Master of Business Administration- MBA Semester 1

MB0041 –Financial and Management Accounting - 4 Credits

(Book ID:B1130)

Assignment Set- 2 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. Illustration 1: Compute the cash flow from operating activities Profit and Loss

Account

To By

Cost of goods sold 4,00,000 Sales including cash

sales 1,00,000

5,00,000

Office expenses 12,000 Profit on sale of land 30,000

Selling expenses 8,000 Interest on investment 20,000

Depreciation 6,000

Loss on sale of plant 4,000

Goodwill written off 3,000

Income tax 7,000

Net Profit 1,10,000

5,50,000 5,50,000

Balance Sheet as on March 31

2006 2007

Stock 30,000 28,000

Debtors 15,000 12,000

Bills Recievable 6,000 8,000

Creditors 10,000 12,000

Bills Payable 8,000 5,000

Outstanding expenses 4,000 5,000

Hint: Net cash from operating activities= 76000

A.1

Q2. The following extract refers to a commodity for the half year ending 31st March 2008.

Prepare a cost statement.

Purchase of raw

materials

1,20,000 Direct wages 1,00,000

Rent, rate, insurance

and work expenses

40,000 Opening stock

Raw materials

Finished goods

(1000units)

20,000

16,000

Work in progress

Opening

closing

4,800

16,000

Closing stock :

Raw material

F. Goods (2,000 tons)

22,240

Carriage inwards 1,440 Sale of finished goods 3,00,000

Cost of factory 8,000

Advertising, discounts allowed and selling costs Re.1 per ton sold. Production during the

year is 16,000 tons. Prepare a cost sheet.

Hint: Total cost or cost of sales= 255000

Profit= 45000

Sales= 300000

A.2

Q3. Avon garments Ltd manufactures readymade garments and uses its cut-pieces of cloth

to manufacture dolls. The following statement of cost has been prepared.

A.3 Discontinue manufacture of dolls

Readymade garments Dolls Total

Total Cost 1,34,000 13,000 1,47,000

Profit (loss) 36,000 (1000) 35,000

Q4. Describe the essential features of budgetary control.

A.4 Essential Features of Budgetary Control

An effective budgeting system should have essential features to get best results. In this direction,

the following may be considered as essential features of an effective budgeting.

Business Policies defined: The top management of an organization strives to have an action plan

for every activity and for each department. Every budget should reflect the business policies

formulated from time to time. The policies should be precise and the same must be clearly

defined. No ambiguity should enter the document. Clear knowledge should be provided to all the

personnel concerned who are going to execute the policies. Periodic suggestions should be called

for.

Forecasting: Business forecasts are the foundation of budgets. Time and again discussions

should be arranged to derive the most profitable combinations of forecasts. Better results can be

anticipated based on the sound forecasts. As far as possible, quantitative techniques should be

made use of while forecasting

Formation of Budget Committee: A budget committee is a group of representatives of various

important departments in an organization. The functions of committee should be specified

clearly. The committee plays a vital role in the preparation and execution of budget estimated. It

brings coordination among other departments. It aids in the finalization of policies and programs.

Non-financial activities are also considered to make it a wholesome affair.

Accounting System: To make the budget a successful document, there should be proper flow of

accurate and timely information. The accounting adopted by the organization should be proper

and must be fine-tuned from time to time

Organizational efficiency: To make the budget preparation and its subsequent implementation a

success, an efficient, adequate and best organization is necessary a budgeting system should

always be supported by a sound organizational structure. There must be a clear cut demarcation

of lines of authority and responsibility. There must also be a delegation of authority from top to

bottom line.

Management Philosophy: Every management should set a healthy philosophy while opting for

the budget. Management must wholeheartedly support the activities which developing a budget.

Encouragement should flow from top management. All the members must be involved to make it

a workable preposition and a dream-driven document.

Reporting system: Proper feedback system should be established. Provision should be made for

corrective measures whenever comparative measures are proposed.

Availability of statistical information: Since budgets are always prepared and expressed in

quantitative terms, it is essential that sufficient and accurate relevant data should be made

available to each department.

Motivation: Since budget acts as a mirror, the entire organization should become smart in its

approach. Every employees both executive and non-executives should be made part of the

overall exercise. Employees should be persuaded than pressurized to appreciate the benefits of

the budgets so that the fruits can be shared by all the members of the organization.

Q5. Briefly describe labor mix variance and yield variance.

A.5 Labour Mix Variance

This variance arises only when different types of workers (women and men workers, trained,

semi-trained and untrained workers, are employed in manufacturing. If actual working force of

different grades of workers is not in the pre-determined ratio, then the mix variance will occur.

The variance shows to the management as to how much of the labor cost variance is due to the

changes in the composition of labor force. It is calculated as follows:

LMV = (Revised standard hours – actual hours worked) x standard hourly rate Shorten (RSLH –

ALH) x SR

Where revised standard hour = total time of actual worker / total time of standard workers x

standard labor rate.

Labour Yield Variance

This is due to the difference in the standard output specified and the actual output obtained. The

formula is as follows:

LYV = (Actual output – Standard output) x standard cost per unit

Q6. How is standard costing related to budgetary control?

A.6 Both are closely interrelated. They both aim at the improvement of the system of managerial

control. They both achieve the same objective of maximum efficiency and cost control by

establishing pre-determined standards. They compare actual performance with the predetermined

standard. They take necessary steps to improve the situation wherever necessary. Both

techniques are forward looking.

However, the following are some of the differences identified.

1. The scope of budgetary control is wider. It is integrated plan of action, a coordinated plan in

respect of all functions of an enterprise. The scope of standard costing on the other hand is

limited to the operating level. Here too, it is further linked to costs. Budgetary control is

extensive whereas standard costing is intensive in its application

2. Budgetary control deals with costs and revenues. But standard costing restricts only with

costs.

3. Budgetary control takes into account all activities such as production, sales, purchases,

finance, capital expenditure, personnel whereas standard costing is restricted to deal with only

costs.

4. Budgetary control targets are based on past actual adjusted to future trends. In standard

costing, standards are based on technical assessment.

5. At the approach level, budgeted targets work as the maximum limit of expenses above which

the actual expenditure should not normally exceed. Under standard costing, standards are

attainable level of performance.

6. Budget is projection of final accounts. Standard costs are projection of only cost accounts.

7. Budgetary control emphasizes the forecasting aspect of the future operations. Standard

8. Costing scope and utility is limited to only operating level of the concern.

9. In budgetary control, the degree of variance analysis tends to be much less and variances are

not revealed through the accounts but are revealed in total. But in standard costing, variances are

analyzed in details according to their originating causes and are revealed through different

accounts.

10. Budgetary control is possible even in parts of expenses according to the attitude of

management. A standard costing system can not be operated in parts. All items of expenditure

included in cost units are to be accounted for.