Falcon Invoice Discounting: The best investment platform in india for investors
Cost and management accounting
1. Management
Accounting
(NET Paper 2)
Anuj Bhatia
BBA (Gold Medalist), M.Com (Gold Medalist), CA(Inter.),
CMA(Inter.), GSET, UGC NET-JRF, Ph.D (Pur.)]
Research Scholar,
Department of Business Studies,
Sardar Patel University
2. • Cost and Management Accounting :
• Ratio Analysis,
• Funds Flow Analysis,
• Cash Flow Analysis,
• Marginal costing and Break-even analysis,
• Standard costing,
• Budgetary control,
• Costing for decision-making
• Responsibility accounting
3. Ratio Analysis
• Ratio Analysis is the relationship between two terms of
financial data expressed in the form of ratios and then
interpreted with a view to evaluating the financial condition
and performance of a firm.
• Ratio Analysis can also help us to check whether a business is
doing better this year than it was last year; and it can tell us if
our business is doing better or worse than similar type of
business.
4. Example : Firm A earns a profit of Rs. 50,000 while Firm B earns a profit of Rs.
1,00,000. Which of them is more efficient? We could tend to believe that firm
B is more efficient than firm A. But in order to understand correctly , we need
to find out their sales figure. Say firm A’s sales are Rs. 5,00,000 while firm B’s
sale are Rs. 50,00,000. Now let’s compare the percentage of profit earned by
them on sales.
For A: 50,000 X 100 = 10 %
5,00,000
For B: 1,00,000 X 100 = 2 %
50,00,000
This clearly shows that firm A is doing better than Firm B.
This example shows that figure assumes significance only when expressed in
relation to other related figures.
5. Objective of Ratio Analysis :
The main objective of analyzing financial statement with the help of
ratios are:
• The analysis would enable the calculation of not only the present
earning capacity of the business but would also help in the
estimation of the future earning capacity.
• The analysis would help the management to find out the overall as
well as the department – wise efficiency of the firm on the basis of
the available financial information.
• The short term as well as the long tem solvency of the firm can be
determined with the help of ration analysis.
• Inter – firm comparison becomes easy with the help of ratios.
6. Advantages of Ratio Analysis:
• Help in Financial statement analysis
• Simplified accounting figures
• Helps in calculating operation efficiency of the business enterprise
• Facilities inter- firm comparison
• Makes intra- firms comparison possible
• Helps in forecasting
7. Limitations of Ratio Analysis
• Historical Analysis
• Price Level Change
• Not Free from bias
• Window dressing
• Qualitative factors ignored
• Different accounting practices render ratios incomparable
8. LIQUIDITY RATIOS
Current Ratio
Current ratio establishes the relationship between current assets and
Current liability. It measures the ability of the firm to meet its short
term obligation as and when they become due. It is calculated as:
Current ratio= Current Assets
Current liabilities
Generally , a current ratio of 2:1 is considered satisfactory.
Interpretation: It provides a measure of degree to which current
assets cover current liabilities. The higher the ratio , the greater the
margin of safety for the short term creditors. However, the ratio
should neither be very high nor very low. A very high
current ratio indicates idle funds , piled up stocks, locked amount in
debtors while a low ratio puts the business in a situation where it will
not be able to pay its short- term debt on time.
9. Quick Ratio / Acid test ratio/Liquid ratio
Quick ratio establishes the relationship between quick/ liquid
assets and current liabilities. It measures the ability of the firm to
meet its short term obligations as and when they become due
without relying upon the realization of stock. It is calculated as:
Quick ratio = Quick Assets
Current Liabilities
Interpretation: Quick ratio is considered better than current ratio
as a measure of liquidity position of the business because of
exclusion of inventories. The idea behind this ratio is that stock are
sometimes a problem because they can be difficult to sell or use.
That is , even through a supermarket has thousand of people
walking through its doors every day, there are still items on its
shelves that don’t sell as quickly as the supermarket would like.
Similarly, there are some items that will sell very well.
10. Solvency Ratios
Solvency ratio are used to judge the long term financial soundness of
any business. Long term Solvency means the ability of the
Enterprise to meet its long term obligation on the due date. Long term
lenders are basically interested in two things: payment of interest
periodically and repayment of principal amount at the end of the loan
period. Usually the following ratios are calculated to judge the long
term financial solvency of the concern.
1. Debt equity ratio;
2. Total Assets to Debt Ratio;
3. Proprietary ratio;
4. Interest Coverage Ratio.
11. Debt-Equity Ratio
Debt Equity Ratio measures the relationship between long-term
debt and shareholders’ funds. It measures the relative
proportion of debt and equality in financing the assets of a firm.
It is computed as follows:
Debt-Equity ratio = Long-term Debt’s/ Share holder funds
Where –
Long- term Debt = Debentures + Long – term loans
Shareholders Funds = Equity Share Capital + Preference Share
Capital + Reserves and Surplus– Fictitious Assets
12. Total Assets to Debt Ratio
This Ratio established a relationship between total assets and long
debts. It measures the extend to which debt is being covered by
assets. It is calculated as
Total Assets to Debt Ratio = Total assets
Long-term Debt
Interpretation: This ratio primarily indicated the use of external funds
in financing the assets and the margin of safety to long-term creditors.
The higher ratio indicated that assets have been mainly financed by
owners’ funds , and the long- tem debt is adequately covered by
assets. A low ratio indicated a grater risk to creditors as it means
insufficient assets for long term obligations.
13. Proprietary Ratio
Proprietary ratio establishes a relationship between shareholders
funds to total assets . It measures the proportion of assets financed by
equity. It is calculated as follows :
Proprietary Ratio = Shareholders Funds/ Total assets
Interpretation: A higher proprietary ratio indicated a larger safety
margin for creditors. It tests the ability of the shareholders’ funds to
meet the outside liabilities. A low Proprietary Ratio , on the other hand
, indicated a grater risk to the creditors. To judge whether a ratio is
satisfactory or not, the firm should compare it with its own past ratios
or with the ratio of similar enterprises or with the industry average.
14. Interest Coverage Ratio
Interest Coverage Ratio established a relationship between profit
before interest on long-term debt and taxes and the interest on
long term debts. It measures the debt servicing capacity of the
business in respect of fixed interest on long term debts. It
generally expressed as ‘ number of times’.
It is calculated as follows:
Interest Coverage Ratio = Net Profit before Interest and Tax
Interest on long term debt
Interpretation : It reveals the number of times interest on long-
term debt is covered by the profits available for interest. It is a
measure of protection available to the creditors for payment of
interest on long term loans. A higher ratio ensures safety of
interest payment debt and it also indicates availability of surplus
for shareholders.
15. Activity (or Turnover) Ratios
The Activity (or Turnover) Ratios measures how well the
facilities at the disposal of the concern are being utilized. They
are known as turnover ratios as they indicates the speed with
which the assets are being converted or turned over into
sales. A proper balanced between sales and assets generally
reflects tat assets are being managed well. They are expressed
as ‘number of times’. Some of the important activity ratios
are:
1. Stock Turn-over;
2. Debtors (Receivable) Turnover;
3. Creditors (Payable) Turnover;
4. Fixed Assets Turnover;
5. Working Capital Turnover.
16. Stock (or Inventory) Turnover Ratio
It establishes a relationship between cost of goods and average
inventory. It determines the efficiency with which stock is converted
into sales during the accounting period under consideration. It is
calculated as:
Stock Turnover Ratio = Cost of Goods Sold/ Average Stock
Where - Average stock = (opening + closing stock) /2 and
Cost of goods sold = Net Sales - gross profit or
Cost of goods sold = opening stock + net purchases + direct expenses –
closing stock
17. Debtors Turnover Ratio or Receivables Turnover Ratio
It establishes a relationship between net credit sales and average debtors
or receivables. It determine the efficiency with which the debtors are
converted into cash.
It is calculated as follows :
Debtors Turnover ratio = Net Credit sales/ Average Accounts Receivable
Where Average Account Receivable = (Opening Debtors and Bills
Receivable + Closing Debtors and Bills Receivable)/2
Note: Debtors should be taken before making any provision for
doubtful debts.
Interpretation : The ratio indicated the number of times the
receivables are turned over and converted into cash in an accounting
period. Higher turnover means that the amount from debtors is being
collected more quickly. Quick collection from debtors increases the
liquidity of the firm. This ratio also helps in working out the average
collection period as follows:
18. Debt collection period
This shows the average period for which the credit sales remain
outstanding or the average credit period enjoyed by the debtors. It
indicates how quickly cash is collected from the debtors.
It is calculates as follows:
Debt collection period =
12 months/52 weeks/365 days
Debtors’ turnover ratio
19. Creditors Turnover Ratio or Payable Turnover Ratio
This ratio establishes a relationship between net credit
purchases and average creditors or payables. It determine the
efficiency with which the Creditors are paid.
It is calculated as follows :
Creditors turnover ratio = Net credit purchase / Average accounts
payable.
Where Average accounts payable = (Opening Creditors and Bills
Payable + Closing Creditors and Bills Payable)/2
20. Debt payment period/Creditors collection period
This shows the average period for which the credit purchases remain
outstanding or the average credit period availed of. It indicate how
quickly cash is paid to the creditors.
It is calculated as follows:
Debt collection period =
12 months/52 weeks/365 days
Creditors’ turnover
21. Fixed Assets Turnover Ratio
This ratio establishes a relationship between net sales and net fixed
assets. It determined the efficiency with which the firm is utilizing its
fixed assets.
It is computed follows
Fixed Assets Turnover= Net sales/ Net Fixed Assets
Where Net Fixed Assets =Fixed Assets- Depreciation
Interpretation: This ratio reveals how efficiently the fixed assets are
being utilised.
It indicates the firms’ ability to sales per rupee of investment in fixed
assets. A high ratio indicates more efficient utilization of fixed assets.
22. Working Capital Turn Over Ratio
This ratio establishes the relationship between net Sale and working
capital. It determines the efficiency with which the working capital is
being utilised.
It is calculated as followers:
working capital Turnover = Net Sale/ working Capital
Interpretation: This ratio indicates the firms’ ability to generate sales
per rupee of working . A higher ratio would normally indicate more
efficient utilized of working capital ; through neither a very high nor a
very low ratio is desirable.
23. Profitability Ratios
Every business must earn sufficient profits to sustain the operations of the
business and to fund expansion and growth.
Profitability ratios are calculated to analysis the earning capacity of the
business which is the outcome of utilisation of resources employed in the
business. There is a close relationship between the profit and the efficiency
with which the resources employed in the business are utilised. Following are
the important Profitability ratio
• Gross Profit Ratio
• Net profit Ratio
• Operating Ratio
• Operating Profit Ratio
• Return on Investment (ROI) or Return on Capital Employed (ROCE)
• Earnings per Share
• Price Earning Ratio.
• Dividend Payout Ratio
24. Gross Profit Ratio
Gross profit ratio establishes relationship between Gross Profit and
net sale. It determines the efficiency with which production,
purchase and selling operations are being carried on. It is calculated
as percentage of sales. It is computed as follows:
Gross Profit Ratio = Gross Profit/Net Sales × 100
25. Net Profit Ratio or Net Margin
This ratio establishes the relationship between net profit and net sale .
It indicates managements’ efficiency in manufacturing, administering
and selling the product. It calculates as a percentage of sale. it is
computed as under:
Net Profit Ratio = Net profit / Net Sales × 100
Generally, net profit refers to Profit after Tax (PAT).
26. Operating Ratio
Operating Ratio establishes relationship between operating cost and
net sales. It determine the operational efficiency with the production ,
purchase and selling operations are being carried on. It is calculated as
follows:
Operating Ratio = (Cost of Sales + Operating Expenses)/ Net Sales ×
100
Operating expenses include office expenses, administrative expenses,
selling expenses and distribution expenses.
27. Operating Profit Ratio
Operating Profit Ratio establishes the relationship between Operating
Profit and net sales. It can be computed directly or as a residual of
operating ratio.
Operating Profit Ratio = Operating Profit/ Sales × 100
Where Operating Profit = Sales – Cost of Operation
28. Return on Capital Employed or Return on Investment (ROCE or
ROI)
This ratio establishes the relationship between net profit before
Interest and Tax and capital employees. It measures how
efficiently the long-term funds supplied by the long-term
creditors and shareholders are being used. It is expressed as a
percentage.
Thus, it is computed as follows:
Return on Investment = Profit before Interest and Tax/Capital Employed × 100
Where capital employed = Dept + equity
Or
Capital Employed = Fixed Assets + Working Capital
29. Earnings Per Share
This ratio measures the earning available to an equity shareholders
per share. Itb indicates the profitability of the firm on a per share
basis.
The ratio is calculated as -
Earning Per Share = Profit available for equity shareholders/ No. of
Equity Shares
In this context, earnings refer to profit available for equity
shareholders which is worked out as Profit after Tax – Dividend on
Preference Shares.
30. Price Earning Ratio
This ratio establishes a relationship between market price per share
and earning per share. The objective of this ratio is to find out the
expectations of the shareholders.
This ratio is calculated as –
P/E Ratio = Market price of a Share/Earnings per Share
Interpretation : It indicates the numbers of times of EPS the share is
being quoted in the market. It reflects investors’ expectation about the
growth in the firms’ earning and reasonableness of the market price of
its shares. P/E ratios vary from industry to industry and company to
company in the same industry depending upon investors perception of
their future.
31. Dividend Payout Ratio
This refers to the proportion of earning that are distributed
against the
shareholders. It is computed as –
Dividend Payout Ratio = Dividend Per Share
Earnings Per Share
32. Cash Flow Statements
Meaning of Cash Flow Statement
• Cash flow is made up of two words i.e. Cash and Flow, whereas Cash
means cash balance in hand including cash at bank balance, and Flow
means changes (which may be + or – increase or decrease) in the cash
movements of the business.
• Cash Flow Statement deals with only such items, which are connected
with cash i.e., items relating to inflow and outflow of cash. In other words,
it is prepared to study the changes in cash, or to show impact of various
transactions on the cash. In short, it is a statement, which is prepared to
show the flow of cash in the business during a particular period. It thus,
tells about the changes in cash position of a business. The changes may be
related either with the cash receipts or cash payments or disbursements
of cash. Thus, Cash Flow Statement is a summary of cash receipts and
payments whereby reconciling the opening cash balance with the closing
cash including bank balances in done.
33. Objectives of CFS
• To Help the Management in Making Future Financial Policies
• Helpful in Declaring Dividends etc.
• Cash Flow Statement is Different than Cash Budget
• Helpful in devising the cash requirement
• Helpful in finding reasons for the difference
• As per AS-3, Cash Flow Statement
• Helpful in predicting sickness of the business
34. IMPORTANTDEFINITIONSASPER
ACCOUNTINGSTANDARD-3(REVISED)
• Cash comprises cash on hand and demand deposits with
banks.
• Cash Equivalents are short-term, highly liquid investments
that are readily convertible into the known amount of cash
and which are subject to an insignificant risk of change in
value. An investment normally qualifies as cash equivalent
only when it has a short maturity of, say, three months or less
from the date of acquisition Examples of cash equivalents are :
(a) treasury bills,(b) commercial paper, (c) money market
funds and (d) Investments in preference shares and
redeemable within three months can also be taken as cash
equivalents if there is no risk of the failure of the company.
35. • Cash Flows are inflows and outflows of cash and cash equivalents. AS-3
requires a Cash Flow Statement to be prepared and presented in a manner
that it shows cash flows from business transactions during a period
classifying them into :
(i) Operating Activities; (ii) Investing Activities ; and (iii) Financing
Activities.
• Operating Activities : Operating activities are the principal revenue-
producing activities of the enterprise and other activities that are not
investing or financing activities.
• Investing Activities : Investing activities are the acquisition and disposal of
long-term assets and other investments not included in cash equivalents.
• Financing Activities : Financing activities are the activities that result in
change in the size and composition of the owners’ capital (including
preference) share capital in the case of a company) and borrowing of the
enterprise.
36. STANDARD COSTING & VARIANCE
ANALYSIS
STANDARD COST & STANDARD COSTING
Standard cost is a “predetermined cost which is calculated
from management standard of efficient operation and the
relevant necessary expenditure.”
- I.C.M.A ENGLAND
Standard costing is “the preparation of standard costs their
comparison of actual costs and the analysis of variances to
their causes and points of incidence”
- I.C.M.A ENGLAND
37. OBJECTIVE OF STANDARD COSTING
The main objectives of standard costing are:
-To control the factors which affect production.
- to supply reports promptly to the management showing the progress
of production and how expenditure to date compares with estimates
so that corrective actions may be taken in time, and
- To disclose the effect of temporary increase or decrease in the
volume of output and sales or revenues.
38. TECHNIQUES OF STANDARD COSTING
The technique of standard costing involves:
- The ascertainment of standard costs.
- The use of standard costs.
- Their comparison with the actual cost and the measurements of
variances.
- the location of responsibility for the variances and the corrective
action to be taken.
- the analysis of variances for ascertainment the reasons for the same.
39. VARIANCE ANALYSIS
The main aim of the standard costing is the control of the cost. So the
management is provided with the information about situations where
in the actual results are not as they were planned to be. Hence
management is informed of only the deviations or variances from the
original plans, their favourable or unfavorable nature and the causes of
such deviations. In this context standard costing subscribes to the
principles of “management by exception”.
Variance is the difference between standard cost and actual cost. It is
expressed by a simple formula as follows:
Variance = actual cost – standard cost.
40. MATERIAL COST VARIANCE (MCV)
This is the difference between the standard cost of materials specified
for the output achieved and the standard cost of the materials used
Material Cost Variance = Total std. – Total Actual Cost.
MCW = (SQ*SP) – (AQ * AP)
Where :
SQ = Standard Quantity
SP = Standard Price
AQ = Actual Quantity
AP = Actual Price
41. MATERIAL PRICE VARIANCE (MPV)
This is the difference between the standard price specified and the
standard price paid.
MPV = AQ (SP – AP)
CAUSES of MPV
• Change in basic purchase price of material.
• Change in quantity of purchase or uneconomical size of purchase
order.
• Rush order to meet shortage of supply or purchase in less or more
favourable market.
• Failure to take advantage of off – season price, the failure to
purchase when price is cheaper.
• Failure to obtain cash and trade discounts or change in the discount
rates.
42. MATERIAL USAGE VARIANCE (MUV)
This is the difference between the standard quantity specified and
actual quantity used.
MUV = SP (SQ – AQ)
Material usage variance is subdivided into
• Material mix variance
• Material yield variance or scrap variance
43. MATERIAL MIX VARIANCE (MMV)
• This is the portion of the direct material usage variance which is
due to the difference between the standard and the actual
composition of a mixture.
• When the ratio of mix is different but the total quantities of
standard mix and the total quantities of actual mix are the same.
• MMV = SP (SQ – AQ)
44. MATERIAL YIELD OR SCARP VARIANCE
• This is the portion of the direct material usage variance which is
due to the difference between standard yield specified and actual
yield obtained.
MYV = SP * Abnormal Loss / Gain
Or
MYV = SP (SY – AY)
45. MATERIAL YIELD OR SCARP VARIANCE
This is the portion of the direct material usage variance which is due to the difference
between standard yield specified and actual yield obtained.
MYV = SP (SY – AY)
CAUSES FOR MATERIAL USAGE VARIANCE
• The causes of material usage variance are:
• Variation is usage of materials due to inefficient or careless use or economic use of
materials.
• Change in specification or design of product.
• Inefficient and inadequate inspection of raw materials.
• Purchase of inferior material or change in quality of materials.
• Inefficiency in production resulting in wastages.
• Use of substitute materials.
• Theft or pilferage of materials.
46. LABOUR COST VARIANCE (LCV)
• It is the difference between standard direct specified for the activity
achieved and the actual direct wages paid.
• LCV – SLC – ALC (Standard Labour Cost – Actual Labour Cost)
47. • LABOUR RATE OF PAY VARIANCE (LRV)
• This is that portion of labour cost variance which is due to the
difference between the standard rate of pay specified and the
actual rate paid.
LRV = AT (SR - AR)
= Actual time (standard rate – actual rate)
48. CAUSES FOR LABOUR COST VARIANCE
• Direct labour rate variance occur due to the following:
• Change in basic wage structure or change in piece work rate. This will give
rise to the variance till such time the standards are not revised.
• Employment of workers of grades and rates of pay different from those
specified due to shortage of labour of the proper category, or through
mistake, or due to the retention of surplus labour.
• Payment of guaranteed wages to workers who are unable to earn their
normal wages if such guaranteed wages form part of direct labour cost.
• Use of a different method of payment e.g. payment of day – rates while
standards are based on piece work method of remuneration.
• Higher to lower rates paid to casual and temporary workers employed to
meet seasonal demands or urgent or special work.
49. LABOUR EFFICIENCY VARIANCE (LEV)
• This is also that portion of labour cost variance which is due to the
difference between the standard labour hours specified for the
outputs achieved and the actual labour hours expended. This is
otherwise known as labor time variance. Labour spending variance,
labour usage variance, labour quantity variance.
• LEV = SR (ST – AT)
50. CAUSES FOR LABOUR EFFICIENCY VARIANCE
• The causes giving rise to direct labour efficiency variance as
follows:
• Lack of proper supervision or stricter supervision that
specified.
• Poor working conditions
• Delay due to, waiting for materials tools, instructions etc. if
not treated as idle time.
• Defective machine tools, and other equipment's.
• Machine break down if not booked to idle time.
• Work on new machines requiring less tike then provided for
as long as the standard is not revised.
• Basic inefficiency of workers due to low morale, insufficient
training, faulty instructions, incorrect scheduling of jobs etc.
• Use of non standard material requiring more or less operation
wages.
51. • LABOUR MIX VARIANCE (LMV)
It is due to the difference in the standard output specified and
actual output obtained.
LYV = Standard labor cost per unit (actual output – standard
output)
52. COST-VOLUME PROFIT ANALYSIS
Today the manager is a principal factor in the success or failure
of any business enterprise. The primary function of management is to
make a profit for the firm. Essentially, profit is generated by effective
sales and/or distribution of products or services.
Any decision-making organization actively concerned with
profits will find itself involved in the analysis of costs and revenues.
Since the firm must first recover its costs before it can make a profit.
53. There are definite relationships between costs, revenues and profits.
There are three levels of activity that are of the greatest concern to the
management of any profit-seeking business.
Break-even point
The activity level at which the firm has exactly enough revenue to
recover all costs.
The firm is operating at a loss.
The revenue that is penetrated is not sufficient to recover all costs that
have been incurred (Total costs > Total Revenue ).
The firm may be operating at profit.
The revenue of the firm completely recovers the costs and has funds
left over.
54. In Decision making process, it is more useful to classify costs as follows
:
Fixed Cost : A cost that remains constant (within a specified range)
regardless of the level of operations. (Taxes, salaries for executive
personnel)
Variable Cost (Direct costs) : are cost which fluctuate in direct
proportion with the level of manufacturing output or unit sales.
Sunk Costs : are previous investments which have no effect on a
current decision.
Total Cost = Total Fixed Cost + Total Variable Cost
55.
56. Assumptions of Break Even Point: The concept of break even point is
based on the following assumptions.
1. Production and sales are the same, which means that as much as is
produced is sold out in the market.
Thus there is no inventory remaining at the end.
2. Fixed cost remains same irrespective of the production volume.
3. Variable cost varies with the production. It changes in the same
proportion that of the production.
Hence it has a linear relationship with the production. In other words,
variable cost per unit remains
the same.
4. Selling price per unit remains same irrespective of the quantity sold.
57. The break even point is the point at which,
a) There is no profi t, no loss
b) Contribution margin is equal to total fi xed cost
c) Total fxed cost is equal to total revenue
d) All of the above.
58. • A large margin of safety indicates
• a) Over capitalization
• b) The soundness of business
• c) Overproduction
• d) None of these
59. • The selling price is Rs.20 per unit, variable cost Rs.12 per unit,
and fixed cost Rs.16, 000, the breakeven-point in units will be,
• a) 800 units
• b) 2000 units
• c) 3000 units
• d) None of these
60. • The P/V ratio of a product is 0.4 and the selling price is Rs.40
per unit. The marginal cost of the
• product would be,
• a) Rs.8
• b) Rs.24
• c) Rs.20
• d) Rs.25
61. • Under the marginal costing system, the contribution margin
discloses the excess of,
• a) Revenue over fixed cost
• b) Projected revenue over the break-even-point
• c) Revenues over variable costs
• d) Variable costs over fixed costs.
62. • Contribution margin is known as,
• a) Marginal income
• b) Gross profit
• c) Net income
• d) Net profit.
63. Budgetary Control
• MEANING AND DEFINITION OF BUDGET
• A budget is a future activity. It is a chart of future incomes and
expenses. It is a coordinating financial plan for a business
enterprise. It includes estimates of sales, production,
purchases, labor cost, overheads and financial position.
• According to Shubin, “a budget is a comprehensive overall
plan in which management, on the basis of estimated sales
volume and receipts, establishes cost and expense allowances
for future operations. In this way effectively integrating and
directing activities towards carefully determined.
64. • MEANING AND DEFINITION OF BUDGETARY CONTROL:
• Budgetary control is a process which covers making of a
business budget, comparison of the actual performance with
the budgeted one and detecting the errors and mistakes
committed so that an attempt may be made to rectify them in
future.
• According to Moore and Jakedine, "Budgetary control is using
budget as a tool of controlling the actual operation of
business.”
65. • Sales Budget: A Sales Budget shows forecast of expected sales
in the future period [the period is well defined] and expressed
in quantity of the product to be sold as well as the monetary
value of the same. A Sales Budget may be prepared product
wise, territories/area/country wise, customer group wise,
salesmen wise as well as time wise like quarter wise, month
wise, weekly etc. The following factors are taken into
consideration while preparing a sales budget.
66. • Production Budget: This budget shows the production target
to be achieved in the next year or the future period. The
production budget is prepared in quantity as well as in
monetary terms. Before preparation of this budget it is
necessary to study the principal budget factor or the key
factor.
• Material Purchase Budget: This budget shows the quantity of
materials to be purchased during the coming year.
• Cash Budget: A cash budget is an estimate of cash receipts
and cash payments prepared for each month. In this budget all
expected payments, revenue as well as capital and all receipts,
revenue and capital are taken into consideration. The main
purpose of cash budget is to predict the receipts and
payments in cash so that the firm will be able to find out the
cash balance at the end of the budget period.
67. • Master Budget: All the budgets described above are called as
‘Functional Budgets’ that are prepared for planning of the
individual function of the organization. For example, budgets
are prepared for Purchase, Sales, Production, Manpower
Planning, and so on. A Master Budget which is also called as
‘Comprehensive Budget’ is a consolidation of all the functional
budgets. It shows the projected Profit and Loss Account and
Balance Sheet of the business organization.
68. • Zero Base Budgeting: Zero Base Budgeting is method of
budgeting whereby all activities are revaluated each time
budget is formulated and every item of expenditure in the
budget is fully justified. Thus the Zero Base Budgeting involves
from scratch or zero.
• Zero based budgeting [also known as priority based
budgeting] actually emerged in the late 1960s as an attempt
to overcome the limitations of incremental budgeting. This
approach requires that all activities are justified and
prioritized before decisions are taken relating to the amount
of resources allocated to each activity. In incremental
budgeting or traditional budgeting, previous year’s figures are
taken as base and based on the same the budgeted figures for
the next year are worked out. Thus the previous year is taken
as the base for preparation of the budget.
69. • A budget is
A] an aid to management
B] a postmortem analysis
C] a substitute of management.
D] all of the above
70. • A budget is a projected plan of action in
• A] physical units
• B] monetary terms
• C] physical units and monetary units.
71. • The document which describes the budgeting organizations,
procedures etc is known as
• A] Budget center
• B] Principal Budget Factor
• C] Budget Manual
• D] All of the above
72. • The scarce factor of production is known as,
• A] Key factor
• B] Linking factor
• C] Critical factor
• D] Production factor.
73.
74.
75. MCQ:
• Accounting Ratio are important tools by:
A. Managers
B. Researchers
C. Investors
D. All of the above
76. • Capital Employed refers to:
A. Equity Share Capital
B. Net Worth
C. Shareholders funds
D. None of the above
77. • ROI may be improved by:
A. Increasing turnover
B. Reducing expenses
C. Increasing capital utilization
D. All of the above
78. • Return of asset and ROI belongs to
A. Liquidity ratios
B. Profitability ratios
C. Solvency ratios
D. turnover
79. • XYZ ltd has a debt equity ratio of 1.5:1 as compared to 1.3:1 of
industry average. It means the firm has
A. Higher liquidity
B. Higher financial risk
C. Higher profitability
D. Higher capital employed
80. • Debt to total assets is .2 . The debt to equity ratio would be
A. .8
B. .25
C. 1
D. .75
81. • Which of the following helps anaylsing ROE to share holders
A. ROA
B. EPS
C. ROI
D. All of the above
82. • ABC has a current ratio of 1.5 and WC of Rs.500000 , what are
current assets?
A. 500000
B. 1000000
C. 1500000
D. 2000000
83. • All listed companies are required to prepare
A. Cash flow statement.
B. Fund flow statement..
C. Statement of affairs.
D. All of these.
84. • Which of the following cash flow from investment activity
A. Interest received
B. Interest paid
C. Dividend paid
D. income tax paid
85. • Which of the following would increase working capital.
A. Issue of bonus share
B. Issue of right share
C. Conversion of debt into capital
D. All of the above
86. • In order to test the liquidity of the business which ratio is used
A. Inventory turn over ratio
B. Acid test ratio
C. Debt equity ratio
D. All of the above
87.
88. • Given , stock turn over 6 times , sales Rs 300000
• Gross profit 20%
• Closing stock is Rs. 4000 more than opening stock
• The opening stock is –
A. 36000
B. 38000
C. 40000
D. 42000
89. • If the current ratio is 2.5 , quick ratio is 1.5 and NWC is Rs,
15,000, the value of inventory is-
A. 10,000
B. 15,000
C. 37500
D. 52500
90. If the total assets is
• If the total assets is 260000, total debt is 1,80,000, CL is Rs.
20,000 then Debt –Equity ratio will be-
A. 4:1
B. 3:1
C. 2:1
D. 1:1
91. • If average collection period is 15 days and average accounts
receivable is Rs. 45,000, what will be the annual credit sales?
A. 10,80,000
B. 16,20,000
C. 6,75,000
D. 187500
92. • A co. has PBT of Rs. 2,00,000. if the ICR is 5, what is the total
interest charged?
A. 20,000
B. 33,333
C. 40,000
D. 50,000
93. A predetermined calculation of how much costs should be under
specified working conditions is called:
A. Standard cost
B. Pre determined cost
C. Estimated cost
D. Actual cost
94. • The managements time saved by reporting only deviations
from the predetermined standards is called
A. MBO
B. Standard costing
C. Budgetary control
D. Management by exceptions
96. • Costs are segregated into controllable and non-controllable in
A. Activity based costing
B. Integrated accounting
C. Responsibility accounting
D. Cost accounting
97. • Responsibility centre is a __________ group of control centre
A. Personalized
B. Customized
C. Specialized
D. Mechanized
98. • Responsibility accounting is a method of accounting in which
cost are identified with
A. Cost centers
B. Machine centers
C. Persons
D. Deparments
99. • A responsibility center whose performance is measured by
ROI is known as
A. Investment center
B. Cost center
C. Revenue center
D. Profit center