Accounting for Management

Accounting for Business

Accounting for Business Management/ Resource Management
Accounting for Managerial Decision making

What is Management Accounting ?

It refers to the use of Accounting Information by the management internally to perform various
managerial functions like policy making, decision making, planning/Budgeting, controlling

What is Financial statement ?

Financial statement is a output of Accounting, as it is prepared at the end of the accounting
period it is called as financial statement. This statement is consisting of

a) Trading & profit and loss Account( Income statement)

b) Balancesheet( Position statement)

What is Money Measurement Concept

MONEY MEASUREMENT

The money measurement concept states that a business should only record an accounting
transaction if it can be expressed in terms of money only. Those transactions which cannot be
expressed in money cannot be recorded in the books of accounts

What is Break even Point?

BEP is the point at which Business neither makes Profit nor incurs losses

Break Even Point[BEP} represents the Volume of sales required to cover up all the business
expenses.

It determines the sales level at which total cost = sales revenue.

What is Contribution ?
Contribution is the Difference between sales and variable cost.It represents sales above break-
even point sales.It’s a contribution towards fixed cost & profit.

FORMULA : CONTRIBUTION = SALES – VARIABLE COST.

What is Margin of safety ?

It represents sales above break-even point sales.Margin of safety is the Difference
between Actual sales and Break even sales or it is the excess of Actual sales over Break even
sales

What is Budgeting?
Budget is a financial plan expressed in quantitative form, it is prepared for future for various
business operation like production, purchase, sales etc, budgeting is process preparing budget

PART – B

II Answer any Five of the questions. 5x5=25

1. Calculate Break even point from the following.

Sales 1,000 units at Rs.10 each Rs.10,000
Variable Cost - Rs.6per unit
Fixed Cost - Rs.8,000
If the selling price is reduced to Rs.9, what is the new break even point?
2. Calculate Fund From Operation
Profit and Loss Account

To Salary 28,000 By Gross Profit 1,50,000

To Rent 12,000 By Profit on Sale of Furniture 12,000
To Printing 6,000 By Interest on Investment 8,000
To Deprecation on Plant 25, 000
To Good Will Written Off 10,000
To Loss on Sales on Plant 5,000
To Provision For Tax 15,000
To Proposed Dividend 14,000
To Net Profit 55,000
1,70,000 1,70,000
3. You are asked to compile a working capital statement for the following details:

Particulars 1-1-1999 31-12-1999

Rs. Rs.
8% debentures 40,000 40,000
Outstanding rent 8,000 12,000
Cash in hand 4,000 8,000
Cash at bank 12,000 15,000
Accounts payable 20,000 26,000
 Machinery 25,000 16,000
Accounts receivable 30,000 34,000
Prepaid commission 4,000 _
Inventories 22,000 27,000
Share premium 15,000 15,000
Equity share capital 50,000 50,000

Distinguish between financial accounting and management Accounting?

NO: Financial Accounting Management Accounting

1 Provide information about business in Provide information to the management.
terms of financial performance and (Internal parties). Which can be used
financial position. within the organization.

2 Established principles & rules are
followed.
3 Evaluate the performance of entire
business.
4 Both the internal and external parties can
use these accounts information’s
effectively.
5 Its purely based on past
Preparation of this accounting is
mandatory for company as per the law
(E.g.: Income tax act, company act, etc)
No such account principles are followed
.
Evaluate the performance of different
division in an organization.
Only internal parties can use these
information’s for enhancement.
Its purely based on present
Preparation of this accounting is not
mandatory until the requirement arise.

What is zero Based Budgeting ? Explain its

Advantages
A budgeting practice that begins each year budget from scratch

Zero base budgeting?

 Meaning: “Zero base budgeting” was originally developed by peter A.
Pyhrr at Texas Instruments. Peter A. pyhrr has defined ZBB as “an
operating, planning and budgeting process which requires each manager to
justify his entire budget.

Advantages of zero base budgeting:

 Optimum use of financial resources

 Weeding out of wastage
 Participation by all concerned
 Flexibility in budget
 Realistic targets
 Zero base budgeting [ZBB] is one of the main techniques for budgeting.
It’s one of the renowned managerial tool.
 It gives accurate budget ; but takes time and energy much.
 Zero base budget is the best route to dynamic organization that is
proactive in taking on new challenges.
 It consider the current year as a new year for preparation of the budget
but the yester year is not to be considered.
 It is more decision oriented. It is towards the achievement of objectives.
 It operates in both horizontal and vertical direction.
 Its decision package is totally based on the cost benefit analysis.
 It’s stages is to prioritize the activities.
 The zero base budgeting [ZBB]paves way for optimum utilization of
resources available.

Explain the Break –Even analysis

Break even analysis is a method of studying relationship between revenue and
costs in relation to sales volume of a business enterprise and determination of
volume of sales at which total costs are equal to revenue. According to Matz curry
and frank "a break -even analysis determines at what level cost and revenue are in
equilibrium". Thus , break even analysis refers to system of determination of that
level of Activity is generally termed as break -even point (B.E.P). At the break
even point a business man neither earns any profit nor incurs any loss. Break even
point is also called "No profit, no loss point" or “Zero profit & Zero loss point".

SIGNIFICANCE OF BREAK EVEN CHART AT VARIOUS LEVELS OF

ACTIVITY :
(1) The break even chart shows the fixed costs variable costs and total costs.
(2) The chart shows the sales units and sales value at which sales revenue is
equal to total costs. in other words it shown the break even point at which there is
no profit or loss.
(3) The chart shown the profit/loss at various volumes.
(4) Margin of safety is clearly shown.
(5) The chart also shown the angle of Incidence Which is the difference
between total cost line and sales line on the Graph.

ASSUMPTIONS OF BREAK EVEN CHARTS :

(1) Costs are classified into fixed and variable
(2) Variable Costs directly change in proportion to output.
(3) Fixed costs remain constant at all levels of activity.
(4) Selling price is same at different level of output.
(5) No change in product Mix.
(6) Level of efficiency and management policy do not change.
(7) There are no opening and closing stocks since the entire units produced are
sold

PART – C

III Answer any TWO of the questions. 2x10=20

for the production of 10,000 electrical goods the following are the budgeted Expenses
Particulars per unit
Direct material 60
Direct labour 30
Variable overheads 25
Fixed Overheads ( Rs.150000) 15
Variable expenses ( direct ) 5
Selling Expenses (10%fixed ) 5
Admin Expenses( Rs. 50,000) 5
Distribution Expenses(20% Fixed) 5
Total cost per unit 150
Prepare a budget for the production of 6000, 8000 electrical

16. The sales turnover and profit during two years were as follows.
Year Sales Profit
Rs. Rs.
2007 1,40,000 15,000
2008 1,60,000 20,000

(a) P/V Ratio

(b) Break-even point
(c) Sales required to earn a profit of Rs. 40,000
(d) Fixed expenses and
(e) Profit when sales are Rs. 1,20,000
Solution

When sales and profit or sales and cost of two periods are given, the P/V Ratio is obtained by
using the `Change formulae’.
Fixed cost can be found by ascertaining the contribution of one of the periods given by
multiplying sales with P/V Ratio. Then, contribution – Profit can reveal the fixed cost.
Ascertaining P/V ratio using the change formula and finding fixed cost are the essential
requirements in these types of problems.
Change in profit
(a) P/V Ratio = -------------------------- X 100
Change in sales
Change in profit = 20, 000 - 15,000 = Rs. 5,000
Change in sales = 1,60,000- 1,40,000 =Rs. 20,000

5,000
P/V Ratio = ------------- X 100 = 25%
 20,000

Fixed expenses
(b)Break even point= -------------------------
P/V Ratio
Fixed expenses = Contribution - Profit
Contribution = Sales x P/V Ratio
25
Using 2007 sales, contribution =1,40,000 x ----- = Rs.35,000
100
Fixed expenses = 35,000 – 15,000 = Rs. 20,000
Note: The same fixed cost can be obtained using 2008 sales also.
20,000
Break even point = ------------ = Rs. 80,000
25%

(c) Sales required to earn profit of Rs. 40,000

Required profit + Fixed cost

Required sales = ------------------------------------------
P/V Ratio
40,000 + 20,000
=------------------------ = Rs. 2,40,000
25%
(d) Fixed expenses= Rs. 20,000 (as already calculated)
(e) Profit when sales are Rs. 1,20,000

Contribution = Sales x P/V Ratio

25
= 1,20,000 x -------- = Rs. 30,000
100
Profit = Contribution – Fixed cost
= 30,000 – 20,000
= Rs. 10,000

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Prepare a Trading & profit & loss A/c for the year ended 31st march 2016 and a Balance sheet
from the following Trail Balance

Amount Amount
( dr Cr.
 balances Balances
Drawings 45000 Capital 160000
Goodwill 90000 Bills Payable 35000
Buildings 60000 Creditors 70000
Machinery 40000 Purchases Return 2650
Bills Receivables 6000 Sales 218000
Opening stock 40000
Purchases 51000
Wages 26000
Carriage outwards 500
Carriage in wards 1000
Salaries 35000
Rent 3000
Discount 1100
Repairs 2300
Bank 25000
Cash 1600
Debtors 45000
Bad debts 1200
Sales Return 2000
Furniture 6000
Advertisements 3500
General expenses 450
485650 485650
Adjustments:
1)Closing stock was Rs 35,000
2)Depreciate Machinery & Furniture by 10%
3)Outstanding Wages Rs 1500
4) Prepaid Advertisements Rs 500
5)Create 5 % On debtors for bad debtors as provisions

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