MANAGEMENT ACCOUNTING

FOR
B.COM

PREPARED BY

Dr. P. Vaitinadane
Assistant Professor
P.G & Research Department OfCommerce
St. Joseph’s College Of Arts and Science
(Autonomous)Cuddalore.

P.G & RESEARCH DEPARTMENT OF

COMMERCE

ST. JOSEPH’S COLLEGE OF ARTS & SCIENCE

(AUTONOMOUS)
CUDDALORE-1.
 ST JOSEPH’S COLLEGE OF ARTS AND SCIENCE
PG AND RESEARCH DEPARTMANT OF COMMERCE
(AUTONOMOUS)
CUDDALORE – 607001.

SUBJECT: MANAGEMET ACCOUNTING

SUBJECT CODE: CM616Q

 MIBCOM MANAGEMENTACCOUWMNG CM6l6Q
SIMRSTER-VI tFor the Snidenls Admitted Tom The year 2016 HRS/WK —6
CORE- XII onwards) CREOIT - 5

Course Outcomes:
After completing the course the student will be able to:
C01: Understand management accounting and its importance in decision making
C02: Calculate accounting ratios and interpret them relevantly.
C03: Prepare fund flow mtetnent and cash flow statement.
C04: Draft various kinds of budgets fora business concern.
COS: Relate the concepts of marginal costing.

TlTLBOPTHBPhPB&MMMhGBMIIMTAC€Ob#HT¥G

10URSB
OL€OMM t4BAti SCORB OF COS
PO 1 POS PO3 Ptf't POS PSß1 PSDt PSO3 PSO4 PSOS

101 5 5 5 S 4 4
€O2 5 S s
103 s s
104 S S 5 s
COS

This Course is having VERY HIGH association with Programme Outcome and
Programme Specific Outcome

UNIT- I: Introduction to Management Accounting (10 Hrs.)

Management Accounting: Meaning, Definition, Objectives, Nature and Scope —Role of
Management Accountant - Relationship between Financial Accounting and Management
Accounting, Relationship between Cost Accounting and Management Accnunting.
Analysis of Financial Statements: Types of Analysis —Methods of Financial
Analysis—Problems on Comparative Statement analysis —Common Size Statement
a nalysis and Trend Analysis.

UNIT-II: Ratio Analysis (20 Hrs.)

Meaning a nd Definition of Ratio, Classification of Ratios, Uses & Limitations —Meaning
and types of Ratio Analysis —Calculation of Liquidity ratios. Profitability ratios and
Solvency ratios.

UNIT-III: Fund Flow and Cash Plow Analysis (20 Hrs.)

Meaning and Definition of Fund Flow Statement —Uses and Limitations nf Fund Flow
Statement -Differences between Cash Flow Statement and Fund Flow Statement
St, J‹ .sepm’s Cr›llege ct Arts R Science (Autonomous ), Cir ‹hlulore J Page | 47
Procedure for preparation of Fund Flow Statement —Statement of changes in Workin g
Capital —Statement of Funds from Operations —Statement of Sources and Applications of
Funds —Problems. Meaning and Definition of Cash Flow Statement —Uses of Cash Flow
Statement —Limitations of Cash Flow Statement —Provision s of Indian Accounting
Standard -7 (lAS 7) —Procedure for preparation of Cash Flow Statement —Cash Flow
from Operating Activities —Cash Flow front Investing Activities and Cash Flow from
Financing Activities —Preparation nf Cash Flow Statement according to lAS-7 (Indirect
Method Only).
UNIT-IV: Budgeting and Budgetary Control (15 Hrs.)
Meaning and d efinition of budget - essential features of budget-budgeting-budgetary
control-objectives-essentials of successful budgetary control —classificatinn of budgets-
on the basis of time-on the factors of production -on the basis of flexibility— on the basis
of functions-zero based budgeting -advantages and limitations of budgetary control -
preparation nf production, sales, materials, material purchase, production cost, cash and
flexible budgets

UNIT-V: Marginal Costing (l0Hrs.)

Marginal costing — definition, features, advantages and limitation - break even analys is
and break- even point — margin of sarety.

1. Accounting and financial control - S.N. Maheswari, S. Chand & Cn ltd. New Del hi.
2. Management Accounting -T. S. Reddy and Dr. Y. Hariprasad Reddy, Markham
Publications, Chennai.

REFERENCE BOOKS
1. Management accounting - H.Y Khan & P.K Ja in, Tata McGraw Hill, New Delhi.
2. Dr. S. N. Maheswari, Management Accounting Sultan Chand & Sons, New Delhi.
3. Management accnunti rig T.S. Reddy and Mnorthy, Markham Publications, Chennai.

QUESTION PAPER PATTERN

Problem Oriented paper

Time: 3 Hours Marks: 75
Theory: 20% Problems: 8096
1) Part - A = 10x2 =20 Marks — All the Questinns are lo be Answered.
2) Part — B = 5x5 = 25 Marks — Five out of Eight - Open Choice.
3) Part — C = 3x10 = 30 Marks — Three Out of Five - Open Choice.
Note: Questions should be asked from all the units with equal weightage.
 UNIT 1
ANALYSIS OF FINANCIAL STATEMENT

Problem 1
Problem 2
Problem 3
Problem 4
Problem 5
Problem 6
Problem 7
 UNIT 2
RATIO ANALYSIS

Problem 1

Problem 2
Problem 3
Problem 4
Problem 5
Problem 6
Problem 7
Problem 8
Problem 9
Problem 10
Problem 11
Problem 12
Problem 13
Problem 14
Problem 15

Problem 16
Problem 17
Problem 18
Problem 19
Problem 20
Problem 21
Problem 22
Problem 23
Problem 24
Problem 25
Problem 26
Problem 27

Problem 28
Problem 29
Problem 30
Problem 31
Problem 32
Problem 33
Problem 34
Problem 35
Problem 36
 UNIT 3
FUND FLOW AND CASH FLOW
Problem 1
Problem 2
Problem 3
Problem 4
Problem 5
Problem 6

Problem 7
Problem 8
Problem 9
Problem 10
Problem 11
Problem 12
Problem 13
Problem 14
Problem 15
Problem 16
Problem 17
Problem 18
Problem 19
Problem 20
Problem 21
Problem 22
Problem 23
Problem 24
Problem 25
CASH FLOW
Problem 26
Problem 27
Problem 28
Problem 29
Problem 30
Problem 31
Problem 32
Problem 33
Problem 34
Problem 35
Problem 36
Problem 37
Problem 38
Problem 39
Problem 40
Problem 41
Problem 42
Problem 43
 UNIT 4
BUDGETING AND BUDGETARY CONTROL

Problem 1
Problem 2
Problem 3

Problem 4
Problem 5
Problem 6

Problem 7
Problem 8
Problem 9
Problem 10
Problem 11
Problem 12
Problem 13
Problem 14
Problem 15
Problem 16

Problem 17
Problem 18
Problem 19
Problem 20
Problem 21
Problem 22
Problem 23
SOlUÍfiOD1

Contribution
x ice
8a1es

Contribuiion Sales — Variable Cost

Total Sales Rx. 5,00,ŒD
Selling pńcc per unit Rs. 100

Contribution m. s.œ.œn - t ono so)

Rs. s.tXì. - Rs. s.00. = R« z,00,000
Rs. 2.00.0Œł
P/ Y Ratio x ì00 = 40
R›.5.0'0.DDO

Fixed Cøst
P/ V Raùo

R+ 120.üŒ U0000

1,2D,000

- Rs. 4,0D,0O0
Pìxcd Cost
Break-Evcn Point
(in units) Contnbution per unit
(or)
Sized Cost
Selling Price — Variable Cost
Rs. I.20.0Œf I.20.ŒKi
= - 4,000 uniis
 Break-Evcx Point in Sales = 4,tXIO units x Rs. 80
= Rs. 3.20,000
Illustration: 4
Sctcs Rs. 2.0O,0tX)
Profit Rs, 20.Q0
Variable Cost 60%
You src required to calculate :

fl) P / V Ratio
t2) Fixed Cost

f3) Sslcs volume to esrn a pror‹t of Rs. TO.AB

s»ic•
Variable Cost

V9risble Cost

Rs. I.D.QO
Sales — Variable Cnst
(l} P / V Ratio
Sales
2.tD,000 - l.20.ID
x 100

x ltXl - 40%
 (2)Con1nbudon Fixed Cost + Prnfit

Sales — Variable Cos

= Rs. 2,Hi.TO — R«. l,20,OCO = Rs. 80.000
Contribution fiixczl Cost + Profit
to,om Fixtd Cost + Rs. 2IXXD
Fixed Cost Rs. 804XI0 — Rs. 20,&O — Rs, 60,@0
(3) Sales volume to earn a profii of Rs. 40.tO
Fix«J Cost + Desired PruFt
Snlcs
P/V Rarjo
Rs. 60.000 + Rs. S0,/AO

Rs. I, 10.QXJ R.s. 1,10,000

Rs.2.75.

Ftom the following particulars, calculate :

(a) P / V Ratio
(b) Profil when salCs are Rs. 40,DIXf, end
(c) New hreak-even priinf if selling price is reduced by ]0&
Fixed co«i - R«. 8,0IXi
Break-even point = Rs. 2O,IX¥t
Vwiablc cost = Rs. 6f) per unit
Solti(ion:

Fixed Cosi
(a) BmA-Even Point
P / V Ratio

Fixed Cost
P / V Ratio
Break-Even Point

x 40a
8

Z0,0O0
 (b) Profit when sales are Rs. 40,í)£D
Profit = Sales x P / V Ratio - Fixed Cost
= Re, 40,000 x 40% — Rs. 8,000
= Us. l6,000 - Rs. 8,0£I0 = Rs. 8,000
(c) New break-even point if the selling price is reduced by ION. If the selling price is Rs. l0t), now
it is reduced by l £H , i.e., it will be Rs, 90 t 1 TO — l0)
Variable Cost Rs. 60 Per unit
Selling Price — Variable Cóst
New P/ V Raiio = x 100
Selling Price

x t00 = 33.33%

rixed Cost
New 8mak-Sven Point
New P / V Ramo

= Rs, 24,002.40
33.33&

New Break-Even Point - Rs. 24,tXJ2,40

A Company manufactures a iingle product with a capacity of l,50,OCD units per annum. The
iummarized profitability statement for the year is as under:
Re. Re.
Salcs : l,tXt,(XD uni is Rs.15 per unit 13,00,000
Lrss .- Cost of Sales
Direct Maicrials
Dircct Labour
Produclion overhead :
Variable 60,000

Adniini*trsÑun Ovcrheaü ( •ixcd) 1.50,000

5cII\ng afld Diltribulion OverhCads :
Variable 90,WD
100.UD 12,30.000
Proffit ?,50.0O't3
You ure requlred io evaluaie ibe foltowlng options:

(l} What wili be ihe amount ot’ sales required to ewn a target profit of 25a on sales, it’ ihc packing iv
improved at a cost of kc.l per unit?
(2) Thczc is an o/r« run ‹ ‹ailcr for purchasing 30.000 units per annum, subject to providing a
packing wilh a different brand name at a cos! of Rs. 2 per unit. However. in this case lherc viii fie nn
sel1ing and distribution expenses. Also this will nut, in any way, affccl the company’s existing business. What
be tha break-even price for Ihis additional ofTcr.?
(3) If an expenditure of Rs. 3,lXl,iXD is made on adveriising the sstns weuld i itemise from the present level of l,fD,0fD
units to 1,20, IXD units at a price of Rs. 18 per unit. will ihat c xpcnditure be justified?
(4) If lhe selling price is reduccd by Rs. 2 per unil, there will be l Ul% capacity ulilizelinn. Will the reduction
 (Per unit Rs.) (in rat Rs.)
Suiting gñce is.m ii.m,oxi
: £ers Variable Cost :

Direct Labour 2.DO 2.00.OOD

0.b0
0.90
Total variable Cost
Contribution (Sql Variable Cost) 8.50 s.so.no

Eve1uati•n of Options

: Add Additimsl Con of Packing

Revised Coniribution
(Sales - Vañable Costj 7.X
7.30,OXI
P / V Raiio - - S0%
1S,00,fXI0
Let N proposed sales bz oqual to X

‹Fixcd Cos‹ + cis «rx

6,01,SC0 + 0.25 X

Rs.24, ,AD
 rriaHve Solution:
Let the number of units to be sold - X

Sales Variable Cost + Ptxcd Cost + Profit

If x 7.30 x + R‹.&QI,@Q + 3.75 x
Tixns¡xising and solving we get
3.73 x Rs, d,00,000

3.75

IS - Rs. 24,fXl.IXXI

(2) Opt{oo If :
Present Marginal Cost Rs. 6.5u
sets . Variable selling Cosl = Rs. 0.PO
= Rs. 5.60
add : Special potting Cost - Rs. 2.0fI
Total Variable Cost per unit Rs. 7.60
Total Variable Cosi for 30,ID units 30,0tXI x 7.6P
Rs. 2,28,0tXi
There is no impnci of this lr8nSaciionS on fi Zfid cosi. Hence the price s hould at lest cover
Rs. 2.28.IXD. Therefore, unit price to break-cveti is Rs. 760.

T3) Opiioo HI :
Revised Conctbution when selling prim is Its. 18
Contribution Selling Cost - Variable Cost
= Rs. ld - Rs. 6,50 = Rs. I 1.50
Quantum of sales = l,20,fXKl units
Touil contribution l,2tl,0fD x 11.50 - Rs. 13.80,tXD
Less : Fixed Cost : Present 6,00,RD

Atiditional 3,00,0£D = Rs. 9.00.ITD

Probe Rs. 4,8O,tXO
As the proF›t increases’, the proposzti is justiFic‹I.
Revised price Rs. l5 — 2 Rs. 13.Œł
Rs. 6.50
Rs. ó.30
Toul coiułńction at ł.50.łXl0 ucits
(lJ0,QXł x Rs. 6.50) Rs. 0,75.QXI
hear: Fixed Cosi Rs. ó006,ŒO
Ptofit (contribution — E•İxed Cost) Rs. 3,75,000
As per problem normal profit it Rs. 2,50,Œi0

Sínœ the profit is increased fry (R». S.?3.0Œ — Rs. 2.3O,ÏXX\) Rs. I.23,tÖ0 ihc projx›sal is acceptable.
+ıo,. o
Fill in the blanks for each of the following independent situation :
A B C E
— Rs. 50 Rs, 20 — Rs30

— 75 75 —
No. of units sold 4,ŒD — 6,ŒD 5.ŒD
Marginal contnbution Rs. 80,ŒD Rs. 25,ŒD Rs. 50,ŒD
Fixad cosls — Rs. 1,20.000 Rs. I0,ŒD —
— 2ß,ŒD Rs.30,ŒD — Rs.15.IND

(A) Profit = Co]ntribution - Fixc‹l costs

= Rs. 20,Œ0 - 12,000 = 8,000
off

= =Riõ0,ŒD
P / V Røtio
10.000

Sales volume 5ŒD0

Selling Priœ - Rs.5

(B) Sales 4Œł0 units X Pricc Rs.SO = Rs. 2,00.ŒXI

Contribution (S - V.C. = Rs. 2,ïX\.0A/ - Rs. l,20,ŒÖ) = Rs. 80.ŒI0

vU•bIc Cost (60a of sales. i.e.. 2.&.iXD x - Rs. I.20.ŒD

Fixed Cost (co«uibuùon — Rofit) Rs 80,Oxl - Rs 2O,ŒO ° Re. óo.ŒO

‹Cj Co•tnb«iion (-ix d cœt + Prori) Ił•. I.30,OXï + Rs. 30, = ss. \,3o,œ0
Contribution per unit 25% of Rs. 20 = Rx. ô

Contribution 1J0.0ŒI
No. of units = -
Contribution per unit
(OJ ProFit (Contribution - I=izcd Coat) 25,œ0 - î0.Œil - Ra. î5.Œi€l
P / V Ratio =
Concibution 25.QXI
" P / V Ratio

ö,QXl Units
Contribution J,00,Œ0
- - Ra. 16.d7
Xo. of Units 6,ŒD

(E) Saks S.Q¥l unit-1 x Rs. 30 - Rs. I.3D.0Œt

Variable cost (Sslœ - Contributiae) Ra. 1,50.ŒO - 30,000 = 1,00.ŒQ
i.æ,ooo

F'ixed Cost (Conoibution - Profit) = Rs. 50,QX/ - Rs. I3,@K,i = Rs. 3S,IXO
From the following particulars, calculate Margin of safety :
Finod cost Rs. l.0O,ŒD
Variable cost Rs, l,SÙ,fXD
fl›izlSxz Ri3,0ŒŒN

Profit
Margin of Safety

s ActuaJ 5aJes - BreBk-Evan Sales

ña1r• — Variable Cosi

3.fD.ŒD
 = 50'
P / V Ratio - 5lH›
Re. 1.t LIXD
ßrcak-Even Sales
5fH›

Maigin of Safety = Aciual Sales - Blatt-Even Sales

Rs. 5.ID.ID — Rs. 2,tD.tXD = Re. 1.t I,IXD

= Rs. 3.tI,tXD - l,50,tXD = gs, l,5ß,IXD

f'nfii Doniribution - Freed Cost
= Re. l,30,IXD — 1,tD,RD = Rs. 50,tXD
to.tXI0
Maon or sa«t,
P / V Ratio 406

Mz oMSaegzpnmudMpoxznMgofMm:

Margin of Safety
Actual Sales

- 33.33&

Material Cost Rs. Y.50 per unit, Labovr Cost Rs. 6,2d per unit. Scmi-Variable Cost (including veriablc cost of
Rs. 3.75 per unit) Rs. I ,80,tXD.
riss cot e›.PO.0tXI upto B09L level of output, beyond this an nrlflitimal Rs. 2ß,000 will bc incurrcA
Calcutate:
(I) Activity level at 8r¢ak-Even PoinL
(2) Number of units to be sold to carn a net income of B's of sales.
(3) Aczivify TcvcJ needed to cam a profit or Rs. 95,QXI.
('4) What skould be ihc wlling price per unit, if break-cvrn point is to be brought down to 40% activity level?
rf‹ing Notes :
(a) Yartabte cost per iudt : Rs.
f•4atorial cost per unit = 3.50
Labour cost per unit = 6.23
Semi Variable cost per unit = 3.75
Variable Cost per unit - 17.50

Contribution per unit - Selling price per unit — Variable tosl per unit
= Rs. 2S — Rs. 17.50
Rs, 7.50 per unit.

(c) €'ixed «a« in Seml Tarisble C‹›sa :

Total semi variable cost = Rs. I.80.IXP
Lzzs Variable cost @ Rs. 3.73 per unit
(Rs. 3.73 x 32QXI uhits) =• US. I.20,(KB
Fixed cost in semi-variable cost = Rs. 60.Q I

= Rt. 90.ID
r•ca cwi «pro SW - Rt, 60,tXD
add : Ptned cost in Semi variable cmi - Rs. l.50,tXD
Total Fixed cost upto 8fH› level

(e) TetsJ Pined coat sbovc B0% Ic«el :

- Rs. PO.000
fixed cost upto Level
Fixed cost in Semi-variable oost = Rs. 20,IXD
Rs. l.70.IXD

= Rg. 8.tXl.(XXI
Total Turnover = Rs. 23
 = ' = 32.UD unita
No. of units produced 25

(g) to. of units produmd at ltD' level :

No. of units prtxiuced zt 80% level 32,0tXt uyits
32.tXD

No. of units produced at UI% kvel - = 40,000 uniis

80

Pmfil - Seles units x Contribution per unit - Fixed Cost

- (32,0£D n Ra. 7.S} — Rs. 1,50,DOD
= Ri. 2,40,tXD - Rs. t,50,tXD = Rs. Ki,OD

(IJ So upto destnd profit Rs. S0,fXXl

II.M% of sales
ri«n Car = Rs, t,3O,f 0
(1) Acflvlty lever ut B E P:
Fixed Cost
Activity level at B E P
Conlribulion per unit

Rs. 7.5
20,tXD
Activity level

(2) xumber or units to be 6oid to cam a net Income ofss or6aies :

Suppose S•lcs Unit = X

- Yariablc Cost + Fixed Cos‹ + Prof›t

zx x 17.Hi X + t,50.IX0 + ZX

ux = i9 s x + i;so.«o
25 X - 19.5 X - 1.50.(ID
 3f‹ir$inoI Costing uM Cum Vulume Pmfli Awal yzi‘i

5.5 X 1.50.0fD
t,50,OOO
- 27.275 vnin

(3) Activity izvel aeeded to ¢arn a profij of Rs, 75,{XXl

The profit amount cBo be achicYcd at over B0% level, hEnce fixed cust will be Rs. I .70.{CIO

Pixed Cost + desired Profit

Sates
Contribuiion per unit
l,7D,IXD + 95.tXD
- - 3§,333 units
7.5

t3) Activity level needed 4o eai•n a profit of Rs. 95,0fD

The profit amount con be achieved at over BE level, hence lixed cust will be Rs. I .70.0tXl

fixed Cost + Desired Profit

Sales
Contribution per unit
l,7D,IXD + 95,0tXl
= 33,333 units
7,3
8cs
Activity Level =

No of uxiBp‹odut4dzl lGD9Dlevol

x 100

(4) Belting price per unit required to bring dnwn B F. P to 40% activity level •
40a Aciiviiy level 40% of 40,IXD
40
= 40.OSD x t6,tXP units

Selling priEC to Brcak•Even at the [cvcl

Fixed Cost + Variable cust per unit
Sales
I.50.OSD
= + Rs. 17.50

Rs. 9.375 + Rs. 17J0 - Rs 26.875

Selling price per nutr
required to bring down = Rs. 2d.875
B E P to 40% activity level
 GtUCSTIOl'4 1 • - A company has on opcninh stoCk of fi,fititl unils ot‘ oulput. The production pt.cried for lhc
current period is 24,fX)fl units and expected sales for thc cuncnt period amount to 2H,(1f8l unils. The selling price per
unii ot’ouiput is Rs. I t). Variable cost per unit is expected lo be Rs. 6 per unit white it was only R.s. 5 per unii
during the previous period. What is ihc Break Even volume for the cuncnt period if fire total fixcd co.sts for the
cuncnt period is Rs. 86,t)f¥)‘? As.suinc that ihc first In first out sysicm i.s followed. Assume thai the L.at in firsl out
system is followed.
Statement of Break Even Point (FIFO)
Nature Quantity contribution per unit Total contribution
t3pcning stc›ck 6tlt8l 5/- 3t1 (Xltl
Current l4,(HU 4/- 5fL(Xltl (B.f.)
production
Brcak cvcnt 2(l,(Citi unit tixcd cost
point

Hcncc, Under FIFO Systcm i.s covered by SRttJRh Of 2tlf8itl unit.s. There fore. The sale of 2fl.t)fX) units is lhc
break even point

.Statement nf break event pnint (LIFO)

mature Quantity Contribution per unit Total contribution
Current 2I ,5tX) 4/- 4/-
t3pcning steck
21.Std)
. Brcak Evcn Point = 2l,5fX) units
QUESTION 2:- Lucy & Co. has given the following data;
Selling price per unit Rs. 2(I
Dirccl material cost per unii Rs. 8
Direct labour cost per unit Rs. 2
V.Table ovcrhcad per unit R.s. 2
FJKCd ovciticad (Tetal) R.s. 2fi,tif8l
Find out
(a) P/V iuiio. (b) Brc.d-even sales.
(c) Margin of safct y at a rate lcvcl of Rs. l,fX),fXk).
(d) Profit, if salcs arc 2flW .Wye the brc.J-cvcn suec.s.
(c) Salcs lo niakc a pintit of Rs. 5,ï¥X1
(t) P/V ratio if the .sclling pi icc is incrca.scd by I t)&.
(g) Brcak-eren .salcs, if the sclling pricc is incrczscd by I fPJ.
(li) Brcak-eren .salcs, if the fixcd ovciticad is incrca.scd by 2flW
4€tI .I ITTftN •-
a) P.V. Ratio =
Safe.s

(b) Break Even Sales = Fi xed co*t

= Rs. St).fX1tl
 (c) Margin nf safety = Total Calc — Break even safe
= as. (i.‹xi.(xxs — zti.(xx))
= Rs. St).fXitl

td) Safe x P.V. Ratio — Fixed cost = Profiit

St).fX1t1 x ]2flW x 4fl*Z - 2fl.t)f8) = Profit
-. Profit = 4fXXJ

Salcs x P.V. Ratio — tixcd cost = Profit -

Sales x 4fFñ - 2t).tX)fl = 5fXX)
saics x 4‹flz• = 5txx) + 1‹l.‹flx) =
Sales =
= 61,5(XJ An.s
=45.45%•

Fixed cost
(g) Break Even fiales (At increase ñ.P.) =

= - @'
4.1.41
. Rcquircd sales = 4fl.t)(l4

fixed crust (fnc reased j

'h) Break Even fiales =
P. V. Rat ion

Required Sales = f›fl.U8) Ans

QUESTZOH3 • - The following dala arc obtained form the records of company :
First Second year

Sale.s (Rs.)
Profit (Rs.) ]4,fXX)
C.alculatc
(a) P/V iuiio,
(b) Brcak-cvcn point .
(c) Profit or los.s .at Salcs of Rs. 5(),fXlfl.
(d) Salcs required to carn a profii of Rs. 1 9,t)fX )
 (c) Marg in of safety, if sale is Rs. 6fl,GfiCi.

SoluCon
Change in prnfit
(a) P.V. Ratio =

(b) Calculation of Break Even Point

Sales x P.V. Ratio — Pixcd cost = Profit
Rfi.fXJfJ x 4fl%n — 6‹xcd cost = lfi.OU
Fixed case = g(J.0U0 x 4fi% - I 0.IX II = Rs. 22.000
Fixed cost
Break Even Sale = P.V. R miv

(c) Sauce x P.V. Ratio — 8ixcd cost = Profit (loss)

SO.01 i x 4O& - 22.Of I = Profit (loss)
. Profit = 2fl.till — 22tXl0

. (loss) = 28IXl
There fore when sales is SO.fill then loss of Rs. 2 is incurred.

(d) Saics x P.V. Ratio — 8ixcd cost = Profit

Salcs x 4f& - 22, 0 = 1 OPTIO
Salcs x 4f& = I 0fXltl + 22fXltl
Sales =

Required Sales = lfi25tXl Ans

c) Margin of fiafety = Total sale — Break even

=Rs50N0Ans
QiJ£STTON 4 - A newspaper presently sells 1 lX1,fXlD copies of its morning daily. lt want* to publish
evening daily. Particulars arc:
Actual for morning Estimates for Evening
Sales price Rs.2 per paper Rs.II.5fl per paper
Variable cost Rs. I .2t) per paper Rs.II. 22 per paper
K4KCd cost Rs. 2.4 lack per week Rs. I(1, (PHI per week
Calc of morning daily will fall C.* I copy for every I U copics sold of evening daily.
Calculate Break-even sales for evening daily per week.
 Fixcd cosl foi cv0H1Rh flDSS pä Of = R.s. lt),ï1tl
V.table cnst. Rs.
Cost to bc incurrcd fl.22
Bcncfii lo.st duc to 1 il
= ContribtltiOn from l inorniflh QäQC1’ LO.

. Contribution tost in 1 cVCHiHh HCWS]3ilQCf -

Rclcvant Variablc cost

Fixed colt
Break Evcn Point =

Cl5(l.(l..été Cl.2tl

Hcncc, Rcquircd BrcakEvcn Poinl = “St).fX itl copies.

ü C STI O l'4 5° - PV Ratio of .a business is 3fl per cent. BER is 4fl per cent of the capacité. Capital
turnover is 2.5 and profil is IS per cent on capital cinploycd. At what lc vet (per cent of the capacity) the
business is operating ‘? ( Turnover = .sales / C.Ei)
SOLUTION:-
Let sn1c.s
Contribution

Turnos’er a les)
C.apital Turn over Ratio =

l.l)
2.5 =
Capital Eriipioyed

100
. . Capital Einploycd =
Wc have,
. Profit = ISO of capital Eniploycd

Contribution — rixod Cost = Profit

R.s. 3fl — fixed cest = Rs. 6
. Fixed cost = Rs. 3ï) — R.s. éi
 = Rs. 24
Fiaed cost
Break Even Ratio = r.v. Ratic

40a of caparity =
. Capacity =
30 x 4fl
= Rs. 2fJ

Hcncc, It indicates we arc operating at SOA of capacity.

QUESTION 6 • — If M.S. Ratio is changed from 3O per cent to 6fl per cent how will the profitability be
affected taking 2tl per cent PM Raiio‘'
SOLUTIGN:-
Let Total Sale = Rs. I OU
Margin of Safcty Safe = I (lfl x 30a
= Rs. 3fl
-. Profit = 2flW of Rs. 3€1
= Rs. 6
Revised,
Margin of Safety Safe = 60a of 100
=Rs. 60

.-. Profit = R.S. b() K 20&• = R.s. l2

Hcncc, As flic margin of safety sale increase from 3fl9o to fills Ux I profit is increased with double

QUESTION 7: —
1year O vear
Decrease in sales Price and
Decrease in Fxcd cost, no change in variable
cost.Slab vaiuc rcamin some.
4flK

Find sales, Profit Fixcd cost and BEP in 11 year

Contribution in Let year = Sâics x P.V. Ratio
= Rs. 2.In.fxxl x 33.50c
-. Contribution = 67,fXlD
Now
Sales — Variable cost = Contribution
Variable cost = Slice — Contribution

It is givcn in the qucstion tiiat

Variablc cost of 1 year = Variable cost of 11 year
. Variable cost of llnd year = Rs. 1.33.Intl
Hence,
P.V. Ratio = 30a (ln 11 Year)
Then
. . Variable cost = 7O&• of sales
1.33.tXifl = 7fl% x sales
 Margin of.safety ratio 25a 4t)*Z
. Mai gin Calc (Total .sale x in/s 1.()I).()f)() x 25a l.9O.fZlfl x 4t)&
Rxtio}
5fl.t)fx) 7i.fx8)
. ProiJt (= Margin Sale x P.V. 3(I f8Xl x 33.5(l& 7fi,fitifl X 3ll‘Z
Patrol = l6,75fl = 22,h2t)
. Break Even Sxlc (Total Sxlc — 1,5fl.(IU I l4fXitl
Margin S.ale)
Fixed cost (Sale Variable cost — 2,tlfl,(ltXl — 1,33,(ltX) I.9fl,t1t8) —
Profit) - 16,75f1 I33,(its —228(itl
= St) 25fl 34,2tX)
Number of units that must be sold to earn a profit of Rs. O,OOD.

••’.»*
Variable Manufacturing Cosl per unit 12
Variable S4ltingCost per unit
Selling Pfioc Sunil
From the follooTng data, you are required to calculate:

(a) P/¥" ratio

(b) Break-even sales with the help of P/¥" ratio.

ADVERTISEMENTS:

(c) Sales i equired to earn a pi ofit of Rs- 4.30,OOO

FLxed Expenses = Rs 9 ,OOO

X'ariab1e Cost per unit:

Direct Material =

Direct Labour = Rs. 2

Direct Overheads = ioo% of Direct Laboiii’

Selling Price per unit =

 Selling Price pet tinit

laśs • V8ri9hle Cos per unit •

-œ,
II

From the following data, you are required to calculate break-

eveo poîot aod oet sales vaîue at žhîs poîot:

Dżrœł rn8tćrîal œst per uniż JO

Dirżm Iebour čost per uniy
Variable ovoMæls @”ôó96on ğircø.Iśboyr
Sgllińg pricc pgrunit 2s
7rad¢”disœunt 49t

If sales are io% and •s% above the break even volume, determine the
net profits.
Suiting price permit 23
less .' Trade di6óotint {?3 x 4ftIX/) 1
Net selling pńoe'per «riit
exx .' Vsrîablc cost pet unit
Diro¢”tntatsriøI IO
Direct Inbout
Vańab?eovoteæIa(5 x 6£I/100)
Conlribudoø pør un'xt

8,333 iiø
6
 Break - even Pólot (ia leles value) - t V a io

P/V Ratio

50.tXD im
-Ӵ z:00,0o0
PròÏit wl›en Atis krs 10°A abovd rhe bréak c\/ctt vgluútc
”sus - ?,«r,os • io›soiz,%is‹›o -r2m,o‹n
C •ïrïb«ti in - SaÏcs «. ï'/V.Ratio = 2.2”0, x ZS/Ï00. - F 53, 000
Coúrrihciion - rixed Cost + f›tofiI
z ssïóoo. - @,‹xo + n»fb
Profit - Z s:00o
.Profit when seizs are 253a ebove thc bresk evezs yoluase

Goiisibu¡ioft - Fiúed Cort + Pròfit

= 50,000 + Profii
Profit = T t3,S00

6rozzz tfze £oï1owïog pactïczz1zrzs, fïzztï out tHe b eaït-evezz-

What should be the selling price per unit, if the break-even point
should be brought down to 6,ooo units?

Or,
The fixed costs amount to Rs. 5o,ooo aod the percentage of variable
costs to sales is given to be 66 'Z 96.

If aoo& capacity sales are Rs. g,oo,ooo, an‹i «ut the break-
everpnirit arid the percentage sales when it oomxreeK
Determine prnfit at 8n96 capacity:

-êl

Prom the following inforzriation, ascertain by how much the

value nf sales must be increased by the cnmpaziy to break-
even:
 ”r°ak—° point "So Va iaIcC«t

'3.U&It.-2,t LIED
-',50,tXD‘*tO,tXD-s. J$o
1.%.ID
Hence, 5aies io be indd by tl e ‹x›mpeny yr breakmvex arc=Z‘4,50,000 -3,00;000 -Z l,I0,0p0.

Cslcñ!mAe:

(i) The amount of fixed expenses.

(ii) The number of units to break-even.

(iii) The number of units to earn a profit of Rs 4O,OOO.

The selling price per unit can be assumed at Rs. ioo.

The company sold in two successive periods 7.ooo units a=< 9.OOO
units and has incurred a loss of Rs. io,ooo and earned Rs. io,ooo as
profit respectively.

Thus for an additional sales of12.Oti,0fD there is ari addiiionai contribuiion ofT 20,tO0 which has wipe4 off the loss
ord I”0,0tXl ofpcriâd 1 arid named”:a profii off: l0,ffiXl ”in p«riod. II.
PfV Ratio

z,‹o.Qo ””
Con\ri”bution of Period 1. = 7,IXI.000 x — = Ri. ?0,fKKi
Loss”OFperiad.I {gi+en) - y [0,000

Cantzihutian = Fixxd Cost k Pzofiv'Loss

Fixed Cast - C•ezribulion e Loss/Profit
 i‹o
”Selling Prioe pts aft

¿0
Acompany1sm sJdnga IossofRs• 4* osndrelevant
lnforsmfionzsasfoflows:

Sales Rs. i,zo,ooo; Variable Costs Rs. do,ooo; Fixed costs Rs.
1, OO, OOO.

Loss can be made good either by increasing the sales price or by

increasing sales volume. What are Break even sales if

(a) Present sales level is maintained and the selling price is increased.

(b) If present selling price is maintained and the sales volume is

increased. What would be sales if a profit of Rs. i,oo,ooo is required ?
 ”ca«aa«ian - e i,za,e‹›o—6o, s -Rao.no
P/v zaiio =C“a*‘u"°n x ie

&ustration 13a: The following information is given:

Sales = ” 2,00,000
Variable cost = ” 1,20,000
Fixed cost = ” 30,000
Cal‹nilote (a) Break-even point
{b) New break-even point if selling price is reduced by 10%
{c) New break-evenpoint ifvariable cost increases by 10%
(d) New break-even point if fixed cost increases by 10%
Solution:
S —V 2,00,000 —1,20,000 80,000
S 2,00,000 2,00,000 100
= 40%
F- 30,000
{a ) Break-even point ” 75,000
P/ V ratio " 4096
(ô) 42ien sellilig price in rediic ed by 10.z. liew sales = 2,00,000 — 10O’ o -
1.80,000
1,80,000 — 1,20,000 60,000 1
1,80,000 1,80,000 3

F 30,000
New Break-even point = - 90.000
P/V r.mtio " 1/3

(c) 42ien vai4able cost increases by 10.z. men vaiiable cost

= 1.20,000 + 10’.’o - 1.32,000
2,00,000—1,32,000 68,000
100 = 34%t
2,00,000 2,00,000

30,000
New Break-even point=
34%

( If fixed cost increases by 100 â, new lixed cost= 30.000 + 100 = 3ì3,000
PM" ratio reiiiailis iiliaffected at 400. o
33,000
New Break-even point= =- 8ż.600
40%
Example: Suppose price is reduced front 7* to 60. vaiiable cost *0 pei iiliit.
fixed cost 10,000, calculate margin oł“safety.
B‹foi'r.

Selling ¡nice per iiliit(.Ț 75 60

X'aiiable cost per iiliit (Jÿ *0 50
Total fixed cost ( 10,000 10.000
Contribution(6“— 25 10
25 1 10 1
PA'ratio
75" S 60" 6
10,000 10,000
Bi'eak-even poiнt Õ/Ù fdt/0 I 1/3 1/6
= 10,000 = 60,000
Actual sales (assumed) 75 .000 75,000
II/S (Acfiialsales — B.E. Point) 75,000 — 30.000 75,000 — 60,000

= 4fi,000 = 1fi,000
Illııstratiou 1.3.3: BIR to. Ltd has to clıoose between lııaclıilıe X, alıd X and
proı?des the follou inç data:

Onuru per almamı(tınits) 10,000 10.000

Proflt at the aboı e level 30,000 24.000
Fixed cost per aklının 30,000 16.000

(ı) B.E Point ot“tlıe m o lııaclıilıes

(/ı) Level of oııtpııt u here the m o ınaclıiııes are eqııally protitable
(//ı) The nınclıine sııitable for dıfterent ler ele oi“oııtpııt of the pıodııct
Solufiou:
C oııtnbııtiolı= Fixed cost + Profit
Nlaclıine A= 30.000 + 30.000 = 60.000
hlaclıine B = 16,000 + 24.000 = 40,000

C or coııtribııtioıı per ıuıit —A= 60.000 - 10.000 ııııits = 6

40.000 - 10.000 ııııits = 4
Bıeak-et en point= FC :— C
A= 30.000 - 6 = 5.000 ııııits
B= 16.000 - 4 = 4.000 ııııits
Difference in FC
C ost iııditTeıeııce point =
Difference in C

30,000—16,000 14,000
=7.000noös
6— 4 2
.İt .000 burns. botlıtlıe ıııaclıiııes will pıodııce the some aıl ıoııııt ofprotit
Klaclıiııe B will be ıııore profıtable benveeıı break-eveıı ı)oiııt and point of
colt iııdift“ereııce, i.e.. behveeıı 4,000 ıuıits and 7.000 ıuıits.
A is ıMore profıtable u hem sales one moıe tlıaıı 7.000 ııııits.
Illustration 13.4: The following Sta at is gix•en:
Prorluct A Product B
Diiectinaterials 24 14
Direct labour @ 3 per horir 6 9
Variable overhead @ 4 per hour 8 12
Selling price 100 110
Standard tilne 2 his 3 hrs
State which prodrict you would recoimneud to nianiifactrue when:
{a) Laborer time is the key factor
{b) Sales xzlue is the key factor
 Pron’iict B

100 110
Duect tuntenal 14
Duect labour 9
lhriable nx erhead
i ab1ecost(Dj 33
7J
(a) C ontiibutiou per laboiu hour

(b) Coutrib union per rupee of sales x‘alue = 62' 100 = 75 :— 110

= 68 paise

C’ouc1iisiou
(n) Prodiict.4 is reconiinended when laboiii‘ tiliie is the key factorbecaiise
contribiition pei’1abour horn’ of¡»’odiict N is more tlian that ofprodiict B.
(b) \S'1ieli sales value is the key tnctor, piodiict B is recommended because
CO1lt1“iblit1O1l D1“ l1i¡iee of sales value ofprodiicl B i5 liiore than that of pi
odiict.d
(c) \S0ie1i sale quantity is the key factor. product B is liiore profitable because
its contribution perNiiit is higher tliali that of product.d
Illiistratiou 14.1: Auto Parfs Ltdlias an animal prodiiction of 50.000 unite for a
lnotor coliiponeiii. The componelit cost sinicuRe is as belou :
Nlaterials
Labour (25 I fixed)

1'aiiab1e 90 pei init

Fixed 135 per Init
Total 675 per tuiit
(o) The purchase inanaeei has an ofit finn a siipplierulio is u illing to supply the
colNpoHent at 540. Slioiildlliecomponenlbepiucliasedand prodiictioli
stopped'?
(b) Assiiine the resoiuces nou used tor this coiii¡ioiient’s manNtăctiue are to be
iised to produce aliotlier new' prodiict foi u’1iiclitlie selline price is 48a.
In the latter case, the material price will be 200 per rinit. 90,000 units of this
product can be prodrtced at the same cost basis as above for laboiu and expenses.
Discuss whether it would be advisable to dix•ei1 the iesoiuces to manufacture that new
product, on the footing that the component preseiitlybeiiig pioduced would,
instead ofbeing pioduced, be purchased front the market.
‹CS Inter)
Solution:

Materinl
Laboiu (75% of 180) 135
Variable expenses
Total s-alâable cost when component is produced
Suppliers price

Excess of prirchase price over variable cost = 540 —495 = 45

{a) Fixed expenses have to be incurred whether the component is made or

piuchased. Thris company shorild make the component itself because if
purchased from outside it will have to pay 4ñ per unit more and on 90,000
units 4ñ it comes to 40,ñ0,000.
{b) Cost implications ofproposal to divert available prodriction facilities for a
new prodrict:
 Sellilıg¡ııice oi“per ıuıit of lıew prodııct 1s›
Zr.ı.ı. X'ariable costs — Klaterial
Laboıu
Expenses 425
Contııbııtıon peı ınıit 60
Loss if present coıııpolıent is pıırclıased= 540 — 49a = 45.
Ifcolııpany diyene the resoıırces tor the¡ırodııctiolı ofa Iten ¡ııodııct, it u ill
benefit by lü (i.c., 60 —4ü) ¡ter umut.
On 90.000 ıuıııs it will save /qv 15, i.e.., 1/l,ü0,000. Tlıııs, it is advisable
to divert the¡ odııction facılitıes ilı the ınaııııfacune of the new prodııct alıd the
coınpolıeııt preselıtly beaıg nıaınıfactnredslıoıfld be boııplıt frolıı oııtside. Tlıis will
resıılt ilı additional profit of 13,*0.000.
I11ııstı’atiou 14.2: Alfred Nlaırnfactıırine Corrıpany giyen you the tollou ing
ıııfoııııation.
D odıırt A R'odııcr B

Fixecl overlıeads — “ 10.000 p.a.

Diı CCt lllatCllals pm ıınit ı7
Diı ect labouı' peı ıuıit 10 ı«

5"oıı aı’e reqııiıed to preselıt a statelııent s1ıou’inptlıe ıııaı’pina1 cost of“eaclı

prodııct and reconuııend wlıiclı of the follou ing sales nıixes slıoııld be adopted:
(o) 900 ıınits ot“ü un.d 600 ıınits ofB
(û) 1.800ııııits ot“.d olıly
(c) 1.200 ımits ofB only
( 1.200 ıınits of.4 and 400 ıuıits ofB
 OIU$IOH:
ñlarginal Cost Statement

Per unit
Prociic t.4 Product B

Direct materials *0
Direct labour 10
Pliable oxerhe ads 10 15
Marginal cost 40
C nutrihiitiou 20
3el1in•q price 60 100

Statement of C“ontribtitious unit Profits of Diffei'ent Sales A1ixes

to ii rributlo n G.onirl- Total Nrrm’

yer u!i it button contribiitio!i rost

(n) .4 — 900 iuiits 20 18.000

B— 600 iuiits s *7.OOO † .OOO 10.000 35,000
(b) .1 — 1.800 iuiits 20 36.000
B— Nil 45 Nil 36.000 10.000 26,000
(c) .4 — Nil 20 Nil
B— iuiits 10.000 M,000
(@ .4 — iuiits
B— 400 iuiits 16 OOO †?.OOO 10 000 32,000

Tlnis. sales niix (c) is recoiiuiielided as it yields the liiQiestpiofilof -1-t,000.

Tliis is becaiise contribiition per unit ofB is iiiore tlian that ot“N, aud tlieiefore. and
sales iiiix that tates into accoiuit the maxiliiiiiii iiiiiiiber of unite ofB u’oiild be
lnore protitable.
Illiisfi’atiou 14..3: A coinpmiymalinfacfiues thee products. The biideeted qivinit:
selling piices and unit costs are as iuidel:
 A B

Rau° materiale ( 0 per kp) 80 40 0

Direct u ap•es (( ' * l**r horn) 15 10
5 firiable overlieads 10 30 20
Fixed oxeiheads 2 1$
Biidgeted prodiiciion (ln. iuuts) 6400 3.200 2, 00
Sellin price per unit (in ) 140 l2o 50

(i) Preselit a stateiiient oi“biidpeted ¡u‘otit.

(ii) Set optiiiialprodiict mix and deteiiiiiiie the proiii. if the siipply of raw
materiale is restricted to 18,400 kgs.
solution:
) Statement of Biirlgeterl Pi ofiit

Bridgeterl production (units) 6,400 2.400

Selling price
Sales (S) 14,96.000
Raw materials
Direct u‘ages
Variable ox erlieads
Total variable cost (I') 10.00,000
Coutribution (S — I') 4,96,000
Less: fixed cost* 1.71,200
Prnfit 3.24,500
Calciilatioo of Fixed Cost
.1 = 6,400 iuiit • 9 57,600
B —— 3.200 units • 22 70.400
= *.400 units x 18 43.200
Totnl fixed cost 1.71,200
 Milieu i an‘ inatei iat is the key fartoi
.1 B C
Raw' material per unit of output † kgs 2 kgs l kms
Total raw' material consumed (kg) 6†00 • 4 3200 • 2 2400 • 1
= 25.600 = 6,400 = 2.†00
g,gg,ppp - 1,12,000 96,000
^C onoihntion yer kg a:L rna' material 6,400 kgs
25,60D ki› 2,›00 kgs
= I 1.2* = 17.*0 = 40
Ranks III O I

' Contribution per k•q of raw material is calculated as:

Totul contributiou - Total raw motenul* coiisunied
Siiggesteil sales mix (rară" limterial iS the key factoi)
hank I — Prodiict C — ?'.-t00 uiiits 1 Le = ?".400 l‹Rs
Ratik II — Prorlixt B — 3.î'00 unite < 2 kes = s.‹0oi‹es
Ratili III — Prorliict A — .400 iuiits fi des (b.alance) = 9.b00 kes
Total iixaterials 18.400 kes

Tliiis prodiict iiiix is: N — 2,400 muita. B ./.200 iuiits aiid C — 2.400 iuiits
C alciilation of Profit Con rr/6iif/oii
Prodiict A 2.400 tinits {fi “ 43 p.ii. “ 1.08.000
is s.zoo »‹›it› :z ” .i3 ,.». i.iz.ooo
o z.joo »‹›it› :i ” <0 ,.». sx.ooo
Total conti ibrition 3.16.000
Lms,' Total fixed cost 1.71.200
Pi'ofit “ 1.M.800

Illustration 1: Hydi’o Electric Ltd. fiiriiislies the following infoiiiiation Horn its cost records for
the fast qiiartci’ of the ciui’ent veai’.
Noiiiial production (iinits) 1,000
Acfiial pl’ocluction (unite) 1,100
Acfiial overlieads per qiiarter at nonnal production 4,000
Otlier expenses pa qtiarter 300
Standard iixed oi erliead rate per unit
\"ariable coste per unit
Sales x oltinie (sellili-° l°*’ice is T 14) NIL
Prepare the income statement iuidei absorption and vai’iable costing.
Solution:
 Lrs,s: Total Cost of M
I 6.600
4.400
11.000
11.000

Mai‘gui (U usted)

Gioss Margot (Adjusterl) 100

300
Net lncoiiie before Taxes 100

Income Statement (X’ariable C’osting)

T 6)
1600

Lms.’ Fixed Costs:

Fixed Overheads 4.000

Otlia‘ Expenses 300 (4.300)
Net Licoiiie before Taxes (Loss) (4.300)

liifei euce: L*ndci’ absorption costum, tlic nct tricouri befoi’c taxcs is 7 100 wliilc m nurginal
:osting, net inconx before t.axes is 4300) (loss). lire sigiiificant differeiice can be atnibiited to the faci
that iuidel absorption costing, tlic iixcd niaiiiifacnuiiig oserlicaâs .ai’e incliidcd in uri eiitorv, ivliercos m
vari.ahlc costiiig. inventory carnea oiily vai’iablc coste.
Inx’entory X'.aliiation
Uiiderabsorption Costing 11.000
Inx’entory X'.a1iiation iuidcr 1"ariable C’ostin_ 600
Difference --------------------------------------------------------- 4.-i00
(This difference is cqnal to difference bemeen neI income before taxes iindcr absorption costing
ind variable costing.)
 Ye:ir Sales Profit
0 I ?• 10,00,000 1,00,000
0 l4 l5.00.000 2.00000

(a) Rofit X"oliniic Ratio.

(b) Sales icqiñcd to care piofit of T 4.00.000.
(c) Rofit alien salcs are 20.00.000.

change iB Profit
(.a) P.-h' Ratio = x 100
C lunge iii Sales

2.00.000 — 1.00,000
— X 100
15.00.000 — 10.00.000
1.00,000
x 100
5,00.000
= 20% o

(b) Desired Sales

Fixed C est Contribution — Profit

COliiribiifion Sales P.'X’ Ratio
COliiribiifion 11.00,000 20 I
3,00.000
Fixed Cost 3,00.000 — 2.00.000
1.00.000
1.00.000 + 4.00,000
Desired sales
200a
.00,000
20%t
25.00.000
(c) Sales Fixed Cost + Pi ofit
PM" Rntio
 1.00.000 + P iofit
20.00.000

20.00.000 20 ,
4,00.000
Rofit
I1liisti’a ed ‹est 2.00.000. calculate the
followings:

C’Ol1tl ibiltiOil
Q) PVRaio 100
Sales
Sales — \’ ariable C’ost ioo
Sales
20.00.000 — 15.00.000
100
20.00.000
5.00.000 100 = 25 s
20.00.000
(b) Bi’eak-even Point
Fixed C’ost
 2.00.000

= 8.00,000
(c) Sales reqiuied to eaiz piofit of 7 1.00.000
Fixed Coil + Pioht
Desired Sales
PM" Ratio
2.00.000 — 5,00,000
. Desred S.ales
2 ?8
2.00.000 — 5,00,000
25° 8
28.00.000

Illustration 4:

Ye:ir Sales C’ost

20 l 2• 16,00,000 15.76.800
014 20,52,000 19.22.400

Front the above iiJoi’nration, calciilate: (A) P.V Radio, (B) Fixed Ratio. (C) Bi’eak-even Point and
(D) Profit,1oss when sales 12,96,000.
SOlutiOll:
Sales C'ost Print (Sales Cost)

19, 2,400
Change in Profit . 100
C lunge in Sales
1,29,600 — 43200 100
20,52,000 —16.20,000
 86.400 X 100
4,32,000
= 20 o

(b) Fixed t?ost —— t?oiiriblitioii — Prinl

= ,3}¢ x ,. Y R‹atio — Rofit
= 16.20,000 20%.o — 43,200
= 2,80.800
Fixed Cost
PM" Ratio
180.800

Fixed Cost + Desired Rofit

(d) Deri\ red S‹a1es
P. X' Ratio
2.80.800+ Pi ofit
96.000
P. X' Ratio
12,96.000 20a, = 2.80,800 — Profit
2.f9.200 — 2.80.800 = Profit,--Losi
Rofit,--Loss = (21,600)
Lois = Z 21,600
Illııstratiou 3: From the followiı's P- tıcıılars, you are reqıuıed to calcıı1.ete:
1. R’ofıt X"oltoııe Ratıo:
2. Brcak-even Point:
3. Rofıt chen salc is 7 2,00,000,
4. Sales ı’eqıuı’ed to eaııı to eaıaı a profıt of T 40,000:
5. hlaıgin of safeq° in the 2ud yeaı’.
X"eaı' Sales T Pı'ofıt Z
I 2.40.000 18.000
II 2.80,000 26.000
1"oıı way assınııe that tlıc cosı strııctuıe and sellins Prices reılıain constant in the mo yeaı’s.
Solutiou:
Changein Pr ofit 8,000
1. Protit X*o1ıımeRntio(PVR) = x 100 100 = 20' •t
Changein Sales 40,000

2. Brcak-even Point (BEP) — Fixed CoSÎ x 100 = 30,000 x 100 ' 7 1,10,000
P X" Rntio 20

1 Conti’ibiinon = Sales PC' Ratio = 2.40,000 200 o = T 40.000

2 Fixed Cost (FC) = Conti’ibiinon — R’ofii = 48.000 — 18,000 = 30.000

Contı’ibıınon = Sales P fi' Ratio = 2,00.000 20%t = Z 40.000

R’ofıt = Contribııtion — FC = 40.000 — 30,000 = 7 10.000
4 Sales reqıuted to eaN'i ›’ıofıt of T 40,000 = FC. + Desired Pr ofit .10.000 — 40.000 _ 3,50,000

5. Xl.amin of saf in sccond yc.ar = Acnnl salcs — BE sales = T 2.80.000 — T 1.û0.000 =

T 1.30.000
 Blustration 6: KT & Co. has prepared the following bixlget estirriates for the year 2014-2015:
Sales 15,000.
You are required to find:
1. Profit Volume Ratio.
2. Break-even Point.
3. Margin of safety.
Also create revised Profit Volume Ratio, Break-even Point and Margin of Safety, if selling price
per unit is reduced by 10%.

Projected
Units (U) Givezt 15,000 Given 15,000
Sale Price (SP) 10 9
Sale (S) 1,50,000 1,35,000
Variable Cost 0 0 0 0
Contribution (S — V) 60,000 45,000

(i) Profit Volume Ratio (PVR) 34 000 45 000

= x 100 = x 100
Contribution x 100 1,35,000

Sales = 40.0tD6 = 33.33%

(ii) Break-even Point (BHP)
Fixed Costs x 100 =85,000 = 1,02,000

(iii) Margin of Safety (T) = 1,50,01D — 85,000 = 1,35,000 — 1,02,000

= Actual Sales— Break-cvcix snlm = 33,000
(iv) Contribution Per Uoit 60,000 + 15,000 = 4 45,000 + 15,000 = 3
Contribution = Units
(v) Break-even Point (BflP) (Units) 85,000 = 10 = 8,500 1,02,000 = 9 = 1 1,333
BEP - SP
(vi) Margin of Safety (Uoits)

Actual Salcs — Brcak-cvcn Salcs 15,000 — 8,500 = 6,500 15,000 — 11,333 = 3,667

Dlustration 7: The following data have been extracted from the books of Alfa Ltd.
Sales T Profit T
2014 5,00,000 50,000
2015 7,50,000 t,00,000

You are required to calculate:

(i) P/V Ratio
(ii) Fixed Cost
(iii) Break-even Sales
(iv) Prnfit on Sales of T 4,00,000
(v) Sales to earn of profit of T 1,25,000.
 Change in Profit
1. P.'4" Rntio (PX'R)
Change in Sales
? 1.00.000 — 10.000
— x 100
* 7.50.000 — 5.00.000

50.000
= 1o0
2.50.000
20º.

2. Fixed C’ost = Connibiition — Profit

(a) i.oo.ooo — s0,ooo = r 5o.ooo
(b) 1,50.000 — 1,00.000 = ł 50.000
C’ontribiition = 'tales P.''fi' Ratio
= 5.00.000 20 = ? 1.00.000 OR
= 7.50.000 20 = T 1.50,000
Fixed Cost 100
3. Break-even Sales › 2.50.000
P " P яtJo 20
I, Proflt on Sales o1 00
C’ontribution 0. 008 = T 80. 000
Proflt 00 — 50,000 = ? 30.000
5 , Sales to earl° l»1otìi ,2

Required sales

50.000 + 1.25.000

100
1. ,' 5.000
20
T S. 5,000
 Illustration 8: Z Ltd. produces and sells a single article at CIO each. The marginal cost of
production is T 6 each and fixed cost is T 400 per aiiruun.
Calculate:

2. The break-even sales (in T and numbers)

3. The sales to earn profit of T 500.
4. Profit at sales of Y 3000.
5. New break-even poMit if sales price is reduced by 10%.
6 Margin of safety at sales of T 1,500.
7 Selling price per unit if the break-even point is reduced to 80 units.
SO liitiOu:

1 p ,J. Ratio _ C ollÍrJb£liJoll

100 = X' 100
Sales Sales
2. Break-e en Sales

Fixed Cost 400 100 _

(a) In T = = =400X i 1 000
40

Fixed Cost 400

(a) In Nos. = = = 100 suits
C“olitribiitioii Per Ulilt 40º
F ÍX e C“ost + Desired Profit
.3 , Sales io ear i'roií t of T .500 = "
P.'fi" Ratio

4. Profit ori Sale of ? 3000

Profit = C’ontribiitioli — Fixed Cost = 1.200 — 400 = T 500
C’o1itribiitioli = 40? â of T ?•.000 = I 1.200
New Break-even Point if sales price is iediiced by 10St
Old Sales Price T 1
New Sales Price 1
New Contribiition
New P''X' Ratio
FI
New BEP J) 00

Fixerl Cost 400

New BEP (Uiúis) =
C ontribrition Per Unit 3
6 Margin of Safety at Enter 7 1.500
(Old) Margin of Safety = Actual Sales — BEP S me s
= i, oo — i.ooo = 7 5oo i e to i«iit« ;soo = io)
(New) Marei of Safer' = 1.500 — 1. 200 = I ?•00, i.e.. 34 units (300 - 9: r/o)
Selling Price per iuiit if BEP is reduced to 80 units
Fixed C.ost
Br eak-even Polnr in limite
C ontribiition per iinit
 400
Contribution per unit =

Sellhig Price per unit = Contribution Per Unit + Variable Cost per unit
= 5 + 6 = T l l per unit

Dlustration 9: A product is sold at 1 80 per unit. Its variable cost is 1 60 and fixed cost is
T 6,00,000. Compute the following.
1. PfV Ratio
2. Break-even Point
3. Margin of safety at a sale of 50,000 units.
4. At what sale, the producer will earn profit at 15% on sales?
Solution:

Sale 80.00
Variable Cost 60.00
Contribution 20.00
Contribution 20g
1. P/V Ratio . * = 25%
Sales 80
Fixed Cost 6,00,000
2. Break-even Point i 24 00 000
P / V Ratio 25% ' ’

3. Margin of Safety (MOS) at a Sale of 50,000 Units

BHP(Z) 24,o0,000
BEP Units 30,000
Sale Price fi0
 1.

Profit = 15 80 - 100 = 12 pei unit

Fixed Cost = T 6.00,000
Let iinits sold be .v
Sale = 50 x .i. since Sales = 4"ariable Cost + Fixed Cost — Profit
Tlielefore. fi0X = 60X + 6.00.000 — 12X
80X = 72X + 6.00.000
SX = 6.00.000
X 6.00.000 - 8
X ' 5.000 iuiits

Illiisti atiou 10: Frolii the follov ing dnta. coliipiite:

1. P ''4" Ratio
2. BEP in lxipees and unit.
3, Niiiiiber of iinits to be sold to eaiai a profit of T 7.50.000.

Sales Price
Direct Material
Direct U'ages T 6 pei init
fi"ariable Adniinisti‘aiion O •ei1ieads T 3 lei init
Fixed FactO1)* Overlieads I 6.40.000 per year
Fixed Adlliillistration O› elliead I 1.52.000 per year
Solution:

date per Uiut T 20

3"ariable Cost Per Unit Direct Externes — X"ariable Expenses = 1 — 6 + 2• = T 14
Contribution Per Unit = Sale — 4*ariab1e Cost = 20 — 14 = T 14
Fixed Cost Factory’ Overliead — Adniimstrative Overliead
6.J0.000 + 1.52,000 = T .92.000
 6
1, P1‘of1t )"oltlllie Atio (P) ) C oiitri ’ti oi‘ 100

2, Bieak-n en Point (BEP) =

Break - exten Point 26,40.000

3, BEP (Units) r 1 3* 000
Sales Pr ice 20 “

Fixed C. osi — Pr ofit

4. Number of units to be sold tO Ri1121 p1’Ofit of T 7 50,000 =
Conti ibution per unit
7.92.000 + . 0.000
^ ,000
6

Illustration 11: The XL Ltd, k“irnisli the following iliforlnation:

Ist Prrioil Hull Period
Sales 20.00,000 30.00.000
Profit 2 00.000 4.00.000
fi"oii are required to calculate:
1. P ''4" Ratio
2. Fixed Expelises
3. BEP
4. Sales to ear•* 1›1oii i I 5.00.000
5. . Profit v lien sales are T 15 .00.000
Solution:
 C lianee in Pr ofit ?'.00.000
100 = x 100 = 20° â
1, P ''4" Rntio

C’haiige in Sales 1 0. 00.000

2, Fixed Expenses = Contribiition — Profit = 4.00.000 — 2,00.000 = I 2.00,000
C’O11t1ibiition Sales x PA" Ratio = 20.00.000 20°3 = 4.00.000

Fixerl Cost .00.000

3 Break-m en Point (in T) x 100 = 100 = T 10.00.000

Sales to eai’** l°*’ o1 T 1,00.000

Desired Contribtition Fixed Cost — Reqiiired Profit
2.00.000 + 5.00.000 = T 7,00.000
Desirerl Conti ibution 7.00.000
Reqiiired Sales x 100 x 100 = I 3ñ .00,000

4, Profit v lien sales are T l ñ .00.000

Desired Conti‘ibiition Sales PR" Ratio = l 5,00.000 20ᵉ t = ? 3,00.000
Desired Piont Desired Conti’ibiition — Fixed Cost
?•,00.000 — 2.00,000
T 1,00.000

I1liistr:ation 12: Following particulars are available for .fi Ltd. and B Ltd.:

Calculate for each co

Sales reqiuied to fit 0,

 Solntiou:
A Ltd. B Ltd.
(a) Fixed C ost 90 000 60.000
B reak-ex en Pomt =
P / Y Ratio L°5?ó 0%t
=C3,60,000 =C400.000

(b\ Marein of Safety = .Actual Sales — Brealc-even Sales 6.00,000 — 3,60.000 6.00 000 — 4 00.000
=C2,40,000 =Cl00.000
(c) Sales required to e.així profit I 90.000
Fixed C. ost — Desired Pl ofit 90.000 + 90.000 80.000+90.000
P .'' ¥”Ratio L°5? ó 0°%
= T 7 20,000 =C8.50.000

Illustr:itiou 13: M’'s EAR Enterl• ises fruit slies the following information:
4"enr Sales (T) Pro fit (T)
20 l3 6,00.000 60.000
20 14 5,00.000 1,00.000

Fi oin the above. calciilate the fo11OI¥‘11lg Í1JO12lIi3l1O1l '

(ii) Fixed C’ost

(iii) Break-n en Cost
(iv) Sales to eai11 l›roilt I 2.00.000
(v) Marvin of Safety of 2014.
Soliition:
C.lian_•eiii Pr ofit
1. P''4 Rntio ' 100
C.1iange in Sales
1.00.00 — 60.000
= 100

8.00.000 — 6.00.000
20' t
2. Fixed C’ost = C’onti ibiition — Proiìt

(PS' 'R Sales) — Profit

= (20? t 6 00 000) — 60,000 = T 60.000
0' t 0) — .000 = T 60 000
?6
r 3.00.000
tÌ
4. Sales to Earn

Desired

2.60.000
Desired Sales = T 1?•. 00.000
2 0 0. ê

1. Margin or Safety for 2014

MOS Sales = Total Sales — Break-even Sales

= 5,00.000 — 3.00.000 = T 5.00.000
MOS Sales
— x 100
Total Sales
1.00.000
= 100
8.00.000
Illiistiratiou 14: Front the follow ing pnrticiilørs. you are refuted to calculate:
(i) Fixed C’ost
(it) Profit X"oliinie Rntio
(tit) Break-even Sales

(iv) Sales to eai i= otit of 7 6,00.000

(v) Margin of Safety of the year 201
2012 (Ç 2013 tT)
Total Cost 1 .96,000 18. 1000
Sales 1440,000 2lt0.000
Solution:
Profit (1st Peiiod) = 14 40.000 — 12.96 000 = 1.TI.000
Profit (2nd Period)= 2 1,60.000 — 1S.72,000 = 2,88.000
Change in Pr oîìt
(a) P 'X" Rntio 100
Change Sales
( .88 000 —1.44. 000)
. 100
(21.ò0.000 — 14.40.000)
1.ñ4. 000
100 = 0ᵉ 3
7. *0.000
(b) Fixed C’ost (2012) = Contribution — Proîìt
= (P/fi' Ratio Sales) — Profit
( T 14,40,000 20%) — 1.U,000
= č 2,8$. 000 — T 1.44.000 T 1.W.000
 _ Fixed Cost _ 1.44,000
Z 7 20 300

I1ltistr:ition 1.i: T)ie following is the cost structure of a prodrict Se11inp• price 7 100 per iuiit.

h4aterial
Labour‘
Direct Expenses
Fixe‹l ovei'heads foi' the yeni.•
Factory Overheads ? .80,000
Office Oveilieads T .20,000
to, of Units Produced and Sold 40,000
Calculate:
1. P,'fi' Ratio
2. Break-even Point in units
S. hiareuiofSa1uy-Amount
4. Break-e en Point if fixed overheads incieased by 20 5.
5. Re› ised P''1' Ratio when selling piice ilicreased by 20 â.

Solution:
Total T Per Unit T
(A1 Sales 40. 00.000 100
(B) 4"ariable €?ost
— Material 1120.000
— Labour 560.000 14
120.000 8
2400.000 60
(C’) Contribution (A — B)
(D3 Fixed C. ost 1é.00.000 40

Factorys
280.000
Olfice
120.000
5.00.000
Subtotal
(E) Profit ( C. — D1 1100.000

1. P.’'4* Rntio
Sales 100
rixed Cost
2. Break-n en Point n Unils = 12.500 Units

Marvin ofSai’ety Amount =

3. =
 I, Break-ei en Point is fixed overheads increased by 20°.â
Contribution = 16.00,000
New Fixed Or erheads = 5.00.000
Proi“ii 10.00.000

Fixed Cost 6.00.000

Break-n en Point in Units = = 15,000 units

C ontribiition per‘ Unit 40

Break-n en Point in T 15.00.000

titles — Variable C’ost _ 120 — 60

1. Selling Price increased by 0. é = PA' Ratio = — «0° ›
S.ales 120

Illustr:ation 16: A company produces and sells 1.500 iuiits of a conunodity at 7 0 ea cli, The
amiable cost of the production is T 12 per iuiit and fixed cost T 8.000 per aiiiauii.
Calculate:
(i) P, Y Ratio
(ii) Sales at break-even point
(iii) Additional sales reqiiii’ed to earn the sarrie amount of profit if se1lin_• price is i‘educed by 10ââ.

Solntiou:
Pai tiriitai s Original (li 00 units) \\’oi king Res ised
Sales pei Unit [fi] 0 .3 0.000 2 0 — l Olâ 18
Yariable C'os t per Lhfit [V] 12 l 8.000 12
Conti’ibiition per Utiit [S — 4'] 8 12.000 6
Fixecl C. osts (FC ) 8.000 8.000 8.000
Profit 4000

Equutious:
COlltribul ioil C’ 1s. 000
1. Profit X"oltune Rntio (PXR) = 100 = — 100 =
Sales S 30.000
rixed Cost g.ooo
2. Break-m en Point in Units ‹ 0 000
Pr ofit \'olunie Ratio 40°. 6 ‘

BEP (Units) Break - even Point _ 20.000

= 10,000 iuiits

Sale Price 203.a

5'oi'k-Bark:

Fixed cos I + Pi ofit

1, Niunber of units to be sold to earn same pi’ofit of T 4.000
Contribution per unit
8.000 — 4.000

= 2,000
2, Units sold earlier = 1,100
3, Add1tiO11a1 filths to be sold = 2.000 — 1,500 = 500
 Illustration: 10

A company manufactures a product, currently utilizing 80a capacity w'ith a turnover of Rs. 8,(D,000
at Rs,25 per unit, The cost data arc as under :
Material Cc›st Rs. 7.30 per unit. Labour C’osr Rs. 6.25 per unit. 5emi-Variable Cost (including variBblc cOSt of
Rs. 3.7'i |mr unit) Rs. I ,8O,fXO.
Fixed Cost Rs. PfJ.IXO upte 8t/96 level of output, b¢yond this an additional Rs, 20,QXi will be incuncd.
Calculate:
(1) Activity level nt Brrak- Even Point.
(2} Number of units to be sold to earn a net inccirne of 8% of sales.
(3) Activity level nocdcd to csrn a profit of Rs. 95,OXI.
(4j What should he lhC selling price per unit, iL break-c ’en point is to be brought down to 40% activity level?

lYprking Ffotes :
(o) Variable cost ptr unit :
Material cnst Juir unit 7,50
6.25
Semi Vnriakle cost per unir 3,75
Variable Cost per unit
(h) Cuytribution per unil :
Contribution per unil Selling price per unit — Variable cosl per unit
Rs, 25 - Rs. 17.50

ie) Fixc4 cmt in Semi Vert»ble Cest :

Total semi variable cost Rs. 1.80.000
Fees . Vari‹ib\c cost @ Rs. 3.7$ per unit
(Rs. 3.7*l x 320tXI uni£s) - Rs. t,20,0Q/

Fined cost in semi-variable cost Rs. 60,0Xi

Idl sbi»i ri«a «u »pi» aoa lev*i:
r•ed cost upio 80a Rs. 90.GD
hdd .' Fixed cost in Semi variable cost Rs. 60,IXD

Total Fixed cost upro 80R level = Rs. 1,50.IXD

(e) Total Plzed cæt above b0% iesel :
Fixed cost opio 80' Level - Rs. 90,000
Fixed cest in Semi-variable cost = Ri.
Add .‘ AdditiouaJ Fixed cost = Re. 20,ŒO
To‹ai Fixæ cœt «io›c æs k›vci Rs. 1,70.ŒO
I0 Ne of units prodnced st 80s kvel :
Total Tumovcr - Rg. 8.JAI.ŒXf
Ra. 23
8,œ,0tZi
No. of units produced = = 33.ŒO ‹u›its
25

(g) Ho. of units predueed st 1tD& levcl :

No. of units prat ced at 80% level 32.ŒD units
{g) léo. of asile Produced et 1ŒI& lewt :
32. ŒD units
32,IXD
mo. of units produced at tŒi% luvel

• Sales unisx Confibuûon yr unit -Fisnd Con

- (32.ŒXI x Rs. 7.5) - Rs. t,50,000
= Rs. 2,40,IX0 - Rs. l,50,ŒXt = Rs. 90,ŒX\

Porccntage to sales

ll.M% of sales
fiixcd Cost = Rs. l,40,tXKl
 1) A< bylmdsBEP:
Fixed Cnst
Artivity level at B E P =

Rs. 1.30.000
Rs. 7.5
20,RD
= x 100 = 50a lcvel

2) humMzoFunWtoMmNdazzmana1nronwd8' ofsNm:
SuppowSales Unit = X
Equation :
saics Vsriabic Cost + Fixed Cost + Rrofit
25 X 17.SX+l50DD0+2X
( 1
25 X l9,âX+lJ0.GD
25 X - 19.5 X = I50.AD

Hupinal Cosmo and Cum Vmmie Profit Annlys‘u

5.5 X

S.5X l.So.000
1.50.ID
- 27.273 units

(3) Artivity kvel needed to erm s proht of Rs, 9S,0ID

The profit amount cun be achieved at over 8 ' level. hence fixel cest will be Rs. I.70,0fD

Sales

= 35.33d units
7,3
 35,333

(4) Selling price per unit required in brlng down B E P tn 4oR activity ievtJ :
4OR› Aciivity level 40'I of 40,OD

Selling price to Breah-Even at the level

l Jfi,0tD
- +Ri. 17.50

Ri. 9 375 - Rs. 26.87$

Selling price per unit

required to bring down - Rs. 26.875

B E P to 40'X activity kvcl

From ihe following informzzion calculate the Cash Brzak-Even Point:

Selling price per unit Rs. 60
Variable cost per unit Rs. 40
Fixed cost Rs. 2,tD.tXD
Deprefiafinn iricliufcd in fixed cost Rs. S0,0tD

Cesh Fiacd Cnst

Cash Piled Cosi

Cash Break-Even point in units
Contribution pet unit
. + .
= =7 an›ts

SOLUTION:-
Calculation of cost bieak even point between A & B.
hC#O(Xl(x lix = '7C)l(MM)+ lOa
 I2x — 1 0x = xi9.DLI.000 — fi.UI).GUI
. ’°°””' =› ‹no‹o..«
Honor ao breaL even* poiqt butwuezi A end B - I ,°i0.IXXI units
Calculation of break even’ int between A and C.

Hence, cost break cvcn point bcrwccn A and C = 2,2*i.fXJtJ unics.

Calculation of break even oint between ‘B and C’
T.C.» = T.C

Hence, Cost break even point between B and C is 3,0fl.Otfl uniCs.

Ststeoient o/' Rsnge
Levnl (imit) Preference
NI- 14.9999 A
l,5fl.flfi A or B
i3‹.xxxi la 2,w,ve a
More tban 3,tX).tXI0 C

QUESTIOI'4 10°— The product of a company is as under:

UniLs 3fi.tltXl I 2.titltl

Selling Price Rs. 5 l II
Variable cost Rs. 4 3
Fixed Costs Rs. 3€I.UI
You arc required to calculate the bicak-even point in units.
Find the shiñ in the break-even point in units, if the company discontinucs product A and substitutes
products C in iLs placc. Tire quantity of products C is ñ00O unins and iLs selling price and variable costs
respectively arc Rs. 12.IN and 6.00.

Statement of Break Even Point (Unit) {between A and B]

Prmluct Quantity Selling Variable Contribution Contribution Break Even

A 36.IXXI *i 4 I 36.CXXI IXXI

J2,fXXT 10 3 7 84,fITXl 3fXX
4ff,fXX Concribucton I.2‹ .IXXI J2(XX7

€'roup Break Even Male (Unit)

Total cfrnlribution
°Gmupxo€nbufonpruoit =
T l
1 2D (If
 2.5
.•-Gmup Break Even Point = 12.11 unics

Statement of Break Even Poinf [between C and B)

Pmduct Quanóly Ńelłing Prace Variable ’f’otał Break Even
Contribuiion Point

t2tXXJ Itd 3 H4.fXXJ 3IXXJ

I .2fJ.0U 45UfJ

Group contribution pcr unit = Tntal cnnrrihutinn

=6.66

F\xed mst
p u ion par

= 45Ifl uniŁs

QUESTION 12:-The budgeted results of A LU are as under:

Values Ratio

2,5O,flofl 30 2€i
32
30 4g
I 2.SI).(** I i‹x›
Fixcd ovcrhcads tor thc pcriod Rs. 5,Ii2,2(XI.
Tim managcmcnt is worricd about Uic rcsults.
You are required ta prepare
(a) A statement showing tire amount of loss, if any, being incurred at present and recommend a change in
tlic sale vaiuc of cach product zs well as in the total salcs vaiuc maintaining same saics- mix,
which will eliminate the said loss.
(by Recommend the additional sales of any individual product to recover the loss.

Statement showing profil and loss

Przxłuct Sales P.Y. Ratio Contribution Break Even Additional

Małe (Ile.) fiale
X 2,3(l,tXXl J ,23,fXXJ 2 7ft,tXXJ 2fJ.IXXI
Y I,fi ,ffXJ 4,32,tlID 32,UfXl
Z J,tt0,fXXł ń.4tt,0ł I 48,0fXJ
Total 4.ń3,fXXł 13.D6.IXXI l,00,u0fT

profit (37.2fKl)
 Group P.Y. Raiio =
Total sa les

= 37.2'S
Break Evan Sales (Rs.) = 7 2,s
Existing Sale = l2,50,ffXl
.-. Addition at Safe = l,fXl.GfXl
fb) Individuel sale to be increased.
Additional cnntrihu finn _ 97.200
For x =
P.V. Ratio 5Û’à

= R.s. 74.4fW

Addition al contributir›n
For Y = 37.2M
P.Y . R atir› 4tl'f

= Rs. 93.fX1tl
AdditionaJ cr›niribution 37.2tlfï
For Z =
= t,24,ÛfXJ

QuestÏonl8: - S. P. Rs. 245 per unit

Production cout per unit
Matcrial 7()
Ln8our (10 Hrs Ié* Rs. 8)
Variable production ovcrhced
Fixcd Production ovciticad l()

Rs. JO
Installed capacity 20,fOi uniLs. Normal capacity I €i,0fXl units. Staffing overhead (fixed) Rs. I ,0fl,0fXl. Under
en agreement with union. Labour has to be pnid for minimum l,fi€l,fXlfl hours. For labour hours in excess of
1,5tl,€if8l hours, labour has to 8c pnid er the rate of tCs. 12 per hour .
1. Find BEP,
2. Find BEP if fixed sclling ovcrhcad to Rs. 3.95,fflfl
3. Find BEP if fixed sclling overhead increases to Rs. 6,'tlfl,flffl.
SOLUTION:-
(i) Statenient nf Break Everit Póint (for fira 1O.Otl0 unit)
Qty Contribution per unit (W.N I) Total Fixcd Cost
RíXXl 125 Ib hi lXlú
Totai Fixcd cost (W.N z) líl,6Il.6ti0

tü) Stateme st of break even poiist (for next 50lttt unit)

Qty ixintribution per unit(W29 -1) Totalfi»«l«»t
l8,t1IXl 125 l2,5tl,IXfll
líXXl 45 45.tXJIl
iz,9s,txxi
(üi} fitatemeot of Brzak Eveo Poiot
Qty Cazstrtbuóon Per fJo“zt ’l'otal E'ixed cost
ln,‹Ifk› i25 i2,s‹›.fkxl
SfltXl 45 2,25.0 D

Fixcd cost (W.N — 2) 15.Gú.GtX1

CalczüaÒon of contrtbuJïon per unit

Fn fiW 19@B Fou Not 5@0 Fou Nm4 5M@
Slhng pncc 243 245 245
Less: Material cost 7í1 7tl 7(1
Latxsur cost ii8 I2fl
Variable cost 5tl 5tl
Contribution 125 45 5

CatculaÒon of fïseó cost

I casc II caae IU casc
Pnadoctionovcr scihng ],fk›.cxl i,‹N.‹xx) l,c›.cN
Sciling ovcr hcad i,.íximo 3, s.Gfxi e,M.rxi»
 Fixed cnrt
(i) Break Even Point (only including fixed cnst) = Cnntrihut ion

= RJ Unit

(ü) Semi variable cost for 80 units

=2d1
F ed cnrt + Remi vzriah Ie cnst
Again, Break Even Pint (Including S.V.C) =
Contrihution/Unit
_ 2Dfl0 +
?00" 25
= RR unie.s
At the tevel of 88 units
Semi variable cnst to be inciirred
= 5Ö (Approx.)
 Any Key Factor Is Concerned With Production Or Sales Which Imposes
Limits On The Production Or Sale Can Be Called Limiting Factor. Key Factor
Can Be Any Of The Following:
a. Sale Potential May Be Limited
b. Production Capacity May Be Limited Due To Limited Availability Of
Skilled Labour Time`
c. Finance Can Also Impose Limitation On The Operation .
d. Raw Material May Be Short In Supply.

8. What Is Incremental Analysis?

According To Icma London “ Differential Costing Is A Technique Based
On Preparation Of Adhoc Information In Which Only Cost And Income
Differences Between Two Alternatives Or Courses Of Action Are Taken Into
Consideration”.
9. What Is P/V Ratios?
This Is The Ratio Of Contribution To Sales. It Is Important Ratio
Analysing The Relationship Between Sale And Contribution. A High P/V Ratio
Indicates High Profitability And Low Profitability Ratio Indigates Low
Profitability.
Formula For P/V Ratio:
P/V Ratio = Contribution
* 100
Sales
 1. Pepsi Co mpany produces a single artic Ie. Following cost data is given about its
p roduct:-
Selling p ri ce per unit Rs.40
Marginal cast per unit Rs.24
Fixed cast pe r annum Rs. 16000
Calculate:

(a) P/V ratio (b) break even sales (c) sales to earn a profit of Rs. 2,000 (d) Profit
at sal es of Rs. 60.000 (e) N exv break even sales, if p rice is reduced by 1 @o o.

Solution:
We knoyz that (S-v) /S= F + P OR s x P/V Ratio = Contri buti on
So, (A) P/V Ratio = Contributio n/sales x 100
= (40-24)/40 x 100 = 16/40 x 100 OR 40Pa

(B) Break even sales

S x P/V Ratio = Fixed Cost
(At break even sales, contribution 1s equal to fixed cost)
Putting this values: s x 40/100 = 16,000
S = 16,000 x 100 / 40 = 40.000 OR 1000 units

(C) The sales to earn a profit of Rs. 2,000

S x P/V Ratio = F + P
Putting this values: s x 40/100 16000 + 2000
S = l8,O0Ox 100/40
S Rs. 45,000 OR 1125 units

(D) Profit at sales of 60,D00

S x P/V Ratio = F + P
Putting this values: Rs. 60,000 x 40/100 = 16000 + P
24,000 = 16000 + P
24,000 — 16,000 = P
8,000

(E) N e v break even sales, if sale p rice is reduced by10P

New sales price 40-10% ' 40-4 = 36
M argi nal cast = Rs. 24
Contribution Rs. 12
P/V Ratio Contribution/Sales
12/36 x100 OR 33.33%
N ov/, s x IN Ratio = F (at B.E.P. ca ntri button is equal to fixed cast)
S x 100/300 Rs.16000
II

”8

S= Rs ,48,000.
 2. From the fallavvi ng i nformation's find out:
a. P/V Ratio
b. Sales &
c. M argi n of Safety
Fixed Cast = Rs.40, 000
Profit Rs. 20,000
B.E.P. = Rs. 80,000

Solution:
a. P/V Ratio.
We know that S — V = F + P OR S(S — V)/S = F + P
B.E.S. x P/V Ratio F (Value of P is zero at BE Sales) OR P/V Ratio F/BES
Putting the value,
P/V Rati o 40,000/80,000 50/100 OR 50%
b. Sales.
We know that Sales x P/V Ratio F+ P OR Sales x P/V Ratio Contribution
OR Sales = Contribution/P/V Ratio
So, = (40.00O + 20,000)/sO/1O0
= (60,000 x 100)/50
'Rs.1. 20,000
c. Margin of Safety.
Margin of Safety Sales — B.E.P Sales
So, MOS = 1, 20,000 — 80,000
MOS = Rs.40. 000

3. Bansi can pany manufactures a single product having a m arginal cost of Rs. 1.TO per
unit.
Fixed cost is Rs. 30,000 per annum. The market is such that up to 40,000 units can
be sold at a price of Rs. 3.00 per unit, but any a dditional sale must be made at Rs.
2.00 per unit. Company ha s a plann ed profit of Rs. 50,000. How m any units must be
ma de and so Id?

Solution:
a. Contribution desired = Fixed cost + Desired Profit
= 30,000 + 50,000 = 80,000
b. Calc ulatiait of contribution by producing 40,000 units.
Contribution per unit = Selling price — Marginal cast
= 3.00 — 1.50
= 1.50
c. Contributia n far producing 40,000 units.
= 1.50 x 40,000 units
= Rs.60, 000
d. Additional units to be produced and sold at Rs. 2.00 per unit after 40,000 units.
=Rs.80, 000 —Rs. 60, 000
 =Rs.20, 000
e. Units to be produced far contribution of Rs. 20, 000 after c hange i n price.
Contri buti on per unit = Rs . 2.00 — Rs. 1.50= Rs. 0.50
f. Additional units to be produced for co i›tribution of Rs. 20, 000.
(20, 000 x 100)/50 40, 000 units.
Total units to be produced to earn planned profit= 4D, D00 + 40, D00= 80, D00 units.

4. Mita its I1i & compa ny ma n ufa cture three p roducts. The Tal la cvi ng is the cast data
relating to products A, B, an d C.
Products A B C Total
Rs. Rs. Rs. Rs.
Sales 1, 50. 000 90. 000 60. 000
Variable Cost 1, 20. 000 63. 000 3 6. 000
2. 19, OOO
Co iltribution 30, 000 2 7, 000 24, 000
81, OOO
Fixed Cost 40, SOO
Profit 40, SOO
P rove that how knowledge of margi ical costi i1g can help man age we nt in c hanging the
sales mix i n a rd er to increase profit of the compa ny.

Solution: Let’s finda ut relative profitability so that we can compare it later on.
Products A B C TataI
Rs. Rs. Rs. Rs.
Sales 1. 50, 000 90, 000 3, 00, 000
Variab Ie Cast 1, 20, 000 36, D00 2, 19, 000
Contribution 30, 000 81, 000
Fixed Cost 40, 500
Profit
P/V Ratio 20% 3D% 40% 2796
From the above table it is clear that \’vith the cainparisait of product B and C, A is less
profitab Ie. Kee ping total producti o n same, company should chailge the sales mix i it
a way that emphas is shouId be on praducing product C a nd B .
Now a ss ume that the con pany decides to use its production capa city wore for product
B a nd C thait A. Let’s see the effecta it profit if sale of p roduct B and C is increased by Rs.
30, 000 each and p rodu ct A by reducing Rs. 60, 000.
Products A B C Total
Rs. Rs. Rs. Rs.
Sales 90, 000 1, 20, 000 90, 000 3, 00, 000
Variable Cost 72, 000 84, 000 54, 000
Contribution 18, 000 36, 000 36, 000 90, 000
Fixed Cast 40, TOO
Profit
From the above table, we can observe that proposed c hange in product mix lea ds to
an increa se in profit from Rs.40, 500 to Rs. 49. 500.
 5. A co mpany ha s a icac hi ne No. 9 \’v hich can produce e ithe r p rod uct A or B. The cast
data rel ating to ma chine A and B are as follows:

Particulars Product Product B

Selling price Rs. 20.00 Rs. 30.00

Variable Rs. 14.00 Rs. i8.00
expenses
Contributia n Rs. 6.00 Rs. 12.00

Additional Informati on:

a. Capacify of m achi ne No. 9 is 1, 000 hrs.
b. I n one hrs m achine No. 9 cait produce 3 units of A a nd 1 unit of B.
Whic h p roduct sho uld icachi we No. 9 produced ?

Solution:
Statement sha\vi ng coiltri bution per hour for m achine N o. 9

Particulars Product Product

Sales
Variable expenses 18.00
Co ntributian per uilit 6 12
Co ntributian per hour
Co ntributian per 1, 000 GB, 000
units
From the above ta ble we can see that company should produce product A with the
hel p of ma chin e No. 9.

6. Meet & company Ltd. has three divisions each of \’vhich makes a different product.
The budgeted data far the next year is a s follows:

Divisions A B C
Rs. Rs. Rs.
Sales 1, 12, 000
56, 000
Direct m aterial 7, 000
Direct labo r 7, 000 22, 400
Variable averhea d 7, 000 28, 000
Fixed cast 14, 000 28, 000
Total cost 35, 000 92, 400
The management is can sidering cl osing down division C. There is no possibility of
reducing variable costs. Advice whether or nat division C shauld be closed down.
S-olution:
Marginal Cost Statement

Division A B C
Rs. Rs, Rs.
Sales 1, 12, 000 56, 000 84, 000
Marginal cost 33, 600 21, 0D0 64, 400
(Direct material + Direct cost +
Variable overheads)
Contribution 78, 400 35, OD0 19, 600
Fixed cost 28, 000 14, OD0 28, OOD
Profit 50, 400 21, 000 (8, 400)

7. Cost d ata for last year:

Sales 60, OO, 000 (Operating at 75% capacity)
Marginal cost (509a of sale) 30, DO, OOO
Contribution 3D, DO, OOD
Fixed cost 2D, DO, OOD
Profit 1D, DO, OOO
Percentage of profit over sales 16.7%
A report on the performance for th e year stated:
Sale's BD, 00, OOO
Profit 16, 00, 000
Percentage on profit on sale 2096
Should the performance of current year be commended? What option should be
conveyed to th e managing director on the basis of the Cost - Volume - Profit analysis?

Statement showing profit for last year and profit at a sale of Rs. 80, DO, 000
Particulars Last year performance Performance in present
759'â capacity activity level, i.e., 10096
Rs. Rs.
5ales 60, 00, 0D0 80, 00, 0D0
Marginal cost 30, 00, 000 40, 00, 000
(5096 of sales)
Contribution 30, 00, 0D0 40, 00, 0D0
Fixed cost 20, 00, 000 20, 00, 000
Profit 10, 00, 000 20, 00, 000
 From the above table y/e can say th at resuIt of current year’s performa wee is not
commendable because profit should have been 25Pa of sales after ope rating at 100%
ca pacity, v/herea s it is only 20Pa of sales.

8. The lo ll o\’ving budget has bee n prepared at 70% level af home market:
Units - 4, 200
Wages - 12, 600
Materials - 21, 000
Fixed Lost - 7, 000
Variables cost
Total 42, 700

Th e selling p rice in lndi a is Rs. 15. In Sri Lanka abaut 800 units may be solda nly at Rs.
10 and in addition 25 paise per unit will be expe nses as freight etc, Do you a dvise trying far
the market in the Sri Lanka?
SolLît ÎOn:

Particula rs India Sri Lanka Total

(BOO units) (5000 units)
Rs. Rs. Rs.
Sales (units x price) (A) 71, 000
Materials (Rs. 5 per unit) 25, 000
Wages (Rs. 3 per unit) 2, 400 IS, OOO
Variables(Rs. 0.50 per unit) 2.100 400 2, SOO
Freight (O idly fa r Sri Lanka Rs. 0.25 per unit) 200 200
MarginaI cost (B) 85,700 7, 000 42, 700
Cant ri bution (A — B ) 27. 500 28,300
Less: Fixed cost 7.000 7, 000
20, 300 1, DO0
Suggestion: It is a dvisab Ie to try for th e Sri Lan Can market at Rs. 10 per unit as by
doing so there is an in crease of Rs. 1000.

9. Asiait paints mailufacture 1, 000 tins of paints when working at no rmal capacity. It incurs
the cost of Rs. 16 i it manufacturing one unit. The details of t his cost are give it be low:
Pa rti cu lars Rs.
Direct material 7.SO
Direct I abar 2.00
Vari able overheads 2.SO
Fixed overheads 4.00
Production cost (per 16.00
unit)
Each unit of product is sold far Rs. 20 with variable se lling and administrative
expenses of Rs. 0.50 per unit of production.
 During the next 3 months, o nly 500 units ca it be p roduced and sol d. Managementp
lans to close doyen the factory estimating that the fixed mailufactu ri ng cost can be reduced
to Rs. 2, 000 for the quarte r.
Whe it the plai1t is operati ng, the fixed overhead costs are in curred at a uniform rate
throughout the year. Additai ical cost of p lant shut down for the three month is
estimated at Rs. 2, 800.

Express your vie\’v whether the plai1t should be shut dov/n fo r three moilths, and
calculate the s hut down paint fa r three manths in units of products.

Solution:
(A) Statement showing Contribution per unit:
Particulars Per unit
Rs.
Direct mate real 7.50
Direct labor 2.00
Variable overheads 2.50
Vari abl e selli ng and 0.50
admini strative expenses

Margi ical cost (Total) (A) 12.50

Sales (B) 20.00
Contribution (A - B ) 7.50
(B) Computation of Loss, if the plant is operated:
500 units to be produced:
Co i›tri bution on 500 units:
500 x Rs. 7.50 = Rs. 3, 750
Fixed cast for three months

= Rs. 10, 000

Expected cost on Operation
(Contribution — Fixed cost) = Rs. 6, 250
(C) Computation of loss, if the plant is shut down:
Unfavorabl e Fixed cast = Rs. 2, 000
Additi o ical cost of Shut down = Rs. 2, 800
Total loss an shut do\’vn = Rs. 4, 800
(D) Advise: From the above calculation, it is clear that it is in the interest of
company to shut down.
(E) Calculation of shut down point:
Avoidable fixed cost far the period
= Total fixed costs for the period - unavoidable fixed cost - additional cost for shut
down
= Rs. 10, 000 — Rs.2, 000 — Rs. 2, 800
= Rs. 5, 200
Ski ut down point = Avoidable fixed cost / Contribution per unit
= 5, 200 / 7.50 = 693 units.
 10. A con pany is p roviding its product to the co ns ume r through the wholesalers. The
managing director of the company tllinks that if the ca inpany starts selling thraugh
retailers or to the co ns ume rs directly, it can increase its sales, ch arge higher prices and
m ake more profit.
On the ba sis of the la llo ving i nform ati a it, advise the managing directar whether the
company s houl d change its channel of di stributia it a r not:

Particulars Wholesaler Retailer Cons umer

Rs Rs. Rs.
Sales per unit 5.25 6.00
Estrnated Sales per year 1, OO, OOO 1. 2O OOO 1, 8O OOO
(units)
Selling and distribution 040 1.OO
averhea ds (pe r unit)
Cost of p rodu ction: Vari ab Ie cost Rs. 2.50 per unit, Fixed cost Rs . TO, 000.

Statement of profit
Particulars Wholesaler Retailers Consumers
Rs. Rs. Rs.
No. of unit so Id 1, 00, OOO 1. 20, 000 1, 80, OOO
Sales reve nue (unit x 6, 30, OOO 10, 80, OOO
price) (A)
Variable cost 2. 50, 000 4,50,000
Selling and distribution 40, 000 1. 20, OOO 2,70, OOO
overheads
Marginal cost (B) 2. 90, 000 4, 20, 000 7, 20, OOO
Contribution (A — B) 70, 000 2. 10, 000 3, 60, OOO
Less: Fixed cost 50, 000 50, 000 50, OOO
Profit (Contribution - 2D, 000 1, 60, OOO 3, 1D, 000
Fixed cost )
Advise: Sales shouId be made directly to the coils ume rs as this c Manuel Contributes
higher profit.

11. The cost analysis of two products A and B is given beloz’v :

Particulars Product A Product B
Rs. Rs.
Material Rs. 2.50 per unit 25 45
Labor @ Rs. 1 per hour 12
Labor @ Rs. 1.50 per hour 15
Variable overheads 5
Selling price 70 80
 On the basis of above information, which product would you recommend to be
manufactured if labor is key factor and if material i5 key factor?

Solution:
Here first of all we have to find out contribution on the basis of both, material as a key
factor and labor as a key factor.
Statement showing marginal cost and contribution
Particulars Product A Product B
Rs. Rs.
Selling price(A) 70 80
Material 25 45
Labor 12 15
Overheads 2 5
Marginal cost (B) 39 65
Contribution (A — B) 31 15
Contribution per unit of 31/1D units = 3.10 15/18 = 0.83
Material (25 units/ 2.50 = 10 units) (45 units/ 2.50 = 18 units)
Contribution per labor 0.258 1.5D
Hour (31/12 hrs) (15/10 hrs)
Advise: If labor is key factor then product B and if material is key factor then product A
should be produced.
12. A manufacturer produces 15D0 units of products annually. The margin al cost of each product
is Rs. 960 and the product is sold for Rs. 120D. Fixed cost incurred by the company is Rs.
48, D00 annually. Calculate P/V Ratio and what would be the break - even point in terms
of output and in terms of sales value?

Solution:
A. Contribution per unit = Sales - Variable cost = Rs. 12OD — Rs. 960 = Rs. 24D
B. P/V Ratio = Contribution / Sales x 100 = 240/12OD x 100 = 20P«
C. BreaL-even point (in units) = Fixed cost / Contribution per unit=
=48, OOO /240 = 2OD unit5
D. Break-even point (in Rs.) = Break-even point x selling price per unit
= 2DO x 1200 = 2, 40, OOfi
OR
D. Break-even point (in Rs.) = Fixed cost / P/V Ratio
= 48, DOD / 2D96 = 2, 4D, DO0

13. From the following d ata calculate Margin of Safety.

1S, 00, OOO

Fixed expenses
Profit
 Solution:
P/V Ratio = Fixed expenses + Profit / Sales x 100
= Rs. 4, 50, OOO + 3, OO, OOO / 15, 00, 000 x 100
- 7, so, ooo / es, oo, ooo x too
= 5096
Margin of Safety = Profit / P/V Ratio
= 3, 00, 000 / 50%
= 6, 00, 000

14. Following data is of Dev manufacturing company.

Costs Variable cost Fixed cost
(9â of Sales) Rs.
Direct materials 23.8
Direct labor 18.4
Factory overheads 21.6 37, 98D
Distribution expenses 4.1 11, 68D
General & administrative expenses 11.1 13,34D
Budgeted sales for the next year are R5. 3, 70, 000.
Calculate the followings :
The sales required to break even.
Profit at the budgeted sales volume
The profit, if actual sales — A. Increases by 5 P» from the budgeted sales and B. Drop
by 10#« from the budgeted sales.

Solution:
A. Variable cost = 23.B + 18.4 + 21.6+4.1+11.1 7996 (of sales)
So, it will be 7996 of sales = 3, 70, OD0 x 79 / 100 = 2, 92, 30D
B. Fixed cost = Rs. 37,980 + Rs. 11, 680 + Rs. 13, 340 = 63, 000
C. Contribution 100 — 79' 219a
D. P/V Ratio = Contribution / Sales x 100
' 21 / 1D0 x 100 21%
Break-even point = Fixed most / P/V Ratio
= 63, OD0 / 21P
Rs. 3, OD, DOO
Profit at budgeted sales of Rs. 3, 70, 000
Contribution = Sales x P/V Ratio
= 3, 70, D00 x 21a
= Rs. 77, 700
Contribution= Fixed expenses + Profit
So, Profit = Contribution - Fixed expenses
= Rs. 77, 700 — 63, OD0
= Rs. 14, 700
 Profit if aetual sales increased by 596 from the budgeted sales.
Particulars Rs.
Sales 3, 70, OD0
Add: 596 increase on Rs.3, 7D, D00 1B, 5D0
Revised sales 3, 88, 5D0
Less: Variable cost 7996 of Rs. 3, 88, 3, 06, 915
DOD
Contribution 81, 585
Less: Fixed cost 63, 0D0

Profit if actual sales dropped by 109a

Particulars Rs.
Sales 3, 70, OD0
Lees: 10 96 decrease on R5. 3, 70, OOO 37, OD0
Revised sales 3, 33, OD0
Less: Variable cost 79% of 3, 33, D00 2, 63, 070
Contribution 69, 930
Fixed cost 63, OD0
Profit 6, 930

15. Gyan limited manufactures and 5ell5 four types of products under the brand names A,
B, C, and D. The sales mix in value comprised 30P«, 4096, 2096, and 1096 of A, B, C, and D
respectively. The total bu dgeted sales are Rs. 60, OOO per month. The operating costs
are:
Product A - 6096 of selling price
Product B - 70% of selling price
Product C - 8096 of selling price
Product D - 70% of selling price
Fixed cost Rs. 12, 000 per month. Calculate the break-even point and percentage of
margin of safety for the product on overall basis.

Solution:
Calculation of Sales Mix
Products
A B C D Total
Particulars 30% 40% 2D% 10% 1D0%
Rs. Rs. Rs. Rs. Rs.
Sales 18, OOO 24, OD0 12, OOO 6, 0D0 60, D00
Less : Variable cost 10, BOD 16, BDO 9, 6OD 4, 2DD 41, 4DO
Contribution 7, 200 7, 200 2, 400 1, 800 18, 600
Less : Fixed cost 12, ODO
Profit 6, 600
 P/V Ratio = Contribution / Sales x 100
= 18, 600 / 6o, o0O x 1Do
= 3196
Break-even point= Fixed cost /P/V Ratio
= 12, OOO / 31%
= 38, 709
Margin of safety = Actual sales - Break-even point / Actual sales x 100
= 60, OOO — 38, 709 / 60, OOO x 1D0
= 35.4896

16. From the following information, calculate Break-even point and Sales to earn profit
of Rs. 2, 40, OOO.

Particulars Rs.
Sa les 8,OD,DOO
Fixed cost 3, 6D, 000
Variable cost 5, 6D,00D

Solution:
Contribution = Sales - Variable cost
= 8, OO, 000 — 5, 60, OOO
= 2, 40, OD0
P/V Ratio = Contribution / Sales x 100
= 2, 40, ODO / 8, OO, ODO x IOD

Sales to earna profit of Rs. 2, 40, 000

= Fixed cost + Desired Profit / P/V Ratio
= 3, 60, OOO + 2, 40, OOO / 3096
= 6, DO, OO / 3096
= 20, OO, OOO

17. From the information given below, calculate P/V Ration, Fixed expenses, Expected
profit if sales i5 budgeted at Rs. 90, OD0.
Year sales Profit
2004 1, BD, OOO 30, OOO
2005 2, 6D, OOO 50, OOO

Solution:
I”/v Ratio = (Change in profit Rs. / Change in sales Rs.) x 100
- so, ooo — so, ooo / 2, so, ooo — i, ao, ooo ioo
= 2O, OOO / 8O, OOO x IOD
= 2S96
Contribution= S x P/v Ratio
= 1, 8D, D00 x 25a
= 45, OOO
 Fixed cost = Contribution = F + Profit
= 45, OOO = F + 30, OOO
= F = 45, OOO — 30, OOO
= F = 15, OOO
When sales is budgeted as Rs. 90, 000
Contribution = Sales x P/v Ration
= 90, 0D0 x 25 / 100
= 22, 50D
Profit = Contribution - Fixed cost
= 22, DOD — 15, OOO= 7, 500

18. The bu dgeted results of Dev limited company inclu de the following:
Products Sales volume Rs. P/V
Ratio

25P
Total 4,00, OOO 30a
Fixed overheads for the period are Rs. 80, 0D0. The management is very much
concerned at the result forecasts for the company. They have requested you to prepare
a statement showing the amount of loss expected and recommend a change in sales
mix which will eliminate the expected loss.

Solution:
A. Contribution = 4, 00, 000 x 30 / 100 = 1, 20, 000
Loss = Contribution - Fixed oost
= 1, 20, OOO — 80, OOO
= 40, OOO
B. Recommended change in sales mix:

Under recovery of fixed oost or Loss / P/V Ratio of the product

Product A = 40, 000 f 40a
= 1, 00, OD0
Product B 4D, 000 / 5096
= 80, OD0
Product C = 40, 0D0 / 25a
= 1, 60, 000
C. Increase in total sale to eliminate loss of Rs. 40, 000:
= Expected Loss / Composite P/V Ratio
=40,OOD/30%
= 1, 33, 334
 19. Use the follo\’ving information and expl ain that ho\’v the reduction i n selli ng pri ce
would affect the margin of safety?
Particulars Rs. Rs.
Selling price pe r unit 40
Variable cost
Material 12
Labor 8
Overheads 24
Fixed cast is Rs. 8, 000.
Full capacity of the Plant is 5, OOO units.
Reduced selling price is Rs. 32 per unit.

Solution:
1. When selling price is Rs. 40, then Margin of Safety:
MOS = Total sales — Sales at B.E.P.
So, first of all I’ve have to calculate Total sales and Sales at B.E.P.

A. Total Sales= Total units x Sales price per unit

= 5, 000 x 40

B. Sales at B.E.P=. Fixed cost x Price / Price - Variable cost

= 8, DOO x 40 / 4D — 24
= 3, 20, OOD / 16

From the above inform atio n no v we can calculate Margin of Safety by the follov/i ng

Margin of Safety = Total sales — Sales at B.E.P.

2, 00, 000 — 20, 000
1, 80, 000

2. Margin of Safety vhe n reduced selling price is Rs. 32:

B.E.P. = Fixed cast x Price / Price — Variable cast
= 8, 000 x 32 / 32 — 24
= 8, 000 x 32 / 8
= 32, 000
Margin of Safety = 1, 80, 000 — 32, 000
Margin of Safety = 1, 48, 000
3. Innpact: Fro m the above calc elation we can see that the redu ced price will decrease
margin of safety and B.E.P. ’VIII increase.
 2 MARKS
1. What is Management Accounting?
A business enterprise must keep a systematic record of what happens from day-to-day
events so that it can know its position clearly. Most of the business enterprises are run
by the corporate sector. These business houses are required by law to prepare periodical
statements in proper form showing the state of financial affairs.

2. Define Management Accounting?

Accounting is the process of recording, classifying, summarizing, analyzing and
interpreting the financial transactions of the business for the benefit of management and
those parties who are interested in business such as shareholders, creditors, bankers,
customers, employees and government. Thus, it is concerned with financial reporting
and decision making aspects of the business.

3. Give any two objectives of Management Accounting.

1. Planning and policy formulation
2. Interpretation process
3. Assists in Decision-making process:
4. Controlling:
5. Reporting:
6. Facilitates Organizing:
7. Facilitates Coordination of Operations:

4. What is flexible budget?

A budget prepared to give the budgeted cost of any level of activity is termed as a
flexible budget. According to CIMA, London, a Flexible Budget is, „a budget designed
to change in accordance with level of activity attained‟. It is prepared by taking into
account the fixed and variable elements of cost.

5. What is Ratio Analysis?

Ratio analysis is the process of determining and interpreting numerical relationship
based on financial statements. It is the technique of interpretation of financial
statements with the help of accounting ratios derived from the balance sheet and profit
and loss account.

6. What do you understand by financial statements?

Financial statements (or financial report) is a formal record of the financial activities
and position of a business, person, or other entity. Relevant financial information is
presented in a structured manner and in a form easy to understand.

7. Give any two limitations of financial statements?

• Dependence on historical costs.
• Inflationary effects.
• Intangible assets not recorded.
• Based on specific time period
• Not always comparable across companies
• Subject to fraud
• No discussion of non-financial issues.
8. What is fund Flow Statement?
Funds Flow Statement is a statement prepared to analyse the reasons for changes in the
Financial Position of a Company between 2 Balance Sheets. It shows the inflow and
outflow of funds i.e. Sources and Applications of funds for a particular period.

9. Define the term cash Flow Statement?

A cash flow statement, also known as statement of cash flows, is a financial statement
that shows how changes in balance sheet accounts and income affect cash and
cash equivalents, and breaks the analysis down to operating, investing and financing
activities.

10. How would you calculate pay back period?

Payback method with uneven cash flow:

11. What is IRR?

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the
profitability of potential investments. Internal rate of return is a discount rate that makes
the net present value (NPV) of all cash flows from a particular project equal to zero.

12. Write any two characteristics of management accounting.

1. Selective Nature
2. More Emphasis on Future
3. Provides only information but no decision
4. The Problem of Choice
5. Study Causes and Effects Relationship
6. Importance to Elements of Costs
7. Not bounded by the Rules of Financial Accounting
8. Recognition of Non-monetary Variables
9. It modifies, analyses and interprets data
10. No Specific Rules and Conventions
11. Achievement of Objectives
12. Improving Efficiency
13. Write any two differences between management accounting and financial
accounting.
FINANCIAL MANAGEMENT ACCOUNTING
ACCOUNTING

To provide financial To assist the management in planning and decision

information to outsiders. making process by providing detailed information on
various matters.

Summarized Reports Complete and Detailed reports regarding various

about the financial information.
position of the
organization

14. What are the balance sheet ratios?

It is calculated by dividing total liabilities by total assets, both of which are balance
sheet components. Debt to equity ratio is a balance sheet ratio because it is calculated
by dividing total liabilities by total shareholders equity, both of which arebalance sheet
items.

15. Mention the main objective of budgetary control.

The main objectives of budgetary control are the follows:
• Elimination of wastes and increase in profitability.
• To anticipate capital expenditure for future.
• To centralise the control system.

16. What is NPV ?

Net present value is a calculation that compares the amount invested today to the
present value of the future cash receipts from the investment.

17. Define leverage ratio.

A leverage ratio is any one of several financial measurements that look at how much
capital comes in the form of debt (loans), or assesses the ability of a company to meet
its financial obligations.

18. What are the classifications of ratios?

Liquidity Ratio
Solvency Ratio
Profitability Ratio
Efficiency Ratio

19. Define fund.

Fund is the act of providing resources, usually in form of money, or other values such
as effort or time, for a project, a person, a business, or any other private or public
institution. The process of soliciting and gathering funds is known as fundraising.
20. How does zero base budgeting?
Zero-based budgeting (ZBB) is a method ofbudgeting in which all expenses must be
justified for each new period. The process of zero-based budgeting starts from a "zero
base," and every function within an organization is analyzed for its needs and costs.

21. Define budgetary control.

A system of management control in which actual income and spending are compared
with planned income and spending, so that you can see if plans are being followed and
if those plans need to be changed in order to make a profit.

22. State any four functions of management accounting.

1. Presentation of Data
2. Modifies Data
3. Forecasting
4. Analysis and Interpretation of Data
5. Help in Organizing
6. Means of Communication

23. What is trend analysis?

Trend analysis is an aspect of technical analysis that tries to predict the future
movement of a stock based on past data. Trend analysis is based on the idea that what
has happened in the past gives traders an idea of what will happen in the future.

24. What is working capital?

The cash available for day-to-day operations of an organization. Strictly speaking, one
borrows cash (and not working capital) to be able to buy assets or to pay for obligations.

25. What is a budget?

A budget is a financial plan for a defined period of time, usually a year. It may also
include planned sales volumes and revenues, resource quantities, costs and expenses,
assets, liabilities and cash flows.

26. What is capital budgeting?

Capital budgeting, and investment appraisal, is the planning process used to determine
whether an organization's long term investments such as new machinery, replacement
of machinery, new plants, new products, and research development projects are worth
the funding of cash through the firm's capitalization structure.

27. What do you understand by “Operating Profit”?

Operating profit is the profit earned from a firm's normal core business operations. This
value does not include any profit earned from the firm's investments, such as earnings
from firms in which the company has partial interest, and the before the deductions of
applicable interest and taxes owed.

28. What are turn over ratios?

The turnover ratio is the percentage of a mutual fund or other investment's holdings that
have been replaced in a given year, which varies by the type of mutual fund, its
investment objective and/or the portfolio manager's investing style.
29. What is Funds from Operation?
Funds from operations (FFO), is the actual amount of cash flow generated from
business operations.In order to calculate the FFO, one must add the expenses or losses,
which are not actually incurred from the operations, such as depreciation, amortization,
and any losses on the sale of assets, to net income. Then subtract any gains on the sale
of assets and interest income.

30. What is the formula for Current Ratio?

Current Ratio = Current Assets ÷ Current Liabilities

31. What do you understand by “EPS”?

Earnings per share (EPS) is the portion of a company's profit allocated to each
outstanding share of common stock. Earnings per share serves as an indicator of a
company's profitability.

32. What are the non –fund sources?

Funding is the act of providing financial resources, usually in the form of money, or
other values such as effort or time, to finance a need, program, and project, usually by
an organization or company.

33. What is vertical analysis of financial statement?

Vertical analysis is a method of financial statement analysis in which each entry for
each of the three major categories of accounts, or assets, liabilities and equities, in a
balance sheet is represented as a proportion of the total account.

34. What are the short – term solvency rations?

Short-term Solvency Ratios attempt to measure the ability of a firm to meet its short-
term financial obligations. In other words, these ratios seek to determine the ability of
a firm to avoid financial distress in the short-run.

35. What are the cash flows from financing activities?

The cash flows from financing activities line item is one of the more important items
on the statement of cash flows, for it can represent a substantial source or useof cash
that significantly offsets any positive or negative amounts of cash flow generated from
operations.
 5 MARKS & 10 MARKS
1. What are the tools and techniques of Management Accounting?
The various tools used at present in management accounting may be classified into the
following groups.
1. Based on Financial Accounting Information
▪ Analysis of Financial Statements through Ratio Analysis.
▪ Analysis of Financial Statements through comparative statements, trend, graph and
diagram.
▪ Fund flow and cash flow analysis.
▪ Return on capital employed techniques.
2. Based on Cost Accounting Information
▪ Marginal costing (including cost volume profit analysis).
▪ Direct or incremental Costing and differential costing.
▪ Standard Costing.
▪ Analysis of Cost Variances.
3. Based on Mathematics
▪ Operations Research.
▪ Linear Programming.
▪ Network analysis.
▪ Queing theory and Games Theory.
▪ Simulation Theory.
4. Based on Future Information
▪ Budget and Budgeting.
▪ Budgetary control: Analysis of Budget Variance / Revenue Variance.
▪ Business Forecasting.
▪ Project Appraisal or Evaluation.
5. Miscellaneous Tools
▪ Managerial Reporting.
▪ Integrated Auditing.
▪ Financial Planning.
▪ Revaluation Accounting.
▪ Decision making Accounting.
▪ Management Information System

Important tools and techniques used in management accounting

Some of the important tools and techniques are briefly explained below.

1. Financial Planning
The main objective of any business organization is maximization of profits. This
objective is achieved by making proper or sound financial planning. Hence, financial
planning is considered as best tool for achieving business objectives.

2. Financial Statement Analysis

Profit and Loss account and Balance Sheet are important financial statements.
These statements are analyzed for different period. This type of analysis helps the
management to know the rate of growth of business concern. This analysis is done
through comparative financial statements, common size statements and ratio analysis.
3. Cost Accounting
Cost accounting presents cost data in product wise, process wise, department
wise, branch wise and the like. These cost data are compared with predetermined one.
This comparison of two costs enables the management to decide the reasons responsible
for the difference between these costs.

4. Fund Flow Analysis

This analysis find out the movement of fund from one period to another.
Moreover, this analysis is very useful to know whether the fund is properly used or not
in a year when compared to the previous year. The working capital changes and funds
from operation are also find out through this analysis.

5. Cash Flow Analysis

The movement of cash from one period to another can be find out through this
analysis. Besides, the reasons for cash balance and changes between two periods are
also find out. It studies the cash from operation and the movement of cash in a period.

6. Standard Costing
Standard costing is predetermined cost. It provides a yard stick for measuring
actual performance. It is used to find the reasons for the deviations if any.

7. Marginal Costing
Marginal costing technique is used to fix the selling price, selection of best sales
mix, best use of scarce raw materials or resources, to take make or buy decision,
acceptance or rejection of bulk order and foreign order and the like. This is based on
the fixed cost, variable cost and contribution.

8. Budgetary Control
Under Budgetary control techniques, future financial needs are estimated and
arranged according to an orderly basis. It is used to control the financial performances
of business concern. Business operations are directed in a desired direction.

9. Revaluation Accounting
The fixed assets are revalued as per the revaluation accounting method so that
the capital is properly represented with the assets value. It helps to find out the fair
return on capital employed.

10. Decision-making Accounting

A business problem can be solved by choosing any one of the best and most
profitable alternative. To select such alternative, the relevant costs are compared. Thus,
accounting information are used to solve the business problem which are arising out of
increasing complexity of nature of business.

11. Management Information System

The free flow communication within the organization is essential for effective
functioning of business. Hence, the management can design the system through which
every employee of an organization can assess the information and used for discharging
their duties and taking quality decisions.
 12. Statistical Techniques
There are a lot of statistical techniques used in removing management problems.
Methods of least square, regression and quality control etc. are some examples of
statistical techniques.

13. Management Reporting

The management accountant is preparing the report on the basis of the contents
of profit and loss account and balance sheet and submit the same before the top
management. Thus prepared reports disclose the strength and weakness indifferent
areas of operating activities and financial activities. These identification are highly
useful to management for exercising control and decision-making.

14. Historical Cost Accounting

It means that costs are recorded after being incurred. This is used for comparing
with predetermined costs to evaluate performance.

15. Ratio Analysis

It is used to management in the discharge of its basic functions of forecasting,
planning, coordination, communication and control. It paves the way for effective
control of business operations by undertaking an appraisal of both the physical and
monetary targets.

2. What are the limitations of financial analysis?

Financial analysis is a powerful mechanism which helps in ascertaining the
strengths and nesses in the operations and financial position of an enterprise. However,
this analysis is subject to certain limitations. Most of these limitations are because of
the limitations of the financial statements themselves. These limitations are as follows:
1. Financial Analysis is only a Means
Financial analysis is a means to an end and not the end itself. The analysis should
be used as a starting point and the conclusion should be drawn not in isolation, but
keeping view the overall picture and the prevailing economic and political situation.
2. Ignores Price Level Changes
Financial statements are normally prepared on the concept of historical costs. They
do not reflect values in terms of current costs. Thus, the financial analysis based on
such financial statements or accounting figures would not portray the effects of
price level changes over the period.
3. Financial Statements are Essentially Interim Reports
The profit shown by Profit and Loss Account and the financial position as depicted
by the Balance Sheet is not exact. The exact position can be known only when the
business is closed down. Again, the existence of contingent liabilities and deferred
revenue expenditure make them more imprecise.
4. Accounting Concepts and Conventions
Financial statements are prepared on the basis of certain accounting concept and
conventions. On account of this reason the financial position as disclosed by
statements may not be realistic. For' example, fixed assets in the balance sheet,
shown on the basis of going concern concept. This means that value placed on&
assets may not be the same which may be realized on their sale. On account
convention of conservatism the income statement may not disclose true income of
 the business since probable losses are considered while probable incomes are
ignored.
5. Influence of Personal Judgment
Many items are left to the personal judgment of the accountant. For example, the
method of depreciation, mode of amortization of fixed assets, treatment of deferred
revenue expenditure - all depend on the personal judgment of the accountant. The
soundness of such judgment will necessarily depend upon his competence and
integrity. However convention of consistency acts as a controlling factor on making
indiscreet personal judgments.
6. Disclose only Monetary Facts
Financial statements do not depict those facts which cannot be expressed in terms
of money. For example, development of a team of loyal and efficient workers,
enlightened management, the reputation and prestige of management with the
public are matters which are of considerable importance for the business, but they
are nowhere depicted by financial statements.

3. Explain the objectives of management accounting.

The main objective of management accounting is to help the management to
take quality decision for controlling the business activities effectively. The other
objectives and the following functions of management accounting are performed to
achieve all the objectives.
1. Presentation of Data
Both profit and loss account and balance sheet are not useful for taking a
decision in accounting. Hence, the contents of profit and loss account and balance sheet
are modified and rearranged in such a manner that helps the management for taking
decision through various techniques.
2. Modifies Data
The financial accounting information is modified according to the management
expectations. For example, total purchase figures are modified month wise, product
wise, supplier wise and territory wise.
3. Forecasting
The management can forecast the achievement of objectives for short term and
long term. The accountant provides necessary information and data for forecasting.
4. Analysis and Interpretation of Data
The financial accounting data is rearranged for proper analysis. Comparative
and common size statements are prepared for the meaningful interpretation of data.
Ratios are calculated and likely trends are projected.
5. Help in Organizing
Organizing refers to allocation of company resources to various departments
and assignment of duties to employees at various levels of management. The modified
data and analysis and interpretation help the management to organize.
6. Means of Communication
The analysis and interpretation of modified data is conveyed to the employees
of an organization as a whole. More meaningful information is supplied to all levels of
management executives. In this way, rearranged and modified data are used as means
of communication under management accounting system.
 7. Planning
The fund flow statement, cash flow statement, budgeting, standard costing,
capital budgeting and marginal costing are used for planning purpose. These are
important tools of management accounting.
8. Facilitates Control
Management accounting translates the objectives into achievements within a
specified time. This is possible through budgetary control and standard costing which
are an integral part of management accounting. In this way, management accounting
facilitates control.
9. Decision-making
Modified data, analyzed and interpreted information are highly useful to
management for taking quality decision and policy formulation in a management
accounting system.
10. Using of Qualitative Information
Qualitative information means data cannot be measured in terms of rupees,
units, kgs, tons, metres and the like. Employees efficiency, policy of management,
employer and employee relationship etc are the examples for qualitative information.
These types of information are also used in the management accounting system.
11. Coordination
The preparation of budgets on functional basis is the fixation of targets for each
department separately. The objectives of organization is achieved through attainment
of targets of all the departments. The preparation of periodical performance report of
all the departments under management accounting system brings coordination among
all the departments.
12. Special Cost and Economic Studies
The special cost and economic studies are considered in the management
accounting system in order to increase the profits of the concern.
13. Motivating Employees
The preparation of budgets and adoption of standard costing
techniqueautomatically motivates the employees indirectly. If the budgets are achieved
and if there is any favorable variances under standard costing technique, a suitable
monetary and non-monetary motivating schemes are prepared and implemented.

4. Explain the tools of financial statement analysis?

Financial Statement Analysis is done in different ways using various tools and
techniques. As discussed in the previous article, there are different users of financial
analysis and they may be interested in some tools and techniques and uninterested in
the others.

The various tools and techniques available for financial statement are mentioned below.

1. Comparative Financial Statement Analysis (Horizontal Analysis):

As the name suggests, comparative analysis provides a year-on-year
review of the various financial statements. For example, in the Income
Statement, the Sales figure may be compared over a period of consecutive years
to understand how the sales figures have grown (or declined) over the year. It
should be noted that horizontal analysis compares the internal performance of
the company.
2. Common-size Financial Statement Analysis (Vertical Analysis):
 Vertical analysis is applicable for internal performance review as well
as for comparison to peers and bench-marking. In vertical analysis all the items
in a particular statement are represented as a percentage of a particular item. For
example, Operating Expenses, Depreciation, Amortization, Profit before tax,
Tax, Profit after tax, etc. may be represented as a percentage of Sales in the
Income Statement. Common standard base can easily reveal the internal make-
up of financial statements and any proportionate increase and decrease of the
same.
Vertical analysis is also put to use for comparison across companies as
financial statements are converted to common-size format, which can then be
used to compare with competitor or industry averages, highlighting key
differences which can then be analyzed.

3. Ratio Analysis:
Ratio analysis is the most widely used tool of financial statement
analysis. A ratio gives relationship between two numbers, in this case items in
the financial statements. Ratios are popular because they readily allow internal
evaluation as well as comparison across firms. The ratios are categorized
according to activities or functions they perform or the information they
provide. For example, profitability ratios measure the profit making capability
of the company.
4. Graphical Analysis:
Graphs provide visual representation of the performance that can be
easily compared over time. The graphs may be line graphs, column graphs or
pie charts.
5. Trend Analysis:
Trend analysis is used to reveal the trend of items with the passage of
time and is generally used as a statistical tool. Trend analysis is used in
conjunction with ratio analysis, horizontal and vertical analysis to spot a
particular trend, explore the causes of the same and if required prepare future
projections.
6. Regression Analysis:
Regression analysis is a statistical tool used to establish and estimate
relationship among variables. Generally, the dependent variable is related to one
or more independent variables. In case of financial statement analysis, the
dependent variable may be, say, sales, and it is required to estimate its
relationship with the independent variable, say, a macroeconomic factor like
Gross Domestic Product.

5. Difference between cash flow statements and fund flow statements.

 Cash Flow Statement Fund Flow Statement
1. It is prepared on the basis of cash 1. It is prepared on the basis of fund as working
and cash equivalents. capital.
2. Cash from operation is
calculated. 2. Funds from operation is calculated.
3. Statement of changes in working 3. Statement of changes in working capital is
capital is not prepared. prepared.
4. It is started with cash flows from 4. It is started with funds from operation or
operating activities. funds lost in operation.
5. It is ended with closing cash in 5. It is ended with either increase in working
hand and cash equivalents. capital or decrease in working capital.
6. The reasons for the change in
cash are known through cash flow 6. The reasons for the change in working
statement. capital are known through fund flow statement.
7. Short term financial pIanning is 7. Medium term and long term financial
done through cash flow statement. planning is done through funds flow statement.
8. Cash flow analysis is based on 8. Funds flow analysis is based on accrual
cash concept. concept.
9. It is used for preparing cash
budgeting. 9. It is used for preparing capital budgeting.
10. It shows only changes in cash 10. It is concerned with the changes in working
position. capital between two balance sheet dates.
11. It is not necessary that an improved fund
11. It is worked as an indicator of position will be an indicator of improved and
improved working capital. sound cash position.
12. Increase in current liability or
decrease in current assets brings 12. Increase in current liability or decrease in
decrease in working capital and current asset brings increase in cash and vice
vice versa. versa.

6. Explain Zero-base budgeting?

Zero base budgeting is a new technique of budgeting. It is designed to meet the
needs of the management in order to ensure the operational efficiency and effective
utilization of the allocated resources of a concern. This technique was originally
developed by Peter A. Phyhrr, Manager of Taxas Instrument during 1969. This concept
is widely used in USA for controlling their state expenditure when Mr. Jimmy Carter
was the president of the USA. At present the technique has for its global recognition
for many countries have implemented in real terms. According to Peter A. Phyhrr ZBB
is defined as an “Operative planning and budgeting process which requires each
manager to justify his entire budget in detail from Scratch (hence zero base) and shifts
the burden of proof to each manager to justify why we should spend any money at all”.
 In zero-base budgeting, a manager at all levels, have to justify the importance
of activity and to allocate the resources on priority basis.

Important aspect of ZBB

Zero-based budgeting involves the following important aspects: 1. It
emphasises on all requisites of budgets. 2. Evaluation on the basis of decision packages
and systematic analysis, i.e., in view of cost benefit analysis. 3. Planning the activities,
promotes operational efficiency and monitors the performance to achieve the
objectives.

Steps involved in ZBB

The following are the steps involved in zero base budgeting:
1. No previous year performance of inefficiencies is to be taken as adjustments
in subsequent year.
2. Identification of activities in decision packages.
3. Determination of budgeting objectives to be attained.
4. Extent to which zero base budgeting is to be applied.
5. Evaluation of current and proposed expenditure and placing them in order of
priority.
6. Assignment of task and allotment of sources on the basis of cost benefit
comparison.
7. Review process of each activity examined afresh.
8. Weightage should be given for alternative course of actions.

Advantages of ZBB
1. Utilization of resources at a maximum level.
2. It serves as a tool of management in formulating production planning.
3. It facilitates effective cost control.
4. It helps to identify the uneconomical activities.
5. It ensures the proper allocation of scarce resources on priority basis.
6. It helps to measure the operational inefficiencies and to take the corrective
actions.
7. It ensures the principles of management by objectives.
8. It facilitates co-operation and co-ordination among all levels of management.
9. It ensures each activity is thoroughly examined on the basis of cost benefit
analysis.

7. Narrate the scope of management accounting.

The main purpose of management accounting is to utilize the accounting
information in solving the business problems and taking scientific decisions. Moreover,
the scope of management accounting is very wide. Therefore, it is very difficult of
pinpoint the exact scope of management accounting. However, the scope of
management accounting are listed below.
1. Financial Accounting
Financial accounting is relating to the recording of business transactions
immediately soon after the transaction taken place or afterwards incurring the expenses.
The business transaction may be relating to income, expenses, inventory movement,
assets, liabilities, cash receipts and payments and so on.
 The process of financial accounting includes the preparation of financial
statements regularly at the end of each accounting year for knowing operating results
for a definite period. The term financial statements includes profit and loss account and
balance sheet.
Management is unable to exercise the coordination and control out of the
information supplied by financial accounting system. But, the financial accounting
system information is the basis of future business planning and financial forecasting.
2. Cost Accounting
Cost accounting is concerned with the ascertainment of various elements of
costs for different business operation and activities. These cost data are used in the
management accounting system for further analysis so as to solve business problems
and take quality decision.
3. Budgeting and Forecasting
Management accounting includes budgetary control and forecasting techniques
also. Under budgetary control system, the budgets are prepared on functional basis and
measure the actual performance, find the difference between the actual and standard for
taking corrective actions In this way, budgeting assists the management for identifying
responsibility and ensuring coordination.
4. Revaluation Accounting
This type of accounting system is ensuring that the capital is maintained intact
in real terms. By keeping this fact in mind, correct amount of profit is calculated and
used for managerial decision making.
5. Cost Control Procedures
Cost control procedures are an integral part of management accounting process.
In includes inventory control, cost control, time control, budgetary control, standard
costing etc.
6. Statistical Methods
In order to analyze the financial accounting data, tables, diagrams and graphs
are used in the management accounting system. These are nothing but statistical
methods.
7. Inventory Control
Inventory control refers to exercising control over the utilization of raw
materials, processing of work in progress and disposal of finished goods for a specific
period.
8. Reporting
Reporting is divided into two types. They are interim reporting and external
reporting. Interim reporting is supplying information to the top management. External
reporting is supplying information to outsiders i.e. shareholders, banks and financial
institutions.
Interim reporting deals with the submission of financial results by means of
weekly, fortnightly, monthly, quarterly or half yearly accounts or statements to the top
management.

9. Taxation
It includes the computation of corporate income tax in accordance with the tax
laws, filing of returns and making tax payments.
 10. Methods and Procedures Design and Installation
Management accounting is relating to the most efficient and economic system
of accounting suitable to any size and type of undertaking. Moreover, it employ best
use of mechanical and electronic devices.
11. Internal Audit
Internal audit is conducted by the business organization with the help of paid
employee who has thorough accounting knowledge. All the relevant records are
maintained under the management accounting system so that the internal audit is
conducted in an effective manner.
12. Office Services
It includes maintenance of proper data processing and other office management
services.
13. Financial Management
Every owner of the business concern expects fair rate of return on investments.
It is possible through the effective utilization of the finance. Hence, it is termed as
financial management and considered as separate discipline. The tools in financial
management are developed through management accounting system.
14. Interpretation
Management accounting is relating to the interpretation of financial data to
management and advising them on decision-making.

8. Enumerate the major steps involved in capital budgeting?

(1) Creative Search for Profitable Opportunities
The first stage in the capital expenditure programme should be the conception
of a profit making idea. It may be rightly called the organization of investment
proposals. The proposals may come from a rank and file worker of any department or
from any line officer. To facilitate the origination of such ideas a periodic review and
comparison of earnings, costs, procedures and product line should be made by the
management.
(2) Long-range Capital Plans
When a specific proposal is made to management, its consistency with the long-
range plans of the company must be verified. It requires the determination of overall
capital budgeting policies before hand based upon the projections of short and long-run
developments.
(3) Short-range Capital Budget
Once the timeless and priority of a proposal have been established, it should be
listed on the one year capital budget, as an indication of its approval.

(4) Measurement of Project Worth

 This stage involves the tentative acceptance of the proposal with other
competitive projects within the selection criteria of the company. Small projects under
a certain rupee amount could be approved by the departmental heads. Larger projects
should be ranked according to their rate of return. Any one or more tests of profitability
may be used for
(5) Screening and Selection
This stage involves the comparison of a proposal with other projects within the
selection criteria of the firm. This is done either by financial manager or by a capital
expenditure planning committee. Such criteria should encompass the supply and cost
of capital and the expected returns from alternative investment opportunities. Once the
proposal passes this stage, it is authorized for outlays.
(6) Establishing Priorities
Then comes the stage of establishing the priorities. When the accepted projects
are put in priority, it facilitates their acquisition or construction, avoids costly delays
and serious cost over-runs.
(7) Final Approval:
Once the financial manager have reviewed top the projects, he will recommend
a detailed programme, both of capital expenditures and of sources of capital to meet
them, to the management Possibly, the financial manager will present several
alternative capital-expenditure budgets to the top management, it will finally approved
the capital budget for the firm.
(8) Forms and Procedure
This is a continuous phase that involves the preparation of reports for every
other phase of the capital expenditure programme of the company.
(9) Retirement and Disposal
This phase marks the end of the cycle in the life of a project. It involves more
than the recovery of the original cost plus an adjustment for replacement programmes.
(10) Evaluation
An important and last step of the capital budgeting process is an evaluation of
the programme after it has been fully implemented.
• Was the net investment greater than anticipated ?
• Were the expected net cash benefits after taxes actually realized ?
Management can improve its capital budgeting techniques for the future as a
result of an evaluation of past performance. Such an evaluation also has the advantage
of forcing departmental heads to be more realistic and careful.
9. Discuss the important features of management accounting.

1. The first and foremost feature of management accounting is that it provides accounting
information to the top management of the company, hence in a way management
accounting is not hardcore accounting rather its job is to convert complex information
of accountancy into simple and comprehensive information for the management so that
they can make future decision on the basis of such information.

2. Another feature of management accounting is that it is more flexible as there are no

fixed conventions or principals which is the case with financial or cost accounting,
hence in management accounting there is more scope of changing things according to
situations as and when they arise.

3. Management accounting makes use of various fields like financial accounting, cost
accounting, statistics, quantitative research, and economics. In simple words it
integrates functions of many fields in order to provide management the best possible
information so that they can make right decision at the right time.

4. Management accounting is meant for internal users only that is the top management of
the company unlike cost or financial accounting which are prepared for external parties
like shareholders, creditors, employees, government and so on.

5. There is no statutory requirement to publish the reports of management accounting in

the public domain and hence company does not have to stress about publishing the
reports every quarter or year which is the case with balance sheet or other reports of
financial and cost accounting.

6. Management accounting is not required every time rather it is needed when

management has to make important decisions, in other words management accounting
in the majority of the companies is needed temporary and not

10. Explain the advantages of Budgeting.

1. Planning orientation
The process of creating a budget takes management away from its short-term, day-
to-day management of the business and forces it to think longer-term. This is the chief goal
of budgeting, even if management does not succeed in meeting its goals as outlined in the
budget - at least it is thinking about the company's competitive and financial position and
how to improve it.

2. Profitability review
It is easy to lose sight of where a company is making most of its money, during the
scramble of day-to-day management. A properly structured budget points out what aspects
of the business produce money and which ones use it, which forces
management to consider whether it should drop some parts of the business or expand
in others.
3. Assumptions review
The budgeting process forces management to think about why the company is
in business, as well as its key assumptions about its business environment. A periodic re-
evaluation of these issues may result in altered assumptions, which may in turn alterthe
way in which management decides to operate the business.
4. Performance evaluations
You can work with employees to set up their goals for a budgeting period, and
possibly also tie bonuses or other incentives to how they perform. You can then create
budget versus actual reports to give employees feedback regarding how they are
progressing toward their goals. This approach is most common with financial goals, though
operational goals (such as reducing the product rework rate) can also be addedto the
budget for performance appraisalpurposes. This system of evaluation is called
responsibility accounting.
5. Funding planning
A properly structured budget should derive the amount of cash that will be spun off
or which will be needed to support operations. This information is used by the
treasurer to plan for the company's funding needs.
6. Cash allocation
There is only a limited amount of cash available to invest in fixed assets
and working capital, and the budgeting process forces management to decide which assets
are most worth investing in.
7. Bottleneck analysis
Nearly every company has a bottleneck somewhere, and the budgeting process
can be used to concentrate on what can be done to either expand the capacity
of that bottleneck or to shift work around it.

11. What are the limitations of management accounting?

Based on Records:
The management accountant takes into consideration the past records provided
by the financial and cost accounting while making decisions for the future. The
accuracy and utility of past records will limit the dependence of the management
accountant for future decisions. If the past data is not reliable, the decisions suggested
by management accountant may be misleading.
Lack of Knowledge and Understanding :
For taking a sound decision it is necessary that the management must have
knowledge of various fields like accounting, statistics, economics, taxation, production,
engineering and so on. But it has been observed that the person who is taking the
decisions may not have comprehensive knowledge of all such subjects.
Intuitive Decisions:
Though it has been realized that scientific decisions must take into consideration
the quantitative techniques yet because of simplicity and personal factors, the
management has a tendency to persistence intuitive decision-making.
Lack of Continuity and Coordination:
In order to make the conclusions drawn by management accountant meaningful,
they must be implemented in the organisation at various levels. But in actual practice
they lose their significance because it is not feasible to implement such conclusions.
No Substitute of Administration:
The techniques and tools suggested by the management accountant are not
alternatives or substitutes of good administration but in fact these are only to
supplement the sound management and administration.
Lack of Objectivity:
There is every possibility of personal bias and manipulation from the collection
of data to the interpretation stage in financial accounting. Thus, it losses objectivity and
validity.
Unquantifiable Variables:
There are various problems in business which cannot be expressed in monetary
terms. Such problems cannot be interpreted for the future.
Costly:
The installation of management accounting system in a concern requires large
organisation and a wide network of rules and regulations and thus requires a heavy
investment. Therefore, it cannot be utilized by a small organisation profitably.

Not in Final Stage:

Management accounting has not reached the final stage and is in the process of
development. That is why its techniques suffer from fluidity of concepts, diversity in
opinions and various interpretations.
 Psychological Resistance:
For introduction and operation of management accounting system in any
organisation, it requires a lot of changes in the organisation structure, rules and
regulations. These changes are resisted by the management itself as it creates
difficulties in its successful operations.

12. Explain the function of a management accountant.

1. Forecasting and Planning:

One of the important functions of management accounting is to provide
necessary information and data for making short-term and long-term forecasts and
planning the operations of the business.
For doing this, the management accountant uses techniques of statistics, like
probability, trend study of correlation and regression; budgeting and standard costing;
capital budgeting; marginal costing and cash funds flow statements etc. These are
important tools in the hands of management accountant for the planning of the business.
2. Organising:
The management accountant helps the management in organising the human
and non-human resources of the business by analysing different functions and assigning
specific responsibilities. He tries to organise the accounting and finance function of the
business on the modern lines.
3. Coordinating:
The management accountant increases the efficiency of organisation and
maximise its profits by providing different tools of coordination as budgeting, financial
reporting, financial analysis and interpretation etc. It helps the management by
reconciling the cost and financial accounts, by preparing budgets and setting the
standard costs and in analysing variances in costs to facilitate management by
exception.
4. Controlling Performance:
The management accountant helps in controlling the performance of the
organisation by using standard costing, budgetary control, accounting ratios, cash and
funds flow statements, cost reduction programmes and evaluating the capital
expenditure proposals and return on investment.

5. Financial Analysis and Interpretation:

The management accountant analyses the data and presents it before the
management in non-technical manner along with his comments and suggestions so that
the owners and the top personnel’s in the management may understand it and take
decisions without any difficulty.
 6. Communication:
The management accountant prepares various reports to communicate the
results to the superior, to motivate the employees, to exercise effective control on their
activities and to enable the management to take sound decisions. He also communicates
with the outside world about the progress of the business through published accounts
and returns.
7. Special Studies:
The management accountant tries to maximise the profits of the concern by
conducting various cost and economic studies on regular basis. He tries to determine
the needs of long-term and short-term capital, recommend appropriate capitalisation for
the enterprise, evaluation of alternative capital expenditure proposals and their impact
on the return and profits of the concern.
8. Protection of Business Assets:
The management accountant will be responsible for the protection of business
assets. He is to see that sufficient funds are available for repairs, maintenance and
replacement of fixed assets so that production capacity of the enterprise may not be
badly affected. He is also to see that business assets are properly insured.
9. Tax Policies:
The management accountant is responsible for tax policies and procedures. He
will make available the reports required by various authorities. He will make proper
provision for taxation and he is to ensure that quarterly payments of taxes paid in
advance as required by the Income Tax Act are made in time to avoid penal interest
payment on delayed payment of tax.

10. Miscellaneous Functions:

Besides the above functions, the management accountant supplies useful
information to different functional authorities, provides necessary accounting
information and advice for price determination and pricing decisions and helps to make
strategic decisions as seasonal or temporary suspension of production, make or buy
decisions, replacement decisions and expansion or closure of particular division or
department, etc.

13. What are the limitations of cash flow statement?

Cash flow statement is used as a tool of financial statement analysis. Even
though, cash flow statement suffers from some limitations. Such limitations re listed
below.

1. Cash flow statement shows only cash inflow and cash outflow. But, the cash balance
disclosed by the statement cannot reveals the true liquid position of the business.
 2. Net Cash Flow disclosed by Cash Flow Statement does not necessarily mean net
income of the business because net income is determined by taking into account both
cash and non-cash items.

3. It does not give complete picture of the financial position of the business concern.

4. The preparation of cash flow statement is only postmortem analysis. There is no

projection of cash in future in this method.

5. It is not a substitute of Income Statement.

6. The accuracy of cash flow statement is based on the balance sheet. If balance sheet
is wrong, the cash flow statement is also wrong.

7. It is not prepared on the basic accounting concept of accrual basis. Hence, the
accuracy of cash flow statement is questionable.

8. It is not suitable for judging the profitability of a firm as non-cash items are not
included in the calculation of cash flow from operating activities.

14. Write advantages and limitations of management Accounting.

Advantages:

1. Planning
The management can prepare the plan and execute the same for effective
operation of business. In this context, various functional budgets are prepared and
accounting information are rearranged in department wise, product wise, section wise
and the like for proper planning.

2. Controlling
The actual performance of every business activity is measured and compared
with the standard fixed or planned one. If the deviations are found that are controllable,
the management can decide the course of action to exercise control. Both standard
costing and budgetary control system are highly help the management in this aspect.

3. Service to Customers
Better and improved services by management to customers are assured by this
system of accounting.

4. Organizing
The scope of authority and responsibility of key executives are properly defined
and explained under management accounting system. Hence, everyone knows who is
responsible for what and to whom? It helps for proper organizing the work in an
organization.
5. Coordinating
It is the process of integrating the various work performed in an organization to
achieve the objectives effectively. Thus, perfect coordination is required for among
production, purchase, finance, personnel, sales and the like departments. This is
achieved through preparing budgets and reports of performance.

6. Improvement of Efficiency
The management accounting system may eliminate various types of wastage,
production, defectives and other work thereby the workers efficiency may be improved.

7. Motivating
It helps to maintain high degree of morale among the employees. The reports of
business operation are periodically prepared and submitted before the top management
periodically. Based on the report, the management can find out whom to demote or
promote or to reward or penalize. In this way, the employees are motivated.

8. Communication
Two way communication is followed in an organization if management
accounting system is followed. Modified accounting information and reports regarding
performance are sent to top management for decision making. In another way,
assignment of work and responsibilities over employees are communicated to lower
level executives.

9. Regulation of Business Activities

Proper planning, organizing, coordination and motivation can bring systematic
regularity in the business activities.

10. Maximization of Profit

There is a morale among the employees. Standards are fixed and measure the
actual performance to find the deviations. If the causes for deviations are reasonable
and controllable, proper action may be taken by the management. In this way, profit is
maximized.

11. Reliability
The tools used in management accounting system are reliable. This procedure
usually makes the data supplied to management accurate and reliable.

Additional Advantages:
1. It helps to increase the efficiency of all functions of3 management
2. It helps in target-fixing, decision-making, price-fixing, selection of product-mix and
so on
3. Forecasting and Budgeting help the concern to plan the future and financial
activities
4. Various tools and techniques provide reliability and authenticity to carry out the
business functions
5. It is useful in controlling wast1age and defects
6. It helps in complete communication between all levels of management
7. It helps in controlling the cost of production thus increasing the profit percentage
8. It is proactive-analyses the governmental policies and socio-economic scenario
which helps to assess the external environmental impacts on the o1rganization

Limitations:
1. It is concerned with financial and cost accounting. If these records are not reliable,
it will affect the effectiveness of management accounting.
2. Decisions taken by the management accountant may or may not be executed by the
management.
3. It is very expensive. Only big concerns can adopt this method of accounting.
4. New rules and regulations are to be framed, hence there is a possibility of opposition
from the employees.
5. It is only in the developing stage.
6. It provides only data and not decisions.
7. It is a tool to the management and not an alternative of management.
 1. What are the tools and techniques of Management Accounting?
The various tools used at present in management accounting may be classified into the
following groups.
1. Based on Financial Accounting Information
▪ Analysis of Financial Statements through Ratio Analysis.
▪ Analysis of Financial Statements through comparative statements, trend, graph and
diagram.
▪ Fund flow and cash flow analysis.
▪ Return on capital employed techniques.
2. Based on Cost Accounting Information
▪ Marginal costing (including cost volume profit analysis).
▪ Direct or incremental Costing and differential costing.
▪ Standard Costing.
▪ Analysis of Cost Variances.
3. Based on Mathematics
▪ Operations Research.
▪ Linear Programming.
▪ Network analysis.
▪ Queing theory and Games Theory.
▪ Simulation Theory.
4. Based on Future Information
▪ Budget and Budgeting.
▪ Budgetary control: Analysis of Budget Variance / Revenue Variance.
▪ Business Forecasting.
▪ Project Appraisal or Evaluation.
5. Miscellaneous Tools
▪ Managerial Reporting.
▪ Integrated Auditing.
▪ Financial Planning.
▪ Revaluation Accounting.
▪ Decision making Accounting.
▪ Management Information System

Important tools and techniques used in management accounting

Some of the important tools and techniques are briefly explained below.

1. Financial Planning
The main objective of any business organization is maximization of profits. This
objective is achieved by making proper or sound financial planning. Hence, financial
planning is considered as best tool for achieving business objectives.

2. Financial Statement Analysis

Profit and Loss account and Balance Sheet are important financial statements.
These statements are analyzed for different period. This type of analysis helps the
management to know the rate of growth of business concern. This analysis is done
through comparative financial statements, common size statements and ratio analysis.

3. Cost Accounting
Cost accounting presents cost data in product wise, process wise, department
wise, branch wise and the like. These cost data are compared with predetermined one.
This comparison of two costs enables the management to decide the reasons responsible
for the difference between these costs.

4. Fund Flow Analysis

This analysis find out the movement of fund from one period to another.
Moreover, this analysis is very useful to know whether the fund is properly used or not
in a year when compared to the previous year. The working capital changes and funds
from operation are also find out through this analysis.

5. Cash Flow Analysis

The movement of cash from one period to another can be find out through this
analysis. Besides, the reasons for cash balance and changes between two periods are
also find out. It studies the cash from operation and the movement of cash in a period.

6. Standard Costing
Standard costing is predetermined cost. It provides a yard stick for measuring
actual performance. It is used to find the reasons for the deviations if any.

7. Marginal Costing
Marginal costing technique is used to fix the selling price, selection of best sales
mix, best use of scarce raw materials or resources, to take make or buy decision,
acceptance or rejection of bulk order and foreign order and the like. This is based on
the fixed cost, variable cost and contribution.

8. Budgetary Control
Under Budgetary control techniques, future financial needs are estimated and
arranged according to an orderly basis. It is used to control the financial performances
of business concern. Business operations are directed in a desired direction.

9. Revaluation Accounting
The fixed assets are revalued as per the revaluation accounting method so that
the capital is properly represented with the assets value. It helps to find out the fair
return on capital employed.

10. Decision-making Accounting

A business problem can be solved by choosing any one of the best and most
profitable alternative. To select such alternative, the relevant costs are compared. Thus,
accounting information are used to solve the business problem which are arising out of
increasing complexity of nature of business.

11. Management Information System

The free flow communication within the organization is essential for effective
functioning of business. Hence, the management can design the system through which
every employee of an organization can assess the information and used for discharging
their duties and taking quality decisions.
 12. Statistical Techniques
There are a lot of statistical techniques used in removing management problems.
Methods of least square, regression and quality control etc. are some examples of
statistical techniques.

13. Management Reporting

The management accountant is preparing the report on the basis of the contents
of profit and loss account and balance sheet and submit the same before the top
management. Thus prepared reports disclose the strength and weakness indifferent
areas of operating activities and financial activities. These identification are highly
useful to management for exercising control and decision-making.

14. Historical Cost Accounting

It means that costs are recorded after being incurred. This is used for comparing
with predetermined costs to evaluate performance.

15. Ratio Analysis

It is used to management in the discharge of its basic functions of forecasting,
planning, coordination, communication and control. It paves the way for effective
control of business operations by undertaking an appraisal of both the physical and
monetary targets.

2. Explain the objectives of management accounting.

The main objective of management accounting is to help the management to
take quality decision for controlling the business activities effectively. The other
objectives and the following functions of management accounting are performed to
achieve all the objectives.
1. Presentation of Data
Both profit and loss account and balance sheet are not useful for taking a
decision in accounting. Hence, the contents of profit and loss account and balance sheet
are modified and rearranged in such a manner that helps the management for taking
decision through various techniques.
2. Modifies Data
The financial accounting information is modified according to the management
expectations. For example, total purchase figures are modified month wise, product
wise, supplier wise and territory wise.
3. Forecasting
The management can forecast the achievement of objectives for short term and
long term. The accountant provides necessary information and data for forecasting.
4. Analysis and Interpretation of Data
The financial accounting data is rearranged for proper analysis. Comparative
and common size statements are prepared for the meaningful interpretation of data.
Ratios are calculated and likely trends are projected.
5. Help in Organizing
Organizing refers to allocation of company resources to various departments
and assignment of duties to employees at various levels of management. The modified
data and analysis and interpretation help the management to organize.
 6. Means of Communication
The analysis and interpretation of modified data is conveyed to the employees
of an organization as a whole. More meaningful information is supplied to all levels of
management executives. In this way, rearranged and modified data are used as means
of communication under management accounting system.

7. Planning
The fund flow statement, cash flow statement, budgeting, standard costing,
capital budgeting and marginal costing are used for planning purpose. These are
important tools of management accounting.
8. Facilitates Control
Management accounting translates the objectives into achievements within a
specified time. This is possible through budgetary control and standard costing which
are an integral part of management accounting. In this way, management accounting
facilitates control.
9. Decision-making
Modified data, analyzed and interpreted information are highly useful to
management for taking quality decision and policy formulation in a management
accounting system.
10. Using of Qualitative Information
Qualitative information means data cannot be measured in terms of rupees,
units, kgs, tons, metres and the like. Employees efficiency, policy of management,
employer and employee relationship etc are the examples for qualitative information.
These types of information are also used in the management accounting system.
11. Coordination
The preparation of budgets on functional basis is the fixation of targets for each
department separately. The objectives of organization is achieved through attainment
of targets of all the departments. The preparation of periodical performance report of
all the departments under management accounting system brings coordination among
all the departments.
12. Special Cost and Economic Studies
The special cost and economic studies are considered in the management
accounting system in order to increase the profits of the concern.
13. Motivating Employees
The preparation of budgets and adoption of standard costing
techniqueautomatically motivates the employees indirectly. If the budgets are achieved
and if there is any favorable variances under standard costing technique, a suitable
monetary and non-monetary motivating schemes are prepared and implemented.

3. Difference between cash flow statements and fund flow statements.

 Cash Flow Statement Fund Flow Statement
1. It is prepared on the basis of cash 1. It is prepared on the basis of fund as working
and cash equivalents. capital.
2. Cash from operation is
calculated. 2. Funds from operation is calculated.
3. Statement of changes in working 3. Statement of changes in working capital is
capital is not prepared. prepared.
4. It is started with cash flows from 4. It is started with funds from operation or
operating activities. funds lost in operation.
5. It is ended with closing cash in 5. It is ended with either increase in working
hand and cash equivalents. capital or decrease in working capital.
6. The reasons for the change in
cash are known through cash flow 6. The reasons for the change in working
statement. capital are known through fund flow statement.
7. Short term financial pIanning is 7. Medium term and long term financial
done through cash flow statement. planning is done through funds flow statement.
8. Cash flow analysis is based on 8. Funds flow analysis is based on accrual
cash concept. concept.
9. It is used for preparing cash
budgeting. 9. It is used for preparing capital budgeting.
10. It shows only changes in cash 10. It is concerned with the changes in working
position. capital between two balance sheet dates.
11. It is not necessary that an improved fund
11. It is worked as an indicator of position will be an indicator of improved and
improved working capital. sound cash position.
12. Increase in current liability or
decrease in current assets brings 12. Increase in current liability or decrease in
decrease in working capital and current asset brings increase in cash and vice
vice versa. versa.

4. Explain Zero-base budgeting?

Zero base budgeting is a new technique of budgeting. It is designed to meet the
needs of the management in order to ensure the operational efficiency and effective
utilization of the allocated resources of a concern. This technique was originally
developed by Peter A. Phyhrr, Manager of Taxas Instrument during 1969. This concept
is widely used in USA for controlling their state expenditure when Mr. Jimmy Carter
was the president of the USA. At present the technique has for its global recognition
for many countries have implemented in real terms. According to Peter A. Phyhrr ZBB
is defined as an “Operative planning and budgeting process which requires each
 manager to justify his entire budget in detail from Scratch (hence zero base) and shifts
the burden of proof to each manager to justify why we should spend any money at all”.
In zero-base budgeting, a manager at all levels, have to justify the importance
of activity and to allocate the resources on priority basis.

Important aspect of ZBB

Zero-based budgeting involves the following important aspects: 1. It
emphasises on all requisites of budgets. 2. Evaluation on the basis of decision packages
and systematic analysis, i.e., in view of cost benefit analysis. 3. Planning the activities,
promotes operational efficiency and monitors the performance to achieve the
objectives.

Steps involved in ZBB

The following are the steps involved in zero base budgeting:
1. No previous year performance of inefficiencies is to be taken as adjustments
in subsequent year.
2. Identification of activities in decision packages.
3. Determination of budgeting objectives to be attained.
4. Extent to which zero base budgeting is to be applied.
5. Evaluation of current and proposed expenditure and placing them in order of
priority.
6. Assignment of task and allotment of sources on the basis of cost benefit
comparison.
7. Review process of each activity examined afresh.
8. Weightage should be given for alternative course of actions.

Advantages of ZBB
1. Utilization of resources at a maximum level.
2. It serves as a tool of management in formulating production planning.
3. It facilitates effective cost control.
4. It helps to identify the uneconomical activities.
5. It ensures the proper allocation of scarce resources on priority basis.
6. It helps to measure the operational inefficiencies and to take the corrective
actions.
7. It ensures the principles of management by objectives.
8. It facilitates co-operation and co-ordination among all levels of management.
9. It ensures each activity is thoroughly examined on the basis of cost benefit
analysis.

5. Narrate the scope of management accounting.

The main purpose of management accounting is to utilize the accounting
information in solving the business problems and taking scientific decisions. Moreover,
the scope of management accounting is very wide. Therefore, it is very difficult of
pinpoint the exact scope of management accounting. However, the scope of
management accounting are listed below.
1. Financial Accounting
Financial accounting is relating to the recording of business transactions
immediately soon after the transaction taken place or afterwards incurring the expenses.
The business transaction may be relating to income, expenses, inventory movement,
assets, liabilities, cash receipts and payments and so on.
The process of financial accounting includes the preparation of financial
statements regularly at the end of each accounting year for knowing operating results
for a definite period. The term financial statements includes profit and loss account and
balance sheet.
Management is unable to exercise the coordination and control out of the
information supplied by financial accounting system. But, the financial accounting
system information is the basis of future business planning and financial forecasting.
2. Cost Accounting
Cost accounting is concerned with the ascertainment of various elements of
costs for different business operation and activities. These cost data are used in the
management accounting system for further analysis so as to solve business problems
and take quality decision.
3. Budgeting and Forecasting
Management accounting includes budgetary control and forecasting techniques
also. Under budgetary control system, the budgets are prepared on functional basis and
measure the actual performance, find the difference between the actual and standard for
taking corrective actions In this way, budgeting assists the management for identifying
responsibility and ensuring coordination.
4. Revaluation Accounting
This type of accounting system is ensuring that the capital is maintained intact
in real terms. By keeping this fact in mind, correct amount of profit is calculated and
used for managerial decision making.
5. Cost Control Procedures
Cost control procedures are an integral part of management accounting process.
In includes inventory control, cost control, time control, budgetary control, standard
costing etc.
6. Statistical Methods
In order to analyze the financial accounting data, tables, diagrams and graphs
are used in the management accounting system. These are nothing but statistical
methods.
7. Inventory Control
Inventory control refers to exercising control over the utilization of raw
materials, processing of work in progress and disposal of finished goods for a specific
period.
8. Reporting
Reporting is divided into two types. They are interim reporting and external
reporting. Interim reporting is supplying information to the top management. External
reporting is supplying information to outsiders i.e. shareholders, banks and financial
institutions.
Interim reporting deals with the submission of financial results by means of
weekly, fortnightly, monthly, quarterly or half yearly accounts or statements to the top
management.

9. Taxation
It includes the computation of corporate income tax in accordance with the tax
laws, filing of returns and making tax payments.
 10. Methods and Procedures Design and Installation
Management accounting is relating to the most efficient and economic system
of accounting suitable to any size and type of undertaking. Moreover, it employ best
use of mechanical and electronic devices.
11. Internal Audit
Internal audit is conducted by the business organization with the help of paid
employee who has thorough accounting knowledge. All the relevant records are
maintained under the management accounting system so that the internal audit is
conducted in an effective manner.
12. Office Services
It includes maintenance of proper data processing and other office management
services.
13. Financial Management
Every owner of the business concern expects fair rate of return on investments.
It is possible through the effective utilization of the finance. Hence, it is termed as
financial management and considered as separate discipline. The tools in financial
management are developed through management accounting system.
14. Interpretation
Management accounting is relating to the interpretation of financial data to
management and advising them on decision-making.

6. Discuss the important features of management accounting.

1. The first and foremost feature of management accounting is that it provides accounting
information to the top management of the company, hence in a way management
accounting is not hardcore accounting rather its job is to convert complex information
of accountancy into simple and comprehensive information for the management so that
they can make future decision on the basis of such information.

2. Another feature of management accounting is that it is more flexible as there are no

fixed conventions or principals which is the case with financial or cost accounting,
hence in management accounting there is more scope of changing things according to
situations as and when they arise.

3. Management accounting makes use of various fields like financial accounting, cost
accounting, statistics, quantitative research, and economics. In simple words it
integrates functions of many fields in order to provide management the best possible
information so that they can make right decision at the right time.

4. Management accounting is meant for internal users only that is the top management of
the company unlike cost or financial accounting which are prepared for external parties
like shareholders, creditors, employees, government and so on.

5. There is no statutory requirement to publish the reports of management accounting in

the public domain and hence company does not have to stress about publishing the
reports every quarter or year which is the case with balance sheet or other reports of
financial and cost accounting.
6. Management accounting is not required every time rather it is needed when
management has to make important decisions, in other words management accounting
in the majority of the companies is needed temporary and not

7. Explain the advantages of Budgeting.

1. Planning orientation
The process of creating a budget takes management away from its short-term, day-
to-day management of the business and forces it to think longer-term. This is the chief goal
of budgeting, even if management does not succeed in meeting its goals as outlined in the
budget - at least it is thinking about the company's competitive and financial position and
how to improve it.

2. Profitability review
It is easy to lose sight of where a company is making most of its money, during the
scramble of day-to-day management. A properly structured budget points out what aspects
of the business produce money and which ones use it, which forces management to
consider whether it should drop some parts of the business or expand in others.
3. Assumptions review
The budgeting process forces management to think about why the company is
in business, as well as its key assumptions about its business environment. A periodic re-
evaluation of these issues may result in altered assumptions, which may in turn alter the
way in which management decides to operate the business.
4. Performance evaluations
You can work with employees to set up their goals for a budgeting period, and
possibly also tie bonuses or other incentives to how they perform. You can then create
budget versus actual reports to give employees feedback regarding how they are
progressing toward their goals. This approach is most common with financial goals, though
operational goals (such as reducing the product rework rate) can also be added to the
budget for performance appraisalpurposes. This system of evaluation is called
responsibility accounting.

5. Funding planning
 A properly structured budget should derive the amount of cash that will be spun off
or which will be needed to support operations. This information is used by the
treasurer to plan for the company's funding needs.
6. Cash allocation
There is only a limited amount of cash available to invest in fixed assets
and working capital, and the budgeting process forces management to decide which assets
are most worth investing in.
7. Bottleneck analysis
Nearly every company has a bottleneck somewhere, and the budgeting process
can be used to concentrate on what can be done to either expand the capacity
of that bottleneck or to shift work around it.

8. What are the limitations of management accounting?

Based on Records:
The management accountant takes into consideration the past records provided
by the financial and cost accounting while making decisions for the future. The
accuracy and utility of past records will limit the dependence of the management
accountant for future decisions. If the past data is not reliable, the decisions suggested
by management accountant may be misleading.
Lack of Knowledge and Understanding :
For taking a sound decision it is necessary that the management must have
knowledge of various fields like accounting, statistics, economics, taxation, production,
engineering and so on. But it has been observed that the person who is taking the
decisions may not have comprehensive knowledge of all such subjects.
Intuitive Decisions:
Though it has been realized that scientific decisions must take into consideration
the quantitative techniques yet because of simplicity and personal factors, the
management has a tendency to persistence intuitive decision-making.
Lack of Continuity and Coordination:
In order to make the conclusions drawn by management accountant meaningful,
they must be implemented in the organisation at various levels. But in actual practice
they lose their significance because it is not feasible to implement such conclusions.

No Substitute of Administration:
 The techniques and tools suggested by the management accountant are not
alternatives or substitutes of good administration but in fact these are only to
supplement the sound management and administration.
Lack of Objectivity:
There is every possibility of personal bias and manipulation from the collection
of data to the interpretation stage in financial accounting. Thus, it losses objectivity and
validity.
Unquantifiable Variables:
There are various problems in business which cannot be expressed in monetary
terms. Such problems cannot be interpreted for the future.
Costly:
The installation of management accounting system in a concern requires large
organisation and a wide network of rules and regulations and thus requires a heavy
investment. Therefore, it cannot be utilized by a small organisation profitably.

Not in Final Stage:

Management accounting has not reached the final stage and is in the process of
development. That is why its techniques suffer from fluidity of concepts, diversity in
opinions and various interpretations.
Psychological Resistance:
For introduction and operation of management accounting system in any
organisation, it requires a lot of changes in the organisation structure, rules and
regulations. These changes are resisted by the management itself as it creates
difficulties in its successful operations.

9. Explain the function of a management accountant.

1. Forecasting and Planning:

One of the important functions of management accounting is to provide
necessary information and data for making short-term and long-term forecasts and
planning the operations of the business.
For doing this, the management accountant uses techniques of statistics, like
probability, trend study of correlation and regression; budgeting and standard costing;
capital budgeting; marginal costing and cash funds flow statements etc. These are
important tools in the hands of management accountant for the planning of the business.
2. Organising:
The management accountant helps the management in organising the human
and non-human resources of the business by analysing different functions and assigning
specific responsibilities. He tries to organise the accounting and finance function of the
business on the modern lines.
3. Coordinating:
The management accountant increases the efficiency of organisation and
maximise its profits by providing different tools of coordination as budgeting, financial
reporting, financial analysis and interpretation etc. It helps the management by
reconciling the cost and financial accounts, by preparing budgets and setting the
standard costs and in analysing variances in costs to facilitate management by
exception.
4. Controlling Performance:
The management accountant helps in controlling the performance of the
organisation by using standard costing, budgetary control, accounting ratios, cash and
funds flow statements, cost reduction programmes and evaluating the capital
expenditure proposals and return on investment.

5. Financial Analysis and Interpretation:

The management accountant analyses the data and presents it before the
management in non-technical manner along with his comments and suggestions so that
the owners and the top personnel’s in the management may understand it and take
decisions without any difficulty.
6. Communication:
The management accountant prepares various reports to communicate theresults
to the superior, to motivate the employees, to exercise effective control on their activities
and to enable the management to take sound decisions. He also communicateswith the
outside world about the progress of the business through published accounts and
returns.
7. Special Studies:
The management accountant tries to maximise the profits of the concern by
conducting various cost and economic studies on regular basis. He tries to determine
the needs of long-term and short-term capital, recommend appropriate capitalisation for
the enterprise, evaluation of alternative capital expenditure proposals and their impact
on the return and profits of the concern.
8. Protection of Business Assets:
The management accountant will be responsible for the protection of business
assets. He is to see that sufficient funds are available for repairs, maintenance and
replacement of fixed assets so that production capacity of the enterprise may not be
badly affected. He is also to see that business assets are properly insured.
 9. Tax Policies:
The management accountant is responsible for tax policies and procedures. He
will make available the reports required by various authorities. He will make proper
provision for taxation and he is to ensure that quarterly payments of taxes paid in
advance as required by the Income Tax Act are made in time to avoid penal interest
payment on delayed payment of tax.

10. Miscellaneous Functions:

Besides the above functions, the management accountant supplies useful
information to different functional authorities, provides necessary accounting
information and advice for price determination and pricing decisions and helps to make
strategic decisions as seasonal or temporary suspension of production, make or buy
decisions, replacement decisions and expansion or closure of particular division or
department, etc.

10. What are the limitations of cash flow statement?

Cash flow statement is used as a tool of financial statement analysis. Even
though, cash flow statement suffers from some limitations. Such limitations re listed
below.

1. Cash flow statement shows only cash inflow and cash outflow. But, the cash balance
disclosed by the statement cannot reveals the true liquid position of the business.

2. Net Cash Flow disclosed by Cash Flow Statement does not necessarily mean net
income of the business because net income is determined by taking into account both
cash and non-cash items.

3. It does not give complete picture of the financial position of the business concern.

4. The preparation of cash flow statement is only postmortem analysis. There is no

projection of cash in future in this method.

5. It is not a substitute of Income Statement.

6. The accuracy of cash flow statement is based on the balance sheet. If balance sheet
is wrong, the cash flow statement is also wrong.

7. It is not prepared on the basic accounting concept of accrual basis. Hence, the
accuracy of cash flow statement is questionable.

8. It is not suitable for judging the profitability of a firm as non-cash items are not
included in the calculation of cash flow from operating activities.

11. Write advantages and limitations of management Accounting.

 Advantages:

1. Planning
The management can prepare the plan and execute the same for effective
operation of business. In this context, various functional budgets are prepared and
accounting information are rearranged in department wise, product wise, section wise
and the like for proper planning.

2. Controlling
The actual performance of every business activity is measured and compared
with the standard fixed or planned one. If the deviations are found that are controllable,
the management can decide the course of action to exercise control. Both standard
costing and budgetary control system are highly help the management in this aspect.

3. Service to Customers
Better and improved services by management to customers are assured by this
system of accounting.

4. Organizing
The scope of authority and responsibility of key executives are properly defined
and explained under management accounting system. Hence, everyone knows who is
responsible for what and to whom? It helps for proper organizing the work in an
organization.

5. Coordinating
It is the process of integrating the various work performed in an organization to
achieve the objectives effectively. Thus, perfect coordination is required for among
production, purchase, finance, personnel, sales and the like departments. This is
achieved through preparing budgets and reports of performance.

6. Improvement of Efficiency
The management accounting system may eliminate various types of wastage,
production, defectives and other work thereby the workers efficiency may be improved.

7. Motivating
It helps to maintain high degree of morale among the employees. The reports of
business operation are periodically prepared and submitted before the top management
periodically. Based on the report, the management can find out whom to demote or
promote or to reward or penalize. In this way, the employees are motivated.

8. Communication
Two way communication is followed in an organization if management
accounting system is followed. Modified accounting information and reports regarding
performance are sent to top management for decision making. In another way,
assignment of work and responsibilities over employees are communicated to lower
level executives.
9. Regulation of Business Activities
Proper planning, organizing, coordination and motivation can bring systematic
regularity in the business activities.

10. Maximization of Profit

 There is a morale among the employees. Standards are fixed and measure the
actual performance to find the deviations. If the causes for deviations are reasonable and
controllable, proper action may be taken by the management. In this way, profit is
maximized.

11. Reliability
The tools used in management accounting system are reliable. This procedure
usually makes the data supplied to management accurate and reliable.

Additional Advantages:
1. It helps to increase the efficiency of all functions of3 management
2. It helps in target-fixing, decision-making, price-fixing, selection of product-mix andso
on
3. Forecasting and Budgeting help the concern to plan the future and financialactivities
4. Various tools and techniques provide reliability and authenticity to carry out the
business functions
5. It is useful in controlling wast1age and defects
6. It helps in complete communication between all levels of management
7. It helps in controlling the cost of production thus increasing the profit percentage
8. It is proactive-analyses the governmental policies and socio-economic scenario
which helps to assess the external environmental impacts on the o1rganization

Limitations:
1. It is concerned with financial and cost accounting. If these records are not reliable,it
will affect the effectiveness of management accounting.
2. Decisions taken by the management accountant may or may not be executed by the
management.
3. It is very expensive. Only big concerns can adopt this method of accounting.
4. New rules and regulations are to be framed, hence there is a possibility of opposition
from the employees.
5. It is only in the developing stage.
6. It provides only data and not decisions.
7. It is a tool to the management and not an alternative of management
 Q6/1c/03-14

Reg. No

St. Joseph’s College of Arts & Science (Autonomous)

St. Joseph’s College Road, Cuddalore – 607001
CM616S – MANAGEMENT ACCOUNTING
Time : 3 hrs Max Marks :75

SECTION – A (10X2=20)

Answer ALL Questions

1. Define management accounting.

2. What is ratio analysis?
3. What are the financial statements?
4. What are the non – fund sources?
5. What are the cash flows from operating activities?
6. What is meant by fixed budgets?
7. What are the budgets based on time?
8. What is discounted payback period?
9. Write a note on IRR.
10. State any four objectives of management accounting.

SECTION – B (5X5=25)

Answer any FIVE Questions

11. What are the limitations of management accounting?

12. The ratios relating to a company are given below:

Gross profit - 15% of sales
Stock velocity - 6 months
Deptors velocity - 3 months
Creditors velocity - 3 months
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 Q6/1c/03-14

Gross profit for the year ending 31, Dec.2002 amounts to 60,000.
Closing stock is equal to opening stock.
Find out a) Sales b) Closing stock c) Sundry deptors
d) Sundry creditors

13. Distinguish between cash flow and fund flow statements.

14. From the following details calculate funds from operations.

Particulars
Salaries 5,000
Rent 3,000
Depreciation on Plant 5,000
Provision for tax 4,000
Loss on sale of plant 2,000
Opening balance of P & L A/c 25,000
Transfer to general reserve 1,000
Goodwill written off 2,000
Dividend received 5,000
Refund of tax 3,000
Profit on sale of building 5,000
Closing balance of P & L A/c 60,000
Discount on issue of debentures 2,000
Provision for bad debts 1,000
Preliminary expenses written off 3,000
Proposed dividend 6,000

15. The following figures relating to product “Duper” for the quarter
ending 31.3.2007 are available:
Budgeted sales: January 3,00,000 units
February 2,40,000 units
March 3,60,000 units
Stock Position: 1.1.07 – 50% of January’s budgeted sales
31.3.07 – 80,000 units
31.1.07 – 40% of February’s budgete sales
28.2.07 – 60% of March’s budgeted sales

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 Q6/1c/03-14

You are required to prepare a production budget for the quarter

ending 31.3.07

16. Calculate discounted pay – back period from the details given
below:
Cost of project 6,00,000; Life of the project 5 years; Annual cash
inflow 2,00,000; cut-off rate 10%
Year Discounting factor
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621

17. Jane & Co. proposes to take up a project which needs an investment
of 2,40,000. The net income before depreciation and tax is
estimated as follows for the ensuring 5 years.
Year Income in
1 60,000
2 72,000
3 84,000
4 96,000
5 1,20,000
Calculate the ARR on original investment and average investment

SECTION – C (3X10=30)

Answer any THREE Questions

18. Explain the tools of Management Accounting.

19. From the following information make out a balance sheet with as
many details as possible:
a) Gross profit turnover ratio - 25%
b) Deptors velocity - 3 months
c) Creditors Velocity - 2 months
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 Q6/1c/03-14

d) Stock velocity - 8 times

e) Capital turnover ratio - 2.5 times
f) Fixed assets turnover ratio - 8 times
Gross profit for the year ended 31st December 2000 was 80,000.
There was no long – term loan or overdraft. Reserve and surplus
amounted to 28,000. Liquid assets were 97,333.
Closing stock of the year was 2,000 more than the opening stock.
Bill receivable and bills payable were 5,000 and 2,000
respectively.

20. Prepare cash flow statement from the following Balance sheets and
additional information of Mr.Thirumalai
Balance Sheets
Liabilities 1998 1999 Assets 1998 1999

Capital 80,000 41,000 Land & Buildings 70,000 1,00,000

Loan from SFC - 30,000 Plant & machinery 35,000 20,000
Bank Overdraft 60,000 96,000 Inventories 40,000 58,000
Creditors 42,000 60,000 Debtors 30,000 40,000
Outstanding exp. 8,000 13,000 cash 15,000 22,000
1,90,000 2,40,000 1,90,000 2,40,000

21. Prepare a flexible budget for overheads on the basis of the following
data. Ascertain overhead rates at 50%, 60% and 70% capacity.
Variable overheads At 60% Capacity ( )
Indirect material 6,000
Indirect labour 18,000
Semi-variable overheads
Electricity (40% fixed, 60% variable) 30,000
Repairs (80% fixed 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

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 Q6/1c/03-14

22. Two projects M and N which are mutually exclusive are being
under consideration. Both of them require an investment of
1,00,000 each. The net cash inflows are estimated as under:

Year M( ) N( )
1 10,000 30,000
2 40,000 50,000
3 30,000 80,000
4 60,000 40,000
5 90,000. 60,000

The company’s targeted rate of return on investments is 12%. You

are required to assess the projects on the basis of their present
values, using 1) NPV method and 2) Profitability index method.
Present values of 1 at 12% interest for 5 years are given below:
1st year: 0.893; 2nd year: 0.797; 3rd year: 0.712; 4th year: 0.636; 5th
year: 0.567

*************

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 Q6-1/10A/13
Reg. No

St. Joseph’s College of Arts & Science (Autonomous)

St. Joseph’s College Road, Cuddalore – 607001
CM616S – MANAGEMENT ACCOUNTING
U Time : 3 hrs Max Marks :75 U

SECTION – A (10X2=20)

Answer ALL Questions

1. Define management Accounting.

2. State any four tools and techniques of management accounting.
3. What is vertical analysis of financial statement?
4. What are the short – term solvency rations?
5. Explain the meaning of ‘Funds’.
6. What are the cash flows from financing activities?
7. What is a flexible budget?
8. What is meant by budgeting?
9. What is discounted pay – back period?
10. What is profitability Index?

SECTION – B (5X5=25)

Answer any FIVE Questions

11. Explain the function of a management accountant.

12. What are the limitations of cash flow statement?

13. Sundaram Ltd. furnishes the following balance sheets for the years
2007 and 2008. Prepare common – size balance sheets.

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 Q6-1/10A/13

Balance sheets
Liabities 2007 2008 Assets 2007 2008

Share capital 2,00,000 3,00,000 Buildings 4,00,000 4,00,000

Reserves 6,00,000 7,00,000
10% Debentures 2,00,000 3,00,000 Machinery 6,00,000 10,00,000
Creditors 3,00,000 5,00,000 Stock 2,00,000 3,00,000
Bills payable 1,00,000 80,000 Debtors 2,00,000 2,50,000
Tax payable 1,00,000 1,20,000 Bank 1,00,000 50,000

15,00,000 20,00,000 15,00,000 20,00,000

14. The ratios relating to a company are given below:

Gross profit 15% on sales
Stock velocity Debtors 6 months
velocity Creditore velocity 3months
3months
Gross profit the year amount to 60,000. Closing stock is equal to
opening stock. Find out sales,closing stock, Debfors and creditors

15. From the following details,ascertain funds from operations

Particulas 2008 2009
Profit and loss A/C 50,000 60,000
General reserve 30,000 40,000
Good will 20,000 12,000
Preliminary expenses 6,000 4,000
Depreciation provision 25,000 40,000
Income from non exading investments - 20,000
Preference shares of the face value of 1,00,000 was redeemed during the
year at a premium of 10%

16. The following relating to product ‘XMAR’ for the quarter ending
31.3.2011 are available
Budgeted sales : January 300000 units
Februrary 240000 units
March 360000 units
Stock position : 1.1.2011 50% of January’s budgeted sales
31.3.2011 80000 units
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 Q6-1/10A/13

31.1.2011 40% of February’s budgeted sales

28.2.2011 60% of March’s budgeted sales.
You are required to prepare a production budget for the quarter ending
31.32011

17. Neelam enterprises is considering an investment proposel with the

following details:cost of Madine 3,00,000 ; life 10years;Annual
machine hours 5000 and the machine hour rate is 20; producetion @ 10
units per hour. Over heads are to be obsorbed on machine hour rate basis
except the depreciation.
Material cost 1per unit and wages 40 per hour the selling price 10
per unit; Incometax at 50% standard pay back period is 3 years for accepting
the project.Ascertain the pay back period and give your recommenclation.
SECTION –C (3X10=30)
Answer any THREE Questions

18. Examine the scope of Management Accounting.

19. Prepare a Balance sheet with as many details on possible from the
following particulars.
Gross profit ratio 20% Net working capital 3,00,000
Debtors turnover 6 times Stock turnover ratio 6times
(Closing stock)
Fixed assets to net worth 0.80
Reserves to capital 0.50
Current ratio 2.50
Liquid ratio 1.50
20. Prepare a fund flow statement from the following data.
Liabilities 2004 2003 Assets 2004 2003

Share capital 5,300 5,000 Cash 2,500 2,000

Long – term debt 1,300 1,400 Accounts receivables 2,700 2,400
Retained earnings 3,700 2,800 Inventories 3,200 3,100
Accmulated depreciation 2,500 2,100 Other assets 700 800
Accounts payable 2,100 2,000 Fixed assets 5,800 5,000

14,900 13,300 14,900 13,300

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 Q6-1/10A/13

Additional information:
i) Fixed assets costing 1200 were purchased for cash.
ii) Fixed assets (original cost 400,accumlated depreciation
150)Sold with out any loss or gain.
iii) Depreciaion for the year 2004 amounted to 550
iv) Reported income for 2004 was 1200

21. Prepare a flexible budget for overheads on the basis of the following
data. Ascertain overhead rates at 50% ,60% and 70% capacity
Variable over heads [at60% capacity]
Indirect materials 6,000; Indirect labour 18,000
Fixed over heads:
Depreciation 16,500; Insurance 4,500; salaries 15,000.
Esfimafed direct labour hours 186000 at 60% capacity.
Semi variable overheads at 60%capacity:
Electricity (40%fixed) 30,000
Repairs (20% variable) 3,000.

22. Arun Ltd is considering a project which requires investment of 1,50,000.

The cost of capital is 12% The Net estimated cash inflows are as
follows
Year Estimated cash inflows

1 40,000
2 50,000
3 50,000
4 40,000
5 30,000
Calculate the IRR and decide whether the project can be taken up for
implementation.
Discounting factors:
Year
1 2 3 4 5
12% 0.893 0.797 0.712 0.636 0.567
14% 0.877 0.769 0.675 0.592 0.519
10% 0.909 0.826 0.751 0.683 0.621
************

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 F6U3/1A16

Reg. No

St. Joseph’s College of Arts & Science (Autonomous)

St. Joseph’s College Road, Cuddalore – 607001
CM616S – MANAGEMENT ACCOUNTING
Time : 3 hrs Max Marks :75

SECTION – A (10X2=20)

Answer ALL the Questions

1. What are the characteristics of management accounting?

2. What are financial statements?
3. Define leverage ratio.
4. What are the classifications of ratios?
5. Define fund.
6. Why is cash flow analysis?
7. How does zero base budgeting differ from usual budget?
8. Define budgetary control.
9. Define pay back period.
10. How does IRR superior than NPV?

SECTION – B (5X5=25)

Answer any FIVE Questions

11. Narrate the scope of management accounting.

12. Current Ratio 2.5; Quick Ratio 1.5: and Working Capital Rs.60,000. Calculate the amount of
Current Assets, Liquid assets and Current Liabilities.

13. Statement of financial position of Mr. Arun is given below:

Liabilities 1.1.2008 31.12.2008 Assets 1.1.2008 31.12.2008

Rs. Rs. Rs. Rs.
Accounts payable 29,000 25,000 Cash 40,000 30,000
Capital 7,39,000 6,15,000 Debtors 20,000 17,000
Stock 8,000 13,000
Building 1,00,000 80,000
Other Fixed
Assets 6,00,000 5,00,000
7,68,000 6,40,000 7,68,000 6,40,000

1
 F6U3/1A16
There were no drawings and no purchases or sale of either building or the fixed assets.
Prepare a Statement of Cash Flow.

14. You are requested to prepare a Sales overhead Budget from the estimates given below:
Advertisement Rs.2,500; Salaries of the sales department Rs.5,000; Expenses of sales
department Rs. 1,500; Counter salesmen’s salaries and dearness allowance Rs.6,000;
Commission to counter salesmen at 1% on their sales; Travelling salesmen’s commission at
10% on their sales and expenses at 5% on their sales.
The sales during the period were estimated as follows:
Counter sales Travelling salesmen’s
Rs. 80,000 Rs.10,000
1,20,000 15,000

15. The sales Director of a manufacturing company reports that next year he expects to sell
50,000 units of a particular product.
The production manager consults the storekeeper and casts his figures as follows:
Two kinds of raw materials, A and B, are required for manufacturing the product. Each unit
of the product requires 2 units of A and 3 units of B.
The estimated opening balances at the commencement of the next year are:
Finished product : 10,000 units
Raw material : A: 12,000 units; B: 15,000 units
The desirable closing balances at the end of the next are:
Finished products: 14,000 units,
Material: A : 13,000 units, B 16,000 units
Draw up a quantitative chart showing materials purchase budget for the next year.

16. Enumerate the major steps involved in capital budgeting.

17. Payoff Ltd, is producing articles mostly by manual labour and is considering to replace it by a
new machine. There are two alternative models M and N of the new machine. Prepare a
statement of profitability showing the pay back period from the following information:
Machine M Machine N
Estimated life of machine 4 years 5 years
Rs. Rs.
Cost of machine 9,000 18,000
Estimated saving in scrap 500 800
Estimated savings in direct wages 6,000 8,000
Additional cost of maintenance 800 1,000
Additional cost of supervision 1,200 1,800
Ignore taxation.

SECTION – C (3X10=30)

Answer any THREE Questions

18. Define Management accounting. Explain the advantages and limitations of it.

19. With the help of the following ratios regarding Indu Films, draw the Balance Sheet of the
Company
Current Ratio 2.5; Liquidity Ratio 1.5; Net working capital Rs.3,00,000;
Stock Turnover Ratio (cost of sales/closing stock) 6 times; Gross Profit Ratio 20%;
Fixed Assets Turnover Ratio (on cost of sales) 2 times; Debt collection period 2 months;

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 F6U3/1A16
Fixed Assets to shareholder’s Net worth 0.80; Reserve and surplus to capital 0.50.

20. Balance Sheets of M/s Black and White as on 1-4-2008 and 31-3-2009 were as follows:

Liabilities 1-4--2008 31-3-2009 Assets 1.4.2008 31-3-2009

Rs Rs Rs. Rs.
Creditors 40,000 44,000 Cash 10,000 7,000
Mr.White Loan 25,000 - Debtors 30,000 50,000
Loan from bank 40,000 50,000 Stock 35,000 25,000
Capital 1,25,000 1,53,000 Machinery 80,000 55,000
Land 40,000 50,000
Building 35,000 60,000

TOTAL 2,30,000 2,47,000 TOTAL 2,30,000 2,47,000

During the year machine costing Rs. 10,000 (accumulated depreciation Rs.3,000) was sold
for Rs.5,000. The Provision for depreciation against machinery as on 1-4-2008 was Rs.25,000
and on 31-3-2009 Rs. 40,000. Net Profit for the year amounted to Rs. 45,000. You are
required to prepare funds flow statement.

21. Prepare a cash Budget for the month of May, June and July 2009 on the basis of the following
information:
Month Credit Credit Wages Manufacturing Office Selling
Sales Purchase Expenses Expenses Expenses
March 60,000 36,000 9,000 4,000 2,000 4,000
April 62,000 38,000 8,000 3,000 1,500 5,000
May 64,000 33,000 10,000 4,500 2,500 4,500
June 58,000 35,000 8,500 3,500 2,000 3,500
July 56,000 39,000 9,500 4,000 1,000 4,500
August 60,000 34,000 8,000 3,000 1,500 4,500

Cash balance on Ist May, 2009 Rs.8,000

Plant costing Rs.16,000 is due for delivery in July, payable 10% on delivery and the balance
after 3 months.
Advance Tax of Rs.8,000 each is payable in March and June.
Period of credit allowed (i) by suppliers - 2 months, (ii) to customers - 1 month
Lag in payment of manufacturing expenses - 1/2 month
Lag in payment of office and selling expenses - one month.

22. An equipment requires initial investment of Rs. 11000. The cash inflows for four years life
are estimated as Rs.6000, Rs.2000, Rs.1000, and Rs.5000. Calculate Internal Rate of Return.
Present value factors @ 10% and 12% are
Year: 1 2 3 4
PV at 10%: 0.909 0.826 0.751 0.683
PV at 12%: 0.893 0.797 0.712 0.636

*************

3
 Q6/1C/04-15

Reg. No
St. Joseph’s College of Arts & Science (Autonomous)
St. Joseph’s College Road, Cuddalore – 607001
CM616S – MANAGEMENT ACCOUNTING
Time : 3 hrs Max Marks :75
SECTION – A (10X2=20)

Answer ALL Questions

1. Define Management Accounting.
2. Write a short note on Common-Size Balance Sheet.
3. What do you understand by “Operating Profit”?
4. What are turn over ratios?
5. What is Cash Flow Statement?
6. What is Funds from Operation?
7. How do you define the term Budgeting?
8. Write a short note on Zero Base Budgeting.
9. What is the formula for Current Ratio?
10. What do you understand by “EPS”?
SECTION – B (5X5=25)

Answer any FIVE Questions

11. Explain the characteristics features of Management Accounting.

12. The summary of Balance Sheet data in respect of A Ltd and B ltd is as under:
A B

Buildings 1,00,000 4,50,000

Machinery 3.,00,000 7,50,000
Share capital 4,50,000 14,50,000
Retained earnings 50,000 33,000
Debtors 1,15,000 1,60,000
Stock 60,000 2,17,000
Cash 10,000 5,000
Prepaid expenses 5,000 3,000
Creditors 91,000 1,00,000
Liability for expenses 9,000 17,000
Preliminary Expenses 10,000 15,000
Prepare Common-Size Balance Sheet.
13. From the following particulars, prepare :
a) Stock turnover ratio b) Fixed assets turnover ratio c) Debtors turnover Ratio
d) Creditors turnover Ratio e) Debt Collection Period and f) Debt Payment Period

~1~
 Q6/1C/04-15

(figure in ‘000) (figure in ‘000)

Sales 17,874 Bills 2,000
receivable
Sales return 4 Creditors 5,000
Other Income 53 Bills payable 3,000
Cost of sales 15,440 Opening Stock 4,000
Administration 1,843 Closing Stock 5,000
Expenses
Depreciation 63 Fixed Assets 5000
Interest expenses 456 Purchase 5
returns
Purchases 15,000 Debtors 10,000

14. From the following balances you are required to calculate cash from operation
31st December
2003 2004
Debtors 45,000 42,000
Bills receivables 12,000 15,000
Creditors 20,000 26,000
Bills payable 18,000 16,000
Expenses O/S 1,200 1,600
Expenses Prepaid 1.600 1,400
Accrued income 800 900
Income received in advance 250 300
Profit and loss account 25.000 1,55,000

15. What is Budgeting? Explain the advantages of Budgeting.

16. Calculate funds from operation for the following

Particulars 1998 1999
P& L A/C balance at the end 50,000 60,000
General reserve 30,000 40,000
Goodwill 20,000 12,000
Preliminary expenses 6,000 4,000
Depreciation provision (accumulated) 25,000 40,000
Income from non-trading investment ----- 20,000
Preference share of the face value of 1,00,0000 were redeemed during the
year at a premium of 10%. The premium on redemption was charged to
the profit &Loss a/c.

17. Each of the following projects a cash outlay of 10000. You are required to suggest which
project should be accepted if the standard pay-back period is 5 years.
Year Cash in flows
Project X Project Y Project Z
1 2500 4000 1000
2 2500 3000 2000
3 2500 2000 3000
4 2500 1000 4000
5 2500 ---- ----

~2~
 Q6/1C/04-15

SECTION –C (3X10=30)

Answer any THREE Questions

18. In projecting the financial plan of the firm, the use of the following accounting ratios is made:
Annual Sales 2,00,000
Sales to Net Worth 2.5
Current Liabilities to Net Worth 25%
Total Debt to Net Worth 60%
Current Ratio 3.6
Net Sales to Inventory 4 Times
Average Collection Period 36 Days (A Year =360 Days)
Fixed Assets to Net Wroth 70%
On The Above Basis Prepare Proforma Balance Sheet Of The Firm.

19. The Balance Sheet of a company as on 31st December 2003 and 2004 are as follows

Liabilities 2003 2004 Assets 2003 2004

Share capital 2,00,000 2,50,000 Fixed Assets 3,50,000 4,75,000
Retained earnings 1,60,000 3,00,000 Merchandise inventory 1,00,000 95,000
Premium on shares ------- 5,000 Accounts receivable 43,000 50,000
Accumulated depreciation 80,000 60,000 Prepaid expenses 4,000 5,000
Debentures 60,000 ------- Cash 15,800 10,200
Accounts payable 37,800 40,200 Commission on shares 25,000 20,000
5,37,800 6,55,200 5,37,800 6,55,200
Additional information
i. Net income for the year 1,40,000
ii. An addition to the fixed Assets was made during the year at a cost of 1,65,000 and fully
depreciated machinery costing 40,000 was discarded, no salvage being realised .
iii. Depreciation for the year 20,000.
iv. Income tax paid was 40,000
v. Interim dividend paid during the year 20,000.
You are required to prepare
a) Schedule of changes in working capital
b) A statement of sources and applications of funds.

20. For the production of 10,000 electric automatic irons; the following are the budgeted expenses
Per unit
Direct Material 60
Direct labour 30
Variable Overhead 25
Fixed Overhead( 1,50,000) 15
Variable Expenses 5
Selling expenses(10% Fixed) 15
Administrative expenses (`50000 rigid for all levels of production) 5
Distribution expenses (20% fixed ) 5
The total cost of sale per unit 160
Prepare a budget for the production of 6000 and 7000 and 8000 irons showing
distinctly the marginal cost and total cost

~3~
 Q6/1C/04-15

21. From the following information calculate the net Present value of the two projects and suggest
which of the two profits should be accepted assuming a discount rate of 10%.
Profit X Profit Y
Initial investment 20,000 30,000
Estimated life 5 years 5 years
Scrap value 1,000 2,000

Profits before depreciation and after taxes are as follows:

Year Profit X Profit Y

1. 5,000 20,000
2. 10,000 10,000
3. 10,000 5,000
4. 3,000 3,000
5. 2,000 2,000

22. From the following data forecast the cash position at the end of April May and June
Month 1998 Sales Purchases Wages Sales expenses
February 1,20,000 80,000 10,000 7,000
March 1,30,000 98,000 12,000 9,000
April 70,000 1,00,000 8,000 5,000
May 1,16,000 1,03,000 10,000 10,000
June 85,000 80,000 8,000 6,000

Further in formation
I. Sales at 10% realised in the month of sales. Balance equally realised in the subsequent
months.
II. Purchases: creditors are paid in the month following the month of supply
III. Wages: 20%paid in arrears in the following month
IV. Sundry expenses paid in the month itself
V. Income tax 20,000 payable in June
VI. Dividend payable 12,000 in June
VII. Income from investment 2,000 received half yearly in march and September
VIII. Cash balance on hand as on 1-4-88 40,000

~4~
 MARGINAL COSTING
1. Define marginal cost?
Marginal cost is defined by I.C.M.A, London as “the amount at any given
volume of output by which aggregate cost are changed if the volume of output is
increased or decreased by one unit. In practiced by the total variable costs
attributable to one unit”.

2. Write the Characteristics of marginal costing?

 Segregation of cost into fixed and variable elements:
In marginal costing, all costs are segregated into fixed and variable elements.
 Marginal cost as product cost:
Only marginal (variable) costs are charged to products.
 Fixed costs are period costs:
Fixed cost are treated as period costs and are charged to costing profit and
loss account of the period in which they are incurred.
 Valuation of inventory:
The work – in – progress and finished stocks are valued at marginal cost
only.
 Contribution is the difference between sales and marginal cost:
The relative profitability of the products or departments is based on a study
of “contribution” made by each of the products or departments.

3. Write the Advantages of Marginal Costing?

Marginal costing is an important technique of managerial decision making. It
is a tool for cost control and profit planning. The following are the advantages of
marginal costing technique:
1. Simplicity
The statement propounded under marginal costing can be easily followed as
it breaks up the cost as variable and fixed.
2. Stock Valuation
Stock valuation cab be easily done and understood as it includes only the
variable cost.
3. Meaningful Reporting
Marginal costing serves as a good basis for reporting to management. The
profits are analyzed from the point of view of sales rather than production.
4. Effect on Fixed Cost
The fixed costs are treated as period costs and are charged to Profit and Loss
Account directly. Thus, they have practically no effect on decision making.
5. Profit Planning
The Cost – Volume Profit relationship is perfectly analysed to reveal
efficiency of products, processes, and departments. Break – even Point and Margin
of Safety are the two important concepts helpful in profit planning.
6. Cost Control and Cost Reduction
Marginal costing technique is helpful in preparation of flexible budgets as the
costs are classified into fixed and variable. The emphasis is laid on variable cost for
control. The constant focus is on cost and volume and their effect on profit pave the
way for cost reduction.
7. Pricing Policy
Marginal costing is immensely helpful in determination of selling prices
under different situations like recession, depression, introduction of new product,
etc. Correct pricing can be developed under the marginal costs technique with the
help of the cost information revealed therein.

4. Write the Limitations of Marginal Costing ?

Classification of Cost
Break up of cost into fixed and variable portion is a difficult problem. More
over clear cost division of semi – variable or semi – fixed cost is complicated and
cannot be accurate.
Not Suitable for External Reporting
Since fixed cost is not included in total cost, full cost is not available to
outsiders to judge the efficiency.
Lack of Long – term Perspective
Marginal costing is most suitable for decision making in a short term. It
assumes that costs are classified into fixed and variable. In the long term all the cost
are variable. Therefore it ignores time element and is not suitable for long term
decisions.
Under Valuation of Stock
Under marginal costing only variable costs are considered and the output as
well as stock are undervalued and profit is distorted. When there is loss of stock the
insurance cover will not meet the total cost.
Automation
In these days of automation and technical advancement, huge investments
are made in heavy machinery which results in heavy amount of fixed costs. Ignoring
fixed cost in this context for decision making is irrational.
 Production Aspect is Ignored
Marginal costing lays too much emphasis on selling function and as such
production aspect has been considered to be less significant. But from the business
point of view, both the functions are equally important.
Not Applicable in all Types of Business
In contract type and job order type of businesses, full cost of the job or the
contract is to be charged. Therefore it is difficult to apply marginal costing in all
these types of businesses.
Misleading Picture
Each product is shown at variable cost alone, thus giving a misleading picture
about its cost.
Less Scope for Long – term Policy Decision
Since cost, volume, and profits are interlinked in price determination, which
can be changed constantly, development of long term pricing policy is not possible.

5. Write the Distinction between Absorption Costing and Marginal Costing?

Absorption Costing Marginal Costing
Total cost technique is the practice of Marginal costing charges only variable
charging all cost, both variable and fixed cost to products, process, or operations
to operations, process or products. and excludes fixed cost entirely.
It values stock at the cost which includes It values stock at total variable cost only.
fixed cost also. This results in higher value of stock
under absorption costing than in
marginal costing.
It is guided by profit which is the excess It focuses its attention on Contribution
of sales over the total costs in solving which is excess of sales over variable
managerial problems cost.
In total cost technique, there is a It excludes fixed cost. Therefore, there is
problem of apportionment of fixed costs no question of arbitrary apportionment
which may result in under or over
recovery of expenses.

6. Define Break Even Chart?

These depict the interplay of three elements viz., cost, volume, and profits.
The charts are graphs which at a glance provide information of fixed costs, variable
costs, production / sales achieved profits etc., and also the trends in each one of
them.
7. Define Margin of Safety ?
This is the difference between the actual sales level and the break even sales.
It represents the “cushion” for the company. The larger the distance between the
break even sales volume and the actual sales volume, the company can afford to
allow the fall in sales without the danger of incurring losses.

8. State the Uses and limitations of Break even analysis?

Uses of BE analysis are as follows:

 It is a simple device and easy to understand.
 It is of utmost use in profit planning.
 It provides the basic information for further profit improvement studies.
 It is useful in decision making and it helps in considering the risk
implications of alternative actions.
 It helps in finding out the effect of changes in the price, volume, or cost.
 It helps in make or buy decisions also and helpful in the critical
circumstances to find out the minimum profitability the firm can maintain.

The limitations of BE analysis is:

 The basis assumptions are at times base less. For example, we can say that
the fixed costs cannot remain unchanged all the time. And the constant
selling price and unit variable cost concept are also not acceptable.
 It is difficult to segregate the cost components as fixed and variable costs.
 It is difficult to apply for multinational companies.
 It is a short-run concept and has a limited use in long range planning.
 It is a static tool since it gives the relationship between cost, volume and
profit at a given point of time and 6.It fails to predict future revenues and
costs.

9. Define PV Ratio?
PV Ratio is the measurement of the rate of change of profit due to change in
volume of sales. It is one of the important ratio for computing profitability as it
indicates contribution earned with respect of sales.
Pv ratio=contribution x 100/sales.
10. Write the Uses and Importance of P/V ratio?
Uses:
(a) Calculation of break-even point.
(b) Calculation of profit at a given level of sales.
(c) Calculation of the volume of sales required to earn a given profit.
(d) Calculation of profit when margin of safety is given
(e) Calculation of the volume of sales required to maintain the present level of profit
if selling price is reduced.
Importance:
(a) Increasing the selling price.
(b) Reducing the variable cost
(c) Changing the sales mix i.e. selling of those products which have larger P/V ratio,
thereby improving the overall PN ratio.

11. State the Types of Ratio analysis?

There are 4 Types of ratio analysis
1. Liquidity Ratios
2. Solvency Ratios
3. Activity Ratios and
4. Profitability Ratios

1. Liquidity Ratios:
These ratios measure the concern's ability to meet short-term obligations
as and when they become due. These ratios show the short-term financial
solvency of the concern. Usually the following two ratios are calculated for this
purpose:
1. Current Ratio and 2. Quick Ratio
1. Current Ratio:
This ratio establishes a relationship between current assets and
current liabilities.
2. Quick Ratio:
This ratio establishes a: relationship between quick assets and current
liabilities.

2. Solvency Ratios:
These ratios show the long-term financial solvency and measure the enterprise's
ability to pay the interest regularly and to repay the principal (i.e. capital amount) on
maturity or in pre-determined installments at due dates. Usually, the following ratios
are calculated to judge the long-term financial solvency of the concern.
 3. Activity Ratios:
These ratios measure the effectiveness with which a firm uses its available
resources. These ratios are also called 'Turnover Ratios' since they indicate the speed
with which the resources are being turned (or converted) into sales. Usually the
following turnover ratios are calculated: I. Capital Turnover Ratio II. Fixed Assets
Turnover Ratio, III. Net Working Capital Turnover Ratio IV. Stock Turnover Ratio
V. Debtors Turnover Ratio. VI. Creditors Turnover Ratio.

4. Profitability Ratios:
Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating costs,
balance sheet assets, and shareholders' equity over time, using data from a
specific point in time.

12. State the Limitations of Funds Flow Statement?

 A funds flow statement cannot present a continuous change of financial
activities including the changes of working capital.
 Since it is based on financial statement (i.e. Income Statement and Balance
Sheet), it is not a original statement.
 A projected Funds Flow Statement does not always present very accurate
estimates about the financial position since it is a historic one.
 It is not a substitute of financial statements, i.e. Income Statement and
Balance Sheet. It simply supplies information about the change of Working
Capital position which, again, depends on the data presented by the financial
statements.
 Cash Flow Statement, i.e. changes in cash position, is more important or more
informative than the changes in working capital which is presented by a
Funds Flow Statement.
 13. Difference between fund flow and cash flow?

BASIS FOR
CASH FLOW FUND FLOW
COMPARISON

Meaning A cash flow statement is a A fund flow statement is a

statement showing the inflows statement showing the changes in
and outflows of cash and cash the financial position of the entity
equivalents over a period. in different accounting years.

Purpose of To show the reasons for To show the reasons for the
Preparation movements in the cash at the changes in the financial position,
beginning and at the end of the with respect to previous year and
accounting period. current accounting year.

Basis Cash Basis of Accounting. Accrual Basis of Accounting.

Analysis Short Term Analysis of cash Long Term Analysis of financial

planning. planning

Discloses Inflows and Outflows of Cash Sources and applications of funds

Opening and Contains opening and closing Does not contains opening balance
closing balance balance of cash and cash of cash and cash equivalents.
equivalents.

Part of Financial Yes No

Statement

14. Define Budgetary control?

Budgetary control refers to how well managers utilize budgets to monitor
and control costs and operations in a given accounting period. In other words,
budgetary control is a process for managers to set financial and performance goals
with budgets, compare the actual results, and adjust performance, as it is needed.

15. Define Zero based budgeting?

Zero based budgeting in management accounting involves preparing the
budget from the scratch with a zero-base. It involves re-evaluating every line item of
cash flow statement and justifying all the expenditure that is to be incurred by the
department.
 16. What is meant by contribution?
Contribution is the difference between sales and marginal cost. It is
contribution towards fixed costs and profit.

17. Difference between fixed cost and variable cost?

S.No FIXED COST VARIABLE COST

1. It is the total of all those costs which are These are the costs which increase or
termed “period costs “or “time costs”. decrease in proportion to the output
and sales.
2. They do not depend on the volume of Variable costs are called “product costs”
production and sales. or “marginal costs”.
3. Fixed costs are fixed in total but variable Variable costs are variable in total but
per unit. fixed per unit.

18. Explain the Meaning Of ‘Break Even Point’?

In The Words J. Wayne Keller “The Break Even Point Of A Company Or A Unit
Of A Company Is The Level Of Sales Income Which Will Equal The Sum Of Its Direct
Costs And Its Period Expenses”

19. What Is Angle Of Incidence?

In The Graphic Presentation Of Marginal Cost Data I.E A Break Even Chart
The Total Cost Line And Sales Line Cross Each Other. The Point Of Crossing Is
Known As ‘Break Even Point’. The Angle At Which The Sale Line Crosses The Total
Cost Line Is Called ‘ Angle Of Incidence’

20. What Is Key Factor?

Any Key Factor Is Concerned With Production Or Sales Which Imposes Limits
On The Production Or Sale Can Be Called Limiting Factor. Key Factor Can Be Any Of
The Following:
a. Sale Potential May Be Limited
b. Production Capacity May Be Limited Due To Limited Availability Of Skilled
Labour Time`
c. Finance Can Also Impose Limitation On The Operation .
d. Raw Material May Be Short In Supply.
21. What Is Incremental Analysis?
According To Icma London “ Differential Costing Is A Technique Based On
Preparation Of Adhoc Information In Which Only Cost And Income Differences
Between Two Alternatives Or Courses Of Action Are Taken Into Consideration”.

22. What Is P/V Ratios?

This Is The Ratio Of Contribution To Sales. It Is Important Ratio Analysing
The Relationship Between Sale And Contribution. A High P/V Ratio Indicates High
Profitability And Low Profitability Ratio Indigates Low Profitability.

Formula For P/V Ratio:

P/V Ratio = Contribution
______________ * 100
Sales
 f, ~ L 6 U l / 1 N l 5
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St. .Joseph's College of Arts & Science (Autonomous)

St. Jo-,cph's College Road, ('uddalorc 607001
CY1616S - MANAGF:MEN'l ACCOUNTING
Max ~farks :75
l.!.!..'IC : .3 h n,

SECJ ION - A (I0X2=20)

Answer ALL th~ ()ucstions

I. Stare any four functions of management accoun ti ng.

2. I kl 111<.: management accounlmg.

.1. Whal do you mean by linancial statement?
4. Whal is trend ana lysis?
5 Whal is working capital?
6 Cm,<.: two examples for ca<;h nows from in ves tin g activ1Lies.

7. Whal is a budget?
8. Stale any four objectives of budgetary control.
9. Wnl<.: a note on IRR .
I 0. Whal ts capital budg<.:Ling?

SECTfON - B (5X5=25)

Answer any Fl VE Questions

11 . I h<.: following arc the income slalcmcnls of X,Y,7, Co.Ltd for the years 2010 an<l 101 l
Prepare common si/c income statement for thc two years

20 I I - - Partic~lars - .. 20 IO 20 I I -
J>ar11cular 20 10
{ { 1
.
3,50,000 j By 'laks l {
r 'l,00,000
{
t 5,00,000
Io Cost of saks 2,40,000
Io ( ,ross profit c/d 1,60,000 I 50 000
1,00,000 5 00 000 -t,00,000 5,00,000
·1o operating expe nses: By (imss b/J 1 1.60,000 1,50,000
') 5,000 2 S ,000 13) I n11..·rcsL on
Adrninis lra1ion
15,000 )0,000 !11,·cst111..:111 20,000 50.()0U
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'Io 11011 opl'rating
I ~x pc w,c: <; ?0,()00 20,000
l •i1wfl(;c IO 000
<'i<)odwill w1illl'Jl on I 00 000 1,20,000
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,) f,1:i<fard pr,c,;c per u11i1 1,32,(j()(J
30.yr,r½ ◄

25 />cii<;e;, 5 l'ai<;c
15 l'aiS<: I fJ l'aisc ,
-L

J 4i. ( ';dc11/:1fc t/11,; ,Ncrt1g1,; rarc <1/' rctur11 for projects A cind H fr<Jm the foll<,·..ving:

lnv1,; •,tmcll( l' mjc;c[ /\ Pr<Jjcct H

/{ <;.2(),(J(J(; f> <,J (J_()(J(J
J:x pcctnJ f,ifo ( n<J st1 lvagc; vc1 /ucJ4 years
/'roJeUcd Ncl fn ccJTn<.:, ::ifkr fn/crest, JJcprcciation and Laxes: 5years

Years
l'mj<.:ct ;\
I Project H
2/J(J(J
2 3 ()0()
I 50()
J. ()()()
1,50() 2 ()()()
I (J()()
I. ()(JO
1,(J()()
5 rcquin;d rat.e ,,f. rclum ,..,
Jf 1/,c . 121/,,
,, whic · . <, /,1 ,u_Id be undcrtakcu
· .h J>r<JJ<.:U
/ r, I Jr <;cu•,s the iinp<1rtw1t (cal11rc"> 1, f.ma n·agcmcnt account,n"o
/7 J>i•;t1ngiw,li· hclwccn ,.111JC 1 11 <iwa, n<J cash
· f1()w ·statcme11ts.

.~ECTIOi\ - C OX IO -JOJ

/\nswcr any THfU:E C)ucsticms

J X. Hr id1y cxplc1i11 tile tooh and tcc/1111qucs

. . . o ( mwiagt:,ncrll arco1111ti11g.

~2~
 J 111 ,J / I U f'i

l•l I 1, 11111111 I11 II II\\II\I' lllhltl\1111111

II \ 11 111111' ,, 1p1111 ii 111 JIii jl•f/1 ti 1!,d 11111 I II• I I

,l \ l ' 11 1 h ' \11 I ,\I II I

I / I
\,) I 11\lll<I 1\111'1
I ' 'l
,' ) Shi,\_ 1111111 1\\ I l1H\11
,I} l I I' lt1111,
'I I lf hl 111 t)l d1 •!/ 1111 '"l' 1111 I
I 1"11
,,, I ),·ht I 11111'1 \\1111 Jh '""' I "1111111 111 -.
Il l~,•v, \,--. .11111 , 11111lth 111, npil.ll o,
:• ) l i\,',I l'i--.,' h lllt!\\\\, ' I (111\ 1' , Hi l 111 •u ll1 •'i l I 1

hi l ,\['ti.II f 1',lllll\ 1 I \l\d LI 111\!1 f, •1111 d, hi 111 ·, li ,lfl ' 111p11itl) • () 1,

I) l ,,,,,I ,1-,•;,•1,; "' lh' I \\111111 ' I I.,
I\ ,.,k--. l,11 lh,· '1'. \I ~ I 1,()11 (/()(/

I 1.1hd1t1<·, 1l
\
l I l 1 11 I 1 11
\
, \ 'i'i l'I !\ 11
I ( .' '
') 1)1)1/
I H I I l,

,11 l ',111l1.tl '1),t)()t) / l ,OtH) 111111k ii11l.1111 l

I I I )(}I) I / 11111
l \ •1',·t1t\ll1' ... l 1 1 lltlll (1 ()()() \, 1 ,111111 11, 1 1v, ilil1•
•I') )()( I d I /1111 ,
j_ I II I I ,II Ii
I
'I fIll
\,•,,,\ll\lS p.1\ .iii\,•
1\11 pt,1\ tSl1llt
I 1) IC1() I I HItl
l\11ild111 g"
IC) ,()(){) I 1j 1J/ 11Jl1
j() 1/()() I •1 I J(JI j
t,11 ,l,1111'1lul /tll l 8()() t i,H1dwlil
,kbts I ll,OIll I !l, ,110
l\t.:. l \ ,· 1 ,801)

l t.111!-. 1\h'I ,11.11) I

1,0 I l /)(/ l ()( I (JI,, J l
1,!l 1, I tlll I ,t)11 ,tll )()

\,hl111,,11.II 11\[~\I l\l,\(1111\

.1) Hui ld1t1~s ",·1 , •. h ' IJllll t·d l'1ll \ 1(),1100
b) \nwu1\t p11n 1d,•ll l~H ,HlllHl11,1l1t111111 gtindwlll 1n111lt•d R:1 ·,,000
,') l)n 1,kn,b p;lld 1l1t.1kd ~ \, '100.
,t) l)d1,·11tun· hl:111 rep.ltd \\.IS ~ h,tlO!l
l'rt'f',\tt' ,\ t'und l1tl\\ st.1t-'11wnr .

.21. I h,· t'\!X'l\::,·s bull;•t'lt'd !'lll pnldllt"l lt)ll or I0,000 111111s in ,I lat IOI y :ti( ' 1111111·,lted l,t•low.

l\·r l ntt \
\ b!l.'lt.11:: /{) ,,. ,.
~ ,iftM ,

I .lh)llr • ii ~,.., \
\ .m;ibk tn t·rlw,id
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~ ::
\ .m.1bk L'\(Wll:-c:: ldi1cct)
Sdlmt! L',pt·n.:c:,; ( I0" o II\L'd)
" \~•r \\
0
Distnbullnn t'\t)t'I\SL'S (.)() o 1·1:-.i:d
.-\dmmistr:t!Hll\ 1·,pi:11scs (:'10,00ll) "l (lix1•d liu nil kwl s)
l ,1tal ('tbl Ill'! unit I :i .'l
Prt·p;ir(' a 11t·,ibk budgt'l fo1 the prud11t·ti1111111' (11) 8,0001111it s illld (Ii) /1,000 1111it•;,
 !~6 lJ 1/\~\~
' ' Tlw tC,U."' ing details ec·t11ing In 11,,. im•cs1mcn1 p•npnsal in " ""'"'•inc "'" a,.,ii.,ht
- - - - - ~
Cost of tbc rnachinc. ----.
Estimated economic life
Operating time p.a I OYears I ,.xo,oon I
2,000 hours
Production cxpccted
\ \ ·ages per hour 48 units per hour I
I
I
Power per annum 30
Other Expenses per annum 20,000
.\ fate rials per uni l
Selling Price per unit
I 34.000
Re. I
'--Tax rate 50% -L5

a) Ascertain the pay- back period for the machine. . ,

b) If standard pay - pack period is 3 years, would you recommend tts purchase '

***********~***
 CG/u) /I/\ 19

St. ,Jost.'ph's C'oUrol' of \ IR,·~•No I [ J I r I rr I I

St. ,10,,, >h' "' ' rfs ,~ Sricncc ( A
l' (" , l s C'otkg.t' Road , (' litldalon, <: 1)7() ' \llto11on1011s)
), on, lH:GRF ;, _._ . - ) 01
,l t\,\i\llN \Tl<
Tit,,t., : J hrs C:\t 6l6Q - i\t \N \' ' l' ' >N - APRIi , 2019
.. l ' \.I 1,i\lt◄: NT AC'COUNTi~G
l

SEC'TlON - A (lOX2::::20) ~Jax Marks :75

l. \\'rite am· t,,o ·1d, ·\nt· , Ans,,\'r ALL tlw Qucstit)ns

2. \\'l · ·- ' ' ,lgcs ot ~ l:1.nagcmcnt Accounti11no·
1at 1s hnancial statement analysis?

3. \\'hat arc the uses of Ratio analysis•'

4. What arc Profitability ratios?
5
· \\'hat is •ne:ui by luncts llow Statement?
6. \\'hat is working capital?
7. Ex.plain the krm ·Budgetary control".
8. Write anv live essential features of budoet
J b •

9. What do you mean by perfonnance budgeting?

I 0. Variable overheads for production of I0,000 units arc Rs 60,000. What will be the variable
overheads for production of 15,000 units and 20,000 units.

SECTlON - B (5 X 5 == 25)
Answer any FlVE Questions

l l. Explain the importance or financial statement analysis. /. -=- . . ,~

1/·~ ·1, ,11 ,,
tf:. 't, \ 1;
¼"'- ..'- ..·..,,(· ~' \
le ' j ' ~

12. Calculate the earning p~r share from the following data: ~ \)(/ -, ';·· ·, \\
Net profit before ta:x Rs I ,O?,OOO [* _.; ·.
Taxation at 50% ot net proht , ' , 00 000 ,1,::;. -,:-, .
.
I 0% preferences ' each)
,. " (Rs. . 10
hare c,anit"l ks. l, ,
00 000 ' ·~~,:.
. {'•,,:,i
Equity share capital (Rs. IO each) ks. I, , ·<':,~··:;:;:;·~

F . d t the funds from operations rrom ti ic, t IL:). ·t·1ils• giwn bdow:
IJ. m OU •. ?0ICi-1017 Rs. 95,00t
Net profit for the year . . - .. , . Rs ~1 0011 '
D
,. . prcciation charged on lixcd assets ·: --, ', I ·ti i11 thc P&L /\Jc. Rs I ,,000
Prollt
V - on s<1. l~~ 0 f long
.. term
.
. tnvcs
"IIIIL'lllS Ill( l l L

Goodwill written otl Rs _Q, 000 7

,c i.o Base Budgeting.

. tl1c process o I. ''/,
14. Exp Iam
 . d M·. ul'i• 11al < <1'11i11 g
, , ,tll
I ' I >1 •, l1111q 111,I, 111 l\\t'1· 11 llw Al1•io1pl11111 ( o•1l1111.

111 . I . .• x ltd ' ,11:idc lJ JJCI prolit of l{ s 1,00/)()(J fo1

\11,, 1ili111'i11(111•1111·,id, 1.1t11111ll11 111 II ()Wlllµ,1u11,,
1111 \• Ill I 11d1d 11, \, 0 1 /
1

R:: l)',.
C

I )1 Pll'(•i 11(11111 1111 h111 ld111 1•, '1,000 ( 1qodwill wrilt<.:11 off 5,()()()
I 1, p11 ( t,tl11111 Il l) 111111 111111 I y ),0()() I ,i> '.,'., 011 •,ale:, of rnachincry IOJJOO
1'10,•1•, 1011 l01 l.t \.tl1011
I !J,!J(J() l'rt:l11r1111ary l ~x pcn',CS 5,000
< 1iu11 till ·:: tit ol' l>111ld11 q\:i 8,(J()()

I· 111d n1111•, 1:111 1111111 011t•1i1lin11 ·:.

I / \\'11'1 ll1n l1,llu w 111i•, d111 :, 1111 <,O'V., :tcl1vi1y, Prc pa, c a budget for 80% activity:
l\ lilh-11 ,tl :, 1, ·l I() j\L' I 1111i1 ,
W ; 1gt ·:: It ·i <,
hn In, y OVL·llll'ad s Its (1000()0% 1'1 xcd)
,\d1111111 s ti,,11n11 OVL'il1 L·:tds I{ ., ).,400(10'¼, V ariabl e)
,\ •:s111111• lhal p1t1d11('tio11 al (10'¼, activity is 240 units.

I 8, t ': llnd:111• t 110:-.s Prnli1 l{:1110 l'ro 111 tlt t.: following li gurcs:

ll s.
S,tll's Rs.
10,00,000 Purchases 6,00 ,000
s.,ks ll'.111111 1,00 ,000 Purchase return l ,50 ,000
t )pt·11i11g stoek
2,00,000 Closing stock
65 ,000
J

SECTrON - C (3 x l0=30)
Answer any TIIREE questions
I<) . lh! following arc the extracts from the Income statements of Bright Ltd for the 6 years. You
:tit' 1l'qui1cd to ca lculate trend percentages ( Base year 2011)
Particulars - - 2012
2011
-
2013 2014 2015 2016 !

Saks 100 340 420 480 520 600

( 'os1nf goods sold 180 204 256 287 300 330
()ffiec l•:x penscs 40 42 45 50 55 60
:-kllmg cxpcnst;s 20 25 30 40 50 60
Nt·t profit 60 69 89 103 115 150
-· - ---
1()
You arc p,ivc11 the followi11g information:
Cas lt 18,000 Creditors -
- - 50,000
lkbtors 1,,12,000 Outstanding expenses
l5 ,000
( 'lo si11g stock 1,80,000 ru x payable 75,000
Bills payahk 27,000
..
( 'alrn late (a) C1111L:11l iatio (h) I,iquidity ratio (c) J\hsolutc -
liquidity ratio.
2
 Pr1,fit & !.,, ,, ;\/c Ir,,< l)f) !3.(#) PL.1Itl
S1111dry Cn.:di1,,r :~,()(;(1 5.4{}(J fr '· es::--~·
Bill, hiyabk: 1.2()(J 9,00 Sti:r.',·

l'rovi •, io1, for T,JJG1lion 16.(J(){J 1£,000 Bcf -:; Rc,;ei·.-a'.:;'e

Prov, :ion for IJ011b1.ful +<J(J fJO(J O!frn
dt:bL,
CG.Sh ch~

_______ l~,55.6WJ i,55.3')0

I

Th1.: following additional infiinnation has &IS-O ·'jecn ~i·,-':r.: (i) Dep-';?Ct~:it1;- ct::;I-e-: c 7 r..:
wa.-. fz.: 4000 and on buildin'.5 Rs :.H}(J(J (iiJ Pro·, isicr. fo- ta·a~io;1 of 3-s : 91)1)() •:::!_5 .:a~;.> .! __-:::_=-
lhl: year 2015. (iii) Interim di :irfond of Rs. 3000 ·:.as pc.i-i c•Jf-; :.;--e :· ~a:- ::Jl5.
1

22. I· rom thl: following data fon:ca.st the cash f)Q5i~ion at free~ of April f:!.ay ;!i},: :'.:.TI.:'=- :.5.
~fonth 2016 Sales Rs I Purchases P'-" i,;,·ag'e:S Rs Sa-:-s expea..~s ~

:
February 1,20.000 I ZIJ,00Q
March 1,3(),(j(J(J , 98/Y'J) 12.l)(l() 9.000
April /·-' 70::099 ~ . :,Q0,IJQO 3.000

l May
June

further information: -:..- \

.
/, l),«(j(}O"• -~:".•. i,03,000
' :~ ~()(J(j ' ;: 1 , 81),'){1()

•
i

.; . '·
,.

~S.
~i ~:;~}
-I :~ ;
,r ..,..., I
WJ}O.!J
S.000 I
W.000

(i) Sales at l 0% realiwfitc:, i~l\1.r? '1. of sales. ~laac-:' ~;'.~H:, ~~Ez~ in :\'.(' :: .. :-::.~".:;:.~-~:
months (ii) Purchases: Cr·· s~·Me ?aid i;i the ;ao,2.::- :o'.~ov.::::;. :.~;;' 20ri:.'1 ;:-:' '!-.~;'/:
(iiiJWages: 20% paid in arrears in the follo•. ,ing ~on:h. (i·: S:.:.:::, -?·~;:-:-;is,.-,.3 ;'.J.!d !'.: =~--~ ::~,'!'!C.
0

itself. {v) fncome Tax Rs 20,(YJfi payable in J ...:.n~ '•::) Oi·:ice~.i Rs L::O-X _:'.1:,-:t-.;;- !n. ~-:.:'
(vii) Income from fnvestmentc; R.c; 2(J'j'j recci·:cd :1.1ff-:,c.ir!:, i:: \:1,~a K~ s~;:-:>D::X'~
(viii) Cash balance on hand as on I-L2()Uj Rs. -.:.0.000.

23. The sales tum01cr and profit during t·-•.-o :-ears '-'<T;;- ~ follow3:
Year Sales Prori:
t2012-- - - i ,'-VJJJ'i10 i 5,000
! 2() 13 1.60.000 I 20000
Calculate: {i) l'N Ratiu (iiJ Hrtak (":t:n point {iii1 Saks re..;uire-{.i 1(\ ..... m - pr011: ,._,; R:- -\'.000
(ivJ I· ixcd expt:nsts, (v1 Profit \•,hen s:1les ar~ R, 1.20.0tl0
 ()6/L,GI/I ~18

St. .Joseph's College of Aris & Science (Autonomous)

St. ,Joseph's College Road, Cuddalorc - 60700 l
B.Com DEGREE EXAMINATION - NOV 2018
Cl\l616T- MANAGEMENT ACCOUNTI~G
Wax :',larks :75
Time: 3 hrs

SECTION - A (IOX2=20)

Answer ALL the Questions

l. \\'hat is management accounting?

., State any two objectives of management accounting.
3. \Vhat is a ratio?
-L Name the steps in ratio analysis.
5. Give the meaning of current assets.
6. What is a cash Oow statement?
7. Define budget.
8. What is ZBB?
9. Define capital budgeting.
l 0. \\'hat do you understand by net present value?

SECTION - B (5X5=25)

Answer any FIVE Questions

l l. What are the limitations of management accounting?

12. Discuss the scope of management accounting.

13. Calculate funds from operations from the following profit and loss Ale.
Particulars Rs. Particulars Rs.
To Expenses paid 3,00,000 By Gross profit 4,50,000
To Depreciation 70,000 By Gain on sale of land 60,000
To Loss on sale of machine 4,000
To Discount 200
To Goodwill 20,000
To Net profit 1,15,800 -
5, 10,000 5, 10,000

14. What are the signi!icant uses of cash Oow statement?

15. Prepare a production budget for three months ending March 31 , 2015 for a faclL)f\
producing four products, on the basis of' the following information ·

~1~
 , ,
• /( I ( J

f..stbited ~-'·:,,;.: .· ~i r:.i~•.w · ). k.;, •, v+ :1 ,.,., ·' rt-d d:, :· ? · ~-r ~

ur.ui-fH -}f i 5 J&.n. - 11faf ,:(Jl..t" ,1:.. -u z1 . 1m~
:------- --____ .__·_L fC' · r·· , c; . :,.,J
;; .J//
B
C
D

p..i, 15~ - ;-·1

,.:;ages
1 ;:~. 1'1 :.t:; , • ;1
-.1/o:1: expenses.: Fixed
Va.iaole
Gene:a: expe.1x 5 (all foted)
Profo is 2'J % o •• saie :>rice
··- .. c"'· ~ .. " , ,t -Toi-IL
Pre?are ~:.e budgeL for. 200') ,.}xw. i.- ,, ..
·.:. - .,.,,~ :t>•
.... i

9,000 OY1~
2 8,000 fJ.626
...
.) 7,000 1).,: :
4 6,000 fJ_/j~~j.
5 5,000 0.61!
Taking the cut-off rate as IO ½. suggest •,,:ni;the:r ~he p;-oj::ci. s;.o!!l<l oe '1-'.xt?iM '>, n:JL

l8. Calculate the average rate of ren.im for pro;ect A am\ 8 f:"o;n tr.e :ollo•;:ing:
, Particula rs Project A Project B
I [nvestmen ts Rs. 20,000 Rs. 30,0'J,)
Expected life , 4 Years 5 Years
(>fo salvage value)
Projected net income {after interest, depreciation and taxesJ
lYears Project A (Rs.J Project B ffi.s.) l
I I 2,000 3,000 l
I 2 1,soo 3,ooo I
3 l ,50() 2. 000 I
! 4 1,000 l ,OOfJ
I s 1,000 \
'. T()UlJ I 6,000 1 I 0.000 I
ff the required rate of return is 12 %, v,hich project ~hould be undertaken~

StCTIOl \ - C (3X10=30)

Answer any THREE Question<;

19. Describe the various tools and technique!> of management accounting..

20. Prepare a balance sheet with as man~ details as pos:.ible from the following infom1ation:
Gross profit ratio 20 1/c.
Debtor turnover 6 limes
~2~
 l \, I ' I' I t I•

\ '
'

.'
,"(
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l
q
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' ' ' ..,,:\ \ ' \,\\ ~<),1)1\cl "\" d<11I
It),()!)() '!<I 1\1 I<)

1, 1)1)1) (1(\ (t(I(\

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:L ,:- "'' ,, ,\,\\' tt,' ,', .. ,) .. b, ,',i •'-'t''· ,,,.,11,,,, "' i ()(111) \\W ~,,lei (,)1
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' \'.';"' ' ' '\'1 ,' ' ' ' ,\.\),' \ . ' .~,)ltl 1,,1 ,i,., \ ,':'11 )1l I(\ ;1111,\111\(1 " I, I It·

•• •••••-. " l ,1 i... ,, ,1n111h), th,· r,•1 ,,,.i

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.•' , . , ,'. , ..,. 1.. ,'. ,'!'·'• •' :\ ,'.hi\ h1,.l1<'I l,11 111<' ;1!111\•
\: ..• .,, .., . ,,i' 11\,' b:\nk 1:1,'1lifh'' th,' ,' ,)111p;111\ "di

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,~~ \
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\ . :: \ t': :h.• t\,'\\ 11';h'h11h' l'1 ,•p.1n• ;\ ,t.1h•111c•111 c\l

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b:n...m~ T~\sri-o~ • --
 I I,, t N,) I l I l l I I
~ t • .lmH 1 1'h\ ( 'olk1~r ol Al h ,~ S,' 1nu'r (Auft•IloHwlh )
St J11 ~q1h -~ ( (Ill(;.•• li,1,11I , t 11,l,I ,111~ ,. "'' (It! I

, IIN ,\IIO N
ll<'.1111 tlH.liH f, \ .-\ 1 l' ltt\ :ol·l
( ,1,,lc,<_l 1'l .\:\\<.I ,\ UNI\< l tit 1\lli\l,

;\ 11· \\, ' I :\I ,l , fltc (_hie· fltlll "

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<,. \\ h.,f I' 1•.1·, li 11<11111111<·1 :111,111 '/

I kl111,• l111cl! l' llll f\

1

<I , \Vl1:1f i;, l11,•:1kn1c11 p<Hllf'i

Io. Wlt.1! l"i t<llll t tlH1l1,111·J

Answ,'r Any Fl VI•: Qm•s(itms

11 . (:xplai 11 Ill<' ll St'S of r111:111cial :-;(;1!r111cnl :1n:1 lysis.

l '.~. t ·:xpl;1111 the adv:1111agcs of m;1rgin;1l l'()Stin g

I'\ 1·:xplaiu tltt: process or znn.

1,1 1'1q1a1c comparative i11t:omc statcmc1ll ft"l)lll tht.~following incomf st:\h.'HH.'11!.

ParCicuhtrs J 1.12.2008
Rs
JI.IUOM
Rs
1
10,00,000 L\00,()0t)
Net sak s
.,. ~
! ,. . \S0,000 0,0.\ ()()() I
,, ,'-"-.,. ( 'ost of goods sold
~
I I
\.
l
Adn1ini stra1ton t'Xpt:nSt'S 80,000 1,00,00()
60,000 ~\l)J)t)t)
Sdling expenses
F,
~
~'
. lnt<..'rl'sl paid 40,000
50,000
"l),()()()
~()J)()t)
I
),
,' l1Ko1nc tax
./
l 5. Currer1t ratfo=2.8
Acid test rntiou= l .5
\Vorking capital = Rs. 1 ,c =..CGC
Calculate (i) Curreut 1Ssets ~ Ccr:~c:
:UCL!..'..15 ~-

16. Calculate furnis frmi:.. op~2tillli:

(i.) Net prvfit for .b.e year em:al. R:i. -. 5 •

"'L
(ii) Profit on sale of cuihiing '2-.:. 1~•• CC
(iii) Depreciation of :lam
(iv) Gaod.wi.11 w:.-itien off ::.ur.n~ i:he year E.s.
~- CC
(v) Old. madiirrery wcr-..'l R.5. ~.CCG ~as- ce:!r
.. s:1.J. ~ z~. ;.:-,
17. Prepare production ct.:d.get:

\ P rod uct Es timate<l. Istim:l.tei:. 5a;._e:5 D~--:...~ ~~ •toe ',

\ stoc k on ciu. ~~ : ..u.- iY!: l.dr l,l~ ~ - 5 .Ir :u;t s
\ I
1.1.0,(nn.its} (1111!IS

I A 2..000 to.cco :,.}\ .~

t B
I 3.000
I
:~_:co .:.:xe
\ C
I --\000
I t:.:,x
l~ ,,~
3-,-:C~
D
l 3.000
\ -- \;\, :.. -~~

Particul:lrs Amoun. :· Rs
\
Fi..xed cost ~

.:~,\:~~
l
Variable co~t
I t,. :\:~
Sales t_.::~J.:1..\.'
t
Sales in units s\~,_l\\'
\

19. Explain the l\mctions of m :u1a~\.'1th

.'l\\ .1...·1..·\,tmtin:'-,
20. Discuss the us~s :.1nd limirnti'-,n~ ~,r
r-.\tl'-' .m.1 \\ ~---
 06 I '
ent
: L f ro~n che following i:tform::uion p,"t~;:\Jre c~h fiot'. rutem
Ralanre Shec-1
Liabilities ~ons 2006 2005 20%

Sh:ire capit.1l
Rs Rs
~C.000 : J .1)00 Good ..-.il!
Rs
?.-'
_.._ __
.
- !.
Rs

- ~

General resa w 2.S JO 3.600 Land S.000

Profit &Loss.--\. c 3.2.:1) : .600 Buildin;
Sundry Creditors ,
I
LOSO fu•.-esi.--ncui ::..ooo
6,000
I 3.200 I
!.~
Pro\i sion for ta, 3.600 f.n ·.·~r: :ory
2-W I 160 .--\. Cs recei.·anle
Outstanding expense-s I l :o I 8:1.t.k i).ll.1,.1..::c
Pro\ision fo r bad debts SC
Tora! 3 Ll :!0 .31.150
r Tota l 31.12 0 31.16 0

:22. The expenses for production of 10.000 units in a

fa.::r0r;· JI£' fu..Llishai eciow:

Per unit (Rs. 1

Parti cular s
Material
Labour
\ ·ariable O\'erhead
, Fixed o·,erhead (Rs. 1,00,000)
w
Variable e:-..-penses (Direct)
l3
· Selling expenses (10% fixed )
Db"tribution e.x:penses (20% fix:ed)
Administration e:-..-penses (50.000)
I (Fixed for all levels)
Total cost per unit (to make and sell)
tL."Uts 1..C"' C'.1.'JO t!...--:.:~~-
Prepare a flexible budget for the production of l3.) S.LX)O

23. The sales and profit for 2006 and 2007 are as follo,
\-s:

Year Sales (Rs.) Prof it(Rs .)

2006 1,50,000 ~0.000
. '~~...___.
I
:-~:~, ~ '~,
.--""... _...-, '";
2007 l,70,000
-
25,000

'i -;
--
..
1
Find out :
(a) PN ratio
(b) BEP
(c) Sales for a profit or Rs 40.000
(d) Profit for sales of Rs. 2.50,000