MANAGEMENT ACCOUNTING

BBA 04
WINTER 2016

Sachin chaudhary
Roll no – 1405008399
Q1) What are the advantages and limitations of budgetary
control?

Ans ) advantages of budgetary control

 Maximization of profit : Budgetary control increases a company’s
profit by proper planning and coordination of different functions. It
also helps to achieve a control over capital and revenue expenses by
making the best use of available resources
 Coordination : Coordination refers to integrate the efforts of an
enterprise. Budgetary control enables the optional functioning of
various departments and sectors since the budget of various
departments are dependent on one another. To achieve the target
coordination is very important.
 Reduces cost : Budgetary control helps in reducing the costs .In
today’s competitive cost ,budgetary control plays an important role
in reducing the cost of production incurred for maximizing sales
.Organizations generally try to have combinations of products that
are more profitable.
 Corrective action : whenever there is inconsistency in performance
,the management will be able to take corrective action. Deviations
will be reported so as to facilitate the quick action by management.
If budgetary control is not incorporated, Deviations can be
ascertained only at the end of financial year.
 Specific aims: The top management chalk out the plans ,policies and
goals of an organization, wherein every department is assigned
specific goals. The total effort helps achieve the organization’s
 common goal. If gosls are not clearly defined. Then the various
departments will waste their efforts pursuing different goals

limitations :

 Planning and budgeting is not an exact science. Since the future is

unpredictable, budgeting uses approximations and estimates that
may not be 100 percent accurate. Budgets may or may not be true,
as they are based on estimates.
 Coordination and cooperation of all members of management is
difficult to achieve. The success of budgeting depends upon the
cooperation of the management. However, It is not easy to achieve.
 Budgeting is costly and time consuming. The introduction and
implementation of the system may be expensive. During the budget
preparation period, business conditions may change drasticallyand
all the estimates go wrong
 Budgeting will lower the morale and productivity of the personnel if
unrealistic target are set and if it is used as a pressure tool
 Mere budgeting cannot lead to profitability. Budgets cannot be
executed automatically. It may create a false sense of security that
everything has been taken care of budgets.

Q2) The capacity of your organization is to produce 40,000 units

of valve p.a. Due to protracted power cuts, the organization can
operate at 60 % capacity level. Ascertain the working capital
requirements at the current level of production based on the
following :
Elements of Cost Per Unit
Rs.
Raw-materials 6
Direct labour 3
Overhead 4
Total Cost 13
Profit 3
16
Raw-materials are in stock, on an average, for 2 months. W.I.P 1/2
a month. Finished goods are in stock, on an average for 1 month.
Credit allowed to Debtors 3 months and received from suppliers of
raw-materials is 1.5 months. Lag in payment of wages 1/2 a
month. There is usually no lag in payment of overheads.
Ans :
production×cost of raw material×aug.holding R.M
360

40000×6×24000 24000×6
=
360 360

= 400
24000×3
Direct labour : = 200
360

24000×4
Overhead : =266
360

24000×6
Raw material for two months : = 72000
2

24000×3
Direct labour : =48000
1.5

24000×4
Overhead : = 96000
1

Q3) The standard material cost of producing each unit

of product K is as follows :
4.8 kg of material @ Rs. 5 per kg.

Actual material cost of producing 200 units of product K is as

follows:
1,200 kg of material costing Rs. 4,800.
Compute :
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance

Ans ) standard cost : 200 × 5

=1000

Actual cost = 200× 4

 = 800
Material cost variance = SC – AC
= 1000 −800
= 200
Material price variance = 200 units (rs 5 – rs 4)
= 200 (adverse)
Material usage variance : 5( 200× 4.8) – 4(1200×480)
= 4800 – 23040000
= 23035200
Q4 ) From the following information prepare a Balance Sheet. Show the
working.
(a) Working Capital Rs. 75,000, (b) Reserves and Surplus Rs. 1,00,000, (c)
bank Overdraft Rs. 60,000, (d) Current Ratio 1.75, (e)Liquid Ratio 1.15, (f)
Fixed Assets to Proprietor’s funds 0.75, (g) Long term Liabilities Nil

ANS: Balance sheet

liablities assets

Share capital : 43,062 Current assets :

1,00,000 Stock : 1,14,000

Reserve and surplus :
60,000 Others : 1,31,250 2,45,250
Overdraft :

Fixed assets : 32,812

Current liabilities :

Working capital : 75000 75,000

2,78,062 2,78,062

WORKING NOTES :
Current ratio =1.75
current assets
A) Current ratio : x 1.75
current liablities
 current asset
= x 1.75
75000

= 75000 x 1.75

= 1,31,250

quik assets
B) Liquid ratio : x 1.15
quick liablities

current asset−stock 131250−stock

= x 1.15 = x 1.15
current liablities−overdraft 75000−60000

Stock =131250-(1.15 x 15000) = 1,14,000

C) Proprietory fund = fixed assets + working capital

0.75 = fixed assets + working capital
Proprietory fund =75,000 x 0.75 =56,250

D) Reserve and surplus = 100000

Therefore, share capital =100000-56250 = 43,062

E) Fixed asset = 43,750 x 0.75

= 32,812

Q5 ) Explain the objectives of financial analysis . What are the types of

analysis?
ANS) objectives of Financial statement analysis

 Measuring the profitability : The main objective of a business is to

earn profits by receiving satisfactory return on investments
.Financial analysis is performed to determine whether or not
adequate profits are made on the capital invested in the business.
 Indicating the trends of business : Trend of achievements such as
gross profits, net profit, sales, purchases, expenses etc..are
determined by comparing the financial statements of the previous
years. Financial analysis can also be performed by comparing the
value of assets and liabilities to estimate the future prospectus of
the business.
 Assessing the growth potential of the business : The trend analysis of
the business help to determine the growth potential of the business
  Comparative position in relation to other firms : financial statement
analysis help to compare and identify the probability of various
firms involved in similar business. This process help the
organization to evaluate its position in the market with respect to
sales ,expenses, profitability, utilization of capital.

Types of analysis : financial analysis may be classified into different types

on the basis of :
 Materials used for the analysis or the persons interested in the
analysis.
 Modus operandi or method of operation followed in the
analysis.
On the above basis, financial analysis may be classified into
external and internal analysis.

1. External analysis : External analysis is done by the external parties

or outsiders for the business . The external parties Includes
shareholders ,investors ,lenders, creditors who have no access to the
books of accounts and internal records of the concern. They mainly
use published financial statement for their analysis.
2. Internal analysis : internal analysis is done by internal parties such
as personnel of finance department ,accounting departments of the
concern who have access to the books and internal records of the
company.
Classification of financial analysis on the modus operandi or method of
operation followed in the analysis :
 Vertical analysis : When a single set of financial statements relatin
to just one accounting year are analysed , the analysis is known
as vertical analysis
 Horizontal analysis or trend analysis : In this type of analysis,
There is comparison of trend of each item in the financial
statements over a number of years for e.g : trend analysis of
balance sheet.
Q6 ) From the following data find (a) Sales and (b) New Break-
even Sales, if Selling price is reduced by 10 % :
Rs.
Fixed Cost- 4,000
Break-even Sales -20,000
Profit- 1,000
Selling price per unit -20
Ans)
sales per unit = 20
sales price reduce by = 10 %

new price = 18

sales =20,000× 20
= 4,00,000
New sales = 20,000× 18
= 3,60,000