 1. Total fixed costs increase in a step like manner beyond
the range in which they were constant.
2. It is useful in setting up flexible budgets which
2. With changes in demand, the sales mix also changes
indicate costs at various levels of activity.
and the constant sales mix assumption doesnot hold
3. It assists in evaluation of performance for the purpose good.
of control. 3. All costs cannot be separated into fixed or variable
4. It also assists in formulating price policies by showing costs.
the effect of different price structures on costs and 4. Under the concept of absorption costing principle,
profits. profits change with production and sales while under
5. It helps to know the amount of overhead costs to marginal costing profits vary with sales.
be charged to the products cost at various levels of 5. Costs and sales are unpredictable.
operations. 6. Inflationary conditions and political factors also
Uses of C.V.P Analysis in Decision-making influence costs and not just volume.
C.V.P analysis is a very important aid in the decision 2.3 BREAK EVEN ANALYSIS: MEANING,
making process of the management in almost all areas as ASSUMPTIONS, IMPORTANCE AND
shown by the following, LIMITATIONS
Q21. What do you understand by break even analysis?
1. Management can estimate the profit over different
State its assumptions and importance.
levels of volume with the help of C.V.P analysis which
is useful in preparing flexible budgets. Answer :
2. C.V.P analysis also helps the management in analysing Break-even Analysis

the impact of changes in the price on the profit The study of cost-volume-profit analysis is often
position of the company. referred to as ‘break-even analysis’ and the two terms are
used interchangeably by many. This is so, because break
3. C.V.P analysis is also useful to the management in
even analysis is the most widely known form of cost-volume-
determining the BEP and the profits to be made to
profit analysis.
meet the proposed expenditure.
The term “break-even analysis” is used in two senses,
4. C.V.P analysis is vital in pricing too. Modem economy ‘narrow sense’ and ‘broad sense’. In its broad sense, break
is characterised with huge competition. In order to even analysis refers to the study of relationship between
maintain competitive edge, the company has to price costs, volume and profit at different levels of sales or
its products competitively. production. In a narrow sense, it refers to a technique of
Q2Q1 List out the assumptions and limitations of determining that level of operations where total revenues
C.V.P analysis. equal to total expenses, i.e., the point of no profit, no loss.
Answer : Assumptions of BEA
Assumptions of C.V.P Analysis The break-even analysis is based upon the following
assumptions,
The following are the assumptions of CVP analysis,
(i) All elements of cost can be segregated into fixed and
1. All costs can be divided into fixed and variable costs. variable, components.
2. Fixed costs remain constant whereas the variable costs (ii) Variable cost remains constant per unit of output
vary with a change in the output. irrespective of the level of output and thus fluctuates
directly in proportion to changes in the volume of
3. Selling price remains constant.
output.
4. The number of units produced and sold will be one (iii) Fixed cost remains constant at all levels of output.
and the same.
(iv) Selling price per unit remains unchanged or constant
5. There will be no change in the operating efficiency. at all levels of output.
6. There is only one product or the product mix will (v) Volume of production is the only factor that influences
remain the same. cost.
(vi) There will be no change in the price-level.
is, (vii) There is only one product or in case of multi-product, the sales mix remains unchanged.
ond (viii) It is assumed that there is no opening or closing stock i.e., all that is produced is sold.
Uses/lmportance of BEA
iges Break-even analysis has a wide-range of applications in business decision-making. It serves as a valuable tool for
lold a manager to evaluate various business proposals. In the true sense, it is a practical tool for business community. It serves
the following purposes,
able (i) Break-even analysis can be used to forecast the future cost and revenue and depending on it future profit can be
ascertained.
iple, (ii) Break-even analysis is of great importance in decision-making regarding ‘make or buy’ decisions.
tider (iii) It serves as a valuable tool in sales projection.
(iv) By the use of break-even analysis, cost can be controlled.
(v) It is a vital tool for fixing the prices of the products.
also (vi) Break-even analysis helps in choosing a product mix when there is a limiting factor.
(vii) It aids in deciding whether a product or a department is to be dropped or to be continued.
16, (viii) It helps in planning the future operations of a business firm to achieve maximum profit and to maintain desired profit
ND level.
(ix) Break-even analysis plays a prominent role in deciding whether to add a product to its product line.
sis? (x) It facilitates a manager by evaluating the various projects/proposals and choose the best proj ect and the best alternative.
With these multitude of uses, break-even analysis serves as a valuable tool in managerial decision-making. It facilitates
all the managers and different kinds of organizations.________________________________________________________
Q22. What is a break even point? How it is computed through algebraic formula method?
>ften Answer: Model Paper-ll, Q10(a)
> are Break-even Point
eak- The break-even point may be defined as that point of sales volume at which total revenue is equal to total cost. It
lme- is a point of no profit, no loss. A business is said to break-even when its total sales are equal to its total costs. At this point
contribution i.e., sales minus variable cost, equals the fixed costs. If production/sales is increased beyond this level, there
ises, shall be profit to the organization and if it is decrease from this level, there shall be a loss to the organization.
eak- Break-even point can be stated in the form of an equation,
veen
:s or Sales revenue at break-even point = Fixed costs + Variable costs. _ _
le of Computation of Break-even Point with Algebraic Formula Method
nues The break-even point can be computed in terms of,
oss.
f (a) Units i.e., quantity
(b) Money Value i.e., in rupees
iving
(c) As a percentage of estimated capacity.
(a) Break-even Point in Units
I and
As the break-even point is the point of no profit no loss, it is that level of output at which the total contribution equals
the total fixed costs. It can be calculated as follows,
ltput
lates n x Fixed cost Fixed Cost
le of Break-even point =------------------------------------------------------------- or —----- - —:----------- —
Selling price per unit-Variable cost per unit Contribution per unit
(b) Break-even Point in terms of Money Value
mt.
stant Fixed cost , Fixed cost .
=------------------------- x sales =------------------ X sales
Sales-variable cost Contribution
inces Fixed cost
P/V ratio
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(c) Break-even Point as a Percentage of Estimated Capacity
Break-even point can also be computed as a percentage of the estimated sales or capacity by dividing the break-even
sales by the capacity sales. For example, if a firm has an estimated capacity of 1,00,000 units of products and its break
even point is reached at 50,000 units, then the break-even point is at 50% of capacity (1,00,000/50,000). If information as
to total contribution at full capacity is available, the break-even point as a percentage of estimated capacity can be found
as under,
B.E.P (As % age of capacity) =----- Flxed Cost-----
Total Contribution
2.3.1 Break Even Chart ___________________________ ___________

Q23. How do you compute B.E.P with break-even chart or graphic method of break-even analysis?
Answer :
Break-even Chart or Graphic Method of Break-even Analysis
The break-even point can also be computed graphically. A break-even chart is a graphical representation of marginal
costing. The break-even chart, ‘Portrays a pictorial view of the relationships between costs, volume and profits’, it shows
the break-even point and also indicates the estimated profit of loss at various levels of output. The break-even point as
indicated in the chart is the point at which the total cost line and the total sales line intersect.
There are three methods of drawing a break-even chart. These methods of drawing break-even chart have been
explained with the help of the following illustration.
Output Variable per Total Variable Fixed Expense Total Cost Selling Price Total Sales
units units cost ? per Unit
0 5 0 75,000 75,000 10 0
5,000 5 25,000 75,000 1,00,000 10 50,000
10,000 5 50,000 75,000 1,25,000 10 1,00,000
15,000 5 75,000 75,000 1,50,000 10 1,50,000
20,000 5 1,00,000 75,000 1,75,000 10 2,00,000
25,000 5 1,25,000 75,000 2,00,000 . 10 2,50,000
30,000 5 1,50,000 75,000 2,25,000 10 3,00,000
Methods of Drawing Break-even Chart

Under this method following steps are taken to draw the break-even chart,
1. Volume of production/output or sales is plotted on horizontal axis i.e., X-axis. The volume of sales or production
may be expressed in terms of rupees, units or as a percentage of capacity.
2. Cost and sales revenue are represented on vertical axis i.e., Y-axis.
3. Fixed cost line is drawn parallel to X-axis. The line indicates that fixed expenses remain constant at all levels of activity.
4. The variable costs for different levels of activity are plotted over-the fixed cost line. The variable cost line is joined
to fixed cost line at zero level of activity. As the variable cost line is drawn above the fixed cost line, it represents
the total cost at various levels of output/sales.
5. Sales values at various levels of output are plotted and a line is drawn joining these plotted points. The line is called
the sales (revenue) line.
6. The point of intersection of total cost line and sales (revenue) line is called the break-even point.
7. The number units to be produced at break-even point can be determined by drawing a perpendicular to the X-axis
from the point of intersection of cost and sales line.
8. The sales revenue at break-even point can be determined by drawing a perpendicular to the X-axis from the point
of intersection of cost and sales line.
9. The area below the break-even point represents the loss area as the total sales and less than the total cost and the
area above the break-even point indicates the area of profit as the sales revenue exceeds the total cost.
SIIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
4. It aims to help in achieving the planned targets by
producing adequate amount of goods which increases
the profits.
5. It aim to help in formulating price policies by using
different price structures on costs and profits.
Factors Causing Changes in BEP
The following are the factors which would cause the
break-event point to change,
1. There is an indirect relationship between variable cost
per unit and contribution. Because, rise in variable
Figure: Break even Chart cost per unit implies that fall in contribution which
in turn reduces the contribution to sales ratio.
Q24. Explain the significance and objectives of a
break-even chart and state the factors which 2. If the variable cost per unit falls then it means the
would cause the break even point to change. contribution rises which intum rises the value of
contribution to sales ratio.
Answer :
3. Rise in fixed cost implies rise in the break-even point
Significance of Break-even Chart but there is a significant fall in the margin of safety.
The significance of break-even chart is highlighted 4. Fall in the value of fixed cost leads to fall in the
in the following points, break-even point and intum rises the value of margin
of safety. This will not influence the contribution to
1. Break-even chart is very simple and easy to
sales ratio.
understand as it gives a detailed and clear picture of
the organization. It provides useful information to its 5. If selling prices increases then there is an increase
end users. in contribution. The affects of this are increased in
contribution to sales ratio and margin of safety and
2. It is useful in determining the profitability of different fall in the break - even point.
products and even the problems relating to managerial
6. If the selling price falls then there is a significant
decisions are solved through the break-even analysis.
fall in contribution. The affects of this are increases
3. Break-even analysis play an important role in the break-even point and significantly reduces the
forecasting, planning, growth and stability of the contribution to sales ratio and margin of safety.
organization. Q25. Discuss the assumptions and limitations of
4. Break-even analysis is also useful in increasing the break-even chart.
capacity of firm as the angle of incidence indicates Answer :
the operational efficiency. Assumptions of Break-even chart
5. Break-even chart helps in controlling costs, The assumptions of break even chart are similar to
. eliminating wastes and achieving better efficiency. some extent to that ofthe assumptions of break even analysis.
Any fluctuations in fixed and variable cost of The break-even analysis is based upon the following
production can be easily identified with the help of assumptions,
break-even chart and even the changes in selling price (i) All elements of cost can be segregated into fixed and
can be identified easily. variable components.
2 cjectives of Break-even Chart (ii) Variable cost remains constant per unit of output
irrespective of the level of output and thus fluctuates
The objectives of break-even chart and analysis are directly in proportion to changes in the volume of
similar. They are as follows, output.
1. It is usually implemented in business to determine the (iii) Fixed cost remains constant at all levels of output.
cost at different levels of activity and flexible budget.
(iv) Selling price per unit remains unchanged or constant
2. It acts as a measuring tool of performance in order to at all levels of output.
increase profits and reduce costs. (v) Volume of production is the only factor that influences
3. It aims to help management in making decisions such cost.
as make or buy, sales mix, dropping of a product etc. (vi) There will be no change in the price-level.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. — . _
(vii) There is only one product or in case of multi-product, Advantages of Contribution
the sales mix remains unchanged. The concept of contribution is very useful in making
(viii) It is assumed that there is no opening or closing stock managerial decisions. The advantages are,
e., all that is produced is sold.
i.
1. It helps the management in the fixing of selling prices.
These are some specific assumptions which are
different from the assumptions of Break even analysis, 2. It assists in determining the break-even point.
1. Straight lines can be used to show the sales, total costs 3. It helps management in the selection of a suitable
and fixed costs. product mix for profit maximization.
2. Sales increases in the same proportion of the output.
4. It helps in choosing from among alternative methods
3. Variable cost, fixed cost and selling price per unit of production.
remains the same.
5. It helps the management in deciding whether to
Limitations of Break-even Chart
purchase or manufacture a product or a component.
The following are few limitations of break even
charts, 6. It helps in taking a decision with regard to adding a
1. One of the assumption of break even chart is that the new product in the market.
fixed cost remain constant and variable cost changes Q27. Explain profit volume ratio or analysis.
proportionately. This assumption has proved to be
Answer :
incorrect by the real world as the total cost never
changes is proportion to the total output. Profit-Volume Analysis or Ratio
2. Sales lines in break even chart would not be same or The profit/volume ratio, which is also called
straight all the times as it would change according to the contribution ratio or marginal ratio, expresses the
the changes in selling price. relationship between contribution and sales and can be
3. Break-even charts have very short utility as these expressed as under,
chart could not show the dynamic situations. They
Contribution
. are only static devices or instruments. P/V ratio = x 100
Sales
4. In case of more than one product, break even chart
would be in zigzag in nature. Since, Contribution = Sales - Variable cost
= Fixed cost + Profit
232 Contribution, P/V Ratio and Margin of
Safety P/V ratio can also be expressed as,
Sales-Variable cost . S-V
Q26. What do you mean by contribution? How it is P/V ratio = Sales ie’’ S
computed? State its advantages.
Answer : (or)
Contribution Fixed cost + Profit . F+ P
P/V ratio = Sales i’e'’ S
Contribution is the difference between sales and
variably cost or marginal cost of sales. It may also be (or)
defined as the excess of selling price over variable cost per
Change in profit or Contribution
unit. Contribution is also known as contribution margin or P/V ratio =
gross margin. Contribution is the amount that is contributed Change in sales
towards fixed expenses and profit. This ratio can also be shown in the form of percentage
Computation (Example) by multiplying it by 100. For example, if selling price of a
If the selling price of a product is ?20 per unit and its product is ? 20 and variable cost is 15 per unit, then,
variable cost is ?15 per unit, contribution per unit is (i.e., 20-15
?20-15). P/V ratio =
20
Contribution can be represented as,
The P/V Ratio, which establishes relationship between
S = F + V±P/L
contribution and sales is of vital importance for studying the
Contribution = Sales - Variable (marginal) cost (or) profitability of operations of a business. It reveals the effect
Contribution (per unit) = Selling price - Variable (or on profit of changes in the volume. Higher the P/V ratio, more
marginal) cost per unit the profit and lower the P/V ratio, lesser the profit. Every
Cost per unit or contribution = Fixed costs + Profit management aims at increasing the P/V ratio. The ratio can
(- Loss) be increased by increasing the contribution i.e., by,
(i) Increasing the selling price per unit

(ii) Reducing the variable or marginal cost.
(iii) Changing the product mix and selling more profitable products for which the P/V ratio is higher.
The concept of P/V ratio is also useful to calculate the break even point.
The formula for the sales volumes required to earn a given profit is,
, Fixed Cost + Profit F+P
Sales =------------ '--------------- ~--------------
P/V Ratio P/V Ratio
Q28. Write in detail about Margin at Safety (MoS).
Margin of Safety
The excess of actual or budgeted sales over the break-even sales is known as the margin of safety. It is the difference
It represents the amount by which sales revenue can fall before a loss is incurred. As at break-even point there is no
profit no loss, sales beyond the break-even point represent margin of safety because any sales above the break-even point
will give some profit. Thus,
Say, actual present sales are ?5,00,000 and the break-even sales are ?4,00,000, then margin of safety is equal to
^1,00,000 i.e., 5,00,000 - 4,00,000.
Margin of safety can also be expressed in percentage. For example if a company can break-even at 60 per cent of
the expected sales, then it has a margin of safety of (100 - 60) = 40 per cent. In the previous example, margin of safety in
percentage can be calculated as,
1,00,000
x 100 = 20%
5,00,000
Margin of safety calculated in percentage is also known as ‘Margin of Safety (MoS) Ratio’ which is expressed as,
MoS
MoS ratio = Sales xl00
Actual Sales - Sales at B.E.P

Sales 100
Margin of safety can also be calculated with the help of the following formula,
Profit
Margin of safety (MoS) =
P/V ratio
This is so because margin of safety is the volume of sales beyond break-even point and all sales above the break
even point give some profit which can be calculated as,
Profit = Margin of safety * P/V ratio
(or)
Profit
MoS =
P/V Ratio
The size of the margin of safety is an important indicator of the strength of a business. A large margin of safety
indicates that the business is sound and even if there is a substantial fall in sales, there will be some profit. On the other
hand, small margin of safety indicates that position of the business is comparatively weak and even a small decline in the
sales would adversely affect the profit of the business and may result in a loss.
The margin of safety can be improved by taking the following steps,
1. By increasing the level of production.
2. By increasing the selling price.
SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. ----------
3. By reducing the fixed cost.
4. By reducing the variable cost.
5. By substituting unprofitable products with profitable products.
6. By increasing contribution by changing the sales mix or by dropping unprofitable products.
PROBLEMS
Q29. You are given the following data for the coming year for a factory.
Budgeted output 80000 units

Fixed expenses ? 4,00,000
Variable expneses per unit ? 10.00
Selling price per unit ? 20.00
(■) Draw a Break-Even chart showing the B.E.P
(ii) If price is reduced to ? 18, what will be the new B.E.P

Solution :
Fixed Cost
Break Even Point(BEP) =
Selling P rice p.u - Variable C ost p.u
4,00,000
20-10
4,00,000
10
B.E.P = 40,000 (units).
Break Even Point (in value) = BEP (units) x Selling price
= 40,000 x 20
= ? 8,00,000.
When Selling Price is ? 18
„ „ 4,00,000 4,00,000
B.E.P =-^—-----=-^----- = 50,000
18-10 8
BEP (in value) = 50,000 x 18 = 9,00,000.
Calculation of Total Cost and Sales on Output Units
Output Variable Fixed Total Cost Sales Price Sales Price

Units Expenses Expenses in ? (V+F) @ ? 20 @M8
10 in ?
0 0 4,00,000 4,00,000 0 0
10,000 1,00,000 4,00,000 5,00,000 2,00,000 1,80,000
20,000 2,00,000 4,00,000 6,00,000 4,00,000 3,60,000
30,000 3,00,000 4,00,000 7,00,000 6,00,000 5,40,000
40,000 4,00,000 4,00,000 8,00,000 8,00,000 7,20,000
50,000 5,00,000 4,00,000 9,00,000 10,00,000 9,00,000
60,000 6,00,000 4,00,000 10,00,000 12,00,000 10,80,000
70,000 7,00,000 4,00,000 11,00,000 14,00,000 12,60,000
80,000 8,00,000 4,00,000 12,00,000 16,00,000 14,40,000

33
Q30. The following information is provided to you:
Selling price per unit ? 40-00
Variable cost per unit ? 24-00
Fixed cost per unit T 6-00
/ Profit per unit ? 10-00
Present sales volume is 2000 units
You are required to calculate:
(i) P/v Ratio
(ii) Break-Even Point
(iii) Margin of Safety
(iv) Sales required to earn a profit of ? 26000.
Solution : Model Paper-ll, Q10(b)
Contribution (per unit) = Selling price (per unit) - Variable cost (per unit)
= 40-24
= 16
TD.
r
(or)
Contribution = Fixed cost + Profit
= 6 + 10
= 16
Contribution = T 16
(0 PA/ Ratio
_„, . Contribution Per Unit

P/V ratio = ———————- x 100
Selling Price Per Unit
^*10°
= 40%
Fixed costs
Break even point (in units) =--------------------------------
Contribution per unit
Fixed costs = ? 6 x 2000 = 12000
B.E.P = =750
16
B.E.P (in ?) = B.E.P (in units) x S.P
= 750 x 40 = 30000
Profit
MOS =--------------
P/V ratio
= 10
0.40
= MOS x Sales Volume (units)
= 25 x 2000 = 50,000
X (or)
MOS = Actual sales - Break even sales

= (40x 2000) - (30,000)
= 80,000 - 30,000
= 50,000
(iv) Sales Required to Earn a Profit of 26,000
„ . , , Fixed cost+ Desired profit

Required sales =---------------------------------------
P/V ratio
(6x2000)+ 26,000 12000 + 26000
40 ~ 40
= 950 units.
35 36 ___ _____________________________________________________ qp MANAGERIAL ACCOUNTING
Q31. An analysis of Mafatlal Manufacturing Co. Ltd. gives the following information, Variable cost as a
percentage of sales 80%.
Fixed cost ? 3,15,000
Budgeted sales are ? 18,50,000
You are required to determine,
(i) Break-even sales value
(ii) Profit at the budgeted sales value
(iii) Profit if actual sales
(a) Drop by 10%
(b) Increase by 5% from budgeted sales.

Solution :
(i) Calculation of Breakeven Sales
Fixed cost
Breakeven point = —------------
P/V ratio
Contribution
P/V ratio =-------------------
Sales
Variable cost = Sales x 80%
= 18,50,000 x 80%
= ? 14,80,000
Contribution = Sales - Variable cost
= 18,50,000- 14,80,000
= 3,70,000
3,70,000
P/V ratio =
18,50,000
= 0.2 x 100 = 20%
3,15,000
Breakeven point (sales) = ———
= ? 15,75,000
(ii/ Profit at Budgeted Sales Value

= 18,50,000 x 20% — 3,15,000
= 3,70,000-3,15,000
= T 55,000
(iii) (a) Profit if Actual Sales Drop by 10%
Sales = 18,50,000
Less: 10% on sales = 1,85,000
16,65,000
Profit = Sales x p/V ratio - Fixed cost
= 16,65,000 x 20%-3,15,000
= ? 18,000
TD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ..................... ..... ..................
r
(b) Profit if Actual Sales Increased by 5%
Sales = 18,50,000
Add: 5% = 92,500
19,42,500
Profit = Sales x P/V ratio - Fixed cost
= 19,42,500 x 20% - 3,15,000
= ? 73,500
Q32. From the following particulars calculate,
(i) Contribution
(ii) PA/ ratio
(iii) Breakeven point in units and rupees
(iv) What will be the selling price per unit if the break even point is brought down to 25,000 units?
Particulars (^)
Fixed expenses 1,50,000
Variable cost per unit 10
Selling price per unit 15
Solution : Model Paper-Ill, Q10(b)
(i) Contribution
Contribution (per unit) = Selling price - Variable cost per unit

= 15-10
= ?5
(ii) PA/ Ratio
„ Contribution
P/V ratio =---------------------- -----
Sales or selling price
5
” 15
? =0.3333
(iii) Break-even point in Units and Rupees
Fixed cost
Break-even point (in units) = ——------;------------ ;--- ———----------------~
Selling price per unit - Variable cost per unit
_ 1,50,000
~ 15-10
= 30,000 units
F ixed cost
Break-even point (in rupees) =-------------
P/v ratio
= 1,50,000
0.3333
= 4,50,045
37
(iv) When Break-even Point Brought Down to 25,000 Units Selling Price Per Unit Would be,
Break-even point (in units) =---------------------------------------------------------

Selling price per unit- Variable cost per unit
1,50,000
25,000
SP -10
(25,000) x (SP - 10) = 1,50,000
SP_ 10 =1^000
25,000
SP- 10 =6
SP = 6 + 10
SP = ? 16
Selling price per unit = ? 16
Q33. You are required to calculate P/V ratio, B.E. Point and margin of safety from the following information:
Total sales ? 3,60,000
Selling price per unit ? 100
Variable cost per unit ? 50
Fixed cost ? 1,00,000

10(b)
If the selling price is reduced to ? 90, by how much is the margin of safety reduced.
Solution :
Calculation of P/v Ratio
Selling price- Variable cost

P/V ratio =----------------------------------------
Selling price
100-50
X100
100
= 50%
Calculation of Break-even Point
Fixed cost
B.E.P =---------------
P/v ratio
= 1,00,000
0.50
= ? 2,00,000
Calculation of Margin of Safety

= 3,60,000 - 2,00,000
= ? 1,60,000
Reduction in Margin of Safety when Selling Price is Reduced to ? 90
New MoS = Actual sales - Break-even sales
= 3,24,000 - 2,25,000
= ? 99,000
SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. ______
F
Reduction in MoS = Old MoS - New MoS
= 1,60,000-99,000
= ? 61,000
Working Note
When selling price per unit was ? 100, sales was 3,60,000. If selling price is reduced to ? 90 then,
100 ---- 3,60,000
90 ---- ?
90
—X 3,60,000 =3,24,000
Now, the new break-even sales would be,

Fixed cost
BEP (units) =
Selling price- Variable cost
1,00,000
= 2,500 units
90-50
BEP = BEP (units) x Selling price
= 2,500 x 90
__________ = ? 2,25,000_________________________________________________________________
Q34. Sales of a product amount to 200 units per month at ? 10 per unit. Fixed overheads cost is ? 400 per
month and variable cost is ? 6 per unit. There is a proposal to reduce prices by 20%. Calculate present
and future PA/ ratio. How many units must be sold to earn the present total profits?
Solution : Model Paper-I, Q10(b)
Calculation of Present P/v Ratio
Contribution
P/V ratio =
Sales
800
= 0.4
2000
Calculation of Future P/V Ratio
Contribution
P/V ratio =
Sales
600
= 0.3333
1,800
Units to be Sold for Earning Present Total Profit (i.e., Desired Profit of 400 units)
Fixed cost+Desired profit

Desired sales =--------------- ------- ;---------------
P/V ratio
400 + 400
0.3333
800
= 2400.24
0.3333
_ . d , z. . x 2400.24
Desired sales (in units) = —-----
= 266.69 or 267 units

Working Notes
Calculation of Sales Contribution and Profit at Present Selling Price
Number of units per month = 200

Present selling price per unit = 10
1. Sales value = 200 x 10 = 2,000
2. Contribution = Sales - Variable cost
= 2,000 - (200 x 6)
= 2,000- 1200
= ?800
3. Profit = Contribution - Fixed cost
= 800 - 400
= 400
Calculation of Sales, Contribution and Profit, if Selling Price is reduced by 10% (i..e, 10 - 10% = ? 9)
Number of units per month = 200 units

10% reduced selling price per unit = ? 9
1. Sales value = 200 x 9 = ? 1,800
2. Contribution = Sales - Variable cost
= 1,800-(200 x 6)
= 1,800-1,200
= ?600
3. Profit = Contribution - Fixed cost
= 600 - 400
= ? 200

INTERNAL ASSESSMENT
I. Multipl e Choice
1. Marginal costing is used for making which of the following decisions [ 1
(a) Make or buy decisions
(b) Optimization of product mix decisions
(c) Plant shut down decisions
(d) All of the above
2. A marginal cost equation can be derived as, [ 1

(a) S-V=F±P
(b) Sales - Variable Cost = Contribution
(c) Sales = Variable Cost + Contribution
(d) All of the above
3. Which of the following formula is used to calculate contribution margin? [ ]
(a) Contribution Margin = Sales - Variable cost
(b) Contribution Margin = Sales - Fixed cost
(c) Contribution Margin = Sales -Variable cost - Fixed cost
(d) Contribution Margin = Fixed cost - Variable cost

4. Which of the following formula is used for calculating P/V ratio? [ ]
. Contribution
(a) P/V ratio =---------------- x 100
Sales
Sales- variable cost ,. „
(b) P/V ratio =-------- —----------- xlOO
Sales
(c) Both (a) and (b)
Profit ,. „
(d) P/V ratio - . xlOO
if Volume
5. P/V ratio is also known as [ ]
(a) Contribution ratio
(b) Marginal ratio
(d) None of the above
6. The break-even point can be computed bv method. [ ]

(a) Algebraic Formula method
(b) Graphic or chart method
7. _________ is a graphical representation of marginal costing. [ ]
(a) Break-even chart method
(b) Algebraic formula method
(c) Margin of safety
(d) Contribution
8. Volume of production/output or sales is plotted on _________axis. [ 1

(a) Vertical axis (y-axis)
(b) Horizontal axis (X-axis)
9. Margin of safety can also be calculated with the help of following formula, [ 1
(a) Margin of Safety (MOS) =

Profit
Contribution
(b) Margin of Safety (MOS) =
Profit
Profit
(c) Margin of Safety (MOS) =
P/V Ratio
10. _______are represented on vertical axis (y-axis). [ 1

(a) Volume of production/output
(b) Fixed cost
(c) Variable cost
(d) Cost and sales revenue

1/ Fixed costs and variable costs are also known as__________and______ .
2. __________ is the difference between actual sales and the break-even sales.
3. The angle formed at a break-even point by the intersection of total cost line and sales line is called__________ .
4. BEP stands for__________ .
5. Contribution margin is also known as ______ .
6. __________ is a factor which puts a limit on production and profit of a business.
7. ________ , analysis is a technique used for studying the relationship between cost, volume and profit.
8. BEP (in ?) is calculated by using formula__________.
9. Sales revenue at break-even point =__________ .
10. Break-even point can also be computed as a percentage of estimated__________.

SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. _
UNIT-2 : Marginal.Ctnting
■ ■
KEY
I. Multiple Choice
1. (d)
X
2. (d)
3. (a)
4. (c)
5. (c)
6. (c)
7. (a)
8. (b)
9. (c)
10. (d)
II. Fill in the Blanks f
1. Period cost, engineered costs
2. Margin of safety
3. Angle of incidence
4. Break-even point
5. Gross margin
6. Key factor
7. Cost-volume-profit •
Fixed cost „ ,
8. BEP(in ?) = -- ----- ,v . x Sales
Contribution
9. Fixed Costs + Variable Costs

1? 10. Capacity.

43 44 eni MANAGERIAL ACCOUNTING
III. Very Short Questions and Answers
Q1. Write a short note on marginal costing.
Answer :
■
The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased
or decreased by one unit is called marginal cost. In this context, a unit may be a single article, a batch of articles, an order,
a stage of production capacity or a department. It relates to the change in output in the particular circumstances under
consideration. From the above definition of marginal cost, it is clear that the total variable cost is regarded as the total
marginal cost because only variable cost changes with change in output and fixed cost remains the same.
Q2. Define BEA.
Answer :
The study of cost-volume-profit analysis is often referred to as ‘break-even analysis’. Mostly these two terms are
used interchangeably. The term “break-even analysis” is used in two senses, ‘narrow sense’ and ‘broad sense’. In its broad
sense, break-even analysis refers to the study of relationship between costs, volume and profit at different levels of sales
or production. In a narrow sense, it refers to a technique of determining that level of operations where total revenues equal
to total expenses, i.e., the point of no profit, no loss.
Q3. Write a note on Break Even Point.
Answer :
The break-even point may be defined as that point of sales volume at which total revenue is equal to total cost. It
is a point of no profit, no loss. A business is said to break-even when its total sales are equal to its total costs. At this point
contribution i.e., sales minus variable cost, equals the fixed costs.
Break even point (in units) Selling Price per unit - Variable Cost per unit
BEP <in - SalesÊ Cost * Sale
Q4. What is Contribution?
Answer :
Contribution is the difference between sales and variable cost or marginal cost of sales. It may also be defined as
the excess of selling price over variable cost per unit or the amount that is contributed towards fixed expenses and profit.
Contribution is also known as contribution margin.
Contribution can be represented as,
S = F + V ± P/L
Contribution = Sales - Variable (marginal) cost

Q5. What is P/V Ratio?
Answer :
The profit/volume ratio is also known as the contribution ratio or marginal ratio. It expresses the relationship between
contribution and sales P/V ratio is expressed as,
Contribution
P/V ratio = x 100
Sales
r. LTD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. —

UNIT
3 DECISION MAKING
V
SIIA GROUP
J
c LEARNING OBJECTIVES 3
❖ Concept of Make or Buy Decisions.
❖ Concept of Add or Drop Products.
❖ Concept of Sell or Process Further.
❖ Concept of Operate or Shut-Down.
❖ Concept of Special Order Pricing.

❖ Concept of Replace or Retain of Plant and Equipments.
Decision making is the study of identifying and choosing alternatives based on the values and preferences of
the decision maker. Decision making is a process of identification and selection of an action from a number
of alternative courses of action for resolving a problem in the organization. Decision making acts as the basis
for planning an activity in the organization, ft is one of the important managerial functions. Decision making
must be rational for achieving the set goals successfully. It is very important to take the decisions at every
stage of the organization. The decisions which are taken by top management are called strategic decisions
and the decisions which are related to the normal day-to-day activities of organization are called as tactical
or operational decisions.
f Make or Buy Decision is the first step in process plarming. It includes whether the products/services must be
made in the organisation or should be brought from the other manufacturing concern i.e., from the outside party.
When a firm plans to add new products (diversification) in the product line for utilizing the idle capacities of
the inputs or for entering in new markets, then the management of the firm should take the decisions regarding
the profitability and production of that new product. In such situations, marginal costing technique can be
used for taking effective decisions. A decision can be defined as a course of action purposely choosen from
a set of alternatives to achieve managerial objectives or goals.
Operating or shutting down of products with reference to marginal costing also referred as closing down or
suspending of activities. When the production capacity of a company is idle or in excess and the consideration
by management is to sell additional products below normal selling prices without affecting regular sales of
same product is referred as special orders or one time orders.
SSSM

PART-A
__ .,
Q1. Write about criteria for ‘Buy’ Decision.
Based on the following criteria, the firm takes the decision to buy a product or component,
1. Buy decision is the most important factors to be considered as a part of quantitative analysis.
2. Instead of spending high investments on facilities which are already at suppliers point, a firm can buy the product.
3. If a firm does not have adequate facilities for making a part or product and does not have any scope for more profitable
opportunities for investing the firm’s capital, then it opts for buying a part or component.
4. A firm can use existing facilities for making the other parts more economically.
5. The personnel of the company may not have adequate skills and abilities for making the required new product.
6. A company may be prevented from making a part due to patent or other legal barriers.
7. The part to be made by the firm may have temporary or seasonal demand.
Q2. List out the specific cost factors that are considered before make or buy decision.
The specific cost factors which needs to be considered while taking the make or buy decisions are as follows,
1. The availability of plant facilities.
2. The quality of the product which has a considerable impact on production plan.
3. Availability of suitable area for production.
4. Availability of required machinery.
5. Transportation facility (if necessary) for moving the production resources to the location of plant.
6. The cost incurred on the acquisition of special practical knowledge or skills needed for the production of a product.
7. The factors such as market price, price trend and availability of the materials should be considered while purchasing
raw materials.
8. The decision as to whether a business should make or buy a product is based on both tangible and intangible factors.
9. Labour factors such as availability of skilled labour, wage rates etc.
10. Factors that affects the apportionment of overhead expenses.
11. f’The implementation of the costingTechniques should be taken into account for marginal costing, differential costing etc.
Q3. What do you mean by temporary shut down?
A shutdown point is a level of operations at which a company experiences no benefit for continuing operations and
therefore decides to shutdown temporarily. Temporary shut down is a short term decision for suspending or closing down
the plant operations for a shorter period of time. Management of the firm would usually take up this decision of trade
recession with an aim to minimize the effect of recession on the firms profitability in the future. In such circumstances the
firm decides to re-start the plant’s operation in the future period of time after recovering from the recessions effect. A firm
can continue their plant activities even in recession if the selling price of the product is more than that of marginal cost
which would help in compensating the loss. The firm can ignore few of its fixed costs by reducing the number of firm’s
production operations.
Shutdown means that the firm is temporarily suspending production. While going for the shutting down decisions in
the short run, the firm needs to take into consideration and compare the losses that would incur because of closing down of
the plant with that of losses due to the continuation of the plant activities with the help of this comparison the management
would be able to come to a conclusion as follows,
SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. —________________________________
UNIT-3 : Decision Making 47
(i) If the loss due to closing down is more than that of continuing the plant then, it is better for the firm to continue the
plant’s operations.
(ii) If in case the losses due to shutdown of plant is less than that of its continuation then it is advisable to shut down
the plant for a short period.
Q4. With what criteria, managements can think of diversifying their products?
Answer :
While taking the decisions about the production of a new product, the firm should consider the following factors,
(i) The production of new product should not increase the fixed costs of the firm.
(ii) The information regarding the costs of production should be given under marginal costing method.
The management should also consider the variable costs during diversification i.e., price of the product should cover
all the variable costs incurred in the production of the new products and should contribute towards the firm’s profitability.
Q5. Write a note on decision making process.
The process of decision making deals with a series of activities which results in a best solution to a problem. The
decision making process involves seven steps which are as follows,
1. Specifying the objectives.
2. Identifying and defining the problem.
3. Generating alternatives.
4. Principles forjudging the alternative.
5. Evaluation of alternatives.
6. Selection of the best alternative.
7. Implementation of the action.
8. Execute the decision.
9. Evaluating the results. '
Q6. Write a note on sell or process further.
Answer :
The sell or process further decision is mainly applicable to farms and producers of natural resources. Most of the
manufacturers faces the decisions either to sell products at split-off point or process further. Decision to be choosed betweer
selling a product at split-off or processing further is to be known as short-run operating decision. Value to a product is
added by additional processing, which increases the selling price of the product above the price of selling at splitt-off. A
pjjoduct to be processed further is depended up on whether increase in total revenues surplus the additional costs incurred
for processing the product apart from split-off. j
Q7. Write a short note on relevant cost and relevant revenues.
Relevant Costs
A make or buy decision is a marginal cost decision and for the purpose of decisions based on marginal cost, all costs
are divided into fixed costs and variable costs. Relevant cost is a cost that differs between alternatives being considered.
The concept of relevant cost is used to eliminate unnecessary data.
Relevant Revenues
Relevant revenues refer to those revenues which a firm can gain in future. The two main characteristics of relevant
revenues are, |
(a) Such revenues occur only in future and
(b) They are different for different courses of actions that are available for a firm.
Relevant means that a cost or revenue will change, depending on a decision you make. The information about relevant
costs and revenues assists a manager in taking decisions regarding the selection of best suitable alternative among the group
of alternatives.
....... SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD
PART-B
3.1 DECISION-MAKING ________________________

Q8. What is decision making? Explain the various steps in the process of decision making.
Decision Making
Decision making is a process of identification and selection of an action from a number of alternative courses of
action for resolving a problem in the organization.
Decision making acts as the basis for planning an activity in the organization. It is one of the important managerial
functions. Decision making must be rational for achieving the set goals successfully. It is very important to take the decisions
at every stage of the organization. The decisions which are taken by top management are called strategic decisions and the
decisions which are related to the normal day-to-day activities of organization are called as tactical or operational decisions.
Process of Decision Making
The process of decision making deals with a series of activities which results in the best solution to a problem. The
decision making process involves certain steps which are as follows,
Step 1: Defining the problem
Step 2: Specifying the objectives
Step 3: Identifying the problem
Step 4: Generating alternatives
Step 5: Evaluation of alternatives
Step 6: Selection of the best alternative
Step 7: Implementation of the action and
Step 8: Evaluating the results.
Step 1: Defining the Problem
The first step in decision making is to find out the correct problem. It should be seen what is causing the trouble and
what will be it’s possible solutions.
Step 2: Specifying the Objectives
The second step in the decision making process is to specify the objectives or goals of organization. Based on these
objectives, the decisions relating to the actions which need to be taken by managers to accomplish the set of objectives are
taken.
Step 3: Identifying the Problem
The third step of decision making process is the identification of the problem. In this step, the management collects
adequate information about the organizational processes and processes the information to diagnose and identify the problem.
It is very important for managers to diagnose the real problem in the situation as this helps in resolving the problem easily
and taking an effective decision. The manager should analyses it. He should collect all possible information about the
problem.
Step 4: Generating Alternatives
After identifying and defining the actual problem, the manager has to gather appropriate information about the
problem. Based on the gathered information, the manager can generate alternatives to solve a problem by analyzing it
thoroughly. The information also helps in anticipating the results for each alternative. The manager has to find maximum
possible alternatives which are available to resolve the problem. The alternatives should be clear, understandable and
specific and should be able to produce a best solution for the problem identified. Every problem has a number of solutions.
If there is only one solution then there is no need for decision making.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ____________
Step 5: Evaluation of Alternatives (c) Research and Analysis

After generating the alternatives, the manager In this approach, the best alternative is selected by
should evaluate them for selecting the best alternative or using various models. The important step in this
that alternative which gives maximum economy should be approach is to build a simulation model to find the
selected. The possible alternatives can be evaluated by using best solution among the various alternatives for the
the following methods, problem.
(a) Stakeholder Analysis Step 7: Implementation of the Action
In stakeholder analysis, the key aspects involved in Implementation is the realization of an application or
the problem are identified and the impact of each execution of plan and idea. The implementation of an action
alternative on the problem is considered. needs the active support of the organization and employees
(b) Marginal Analysis at all levels of the organization.
In marginal analysis, the alternatives are evaluated Implemented solution can be failed to solve the
by comparing the additional revenues generated with problem when it was developed. Therefore the results of
respect to the additional costs. The factors other than implementing a solution should be monitored and evaluated.
costs and revenues can also be used for evaluation. This stage can have an effect on all the above stages.
(c) Cost-benefit Analysis The errors in this stage can occur due to the lack of active
Marginal analysis is a traditional method and is cost participation of all the staff of the organization. This can be
consuming while cost benefit analysis is a variation avoided by involving the right and capable workers and
of marginal analysis. In this method, the manager managers in the decision making.
compares the costs and the anticipated benefits of Step 8: Evaluation of Results
each potential course of action. The alternative which
involves low cost and high profits can be selected by Evaluation results are used to improve programs,
the manager. sustain position outcomes and improve the community’s over
all plan. After implementation, it is necessary to evaluate
(d) Quantitative and Qualitative Factors
the results obtained from the action. If the results are in
Evaluation of alternatives can also be done by accordance with the specified objectives, then the decision
considering the qualitative and quantitative factors. is a successful decision. The manager should evaluate the
Qualitative factors are intangible in nature such as results for controlling the performance of the organization
labor relations, risk of technological change etc., and for measuring the performance of the decision. If any
whereas quantitative factors are tangible such as the negative results occur, then the manager should reassess the
costs and benefits. These factors can be measured in decision and repeat the above steps for taking appropriate
terms of numbers but qualitative factors cannot be decision to resolve the problem.______________________
expressed in numerical terms. Q9. Discuss in detail the various types of decision
By rating and comparing the outcomes of these making.
factors, the managers can determine the importance of each
Answer :
alternative in solving the problem.
The decisions are categorized broadly into six
Step 6: Selection of the Best Alternative
categories based on the different criteria. They are as follows,
In this stage, the actual decision is made by selecting
1. Classification based on their impact on organization.
one best course of action from the various alternatives. The
managers mostly make use of three approaches for selecting 2. Classification based on the nature of decision
the best alternative. These approaches are as follows, and the nature of problems involved.
(a) Experimentation 3. Classification based on the number of individuals
In this approach, the manager selects the best involved in the process.
alternative by testing all the proposed alternative 4. Classification based on their importance.
courses of action. It is the most expensive technique 5. Classification based on the extent of freedom to
as it requires huge amount of money for conducting decide.
the experiments.
6. Classification based on the persons involved.
(b) Experience
1. Classification Based on their Impact on
In this approach, the manager selects the best
Organization
alternative based on his past experience. The degree
of success depends on the experience of the manager The decisions are classified into two types based on
in selecting the best alternative. their impact on the organization. They are as follows,
(a) Basic Decisions Example
The decisions which are important to the organization Decisions relating to the allocation of resources,
and are strategic in nature are called basic decisions. improvement of community relations etc., are the
These decisions are also called strategic decisions. examples of non-programmed decisions.
These decisions have a major impact on the success
3. Classification Based on Number of Individuals
of the organization. Decision making is the process
Involved
of making choices by identifying a decision.
Example The decisions are classified into two types based on
the number of individuals involved in the decision making
Location of plant, decisions relating to distribution process. They are as follows,
channels, design of the organizational structure etc.
(a) Individual Decisions
(b) Routine Decisions
The decisions which are taken by the managers
The decisions which are related to the routine day-to-
individually or by any individual person of the
day activities are called as routine decisions. These
organization without consulting others are called
decisions do not have a significant impact on the
individual decisions. These are routine in nature and
performance of the organization.
do not have any major impact on the organizational
Example success. The managers have the right to take
The decisions related to the movement of raw individual decisions in certain conditions.
materials to production process, marketing of a
(b) Group Decisions
product at a selected place etc.
Group decision making is a situation faced when
2. Classification Based on Nature of Problems
individuals collectively make a choice from the
Involved
alternatives before them. The organizations mostly
The decisions are classified into two types, based on opt for group decision making. The decisions in
the nature of the problems involved. They are as follows, which a group of members or managers and associates
(a) Programmed Decisions consult with the other group members are called group
The decisions which are taken by the management decisions. These decisions are taken after reviewing
based on its past experience for resolving the the advantages and limitations of each alternative
structured problems are called programmed decisions. proposed by all the members. All the group members
Structured problems are clear and definite. They can collectively resolve the problem. Strategic decisions
be anticipated and are routine in nature. For solving are a type of group decisions which are taken by a
these problems, the managementcan plan the decisions group of managers from each department and board
before its occurrence. The programmed decisions of directors.
follows the policies, procedures and rules which are 4. Classification Based on their Importance
fixed by the organization for a particular period of
The decisions are classified into two types, based on
time. Programmed decisions in management of an
their importance in the organization activities. They are as
organization are concerned with the relatively routine
follows,
problems.
(a) Major Decisions
Programmed decisions may limit the freedom of the
(employees) managers as they are taken as per the The decisions which are strategic in nature and are
policies. It is a time saving process as-the problems are related to the significant aspects of organization like
anticipated and the management can plan to resolve construction of building for production, processing
the problems in advance. of products, business expansion are called major
(b) Non-programmed Decisions decisions. These decisions require huge mount of
money for implementation and are very specific
The decisions which are taken by the management for
decisions.
resolving the complex, unanticipated and exceptional
problems are called non-programmed decisions. (b) Minor Decisions
These problems are also called unstructured problems. The decisions which are routine in nature and deal
It is very important to take non-programmed decisions with the organizational aspect are less significant are
at every level of management. These decisions are called minor decisions. These decisions require low
specific in nature for resolving the non-routine problems. cost for implementation and are not specific decisions.
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5. Classification Based on the Extent of Freedom to Decide
The decisions are classified into two types based on the extent of freedom given to the managers to decide. They
are as follows,
(a) Personal Decisions
The decisions are taken by the manager without consulting others in the organization are called personal decisions.
The manager has the freedom to take personal decisions. Decision making is particularly important when the decision
to be made involves personal values or moral choices.
(b) Organizational Decisions
The decisions which a manager takes by considering the organizational and environmental conditions and factors that
are within the boundaries of the organizational policy are called organizational decisions. The manager either consults
with the colleagues or subordinates or superiors while taking decisions or takes the decisions independently.
6. Classification Based on the Persons Involved in Taking Decisions
The decisions are classified into two types, based on the persons who are involved in taking the decisions. They are
as follows,
(a) Departmental Decisions
The decisions which are taken by the head of the department or chief of the department are called departmental
decisions. These decisions are mostly based on the past performance and the opinions of the people in the department.
Example
Decisions relating to the development of the department etc.
(b) Interdepartmental Decisions
The decisions which are taken by the heads of two separate departments or the chiefs of all the departments of the
organization are called interdepartmental decisions. In some cases, instead of the chief of the departments a group
of senior managers of the department or general managers take the related decisions.
3.2 MAKE OR BUY
Q10. What do you mean by make or buy decision? Discuss the pros and cons of this decision.
Make or Buy Decisions

Make or Buy Decision is the first step in process planning. It includes whether the products/services must be made
in the organisation or should be brought from the other manufacturing concern i.e., from the outside party.
Earlier, make decisions were preferred by a greater number of firms which led to backward integration and ownership
of a wider range of manufacturing concerns and assembly facilities. Buy decisions are helpful in minimising the need for
process selection.
The following factors are taken into consideration while making make-or-buy decisions,
(a) Existing capacity
(b) Expertise
(c) Quality considerations
(d) Nature of demand
(e) Cost and
(f) Risk.
Make or Buy Decisions are also known as, “purchasing function”. The company has three alternatives prior to the
commencement of a new product as follows,
(a) Buy the entire product from a contracted manufacture.
(b) Buy few parts and materials and then produce and collect the remaining parts in their own organisation.
(c) Produce the complete new product (i.e., right from the process of transforming the basic raw-materials into finished
product).
Pros of Make or Buy Decision
Following are the pros of make or buy decision,
Pros/Benefits of Make Decisions Pros/Benefits of Buy Decisions

1. Make decisions help in reducing the production cost. 1. Buy decisions help in reducing the acquisition cost.
2. It makes sure that products are supplied adequately. 2. It helps in sustaining the commitment of supplier.
3. Make decision helps in avoiding the misleading and 3. It helps in obtaining superior capabilities.
deceptive suppliers.
4. It makes effective utilization of excess resources. The 4. Buy decisions help the firms to avoid making investments
managers role is to establish the conditions for an in additional capacity. Buy decisions relate to autonomy
effective group-decision outcome. . and its always an advantage to be able to choose among
more than one option.
5. Make decisions help the firms to produce desired 5. Buy decisions help in decreasing the inventory costs.
quality product.
6. It helps in avoiding the supplier collusion. 6. Buy decisions assure that the supply of items is constant
and continuous.
7. Make decisions help the firm in, 7. Buy decisions help the firm in,
❖ Producing unique products which are difficult to buy. ❖ Buying the products which are protected by patents.
❖ Protecting the intellectual properties. ❖ Emphasizing more on core competency.
❖ Expand its size.
Cons of Make or Buy Decision
_____ Pros of “make” decision are the cons of buy decision and pros of “buy” decision are the “cons” of make decision.
Q11. What are the considerations in make or buy decision? Also state the reasons of when to make and
when to buy.
Answer :
Make or Buy Decision, is considered as one of the important decision of the management. Deciding whether a
component is to be purchased from outside or it must be manufactured using its own plant is known as Make or Buy
decision. Before deciding which alternative is to be selected, the firm must properly analyze the cost as well as the capacity
available of both the alternatives. The alternative with low cost, must be selected.
Consideration in Make or Buy Decision
1. From the economic point of view, the least cost option is chosen from the manufacturing (making) cost and buying
9Dst of the product.
From the economic point of view of Make and Buy decision is usually based on the concept of break-even analysis
or economic order quantity concepts or economic batch quantity. Economic factors include natural resources type
of economic system, capital formation etc.
2. Beside the economic point of view, there are few other non-economic considerations point of views as well, like:
❖ Taking into consideration the quality and reliability.
❖ Meeting the delivery schedule on time.
❖ Preference of employees.
❖ Controlling trade and design secrets.
❖ Accessibility of manufacturing.
❖ Need of lead time for purchasing or in-house manufacturing.
❖ Availability of R and D for in-house manufacturing.
On the basis of various considerations, the managers are supposed to take decisions whether to make
(manufacture) or buy.
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UNIT-3 : Decision Making _____ _ _ _ _ 53
Reasons for Make or Buy 2. The finished product is unable to meet the demand, I
as it is produced by limited suppliers.
Make or Buy decision regulates the supply chain
nature and resulting in management tasks. 3. The component/part is of high value for the firm and I
The decision of making or buying a product is an requires high quality control.
important activity of management. A firm can meet the The company can manufacture the component/part I
customer requirements, by making the products, by utilizing along with the existing facilities for other items in which I
the facilities available within the firm or by buying the parts the company is experienced.
from a subcontractor and assembling them for producing the
finished product. Criteria for ‘Buy’ Decision
The following are the basic reasons which act as the Based on the following criteria, the firm takes the I
basis for taking make or buy decisions, decision to buy a product or component,
1. Retaining Core Technologies of Business 1. Instead of spending high investments on facilities
which are already at suppliers point, a firm can buy I
Many companies prefer to retain those processes
which depict the core elements of their business within their the product.
companies. 2. The majority of the make or buy decisions are made
2. Strategic Considerations on the basis of price.
Make or Buy decisions must be taken within the 3. If a firm does not have adequate facilities for making
strategic framework of the business. The firm determines the a part or product and does not have any scope for
way in which the current and future market positions affect more profitable opportunities for investing the firm’s :
the ability of operations to support the market criteria for capital, then it opts for buying a part or component. I
which it is responsible.
4. A firm can use existing facilities for making the other
3. Buying Instead of Making parts more economically. I
A make or buy decision enable to choose among more 5. The personnel of the company may not have adequate
than one option. A company prefers a “buy” option, when the skills and abilities for making the required new
product needed for producing finished goods is completely product. I
different and needs a different processing machine. When
company selects the ‘buying’ option, it will be difficult for it 6. A company may be prevented from making a part due |
to attain significant competitive advantage from that bought to patent or other legal barriers.
component. 7. The part to be made by the firm may have temporary |
4. Service and Product Volumes or seasonal demand. I
An organization facing different sets of demands Q12. What are the specific cost and non-cost factors I
for different volumes of products and services can opt for that are considered before a make or buy I
outsourcing for responding to one set of demands which decision is taken?
i|fdoes not want to develop within the firm. Globalization Answer :
represents the global integration of international trade.
Specific Cost Factors
5. Globalization of World Trade
The specific cost factors which needs to be considered I
Traditionally, due to high tariff levels on the
while taking the make or buy decisions are as follows,
international trade, organizations used to prefer locally
manufactured products. But in the current scenario, due 1. Fixed amount cost factors.
to the elimination of trade barriers between the countries,
2. Per unit cost factors.
organizations are preferring to go for global trade. This
made global manufacturing economically feasible. Trade 3. The availability of plant facilities.
globalization is a type of economic globalization and
4. The quality of the product which has a considerable I
measure of economic integration.
impact on production plan. I
Criteria for ‘Make’ Decision
5. Availability of suitable area for production.
The following are the criteria on which the firm takes
the decision to make a product or component, 6. Availability of required machinery.
1. The finished product can be produced at low cost by 7. Transportation facility (if necessary) for moving the
the firm, when compared to the outside suppliers. production resources to the location of plant.
..... ' SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD
8. The cost incurred on the acquisition of special practical be considered by the firm while taking make or buy decisions.
knowledge or skills needed for the production of a The cost involved in manufacturing an item are labour, material
product. and overhead and the cost involved in purchasing an item are
purchase price, transportation price and different tariffs, taxes
9. The factors such as market price, price trend and
and fees.
availability of the materials should be considered
while purchasing raw materials. In some cases, the organizations might opt to purchase
an item instead of manufacturing it if they feel that it is
10. Labour factors such as availability of skilled labour,
wage rates etc. cheaper to buy the product instead of making it.
2. Capacity
11. Factors that affects the apportionment of overhead
expenses. The maximum amount that something can contain,
thus capacity means the ability to receive or contain.
12. The implementation of the costing techniques should
be taken into account for marginal costing, differential Usually, companies that are not operating in full capacity
costing etc. might opt to manufacture the components instead of buying
them especially, when a level of work force is required to
13. Demand fluctuations and production requirements as be maintained. In some situations, the available capacity
per the demand. of the company might not be enough to manufacture all
14. The effective utilisation of purchased materials the components. So in such a case, the decision whether to
produce or purchase has to be made.
Non-cost Factors
3. Quality
Non cost factors often end up being the decisive
factor which include labour availability and skills, The ability to provide quality components continuously
economic conditions, infrastructure, innovation, regulatory is also considered while taking the Make or Buy decisions.
environment. The non cost factors which needs to be Generally, it is easy to control the quality of components
considered while taking make or buy decisions are as that are manufactured in the company, but the factors such
follows, as supplier certification, standardization ofparts and supplier
involvement in design can help in enhancing the quality of
1. The factors that favours making decision are as follows,
supplied components.
(i) Maintenance of confidentiality in the information
4. Speed
about the production capacity of the firm
If parts are purchased from a vendor who is at a distant
(ii) Availability of idle capacity of the plant
place, then the savings made on such purchases is lost due
(iii) Factors that affect market supply to the lengthy transportation time involved in the offshore
shipments. Sometimes, the manufacturer receives the goods
(iv) Tax considerations
in advance from the supplier. Mostly, the supplier dealing
(v) Maintenance of special facilities. with small range of goods is more flexible and adaptable to
the technological changes.
2. Jhe factors that favours the buying decision are,
5. Reliability
(i) Fluctuations in the production of finished product
Accounting reliability refers to whether financial
(ii) Extensive selection of materials
information can be verified and used consistently by
(iii) Lack of capital required for production.. investors and creditors with the same results. The suppliers
should be reliable and trust worthy, in terms of providing
Other Factors
quality goods and supplying these goods on time. Delays
The following are the factors influencing Make or in the shipment of orders, or partially filled orders due to
Buy decisions, low quality, can significantly influence the manufacturing
1. Cost system. In the present scenario, several companies want their
suppliers to meet certain delivery and quality standards, so
Cost is one ofthe important factors influencing the Make as to become a certified supplier.
or Buy decision. The firm has to determine whether it is cheaper
to make the product in the company, or to purchase it from 6. Expertise
?utside sources. The cost involved in coordinating production The organizations which effectively design or manufacture
between distant places and increased inventory levels must also some goods will also control their production system.
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Q13. An engineering company manufactures four components, namely A, B, C and D the cost particulars
of which are given below:
A(?) B(?) C(?) D(?)

Direct Materials 80 100 100 120
Direct Labour 20 25 25 30
Variable Overhead 10 12 15 10
Fixed Overhead 15 23 20 20
125 160 160 180
Output per Machine-hour (Units) 4 2 3 3
The key factor is shortage of machine capacity. You are required to advice the management as to
whether they should continue to produce all or some of these components (which are used in its main
product) or they should buy them from a supplier who has quoted the following prices:
A: ? 115; B: T 175; C: T 135 and D: ? 185.
Solution :
Preparation of Statement Showing Profitability
Components
Particulars
A B c D
Direct Material 80 100 100 120
Direct Labour 20 25 25 30
Variable Overhead 10 12 15 10
Marginal Cost P.U 110 137 140 160
Purchase Price P.U 115 175 135 185
Excess of purchase price over marginal cost 5 38 - 25
Excess of marginal cost over purchase price - - 5 -
Decrease in profitability per machine hour (purchased 5x4 = 20 38x2 = 76 - 25x3 = 75
from outside)
Increase in profitability per machine hour (purchased - 5x3 = 15
from outside)
Observation
1. Components ‘C’ should be purchased from outside. Purchase from outside will increase the profitability by ? 15 per
machine hour.
2. Components A, B and D are feasible by producing by own.
Q14. A company finds that while it costs ? 6.25 each to make component ‘X’, the same is available in the
market at ? 5.75 each, with assurance of continued supply. The breakdown of costs is:
Material < 2.75 each
Labour ? 1.75 each
Other variable cost ? 0.50 each
Other fixed cost ? 1.25 each
Total cost ? 6.25
(a) Should you make or buy
(b) What should be your decision if the supplier offers the component at ? 4.85 each?
------------------ SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD

Solution :
■
If the component ‘X’ purchased from the market, the total cost of component for unit is found to be ? 5.75. In case
rticulars
if the same component is produced within the manufacturing unit, then the cost incurred will be:
Particulars (per unit) ?
Material 2.75
»»
Labour 1.75
Other variables 0.50
5.00
(a) Therefore, it is profitable to produce component ‘X’ within the production plant rather than buying it from the market,
because the production cost is ? 5/unit which is less than the purchasing price i.e., 5.75/unit.
(b) If the supplier is offering the component at 4.85, it is profitable to accept the offer as we can save 15 paise per
nt as to _____ unit. Supplier cost is ? 4.85/unit which is less than the production cost i.e., 5/unit._________________________
its main Q15. Suresh Ltd., is producing a part at a cost of 11 per unit. The composition of the cost is as follows,
Materials 3.00
Wages 4.00
Overheads - Variable 2.50
Fixed 1.50
11.00
Presently, the firm has been incurring a total fixed cost of ? 15,000 for manufacturing the current
production of 10,000 units. An outsider is offering the same component, in all aspects identical in
features, for ? 10 per unit. On enquiry, it is found from the firm that the machine that is manufacturing
the parts would remain idle as the machinery cannot be utilized elsewhere,
(i) Should the offer be accepted?
(ii) Would your answer would be different, if the outsider firm reduces the price to ? 9, after negotiation.
What is the impact of the fixed costs in the decision-making process?
Solution :
Calculation of Total Variable Cost
Particulars Amount (T)

75 Materials 3.00
Wages 4.00
Overheads - Variable 2.50
Total Variable Cost 9.50
(i) The given offer should be rejected because the variable cost for manufacturing the product is ? 9.50 whereas the
? 15 per outside market price of the same product is T 10, this indicates that every unit bought outside results in loss of
? 0.50 per unit of a product.
(ii) The offer should be accepted in case the firm is agreed to reduce the price of the product to ? 9.
Generally fixed costs are not considered in decision making, even if the firm manufacture the product by themself
e in the
or purchase from any other source. _____________________________________________________
Q16. A company can produce and sell at its maximum capacity 20,000 units of a product. The sale price is
? 100. The present sales are 15,000 units. To produce over 20,000 units and upto another 10,000 units
some balancing equipments are to be installed at a cost of ? 10, lakhs and the same will have a
life span of 10 years.
The current cost structure is as under:
Direct Materials 30% of sale value

Direct Labour 20% of sale value
Variable Overheads ? 20 per unit
Profit ^15 per unit
’ LTD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. __
The present cost is estimated to go up due to price escalation as under:
10% in direct material from present level of 30%
25% in direct labour from present level of 20%
? 50,000 in fixed overheads per year.
There is a concrete proposal from a party to take 10,000 units additionally over present level of output
on a long term basis at a unit price of ? 90. Apart from the investment of ? 10 lakhs as shown above,
the fixed overheads will increase by ? 50,000 due to additional administrative expenses.
The Co. is in a dilemma as to whether to accept the order for 10,000 units or to use the present
unused capacity of 5,000 units for which there will be additional selling expenses of ? 50,000.
Ignore financial charges and give your recommendation.
Statement of Profitability with Alternatives
Particulars Alternative Alternative Alternative Alternative

1 II III IV
Sales (A) (W.N-1) 15,00,000 20,00,000 24,00,000 29,00,000
Variable Cost:
(i) Direct Material (33% on sales) (W.N-2) 4,95,000 6,60,000 8,25,000 9,90,000
(ii) Direct labour (25% on sales) (W.N-3) 3,75,000 5,00,000 6,25,000 7,50,000
(iii) Variable expenses (? 20 per unit) (W.N-4) 3,00,000 4,00,000 5,00,000 6,00,000
Total Variable Cost (B) 11,70,000 15,60,000 19,50,000 23,40,000
Fixed Cost:
(i) Fixed expenses (W.N-5) 2,75,000 2,75,000 2,75,000 2,75,000
(ii) Additional selling expenses 50,000 50,000
(iii) Depreciation for balancing equipment 1,00,000 1,00,000
Additional administrative expenses 50,000 50,000
Total Fixed Cost of (C) 2,75,000 3,25,000 4,25,000 4,75,000
Total Costs (D = B + C) 14,45,000 18,85,000 23,75,000 28,15,000
Profit (E = A - D) (Sales - Total Cost) 55,000 1,15,000 25,000 85,000
Comment
Altemative-II is the best choice to obtain maximum level of profit.
Not£
I - Reject proposal of purchasing 10,000 units and continue with present level.
II - Reject proposal of purchasing 10,000 units and use maximum capacity by increasing selling expenses.
III - Accept proposal of party to take 10,000 units @ 90 by installation of balanced equipment and continuing
with present sales
IV - Accept proposal of party to take 10,000 units @ ? 90 by installation of balanced equipment and attaining sales
with maximum available capacity with increasing additional selling capacity.
Working Note-1
Alternative I : 15,000 units @ ? 100 = 15,00,000
Alternative II : 20,000 units @ ? 100 = 20,00,000
Alternative III : (15,000 units @ ? 100 + Additionally 10,000 @ ? 90)
= 15,00,000 + 9,00,000 i.e., 24,00,000
Alternative IV : (20,000 units @ ? 100 + Additionally 10,000 @ ? 90)
= 20,00,000 + 9,00,000 i.e., 29,00,000
Working Note-2
Alternative I : 15,00,000 x 33% = 4,95,000
Alternative II : 20,00,000 x 33% = 6,60,000
Alternative III : 25,00,000 x 33% = 8,25,000
Alternative IV : 30,00,000 x 33% = 9,90,000
(Note: National sale price of? 100 is taken for additional 10,000 units)
Working Note-3
Alternative I : 15,00,000 x 25% = 3,75,000
Alternative II : 20,00,000 x 25% = 5,00,000
Alternative III : 25,00,000 x 25% = 6,25,000
Alternatively : 30,00,000 x 25% = 7,50,000
(Note: National sale price of? 100 is taken for additional 10,000 units)
Working Note-4
Alternative I : 15,000 @ ? 20 per unit = ? 3,00,000
Alternative II : 20,000 @ ? 20 per unit = ? 4,00,000
Alternative III : 25,000 @ ? 20 per unit = ? 5,00,000
Alternative IV : 30,000 @ ? 20 per unit = ? 6,00,000
Working Note-5
Fixed Overheads
Current Sales Value (A) 15,00,000
(15,000 @? 100)
Direct materials (30% on sales value) 4,50,000
Direct labour (20% on sales value) 3,00,000
Variable overheads (? 20 per unit) 3,00,000
Total Variable Cost (B) 10,50,000
Contribution C = A - B 4,50,000
Contribution = Sales - Variable Cost
= S-V
___________ = A-B_____________
Less: Profit D (15,000 x ? 15 per unit) 2,25,000
Total Fixed Overheads (C - D) 2,25,000
Total fixed overheads = Contribution - Profit
Add: Additional fixed overheads 50,000
Total Fixed Overheads 2,75,000
3.3 ADD OR DROP PRODUCTS_______
Q17. Explain in detail about how to add a new product in product line. Give an example.
OR
How can a manager diversify the products using the technique of marginal costing? Give example.
Answer :
Adding (Diversification) of Products Through Marginal Costing
When a firm plans to add new products (diversification) in the product line for utilizing the idle capacities of the inputs
or for entering in new markets, then the management of the firm should take the decisions regarding the profitability and
production of that new product. In such situations, marginal costing technique can be used for taking effective decisions.
SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD.
UN IT-3 : Decision Making 59
Under marginal costing for the calculation of profits for individual products, departments, no attempt is made only
calculation of individual contribution is done. However, while taking the decisions about the production of a new product,
the firm should consider the following factors,
(i) The production of new product should not increase the fixed costs of the firm.
(ii) The information regarding the costs of production should be given under marginal costing method.
The management should also consider the variable costs during diversification i.e., price of the product should cover
all the variable costs incurred in the production of the new products and should contribute towards the firm’s profitability.
If the production of new product involves some specific fixed costs then the firm should firstly deduct these costs from
the contribution margin of the product and then the decisions are to be taken about the production of the new product. The
general fixed costs apart from specific costs will be charged to the products which the firms are currently producing.
Example
If a firm is currently involved in producing a product ‘x’ and wants to diversify the production by adding
a new product ‘y’ which can be produced using the same resources of product ‘x’, then the production
of y is to be decided based on the firm’s ability to meet the variable costs as there is no change in the
• fixed costs.
Particulars X Y
Sales (units) 1,000 1,200 units
Variable cost ? 20/unit ? 22/unit
Fixed cost 10, 000
Selling price ? 50/unit ? 60/unit
Solution :
Particulars X Y
Sales 50,000 72,000
Less: Variable cost 20,000 26,400
Contribution margin 30,000 45,600
Less: Fixed cost 10,000
Profits 20,000 45,600
If product y also incurs some specific fixed costs of 5,000/- in addition to general fixed costs then the profitability will be,
Particulars X Y
Contribution 30,000 45,600
Less: Fixed costs 10,000 5,000
Profits 20,000 40,600
_____ Product ‘y’ is profitable (40,600)._________________________________ _____________________________
Q18. How marginal costing technique is applied in taking decisions regarding dropping out of a product
line?
Answer :
If a firm is engaged in producing a wide range of product in a product line, the management needs to take certain
important decisions with respect to the production of all products or to drop those products which are not contributing
towards the firm’s profitability or incurring losses. The decisions regarding dropping out a product or product line are
usually based on the comparative study of margin of contribution of each product.
Firms usually can take two types of decisions in this respect,
(i) First either to drop the product that incurs loss and introduce another product which would contribute significantly
towards the fixed costs.
(ii) Second to drop the product and emphasize more on other product of the firm’s product line which possess greater
contribution margin.
- 5IA PUBLISHERSAND DISTRIBUTORS PVT. LTD.
Example
If a ‘ART firm is engaged in producing products P, Q, R and S and it is found that product R is contributing minimally
towards the firm’s profits and is also incurring loss gradually. Thus, the firm has taken up the decision to drop out product
‘7?’ and concentrate more on other product which is most profitable than the remaining ones. This strategy has resulted
in increased sale value and firm’s profitability.
P Q R s Total
Sale value 10,000 20,000 7,000 12,000 49,000
Less: variable cost 2,000 3,000 3,000 3,000 11,000
Contribution 8,000 17,000 4,000 9,000 38,000
Less: Fixed cost 5,000 5,000 5,000 5,000
Profit/Loss 3,000 12,000 (1,000) 4,000 38,000
Firm should consider the following factors while taking decisions with respect to the dropping out of a product,
(i) Contribution
Firm must take into consideration the contribution of each product instead of profits, as the contribution is different
from profit as profit is obtained/calculated after deducting fixed costs from the contribution and these costs are apportioned
on some reasonable basis but not on an accurate basis. Hence, contribution would provide correct information about firm’s
profitability. The firm has to drop that product whose contribution is very less or which incurs losses.
(ii) Capacity Utilization
Firms needs to ensure that it is functioning to its full extent and is making optimum utilization of the resources. In
case of any idle capacity, the firm must introduce a new product whose margin/profit would be covering all the fixed costs.
(iii) Availability of Alternate Product
Firm must also inspect the availability of another product which is going to be introduced in the place of dropped
product and that product’s contribution must be more than the existing product towards the firm’s profitability and must
also recover all the fixed costs.
(iv) Product Demand
It is also necessary to take into consideration the extent/degree of demand for the product in the long run.
(v) Effect on Sale of other Products
The firm must also take into consideration the effect of dropped product on the sale of other products in the product
line. Sometimes, the dropped out product may affect the sale of another product which further affects the profitability of
the firm.
.
f.
PROBLEMS
Q19. Mars Ltd, is engaged in manufacturing and selling of a product ‘A’ whose selling price is ?30/unit and
variable cost is ? 10/- per unit.
(a) If the fixed costs for this year are 4,00,000/- and annual sales are at 60% margin of safety. Calculate
the rate of net return on sale, assuming an income tax level of 40%.
(b) For the next year, it is proposed to add another product line ‘B’ whose selling price would be ?
40/- unit and variable cost ? 8/- per unit. The total fixed costs are estimated at 6,00,000. The sale
mix of A and B would be 6:4. At what level of sales next year, would mars Ltd break even? Give
separately for both A and B the break even sales in rupees and quantity?
Solution :
(a) Statement showing contribution per unit of product ‘A’
Particulars
Selling price 30
Less: Variable cost/unit 10
Contribution/unit 20

Fixed costs
Break even point =------ -—:—;——
Contribution/unit
4,00,000
——— = 20,000 units
Break even sales (in units) = 20,000

Actual sales - BES
% Margin of safety =----- ----- -—-——
Actual sales «
Actual sales - 20,000

Actual sales
Actual sales = 60% + 20,000 A
/
20,000
(or) Actual sales = 4 = 50,000 units
Particulars
Total selling price 50,000 x 30 15,00,000
Less: Total variable cost 50,000 x 10 5,00,000
Contribution 10,00,000
Less: Fixed cost 4,00,000
Profit 6,00,000
Less: Income tax (40% on gross profit) 2,40,000
Net Returns 3,60,000
% of net return on sales = Ne* ^roflt x 100 = = 34 0/“

Sales 15,00,000 t
(b) Introduction of new product ‘5’ into the existing product line.
Particulars A B
Selling price/unit 30 40
Less: Variable cost 10 8
Contribution/unit 20 32
P/V Ratio 66.667% 80%
P/VRatio= ^-xIOO
1J
20
= ^T
30
x100
= 66.667%
w
P/V Ratio= ~~ x 100

kJ
32
= ^X10°
1
= 80%
Contribution margin of products A and B = 6:4
A = 66.667 x 6 = 400
B = 80 x 4 = 320
720
Total =720= — =72%
, zny Fixed costs 4,00,000

Break even sales (% of) = ——:—— =------------ = 5,55,555.6
Margin of Safety 72%
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61
Sales Mix
6
Products = 5,55,555.6 x — = 3,33,333.36
4
Product B = 5,55,555.6 * — =2,22,222.24
In Value
_ , , . 3,33,333.36
Products =------ —------ = 11,111.112
2,22,222.24
Product B = = 5,555.556.
40
Q20. The following set of information is presented to you by your client AB Ltd., producing two product X and Y.
Particulars X Y
(a) Direct materials (per unit) ? 20 ?18
(b) Direct wages (per unit) ?6 ?4
(c) Fixed expenses during the period are expected to be ? 1,600.
(d) Variable expenses are allocated to products at the rate of 100% of direct wages.
(e) Sales price (per unit) ? 40 ? 30
(f) Proposed sales mix,
(i) 100 units of X and 200 units of Y
(ii) 150 units of X and 150 units ofY
(iii) 200 units of X and 100 units of Y
As cost account you are requested to present to the management of AB ltd. The following,
(a) The unit marginal cost and unit contribution.
(b) The total contribution and resultant profit from each of the above sales mixes.
(c) The proposed sales mixes to earn profit of ? 300 and ? 600 with the total sales of X and Y being
300 units.
Solution :
(a) Statement of Marginal Cost and Unit Contribution
Product X Product Y
Particulars Per Unit Per Unit Per Unit Per Unit

Sale price 40 30
Less: Variable cost:
Direct materials 20 18
Direct wages 6 4
Variable expenses 6 (20 + 6 + 6) 32 4 (18 + 4 + 4) 26
Contribution 8 4
(b) Calculation of Total Contribution and Resultant Profit
Mix (i) Mix (ii) Mix (iii)

X Y Total X Y Total X Y Total
Particulars (?) (?) (?)
Sales (units) x Contribution 100 X 8 200 x 4 300 150 x 8 150x4 300 200 x 8 100x4 300
per unit
Total contribution 800 800 1,600 1,200 600 1,800 1,600 400 2,000
Less: Fixed cost 1,600 1,600 1,600
Profit - 200 400
Mix (iii) must be adopted as it gives the maximum contribution of? 2000 and profit of? 400.
LTD. 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. —___ .

(c) Proposed Mixes
Case-1 Case-2
~~T~ f
Required profit 300 600
Fixed cost 1,600 1,600
Contribution 1,900 2,200
Case-1
Let ‘a’ number of Xbe sold.
Then (300 - a) number of Y are to be sold.

Equating,
Sa + 4(300- a) = 1,900
Sa + 1,200 -4a = 1,900
Sa - 4a = 1,900- 1,200
4a = 1,900- 1,200
4a = 700
700
a= — = 175
4
a= 175 i.e.,A> 175
T = (300-a) = 300-175 = 125
Proposed mix = A'= 175, T= 125
Case-2
Let ‘Z>’ number of be sold.

Then (300 - Z>) number of Y are to be sold.
Equating,
Sb + 4(300 -b) = 2,200
Sb+ l,200-4/> = 2,200
4b =2,200-1,200
4b= 1,000
6=250 i.e., X= 250
y = (300-Z))
= 300-250
= 50
Proposed mix X = 250 units

Y = 50 units.
. . .—-- ------------- SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
63 64 _____ MAWAGERIAL ACC0UNTIM6
Q21. A firm manufactures two products viz P and Q. The firm wants to drop the product Q as it is yielding
less contribution per unit and add the product R. By adding the product R, the new fixed cost is likely
to be ? 2,50,000/- and the sales volume will increase to T18,00,000/-. Consider the following information
and suggest whether the firm should change the product or not.
Existing Product-mix
Product Selling price/ per unit Variable cost/ per unit % of sales
(?) (?)
P 80 32 60
Q 100 40 40
The total fixed cost during the year is ? 2,00,000/- and sales are T 16,00,000/'
Proposed Product Mix
(?) (?)
P 100 40 30
R 120 48 70
Solution :
Existing Product-Mix
(?) (?)
P 80 32 60
Q 100 40 40
The total fixed cost during the year is ? 2,00,000 and sales are ? 16,00,000.
Proposed Product Mix
(?) (?)
P 100 40 30
R 120 48 70
f New fixed cost is ? 2,50,000 and sales are ? 18,00,000.

There are two situations i.e., situation I with products P and Q and situation II with products P and R. By comparing the
net profit earned in both the situations we can decide which situation is better.
Situation I
(With products P and Q).

Calculation of contribution ratio of each product,
Selling Price - Variable Cost
Contribution ratio = x %Share in total sales
Selling Price
Contribution ratio for product,
= 0.6 x 0.6 = 0.36
LTD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. .......... ..................
F
100-40
£? = x0.4
100
60
x0.4 =0.6 x 0.4
100
= 0.24
Total of contribution ratios for products P and Q
= 0.36 + 0.24
= 0.60
Total contribution = Sales x Contribution ratio
= 16,00,000 x 0.6
= ? 9,60,000
Profit = Contribution - Fixed cost
= 9,60,000-2,00,000
= ? 7,60,000
Situation II
(With products P and Q)
100-40
P = ---------- x0.3
100
60
=---- x0.3 =0.6 x 0.3
100
= 0.18
120-48
R = ---------- x0.7
120
= 0.6 x 0.7
= 0.42
Total of the contribution ratios for products P and R
= 0.18 + 0.42
= 0.6
Total contribution = Sales x Contribution ratio
= 18,00,000 x 0.6
= ? 10,80,000
Profit = Contribution - Fixed cost
= 10,80,000-2,50,000
= ? 8,30,000
The profit in situation II is higher, hence it is better to drop product Q and add product R in place of product Q.
r— ............... -........... SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
65
Q22. The following are the present cost and output data of a manufacturer,
Product Price (?) Variable Cost Per Unit (?) % of Sales
Tables 120 80 40
Chairs 60 40 35
Book cases 80 60 25
Total fixed cost ? 40,000
Last year’s sales was ? 2,00,000
The manufacturer is considering to drop the line of book cases and replace with cabinets. His estimate
for the new scheme are as follows,
Product Price (?) Variable Cost Per Unit (?) % of Sales
Tables 120 80 40
Chairs 60 40 40
Cabinets 150 100 20
Total fixed cost per annum ? 40,000
Sales ? 2,50,000
Is the change worth undertaking?
Solution :
Statement Showing Profitability of each Product
Particulars Table Chair Book Cases Total
Selling price 80,000 70,000 50,000 2,00,000
Less: Variable cost 53,333 46,666 37,500 1,37,499
Contribution 26,667 23,334 12,500 62,501
Net Return 22,501
The net profits of the firm with these 3 products is ? 22,501/-.

After replacing the book cases with cabinets the change in the firm’s profitability can be determined as follows,
Particulars Table Chair Cabinets Total
Selling price 1,00,000 1,00,000 50,000 2,50,000
Less: Variable cost 66,666 66,666 33,333 1,66,665
Contribution 33,334 33,334 16,667 83,335
Net Return 43,335
There is an increase in the profitability of the firm with the dropping of book cases and replacing it with cabinets
from ? 22,501 to ? 43,335. Hence, the change is worth undertaking.
SIIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. -------- —

LTD. %
UNIT-3 : Decision Making
Working Notes
Sale price/value = Total sale value x % of sales
For each product,
For table = 2, 00,000 x -----= 80,000

' 100
Variable cost for each product = Number of units x Variable cost per unit
, _ Total sale value of each product

Number of units =---------- —------ ;----------- ;--------
Selling price per unit
For table = ^^x80 = 53,333
, . 70,000 An Ae ,,,
For chair = ——— x 40 = 46,666
60
For book case = ^0,000 x 60 = 37,500

80
After change,
Calculation of Sales
Sales value = Total sales x % of sales value
40
For tables = 2,50,000 x-----= 1,00,000
100
40
For chairs = 2,50,000 x = 1,00,000
100
For cabinets = 2,50,000 x —= 50,000

100
Calculation of Variable Cost
Total sales value of each product

Variable cost of each unit = x Variable cost per unit
Selling price per unit
For tables = 00,000 x 80 = 833 x 80 = 66,666

120
For chairs = x 40 = 166 x 40 = 66,666

60
For cabinets = ^^x 100 = 333x100 = 33,333 .

150
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD

4
3.4 SELL OR PROCESS FURTHER
Q23. Explain in detail about sell or process further.

Answer :
The sell or process further decision is the choice of selling a product or processing it further to earn additional revenue.
Most of the manufacturers faces the decisions either to sell products at split-off point or process further. Decision to be
choosed between selling a product at split-off or processing further is to be known as short-run operating decision. Value
to a product is added by additional processing, which increases the selling price of the product above the price of selling
at split-off. A product to be processed further is depended up on whether increase in total revenues surpass the additional
costs incurred for processing the product apart from split-off. The sell or process further decision type is mainly applicable
to farms and producers of natural resources.
Decision for a product is to be sold or processed further is determined by the two common conditions,
1. Evaluation by the company for the feasibility of processing product apart from split-off and occurrence of equipment
costs and other fixed costs in case of additional processing is needed.
This situation is a capital budgeting problem and also cannot determine whether incremental revenues surpass
incremental costs. As new investments are involved in machinery and building, rate of return is also considered.
2. A product is already processed by the company apart from split-off and invested in equipment and personnel.
Under this situation, only those costs are relevant costs which are associated to the additional processing of each
product apart from split-off point. For further decisions for processingjoints costs are relevant. Additional processing has
certain fixed costs such as supervisory salaries. These costs are incremental if removed by selling products at split-off and
should be considered under decision analysis. Salary costs are not incremental, incase salaried personnel are assigned on
other duties in the company due to discontinuation of additional processing. Incase equipments which were previously
used for additional processing are idle, then they are not to be considered for decision analysis. Depreciation expenses are
not relevant in short-run operating decisions, as these costs are allocations of costs which incurred in the past.
In order to decide which action to be considered, the company compares the contribution margin from partially
processed product’s sale with contribution margin of completely processed product’s sale.
PROBLEM
Q24. Partially produced product can be sold ? 80 p.u
Cost of production ? 50 p.u
Further processing ? 20 p.u
Final selling price ? 140 p.u
Units produced 10,000
* Suggest the firm whether the product should be sold at the split-of-point or processed further.
Solution :
Profit after Split-of-Point
Particulars Amount (?)

Sales (? 80 @ 10,000 units) 8,00,000
Less: Cost of production (T 50 @ 10,000 units) 5,00,000
Profit 3,00,000
Profit after Further Processing
Particulars Amount (?)

Sales (? 140 @ 10,000 units) 14,00,000
Less: Cost of production (? 70 @ 10,000) 7,00,000
Profit 7,00,000

Profit on sale partially produced product = T 3,00,000
Profit on sale of final product = ? 7,00,000
Net advantage on further production = T 7,00,000 - T 3,00,000 = ? 4,00,000.
Comment
Therefore, the firm should go for further processing.
3.5 OPERATE OR SHUT-DOWN _____
Q25. Explain briefly about operate or shut down of products/plant with reference to marginal costing.
OR
Explain briefly costing in closing down or suspending activities.
Operating or Shutting Down
Shutdown problems involve the following types of decisions,
1. Whether or not to close down a factory department.
2. If the decision is to shutdown whether the closure should be permanent or temporary.
Operating or shutting down of products with reference to marginal costing also referred as closing down or suspending
of activities. A shutdown point is one at which a company experiences not benefit for continuing operations and shutdown
temporarily.
Sometimes, it becomes necessary for a firm to temporarily suspend or close the activities of a particular product,
department or factory as a whole due to trade recession. The decision to close down or suspend its activities will depend
on whether products are making a contribution towards fixed costs or not.
If the products are making a contribution towards fixed costs, it is preferable not to close business or suspend the
activities to minimize the losses. If the business is closed down there may be certain fixed costs which could be avoided but
there will be certain expenses which will have to be incurred at the time of closing the operation like redundancy payments,
necessary maintenance of plant or overhauling of plant on reopening, training of personnel etc.
These types of costs are associated with closing down of the business and must be taken into consideration before
taking any decision. However, fixed costs may be general or specific. General fixed costs may or may not remain constant
while specific costs will be directly affected by the closing down of the operation.
In general, the excess of contribution over specific fixed costs will have to be compared with reduction in general
fixed cost. If the former exceeds the latter it is profitable to continue the activities and close down or suspend activities if
the latter exceeds the former. While fixed costs remain during the shutdown, variable cost can be eliminated.
Types of Shutting Down of a Plant
Marginal costing is usually used in taking decisions with respect to continue a plant/unit or to shut down it. The
shutting down of a plant is basically of two types,
1. Temporary shut down
2. Permanent shut down or complete shut down.
1. ’temporary Shut Down
It results from the combination of output and price where the company earns just enough revenue to cover its total
variable cost. Temporary shut down is a short term decision for suspending or closing down the plant operations for a shorter
period of time. Management of the firm would usually take up this decision of trade recession with an aim to minimize
the effect of recession on the firms profitability in the future. In such circumstances the firm decides to re-start the plant’s
operation in the future period of time after recovering from the recessions effect. A firm can continue their plant activities
even in recession if the selling price of the product is more than that of marginal cost which would help in compensating
the loss. The firm can ignore few of its fixed costs by reducing the number of firm’s production operations.
While going for the shutting down decisions in the short run, the firm needs to take into consideration and compare
the losses that would incur because of closing down of the plant with that of losses due to the continuation of the plant
activities with the help of this comparison the management would be able to come to a conclusion as follows,
(i) If the loss due to closing down is more than that of continuing the plant then, it is better for the firm to continue the
plant’s operations.
(ii) If in case the losses due to shutdown of plant is less than that of its continuation then it is advisable to shut down
the plant for a short period.
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2. Permanent Shut Down or Complete Shut Down
If the firm is not in a position to make up the adequate rate of return on their investment which would be compensating
the risk that is involved in the business, then it is better to shut down the plant completely without giving it a second chance
to re-start. The length of a shutdown may be temporary or permanent, depending on the nature of the economic conditions
leading to the shutdown.
These decisions are usually taken in the long run. Management of the firm must take into consideration and conduct
comparison among the revenues of two different alternatives as follows,
(i) Revenues from the complete shut down of a plant and sale of the plant.
(ii) Revenues from the operations in case of continuing the plant’s operations.
Soon after the comparison is made between two alternatives the firm will get a strong base for taking effective
decision with respect to the shutting down of a plant.
PROBLEMS
Q26. ABC company is engaged in producing a single product and distributes its products to three different
market places X, Y and Z. It is estimated that during the year 1,00,000 units will be manufactured and
sold at a price of ? 25 unit and the sales being spread as follows,
Market Units
X 60,000
Y 25,000
Z 15,000
Standard costs of production are,
Direct materials - ? 5/unit
Direct wages - ? 4/unit
Factory variable overhead’s - 150% of direct wages
Factory fixed overhead’s - ? 5,00,000/annum
Selling and distribution costs X Y Z •

Fixed cost/annum 90,000 50,000 40,000
Variable cost (% on sales value) 12% 15% 10%
You are required to,
(a) Prepare a budget for the business from the figures provided
(b) Advise the management on the desirability of closing down Y and Z markets.
Solution * Model Paper-ll, Qi 1(b)
(a) Preparation of Budget
Particulars X Y Z Total
Units 60,000 25,000 15,000 1,00,000
Sales (? 000) (A) 1,500 625 375 2,500
Direct materials 500
Direct wages 400
Factory variable costs 600
Factory fixed costs 500
Allocated prorate to units (B) 1,200 500 300 2,000
Gross Profit C = (A - B) 300 125 75 500
Selling and Distribution Costs
Fixed 90 50 40 180
Variable 180 93.75 37.5 311.25
Total (D) 270 143.75 77.5 491.25
Net Profit (C - D) 30 (18.75) (2.5) 8.75
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(b) Based on the budget the sales in the markets Y and Z has resulted in losses. It is better to shut down the operations
in those markets.
Preparation of Statement Showing Profitability of each Market
Particular X Y Z Total
Sales (A) 1,500 625 375 2500
Less: Variable Costs
Direct materials 500
Direct wages • 400
Variable factory costs 600
Allocated prorate to units (B) 900 375 225 1,500
(A-B) 600 250 150 1,000
Less: Variable overheads 180 93.75 37.5 311.25
420 156.25 112.5 688.75
Less: Fixed S and D costs 90 50 40 180
Contribution to Fixed Factory Overheads 330 106.25 72.5 508.75
Less: Fixed factory overheads 500
Net Profit 8.75
Based on this marginal costing technique it is evident that there is no need of closing down the operations in the
market Y and Z as they are also contributing to the profits. Both the markets have a positive contribution of 1,06,000 and
72,500 respectively towards fixed factory overheads. In this case, the fixed selling and distribution overheads are assumed
to be specific for each market. This assumption does not hold good in short run.
Working Notes
Sales = Number of units sold x Selling price

For A = 60,000 * 25 = 15,00,000
For Y= 25,000 x 25 = 6,25,000
For Z = 15,000 x 25 = 3,75,000
Total direct materials cost = Number of units x Material cost/unit
= 1,00,000x 5 = 5,00,000
f Total direct wages = Number of units x Wage rate/unit
= 1,00,000x 4 = 4,00,000
Factory variable overheads = 150% of direct wages
= — x 4,00,000
100
= 6,00,000
Selling distribution variable overheads = % of overheads x Total sale value
12
ForX= — xl5,00,000= 1,80,000
For Y= ^x6,25,000 = 93,750
For Z= -^-x3,75,000 = 37,500.

Q27. XYZ company sold 1,20,000 units during the year ending 31st Dec, 2005. The information pertaining to
cost per unit and revenue per unit collected from the records of XYZ company are as follows,
Selling price (per unit) -------- ?12
Direct material (per unit) -------- ?4

Direct labour (per unit) -------- ?3
Selling and distribution costs (per unit) —-— ?3
The fixed cost per annum is ?1,80,000. It is estimated that there will be a 70% reduction in the sales of
XYZ company in the year 2006 because of the reduction in the sales of the industry. Financial advisors
of the company advised the company to shut down the plant for a specific time period and restart its
operations when sales of the industry improves. XYZ company can avoid around 60% of the fixed cost
amount, if it shut down its plant in the year 2006.
Solution :
As given in the problem, there will be a 70% reduction in the sales of XYZ company in the year 2006, So,
Sales (in 2005) 1,20,000 units
70 A
Less: Reduction of 70% 1,20,000 x----- 84,000
100 J
36,000 units
Statement Showing contribution from sales for the year 2006
Amount Amount
Particulars
(in?) (in?)
Sales (36000 x 12) 4,32,000
Less: Variable cost
Direct material (36000 x 4) 1,44,000
Direct labour (36000 x 3) 1,08,000
Selling and distribution costs (36000 x 3) 1,08,000 3,60,000
72,000
Less: Fixed costs 1,80,000
Loss -1,08,000
Conclusion
The XYZ company should shut down its plant temporarily during the year 2006, as its differential revenue in the
year 2006 is ? 72,000 which is not sufficient to recover its fixed costs. XYZ company will incur a loss of ? 1,08,000 if it
continue its operations in the year 2006 but it can avoid around ? 1,08,000 (180000 x 60%) if it stop its operations during
the year 2006. This, XYZ company should stop its operations during the year 2006.
Q28. A businessman produces and sells 95,000 units of a product in a year at its 80% production capacity.
The selling price of the product is ? 8 per unit. The variable cost is 75% of selling price per unit. The
fixed cost is ? 3,50,000. The company is continuously incurring losses and the management plans to
shut down the plant. The fixed cost is expected to be reduced to ? 1,30,000. Additional costs of plant
shutdown are expected at ? 15,000.
Should the plant be shut down? What is the capacity level of production of shutdown point?
Solution :
Calculation of Shutdown Point
Shutdown Point = Avoidable Fixed Cost/Contribution Per Unit

5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. -
Calculation of Contribution Per Unit
Contribution P.U = Selling price P.U - Variable cost per unit
Selling Price = ? 8 per unit
Variable Cost = 75% of selling price per unit
e., ? 8 x 75% = ? 6
i.
Contribution of P.U = T8-?6 = ?2
Calculation of Avoidable Fixed Cost
Avoidable Fixed Cost = Total fixed cost - Minimum fixed cost - Shutdown cost
= 3,50,000 - 1,30,000 - 15,000
Avoidable Fixed Cost = 2,05,000 units
Shutdown Point = 05,000 _ q unqs

?2
Since, present output 95,000 units are less than shutdown point i.e., 1,02,500 units, it is preferable to shutdown the plant
Calculation of Capacity Level of Production of Shutdown Point
Total Capacity = 95,000 -t 80% = 1,18,750 units
Capacity Level at Shutdown Point,
= 1,02,500-5-1,18,750 x 100
= 86.31578
3.6 SPECIAL ORDER PRICING
Q29. Explain briefly about special orders with an example.
Answer :
4
Special Orders
When the production capacity of a company is idle or in excess and the consideration by management is to sei.
additional products below normal selling prices without affecting regular sales of same product is referred as special orders
or ctfie time orders. Special order is a one time customer order involving a large quantity and a low price.
Ascertaining a reasonable price for special order units is a basic problem. The useful technique which determines
short-run profit effects of special order transactions is cost analysis by using contribution approach.
It is not recommendable to include fixed costs to products in deciding pricing of special orders when normal
operations are undisturbed and existation of unused production capacity. Recovery of incremental or variable costs incurrec
while accepting special order is need to be considered in price determination. Normal fixed costs in pricing of special
orders is excluded, because the price of the product may become higher and the company may lose complete order beside?
contribution margin on special order.
Special order enables to make decision using relevant information by keeping the following points in mind,
1. Special order can be fixed only if you have excess capacity.
2. Variable cost are a part of your special order calculation.

In order to have appropriate price, only relevant or variable costs should be considered in decision analysis. Onh
to facilitate special order, incur of fixed costs are relevant.
■ SIIA PUBLISHERS AND DISTRIBUTORS PVT. LTD
Example
A manufacturing firm produces 40,000 units by operating 60% of the capacity and sells at a price
of ? 30 per unit. The budgeted figures for the year 2018 are as follows,
Raw material @ ? 4.25 ? 1,70,000
Direct labour @ ? 5.75 ? 2,30,000
Fixed factory overheads ? 2,50,000
Variable factory overheads @ 7.75 ? 3,10,000
Selling and administrative overheads ? 1,45,000
Variable selling costs 2.75% of selling price.
The firm receives a special order for 20,000 units for other company. The firm desires to earn a
profit of ? 1 per unit and no selling expenses are to be incurred for the special order.
Solution :
Particulars Without Special Special With Special

Order (?) Order (?) Order (?)
Sales (40,000 x 30) 12,00,000 3,75,000 15,75,000
Less: Variable Costs
Raw Materials 1,70,000 85,000 2,55,000

Direct Labour 2,30,000 1,15,000 3,45,000
Variable factory overheads 3,10,000 1,55,000 4,65,000
Variable factory overheads (2.75% on selling price) 33,000 - 33,000
4,57,000 20,000 4,77,000
Less: Fixed Costs
Fixed factory overheads 2,50,000 - 2,50,000

Fixed selling and administrative cost 1,45,000 - 1,45,000
Net Income 62,000 20,000 82,000
Working Notes
Calculation of Special Order
Raw Materials 4.25

Direct Labour 5.75
Variable Overhead 7.75
Variable Cost per unit 17.75
Desired Profit 1.00
Minimum Price 18.75
Special order = 20,000 units * ? 18.75 = ? 3,75,000.

Comments
A profit of? 20,000 will be gained by accepting social order.

. Bid price i.e. ? 18.75 is lesser than the normal price i.e., ? 30.
3.7 REPLACE OR RETAIN
Q30. Explain briefly about replace or retain of plant and equipment with an example.
Answer :
The important decision under decision analysis is to replace or retain plant and equipment, which is need to be done
carefully. There are various differential costs which are important in taking replacing or retaining decisions such as loss
on old equipment’s sales, change in fixed overhead costs, capital investment and associated costs like interest and rate of
return relevant costs to making a change to equipment.
Besides differential costs, management is needed to consider differential benefits that they may get such as rise in
sales, higher production, realisable value of old machines, savings in operating costs and tax benefits.
Differential analysis facilitates in order to evaluate decision alternatives. The factors that determine alternatives
are revenues and relevant costs. Under this, selection of least cost alternative is the main objective. The methods to tackle
these kind of problems are profit estimation and cost computations.
The other qualitative factors that need to be given importance in determining business decisions are competition
pressure, morale, maintenance of supply sources, marketing outlets and existing personnel organizations.
Example
Moin Ltd., is at present operating at 80% capacity level, the production being 30,000 units annually. The
company operates a flexible budgetary control system. The following relevant cost data are obtained
from the company’s budget at different capacity utilisation levels:
Capacity Utilization Level

Particulars
80% 100%
Sales ? 40,00,000 ? 50,00,000
Variable overheads ? 4,50,000 ? 5,00,000
Semi-variable overheads ? 2,10,000 ? 2,22,000
Fixed overheads ? 8,00,000 ? 9,40,000
Output (in units) 30,000 37,500
Material and labour cost per unit are constant under present conditions. The management expects
a profit margin of 10% on sales.
You are required to compute the differential cost of producing the additional 7,500 units by
increasing the capacity utilization level to 100 percent and the minimum price per unit at 10%
profit on cost.
Solution :
Particulars Amount (^)

Sales at 80% capacity 40,00,000
Less: Profit 40,00,000 x 4,00,000
Cost of goods sold 36,00,000

Less: Expenses:
Variable overheads 4,50,000
Semi-variable overheads 2,10,000
Fixed overheads 8,00,000 14,60,000
Cost of Material and Labour at 80% capacity 21,40,000
Material and labour cost at 100% capacity = ? 21,40,000 x

= 26,75,000
- SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
Differential Cost Analysis
Particulars 80% capacity 100% capacity Differential
30,000 units 37,500 units cost
be done Material and Labour 21,40,000 26,75,000 5,35,000

i as loss Variable Expenses 4,50,000 5,00,000 50,000
d rate of
Semi-Variable Expenses 2,10,000 2,22,000 12,000
is rise in Fixed Expenses 8,00,000 9,40,000 1,40,000
Total Cost 36,00,000 43,37,000 7,37,000
■matives
to tackle Differential Cost for 7,500 units = ? 7,37,000
... . _ . 7,37,000 -tk rtrui.
Minimum Price =---- ——:— = ? 98.27
ipetition 7,500 units
Add: Profit on cost (10% on minimum price) = ? 9.82
Capacity utilization level p.u ? 108.09.
illy. The PROBLEM
btained
Q31. A company has an installed production capacity of 2,00,000 units and presently it is working at 70%
capacity utilisation. As production capacity utilisation increases, cost per unit decreases as follows:
Capacity utilisation Cost per unit
70% 194
80% 184
90% 174
100% 164
The company has received three export orders from different sources as under:
xpects
Source X: 10,000 units at ? 110 per unit
nits by Source Y: 20,000 units at ? 104 per unit
at 10%
Source Z: 20,000 units at ? 102 per unit
Advise the company whether any or all the export orders should be accepted or not?
ion: Model Paper-Ill, Q11(b)
Utilisation Different levels of Production Unit cost Total cost Differential Differential cost
Capacity (%) in capacity utilisation (?) (?) cost (?) per unit (?)
(1)
(2) (3) (4) = (2x3) (5) (6)= (5)
' ' 20,000
70 2,00,000 x = 1,40,000 194 2,71,60,000 - -
QQ 22,80,000
80 2,00,000 x — = 1,60,000 184 2,94,40,000 22,80,000
20,000
90 174 3,13,20,000 18,80,000 18,80,000

2,00,000 x = 1,80,000
20,000
100 2,00,000 164 3,28,00,000 14,80,000 14,80,000

20,000
LTD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ____ _____________
Export order Export Capacity Differential costs Price per Sales revenue from Profit or
source order (units) utilisation (%) unit (?) the export order (?) Loss (?)
Cost Per unit (?) Total (?)
X 10,000 75 First 10,000 units being 11,40,000 110 11,00,000 (40,000)

upto 80% @ ? 114
Y 20,000 85 Next 10,000 units @ ? 94 20,80,000 104 20,80,000 -
z 20,000 95 First 10,000 units being 102 20,40,000 3,60,000

upto 90% @ ? 94
Next 10,000 units @ ? 74 16,80,000
Total 50,000 85% 49,00,000 52,20,000 3,20,000
Working Notes
1. Differential Cost Table-1
In differential cost these will be no positive or negative values i.e., only the difference amount is taken as differential
cost.
= 2,71,60,000-2,71,60,000 = 0
= 2,71,60,000 - 2,94,40,000 = 22,80,000
= 2,94,40,000 - 3,13,20,000 = 18,80,000
= 3,13,20,000 - 3,28,00,000 = 14,80,000
2. Differential Cost Table-2
X= 10,000 X ? 114 = ? 11,40,000
Y= 10,000 x^94 =^9,40,000
= 11,40,000 + ? 9,40,000 = ? 20,80,000.
Z = 10,000 x T 94 = ? 9,40,000
10,000 x 74 = ^ 7,40,000
? 16,80,000
Comments
£ The firm should accept export orders from all three sources.

EXERCISE PROBLEMS
An automobile manufacturing company finds that while the cost of making in its own workshop part No. 0028 is
? 6.00 each, the same is available in market at ? 5.60 with an assurance of continuous supply. Write a report to the
Managing Director giving your views whether to make or buy this part. Give also your views in case the suppliers
reduce the price from ? 5.60 to ? 4.60. The cost data is also follows:
?
Materials 2.00
Direct Labour 2.50
Other Variable Costs 0.50
Depreciation and other Fixed Costs 1.00
6.00
i Ans : Make the part if the price is ? 5.60 and buy if the price is ? 4.60).
2. The management of a company is thinking whether it should drop one item from the product line and replace it with
another. Given below are present cost and output data:
Product Price Variable cost per Percentages of

(?) unit (?) sales
Bookshelf 60 40 30%
Table 100 60 20%
Bed 200 120 50%
Total fixed costs per year ? 7,50,000

Sales ? 25,00,000
The change under consideration consists in dropping the line of tables and adding the line of cabinets. If this change
is made, the manufacturer forecasts the following cost and output data:
Product Price Variable cost per Percentage of

(?) unit (?) sales
Bookshelf 60 40 50%
Table 160 60 10%
Bed 200 120 40%
Total fixed costs per year ? 7,50,000

Sales ? 26,00,000
Should this proposal be accepted? Comment.
(Ans : Proposal to drop tables and add cabinets should be accepted).
3. Normal capacity of a manufacturing concern is 1,00,000 units of a product per year. The unit cost of manufacturing
at normal capacity is as follows,
Particulars (Amount) ?
Direct materials 10
Direct labour 5
Variable overhead 2
Fixed overhead 5
Production cost per unit 22

UNIT-3 : Decision Making J79
During the next three months, only 5,000 units can be sold and produced. Management plans to shut down the plant
estimating that fixed overhead can be reduced to ? 40,000 for the quarter. It may be assumed that fixed expenses
are increased at a uniform rate when the plant is operating. Additional cost of plant shut down for the three months
are estimated at ? 10,000.
Should the plant be shut down for 3 months? What is shut down point in units?
(Ans : Plant should be shut down because it gives lesser loss of ? 50,000 as compared to the loss of T 85,000 if
plant is continued; shut down point 9,375 units).
4. Efficient engines corporation produces most of its engine parts in its own plant. Recently, it has been contemplating
to buy some semi-finished parts instead of manufacturing them from the raw material stage. At present it is studying
the advantages of buying part No. M-44 from an outside supplier for ? 120 per unit. If this were done, month!,,
purchasing costs would be increased by ? 9,000.
Part No. M-44 is now manufactured in the Forging Department along with several other parts. The department woul:
continue operations on a somewhat reduced scale if part No. M-44 were no longer produced there. Normally 7,500
units of the part are required per month.
The direct costs of producing Part No. M-44 include ? 50 per unit for materials and ? 64 per unit for direct labour of,
20 labour hours. Overhead is applied to production in the Foregoing Department on the basis of direct labour hours
The monthly overhead budget for the department is as follows,
1,50,000 2,10,000
Direct labour hours
(?) (?)
Variable costs (80 paise per hour) 1,20,000 1,68,000
Fixed costs 2,00,000 2,00,000
3,20,000 3,68,000
Current actual production volume in the department is 1,80,000 direct labour hours and discontinuation of productii
of Part No. M-44 in the department will result in an unfavourable volume variance of 16,500 per month.
(i) Would it be more profitable to the company to continue making part No. M-44 or purchase it?
(ii) What other non-financial considerations should weigh with the company if the decision is to purchase?
(Ans : (i) Increase in profit by decision to buy ? 66,000; More profitable to the company to purchase the part).
5. A toy manufacturer earns an average net profit of ? 3 per piece in a selling price of ? 15 by producing and sellii
60,000 pieces at 60% of the potential capacity. Composition of his cost of sales is:
Direct material ?4
Direct wages ?1
Works overhead ? 6 (50% fixed)
Sales ? 1 (25% variable)
During the current year, he intends to produce the same number but anticipates that:
(a) His fixed charges will go up by 10%
(b) Rates of direct labour will increase by 20%
(c) Rates of direct material will increase by 5%
(d) Selling price cannot be increased.
Under these circumstances, he obtains an order for a further 20% of his capacity. What minimum price will yi
recommend for accepting the Order to ensure the manufacturer an overall profit of ? 1,80,000?
......................... ‘....'............ SIA PUBLISHERS AND DISTRIBUTORS PVT. LTI
A company follows the flexible budgeting system, and the position at 70% level of production, is as follows:
Production 400 units
Direct wages ? 60,000
Direct materials 80,000
Overhead:
Fixed 84,000
Variable 42,000
2,66,000
The selling price per unit is ? 865.
In the present market conditions there is hardly any chance for selling more locally. A special export order for 80
units @ ? 650 per unit is received, (a) Would it be prudent for the company to accept the order at this price? (b) What
_____ is the price beyond which it would be profitable to accept this order?____________________________________
7. A company is at present working at 90 percent of its capacity and producing 13,500 units per annum. It operates a
Flexible Budgetary Control System. The following figures are obtained from its budget:
90% ? 100%?
Sales 15,00,000 16,00,000
Fixed expenses 3,00,500 3,00,600
Semi-fixed expenses 97,300 1,00,500
Variable overhead expense 1,45,000 1,49,500
Units made 13,500 15,000
Labour and material cost per unit are constant under present conditions. Profit margin is 10 percent.
(a) You are required to determine the differential cost of producing 1,500 units by increasing capacity to 100 per cent.
(b) What would you recommend for an export price for these 1,500 units taking into account that overseas prices
_________ are much lower than indigenous prices?______________________________________________________
8. A company manufactures three products A, B and C. There are no common processes and the sale of a product
does not affect price or volume of sales of any other.
The company’s budgeted profit/loss for 2009 has been abstracted as follows:
Total A
Sales ? 3,00,000 ? 45,000 ? 2,25,000 ? 30,000
Production cost: Variable 1,80,000 24,000 1,44,000 12,000
Fixed 60,000 3,000 48,000 9,000
Factory cost 2,40,000 27,000 1,92,000 21,000
Selling and administration costs: Variable 24,000 8,100 8,100 7,800
Fixed 6,000 2,100 1,800 2,100
Total cost 2,70,000 37,200 2,01,900 30,900
Profit 30,000 7,800 23,100 (—) 900
On the basis of the above, the Board had almost decided to eliminate product C, on which a loss was budgeted.
Meanwhile, they have sought your opinion. As the company’s Cost Accountant what would you advice? Give
reasons for your answer.
(Ans.: PA/ ratio, A 28.7, B 32.4%, C 34%
It is found that product C, though has the highest P/V Ratio, seems to be non-profitable because it has
to bear a higher percentage of fixed cost as compared to its total cost. The percentage comes to about 36 (i.e. ,
11,100
x 100) which in case of other products is too less. Since the surplus capacity generated by one product
30,900
cannot be used for other products, there seems to be no justification for discontinuing product C till some new
product is developed which will have a higher PA/ ratio than product C. In the present circumstances, since C has
a higher P/V ratio, and if the sales continue to rise. C may start giving profit too.)
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ------------- . . . ■ ■

I. Multiple Choice
1. Make or buy decision is the step in process planning. [
(a) Fourth
*
(b) First
(c) Second
(d) Third
2. Which factor is need to be consider while making make-or-buy decisions? [ ]
(a) Existing capacity
(b) Expertise
(c) Quality Consideration
(d) All the above

3. Which of the following factor is need to be consider by the firm while dropping out a product? [ ]
(a) Contribution
(b) Capacity utilization
(c) Product demand
(d) All the above

4. is a type of shutting down of a plant. [ ]
(a) Temporary shut down
(b) Permanent shut down
ff5’ Decision making process involves steps. [ ]
(a) 7
(b) 5
(c) 6
(d) 8
6. Decisions regarding dropping out a product or product line are usually based on the comparative study of_______
of each product. [ ]
(a) Product demand

-
(b) Margin of contribution
(c) Profit
(d) Capacity utilization

82
7. Decision to be choosed between selling a product at split-off or processing further is known as decision.
[ ]
(a) Long-run operating

[ 1 (b) Short-run
(c) Short-run operating
(d) Long-run
8. remain constant within a particular range of operations. [ ]
(a) Fixed costs

[ ] (b) Variable costs
(c) Semi-variable costs
9. Relevant revenues refer to those revenues which a firm can gain in_____ .
(a) Present
[ ] (b) Past
(c) Future
10. Elimination of an unprofitable product is a special case of product profitability____________. [ ]
(a) Analysis
[ ] (b) Evaluation
(c) Test
(d) Interpretation

1. Make or buy decisions are also known as__________ .
[ ]
2. __________ shutdown is a short-term decision for suspending or closing down the plant operations for a shorter
period of time.
3. _____ ____ costing is usually used in taking decisions with respect to continue a plant/unit or to shut down it.
4. For the purpose of decisions based on marginal cost, all cost are divided into________ and_______ .
5. Recovery of________ costs incurred while accepting special order.
6. It is recommend to exclude normal fixed costs in pricing of________ orders.

[ ]
7. Most of the manufacturers faces the decisions either to sell products at_______ u or________.
8. ________ analysis helps in evaluation of decision alternatives.
9. From the economic point of view of_______decision is usually based on the concept of break-even analysis or
economic order quantity concepts or economic batch quantity.
10. Firms usually can take two types of decisions in_________ of a product.
LTD. SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. ________
I I
1. (b)
2. (d)
3. (d)
4. (c)
5- (a)
6. (b)
7. (c)
8. (a)
9. (c)
10. (b)

1. Purchasing Function
2. Temporary
3. Marginal
4. Fixed costs, Variable costs
5. Incremental
6. Special
7. Split-off point, process further
8. Differential
9. Make or buy
10. Dropping.

Q1. What do you understand by Make or Buy Decision?
Answer :
Decision making is the process of making choices by identifying a decision, gathering information and assessing
alternative solutions. Make or Buy Decision is the first step in process planning. It includes whether the products/services
must be made in the organisation or should be brought from the other manufacturing concern i.e., from the outside party.
Earlier, make decisions were preferred by a greater number of firms which led to backward integration and ownership
jf a wider range of manufacturing concerns and assembly facilities. Buy decisions are helpful in minimising the need for
process selection.
Q2. What are the decisions to be taken by a firm for dropping out of a product line?
Answer :
Firms usually can take two types of decisions for dropping out of a product line. They are,
(i) First either to drop the product that incurs loss and introduce another product which would contribute significantly
towards the fixed costs.
(ii) Second to drop the product and emphasize more on other product of the firm’s product line which possess greater
contribution margin.
Q3. Write a short note on plant shut down decision.

♦
Answer :
A decision shutdown means that the firm is temporarily suspending production, it does not mean that the firm is going
out of business. Sometimes, it becomes necessary for a firm to temporarily suspend or close the activities of a particular
product, department or factory as a whole due to trade recession. The decision to close down or suspend its activities will
depend on whether products are making a contribution towards fixed costs or not.
Q4. What do you understand by special orders?
Answer :
A special order is an extra order or an order for an item specially requested by a customer. When the production
capacity of a company is idle or in excess and the consideration by management to sell additional products below normal
selling prices without affecting regular sales of same product is referred as special orders or one time orders.
Q5. Write a short note on permanent shut down or complete shut down.
Answer :
If the firm is not in a position to make up the adequate rate of return on their investment which would be compensating
the risk that is involved in the business, then it is better to shut down the plant completely without giving it a second chance
to re-start.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ___ __ ...

t
UNIT Marketed by:
BUDGETS AND BUDGETARY
4 CONTROL
SIA GROUP
x______ -
C LEARNING OBJECTIVES )
After studying this unit, one would be able to understand.
'❖ Meaning and Objectives of Budgets.
❖ Preparation of Budgets.
❖ Essentials of Budgets.
❖ Classification of Budgets i.e., Production Budget, Sales Budget, Cash Budget, Overheads Budget, Fixed
Budget and Flexible Budget.
❖ Concept and Objectives of Budgetary Control.
❖ Advantages and Limitations of Budgetary Control.
( INTRODUCTION )
A budget is represented as a written operational plan of management for a specific budgeted period. It is.the
policy to be followed during the budgeted period for the attainment of specific objectives of the organization.
Budgetary control and budgeting are used interchangeably to indicate a system of managerial control. It is a
way of managing business and industry. A system of management control in which actual income and spending
are compared with planned income.
Generally, budget is prepared for the whole organization or for different departments or for different functions
involved in the organization. Budget enables the management to effectively utilize the scarce raw materials
and other factors of production. It is prepared relating to material, labour, production and other expenses.
SIA PUBLISHERSAND DISTRIBUTORS PVT. LT

PART-A
Q1. What is master budget?
Answer :
After all the functional budgets have been prepared, they are summarized in the form of a summary budget. The
>ummary budget gives a forecast profit and loss account and forecast balance sheet for the budget period. The budget
committee considers the summary budget and adjusts it as satisfactory or otherwise.
If summary budget is not found satisfactory by the budget committee, it issues directions for necessary changes. The
proposed changes are incorporated and revised summary budget is prepared. The revised summary budget thus prepared is
presented to the Board of Directors for approval. When the Board of Directors approves the summary budget, it is known
as master budget. Master budget is the aggregation of all lower level budget.
Thus, the master budget is the organization’s formal plan of action for the forthcoming budget period. It is an
integrated form of all functional budgets bearing approval of top management.
02. Overheads Budget
Answer :
Companies divide their overhead costs in two categories for the purpose of control, i.e., fixed overhead and variable
overhead. Depreciation, insurance and taxes are the main items that fall within the category of fixed overhead. Variable
overhead includes indirect material, indirect labour and indirect expenses, which are used according to production.
Preparation of overhead budget involves following,
1. Fixed overhead budget
2. Variable overhead budget.
Preparation of fixed overhead budget is very easy, because items to be included in the category of fixed overhead
can be forecasted with a flair degree of accuracy. Property taxes, fire insurance, rent, salary of manager, foreman, etc.,
and depreciation are the various items to be included in this budget. The preparation of variable overhead budget presents
considerable amount of difficulty. Variable overhead budget includes indirect material, indirect labour and indirect expense
which vary according to production.
Q3. Find out fixed overheads from the following information,
(?)
Factory overheads at 60% of activity level 4,00,000
f*
Office overheads at 60% of activity level 1,00,000
Selling expenses at 60% of activity level 2,00,000
Selling expenses at 80% of activity level 2, 50,000
Let us assume production at 100% capacity is 100 units so for 60%, it is 60 units and for 80%, it is 80 units.
Total factory overheads at 80% capacity (80 units) = 5,00,000
Total factory overheads at 60% capacity (60 units) = 4, 00,000
Variable factory overheads per units = Difference in total overheads

Difference in capacity utilization
5,00,000-4,00,000
80-60
1,00,000
20 = 5,000 per unit.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. —___ ___

UNIT-4 : Budgets and Budgetary Control _________ <■ 87
Fixed factory overheads = Total overhead at a capacity - Total variable overheads at that capacity
= 5,00,000 - ? 5000 x 80 units
= 5,00,000-4,00,000
= ? 1,00,000
Total office overheads at 80% capacity (80 units) = 1,25,000
Total office overheads at 60% capacity (60 units) = 1,00,000
Difference in total overheads
Variable office overheads per units = Difference in capacity utilization
1,25,000-1,00,000
80-60
25,000
20 = 1,250 per unit.
Fixed office overheads = Total overhead at a capacity - Total overheads at that capacity
= r 1,25,000 - ? 1250 x 80 units
= 1,25,000- 1,00, 000
= ? 25,000
Total selling expenses at 80% capacity (80 units) = 2,50,000
Total selling expenses at 60% capacity (60 units) = 2,00,000
,, . ,, Difference in total expenses
Variable selling expenses per unit = Difference in capacity utifizatiîT
2,50,000-2,00,000
80-60
50,000
20 = 2,500 per unit
Fixed selling expenses = Total expenses at a capacity - Total expenses at that capacity
= 2,50,000 - ? 2500 x 80 units
= 2,50,000 - 2, 00, 000
= ? 50,000
Hence,
Fixed factory overheads = ? 1,00,000
Fixed office overheads = ? 25,000
Fixed selling expenses = < 50,000
Q4. Distinguish between a forecast and budget.
Differences between forecast and budget are as follows,
Forecast Budget
1. Forecast is related to probable events i,e the events that are 1. Budgets are concerned with planned events i.e the
expected to occur under predictable conditions. various programmes and policies to be formulated.
2. Forecast can be done by any person. 2. Budgets are prepared only by the authorized persons in
the management.
3. It is an estimation of events. 3. It is a controlling tool.
4. Forecasting is essential for budgeting. 4. Budgeting is not a essential for forecasting.
5. Forecast is concerned with economic and non-economic 5. Budgets are concerned with economic activities of
activities of the business. business, government, enterprise etc.
Ex: Stock market forecast, weather forecast. •
Q5. X company Ltd. produces 20,000 units at 100% capacity. Utilisation and its cost structure is as follows:
Fixed cost ? 60,000; Variable cost ? 5 per unit. Semi-variable cost ? 6 per unit (50% are variable). Prepare
a flexible budget at 80% and 100% level.
Answer :
Flexible Budget
Particulars 80% 100%

Total units 16,000 20,000
[80% = 20,000 x 80%]
[100% = 20,000 x 100%]
Fixed cost 60,000 60,000
Variable cost [80% = 5 x 16,000] 80,000 1,00,000
[100% = 5 x 20,000]
Semivariable Cost
Fixed [6 x 50% = 3 x 20,000] 60,000 60,000
Variable 80% = [6 x 16,000] x 50%
100% = [6 x 20,000] x 50% 48,000 60,000
Total Costs 2,48,000 2,80,000
Q6. Explain the objectives of Budgetary control.

Answer :
The objectives of budgeting control are as follows,
1. Planning
It is an important managerial function as it helps to decide in advance, what to do, how to do, when to do and who
has to do it. Thus, planning helps the manager to anticipate eventualities, prepare for contingencies and for achieving the
ultimate goals. Budget preparation drives the managers to prepare future plans. Without a formal procedure of budgetary
control, many operating managers will not find the time to plan ahead. Thus, budgeting is an important planning device.
2. Communication
The employees of an organization should know organisational aims, objectives of subunits (budget centres) and
their roles which they have to play for their attainment. Budgets effectively communicate this information to employees.
3. Coordination
Coordination is to harmonize all the activities of a company so as to facilitate its working and its success. Coordination
will lead to the following results,
(a) Each department will know the specific role that it has to play in the accomplishment of overall organisational
objectives and
X
(b) The sequential arrangement of activities of different departments is so governed that overlapping of activities and
wastage of time and labour is avoided.
4. Motivation
If employees have actively participated in budget preparation and are convinced that their personal interests are
closely associated with the success of organisational plan, budgets provide motivation in the form of goals to be achieved.
5. Control
Under the system of budgetary control, budget forecast is thoroughly discussed and reviewed to be finally approved
as functional budgets. The budgets formation is followed by a feedback system to pinpoint the extent of variation between
the actual level of performance and the budgeted level of performance. Thus, the inbuilt mechanism of the routine of
budgetary control leads to an operational control.
6. Approved Plan
A master budget provides an approved summary of results that has to be expected from proposed plan of operations. It
concerns all functions of organisation and serves as a guide to executives and departmental heads responsible for achieving
various departmental objectives.
89
UNIT-4 : Budgets and Budgetary Control first fiscal quarter, 1,20,000 units in the
•c n the fourth quarter and 1,40,000 units
Fixed factory overheads - Total overhead at a capacity -Tc
first quarter there are 14,000 units of
= 5,00,000 — ? 5000 x 80 units d* o, have an inventory equal to one fifth
= 5,00,000 - 4,00,000 anufactured in each quarter of the
= ? 1,00,000
Model Paper-ll, Q6
Total office overheads at 80% capacity (80 uni
Total office overheads at 60% capacity (60 i
Variable office overheads per units = 1 Quarter Fourth Quarter
Units
£30,000 1,50,000
30,000 28,000
1,60,000 1,78,000
Fixed office overheads = Total r 26,000 30, 000
= ? .'ffi 1,34,000 1,48,000
Total selling ex
Total selling expen?
Variable selling f
&
& .11 be opening stock of second quarter and so on.
. of Budgets.
% a. *
uepicts the classification of budgets,
Classification of
t-
Depending Dep ending upon Depending upon Dep ending up on the

up on the Time the Functions the activity levels nature of transactions
'1
Short -term Long -term Current Fixed Flexible Operating Capital
Budget | Budget Budget Budget Budget Budget Budget
.:—
Purchase Sales Production Production Cash
Budget Budget Budget Cost Budget Budget
Figure: Classification of Budgets

— SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
Q9. From the following particulars, prepare a Production Budget of Arun Sales Corporation for the year
ended June 30, 1987.
Product Sales (Units) (as per Sales Budget) Estimated Stock (Units)
July 1, 1986 June 30,1987
A 1,50,000 14,000 15,000
B 1,00,000 5,000 4,500
C 70,000 8,000 8,000
Answer :
Calculation of Production Budget for the Year Ended June-30-1987
Particulars A B C
Sales 1,50,000 1,00,000 70,000
Add: Closing stock 15,000 4,500 8,000
Total 1,65,000 1,04,500 78,000
Less: Opening stock 14,000 5,000 8,000
Production Budget 1,51,000 99,500 70,000
Working Notes
_____ Production Budget = Sales + Closing Stock - Opening Stock.____________________________________________

Q10. What are the advantages of budgetary control?
Answer :
Budgetary control has become an important tool of an organization to control costs and to maximize profits. Advantages
of budgetary control are as follows,
A budget program forces the managers to plan ahead.
2. It forces early consideration of basic policies.
?. All members of top management participate in budget committee. For this reason, even planning at departmental
level gets benefit of experience of seasoned executives.
4. All functional heads are compelled to make plans in harmony with the plans of other departments.
5. It develops an attitude of cost consciousness, stimulates the effective use of resources and creates an environment
of profit minuteness throughout the organisation.
Q11. Materials Purchase Budget
Material Purchase Budget
Material purchase budget is a forecast of the quantity of raw materials which are supposed to be purchased for the
rurpose of production during the budget period.
Illustration
Prepare a raw material purchase budget for Jan.-2009 using the following data,
Materials in Units
A B C
Estimated opening stock 16,000 6,000 24,000
Estimated closing stock 20,000 8,000 28,000
Consumption 1,20,000 44,000 1,32,000
Standard price/unit ?1 ? 1.50 ?2.00
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ...............

UNIT-4 : Budgets and Budgetary Control _______ ________________________ 91
Solution :
Material Purchase Budget
Materials
Particulars
A B C
Estimated consumption 1,20,000 44,000 1,32,000
Add: Estimated closing stock 20,000 8,000 28,000
1,40,000 52,000 1,60,000
Less: Estimated opening stock 16,000 6,000 24,000
Raw materials to be purchased (in units) 1,24,000 46,000 1,36,000
1,24,000 x 1 46,000 x 1.50 1,36,000 x 2
Raw materials to be purchased (In ?) 1,24,000 69,000 2,72,000
Total materials purchase cost = 1,24,000 + 69,000 + 2,72,000

= ^4,65,000/-
Q12. Define Rolling Budget.
Answer :
According to ICMA terminology, the rolling budget is defined as “the continuous updating of a short term budget
by adding, say, a further month or quarter and deducting the earliest month or quarter, so the the budget can reflect current
condition. “The rolling budget or continuous budgeting is aimed at updating budgets. It is used to show the continuity in
the budgeting process.
For Example, a company prepares budget for a year, then the budget would be revised at the end of each month by
taking into consideration the results of the previous month’s operations and any new information in the business. This budget
is revised for the next 11 months and one additional month budget is prepared to make sure that the budget covers the next
12 months. A rolling budget is continually updated to add a new budget period as the most recent budget is completed.
Every month, the budget “Rolls” forward one month and one additional month is added to replace the past month.
Rolling budget is helpful in planning to make it continuous activity.___________
Q13. What is budget report? What are the principles of budget report?
Budget Report
Budget report is an internal report used by management to compare the actual and estimated results. After the
preparation and approval of budgets, the budget officer prepares reports on a regular basis as to simplify the comparison of
actuals with budgets. These budgets reports are given to different departmental managers exhibiting adverse or favourable
variance from the budget. Depending on the provided budget reports, the departmental managers prepare a report which
is presented to the managing directors which shows the causes of variance. This report helps the management in taking
remedial measures regarding the unfavourable variance and assists in future planning.
Principles of Budget Report
In order to prepare more effective reports, certain principles are to be followed as suggested by W. W. Bigg. They are.
1. The budget report should show a clear heading and the period covered in it. Even units like cash, liters, etc., should
be mentioned.
2. The report should not contain any confusion relating to information.
3. The report must show only the relevant information related to the purpose. Other unnecessary information should
be omitted.
4. The report must provide clear information. In case of complicated information, more than one statement can be used.
5. The report must cover information required by the person to whom it is given.
6. Promptness should be maintained in the report. It should not only convey the information but should also encourage
the person to take the action.
7. It is preferable to review all the reports on a periodic basis. This helps in deciding whether to expand, contract or
discontinue the report.
SIIA PUBLISHERS AND DISTRIBUTORS PVT. LTD
4.1 BUDGET - MEANING, FEATURES, PREPARATION OF BUDGETS
Q14. Define budget. What are its features? What are the steps involved in preparation of budgets?
Answer :
Budget
A budget is a quantitative expression of a plan of action relating to the future period of time. It represents a written
operational plan of management for the budget period. It is always expressed in terms of money and quantity. It is the
policy to be followed during the budget period for attainment of specified organisational objectives.
Features of Budget *
The essential features of a budget are,
(a) Financial and quantitative statement of the action plan.
(b) Laid down prior to the budget period during which it is followed.
(c) Prepared for specified objective.
(d) Based on management’s policy.
(e) Regular reviews.
(f) All the item for saving.
(g) Accurate income projections.
In the CIMA terminology, a budget is defined as,
“A financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to
be pursued during that period for the purpose of attaining a given objective”.
Steps Involved in Preparation of Budgets
The step-by-step process in preparing budgets is as follows,
Step 1: Setting Objectives
Objectives must be specified clearly. Budgets must be present in written form covering all the aspects clearly and also
mentioning the areas which require control in the budget and sources of revenue and expenditure must also be mentioned
in the budget clearly. All these would help in making the budget clear to the people who are going to implement the budget
successfully.
Step 2: Determining Key Factor
‘Key factor’ is also known as ‘Budget factor’. Key factor refers to that resource which does not have abundant supply
and its shortage restricts the organization from enjoying the maximum profit. In order to prepare an effective budget, proper
identification and forecasting of key factor is a must.
Step 3: Appointing Budget Committee and Controller
Preparation of a budget needs the full time services of senior executives. In budget preparation, the senior executives
are helped by the budget committee. The higher authorities of various departments together forms the budget committee and
the managing directors acts as the chairman. The task of coordinating and developing the budget programs and preparing
‘Budget Manual’ are assigned to the ‘controller’.
Step 4: Preparation of Budget Manual
Budget Manual is a schedule (document or booklet) which includes all the budgeting procedures in a written form.
Budget manual must be properly prepared with indexes. The copy of budget manual must be sent to the heads of each
department for further references and guidance.
Step 5: Deciding Budget Period
Budget period is the period which is being covered under the budget. Usually, calendar year or financial year is taken
as the budget period. The budget period is further divided and categorized into shorter periods like months or quarters.
Step 6: Setting Standards of Activity Levels
On the basis of the past statistical information, the present situations, estimations about future market conditions
the known changes in the market, standards of activity levels for future period can be decided. Achieving greater success
in the present year when compared to the previous years is an indication of business progress.
UNIT-4 : Budgets and Budgetary Control 93
4.2 BUDGETARY CONTROL - OBJECTIVES, 3. Coordination

ESSENTIALS OF BUDGETS Coordination is to harmonize all the activities of a
company so as to facilitate its working and its success. A
Q15. Define ‘Budgetary Control’. State the objectives comprehensive system of budgeting helps to coordinate
of Budgetary Control System. different functional budgets. In other words, a budget will
Answer : prevent the production department from producing more
Budgetary Control than the sales department can sell.
The terms budgetary control and budgeting are often 4. Motivation
interchanged to refer to a system of managerial control. Employees are motivated for improving their
Budgetary control implies the use of a comprehensive performances by budgetary control. If employees have
system of budgeting which helps management in carrying actively participated in budget preparation and are convinced
out its functions like planning, coordination and control. that their personal interests are closely associated with the
It is a system which uses budgets for planning and success of organizational plan, budgets provide motivation
controlling different activities of business. This system in the form of goals to be achieved. Budgets will motivate
involves, the workers, depends purely on how the workers have been
mentally and physically involved in the process of budgeting.
(i) Division of organisation on functional basis into
5. Control
different sections (each section is technically known
as a budget centre). Under the system of budgetary control, budget forecast
(ii) Preparation of separate budgets for each “budget is thoroughly discussed and reviewed to be finally approved
as functional budgets. Thereafter a lot of modifications are
center”.
made to make functional budgets fit in the organizational
(iii) Integration of all functional budgets to present overall
objectives.
organisational objectives during the forthcoming
The budgets formation is followed by a feedback
budget period.
system to pinpoint the extent of variation between the actual
(iv) Comparison of actual level of performance against
level of performance and the budgeted level of performance.
budgets. Comparison process is stretched far enough
Thus, the inbuilt mechanism of the routine of budgetary
to declare either attainment of objective or basis of
control leads to an operational control.
revision of plan of action and
6. Approved Plan
(v) Reporting the variances with proper analysis to
A master budget provides an approved summary
provide basis for future course of action.
of results that has to be expected from proposed plan of
Purpose/Objectives of Budgets/Budgetary Control
operations. It concerns all functions of organization and
Purpose or objectives of budgets/budgetary control serves as a guide to executives and departmental heads
are as follows, responsible for achieving various departmental objectives.
1. Planning
Q16. Define Budgeting. What are the essentials of a
The process of making plans for something. It is good budgeting system?
an important managerial function as it helps to decide in
Answer :
advance, what to do, how to do, when to do and who has
Budgeting
to do it. Thus, planning helps the manager to anticipate
eventualities, prepare for contingencies and for achieving Budgeting is a way of managing business and industry.
the ultimate goals. Budget preparation drives the managers It emphasizes on management to anticipate problems and
to prepare future plans. Managers express their operational difficulties.
plans for anticipated business conditions. Without a formal Prior decision should be taken for the course of
procedure of budgetary control, many operating managers activities during the forthcoming budget period. It denotes
will not find the time to plan ahead. Thus, budgeting is an a formal system based on the concept of budgeting.
important planning device. Essentials Requirements of a Good Budgeting
2. Communication System
The employees of an organization should know Following are the requirements of a good budgeting
organisational aims, objectives of subunits (budget centres) system or budgetary control system,
and their roles which they have to play for their attainment. (i) Budgeting process should be backed and supported
Budgets effectively communicate this information to by the chief executive of an organisation.
employees. Besides, budgets keep different sections of the (ii) The organisational goal should be quantified and clearly
organisation informed about the contribution of different stated. These goals should be within the framework of
subunits in the attainment of overall organisational objective. organisations strategic and long-range plans.
(iii) The organisational goals must be divided into 3. Preparation of Organisational Chart
functional goals. It is a statement defining functional responsibilities of
11 v) The functional goals should not conflict with overall executives responsible for accomplishment of organisational
organisational objectives. objective. This chart shows,
(v) Everyone in the organisation should mentally accept (a) Functional responsibility of a particular executive.
the exercise of budget preparation.
(b) Delegation of authority to various levels and
(vi) The persons responsible for execution of budget
(c) Relative position of a functional head with heads of
should participate in the budget preparation.
other functions.
(vii) The budget should be realistic. It should represent
goals that are reasonably attainable. If due attention is given for preparation of
organisational chart, it will avoid duplication of labour and
(viii) The budget should cover all the phases of the
facilitate quick compilation of information for preparation
organisation.
of budgets.
I ix) The budget should be a continuous exercise. r
4. Linking of Budget Requirements with Chart

(x) Periodic reports should be prepared promptly, of Accounts
comparing budget and actual results i.e., there should
be effective follow up. Budgets for different budget centres are prepared on
standard forms. If requirements of forms is linked with chart
(xi) Clear-cut organisational lines should be established
of accounts, information of different budget centres will be
with appropriate delegation of responsibilities for
consistently compiled involving minimum loss of time.
effective budget implementation.
5. Establishment of Budget Committee
(xii) The budgeting system should be based on information,
communication and participation. In small organisations one executive may handle work
relating to preparation of budget, but in big organisations
4.3 ORGANIZATION OF BUDGETARY having different units at different places, a budget committee
CONTROL is formed with chief executive, budget officer and heads of
Q17. Discuss the preliminaries or procedure for the all budgets centres. Often chief executive of an organisation
operations of budgetary control. is the head of this committee, so that decisions of this
committee may be binding on others. The budget officer
Answer s Model Paper-I, Q12(a)
acts as a secretary to chairman.
Procedure or Preliminaries for Operation of Budget
6. Preparation of Budget Manual
Control are,
For proper operation of budgetary control, a budget
1. Specification of Organisational Objective
manual is prepared setting out responsibilities of executives
Budget presents a view of a plan in figures. It is involved in the routine of introduction of budgetary control.
necessary that broad objectives of organization are specified This manual contains standardised forms which become
before plan is stated. The statement of broad objectives of input resources for compilation of budgets. Budget manual
organisation will involve expressing mission, vision and contains a complete programme of activities involved in
ethical tone of organisation. This type of specification guide budget preparation.
managers to take corrective decisions and independent
decisions within the given frame work. Following is the brief summary of the contents of
budget manual,
2. Establishment of Budget Centres
(a) Different terms used in budgets are clarified.
Budget centre is a section of entity in which control
(b) Objects are clearly defined.
may be exercised and budget is prepared. Preparation of
budget for a budget centre is specifically linked with the (c) The role of different functional heads is specified.
responsibility of concerned department head. The budget (d) Procedures of budgetary control are explained in
which is prepared for a budget centre is called a departmental detail.
budget. (e) Responsibilities for preparation of different budgets
With the help of departmental budgets, functional are fixed.
budgets are compiled. They are integrated to present (f) The reports and statements required at different points
organisational budget. A machine shop is a ‘budget centre’. of time in budget period.
The budget for a machine shop is a departmental budget. (g) If system of budgetary control is mechanised, it will
Because machine shop is a department relating to production, contain information like account code, budget centre
the figures must be summarized in production budget, which code and other codes relating to item number of
is functional budget. different forms, etc.
SIA PUBLISHERS AND DISTRIBUTORS PVT.
(h) It will include the statement of sequence in which 2. Budget Officer
budgets will be presented and discussed for final The general manager entrusts the authority to the
approval. budget officer of managing the various budgeting functions.
(i) Budget manual states dates on which different The budget officer has the responsibility to coordinate and
performance reports and statements of expenditure advice the departmental managers regarding the, budgets
should be submitted to the budget committee for prepared by them to obtain a master budget. Also, he has
analysis and review. the responsibility of completing the budget. The various
functions of Budget officer are,
Q18. “A sound organisation is essential for an
effective budgeting programme”. Explain. (i) To instruct the departments about requirements,
submission dates of data etc.,
Answer :
(ii) To provide the departmental managers with historical
An effective budgeting programme requires a sound information for forcasting purpose.
organisation. Because a good organisation makes sure that
there is cooperation from all the management levels and (iii) To receive and check budget estimates and to advice
help in controlling the various cost elements. The important modifications.
constituents of sound organisation are, (iv) To discuss the problems with managers and make
1. Organisation Chart sure that budgets are received on time.
(v) To prepare the budget summaries and record the
Organisation chart is a statement defining functional
estimates of departments on a master plan.
responsibilities of executives responsible for accomplishment
of organisational objective. This chart shows, (vi) To submitt budgets to the committee and provide clear
explanation on some specific aspects.
(a) Functional responsibility of a particular executive.
(vii) To inform the departmental managers regarding the
(b) Delegation of authority to various levels and
changes made by the committee in their respective
(c) Relative position of a functional head with heads of budgets.
other functions.
(viii) To prepare the master plan which is approved by
If due attention is given for preparation of the committee and coordinate all the work related to
organisational chart, it will avoid duplication of labour and budget.
facilitate quick compilation of information for preparation 3. Budget Committee
of budgets.
In small organisations one executive may handle work
Atypical organization chart is represented as follows, relating to preparation of budget, but in big organisations
having different units at different places, a budget committee
is formed with chief executive, budget officer and heads of
all budgets centres. Often chief executive of an organisation
is the head of this committee, so that decisions of this
committee may be binding on others. The budget officer
acts as a secretary to chairman.
The important functions of Budget Committee are as
follows,
(i) Receiving and reviewing estimates of individual
budgets.
(ii) Resolving disputes between functional heads.
(iii) Suggesting revisions
Figure: Budgetary Control Organisation Chart (iv) Deciding the general policies.
From the above chart, it is clear that the general (v) Revising and approving the budgets.
manager has the complete responsibility of budgetary control
process. He gives the budget officer an authority to execute (vi) Receiving the budget reports.
the budget programme. The budget officer looks after the (vii) Suggesting necessary actions to be taken where ever
budgets prepared by the managers of various departments. required.
4. Budget Center (c) Labour
Budget centre is a section of entity in which control It includes insufficient key processes and general
may be exercised and budget is prepared. Preparation of shortage.
budget for a budget centre is specifically linked with the
(d) Sales
responsibility of concerned department head. The budget
which is prepared for a budget centre is called a departmental It includes low market demand, inadequate
budget. advertisement and shortage of experienced salesmen.
With the help of departmental budgets, functional (e) Management
budgets are compiled. They are integrated to present It includes lack of capital, insufficient research related
organisational budget. A machine shop is a ‘budget centre’. to product design and methods, lack of “know-how”
The budget for a machine shop is a departmental budget. and shortage of executives.
Because machine shop is a department relating to production,
the figures must be summarized in production budget, which 4.4 CLASSIFICATION OF BUDGETS
is functional budget.
Q19. Describe the types of budgets.
5. Budget Manual
Answer : Model Paper-ll, 012(a)
For proper operation of budgetary control, a budget
manual is prepared setting out responsibilities of executives The different types of budgets are represented in the
involved in the routine of introduction of budgetary control. following figure,
| Budget |
This manual contains standardised forms which become
input resources for compilation of budgets. Budget manual 1 1 1 1
contains a complete programme of activities involved in | Based on Duration | | Based on Condition | | Based on Coverage | | Based on Capacity |
budget preparation. 1— Short-term budget — Basic budget — Functional budget — Fixed budget
1— Long-term budget 1— Current budget 1— Master budget 1—Flexible budget
6. Chart of Accounts
Figure: Types of Budgets
A systematic set of accounting books that can record
and analyze the required information is referred as “chart 1. Classification of Budgets Based on Duration
of Accounts”. For each budget centre, a separate chart of Based on duration, budget may be classified into two
accounts is maintained which shows the accounting structure types. They are,
needed for budgetary control.
(a) Short-term Budget
7. Budget Period
Short-term budgets are the budgets which are prepared
Budget period is the period time during which you
for short period i.e., for one year. Cash budget,
are authorized to spend the funds. A budget period is a time
material budget and so on are the examples of short
duration for which a budget is prepared. Like short-term
term budget.
period or a long term period. Short-term budget is preferable
except for the functions that take long period of time. The (b) Long-term Budget
duration of budget period is decided based on the type of Long-term budgets are the budgets which cover longer
business, length of manufacturing cycle, future market period oftime (i.e., 5 years to 10 years). Research and
conditions etc. The period of short-term budget could be 3 Development Budget and Capital expenditure budget
months to 1 year. If the budget is prepared for more than a are the examples of long-term budget.
year, then it is considered as term budget.
2. Classification of Budgets Based on Condition
8. Key Factor
Based on conditions prevailing, the budget can be
According to ICMA terminology, the key factor is
classified into two types. They are,
defined as “a factor which at any time or over a period
may limit the activity of an entity often one where there is (a) Basic Budget
shortage or difficulty of supply”. The key factor include the According to ICMA terminology, the basic budget
following, is defined as “a budget which is established for use
(a) Material unaltered over a long period of time”. This budget is
It includes availability of supply and the conditions useful in formulating policies by the top management.
laid down by quotes, licences etc., (b) Current Budget
(b) Plant Current budgets are prepared for a very short period
It includes insufficient space, lack of market and lack of time i.e., for one month or one-quarter. Current
of capacity due to insufficient capital. budgets are concerned with the current situations.
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3. Classification of Budgets Based on Coverage (v) Production Cost Budget
Based on information coverage and business activities, Production cost budget expresses the cost of
the budget can be classified into two types. They are, carrying out production plans and programmes
(a) Functional Budget set out in production budget. It summarizes
The budgets which are prepared based on the material costs, labour costs and factory overhead
functions performed in a business are referred to as for production. Production Budget is the
functional budgets. The various types of functional combination of direct material, labour, overhead.
budgets are, (vi) Plant Utilization Budget
(i) Sales Budget Plant utilization budget shows the capacity of
Sales budget is the first and basic component plant needed to meet the production budget. It
of matter budget. The sales budget is the most is essential to consider allowances for the time
important functional budget. If sales figure is spent on maintenance and repair, setting-up time
incorrect, practically all functional budgets and etc., while preparing plant utilization budget. In
consequently master budget will be affected. It order to ensure the smooth flow of production,
is the keystone of the budget structure. The sales the plant capacity should be balanced.
budget primarily forecasts what the concern can
(vii) Material Purchase Budget
reasonably expect to sell both in quantity and
value during the budget period. Material purchase budget is a forecast of the
quantity of raw materials which are supposed
(ii) Selling and Distribution cost Budget
to be purchased for the purpose of production
Selling expenses budget is similar to that of during the budget period.
sales budget. Selling expenses budget involves
(viii) Labour Cost Budget
the expenditure amount of all the items of
selling and distribution in the budgeted period The number of labourers required in
for a finished product. In short, all promotion, manufacturing a single product/item is identified
distribution and maintenance costs falls under in the form of grades and the amount of labour
the selling expenses. time required for performing each job, activity
(iii) Advertising Budget
and process shown in budget. Later on the
amount of pay, incentives, bonuses, allowances
Many large factories set-up a separate advertising and so on are being used for computing the
department for carrying out the intensive sales wage rate. Therefore, the labour cost for
programme. The advertising manager performs individual budget centre is computed by using
various functions while budgeting advertising the following formula,
costs,
Labour cost of individual budget centre = Wage
❖ Ascertains the best advertising methods for rate * Labour hours for budgets units of
the business. products.
❖ Determines the amount to be spent on (ix) Factory Overhead Budget
advertising in a specific budget period.
This amount is called as the “Advertising Companies divide their overhead costs in two
appropriation”. categories for the purpose of control, i.e., fixed
overhead and variable overhead. Depreciation,
❖ Organizes advertising and sales function.
insurance and taxes are the main items that fall
❖ Ensures that the expenditures are within within the category of fixed overhead. Variable
the limits and measures the advertising overhead includes indirect material, indirect
effectiveness. labour and indirect expenses, which are used
(iv) Production Budget according to production.
After having established sales budget, production (x) Administration Cost Budget
budget is prepared. Which shows the quantities
The expenditure of the top level management
to be produced for achieving sales targets and
activities and the expenses relating to financial,
keeping sufficient inventories. legal, accounting and other departments are
Budgeted production is equal to projected sales called as the administrative expenses (or
plus closing inventory of finished goods minus administrative overheads). As majority of the
' opening stock of finished good, i.e;, units to administrative expenses are fixed expenses
be produced, (Budget sales + Desired closing in nature preparation of a budget for the
inventory - Opening inventory). administrative expenses is an easy task.
(xi) Research and Development Budget (b) Flexible Budget or Variable Budget
Research and development budget to a large According to ‘Chartered Institute of Management
extent relies upon the management’s decisions Accountants’ London “flexible budget is a budget
with respect to research and development which by recognizing different cost behaviour
activities, i.e., the existing projects of the patterns, is designed to change as volume of output
company and the expected/future projects. changes”.
(xii) Capital Expenditure Budget
Flexible budget is also known as variable budget. It
Capital expenditure budget contains information is a budget which is designed to fluctuate as per the
relating to the estimated/budgeted expenses that changes in the quantity of the output. Flexible budget
are incurred on fixed assets during the budget is prepared by identifying the difference between
period. The example of fixed assets are, land fixed, variable and semi-fixed and semi-variable costs.
and building, plant and machinery and so on. A In simple words, flexible budget is designed with an
separate budget is created for each fixed asset. intention to provide budgeted cost for any activity
The budget period of capital expenditure budget level achieved.
may be either 5 years or 10 years i.e., long term.
(xiii)Cash Budget 4.4.1 Production Budget
Cash budget is an estimation of the cash Q20. What is production budget? Explain its
inflows and outflows. Cash budget is prepared advantages and steps to be followed in its
after carrying out the cash forecast. A cash preparation.
forecast is a prediction or determination which
depicts the amount of cash that would be in Answer :
hand in the future period. Cash budget usually Production Budget
comprises two parts i.e., one part of the budget
After having established sales budget, production
provides information about the estimates of
budget is prepared. Which shows the quantities to be
cash receipts and another part of the budget
produced for achieving sales targets and keeping sufficient
provides information about the estimates of cash
inventories.
payments.
(b) Master Budget Budgeted production is equal to projected sales plus
closing inventory of finished goods minus opening stock
After all the functional budgets have been prepared,
of finished good, i.e., units to be produced, (Budget sales +
these are summarized in the form of a summary
Desired closing inventory - Opening inventory).
budget. The summary budget gives a forecast profit
and loss account and forecast balance sheet for the Thus, production budget is based on sales budget and
budget period. If summary budget is not found desired inventory levels. Production budget is prepared in
satisfactory by the budget committee, it issues physical units. It is a forecast of production for budgeted
directions for necessary changes. The proposed period. This budget is prepared by production manager and
changes are incorporated and revised summary is based upon the following,
budget is prepared. The revised summary budget thus
1. Key factor
prepared is presented to the Board of Directors for
approval. After the Board of Directors approves the 2. Sales budget
summary budget, it is known as master budget. 3. Budget inventory requirements
4. Classification of Budgets Based on Capacity
4. Opening inventory
Based on capacity, budgets are classified into two
types. They are, 5. Policy of management regarding purchase or
manufacturing of components.
(a) Fixed Budget
It is necessary to coordinate production budget with
Fixed budget is a budget which does not change with
sales budget to avoid imbalance in production. The sales
the changes in the actual level of activity or volume of
department disproportionately emphasises only one factor,
output. Fixed budget is also known as ‘ Static Budget’.
e., volume of sales.
i.
Fixed budgets are prepared for small time period if
the actual output is not expected to differ from the By keeping balance between sales budget and
budgeted output. Fixed budget is applicable to fixed production budget, a situation that leads to idle capacity
expenses as these expenses do not change with the should be avoided. It is an important budget and forms basis
changes in volume of output. It is ineffective to use for preparation of material, labour and factory overhead
fixed budgets for controlling cost. budgets.
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Advantages of Production Budget 3. Types of Customers
Following are the advantages of production budget, 4. Salesman
1. It helps in making the plans to keep inventories at
5. Month, Quarter or Week.
sufficient levels that can meet the sales and production
requirements. Steps of Sales Budget
2. For getting best terms of purchases with quality, the The various steps involved in the preparation of sales
production budget helps in selecting the requirements budget are as follows,
of raw materials and the sources of their supply.
Step-1: Assessing the History of Sales
3. It is possible to maintain the promised delivery dates
by following production schedule. This helps in During the assessment of the past sales information,
increasing the business reputation. cyclical and seasonal changes also needs to be assessed.
4. Cash ■allocation. This assessment would be helpful only till the situations in
the environment remains constant. If changes takes place
5. Performance evaluations.
in a continuous manner then on-going assessment of such
6. Profitability review.
changes must be made as per the changes in the marketing
Procedure for Preparation of Production Budget environment this will affect the sales. Thus, a detailed
Heckert and wilson suggested the following steps for assessment of historical sales would act as a strong basis
the preparation of a production budget, for preparing the sales budget.
1. Ascertain the time period to be utilized for the Step-2: Collecting Market Opinion on Product
production budget.
Soon after assessing the historical sales information,
2. Determine the level of physical quantities to be
emphasis is laid upon collecting the market opinion about
produced to follow the sales budget and to provide
product in order to know as to what opinions customers have
the inventories that are properly balanced.
with respect to the product. The sales executive prepares and
3. Ascertain the time for producing the goods.
submits the periodical reports to the sales director. The sales
4. Ascertain the place for producing. directors on the basis of all these periodical reports presents
5. Ascertain the operations of manufacturing needed for an opinion about the future sales.
the production.
Step-3: Assessment of Market Situations
6. Standards of production performance are developed
for assessing the efficiency of production. Market situations such as, rivals competition,
changing trends, consumer behavior in the form of brand
7. Conduct a programme of labour, equipment and
selection and so on also needs to be assessed.
material requirements.
8. Make use of production budget for cost control. Step-4: Assessment of Environmental Factors
9. Neccessary modifications are made to the production Apart from assessing the local market situations, the
budget. sales director must also assess the environmental factors
of the place where the product is going to be sold i.e.,
4.4.2 Sales Budget assessment of the conditions existing in the economy as well
Q21. Explain sales budget. Discuss the steps in as in the international market is a must. Sales director should
preparation of sales budget. take into consideration the social, political and cultural
Answer : factors which would effect the sales.
Sales Budget Step-5: Cost Benefit Analysis
The sales budget is the most important functional The last step in the preparation of sales budget is
budget. If sales figure is incorrect, practically all functional “cost-benefit analysis”. The cost-benefit analysis involves
budgets and consequently master budget will be affected. developing the draft budget which would include the
It is the keystone of the budget structure. The sales budget information about,
primarily forecasts what the concern can reasonably expect
to sell both in quantity and value during the budget period. ❖ Different costs associated with the production of
Sales budget can be prepared showing sales under forecasted units of products to be sold.
any one or combination of the following headlines, ❖ The selling price of the products to be sold.
1. Product
❖ The revenue to be generated from the sales in each
2. Territory territory or region and so on.
4.4.3 Cash Budget 2. Receipts and Payments Method
Q22. What a brief note on cash budget and its Preparing cash budget through ‘receipts and
objectives. What are the various methods of payments method’ is same as that of preparing ‘receipts and
preparing cash budget? payment account’. In receipts and payment method, firstly
Answer :
an estimation about different sources of cash receipts and
cash payments is made. Receiving cash late and delay in
Cash Budget
paying cash are also taken into consideration while drawing
Cash budget is prepared after carrying out the cash estimations of receipts and payments. Outstanding, prepaid
forecast. A cash forecast is a prediction or determination and other adjustments are not taken into consideration
which depicts the amount of cash that would be in hand in in preparation of cash budget through ‘receipts and
the future period. Cash budget usually comprises two parts payments method’. Cash budget prepared through receipts
e., one part of the budget provides information about the
i. and payments method reveals the cash position of the
estimates of cash receipts and another part of the budget organization for an year complete year.
provides information about the estimates of cash payments.
3. Balance Sheet Method
Cash receipts are ascertained every month and it relies upon
the estimates of cash sales, receipts from debtors, estimated In this method, all the estimated assets and liabilities
receipts from borrowings, sale of plant and machinery and are presented together in the form of balance sheet and the
other assets. These are also taken into consideration while balancing figure would be either a bank overdraft or a cash
preparing the estimates of cash receipts. On the other hand, balance. If liabilities side is more than the assets side then
cash purchases, advance payments to suppliers, payments balancing figure is the ‘cash balance’, while on the other
to creditors, employees compensation, budgeted capital hand, if assets side is more than the liabilities side then the
expenditure and so on are taken into consideration while balancing figure is the ‘bank overdraft’.
preparing the cash payment estimates. In case of cash budget prepared through balance sheet
Objectives method, a forecasted balance sheet with all the estimated
assets and liabilities other than cash balance is prepared.
Some of the significant objectives of preparing cash
This forecasted balance sheet is prepared at the end of the
budget are as follows,
budgeted period.
1. Cash budget helps in showing off the impact of
seasonal and unexpected needs, over stocking, delay 4.4.4 Overheads Budget_______________
in collection of receipts on time and so on. Q23. Discuss about overhead budget with an
2. Cash budget usually provides information about illustration.
the availability of cash in the future period. With Answer :
the help of this information organizations can make Overhead Budget
pre-arrangements for short-term cash borrowings to
Overhead budget contains all the costs, other than raw
avoid shortage of cash in the future period or to make
materials and labour that will be incurred by a manufacturing
investments in case of cash surplus.
company. Companies divide their overhead costs in two
3. Cash budget is prepared in order to allocate sufficient categories for the purpose of control, i.e., fixed overhead and
amount of cash for capital and revenue expenditure. variable overhead. Depreciation, insurance and taxes are the
4. Cash budget provides a good base for credit controlling main items that fall within the category of fixed overhead.
for the existing cash position of the organization. Variable overhead includes indirect material, indirect
5. Cash budget aims at showing what would be the cash labour and indirect expenses, which are used according to
position of the organization in the future period if the production.
planned operation are followed properly. Preparation of overhead budget involves following,
Methods for Preparation of Cash Budget 1. Fixed overhead budget
There are three different methods of preparing cash 2. Variable overhead budget.
budget which are as follows,
Preparation of fixed overhead budget is very easy,
1. Adjusted Profit and Loss Account Method because items to be included in the category of fixed
In adjusted profit and loss account method, both cash overhead can be forecasted with a flair degree of accuracy.
as well as non-cash items are taken into account. Adjusted Property taxes, fire insurance, rent, salary of manager,
profit and loss account method is best applicable for long-term foreman, etc., and depreciation are the various items to
forecasting. For preparing cash budget through adjusted profit be included in this budget. Fixed overhead budget is not
and loss account method, budgeted profit and loss account and dependent on sale or production budget. Methodology for
budgeted balance sheet are also required to be prepared. preparing fixed overhead budget is also very simple.
Therefore, preparations of variable overhead budget presents considerable amount of difficulty. Variable overhead
budget includes indirect material, indirect labour and indirect expense which vary according to production. The budget
is prepared with the cooperation of foreman, departmental heads and other factory executives. Preparation of variable
overhead budget is based on scheduled production and operating conditions.
Illustration
From the following average figures of previous quarters prepare a manufacturing overhead budget for
the quarter ending March 2010. The budgeted output during this quarter is 5000 units.
Fixed overheads ? 40,000.
Variable overheads ? 20,000 [Variable @ ? 5 per unit]
Semi-variable overheads ? 20,000 [40% fixed and 60% varying @ ? 3 per unit].
Solution :
Manufacturing overheads budget for the quarter ending March 31, 2010
Fixed overheads 40,000

Variable overheads [5000 units @ ? 5 per unit] 25,000
Semi variable overheads
Fixed 40% of 20,000 8,000
Variable 60% [ ? 3 per unit for 5000 units] 15,000 23,000
Total Overheads Cost 88,000
4.4.5 Fixed Budget and Flexible Budget

Q24. (a) Discuss briefly about the concept of Fixed Budget.
(b) Explain in detailed about Flexible Budget.
Answer :
(a) Fixed Budget
Fixed budget is a budget which does not change with the changes in the actual level of activity or volume of output.
Fixed budget is also known as ‘Static Budget’. Fixed budgets are prepared for small time period if the actual output is not
expected to differ from the budgeted output. Fixed budget is applicable to fixed expenses as these expenses do not change
with the changes in volume of output. It is ineffective to use fixed budgets for controlling cost.
(b) Flexible Budget
According to ‘Chartered Institute of Management Accountants’ London “flexible budget is a budget which by
recognizing different cost behaviour patterns, is designed to change as volume of output changes”.
Flexible budget is also known as variable budget. It is a budget which is designed to fluctuate as per the changes in
the quantity of the output. Flexible budget is prepared by identifying the difference between fixed, variable and semi-fixed
and semi-variable costs. In simple words, flexible budget is designed with an intention to provide budgeted cost for any
activity level achieved.
Characteristic Features
Some of the characteristic features of flexible budget are as follows,
1. Flexible budgets provide information about various costs associated with different levels of output/volume. In case
of change in the level of output, the cost associated with that output can be easily obtained from the flexible budget.
2. Flexible budgets are basically designed for various levels of activities/output rather than for merely one level of
activity/output.
3. Flexible budgets acts as the perfect budget for a specific level of output.
4. Flexible budgets provide a good basis for carrying out the comparisons. With the help of flexible budget, actual cost
of actual activity level can be compared with budgeted cost of actual activity level. This comparisons is carried out
for imposing control on cost.
5. Flexible budgets are prepared on the basis of the complete information of the behaviour patterns of cost.
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Q25. Distinguish between fixed and flexible budget.
Answer :
Differences between fixed budget and flexible budget are as follows,
Basis for
Fixed Budget Flexible Budget
Differentiation
1. Definition Fixed budget is a type of budget wherein According to the chartered Institute of Management
the production schedule is prepared for the Accountants, flexible budget has been defined as
specific or fixed number of production units. “a budget which recognize the difference in
A fixed budget is a budget that does not behaviour between fixed and variable costs in
change when sales or some other activity relation to fluctuations in output, turnover, or other
increases or decreases. variable factors such as the number of employees,
is designed to change appropriately with such
fluctuations”.
2. Nature Fixed budget is static budget and inflexible Flexible budget is highly dynamic and flexible as
in nature which is found to be independent it is mainly affected by the changes in the volume
of the volume of output. of output.
3. Purpose of preparation Fixed budgets are prepared only for a fixed Flexible budgets are prepared for random activities.
level of activity or fixed level of production. In such budgets, the level of activity is not fixed.
4. Classification of cost There is standard classification of costs into Costs are classified into fixed, variable and
different categories. semivariable types.
5. Relative comparison Relative comparison of actual performance Comparison of firm’s performance with budgeted
with that of budgeted performance may not value is possible even if the output of the firm
be possible ifthe capacity of the firm undergo varies.
changes.
6. Forecast It is not possible to forecast the result in It is possible to forecast the result as it helps in
fixed budget. drawing conclusions about the effect of expenses
on the operational .performance of the firm.
7. Number of budgets Only one budget is prepared at a fixed level A series of budgets have to be prepared showing
of activity. While preparing the budget, the clear picture of each level of an activity.
management is required to assume the
constant conditions of a market.
8. Cost control It is not an effective tool for controlling the It acts as an effective tool for cost control.
cost and its overheads.
9. Price fixation Fixation of price is not accurate because it It helps the management in ascertaining costs at
is not possible to ascertain costs at different different output levels which helps in the fixation
f- levels of output. of optimum price and also in the submission of
tenders.
4.5 ADVANTAGES AND LIMITATIONS OF BUDGETARY CONTROL
Q26. What are the advantages and disadvantages of budgetary control?

Answer :
Merits/Advantages of Budgetary Control
Merits/Advantages of budgetary control are as follows,
1. A budget program forces the managers to plan ahead.
2. It forces early consideration of basic policies.
3. All members of top management participate in budget committee. For this reason, even planning at departmental
level gets benefit of experience of seasoned executives.
4. All functional heads are compelled to make plans in harmony with the plans of other departments.
5. It develops an attitude of cost consciousness stimulates the effective use of resources and creates an environment
of profit minuteness throughout the organisation.
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UN IT-4 : Budgets and Budgetary Control 103
6. It demands the most economical use of labour, 7. Frequent changes may be required in for budgets due
materials, facilities and capital. to fast changing industrial climate. It may be difficult
for a company to update with these fast changes, as
7. It inculcates a habit of timely, careful, adequate
revision of budgets is expensive exercise.
consideration of all factors before reaching important
decisions. 4.6 ZERO - BASED BUDGETING
8. The use of budgets removes clouds of uncertainties
Q27. What is zero-based budgeting? What are the
for lower levels of management regarding basic
steps in ZBB?
policies and objectives.
9. The use of budgets promotes understanding of the
problems of co-workers. Zero-based/Priority-based Budgeting
10. It facilitates periodic self-analysis of the organization. Zero based budgeting is a method of budgeting in
11. It aids in obtaining bank credit. which all expenses must be justified for each new period.
Zero-base budgeting is a new technique of planning and
12. Management is forced to give timely and adequate decision making. It is a very challenging approach. It is
attention to the effect of changing business conditions. a technique, by which manager of each decision unit is to
13. Coordination. justify his entire budget request in complete detail with
zero. The manager of the decision unit has to isolate each
14. Delegation of Authority. item of his budget in order to analyse it in separate decision
15. Motivation. packages, which are ranked in order of importance.
Limitations/Disadvantages of Budgetary Control Zero-base budgeting is completely different to
whether total budget is increasing or decreasing. What it does
Limitations/Disadvantages of budgetary control are
is to identify alternatives, so that if more money is required to
as follows,
be spent in one department, it can be saved in another area.
1. Estimates are used as basis for budget plan and CIMA has defined it as a method of budgeting whereby all
estimates are based mostly on available facts and best activities are revaluated each time a budget is set. Discrete
managerial judgement. Since a lot of human element levels of each activity are valued and a combination chosen
is involved in exercising managerial judgement, it to match funds available.
is natural to give some allowance in interpretation
Features
and utilization of estimated results. Budgeting based
on inaccurate forecasts is useless as a yardstick for Following are the features of zero based budgeting,
measuring the actual performance.
1. Manager of a decision unit has to completely justify
2. The circumstances are constantly changing and why there should be at all any budget allotment for
therefore, budgets and budgetary techniques will not his decision unit. This justification is to be made a
be useful, till they are continually adapted. fresh without making reference to previous level of
spending in his department.
3. In order to make system a success, adequate budget
education should be conveyed at least through the 2. Activities are identified in decision packages.
formative period. Sufficient training programmes
should be arranged to make employees give positive 3. Decision packages are ranked in order of priority.
response to budgetary activities. 4. Packages are evaluated by systematic analysis.
4. Execution of budgetary control will not automatically 5. A frank relationship exists between superiors and
occur. A continuous budget consciousness throughout subordinates.
the organisation is needed for achievement of this
objective. 6. Under this approach there exists a frank relationship
between superior and subordinates. Management
5. Budgetary control cannot reduce the managerial agrees to fund for a specified service and manager of
function. It is only a managerial tool which increases the decision unit clearly accepts to deliver the service.
effectiveness of managerial control.
7. Decision packages are linked with corporate
6. The use of budget may lead to restriction of resources. objectives, which are clearly laid down.
Efforts may, therefore, not be made to exceed the
performance beyond the budgeted targets even though 8. Available resources are directed towards alternatives
it may be physically possible. in order of priority to ensure optimum result.
- SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
Steps in Zero-based Budgeting
Steps involved in zero-based budgeting are as follows,
1. Corporate objectives should be established and laid down in detail.
2. Decision units should be identified by dividing the organization according to functions, operations or activities for
detailed analysis.
3. An analysis and documentation of each decision unit should be done by a responsible manager keeping the following
points in view,
(i) Current operations of decision units should be identified and linked with organizational objectives.
(ii) Alternatives to meet the target should be expressed.
(iii) Best alternative should be selected and effects that are required to accomplish the alternative should be
documented.
4. “Decision units” should be split into decision packages ranked in order of priority.
5. Budget staff will compile operating expenses for packages approved by departmental heads.
6. Ranking decision packages.
7. Controlling and monitoring.
Q28. State the merits and demerits of zero-based budgeting.
Answer :
Merits of Zero-Based Budgeting
Advantages of zero-based budgeting are as follows,
1. All proposals, old and new, compete equally for scarce resources.
2. This technique drives managers find out cost effective ways to improve operations.
3. It requires less paper work than traditional budgeting because the proposal goes from bottom all the way to top it
avoids successive appraisals at various levels of management.
4. It detects deliberately inflated budget requests.
5. It identifies complete impact of spending money on particular project.
Demerits of Zero-Based Budgeting
Demerits of zero-based budgeting are as follows,
1. Defining the decision units and decision packages is the first difficulty encountered by companies introducing zero
base budgeting. In conventional budgeting, companies are used to think in terms of cost centers, etc., For zero-base
budgeting a very exhaustive analysis is to be attempted.
2. Zero-base budgeting has been referred to as a very threatening process. In this process, the mangers have to justify
their budget request incomplete detail taking nothing for granted. The managers have to justify each item of budget
or the budget allotment relating to their decision unit. While the managers relating to functions like research and
development and advertisement are most threatened under zero base budgeting, managers of production centers are
likely to have major benefits.
3. Zero-base budgeting requires alot training for managers. If managers do not understand correctly the idea at the
back of zero budgeting, it cannot be introduced successfully. It has to be impressed upon managers that zero-base
budgeting gives them an opportunity to be heard by top management and, therefore, they should use their innovation
and efforts to maximum limits.
4. Some critics have charged that zero-base budgeting will lead to an enormous increase in paper work. The advocates
of zero-base budgeting hold that it is not a correct argument. In conventional budgeting a budget proposal is reviewed
at successive levels, before it is finally approved by top management, Under zero-base budgeting, a budget proposal
goes from bottom all the way to top. Thus, the advocates to zero-base budgeting express the view that it may reduce
the paper work.
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. --
UNIT-4 : Budgets and Budgetary Control
PROBLEMS ON BUDGETING
Q29. Karmanghat Co. Ltd presently working at 50% level (1000 units). The breakup of cost per i
for the last year is ? 320 (Material ? 200; Labour wages MOO and variable overheads ? 20). Ot
overheads are: Selling and Distributing ? 1,00,000 (60% fixed). Administrative overheads ? 80,
(50% fixed). Prepare a flexible budget for production @ 75% and 100% level.
Solution :
Flexible Budget of Karmanghat Co. Ltd
Level of Activity
50% 75% 100%

Particulars
Per unit Amount Per unit Amount Per unit Amount
Number of units 1000 1500 2000
Material 200 2,00,000 200 3,00,000 200 4,00,000
Labour wages 100 1,00,000 100 1,50,000 100 2,00,000
Variable overhead 20 20,000 20 30,000 20 40,000
Other overheads:
Selling & Distribution:

Fixed 60% 60 60,000 40 60,000 30 60,000
Variable 40% 40 40,000 40 60,000 40 80,000
Administrative
Overhead:
Fixed 50% 40 40,000 26.67 40,000 20 40,000

Variable 50% 40 40,000 40 60,000 40 80,000
Total cost 500 5,00,000 466.67 7,00,000 450 9,00,000
Working Notes:
1500= 1000 x —
50
/f 2000 = 1000 x
Q30. The expenses budgeted for production of 10,000 units in a factory are furnished below,
Per unit (?)

Materials 140
Labour 50
Variable factory overheads 40
Fixed factory overheads (? 2,00,000) 20
Variable expenses (Direct) 10
Selling expenses (10% fixed) 26
Distribution expenses (20% fixed) 14
Administrative expenses (Fixed -? 1,00,000) 10
Total cost sales per unit 310
You are required to prepare a budget for production of 6,000 units and 8,000 units.
——_______ SIA PUBLISHERS AND DISTRIBUTORS PVT. LTI

105
Flexible Budget
>er unit
. Other 10000 units 8,000 units 6,000 units
80,000 Particulars Per Unit Amount Per Unit Amount Per Unit Amount
(?) (?) (?) (?) (?) (?)
Production Expenses:
Material 140 14,00,000 140 11,20,000 140 8,40,000
Labour 50 5,00,000 50 4,00,000 50 3,00,000
Factory Overheads:
Variable 40 4,00,000 40 3,20,000 40 2,40,000
Fixed 20 2,00,000 25 2,00,000 33.33 2,00,000
Direct variable expenses 10 1,00,000 10 8'0,000 10 60,000
Selling Expenses:
Fixed 10% 2.6 26,000 3.25 26,000 4.333 26,000
Variable 90% 23.4 2, 34,000 23.4 1,87,200 23.4 1,40,400
Distribution Expenses:
Fixed 20% 2.8 28,000 3.5 28,000 4.667 28,000
Variable 80% 11.2 1,12,000 11.2 89,600 11.2 67,200
Administrative Expenses:
Fixed (1,00,000) 10 1,00,000 12.5 1,00,000 16.667 1,00,000
Total Cost 310 31,00,000 318.85 25,50,800 333.597 20,01,600
Working Notes
Fixed Factory Overheads
1 0000 units x 20 = 2,00,000
f 2,00,000
onnn units, cost per unit = —
r or 8000 — = 25
r
For cnnn ;♦ cost+ per unit
6000 units, : = —
2,00,000 „
00q = 33.33
Variable Factory Overheads
40 x 10,000 =4,00,000
40 x 8,000 = 3, 20,000
40 x 6,000 =2,40,000
»
Selling Expenses
Fixed - 10% of 26 = 2.6 x 10,000 = 26,000
? 26,000 remains same for 8000 units and 6000 units but cost per unit will be 3.25 and 4.33 respectively.
Variable = 90% of 26 = 23.4 x 10,000 = 2, 34, 000
For 8000 units = 23.4 x 8,000 = 1,87,200
For 6000 units = 23.4 * 6,000 = 1,40,400
Distribution Expenses
Fixed - 20% of 14 = 2.8 x 10,000 = 28, 000
? 28,000 remains same for 8000 units and 6000 units but cost per unit will be 3.5 and 4.667 respectively.
Variable = 80% of 14 = 11.2 x 10,000 = 1,12,000
For 8000 units = 11.2 x 8000 = 89,600
4
For 6000 units = 11.2 x 6000 = 67,200
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. -------------------- l__
Administrative Expenses
1000 units x 10 = 1,00,000
For 8000 units, cost per unit =
For 6000 units, cost per unit =
Q31. The following information relates to a Flexible Budget at 60% capacity. Find out the overhead cost at
50% and 70% capacity and also determine the overhead rates.
Expenses at 60% capacity (?)

Variable Overheads:
Indirect Labour 10,500
Indirect Material 8,400
Semi-Variable Overheads:
Repairs and Maintenance (70% Fixed, 30% Variable) 7,000
Electricity (50% Fixed, 50% Variable) 25,200
Fixed Overheads:
Office Expenses including Salaries 70,000
Insurance 4,000
Depreciation 20,000
Estimated Direct Labour Hours (1,20,000)
Solution : Model Paper-Ill, Q12(b)
Flexible Budget
Level of Capacity
Particulars
50% 60% 70%
Variable Overheads
Indirect Material 7,000 (WN-1) 8,400 9,800 (WN-1)
Indirect Labour 8,750 (WN-2) 10,500 12,250 (WN-2)
Semi-Variable Overheads
Repairs and Maintenance:
Fixed - 70% 4,900 (WN-3) 4,900 (WN-3) 4,900 (WN-3)
Variable - 30% 1,750 (WN-3) 2,100 (WN-3) 2,450 (WN-3)
Electricity:
Fixed - 50% 12,600 (WN-4) 12,600 (WN-4) 12,600 (WN-4)
Variable - 50% 10,500 (WN-4) 12,600 (WN-4) 14,700 (WN-4)
Fixed Overheads
Office Expenses including Salaries 70,000 70,000 70,000
Insurance 4,000 4,000 4,000
Depreciation 20,000 20,000 20,000
Total Overheads (A) 1,39,500 1,45,100 1,50,700
Estimated Direct Labour Hours (B) 1,00,000 (WN-5) 1,20,000 (WN-5) 1,40,000 (WN-5)
Overhead Rate (A + B) 1.395 1.209 1.076

107 138____________ MANAGERIAL ACCOUNTING
*orking Notes
Indirect Material
60% = 8,400
50% = ^p-x50 = 7,000
70% = -^^-*70 = 9,800

cost at
1 Indirect Labour
60% = 10,500
1.0^00 x
50% = 60 50
= 8,750
70% = 10^00 x70 = 12,250
Repairs and Maintenance
Fixed-70% 7,000x^ = 4,900
Variable-30% 7,000x— = 2,100
50%= ^^-x50= 1,750
70%= ^g^-x70 = 2,450

II, Q12(b)
4. Electricity
Fixed - 50% 25-2«>xlW = 12,600

Variable
60% = 12,600
50% = -12^°0 x50 = 10,500
70% = ^^-*70 = 14,700
5. 50%= A’W00 x50 = 1,00,000
60% = 1,20,000
7k-i»x70
= 1,40,000.
S. Overheads Rate
Total Overheads
50% =
Estimated Direct Labour Hours
= 1,39,500
1,00,000
= 1.395
60o/o = Msjoo
1,20,000
= 1.209
7no/ = L50,700
° 1,40,000
= 1.076.
LTD. 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
Q32. Top in ten company Ltd, submitted the following particulars.
2013 Sales Production Wages

Month (?) (?) ’ (?)
February 1,80,000 1,24,000 12,000
March 1,92,000 1,44,000 14,000
April 1,08,000 2,43,000 11,000
May 1,74,000 2,46,000 10,000
June 1,26,000 2,68,000 15,000
Additional Information,
(i) Cash at bank estimated T 25,000 (at the beginning month of April 2013)
(ii) Creditors are paid in the following month of purchases

(iii) 50% of the credit sales are realized in the month following sales, and the remaining sales in
the second month following,
The CEO of the company wishes to arrange overdraft facility with Dena bank during that period
April to June 2013. Prepare a cash budget for the same period of April to June 2013.
Solution :
Cash budget in the Books of Top in Ten Company Ltd
Particulars April May June

Opening balance 25000 53000 (-51000)
Receipts (A)
Sales 90,000 96000 54000
Receipts from Debtors 96000 54000 87000
Total Receipts (A) 2,11,000 2,03,000 90,000
Payments (B)
Purchases 1,44,000 2,43,000 2,46,000
Wages (workers are paid on 1st of following months) 14,000 11,000 10,000
1,58,000 2,54,000 2,56,000
Closing (A - B) 53,000 (-51,000) (- 166,000)
Note: Workers wages are paid on 1st of the following month.
Q33. A firm expects to have ? 1,20,000 in the bank on 1 May 2012 and requires you toprepare an estima
of the cash position during the three months May to July 2012. The following information is suppl i<
to you.
Month Sales Purchase Wages Factory Office Selling

Expenses Expenses Expenses
(?) (?) (?) (?) (?) (?)
March 1,60,000 96,000 24,000 12,000 16,000 12,000
April 1,84,000 1,12,000 26,000 14,000 16,000 15,000
May 2,00,000 1,28,000 26,000 16,000 16,000 14,000
June 2,88,000 1,44,000 28,000 17,600 16,000 16,000
July 3,36,000 160,000 29,000 17,000 16,000 16,000
______ SIA PUBLISHERSAND DISTRIBUTORS PVT. LT

Other Information
(i) 25% of sales is for cash, remaining amount is collected in the month of following that of sales
(ii) Suppliers supply goods at two months credit
(iii) Delay in payment of wages and all other expenses-one month
(iv) Income tax of Z 40,000 is due to be paid in July and
(v) Preference share dividend of 10% on ? 4,00,000 to be paid in May.
Solution :
Cash budget
For the Months From May to July 2012
May June July

Particulars
(?) (?)• (?)
Opening bank balance 1,20,000 1,01,000 1,39,000

Receipts
Receipts from cash sales (25%) 50,000 72,000 84,000

Cash realized from debtors (75%) of previous month’s sales) 1,38,000 1,50,000 2,16,000
Total Receipts (a) 3,08,000 3,23,000 4,39,000
Payments
Creditors for purchases [March amount paid in May and so on] 96,000 1,12,000 1,28,000
Wages (Delay by one month) 26,000 26,000 28,000
Factory expenses (Delay by one month) 14,000 16,000 17,600
Office expenses 16,000 16,000 16,000
Selling expenses 15,000 14,000 16,000
Income tax - - 40,000
Preference share dividend 40,000 [10% on ? 4,00,000] 40,000 -
Total payments (b) 2,07,000 1,84,000 2,45,600
Closing balance of bank (a - b) 1,01,000 1,39,000 1,93,400
Working Notes
1. Receipts from cash sales - 25% of sales

May - 2,00,000 x 25% = 50,000
June - 2,88,000 x 25% = 72,000
July - 3,36,000 x 25% = 84000
2. Remaining amount of sales collected in next month of sales.
May - 75% of April = 184000 x 75% = 1,38,000
June - 75% of May = 2,00,000 x 75% = 1,50,000
July - 75% of June = 2,88,000 x 75% = 2,16,000
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. _______
Q34. A Co. is expecting to have ? 32,000 cash in hand in 1-4-2009 and it requests you to prepare cash
budget for the three months April 2009 to June 2009. The following information is supplied to you
Month Sales (?) Purchases (?) Wages (?) Expenses (?)

February 70,000 44,000 6,000 5,000
March 80,000 56,000 9,000 6,000
April 96,000 60,000 9,000 7,000
May 1,00,000 68,000 11,000 9,000
June 1,20,000 62,000 14,000 9,000
Other information:
(a) Period of credit allowed by suppliers is two months.

(b) 25% of sales is for cash and the period of credit allowed to customers for credit sales is one
month.
(c) Delay in payment of wages and expenses one month
(d) Income tax ? 28,000 is to be paid in June 2009.
Solution :
Cash Budget for the Months from April 2009 to June 2009
Particulars April (?) May (?) June (?)

Opening Balance of cash in hand 32,000 57,000 82,000
Receipts
Receipts from cash sales (25%) (W.N) 24,000 25,000 30,000
Cash realised from debtors 60,000 72,000 75,000
(75%) of previous month’s sales (W.N)
Total Receipts (a) 1,16,000 1,54,000 1,87,000
Payments
Creditors for purchases 44,000 56,000 60,000
[Feb amount paid in April and so,on]
Wages 9,000 9,000 11,000
Expenses 6,000 7,000 9,000
Income Tax - - 28,000
Total Payments (b) 59,000 72,000 1,08,000
Closing balance of cash (a - b) 57,000 82,000 79,000
Working Notes
1. Receipts from cash sales - 25% of sales

April - 96,000 x 25% = 24,000
May - 1,00,000 x 25% = 25,000
June - 1,20,000 x 25% = 30,000
2. Cash realised from debtors - 75% of previous month’s sales.
April - (March) 80,000 x 75% = 60,000
May - (April) 96,000 x 75% = 72,000
June - (May) 1,00,000 x 75% = 75,000
SIA PUBLISHERS AND DISTRIBUTORS PVT. LI

□35. Prepare cash budgets for 3 months starting 1st May 2011 from the following summarized Income
ill
and Expenditure forecasts for the months of March to July 2011:
are cash
d to you. Months Sales (?) Purchases (?) Wages (?)
March 60,000 36,000 9,000
April 62,000 38,000 8,000
May 64,000 33,000 10,000
June 58,000 39,000 8,500

| July
56,000 39,000 9,500
(i) Cash balance as on 1st May 2011 is ? 8,000
(ii) Advance tax is ? 8,000 payable in March and June each

>s is one (iii) Credit allowed by suppliers is 2 months and allowed to customers is one month.
(iv) Lag in payment of wages is one month.
Solution :
Cash Budget for Three Months from May to July 2011
Particulars May (?) June (?) July (?)
Opening Balance of cash 8,000 26,000 34,000

Receipts:
Cash realised from debtors 62,000 64,000 58,000

(Previous month sale)
Total Receipts (a) 70,000 90,000 92,000
Payments
Creditors for purchases 36,000 38,000 33,000

(March amount paid in May and so on)
Wages (Lag by one month) 8,000 10,000 . 8,500
Advance Tax - 8,000-
Total Payments (b) 44,000 56,000 41,500
Closing balance of cash (a -b) 26,000 34,000 50,500
Q36. Kala Bandhu Company Ltd. manufactures Dhoop Sticks with two brand “Pooja” and “Harathi” and the
market is classified into three divisions. North, South, Central. The Estimated Sales in units for the
current year are as under. The prices of selling per unit are is 18 and ? 9 respectively.
Brand North South Central
Pooja 15000 21,200 33,000

Harathi 11000 6,000 9,000
On account of Kumbhmela, the sales are expected to increase by 5%, 10% and 15%. To push up the
sales during the last quarter, it is proposed to give special discount to increase the sales by 500,1000
and 600 for Pooja Brand Brand and for Harathi Brand 300,1000, and 1200 units. Prepare sales Budget
at the present price level.
/T. LTD
UN IT-4 : Budgets and Budgetary Control 113
Sales Budget
Brand Pooja Brand Harathi

Regions Quantity Selling Price Total Quantity Selling Total Grand
(Units) (?) (?) (units) Price (?) (?) Toal (?)
North 16,250 18 2,92,500 11,850 9 1,06,650 3,99,150
South 24,320 18 4,37,760 7,600 9 68,400 5.06,160
Central 38,550 18 6,93,900 11,550 9 1,03,950 7,97,850
Total 79,120 14,24,160 31,000 2,79,000 17,03,160
Working Notes
Budgeted Sales for Pooja
Particulars North South Central Total

Budgeted sales 15,000 21,200 33,000 69,200
Add: Increase in sales by 5%, 10% and 15% 750 2,120 4,950 7,820
Add: Special discount to increase sale by 500,1000 and 600 500 1,000 600 2,100
16,250 24,320 38,550 79,120
Working Notes
Budgeted Sales for Harthi
Particulars North South Central Total

Budgeted sales 11,000 6,000 9,000 26,000
Add: Increase in sales by 5%, 10% and 15% 550 600 1,350 2,500
Add: Special discount to increase sales by 300, 1000 and 1200 300 1,000 1,200 2,500
11,850 7,600 11,550 31,000
Q37. A compnay has four sectors for its sales numbered as 1,2,3 abd 4. The following are the expected sales
for the first quarter of April-June, 2013. the average selling price per unit is ? 30, 32, 28 and 35 in each
sector. The estimated sales in units are given below.
Sector -> I II III IV

Month i
April 2000 3000 5000 7000
May 4000 3600 5600 8000
June 5000 4000 6000 9000
Solution :
Sales Budget
Sector Sector -I Sector-ll Sector-Ill Sector-IV

Month Qty Price Value Qty Price Value Qty Price Value Qty Price Value
April 2000 30 60,000 3000 32 96,000 5000 28 1,40,000 7000 35 2,45,000
May 4000 30 1,20,000 3600 32 1,15,200 5600 28 1,56,800 8000 35 2,80,000
June 5000 30 1,50,000 4000 32 1,28,000 6000 28 1,68,000 9000 35 3,15,000
Sales 3,30,000 3,39,200 4,64,800 8,40,000

Net sales for each sector-I = 11,000 units for ? 3,30,000
Sector - II = 10,600 units for ? 3,39,200
Sector - III = 16,600 units for ? 4,64,800
Sector - IV = 24,000 units for ? 8,40,000
Q38. Prepare a selling overhead Budget of Sriram Co., Ltd. From the estimates given below:
?
(i) Advertisement 10,000
(ii) Salaries of the sales department 15,000
(iii) Expenses of the sales deparment (fixed) 5,000
(iv) Salesman salaries and Allowance 20,000
(v) Commission at 2% on sales effected
(Vi) Carriage outwards: Estimated at 3% on sales
(vii) Agent commission 10% on sales
(viii) The sales during the period were estimated as follows:
? 5,00,000 including Agent’s Sales ? 50,000
Solution :
Selling Overhead Budget of Sriram Co. Ltd.
Estimated Sales
Particulars
Amount (?) Amount (?) Amount (?)
Sales 5,00,000 6,00,000 6,50,000
Fixed Overheads
Advertisement 10,000 10,000 10,000

Salaries of sales department 15,000 15,000 15,000
Expenses of the sales department (Fixed) 5,000 5,000 5,000
Salesman salaries and Allowance 20,000 20,000 20,000
50,000 50,000 50,000
Variable Overheads
Commission at 2% on sales 9,000 10,800 11,500

Agent commision at 10% on sales 5,000 6,000 7,500
Carriage outwards at 3% on sales 15,000 18,000 19,500
29,000 34,800 38,500
Total selling overhead (Fixed + Variable Overhead) 79,000 84,800 88,500
5IA PUBLISHERSAND DISTRIBUTORS PVT. LTD. ___ _

Working Notes
Commission at 2% on sales effected
Sales effected = Total sales - Agents sales
= 5,00,000 - 50,000 = 4,50,000 x 2% = 9,000
= 6,00,000 - 60,000 = 5,40,000 x 2% = 10,800
= 6,50,000 - 75,000 = 5,75,000 x 2% = 11,500
Commission = 9,000, 10,800 and 11,500
Agent Commission
10% on sales of Agent
50, 000 x ^- =5,000
60,000 x ^- = 6,000
75,000 x = 7,500
Carriage Outwards
3% on sales
5,00,000 x = 15,000
6,00,000 Xy^y = 18,000
6,50,000 xj^Q = 19,500
Q39. Prepare a Manufacturing overheads budget and ascertain the manufacturing overheads rates at 50%
and 70% capacities. The following particulars are given at 60% capacity.
Particulars (?)
Variable Overheads:
Electricity (40% fixed) 30,000
Repairs and Maintenance (20% variable) 3,000
Fixed Overheads:
Depreciation 16,500
Insurance 4,500
Salaries 15,000
Total Overheads 93,000
Estimated Direct Labour hours 1,86,000 (hours).

Solution :
Manufacturing Overheads Budget
Level of Capacity
Particulars
50% 60% 70%
Variable Overheads:
Indirect Material 5,000 6,000 7,000
Indirect Labour 15,000 18,000 21,000
— 5IA PUBLISHERS AND DISTRIBUTORS PVT. f

Electricity - Fixed 40% 12,000 12,000 12,000
- Variable 60% 15,000 18,000 21,000
Repairs and Maintenance - Fixed 80% 2,400 2,400 2,400
- Variable 20% 500 600 700
Fixed Overheads
Depreciation 16,500 16,500 16,500
Insurance 4,500 4,500 4,500
Salaries 15,000 15,000 15,000
Total Overheads (A) 85,900 93,000 1,00,100
Estimated Direct Labour Hours (B) 1,55,000 1,86,000 2,17,000
Overhead Rate (A = B) 0.55 0.50 0.46
Working Notes
(i) Overhead rate:
_______ Total Cost______
Total Direct Labour Hours
85,900
1,55,000 = 0.55
93,000
1,86,000 = 0.50
1,00,100
~ 2,17,000 = 0.46
> at 50% (ii) Indirect material => 60% = 6,000
50% ^«x 50 = 5,000
70% x 70 = 7,000
(iii) Electricity 30,000

Less: 40% Fixed 12,000
60% Variable 18,000
Variable:
50% =* 18’6q°° *50 = 15,000

70% => 186o°° *70 = 21,000
(iv) Indirect Labour: 60% = 18,000
50% x 50 = 15,000
700/^lW
60
(v) Repairs and maintenance 3,000
Less: Variable 20% 600
Fixed 80% => 2,400
Variables 60% = 600
50% - x 50 = 500
600
70% = 60 x 70 = 700.
T. LTD. I SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. -------------------------------

UNIT-4 : Budgets and Budgetary Control _________ ___ 117
Q40. From the following data, prepare a Production Budget for the ABC company Ltd. Stock for the budgeted
period.
Product As on 1st Jan. As on 30th June Requirements to fulfil Normal Loss in

sales program production
A 8,000 10,000 60,000 4%
B 9,000 8,000 50,000 2%
C 12,000 14,000 80,000 6%
Solution :
Formula for Production Budget = Sales + Closing Stock - Opening Stock
Production Budget for six months from Jan. to June.
Product A:
Estimated Sales 60,000
Add : Closing Stock 10,000
70,000
Less: Opening Stock 8,000
62,000~
Product B :
58,000
49,000
Product C :
94,000
X 82,000
When there is Loss in Production:
Product A (Loss = 4%) = Units to be produced : 62,000 x = 64,583.3 units = 64,583 units
Product B (Loss = 2%) = Units to be produced : 49,000 x = 50,000 units
Product C (Loss = 6%) = Units to be produced : 82,000 x = 87,234 units.

Q41. Prepare a production budget for Deepu Cement Co. Ltd.
(i) The estimated sales for the budget period as reported by sales manager are
Types of Products
Division
A Tonnes B Tonnes C Tonnes D Tonnes
East 10,000 20,000 28,000 28,000
West 8,000 12,000 20,000 8,000
SIIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.

117
(ii) Estimated stock on 1st Jan. 2010
dgeted
A : 2,000 tonnes, B : 2,400 tonnes
C:3200 tonnes, D:2800 tonnes.
(iii) Desired closing stock on 31st March 2010.
A : 2200 tonnes, B : 2600 tonnes
C : 3000 tonnes, D : 2000 tonnes.
Solution :
Production Budget For Deepu Cement Co.Ltd
Estimated Sales Types of Products

During Budget Period
A (Tonnes) B (Tonnes) C (Tonnes) D (Tonnes)
East 10,000 20,000 28,000 28,000
West 8,000 12,000 20,000 8,000
Total 18,000 32,000 48,000 36,000
Add: Desired closing
Stock on 31st March 2010 2,200 2,600 3,000 2,000

20,200 34,600 51,000 38,000
Less: Estimated stock on
1st Jan 2010 2,000 2,400 3,200 2,800

Quantity to be produced 18,200 32,200 47,800 35,200
Q42. From the following figures prepare raw materials purchase budget for January 2010.
t
Materials (Units)
Particulars P Q R S T U
Estimated stock on 1.1.2010 16,000 6,000 24,000 2,000 14,000 28,000
Estimated stock in 31-1-2010 20,000 8,000 28,000 4,000 16,000 32,000
Estimated consumption 1,20,000 44,000 1,32,000 36,000 88,000 1,72,000
Standard price per unit (?) 25 5 15 10 20 30
Solution :
Raw Materials Purchase Budget

Materials
Particulars P Q R S T U Total
Estimated consumption (units) 1,20,000 44,000 1,32,000 36,000 88,000 1,72,000 5,92,000
Add: Estimated shock on 31.1.2010 20,000 8,000 28,000 4,000 16,000 32,000 1,08,000
1,40,000 52,000 1,60,000 40,000 1,04,000 2,04,000 7,00,000
Less: Estimated stock on 1.1.2010 16,000 6,000 24,000 2,000 14,000 28,000 90,000
Estimated purchases (unit) (a) 1,24,000 46,000 1,36,000 38,000 90,000 1,76,000 6,10,000
Standard rate per unit (b) 25 5 15 10 20 30
Estimated Purchases (a « b) 31,00,000 2,30,000 20,40,000 3,80,000 18,00,000 52,80,000 1,28,30,000
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. __ __ _________________

LTD.
EXERCISE PROBLEMS
1. Adventurous company limited manufactures two products X and Y and sells them through two divisions Bangalore
and Cochin. For the purpose of submission of sales budget to the budget committee, the following information has
been made available.
Budgeted sales for the current year were:
Product Bangalore Cochin

X 2,000 units @ T9 3,000 units @ T9
Y 1,500 units @T21 2,500 units @T21
Actual sales for the current year were:

X 2,500 units @ T9 3,500 units @ T9
Y 1,000 units @T21 2,000 units @T21
Market survey reveal that product ‘Y’ is popular but under-priced. It is observed that if the price of product ‘X’ is
increased by T1, it will still find a ready market. On the other hand, product Y is over-priced to the customers anc
the market could absorb more if the sales price of product Y is reduced by T1. The management has agreed to give
effect to the above price changes.
From the information relating to these price changes and reports from salesmen, the following estimates have beer
prepared by divisional managers.
Percentage increase in sales over-current budget is,

X + 10% + 5/o
Y + 20% +10%
With the help of an intensive advertisement campaign, the following additional sales above the estimated sales o
divisional managers are possible.

X 300 units 350 units
Y 200 units 250 units
You are required to prepare a budget for sales incorporating the above estimates and also show the budgeted anc
actual sales of the current year.
(Ans : Total sales for Bangalore and Cochin and for products X and Y for the budgeted current year T. 79,500, foi
the actual current year T. 73,500 and for the budgeted future year T. 95,000.)
2. The sales director of manufacturing company reports that next year he expects to sell 50,000 units of a certair
product.
The production manager consults the storekeeper and casts his figure as follows: Two kinds of raw materials A anc
B are required for manufacturing the product. Each unit of the product requires 2 units of A and 3 units of B. Ths
estimated opening balances at the commencement of next year are finished product 10,000 units; A : 12,000 units
B : 15,000 units. The desirable closing balances at the end of the next year are finished product, 14,000 units; A
13,000 units, B: 16,000 units.
Draw up a quantitative chart showing the materials purchases budget for the next year.
(Ans : Budgeted purchase of A material is 1,09,000 units and B material is 1,63,000 units.)
_____ -__ _ 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD

120 ______ ______ ____ MANAGERIAL ACCOUNTING
3. From the following budgeted figures prepare a cash budget in respect of the three months to June 30, 1993.
Month Sales Materials Wages Overhead

January 30,000 20,000 5,500 3,100
February 28,000 24,000 5,800 3,300
March 32,000 25,000 6,000 3,400
April 40,000 28,000 6,200 3,600
May 42,000 31,000 6,500 4,300
June 38,000 25,000 7,000 4,000
Estimated cash balance on April 1st 1993 ? 10,000.
Materials and overheads are paid during the month following the month of supply. Wages are paid during the month
in which they are earned.
Credit items of sales are payment by the end of the month following the month of sale. It is estimated that one-half
of sales are paid when due, the other half being paid during the next month.
A sales commission of 5% on sales is to be paid within the month following actual sales.
Preference share dividend of 10% on capital of ? 3,00,000 is to be paid on May 1, 1993.
Plant and machinery to be installed in May at a cost of? 10,000 will be payable on 1st, June, 1993
10% calls on equity shares capital of ?2,50,000 are due on April 1st and June 1st 1993.
(Ans : Closing Cash Balance: April - ?28,800, May - ?5,300 June - ?6,300.)____________________________________
4. 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 ?
Variable Overheads:
Indirect labour — 12,000 —
Stores including spares — 4,000 —
Semi-variable Overheads:
Power (60% fixed, 40% variable) — 20,000 —
Repairs and maintenance (60% fixed, 40% variable) 2,000 —
Fixed Overheads:
Depreciation — 11,000 —
Insurance — 3,000 —
Salaries — 10,000 —
Estimated direct labour hours-1,24,000 hours.
Ans : Overhead expenses at 70% T58.900, 80% ?62,000, 90% ?65,100 overhead rates : 0.54, 0.50, 0.47.)_______
5. A factory is currently working to 50% capacity and produces 10,000 units. Estimate the profits of the company when
it works at 60% and 80% capacity and offer your critical comments.
At 60% working raw material cost increases by 2% and selling price falls by 2%. At the 80% working, raw material
cost increases by 5% and selling price falls by 5%.
At 50% capacity working the product costs ?180 per unit and is sold at ? 200 per unit.
The unit cost of ? 180 is made up as follows,
?
Material 100
Labour 30
Factory overhead 30 (40% fixed)
Administrative overhead 20(50% fixed)
Ans : ? 2,00,000; ? 2,12,000; ? 2,12,000.)

UNIT-4 : Budgets and Budgetary Control ____________________________ 121
6. The following data are available in a manufacturing company for a yearly period:
Fixed expenses: (? lakhs)
Wages and salaries 9.50
Rent, rates and taxes 6.60
Depreciation 7.40
Semi-variable expenses 6.50
Sundry administrative expenses
Variable expenses
(at 50% of capacity
Maintenance and repairs 3.50
Indirect labour 7.90
Sales department salaries 3.809
Sundry administrative expenses 2.80
(at 50% of capacity)
Materials 21.70
Labour 20.40
Other expenses 7.90
98.00
Assume that the fixed expenses remain constant for all levels of production, semi-variable expenses remain constant
between 45% and 65% of capacity, increasing by 10% between 65% and 80% capacity and by 20% between 80%
and 100% capacity. Sales at various levels are:
(? lakhs)
50% capacity 100

60% capacity 120
75% capacity 150
90% capacity 180
100% capacity 200
Prepare a flexible budget, for the year and forecast the profits at 60%, 75% and 100% capacity.
(Ans : At 50% ? 2 lakhs, at 60% ? 12 lakhs; at 75% ? 25.20 lakhs at 90% ? 38.40 lakhs; at 100% ? 48.40 lakhs)
7. Following information is given about a limited concern. You are required to prepare a selling overheads budget:
?
Advertisement 2,000
Salaries of sales department 2,000
Expenses of sales department fixed 950
Salesmen’s remuneration:
Salaries 6,000
Commission @ 1% on sales affected
Carriage outwards: Estimated @ 5% on sales
Agent’s commission 6% on sales
Sales during the period were estimated as follows:
? 1,00,000 including agent's sales ?10,000
? 1,50,000 including agent’s sales ?20,000
? 2,00,000 including agent’s sales ?20,000.
(Ans: ? 17,450;? 20,950; ? 23,950.)_____________________________________________________________________

8. A new company commences business on 1st July, 2011 and deposits ? 10,000 in the bank. This amount will be
inadequate to finance its operations over a period of six months and you are asked to prepare a cash budget upto
31st Dec. 2011 to determine the monthly overdraft limits to seek from the company’s bankers.
The data furnished to you are as thus:
(i) Sales are made to one distributor only on thirty days terms, 3% discount and the cheques are received on the
first date of the month following the due date.
(ii) Plant purchases totaling ? 5,000 are to be made in July.
---------- ------------- ------- ----- 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
122 MANAGERIAL ACCOUNTIN
(iii) All purchases are made on net thirty days terms and cheques are paid to creditors on the last day of the month dui
(iv) Budget figures are,
July August September October November December
? ? ? ? ?
Purchases 5,000 4,000 3,000 4,000 4,000 5,000
Wages 4,000 5,000 4,000 4,000 5,000 4,000
Cash expenses 400 500 400 400 500 400
Sales 6,000 7,000 8,000 8,000 9,000 12,000
Also interpret the results as shown by the preparation of cash budget.
(Ans: Overdraft limits July - Nil, October - ? 610, August - ? 10,500, November - ? 1,740, September - ? 2,580, December - ? 640)
9. A company expects to have ? 25,000 in bank on 1st May 2011 and requires you to prepare an estimate of cash
position during the three months May, June and July, 2011.
The following information is supplied:
Month Sales Purchases Wages Office Factory Selling
Expenses Expenses Expenses
? ? ? ? ? ?
March 50,000 30,000 6,000 4,000 5,000 3,000
April 56,000 32,000 6,500 4,000 5,500 3,000
May 60,000 35,000 7,000 4,000 6,000 3,500
June 80,000 40,000 9,000 4,000 7,500 4,500
July 90,000 40,000 9,500 4,000 8,000 4,500
Other Information:
(i) 20% of sales are in cash, remaining amount is collected in the month following that of sales.
(ii) Suppliers supply goods at two month’s credit.
(iii) Wages and all other expenses are paid in the month following the one in which they are incurred.
(iv) The company pays dividends to shareholders, and bonus to workers of? 10,000 and ? 15,000 respectively in
the month of May. . ' »
(v) Plant has been ordered and is expected to be received in June. It will cost ? 80,000 to be paid in June.
(vi) Income tax ? 25,000 is payable in July.
(Ans : Balance May ? 7800, June ? (60,700), July ? (63,700).) _________________________________________
10. Prepare a production budget for each month and a summarized production cost budget for the six months period
ending 31st December, 2011 from the following data of product ‘X’.
(i) The units to be sold for different months are as follows:
July, 2011 1,100
August 1,100
September 1,700
October 1,900
November 2,500
December 2,300
January 2012 2,000
(ii) There will be no work in progress at the end of any month.
(iii) Finished units equal to half the sales for the next month will be in stock at the end of each month (including
June, 2011)
(iv) Budgeted production and production cost for the year ending 31st December, 2011 are as follows:
Production (units) 22,000
Direct materials (per unit) ?10
Direct Wages (per unit) ?4
Total factory overheads apportioned to products ?88,000.
(Ans : 11,050 units, ? 1,98,900).
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ______________

INTERNAL ASSESSMENT
I. Multiple Choice
1. ______ is a statement defining responsibilities of executives responsible for accomplishment of organizational
objective. [
(a) Budget manual
(b) Organizational chart
(c) Chart of Accounts 4
(d) Budget committee

2. contains a complete programme of activities involved in budget preparation. [
(a) Chart of Accounts

(b) Organizational chart
(c) Budget manual
(d) Budget centres
3. Due to having different units at different places in big organizations,_________ is formed with chief executives
budget officer and heads of all budget centres. [ 1
(a) Budget committee
(b) Budget centres
(c) Cost centres
(d) Profit centres
4. budget is classified on basis of duration. [ ]

(a) Short - term budget
(b) Long -term budget

5. Functional and master budgets are based on [ 1
(a) Duration
(b) Condition
(c) Capacity
(d) Coverage
6. _________ has the responsibility to coordinate and advice the departmental managers regarding the budgets prepare:
by them to obtain a master budget. [
(a) Budget officer
(b) Production manager
(c) General manager
(d) Departmental managers
7. _________ overhead includes indirect material, indirect labour and indirect expenses, which are used according to
production. [ ]
(a) Fixed overhead
(b) variable overhead
8. budget is based on sales budget and desired inventory levels. [ ]
(a) Overhead budget
(b) Cash budget
(c) Production budget
(d) Material purchase budget

9. overhead includes depreciation, insurance and taxes. [ 1
(a) Variable overhead
(b) Fixed overhead

10. is a method for preparing cash budget. [ 1
(a) Adjusted profit and loss account method
(b) Receipts and payments method
(c) Balance sheet method
(d) All the above

1. A_________ is a quantitative expression of a plan of action relating to the future period of time.
X
2. _____ ____ is a system which uses budgets for planning and controlling different activities of business.
3. A systematic set of accounting books that can record and analyze the required information is referred as
4. A__________ is a time duration for which a budget is prepared.
5. The budgets which are prepared based on the functions performed in a business are referred as__________.
6. Cash budget is prepared after carrying out the__________
7. __________ budget is also known as static budget,
8. Flexible budget is also known as__________ budget.
9. A summary budget becomes__________ after getting acceptance from top management.
10. __________ budget shows the capacity of plant needed to meet the production budget.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ——————————
I. Multiple Choice
1. (b)
2. (c)
3. (a)
4. (c)
5. (d)
6. (a)
7. (b)
8. (c)
9. (b)
10. (d)
1. Budget
2. Budgetary control
3. Chart of accounts
4. Budget period
5. Functional budget
6. Cash Forecast
7. Fixed budget
8. Variable budget
s.
Master budget
10. Plant utilization budget
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD

Q1. Define Budget.
Answer :
In the CIMA terminology, a budget is defined as,
“A financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to
be pursued during that period for the purpose of attaining a given objective”.
Q2. Define Budgetary Control.
Answer :
The terms budgetary control and budgeting are often interchanged to refer to a system of managerial control.
Budgetary control implies the use of a comprehensive system of budgeting which helps management in carrying out its
functions like planning, coordination and control.
Q3. Define Budgeting.
Answer :
Budgeting is a way of managing business and industry. It emphasizes on management to anticipate problems and
difficulties.
Prior decision should be taken for the course of activities during the forthcoming budget period. It denotes a formal
system based on the concept of budgeting.
Q4. What is a Flexible Budget?
Answer :
According to ‘Chartered Institute of Management Accountants’ London, flexible budget is “a budget designed to
change in accordance with level of activity actually attained”.
Flexible budget is also known as variable budget. It is prepared by identifying the difference between fixed, variable
and semi-fixed and semi-variable costs. The objective of the flexible budgets is to change the budgeted cost as per the
changes in the level of activity achieved. In simple words, flexible budget is designed with an intention to provide budgeted
cost for any activity level achieved.
Q5. What is a Master Budget?
Answer :
After all the functional budgets have been prepared, these are summarized in the form of a summary budget. The
summary budget gives a forecast profit and loss account and forecast balance sheet for the budget period. If summary
budget is not found satisfactory by the budget committee, it issues directions for necessary changes. The proposed changes
are incorporated and revised summary budget is prepared. The revised summary budget thus prepared is presented to the
Board of Directors for approval. After the Board of Directors approves the summary budget, it is known as master budget.
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ■

/T. LTD.
UNIT /---------------------- \
STANDARD COSTING AND
5 VARIANCE ANALYSIS
5IA GROUP
( LEARNING OBJECTIVES )
❖ Concept of Standard Costing.
❖ Importance of Standard Costing.
❖ Standard Costing and Historical Costing.
❖ Steps involved in Standard Costing.
❖ Concept of Variance Analysis.
❖ Types of Variance i.e., Material Variance, Labour Variance, Overhead Variance and Sales Variance.
C INTRODUCTION )
Standard cost is a scientifically predetermined cost, which can be estimated by assuming a particular level of
efficiency in the utilization of material, labour and other indirect services.
Chartered Institute of Management Accountants (CIMA) defines standard cost as a standard expressed in
money. It is built up from an assessment of the value of cost element. Its main uses are providing bases for
performance measurement, control by exception reporting, valuing stock and establishing selling prices.
Standard cost accounting is a traditional cost accounting method introduced in the 1920s.
The comparison of actual performance with standard performance reveals the variances. A variance represents
a deviation of the actual result from the standard result. There can be cost, profit, sales value and operational
and planning variances. Whether a variance is favourable or unfavourable, is ultimately determined with
reference to its impact on profit.
Variance analysis is an exercise, which involves efforts to isolate the cause of variance in order to report to
management those situations which can be corrected and controlled by timely action. The extent to which the
causes of variances are established, depends upon the amount of time, effort and money, that a company is
willing to spend in accumulating data, as the variances occur. In variance analysis, a point is reached where
incremental information is not worth its incremental cost.
Standard costing is an accounting technique that some manufacturers use to identify the differences or
variances between, the actual cost of the goods that curve produced and the cost that should have accrued for
those goods.
........... ..... __ SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD.

Q1. Write a short notes on,

(a) Efficiency variance
(b) Term variance.
(a) Efficiency Variance

Efficiency variance is portion of the volume variance which is due to the difference between the budgeted efficiency
of production and th'e actual efficiency achieved. This variance is related to the efficiency of workers and plant and is
calculated as,
Standard rate per unit = Actual production (in units) - Standard production (in units).
(or)
Standard rate per hour = Standard hours production - Actual hours.
(b) Term Variance
The comparison of actual performance with standard performance reveals the variances. A variance represents a
deviation of the actual result from the standard result.
Variance analysis is an exercise, which involves efforts to isolate the cause of variance so that management can
correct situations and control such deviation by taking timely actions.
Q2. Define the terms standard costing and labour mix variance.
Answer :
Standard Costing
According to Chartered Institute of Management Accountants (CIMA) “Standard costing is the preparation and use
of standard costs, their comparison with actual costs and analysis of variances into their courses and points of incidence”.
Labour Mix Variance
Labour Mix Variance is the portion of labour efficiency variance which is due to difference between actual composition
of labour used and standard composition specified. Some jobs require different types or grades of workers and production
will be completed if labour is mixed according to standard proportion. When actual composition of labour is different from
standard composition specified, it will give rise to labour mix variance.
Labour Mix Variance = Standard labour mix in terms of actual total hours — Actual labour mix x Standard rate per hour
Q3. What are overheads and idle time variance?
Overhead
Overhead is also known as burden or indirect cost. It includes cost due to indirect materials, indirect wages and other
indirect expenses. Overheads are also known as “on costs”, “Supplementary costs”, “burden” or “indirect expenses”.
According to CIMA, indirect cost may be defined as “an expenditure on labour, materials or services which cannot
be conveniently identified with a specific saleable cost per unit”.
Overhead expense/cost plays a key role in ascertaining cost and control by providing guidance related to managerial
decisions during production process.
Idle Time Variance
Idle time variance is that part of wage efficiency variable, which is due to difference between labour hours applied
and labour hours utilized.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ..............
UNIT-5 : Standard Costing and Variance Analysis 129
In practical life, there are sometimes abnormal circumstances like strike, lockout and power failure which prevent
utilization of all labour hours being paid for i.e., labour hours applied.
The idle time variance will be attempted only when there is a difference between labour hours applied and labour
hours utilized.
Idle time variance can be calculated by multiplying idle time and standard rate per hour.______________________
Q4. What are the objectives of standard costing?
Answer :
Following are the objectives of standard costing,
(a) To Establish Control
Setting the standards constitute the main aim of standard costing which is responsible for establishing strategic
control.
(b) To Set Standards for Different Elements of Costs
As per the quantity and price of different element of cost such as material, labour, overhead, etc, standard measures
are set.
(c) To Fix Responsibility
Standards are set for various levels individually. While comparing the actual costs of different levels with that of
standard costs, it is easy to make out variance as is it favourable or unfavourable which enables to fix responsibility of the
variance at every individual level.
(d) To Make Budgetary Control More Effective
Though standard costing, the efficiency of the Budgetary Control can be improved to great extent.
Q5. What are the types of industries where standard costing is more suitable?
Answer :
Standard costing is applicable in only those industries which fulfil the following conditions,
(a) Industries which are engaged in production of sufficient amount of standard products or components.
(b) Methods, operations and processes used by industry can be easily standardized.
(c) Costs incurred by industry can be controlled.
Industries engaged in production of standardized products that are repetitive in nature. Industries which can fulfil
above conditions can use standard costing. For example, industries like cement, steel, sugar and fertilizers.
A full system of standard costing is not suitable for jobbing industries.____________________________________
Q6. differences between standard costing and budgetary control.
Answer : x Model Paper-Ill, Q1
Differences between standard costing and budgetary control are as follows,
Point of Difference Standard Costing Budgetary Control

1. Scope Standard costing relates primarily to one Budgets are prepared for all functions of
function i.e., production. It mainly deals an organization like production, purchase,
with manufacturing cost. selling and distribution and research and
development.
2. Denote different ideas Standard costing denotes a unit idea. It Budgetary control denotes a total idea.
outlines what a unit should cost.
3. Treatment of income Standard costing is mainly confined to In budgetary control, budget preparation
and expenditure expenditure only. considers both income and expenditure.
4. Functional co-ordination Functional co-ordination is not required. Functional co-ordination is required.
5. Projection Standard costs is an estimate of cost Budget is an estimate of final accounts.
accounts.
___________ SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD.

Q7. How can material sub variances be computed?
Answer : , Model Paper-I, Q6
Material sub-usage variance consists of material mix variance and material yield variance.
(a) Material Mix Variance
Material mix variance is a part of material usage variance which is because of differences between actual composition
of mix and standard composition of mixing the different types of materials. Short supply of a particular material is often
the most common reason for material mix variance. Material mix variance indicates the impact on material cost of the
deviation from the standard mix.
This variance can be calculated by using the following formula,
Materials mix variance = (Standard mix of actual total quantity of material used) - (Actual mix of actual quantity
of material used) x SP
Standard
Total weight of actual material mix
Standard cost of standard mix - cost of actual
Total weight of standard material mix
k mix
(b) Material Yield Variance
In certain industries, it is possible to lay down that output will be a particular percentage of total input of material,
in a particular situation, it may be given that normal loss in production will be 20% of input of material.
In a case like this, 80% of the total input of material will be the expected output. If actual yield obtained happens
to be different from the standard yield specified, there will be yield variance. Thus, material yield variance is that portion
of material usage variance which is due to difference between actual yield obtained and standard yield specified.
The formula for finding the material yield variance is,
Material yield variance = (AQ - SQ) x SP.
Q8. Overhead Variances
Answer :
Overheads could be indirect material, labour and expenses. The variance could be factory, office or selling and
distribution overhead related.
Overhead Cost Variance (OCV) is the difference between standard overheads for actual output (recovered overheads)
and the actual overheads.
OCV= Standard overhead - Actual overhead (actual output)
Q9. How are labour mix sub variance computed?
Answer :
Labour mix variance is that portion of labour efficiency variance which is due to difference between actual composition
of labour used and standard composition specified. Some job requires different types or grades of workers and production
will be completed if labour is mixed according to standard proportion. When actual composition of labour is different from
standard composition specified, it will give rise to labour mix variance. This can be computed as,
Labour Mix Variance = (Standard Labour Mix in terms of Actual Total Hours - Actual Labour Mix) x (Standard
Rate per hour).
. ...... 111111,11
PART-B
•
. ...........
5.1 STANDARD COSTING : MEANING AND IMPORTANCE
Q10. What is standard costing and standard cost? State its importance.
Answer :
Standard Costing
According to CIMA “Standard costing is the preparation and use of standard costs, their comparison with actual
costs and analysis of variances into their courses and points of incidence”.
Standard Cost
Standard cost is a scientifically predetermined cost, which can be estimated by assuming a particular level of efficiency
in the utilization of material, labour and other indirect services.
CIMA defines standard cost as a standard expressed in money. It is built up from an assessment of the value of cost
element. Its main uses are providing bases for performance measurement, control by exception reporting, valuing stock
and establishing selling prices.
Importance of Standard Costing
Specific uses of standard costing in connection with different activities of organization are summarized below,
Accounting Department
(i) Planning and budgeting
(ii) Valuation of inventories
(iii) Cost control
(iv) Pricing, sales and cost estimates
(v) Developing monthly operating results.
2. Production Department
(i) Production planning
(ii) Matching scheduled production with machine capacity and
(iii) Preparing reports of business logs in terms of time.
3. Sales Department
(i) Determining and checking selling prices.
X (ii) Preparing quotation on special products and
(iii) Determining the profitability of specific product lines.
Q11. What are the advantages and limitations of standard costing?
Answer :
Advantages of Standard Costing
Following are the advantages of standard costing,
1. Use of standard costing leads to optimum utilization of men, materials and resources.
2. Its use provides a yardstick for comparison of actual cost performance.
3. Only distinct deviations are reported to management, thus, it helps application of the principle of management by
exception.
4. It is very useful to management in discharging functions like planning, control, decision making and price fixation.
5. It creates an atmosphere of cost consciousness. «
6. Since standard cost are predetermined costs they are very useful for planning and budgeting.
„ ________ _____________x SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
7. It motivates workers to strive for accomplishment of defined targets. It precipitates an attitude that is conductive to
efficiency.
8. It highlights areas, where probe promises improvement.
9. Its introduction leads to simplification of procedures and standardization of products.
10. Its use enables the management to reduce time required for preparation of reports for pricing, control or quotation
purposes.
11. Its use enables to find out the cost of finished goods immediately after completion.
12. If standard costing is used, stock ledgers can be kept in terms of quantities only. This eliminates much clerical effort
in pricing, balancing and posting on stores ledger cards.
13. Its usage may initiate cost reduction.
14. Once the standard costing system is implemented it will lead to saving cost.
Limitations of Standard Costing
It is a very good system, but it should be used giving regard to following limitations,
1. Establishment of standards may demand a lot of skills, imagination and experience. If all these factors are not in
harmony, desired result will not be forthcoming.
2. Variance analysis is useful, whereas deviations are linked with responsibilities. Sometimes it is difficult to fix
responsibility, because the result happens to be the outcome of a number of contributory factors.
3. Standard should correspond to current conditions for best result. Current conditions change very rapidly. Revision
of standard is a costly exercise and leads to a lot of associated problems. For this reason revision of standards may
get ignored. This delay may be disastrous for effectiveness of the system.
4. Standard costing is usually confirmed to organization whose processes or jobs are repetitive.
5. It is difficult to use standard costing, when working conditions do not permits standardization of material contents, labour
contents or the use of indirect services relating to different jobs, processes and services.
6. Lack of interest by appropriate level of management renders the use of standard costing ineffective.
7. Sometimes, use of standard costing creates adverse psychological effects, if standards are set at a high level. ________
5.1.1 Standard Costing and Historical Costing j
Q12. What is standard costing and historical costing? Distinguish between standard costing and historical
costing.
Answer : Model Paper-I, Q 13(a)
Standard Costing
According to CIMA “Standard costing is the preparation and use of standard costs, their comparison with actual
costs and analysis of variances into their courses and points of incidence”.
Historical Costing
Historical cost method is used for assets in the United States under Generally Accepted Accounting Principles (GAAP).
Historical costing is ascertainment of cost after they have been incurred. It aims at ascertaining costs actually incurred on
work done in the past. It has a limited utility, though comparisons of costs over different periods may yield good results.
Differences between Standard Costing and Historical Costing
Differences between Standard Costing and Historical Costing are as follows,
Criteria Standard Costing Historical Costing

1. Scientific Standard cost is determined scientifically. It Historical cost is not scientifically determined it
determination means that considerable amount of time and is mainly based on past data relating to product,
energy is spent to decide how a task should which is adjusted according to the anticipated
be accomplished and what resources it should changes in future.
consume.
2. Representation Standard cost represents management view of Determination of historical cost does not
of management efficient operation and relevant expenditure. consider the efficiency idea.
view For this, standard cost ensures a particular
efficiency on initialization of materials, labour
and indirect services.

3. Different aims What should be the cost of the product? And Present and future cost of the product must be
what will be the product’s cost? Must determine determined for its calculation.
while calculating standard cost.
4. Usage of control Precision, efficiency and analysis becomes Precision, efficiency and analysis are not
important in case of standard cost determination, considered while calculating historical cost.
since it helps management in controlling cost
performances.
5.1.2 Steps Involved in Standard Costing

Q13. What are the steps involved in developing a system of standard costing?
Answer :
The various steps involved in developing a system of standard costing are as follows,
1. Setting up of Cost Centres
The first step in the procedure for developing a system of standard costing begins with setting up of the cost centres.
Cost centre is either a department or an individual or an equipment of which the costs are determined and utilized for
controlling the cost.
2. Categorization of Accounts
Categorization of accounts is quite essential for implementing system of standard costing. Coding system may be
used for quick collection and assessment of various accounts. For instance,
(a) Direct material -> A-E
(b) Direct labour -> F-J
(c) Indirect labour -> R-0
(d) Indirect material P-T etc-y JA
»
3. Types of Standards
Based upon tightness, looseness and period of operation, standard have been classified in the following categories.
I. Based on Period of Operations
(i) Current standards

(ii) Basic standards
(iii) Normal standards.
II. Based on Tightness and Looseness
(i) Ideal standards

(ii) Experienced or attainable standards.
4. Establishing a Committee for Setting Standards
Standard costing system can be successful only when set standards are correct and accurate in nature.
In order to set standards, an individual or a committee needs to be appointed. Large organisations usually prefers
appointing a separate committee for setting standards. This committee comprises of the following members, procurement
manager, sales manager, cost accountant, manufacturing manager and the chief engineer. Cost accountant plays the role
of coordinator. The cost accountant provides all the information which is required to ascertain the standards and integrate/
amalgamate the costs associated with various departments. The cost accountant also intimates the committee members
about the changes that take place in price and so on. The committee then would make changes in the standards as per the
changing situations.
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5. Setting Standards Significance of Variance Analysis
Various components of cost are direct material, direct Variance analysis should be a continuous process for
labour and overheads, standards needs to be set for each of following reasons,
these components of cost. With regards to direct material,
three standards are being set as follows, 1. Labour rates, salary levels, etc., changes due to
union negotiations, policy decisions or changes in
(a) Material price standard
composition of the work force.
(b) Material usage standard
(c) Material wastage standard. 2. Changes in selling prices.
With regards to the direct labour two standards are 3. In an multi-product company, product mix changes
being set as follows, and different lines have different margins, the overall
(a) Labour efficiency standard profit position will change.
(b) Standard labour rate. 4. Improvement in system can bring about reduction in
With regard to overheads standards are being set for costs.
fixed and variable overheads separately. 5. Change in level of efforts of operators, supervisors,
5.2 VARIANCE ANALYSIS management and clerical staff can affect the existing
Q14. What is variance and variance analysis? Explain cost levels.
the significance of variance analysis. 6. Investments in new capital equipment and scrapping
Answer : of old equipment/processes/methods can affect the
Variance operating cost levels (i.e., direct labour cost and direct
Variance is the difference between an expected actual material cost). These decisions which are frequently
result such as between a budget and actual expenditure. taken in an organization can affect overhead items
The comparison of actual performance with standard such as depreciation charges and insurance premium.
performance reveals the variances. A variance represents a 7. The prices of bought-out material may vary.
deviation of the actual result from the standard result. There 8. Changes in product design may change cost inputs.
can be cost, profit, sales value and operational and planning
9. Policy decisions of various kinds, for example,
variances. Whether a variance is favourable or unfavourable,
changes in organizational structure may affect cost
is ultimately determined with reference to its impact on
levels.
profit.
10. The amount of idle time may change due to holdups,
Example, a cost variance will be adverse, if the actual
strikes, lockouts and power failure.
cost exceeds the standard cost or vice versa. Profit variance
will be favourable, if actual profit exceeds standards profit Q15. Define variance analysis. What are the ways of
disposing cost variances?
or vice versa.
Variance Analysis Answer :
Variance analysis is an exercise, which involves Variance Analysis
efforts to isolate the cause of variance in order to report to Variance analysis is an exercise, which involves
management those situations which can be corrected and efforts to isolate the cause of variance in order to report to
controlled by timely action. The extent to which the causes management those situations which can be corrected and
of variances are established, depends upon the amount of controlled by timely action. The extent to which the causes
time, effort and money, that a company is willing to spend of variances are established, depends upon the amount of
in accumulating data, as the variances occur. In variance time, effort and money, that a company is willing to spend
analysis, a point is reached where incremental information in accumulating data, as the variances occur. In variance
is not worth its incremental cost. analysis, a point is reached where incremental information
This point indicates the limit of variance analysis is not worth its incremental cost.
and this point is determined by judgement in the light of Ways of Disposing Cost Variances
individual circumstances. Variance analysis must be devised In the cost accounts, all the cost variances are taken
to suit the conditions prevailing within a particular enterprise. into consideration at the end of the accounting period. This
Analysis of variances must be followed by intelligent and is referred to as the disposal of variances or disposition of
factual interpretation. Computation, classification and the variances. There are four methods or ways of disposing
reporting of variances is a vital feature of standard costing. cost variances. They are as follows,
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1. Division Cost Variances into Sales, Closing Types of Material Cost Variances
Finished Goods Inventory and Closing Work The following constitute material cost variance,
in-progress Inventory Material Cost Variance
This method divides the cost variances on the basis I : I
Material Price Variance Material Usage Variance
of sales, closing finished goods inventory and closing work
I------------------ ---------------- I
in progress inventory. It indicates the impact of all these Material Mix Variance Material yield Variance
costs on the actual cost through separate adjustment made
in the financial statement. This helps the management in Figure: Types of Material Cost Variances
understanding the weakness of the standard costing system. Material Cost Variance
This method is based on an assumption that standard cost is
It represents the difference between actual cost of
not only a tool for real cost control but also serves as a tool
material used and standard cost of material specified for
for exercising control. This method values the finished stock
output achieved. Material cost variance arises because of
and work-in-progress on actual or real cost basis. Secondly, variation in prices and usage of materials. It can be computed
it indicates the true profit of the firm by transferring variance by using the following formula,
to costing profit and loss account.
Material cost variance = (SQ x SP) - (AQ * AP)
2. Transferring Variances to Profit and Loss
Account Where,
Under this method, the work in progress inventory, SQ = Standard Quantity
finished goods and cost of sales are recorded at standard SP = Standard Price
cost. This method assumes the standard costs as real cost
AQ = Actual Quantity
and variance as abnormal cost occurring due to inactivity,
abnormal activity or inefficiency. This method reduces the AP = Actual Price.
gross profit. It enables the management to focus on the 1. Material Price Variance
weakness due to variances. Secondly, it facilitates quick
It is that part of material cost variance which is
valuation of inventory. Lastly, it facilitates comparison of
because of difference between actual price paid and standard
gross profit at different time periods.
price specified for the material. It represents the difference
3. Transferring Controlling Variances to the between standard cost of actual quantity purchased and actual
Profit and Loss Account and Non-controllable cost of these materials.
to Cost of Sales, Closing Finished Goods and
Although the material price variance may not be
Closing Work-in-progress
controllable, it provides management with important
This method is a combination of both the above information for purposes of planning and decision-making.
methods. It is based on sound logic and transfers controllable The knowledge ofthis variance may prompt the management
variance to profit and loss account and non-controllable to to increase product price, use substitute materials or find
cost of sales, closing finished goods and closing work-in other offsetting sources of cost reduction.
progress. This method is useful only when there are both
Material price variance can be calculated as,
controllable and non-controllable variances.
4. transferring Variance to Reserve Account Material price variance = (SP-AP) x AQ or (SR-AR) x AQ
Under this method, the variance is carried forward Where,

by transferring it to the reserve account. The favorable SP = Standard Price
variances are set-off against the variances arising in future.
AP = Actual Price
This method is applicable when the variance is seasonal in
nature. AQ = Actual Quantity.
2. Material Usage or Volume Variance
5.2.1 Material Variance
It is also referred to as quantity variance. It is that part
Q16. What is meant by material variance? Explain the
of material cost variance which is because of differences
different types of direct material cost variance.
between actual quantity used and standard quantity specified
Answer : for output. This indicates whether or not material was
Material Variance properly utilized.
Material variances are also known as material cost (i) A debit balance of material usage variance indicates
variances. It is the difference between the standard cost and that material used was in excess of standard
the actual cost. requirements.
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(ii) A credit balance of materials usage variance will indicate saving in the use of material.
As a formula this variance is shown as,
Materials usage variance = (SQ - AQ) x SP
It cannot be automatically assumed that the material usage variance is controllable by the departmental supervisor.
It is also not necessary that favorable material usage variance is advantageous to the company.
Material usage variance consists of,
(a) Material mix variance and
(b) Material yield variance.
(a) Material Mix Variance
This variance is a part of material usage variance which is because of differences between actual composition of
mix and standard composition of mixing the different types of materials. Short supply of a particular material is often the
most common reason for material mix variance.
This variance can be calculated by using the following formula,
Materials mix variance = (Standard mix of actual total quantity of material used) - (Actual mix of actual quantity
of material used) x SP
Total weight of actual material mix

= —----;---- —---- ------- ;—;------- -- —— X Standard cost of standardmix - cost of actual
Total weight of standard material mix
mix
(b) Material Yield Variance
Yield is a measure of productivity. In certain industries, it is possible to lay down that output will be a particular
percentage of total input of material, in a particular situation, it may be given that normal loss in production will be 20%
of input of material.
In a case like this, 80% of the total input of material will be the expected output. If actual yield obtained happens
to be different from the standard yield specified, there will be yield variance. Thus, material yield variance is that portion
of material usage variance which is due to difference between actual yield obtained and standard yield specified.
The formula for finding the material yield variance is,
Material yield variance = (AQ -SQ) * SP.
Q17. What is variance analysis? Explain and illustrate the various types of material variances. What are the
difficulties in setting up standards?
Variance Analysis
For answer refer Unit-V, Page No. 134, Q.No. 14, Topic: Variance Analysis.
Types of Material Variance
For answer refer Unit-V, Page No. 135, Q.No. 16, Topic: Types of Material Cost Variances.
Difficulties in Setting up Standards
Variance analysis is one of the major part or topic of standard costing. The various difficulties or problems which
may arise in setting up the standards of variances are as follows,
1. Difficulties arise while estimating prices of materials when seasonal price variations or discount on bulk purchases
are important.
2. Difficulties arise while deciding the quality of material to be used.
3. Difficulties arise while deciding as how to incorporate inflation into planned unit costs.
Thus, setting up standards of variances involves number of difficulties and also it is a time consuming process.
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UN IT-5 : Standard Costing and Variance Analysis 137
5.2.2 Labour Variance _____ _______________________

Q18. What do you understand by labour variance? What are the different types of labour variances? How
are they calculated?
Answer :
Labour Cost Variance/Labour Variance
It represents difference between actual wages paid and standard wages specified for the production. Standard wages
specified for the production represents the wages which should have been paid according to standard specifications for
production achieved. Standard wages specified for production can be determined by multiplying standard labour cost per
unit and units produced.
Labour cost variance can be computed by using the following formula,
Labour Cost Variance = (SH x SR) - (AH x AR)
Where,
SH = Standard Hours
SR = Standard Rate
AH ='Actual Hours
AR = Actual Rate.
Types of Labour Variance
Labour variance (labour cost variance) arise when actual labour costs are different from standard labour costs. It
constitutes,
Labour cost variance
Labour rate Labour idle Labour efficiency

variance time variance variance
Labour mix
variance
Figure: Types of Labour Variances

(a) £ Labour Rate Variance
Direct wage rate variance is that portion of direct wage variance which is due to difference between actual wage
rate paid and standard wage rate specified. It represents the difference between,
(i) Actual payment to worker for actual hours worked and
(ii) Payment involved, if worker had been paid at standard rate.
Favourable rate variance arises when the actual rates are less than the standard rates, unfavourable variances happen?
when actual rate exceed standard rates. This can be computed as,
Labour Rate Variance = (SR - AR) x AH
(b) Labour Idle Time Variance
It is that part of wage efficiency variable which is because of difference between labour hours applied and labour
hours utilized. In practical life, there are abnormal circumstances like strike, lockout and power failure which prevent
utilization of all labour hours being paid for i.e., labour hours applied. The idle time variance will be attempted only when
there is a difference between labour hours applied and labour hours utilized.
Idle time variance can be calculated by multiplying idle time and standard rate per hour.
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(c) Labour Efficiency Variance
It is that part of wage variance which is due to difference between actual hours paid and standards hours allowed
for output achieved. This is similar to material usage variance and calculated as,
Labour Efficiency Variance = (Standard hours for Actual Output - Actual Hours (AH)) x SR
1. Labour Yield Variance
It is that part of labour efficiency variance which is due to difference between actual output of worker and standard
output of worker specified. There will be no difference between labour efficiency variance and labour yield variance, if
es I efficiency variance had been exclusively due to difference between,
>er I Actual level of performance of workers and
(ii) Standard level of performance of workers.
Method of computing yield variance can be divided in two parts,
(i) When there is idle time variance
(ii) When there is no idle time variance.
Labour yield variance can be computed as,
Labour Yield Variance = (Actual Output - Standard Output based on Actual Hours) x Average Standard Labour
Rate per unit of output.
2. Labour Mix Variance
It is that portion of labour efficiency variance which is due to difference between actual composition of labour
used and standard composition specified. Some job requires different types or grades of workers and production will be
completed if labour is mixed according to standard proportion. When actual composition of labour is different from standard
■ It I composition specified, it will give rise to labour mix variance. This can be computed as,
Labour Mix Variance = (Standard Labour Mix in terms of Actual Total Hours - Actual Labour Mix) x (Standard
Rate per hour).
5.2.3 Overhead Variance
Q19. What is meant by overhead variance? What are the different types of overhead variances?
Answer :
Overhead Variance
Overhead Cost Variance (OCV) is the difference between standard overheads for actual output (recovered overheads)
and the actual overheads.
OCV= Standard overhead - Actual overhead (actual output)
Types of Overhead Variance
pens
1. Variable Overhead Variance

Variable overhead per unit remain the same. It varies with output in total. Variable overhead variance and its sub
division can be summarised in a flow chart given below.
bour Variable overhead variance
:vent
vhen
Variable overhead Expenditure variance Variable overhead Efficiency variance
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For finding out the variable cost variance, three model steps are given below,
VO1 Actual overhead incurred. (It is normally given)
VO2 Actual hours worked at standard variable overhead rate.
(Standard variable overhead rate per hour x Actual hours worked).

VO3 Standard variable overhead for the production. (Standard/Budgeted variable overhead per unit x actual production).
Variable overhead variance represents difference between,

(i) Actual overhead incurred during the period and
(ii) Standard variable overhead for production.
Difference between VO1 and VO3 is variable overhead variance. This variance can also be determined by taking
the aggregate of variable overhead expenditure variances and variable overhead efficiency variance.
(a) Variable Overhead Expenditure Variance
Variable overhead expenditure variance is that portion of variable overhead variance which arises due to difference
between actual variable overhead and standard variable overhead appropriate to the level of activity attempted.
It will represents the difference between actual variable overhead incurred during the period and actualhours worked
at standard variable overhead rate. Difference between VO 1 and VO2 will be variable overhead expenditure variance.
(b) Variable Overhead Efficiency Variance
Some accounts try to determine variable overhead efficiency variance like labour efficiency variance. This variance
will be the difference between,
(i) Actual hours worked at standard variable overhead rate and
(ii) Standard variable overhead for the production, difference between VO2 and VO3 will be variable overhead
efficiency variance.
2. Fixed Overhead Variance
Fixed overhead variance arises when a company uses absorption standard costing system.
Under this system, a standard rate is developed for fixed overhead by dividing the total fixed overhead by a suitable
base like labour/machine hours / numbers of units etc.
Fixed overhead incurred differs from standard allowance for fixed overhead or standard fixed overhead for production
for various reasons, which give rise to deferent kinds of fixed overhead variances.
For finding out the fixed overhead variance five model steps are given below,
z
FO1 Actual fixed overhead incurred.
FO2 Budgeted fixed overhead for the period or standard fixed overhead allowance. It represents the amount of fixed
overhead which should be spent according to budget or standard during the period.
The amount is predetermined for finding out the fixed overhead rate for the related period, the amount of standard
allowance for fixed overhead does not change due to change in volume.
FO3 Fixed overhead for the day/hours available at standard rate during the period. The related period may be given in
terms of days/hours.
The value of this step is found out by multiplying days/hours available and standard overhead rate.
FO4 Fixed overhead for actual hours worked at standard rate. In a actual working conditions, hours worked and hours
available during the period may be different due to strike, locate, etc. Therefore value of FO4 can be determined by
multiplying actual hours worked and standard rate.
FO5 Standard fixed overhead for production. It is different form budgeted fixed overhead for the period or standard fixed
overhead allowance (refer to step2).
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It is arrived at by multiplying the actual production and standard rate. Standard and fixed for production denotes
the amount which should have been incurred for the production if standard relating to fixed overhead had been adhered to.
The standard fixed overhead for production can be found out by,
(i) Nit Method
(Actual production in units x Standard fixed overhead rate per unit)
tion). (ii) Hour Method
(Actual production in standard hours x Standard fixed overhead rate per hour).
It represents the difference between actual fixed overhead incurred and standard cost of fixed overhead absorbed.
It can also be referred to as the difference between actual fixed overhead incurred and standard fixed overhead for
production Difference between F01 and FO5 will be fixed overhead variance.
aking Fixed Overhead Expenditure Variance
It is that part of fixed overhead variance, which is due to difference between actual fixed overhead incurred, and
budgeted fixed overhead or the standard allowance for fixed overhead.
rence This variance indicates differences between actual fixed overhead incurred and budgetary estimates of what should
>d. have been spent. It highlights how far the budgeted overhead for the period has been taken care of, If is also referred to as
budget variance. Difference between F01 and FO2 will be fixed overhead expenditure variance.
orked
Fixed Overhead Volume Variance
iance.
It is that part of fixed overhead variance which is due to difference between budgeted fixed overhead for the period
(or standard fixed overhead allowance for the period) and standard fixed overhead for actual production.
iance This variance indicate how far the plant and facilities have been under/over utilized compared to budgeted level of
operation. The difference between level of activity attempted and level of activity budgeted given arise to fixed overhead
volume. Fixed overhead variance consists of following variance,
1. Calender variance/idle time variance
rhead
2. Capacity variance and
_____ 3. Efficiency variance.____________________________________
5.2.4 Sales Variance
Q20. What is sales variance? Explain sales variance based on turnover method.
itable
Answer: Model Paper-Ill, Q13(a)
Sales Variance
action
Sales variance is the difference between actual sales and budgeted sales. Cost variances are useful in cost control
and cost reduction, but they are not useful for the study of profit variances. Sales variances is carried out to analyze the
profit variance because profit is the difference between sales and cost.
Methods of Sales Variance
fixed Sales variances are computed by the following two methods,

1. Turnover method (sales value)
ndard 2. Profit method (sales margin).
Turnover Method (Sales Value)
yen in Sales variance in relation to turnover,
Safes price
Safes value X variance
Sates quantity
hours
ted by
variance
X Safes volume
variance
variance
Sales mix
I fixed variance
Figure: Bifurcation of Sales Value Variance
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(a) Sales Value Variance (SW)
ti
lt is the difference between the actual and budgeted value of sales.
SVV = Actual value of sales - Budgeted value of sales.
The Sales Value Variance (SVV) mainly shows a sales manager’s efforts or the effects of his efforts.
(b) Sales Price Variance (SPV)
It is the change in revenue caused by the actual selling price differing from that budgeted selling price. (CIMA
terminology).
Actual sales Standard selling
SPV = x - Actual sales revenue
volume price per unit
SPV = Actual Quantity (Actual Price - Standard Price)

(c) Sales Volume Variance (SW)
It the change in sales revenue caused by actual sales volume differing from that budgeted sales volume - Chartered
Institute of Management Accountants (CIMA terminology).
SVV = (Budgeted sales (units) x Standard selling price (per unit)) - (Actual sales (units) - Standard selling price
(per unit))
or
SW = Standard price (Actual quantity of sales - Standard quantity of sales)
(d) Sales Mix Variance (SMV)
A mix variance is caused when there is a variation in proportion of the actual quantities sold when compared to the
budgeted.
SMV quantity approach = (Revised standard quantity - Actual quantity) x Standard price
SMV value approach = Budgeted sales - Revised standard sales
or
SMV = Standard sales - Revised standard sales
Note
❖ If actual quantity > revised standard quantity then there is favourable variance.
❖ If revised standard sales > budgeted sales then there is favourable variance.
(e) Sales Quantity Variance
Sales quantity variance is a consistent of sales volume variance which needs to be calculated separately for each
product/Sales quantity variance is obtained when there exists huge variation in the proportion of actual quantity of sales
and the budgeted quantity of sales.
Sales quantity variance = Revised standard sales - Budgeted sales
„........................... (Budgeted sales for each product A _ , ...
Revised standard sales = ----- ———— ----- ;—;---------- x Total standard sales
I Total budgeted sales I
(i) If the actual sales are higher than the budgeted sales then the resultant variance is said to be favourable.
(ii) On the other hand, if the budgeted sales are higher than the actual sales, then the resultant variance is said to be
“unfavourable” or “adverse” in nature.
Mathematically, it can be represented as,
Budgeted Sales > Actual Sales Adverse (A)
Budgeted Sales < Actual Sales Favourable (F)
It constitutes an important component of sales volume variance,
Sales Volume Variance = Sales Quantity Variance + Sales Mix Variance
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141
Q21. How sales variance is computed based on profit method?
Answer :
Sales margin variance is the difference between the profit as per the original budget and the actual profit achieved.
The total profit variance is the sum of all the subsidiary variances which have been produced - Chartered Institute of
Management Accountants (CIMA).
It represents the difference between actual margin (difference between standard cost and the realization from actual
sales) and standard margins appropriate to the quantity of sales budgeted.
For determining whether variances are adverse or favourable , the approach will be exactly the opposite of what it
was in the case of cost variance. In sales margin variances, if the preceding step is less than the following step, it will be
a case of adverse variance.
Alternatively, if the preceding step is more than following step, it will be cause of favourable variance. This point
should be carefully remembered to avoid confusion. This will hold good for sale value variance also.
(a) Sales Margin Price Variance (SMPV)
rtered
It is that portion of sales margin variance which is due to difference between actual price and standard price of actual
sales effected. Sometimes, it is necessary to adopt the selling price of the product of changing market condition by raising
price or lowering the prices. In these cases, it is specially desirable to segregate sales margin price variance from sales margin
unit)) volume variance.
(b) Sales Margin Mix Variance (SMMV)
It is that portion of sales margin volume variance which is due to change in actual sales mix and budgeted sales mix.
It arises because actual sales mix does not always remain constant. It has to be changed due to changing market conditions,
i.e., national or internal conditions or management policies.
to the (c) Sales Margin Quantity Variance
Sales margin quantity variance can be computed by deducting budgeted sales quantity from the standard actual sales
quantity.
Conditions
(i) Standard sales margin on actual sales is affected, if the sales had been in the ratio of standard mix, and
(ii) If standard sales margin have to be calculated on standard sales mix or budgeted sales margin for the sales as per
budget.
(d) Profit Variance Due to Sales
Profit variance due to sales is calculated by determining the variations between the budgeted profits and the actual profits.
Profit variance due to sales = Actual profit - Budgeted profit
or
each Profit variance due to sales = Actual sales x Actual profit/unit - Budgeted sales x Budgeted profit/unit
sales f or
Profit variance due to sales = Sales volume profit variance - Selling price variance
(i) If the actual profit is higher than the budgeted profits, then the condition is said to be ‘favourable’.
(ii) If the actual profits are less than the budgeted profits, then the condition is said to be “adverse”.
Budgeted Profits > Actual Profit =>Adverse
Budgeted Profits < Actual Profits => Favourable
(e) Sales Volume Profit Variance
to be
It is a part of profit variance due to sales and is to be calculated separately for each product. It is determined by
computing difference between the actual volume of sales and the budgeted volume of sales. This variance has emphasized
on determining the efficiency of the sales department of a firm.
Sales volume profit variance = Standard profit/unit x [Budgeted quantity - Actual quantity]
Whereas,
Standard Profit/unit = Standard Selling Price/unit - Standard Cost per unit
(i) If budgeted volume of sales is higher than actual sales, then the condition is said to be “adverse”.
(ii) If actual sales volume is higher than the budgeted sale volume, then the difference is said to be “favourable variance”.
.TD.
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I
PROBLEMS ON VARIANCES
Q22. The standard labour composition and the actual labour composition engaged in 10 weeks for a job are
as under:
Standard Actual
Category of Workers No. of Workers Weekly Wage No. of Workers Weekly Wage
Rate/worker Rate/Worker
Grade A 40 ? 80 50 ?70
Grade B 50 ?70 60 ?75
Grade C 30 ? 50 10 ? 60
The work is actually completed in 12 weeks. Calculate various labour variances.

Solution : Model Paper-I, 013(b)
Calculation of Various Labour Variances
Standard Actual
Categary of Weeks (Number Wage Rate Amount Weeks (Number of Wage Rate Amount
Workers of Workers x (?) Workers * Number (?) (?)
(?)
Number of Weeks) of Weeks)
Grand A 40 x 10 = 400 80 32,000 50 x 12 = 600 70 42,000

Grand B 50 x 10 = 500 70 35,000 60 x 12 = 720 75 54,000
Grand C 30 x 10 = 300 50 . 15,000 10 x 12= 120 60 7,200
Total 1,200 82,000 1,440 1,03,200
Calculation of Labour Cost Variance
Labour Cost Variance = Standard Cost - Actual Cost

= 82,000- 1,03,200
= 21,200 (Adverse)
Calculation of Labour Rate Variance
’'Labour Rate Variance = (Standard Rate - Actual Rate) x Actual time

Grade A = (80 - 70) x 600 = 6,000 (F)
Grade B = (70 - 75) x 720 = T 3,600 (A)
Grade C = (50 - 60) x 120 = ? 1,200 (A)
Labour Rate Variance = ? 1,200 (F)
Calculation of Labour Efficiency Variance
Labour Efficiency Variance= (Standard Time - Actual Time) x Standard Rate

Grade A = (400 - 600) x 80 = T 16,000 (A)
Grade B = (500 - 720) x 70 = ? 15,400 (A)
Grade C = (300 - 120) x 50 = ? 9,000 (F)
Labour Efficiency Variance = ? 22,400 (A)
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD

Calculation of Labour Mix Variance
Labour Mix Variance = (Revised Standard Time - Actual Time) x Standard Rate
Standard Time x Total Actual Time
Revised Standard Time =
Total Standard Time
400
Grade A = x 1,440 = 480 weeks
1,200
500
Grade B = 1,440 = 600 weeks
1,200
300
Grade C = x 1,440 = 360 weeks
1,200
LM V = (Revised Standard Time - Actual Time) x Standard Rate
Grade A = (480 - 600) x 80 = ? 9,600 (A)
Grade B = (600 - 720) x 70 = ? 8,400 (A)
Grade C = (360- 120) x 50 = ? 12,000 (F)
Labour Mix Variance = ? 6,000 (A)
Calculation of Labour Revised Efficiency Variance
Labour Revised Efficiency Variance = (Standard Time - Revised Standard Time) x Standard Rate
Grade A = (400 - 480) x 80 = ? 6,400 (A)
Grade B = (500 - 600) x 70 = ? 7,000 (A)
Grade C = (300 - 360) x 50 = ? 3,000 (A)
Labour Revised Efficiency Variance = ? 16,400 (A)
Calculation of Labour Yield Variance
Labour Yield Variance = (Actual Yield - Standard Yield) x Standard Cost

/ 1,440
x 82,000
\ 1,200
= (1-1.2) x 82,000
= - 0.2 x 82,000
i
= ? 16,400 (A)
Verification
J
(a) Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance
? 21,200 (A) = ? 1,200 (F) + ? 22,400 (A)
(b) Labour Efficiency Variance = Labour Mix Variance + Labour Revised Efficiency Variance
_________________________ ? 22,400 (A) = ? 6,200 (A) + ? 16,400 (A)._________ _____________________________
Q23. The standard material required to manufacture one unit of product X is 10 kgs. The standard price per
Kg of material is ? 25. The cost accounts records, however reveal that 11,500 Kgs of materials costing
? 2,76,000 were used for manufacturing 1,000 units of product X. Calculate material variances.
Solution :
Given that,
Standard price of material per kg = ? 25
Standard usage per unit of product X = 10 kgs
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD___ ____ —_______ ___________________

Standard usage for an actual output of 1,000 units of product,
X= 1,000 x 10 = 10,000 kgs.
Actual cost of material = ? 2,76,000
Actual usage of material = 11,500 kgs
. . , . r . ■ , , ?2,76,000
Actual price of material per kg - j ^qq
= ?24
(a) Material Price Variance (MPV)
Material Price Variance = Actual Quantity (Standard Price - Actual Price)
= 11,500 (? 25-? 24)
= 11,500(1)
= ? 11,500 (Favourable).
(b) Material Usage Variance (MUV)
Material Usage Variance = Standard Price (Standard Quantity - Actual Quantity)
= ? 25 [ 10,000 kgs - 11,500 kgs]
= ?25 [- 1500 kgs]
= ? 37,500 (Adverse)
(c) Material Cost Variance (MCV)
Material Cost Variance = MPV + MUV
= 11,500 (F) + 37,500 (A)
= ? 26,000 (Adverse).
Q24. Using the following information, calculate various labour variances
Gross Direct Wages ? 3,000

Standard Hours produced ? 1,600
Standard rate per hour ?1.50
Actual Hour paid 1,500 hours
Abnormal idle time in the actual hours paid 50 hours
Solution :
Calculation of Various Labour Variances
(a) Labour Cost Variances

t
= Standard Cost of Labour - Actual Cost of Labour (or) Standard Hours x Standard Rate - Actual Hours x Actual rate
= (1,600 x 1.50) - (1,500 x ? 2) = 2,400 - 3,000
= ? 600 (Adverse)
,_ Gross Direct Wages
Actual Rate =-----ActualTime-----
3000 ,„ ,
= 1500 hrs 2 per hour.
(b) Labour Rate of Pay Variance

= Actual Time (Standard Rate - Actual Rate)
= 1500hrs(? 1.50-? 2)
= 1500 x (? 0.5) = ? 750 (Adverse)
145
(c) Total Labour Efficiency Variance
= Standard Rate (Standard Time - Actual Time)

= ? 1.50 (1600 hrs - 1500 hrs) = ? 1.50(100 hrs)
= ? 150 (Favourable)
d) Labour Efficiency Variance
= Standard rate (Standard Time - Actual Time Worked)

= ? 1.50 (1600 hrs - 1450 hrs)= ? 1.50 (150 hrs)
= ? 225 (Favourable)
(Actual Time = Actual Hours Paid - Idle Hours)
= 1500-50= 1450 hrs.
e) Idle Time Variance
= Abnormal Idle Time x Standard Rate

= 50 hrs x ? 1.50
= ? 75 (Adverse)
Verification
Labour Cost Variance = Labour Rate ofTay Variance + Labour Efficiency Variance + Idle Time Variance
600 (Adverse) = - 750 (A) + 225 (F) - 75 (A)
600 (Adverse) = 600 (Adverse).
Q25. From the following particulars ascertain the actual consumption of materials, actual price and material
usage variance,
Material cost variance ? 700 (Adverse)

Standard quantity 1,000 kgs
Material price variance ? 300 (Favourable)
Standard price ? 5 per kg.
Solution :
Calculation of Material Usage Variance
X MCV= MPV + MUV

-700= 300 + MUV
rare MUV = -700 - 300
MUV = 1,000 (Adverse)
Calculating the Actual Quantity (Actual Consumption)
Material Usage Variance = Standard Price (Standard Quantity - Actual Quantity)

Let ‘x’ be an actual quantity
-1,000 = 5 (1,000-x)
-1,000= 5,000 -5x
5x = 6,000
x= 1,200
Actual Quantity = 1,200 kgs.
LTD.
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD_____________________________________
UNIT-5 : Standard Costing and Variance Analysis___________ ____________ ___________ _______ 147
Calculating the Actual Price
Material Price Variance = Actual Quantity (Standard Price - Actual Price)
Let ‘y’ be an actual price
300= 1,200 (5-y)
300=6,000- 1,200 y
l,200y = 5,700
y = 4.75
Actual Price = ? 4.75 per kg.
Hence, Actual Consumption of Materials = 1,200 kgs.
Actual Price = ? 4.75 per kg.
Material Usage Variance = ? 1,000 (Adverse).
Q26. The standard time and rate for a product are given below,
Standard time per unit 10 hours
Standard rate ? 3 per hour.

The actual data and related information are given below,
Actual output 1,000 units
Actual time 10,200 hours
Actual rate ? 2.90 per hour.

Calculate (i) Labour cost variance, (ii) Labour efficiency variance, (iii) Labour rate variance.
Solution :
».
(i) Labour Cost Variance
Labour Cost Variance = (Standard Hours for Actual Output x Standard Rate) - (Actual Hours x Actual Rate)
= (1,000 x 10x 3)-(10,200 x 2.90)
= (10,000 x 3) - (10,200 x 2.90)
= 30,000 - 29,580
LCV = ? 420 (Favourable)
(ii) ^Labour Rate Variance
Labour Rate Variance = (Standard Rate - Actual Rate) x Actual Hours
= (3-2.90) x 10,200
= 0.1 x 10,200
LRV = ? 1,020 (Favourable)
(iii) Labour Efficiency Variance
Labour Efficiency Variance = (Standard Hours for Actual Output - Actual Hours) x Standard Rate
= (10,000- 10,200) x 3
= ? 600 (Adverse)
Verification
Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance

? 420 (F) = ? 1,020 (F) + ? 600 (A).
__________________________ 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD
Q27. The following details relating to a product during the month of March, 2015 are available. You are
required to compute the material and labour cost variances and also to reconcile the standard and
actual cost with the help of such variances,
Standard cost per unit:
Material: 50 kgs. @ ? 40 per kg.
Labour 400 hours. @ ? 50 per hour.

Actual cost for the months:
Material: 4,900 kgs. @ ? 42 per kg.
Labour: 39,600 hours @ ? 55 per hour.

Actual production: 100 units.
Standard requirements for actual production,

Material - 50kgs x 100 = 5,000 kgs
Labour - 400 hours * 100 = 40,000 hours.
Calculation of Variances
Material Variances
1. Material Price Variance (MPV) = Actual Quantity (Standard Price - Actual Price)
= 4,900 (40-42)
= ? 9,800 (Adverse)
2. Material Usage Variance (MUV) = Standard Price (Standard Quantity - Actual Quantity)
= 40 (5,000 - 4,900)
= ? 4,000 (Favourable)
3. Material Cost Variance (MCV)= MPV + MUV
te)
= 9,800 (A) + 4,000 (F)
= ? 5,800 (Adverse)
Labour Variances
1. Labour Rate Variance (LRV)=Actual Hours (Standard Rate - Actual Rate)
= 39,600 (50 - 55)
£ = ? 1,98,000 (Adverse)
2. Labour Efficiency Variance (LEV)= Standard Rate (Standard Hours - Actual Hours)
= 50 (40,000 - 39,600)
= ? 20,000 (Favourable)
3. Labour Cost Variance (LCV) = LRV + LEV
= 1,98,000 (A) + 20,000 (F)
= ? 1,78,000 (Adverse)
Reconciliation of Standard and Actual Cost
Actual Cost ?
Material = 4,900 kg. @ ? 42 per kg. 2,05,800
Labour = 39,600 hrs @ ? 55 per hour. 21,78,000
Total 23,83,800
LTD. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ___ —

Standard Cost
Material = 5,000 kg. @ ? 40 per kg. 2,00,000
Labour = 40,000 hrs @ ? 50 per kg. 20,00,000
Total 22,00,000
Variance
Material Cost 5,800 (A)
Labour Cost 1,78,000 (A)
Total 1,83,800 (A)
--------------
Q28. From the following data, calculate overhead variances,
Budgeted Actual
Output (units) 15,000 16,000
Number of working days 25 27
Fixed overheads ? 3,00,000 ? 3,05,000
Variable overheads ? 4,50,000 ? 4,70,000
There was an increase of 5% in capacity.

Solution :
Standard Fixed Overhead Rate per unit
Budgeted Overhead (Fixed) _ 3,00,000
Budgeted Output 15,000
Standard Variable Overhead Rate per unit
Budgeted Overhead (Variable)
Bugeted Output
4,50,000
= ?30.
15,000
Standard Production per day
Output (Budgeted)
No. of days (budgeted)
15,000
= 600 units
25
Standard Fixed Overhead Per Day
= Standard production per day x Standard fixed overhead rate per unit
= 600 x 20
= 12,000
Variable Overhead Cost Variance
[(Actual output x Standard variable overhead rate per unit) - Actual variable overhead]
16,000 x ioo = 800

16,000
Add: Actual =
16,800
= [(16,800 x 30)-4,70,000]
= 5,04,000-4,70,000
= 34,000 (F)
Note: 16800 is taken because there is 5% increase in output.
■■ -------------------------------------- 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD.
w 1
149
Fixed Overhead Cost Variance
= [(Actual output x Standard fixed overhead rate per unit) - Actual fixed overhead]
= [(16,800 x 20)-3,05,000]
= 3,36,000-3,05,000
= 31,000 (F)
Fixed Overhead Expenditure/Budget Variance
= Budgeted overhead - Actual overhead

= 3,00,000 - 3,05,000
= 5,000 (A)
Fixed Overhead Volume Variance
= [(Budgeted output - Actual output) * Standard overhead rate per unit]

= [(15,000 - 16,800) x 20]
= 36,000 (A)
Total Overhead Cost Variance
= Standard overhead charged to production - Actual overhead incurred

= [16,800 x (30+20)] - [3,05,000 + 4,70,000]
= 8,40,000 - 7,75,000
= 65,000 (F)
Overhead Calender Variance
= (Budgeted working days - actual working days * Standard fixed overhead rate per day)
3,00,000
= (25- 27) x
25
= 24,000 (A)
Q29. The following information is available from the records of a factory.
Budget Actual
Fixed overhead for June 10,000 12,000
Production in June (units) 2,000 2,100
Standard time per unit (hours) 10 -
Actual hours worked in June - 22,000
Compute,
(i) Fixed overhead cost variance
(ii) Expenditure variance
(Hi) Volume variance

(iv) Capacity variance
(v) Efficiency variance.
Solution ••
Budget production = 2,000 units
Standard time per unit = 10 hours ,
Therefore, budgeted hours (2,000 x 10) = 20,000 hours
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. —__ _________
T. LTD
Budget fixed overhead = ? 10,000
Standard rate per unit (J 10,000 -s- 20,000 units) = ? 5
Standard rate per hour (? 10,000 -»■ 20,000 hours) = ? 0.50
(i) Fixed Overhead Cost Variance
= Actual output x Standard rate - Actual fixed overhead

= 2,100 units x ? 5 - ? 12,000 = ?l,500 (A)
(ii) Expenditure Variance
= Budgeted fixed overheads - Actual fixed overhead

= ? 10,000 - ? 12,000 = ? 2,000 (A)
(iii) Volume Variance
= Standard fixed overhead rate per unit x (Actual output - Budgeted output)
= 5(2,100 - 2,000) = ? 500 (F)
(iv) Capacity Variance
= Standard cost per unit (Actual output at standard rate - Budgeted output)
= SC(SQ - BQ)
= 5(2100 x 0.5-2000)
= 5(1050-2000)
= 5(- 950) = 4750(A)
(v) Efficiency Variance
= Standard cost per unit (Actual output - Actual output at standard rate)
= SC(AQ-SQ)
= 5(2100-1050)
= 5(1050) = 5250(F)
Verification
Volume variance = Efficiency variance + Capacity variance

500(F) = 5250(F) + 4750(A)
£ .
500(F) = 500(F)
Q30. From the following data, calculate overhead variances,
Budgeted overheads
Fixed ? 6000
Variable 4000 10,000
Actual overheads
Fixed ? 5000
Budgeted output 10,000 units
Budgeted hours 5000
Actual hours 5000

151
Solution : Model Paper-NI, Q13(b)
Budgeted overheads
Overhead rate per unit =
Budgeted output
6,000 _
Fixed = --------- = T 0.6
10,000
4,000
Variable = —------= ? 0.4
10,000
Budgeted overheads
Standard time per unit =
Budgeted output
5,000
- 10,000
= 0.5
1. Fixed Overhead cost Variance = Standard fixed overhead rate per unit x Actual output - Actual fixed overheads
= (0.6 x 8000) - 5000
= 4800 - 5000
= 200(A)
2. Fixed overhead expenditure variance = Budgeted fixed overheads - Actual fixed overhead
= 6000 - 5000
= 1000 (F)
3. Fixed overheads volume variance = (Budgeted output - Actual output) x Standard fixed overheads per units
= (10000-8000) x 0.6
= 2000 x 0.6
= 1200 (F)
4. Variable overheads cost variance = (Standard variable overhead rate per unit x Actual output) - Actual variable overheads
= (0.4 x 8000) - 5000
= 3200-5000= 1800(A)
t
5. Variable overhead expenditure variance = (Budgeted variable overhead rate per unit x Actual hours worked) -
Actual variable overheads
= (0.4 x 5000) - 5000
= 2000 - 5000
= 3000 (A).
■. LTD.
SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. _
1. A factory is currently working to 50% capacity and produces 10,000 units. Estimate the profits of the company when
it works at 60% and 80% capacity and offer your critical comments.
At 60% working raw material cost increases by 2% and selling price falls by 2%. At the 80% working, raw material
cost increases by 5% and selling price falls by 5%.
At 50% capacity working the product costs ?180 per unit and is sold at ? 200 per unit.
The unit cost of ? 180 is made up as follows,
Material 100
Labour 30
Factory overhead 30 (40% fixed)
Administrative overhead 20(50% fixed)
(Ans: ? 2,00,000; ? 2,12,000; ? 2,12,000).____________________________________________________________ _____

2. Mixers Ltd. is engaged in producing a ‘Standard mix’ using 60 kgs. of chemical X and 40 kgs. of chemical Y. The
standard less of production is 30%. The standard price of X is ? 6.50 per kg. and Y is ? 10 per kg.
The actual mixes and yield were as follows,
X 80 kgs. @ ? 4.50 per kg and
Y 70 kgs. @ ? 8.00 per kg.
Actual yield 115 kgs.
Calculate material Variances (Price, usage, yield and mix).
(Ans: Material price variance ? 180 (Fav.);Material usage variance T 50 (Fav.); Material yield variance 100 (Fav.);
_____ Material mix variance T 50 (Adverse)).________________________________________ __ __________________
3. Using the following information calculate labour cost variance, labour rate variance, labour efficiency variance and
idle time variance.
Standard hours : 5,000
Standard wage rate : 4 per hour
Actual hours : 6,000
Actual wage rate : ? 3.50 per hr.
Time cost on account of machine breakdown : 300 hrs.
(Ans: Labour Cost Variance -1,000 (A), Labour Rate Variance - 3,000 (F), Labour Efficiency Variance - 2,800 (A),
Idle Time Variance -1,200 (A)).
4 $ Ltd. operates a budgetary control and standard costing system. From the following data calculate,
(i) Sales variance

(ii) Sales volume variance
(iii) Sales price variance.
Product Budgeted Actual

Unit to be Sold Sales Value Units Sold Sales Value
(?) (?)
A 100 1,200 100 1,100
B 50 600 50 600
C 100 900 200 1,700
D 75 450 50 300
325 3,150 400 3,700
(Ans: Sales volume variance = ? 200 (A), Sales price variance = ? 750 (F), Sales variance = ? 550 (F)).
______________________ ______ SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.

5. Gemini Chemical Industries provide the following information from their records:
For making 10 kgs. of Gemco the standard material requirement is,
Material Quantity (Kgs.) Rate per kg. (?)

A 8 6.00
B 4 4.00
During April 1988, 1,000 kgs. of Gemco were produced. The actual consumption of material is as under:
Material Quantity (Kgs.) Rate per kg. (?)

A 750 7
B 500 5
Calculate: (a) Material cost variance, (b) Material price variance, (c) Material usage variance
(Ans: Total material cost variance = 1,350 (A), Total material price variance = 1,250 (A), Total material usage
variance = 100 (A)).
6. Standard output for the year 2,000 units
Actual output for the year 2,500 units
Standard variable overheads ? 8,000
Actual variable overheads ? 9,700
Calculate variable overhead expenditure variance.
(Ans: 300 Favourable).
7. The annual flexible budget of a company is as follows,
Cost: (? thousands) 60% 80% 100%

Direct materials 180 240 300
Direct wages 240 320 400
Factory overheads 126 138 150
Administrative
overheads 62 66 70
Selling and distribution
overheads 68 74 80
Total 676 838 1,000
On account of severe competition in the market, the company is presently operating only at 50% capacity,
the sales value of production at current prices charged by the company being ? 6.00 lakhs. It is anticipated
that a 10% discount in the selling price will enable the company to improve its competitive position thereby
enabling the company to operate at 75% capacity. Present a suitable statement to the management analysing
the implications and giving your recommendations.
(Ans: Sales at 50% 60,00,000 Sales at 75% 8,10,000 Total cost at 50% 5,95,000 Total cost at 75,7,97,500, Profit
at 50% 5,000 Profit at 75% - 12,500).
5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD. ........ ,.... -..................... ......... .
UNIT-5 : Standard Costing and Variance Analysis _ ____ 155
8. A company manufacturing two products operates a standard costing system. The standard overhead content
to each product in cost centre 101 is,
Product A : ? 2.40 (8 direct labour hours at 30 paise per hour)
Product B : ? 1.80 (6 direct labour hours at 30 paise per hour)
The rate of 30 paise per hour is arrived at as follows,
Budgeted overhead ? 570

Budgeted direct labour hours 1,900
For the month of October, the following data were recorded for cost centre 101,
Output of product A 100 units

Output of product B 200 units
No opening or closing stock:
Actual direct labour hours worked 2,320

Actual overhead incurred ? 640
(a) You are required to calculate total variance for the month of October.
(b) Show its division into,
(') Overhead expenditure variance
(ii) Overhead volume variance
(iii) Overhead efficiency variance.
(Ans: (i) Overhead expenditure variance ? 70 (Unfavourable) (ii) Overhead Volume variance ? 30 (Favourable)
(iii) Overhead efficiency variance ? 96 (favourable)).
.............. . SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD

>ntent
I. Multiple Choice
1. Which of the following formula is used to calculate ‘Material price variance’? [ 1
(a) Material price variance = (Standard price - Actual price) x Actual quantity
(b) Material price variance = (Standard price + Actual price) x Actual quantity
(c) Material price variance = (Standard price x Actual quantity) * Actual price
(d) Material price variance = (Standard price Actual price) x Actual quantity
2. Which of the following formula is used to calculate labour cost variance? [ ]
(a) Labour cost variance = (Standard hours X Standard rate) - (Actual hours x Actual rate)
(b) Labour cost variance = (Standard hours X Actual rate) - (Actual hours x Standard rate)
(c) Labour cost variance = (Standard hours x Standard rate) + (Actual hours x Actual rate)
(d) Labour cost variance = (Standard hours X Standard rate) -*■ (Actual hours x Actual rate)
3. Material usage variance is also known as___ [ ]
(a) Quantity variance (b) Volume variance
(c) Both (a) or (b) (d) Price variable.
4. If actual profit or sales are more than the standard profit or sales then such variance is known as [ ]
(a) Unfavourable variance (b) Favourable variance
(c) Neither favourable nor unfavourable variance (d) None of the above
5. Under which standard focus is laid on perfection? [ ]
(a) Attainable standard (b) Normal standard
'able) (c) Ideal standard (d) Basic standard
6. _________defined standard cost as “the standard cost is a predetermined cost which determines what each product
or services should cost under given circumstances”. [ 1
(a) Brown (b) Howard
(c) None of the above (d) Both (a) and (b)
?7' Implicit costs are a part of [ 1
(a) Explicit cost (b) Opportunity cost
8. Implicit costs are also known as_________ . [ ]
(a) Explicit cost (b) Imputed costs
(c) Opportunity cost (d) None of the above
9. _________ are also called as “paid-out costs”. [
(a) Implicit costs (b) Explicit costs
(c) Opportunity costs (d) None of the above
10. _____ are also known as material cost variances. [ ]
(a) Material variances (b) Labour variances
(c) Overhead variances (d) None of the above
LTD. SIA PUBLISHERSAND DISTRIBUTORS gVT. LTD.

1. _________ is a control technique which compares standard costs and revenue with actual results to obtain
variances which are used to stimulate improved performance.
2. A_________ represents a deviation of the actual result from the standard result.
3. Variances may be classified into two categories. They are_________and_________ .
4. Labour variance/Labour cost variance is the difference between_________ cost and_________ cost.
5. SMV stands for_________.
6. The two methods used in the calculation of sales variances are turnover method and_________ method.
7. The term standard means a_________ .
8. _____ refers to the process of identifying benefits associated with the costs so as to ensure that the cost incurred
must be maintained at the lowest possible level.
9. Standard cost is determined_________ .
10. _________ is not scientifically determined it mainly based on past data relating to product.
KEY
I. Multiple Choice
1- (a)
2. (a)
3- (c)
4. (b)
5- (c)
6. (d)
7. (c)
8- (b)
9. (b)
10. (a)
X
1. Standard costing
2. Variance
3. Cost variances, sales variances
4. Standard labour, actual labour
5. Sales mix variance
6. Profit
7. Criterion
8. Cost control
9. Scientifically
10. Estimated cost.

Q1. Define Variance.
Answer :
The comparison of actual performance with standard performance reveals the variances. A variance represents a
deviation of the actual result from the standard result. There can be cost, profit, sales value and operational and planning
variances. Whether a variance is favourable or unfavourable, is ultimately determined with reference to its impact on profit.
Example, a cost variance will be adverse, if the actual cost exceeds the standard cost or vice versa. Profit variance
will be favourable, if actual profit exceeds standards profit or vice versa.________________________________________
Q2. What is Variance Analysis?
Answer :
Variance analysis is an exercise, which involves efforts to isolate the cause of variance in order to report to management
those situations which can be corrected and controlled by timely action. The extent to which the causes of variances are
established, depends upon the amount of time, effort and money, that a company is willing to spend in accumulating data,
as the variances occur. In variance analysis, a point is reached where incremental information is not worth its incremental
cost.
Q3. Standard Cost
Answer :
9 .
The term standard means ‘a norm’ or a criterion. Standard cost acts as a criterion in measuring the efficiency with
which actual cost have incurred.
Q4. What is Material Variance?
Answer :
Material variances are also known as material cost variances. It is the difference between the standard cost and the
actual cost.
Q5. Write about Labour Variance.
Answer :
Labour variance (labour cost variance) arise when actual labour costs are different from standard labour costs. It
constitutes,
Labour cost variance
Labour rate Labour idle Labour efficiency

variance time variance variance
Labour mix Labour yield

variance variance
Figure: Types of Labour Variances
.1203

Important Questions
Q2. How can P/V ratio be improved?
Unit-1
Answer : Important Question
For answer refer Unit-II, Page No. 19, Q.No. 5.

SHORT QUESTIONS Q3. Explain the term key factors.
Q1. Define the term Managerial Accounting. Answer : Important Question
_____ For answer refer Unit-I, Page No. 2, Q.No. 1._____
ESSAY QUESTIONS
Q2. Discuss any four features of managerial
accounting. Q1. Explain the importance of marginal cost.
Answer : Important Question Answer : Important Question
_____ For answer refer Unit-I, Page No. 2, Q.No. 2._____ _____ For answer refer Unit-II, Page No. 22, Q.No. 14,
Q3. Explain the differences between cost accounting Q2. What do you understand by break even analysis?
and financial accounting. State its assumptions and importance.
_____ For answer refer Unit-I, Page No. 3, Q.No. 5._____
ESSAY QUESTIONS
Q3. What is a break even point? How it is computed
Q1. Define the term Managerial accounting. Discuss
through algebraic formula method?
briefly about its features and function.
_____ For answer refer Unit-I, Page No. 5, Q.No. 11. _____ For answer refer Unit-II, Page No. 28, Q.No. 22.
Q2. Explain the scope and objectives of managerial Q4. Write in detail about Margin at Safety (MoS).
accounting. Answer : Important Question
_____ For answer refer Unit-II, Page No. 32, Q.No. 28.
_____ For answer refer Unit-I, Page No. 7, Q.No. 13.
Q5. The following information is provided to you:
Q3. List out the differences between cost
accounting, management accounting and
financial accounting. Variable cost per unit ? 24-00
Answer : Important Question Fixed cost per unit ? 6-00
_____ For answer refer Unit-I, Page No. 9, Q.No. 15. Profit per unit ? 10-00
Q4. Explain the role of management accountant Present sales volume is 2000 units
in an organization. Briefly state the duties of
management accountant.
Answer y Important Question (i) P/v Ratio
_____ For answer refer Unit-I, Page No, 11, Q.No. 18. (ii) Break-Even Point
Unit-2 (iii) Margin of Safety
(iv) Sales required to earn a profit of? 26000.
SHORT QUESTIONS _____ For answer refer Unit-II, Page No. 34, Q.No. 30.
Q1. Calculate B.E.P in terms of sales value and in
Q6. Sales of a product amount to 200 units per
units from the following particulars.
month at ? 10 per unit. Fixed overheads cost is
? 400 per month and variable cost is ? 6 per unit.
Fixed selling overhead cost ? 10,000 There is a proposal to reduce prices by 20%.
Variable manufacturing cost per unit ? 8 Calculate present and future P/V ratio. How
Variable selling cost per unit ? 4 many units must be sold to earn the present
Selling price ? 30. total profits?
Answer : Important Question Answer : Important Question
For answer refer Unit-II, Page No. 18, Q.No. 3. For answer refer Unit-II, Page No. 39, Q.No. 34.
——- 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD.

IQ.2 MANAGERIAL ACCOUNTING
The company has received three export orders
from different sources as under:
Source X: 10,000 units at ? 110 per unit
SHORT QUESTIONS Source Y: 20,000 units at ?104 per unit
Q1. Write about criteria for ‘Buy’ Decision. Source Z: 20,000 units at ? 102 per unit
Answer : Important Question Advise the company whether any or all the
export orders should be accepted or not?
For answer refer Unit-Ill, Page No. 46, Q.No. 1.
02. List out the specific cost factors that are
considered before make or buy decision. For answer refer Unit-Ill, Page No. 76, Q.No. 31.

Q3. Write a note on decision making process.

SHORT QUESTIONS
For answer refer Unit-Ill, Page No. 47, Q.No. 5. Q1. What is master budget?
ESSAY QUESTIONS Answer : Important Question
Q1. What is decision making? Explain the various
For answer refer Unit-IV, Page No. 86, Q.No. 1.
steps in the process of decision making.
Q2. Distinguish between a forecast and budget.
For answer refer Unit-Ill, Page No. 48, Q.No. 8. Answer : Important Question
02. What do you mean by make or buy decision? For answer refer Unit-IV, Page No. 87, Q.No. 4.
Discuss the pros and cons of this decision.
Q3. Ram Ltd. plans to sell 1,10,000 units of a certain
Answer : Important Question product in the first fiscal quarter, 1,20,000 units
in the second quarter, 1,30,000 units in the third
For answer refer Unit-Ill, Page No. 51, Q.No. 10. quarter 1,50,000 units in the fourth quarter and
03. Explain briefly about operate or shut down 1,40,000 units in the first quarter ofthe following
of products/plant with reference to marginal year. At the beginning of the first quarter there
costing. Important Question are 14,000 units of product in stock. If the each
of the quarter, the company plans to have an
OR inventory equal to one fifth of the sales for the
Explain briefly costing in closing down or next fiscal quarter. How many units must be
ûspending activities. manufactured in each quarter of the current
year?
\nswer : Important Question
04. A company has an installed production
capacity of 2,00,000 units and presently it ESSAY QUESTIONS
is working at 70% capacity utilisation. As
production capacity utilisation increases, cost Q1. Discuss the preliminaries or procedure for the
per unit decreases as follows: operations of budgetary control.
Capacity utilisation Cost per unit Answer : Important Question
70% 194 For answer refer Unit-IV, Page No. 94, Q.No. 17.
80% 184 Q2. Describe the types of budgets.

90% 174 Answer : Important Question
100% 164 For answer refer Unit-IV, Page No. 96, Q.No. 19.
Important Questions IQ.3
Q3. What is zero-based budgeting? What are the ESSAY QUESTIONS
steps in ZBB? Q1. What is standard costing and historical
costing? Distinguish between standard costing
and historical costing.
Q4. Kala Bandhu Company Ltd. manufactures
For answer refer Unit-V, Page No. 132, Q.No. 12.
Dhoop Sticks with two brand “Pooja” and
“Harathi” and the market is classified into three Q2. What is variance analysis? Explain and illustrate
divisions. North, South, Central. The Estimated the various types of material variances. What
Sales in units for the current year are as under. are the difficulties in setting up standards?
The prices of selling per unit are is 18 and ? 9 Answer : Important Question
respectively.
_____ For answer refer Unit-V, Page No. 136, Q.No. 17.
Brand North South Central Q3. What is sales variance? Explain sales variance
based on turnover method.
Pooja 15000 21,200 33,000
Harathi 11000 6,000 9,000
On account of Kumbhmela, the sales are Q4. The following details relating to a product
expected to increase by 5%, 10% and 15%. To during the month of March, 2015 are available.
push up the sales during the last quarter, it is You are required to compute the material and
proposed to give special discount to increase labour cost variances and also to reconcile the
the sales by 500,1000 and 600 for Pooja Brand standard and actual cost with the help of such
Brand and for Harathi Brand 300,1000, and 1200 variances,
units. Prepare sales Budget at the present price Standard cost per unit:
level.
Material: 50 kgs. @? 40 per kg.
Answer : Important Question Labour 400 hours. @ ? 50 per hour.
For answer refer Unit-IV, Page No. 112, Q.No. 36. Actual cost for the months:
Unit-5
Actual production: 100 units.
SHORT QUESTIONS Answer : Important Question
Efficiency variance
os. From the following data, calculate overheac
(b) Term variance.

Budgeted overheads
Answer : Fixed ? 6000
Important Question
Variable 4000
-------- -or answer refer Unit-V, Page No. 128, Q.No. 1, 10,000
Actual overheads
Q2. What are overheads and idle time variance?
Fixed ? 5000
Answer :
Important Question Variable 5000 10,000
-------- - or answer refer Unit-V, Page No, 128, Q.No. 3, Budgeted output
10,000 units
03. Differences between standard costing and Actual output
8,000 units
budgetary control. M Budgeted hours
5000
Answer : Actual hours
Important Question 5000
Answer :
For answer refer Unit-V, Page No. 129, Q.No. 6. Important Quest
For answer refer Unit-V, Page No. 151, Q.No. 30.
- SIA PUBLISHERS AND DISTRIBUTORS PVT. L
FACULTY OF COMMERCE
B.Com. (CBCS) lll-Year Vl-Semester Examination
MODEL
PAPER 11
( Common Paper for All Streams)
Time: 3 Hours Max. Marks: 80
PART - A ( 5 x 4 = 20 Marks )
Note : Answer any Five of the following questions in not exceeding 20 lines each
1. Explain the differences between cost accounting and financial accounting. (Unit-I, Page No. 3, Q5)
2. From the following calculate profit when sales are ? 20,000 fixed expenses ? 4,000
and break-even sales ? 10,000. (Unit-ll, Page No. 20, Q7)
3. List out the specific cost factors that are considered before make or buy decision. (Unit-Ill, Page No. 46, Q2)
4. Distinguish between a forecast and budget. (Unit-IV, Page No. 87, Q4)
5. Write a short notes on,
(a) Efficiency variance
(b) Term variance. (Unit-V, Page No. 128, Q1)
6. How can material sub variances be computed? (Unit-V, Page No. 130, Q7)
7. Write a short note on relevant cost and relevant revenues. (Unit-Ill, Page No. 47, Q7)
8. What is angle of incidence? (Unit-ll, Page No. 21, Q11)
PART - B ( 5 x 12 = 60 Marks )
Note: Answer the following questions in not exceedingfour pages each.
9. (a) Define the term Managerial accounting. Discuss briefly about its features
and function. (Unit-I, Page No. 5, Q11)
OR
Discuss various tools and techniques of management or managerial accounting. (Unit-I, Page No. 12, Q19)
10. (a) Explain the importance of marginal cost. (Unit-ll, Page No. 22, Q14)
OR
(b) Sales of a product amount to 200 units per month at ? 10 per unit. Fixed
overheads cost is ? 400 per month and variable cost is ? 6 per unit. There
is a proposal to reduce prices by 20%. Calculate present and future P/V
ratio. How many units must be sold to earn the present total profits? (Unit-ll, Page No. 39, Q34)
11. (a) What is decision making? Explain the various steps in the process of
decision making. (Unit-Ill, Page No. 48, Q8)
OR
(b) A company can produce and sell at its maximum capacity 20,000 units of a
product. The sale price is ? 100. The present sales are 15,000 units. To produce
over 20,000 units and upto another 10,000 units some balancing equipments
are to be installed at a cost of ? 10, lakhs and the same will have a life span of
10 years.

MP.2 MANAGERIAL ACCOUNTING
The current cost structure is as under:
Direct Materials 30% of sale value

Direct Labour 20% of sale value
Variable Overheads ? 20 per unit
Profit ? 15 per unit
The present cost is estimated to go up due to price escalation as under:
10% in direct material from present level of 30%
25% in direct labour from present level of 20%
? 50,000 in fixed overheads per year.
There is a concrete proposal from a party to take 10,000 units additionally over
present level of output on a long term basis at a unit price of ? 90. Apart from
the investment of ? 10 lakhs as shown above, the fixed overheads will increase
by ? 50,000 due to additional administrative expenses.
The Co. is in a dilemma as to whether to accept the order for 10,000 units or to
use the present unused capacity of 5,000 units for which there will be additional
selling expenses of? 50,000. Ignore financial charges and give your
recommendation. (Unit-Ill, Page No. 56, Q16)
12. (a) Discuss the preliminaries or procedure for the operations of budgetary control. (Unit-IV, Page No. 94, Q17)
(b) The expenses budgeted for production of 10,000 units in a factory are furnished
below,
Per unit (?)

Materials 140
Labour 50
Variable factory overheads 40
Fixed factory overheads (? 2,00,000) 20
Variable expenses (Direct) 10
Selling expenses (10% fixed) 26
Distribution expenses (20% fixed) 14
Administrative expenses (Fixed - ? 1,00,000) 10
Total cost sales per unit 310
You are required to prepare a budget for production of 6,000 units and
8,000 units. (Unit-IV, Page No. 105, Q3C
(a) What is standard costing and historical costing? Distinguish between

standard costing and historical costing. (Unit-V, Page No. 132, Q12
OR
(b) The standard labour composition and the actual labour composition engaged in 10 weeks
for a job are as under:
Standard Actual
Category of Workers No. of Workers Weekly Wage No. of Workers Weekly Wage
Rate/worker Rate/Worker
Grade A 40 ? 80 50 ? 70
Grade B 50 ? 70 60 ? 75
Grade C 30 ? 50 10 ? 60
The work is actually completed in 12 weeks. Calculate various labour variances. (Unit-V, Page No. 143. QZ3
SIA PUBLISHERSAND DISTRIBUTORS PVT. LTD. -.... -................. ......
MODEL QUESTION PAPERS WITH SOLUTIONS MP.3
FACULTY OF COMMERCE
MODEL
PAPER 2

PART - A ( 5 x 4 « 20 Marks )
Note : Answer any Five of the following questions in not exceeding 20 lines each.
1. Explain the term key factors. (Unit-ll, Page No. 21, Q10)
2. Discuss any four features of managerial accounting. (Unit-I, Page No. 2, Q2)
3. Materials Purchase Budget (Unit-IV, Page No. 90, Q11)
4. What are overheads and idle time variance? (Unit-V, Page No. 128, Q3)
5. What do you mean by temporary shut down? (Unit-Ill, Page No. 46, Q3)
6. Ram Ltd. plans to sell 1,10,000 units of a certain product in the first fiscal quarter,
1,20,000 units in the second quarter, 1,30,000 units in the third quarter 1,50,000 units
in the fourth quarter and 1,40,000 units in the first quarter of the following year. At the
beginning of the first quarter there are 14,000 units of product in stock. If the each of
the 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? (Unit-IV, Page No. 89, Q7)
7. Calculate B.E.P in terms of sales value and in units from the following particulars.
Fixed selling overhead cost ? 10,000
Variable manufacturing cost per unit ? 8
Variable selling cost per unit ? 4
Selling price ? 30. (Unit-ll, Page No. 18, Q3)
Explain briefly about organization of management accounting. (Unit-I, Page No. 4, Q9)
PART - B ( 5 x 12 = 60 Marks )
Note: Answer the following questions in not exceeding four pages each.
9. (a) List out the differences between cost accounting, management accounting
and financial accounting. (Unit-I, Page No.9,Q15)
OR
(b) Explain the role of management accountant in an organization. Briefly state the
duties of management accountant. (Unit-I, Page No. 11, Q18)
10. (a) What is a break even point? How it is computed through algebraic formula method? (Unit-ll, Page No. 28, Q22)
OR
(b) The following information is provided to you:
Variable cost per unit ? 24-00
Fixed cost per unit ? 6-00
Profit per unit ? 10-00
Present sales volume is 2000 units
(i) P/v Ratio
(iv) Sales required to earn a profit of ? 26000. (Unit-ll, Page No. 34, Q30)
.......... 5IA PUBLISHERS AND DISTRIBUTORS PVT. LTD.

11. (a) What do you mean by make or buy decision? Discuss the pros and cons of
this decision. (Unit-Ill, Page No. 51, Q10)
OR
(b) ABC company is engaged in producing a single product and distributes its
products to three different market places X, Y and Z. It is estimated that during
the year 1,00,000 units will be manufactured and sold at a price of? 25 unit and
the sales being spread as follows,
Market Units
X 60,000
Y 25,000
Z 15,000
Standard costs of production are,
Direct materials - ? 5/unit
Direct wages - ? 4/unit
Factory variable overhead’s - 150% of direct wages
Factory fixed overhead’s - ? 5,00,000/annum
Selling and distribution costs X Y Z
Fixed cost/annum 90,000 50,000 40,000
Variable cost (% on sales value) 12% 15% 10%
You are required to,
(a) Prepare a budget for the business from the figures provided
(b) Advise the management on the desirability of closing down Y and Z markets. (Unit-Ill, Page No. 70, Q26)
12. (a) Describe the types of budgets. (Unit-IV, Page No. 96, Q19)
OR
(b) Kala Bandhu Company Ltd. manufactures Dhoop Sticks with two brand “Pooja”
and “Harathi” and the market is classified into three divisions. North, South,
Central. The Estimated Sales in units for the current year are as under. The
prices of selling per unit are is 18 and ? 9 respectively.
Brand North South Central

Pooja 15000 21,200 33,000
Harathi 11000 6,000 9,000
On account of Kumbhmela, the sales are expected to increase by 5%, 10% and
15%. To push up the sales during the last quarter, it is proposed to give special
discount to increase the sales by 500, 1000 and 600 for Pooja Brand Brand
and for Harathi Brand 300, 1000, and 1200 units. Prepare sales Budget at
the present price level. (Unit-IV, Page No. 112, Q36)
13. (a) What is variance analysis? Explain and illustrate the various types of material
variances. What are the difficulties in setting up standards? (Unit-V, Page No. 136, Q17)
OR
(b) The following details relating to a product during the month of March, 2015 are
available. You are required to compute the material and labour cost variances and
also to reconcile the standard and actual cost with the help of such variances,
Standard cost per unit:
Material: 50 kgs. @ ? 40 per kg.
Labour 400 hours. @ ? 50 per hour.
Actual cost for the months:
Actual production: 100 units. (Unit-V, Page No. 148, Q27)
5IA PUBLISHERSAND DISTRIBUTORS PVT. LTD. .......... ...... - .......

MODEL QUESTION PAPERS WITH SOLUTIONS MP.5
FACULTY OF COMMERCE
MODEL
PAPER
•.
I3
PART - A ( 5 x 4 = 20 Marks )
Note : Answer any Five of the following questions in not exceeding 20 lines each.
1. Differences between standard costing and budgetary control. (Unit-V, Page No. 129, Q6)
2. Write about criteria for ‘Buy’ Decision. (Unit-Ill, Page No. 46, Q1)
3. Define the term Managerial Accounting. (Unit-I, Page No. 2,Q1)
4. How can P/V ratio be improved? (Unit-ll, Page No. 19, Q5)
5. Find out fixed overheads from the following information, (Unit-IV, Page No. 86, Q3)
(?)
Selling expenses at 60% of activity level 2,00,000
Selling expenses at 80% of activity level 2, 50,000
6. Explain the controller functions. (Unit-I, Page No. 4, Q10)
7. What is budget report? What are the principles of budget report? (Unit-IV, Page No. 91, Q13)
8. Write a note on decision making process. (Unit-Ill, Page No. 47, Q5)
PART - B ( 5 x 12 = 60 Marks )
Note: Answer the following questions in not exceeding four pages each.
9. (a) Explain the scope and objectives of managerial accounting. (Unit-I, Page No. 7, Q13)
OR
x
(b) Explain the installation of management or managerial accounting. (Unit-I, Page No. 13, Q20)
10. (a) Write in detail about Margin at Safety (MoS). (Unit-ll, Page No. 32, Q28)
OR
(b) From the following particulars calculate,
(i) Contribution
(ii) P/V ratio
(iii) Breakeven point in units and rupees
(iv) What will be the selling price per unit if the break even point is brought down
to 25,000 units? (Unit-ll, Page No. 37, Q32)
Particulars (?)
Fixed expenses 1,50,000
Variable cost per unit 10
- —..... —----------—— 5IA PUBLISHERSAND DISTRIBUTORS PVT. LTD.

11. (a) Explain briefly costing in closing down or suspending activities. (Unit-Ill, Page No. 69, Q25)
OR
(b) A company has an installed production capacity of 2,00,000 units and presently
it is working at 70% capacity utilisation. As production capacity utilisation
increases, cost per unit decreases as follows:
Capacity utilisation Cost per unit

70% 194
80% 184
90% 174
100% 164
The company has received three export orders from different sources as under:
Source X: 10,000 units at? 110 per unit
Source Y: 20,000 units at ? 104 per unit
Source Z: 20,000 units at ? 102 per unit
Advise the company whether any or all the export orders should be accepted or not?(Unit-lll, Page No. 76, Q31)
12. (a) What is zero-based budgeting? What are the steps in ZBB? (Unit-IV, Page No. 103, Q27)
OR
(b) The following information relates to a Flexible Budget at 60% capacity.
Find out the overhead cost at 50% and 70% capacity and also determine
the overhead rates. (Unit-IV, Page No. 107, Q31)
Expenses at 60% capacity (?)

Variable Overheads:
Repairs and Maintenance (70% Fixed, 30% Variable) 7,000
Electricity (50% Fixed, 50% Variable) 25,200
Fixed Overheads:
Office Expenses including Salaries 70,000
Insurance 4,000
Depreciation 20,000
Estimated Direct Labour Hours (1,20,000)
13. (a) What is sales variance? Explain sales variance based on turnover method. (Unit-V, Page No. 140, Q20
OR
(b) From the following data, calculate overhead variances, (Unit-V, Page No. 151, Q30
Budgeted overheads
Fixed ? 6000
Actual overheads
Fixed ? 5000
Budgeted output 10,000 units
Budgeted hours 5000
Actual hours 5000

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I

(^As Per the Latest 2016-17 Syllabus of B.Com (OU) (CBCsf)

Publishers & Distributors Pvt. Ltd.

> Theory and Practice of GST

- UNIVERSAL BOOK SHOWROOM ■

Printed at: SIA Publishers & Distributors Pvt. Ltd.

For Books Enquiry

The important topics discussed in this subject are as follows,

❖ Introduction , Features, Scope, Need and Importance of Managerial Accounting.

❖ Relationship and differences between Management Accounting and other Branches of

❖ Concept of Marginal Costing and Break Even Analysis.

❖ Concept of Make or Buy Decisions.

❖ Concept of Budgets and Budgetary Control.

❖ Concept of Standard Costing and Variance Analysis.

ABOUT THE BOOK

❖ List of Important Definitions and Formulae are given.

Unit No. Unit Name Unit Description

1. Introduction This unit covers the topics: Managerial Accounting: Features -

UNIT-WISE SHORT & ESSAY TYPE QUESTIONS WITH SOLUTIONS

Unit No. Unit Name Question Nos. Page Nos.

UNIT-I INTRODUCTION 1 -16

Part-B ESSAY QUESTIONS WITH SOLUTIONS Q11 - Q20 5-13

1.1.1 Scope and Objectives Q13 7

1.1.2 Advantages and Limitations Q14 8

1.2 Relationship between Cost, Management and

1.3 Role and Duties of Management Accountant Q17 - Q18 11

1.4 Tools/Techniques and Installation of Management Accounting Q19 - Q20 12

INTERNAL ASSESSMENT 14-16

UNIT-II MARGINAL COSTING 17-44

Part-B ESSAY QUESTIONS WITH SOLUTIONS Q13 - Q34 22-40

2.1 Marginal Costing - Meaning and Importance Q13 - Q15 22

2.1.1 Marginal Cost Equation Q16 24

2.1.2 Differences between Marginal Costing

2.2 CVP Analysis Q19 - Q20 26

2.3 Break Even Analysis: Meaning, Assumptions,

2.3.1 Break Even Chart Q23 - Q25 29

2.3.2 Contribution, PA/ Ratio and Margin of Safety Q26 - Q34 31

INTERNAL ASSESSMENT 41 -44

IMPORTANT QUESTIONS IQ.1 - IQ.3

Managerial Accounting: Features - Objectives - Scope - Functions - Advantages and Limitations -

BUDGETS AND BUDGETARY CONTROL

Budget: Meaning - Objectives - Advantages and Limitations - Essentials of Budgets - Budgetary

STANDARD COSTING AND VARIANCE ANALYSIS

(b) Break-even Point in terms of Money Value =------------------------- x sales

3. Material Cost Variance can be computed by using the following formula,

Material cost variance = (SQ x SP) - (AQ * AP)

4. Material price variance can be calculated as,

Material price variance = (SP - AP) x AQ or (SR - AR) x AQ

5. The formula for finding the material yield variance is,

Material yield variance = (AQ -SQ) x SP.

6. Labour Cost Variance = (SH x SR) - (AH x AR)

❖ Advantages and Limitations of Managerial Accounting.

❖ Relationship between Cost, Management and Financial Accounting.

❖ Differences between Cost, Management and Financial Accounting.

... ..... ............. .

The important features of management accounting are as follows,

Following points highlight the objectives of managerial accounting,

S.No. Point of Financial Accounting Cost Accounting

1.1.2 Advantages and Limitations ______ _ _

2.3.1 Break Even Chart _________________ _