b) Differentiate between cost and management accounting.

Ans.
Cost Accounting
1. It analysis costs for controlling
maximizing efficiency
2. It uses the principles and practices
of cost accounting.
3. It helps to managers for planning
and controlling the operations.
4. It is the complement
management accounting.
Management Accounting
1. It assists the management in
planning, decision-making, and
control.
2. It uses the principles and practice of
both cost accounting and financial
accounting.
3. It helps to management in decision
making before formulating plans
and policies.
of 4. It is an extension of managerial
aspects of cost accounting.

c) What is Intangible Assets?

Ans. The term asset is derived from the French word “assez” which means enough. So assets
mean enough resources for carry on the business. In accounting assets means things,
resources, properties, possessions owned by a businessman. According to Robert N.
Anthony,” Assets are valuables resources owned by a businessman which were acquired at a
measurable money cost.”
Intangible assets are those assets, which are not seen able and touchable, such as goodwill,
patent rights, trademarks, copyrights etc.

d) What are the objectives of preparing Cash Flow Statement?

Ans. Cash flow statement is an important tool of financial analysis, which gives detail
information about inflow of cash, and outflow of cash of the firm. It analysis the financial
position of the business. Cash flow statement can be classified into three categories. (i)
Operating activities (ii) Investing activities (iii) Financing activities.
Objectives of Cash Flow Statement:
1. It gives information about cash to the user of financial statements.
2. It helps in taking decisions of the organization.
3. It helps in determining the future needs of the business.
4. It is very helpful in short-term analysis of the business.
5. It helps in the internal financial management of the business.

e) Draw a chart explaining the break-even point.

Ans. Break-even point is that point where a organization neither earning nor profits. In
other words we can say that no profit no loss situation. When a company sell its products
not more than the cost of the product is called company working at break-even point.
When contribution is sufficient to cover the cost price then that situation is called as no
profit no loss situation.
With the help of marginal costing equation it can be understood in the following
manner:
S-V = F + P/L

Break-even point (in units) = fixed cost

 Contribution margin per unit
OR
Break-even point (in sales value) = Fixed cost
P/V Ratio

g) How would you calculate Material Usage variance?

Ans. Material Usage Variance: In every organization control is very important function
to perform. Variance is deviation in between actual cost and standard cost. When actual
cost is less than standard cost then that ia called as favorable variance and such a variance
is usually a sign of efficiency vice-versa. In material variance material usage variance is
important to calculate.
= Standard Price per Unit (Standard Quantity-Actual Quantity)

h) What is a “Limiting factor”?

Ans. Limiting factor is that factor which limits production. It may be shortage of labour,
material, finance, plant capacity etc. Every organization has key factors and there should be
some experts to make some decision over come from those problems. When a firm has two or
more than two products to produce then in such a case, a decision has to be taken regarding
fruitful production. When resources are scares, the selection of profitable product will be on
the basis of contribution per unit.

Q 1. (a) Define the term ‘Opportunity Cost’

Ans. An opportunity cost is the benefit given up or sacrificed when one alternative is chosen
over another. It can be defined as the opportunity which have been foregone by following one
course of action rather than an alternative course, it considers the profit foregone by utilizing
scarce resources for one particular course of action. For example a vehicle used for delivering
goods in market costs 50000 and it is expected to scrap in 2 years at a price of 10000.
However, it is possible to sell the vehicle at 30000 the opportunity cost will be 20000.

(b) What do you understand by ‘fund flow statement?

Ans. Financial statements do not give the complete financial information. These statements
give the information of funds on a particular date. The purpose of preparation of fund flow
statements is to know about from where funds are coming and where being invested. The
funds flow statements is generally prepared from the data identifiable and profit and loss
account and balance sheets. Fund flow statement is also called as sources and application of
funds. It shows the detail of funds business received from sources and the amount of funds
the business used for different purposes in the year.
Acc. To FOURLKE,” A statement of sources and application of funds, is a technical
advice designed to highlight the changes in financial position of business enterprise
between two dates.”

© What is ‘contra entry’? Explain with examples.

Ans. Contra entries are used in triple column cashbook. By contra entry we mean transfer of
money from cash to bank or vice versa. When there is a effect in both the accounts with one
transaction that entry is called as contra entry i.e. amount deposited in the bank and amount
withdrawn from bank for office use. Contra entries re indicated by a contra sign “c” in the
ledger folio (L.F.) column.
(d) Define the term “working capital.”
Ans. There are two types of capital requirements in the organization. One is fixed capital and
the working capital. Fixed capital is required for fixed assets of the organization. Working
capital is necessary for the day-to-day expenses of the firm. The difference in between
current assets and current liabilities is called as working capital. Working capital flow should
be according to the requirements of the firm if a firm produces on a large scale then
requirement of working capital should also be high.

Working capital = Current Assets - Current Liabilities.

(e) Explain the term ‘budgetary control.’

Ans. Every business firms have main objective to maximize the profits and to minimize the
cost. An organization cannot run properly without a good budgetary system. Budgetary
control system is very helpful in bringing economy in business. Budgetary control is applied
to a system of management and accounting control by which all the operations and output are
forecasted in a proper manner to achieve the best possible profits.

(f) What do mean by cash flow from operating activities?

Ans. Cash flow statement is an important tool of financial analysis, which gives detail
information about inflow of cash, and outflow of cash of the firm. It analysis the financial
position of the business. Cash flow statement can be classified into three categories.
Operating activities are principal revenue producing activities. It is a key indicator to judge
the ability of the enterprise to maintain its operating capability to pay dividend, repay loans.
Following are the items of cash flow from operating activities.
1. Cash receipt from the sale of goods and services.
2. Cash payment to suppliers for goods and services.
3. Cash payment to and on the behalf of employees.
4. Cash receipts to suppliers for goods and services.

(g) What is cost pool vs. cost drives?

Ans. Cost pools and cost drivers are based on activity based costing. Accost pool should be
created for each activity. Cost pool is like a cost center or activity center around which costs
are accumulated. Factory overheads costs of the activities are determined and classified into
homogeneous cost pools. A homogenous cost pool is a collection of overhead costs that are
logically related to the tasks being performed.
The factor that influenced the cost of a particular activity should be
identified. They are known as cost drivers. It should be under stood that direct cost do not
need cost drivers as they can be placed directly to a product. However all other factors or
manufacturing costs need cost drivers. Cost drivers signify factors forceor events that
determine the cost of activities.

(i) What do you mean by EOQ?

Ans. This concept is related with the quantity of material to be purchased by the purchasing
department. Economic order quantity is that size of the order which gives maximum economy
in purchasing any item of material. The exact number of any material to be purchased at a
time is one of the main problems for a purchase manager. Purchase of large quantities results
in over stocking and hence increased carrying cost. The quantity of material to be ordered one
time is known as economic order quantity. The quantity is fixed in such a manner as to
minimize the cost of ordering and carrying. there are few factors of economic order quantity
like cost of inventory, ordering cost, carrying cost, stock out cost.

Q 1. (a) “The emphasis of financial accounting is different from that of cost

accounting.” Comment.

Ans. The following are the main points of difference in financial accounting and cost
accounting.
A. The basic aim of financial accounting is to find out profitability of the organization
and cost accounting is basically deals with control of the organization.
B. In financial accounting we deal with the principles of accounting but to maintain cost
records are voluntary to prepare.
C. Financial accounting deals with recording, classifying, analyzing and presentation of
data and cost accounting deals regarding cost of the products.

(c) “Depreciation is an important source of funds (working capital).” Do you agree?

Justify your answer.

Ans. Depreciation means reduction in the value of an asset with the usage or passage of
time. Depreciation has no effect on current asset and current liabilities so it doesn’t make
any impact on fund flow statement. Depreciation is the value of fixed asset divided over
life of the asset. It is a complicating term that whether it is a source of finance or not. This
is clear that it does not participate directly to funds. But it helps in reducing dividends and
taxes of the firm with that funds are automatically increased so the amount of
depreciation reduces profits of the company, which is helpful in reducing taxes and
dividends so we can say that it is an important sources of funds.

(d) What do you mean by cash flow statements?

Ans. Cash flow statement is an important tool of financial analysis, which gives detail
information about inflow of cash, and outflow of cash of the firm. It analysis the financial
position of the business. Cash flow statement can be classified into three categories.
Operating activities are principal revenue producing activities. It is a key indicator to
judge the ability of the enterprise to maintain its operating capability to pay dividend,
repay loans. Investing activities are for purchasing and disposing of long-term assets as
furniture, plant and machinery etc. it shows the long-term ability of the firm regarding
long-term assets. Financing activities are related with the owner’s capital and
borrowings of the company. It shows the ability of the firm to borrow money from
outside.

(e) “Fixed costs are really variable. The more you produce the less they become.” Do
you agree? Explain.

Ans. Fixed costs are those costs, which will remain constant up to the optimal level. By
optimal level we mean that the maximum production we can produce with the available
resources. For example rent, salary of manager, monthly wages etc. This statement is true
that with the increase in the number of production fixed cost will decrease. For example
rent of the building is Rs.10, 000. Suppose we produce 1, 000 units then cost of rent will
be Rs. 10 per unit. But if we produce 2,000 units in the same time period than cost will
decline to Rs. 5 per unit.
 (f) Distinguish between material price variance and material usage variance.

Ans. Material price variance: It is that portion of material cost variance, which is due to
difference between the standard cost of material used for the output achieved, and the
actual cost of material used.
= Actual Usage (Standard Unit Price – Actual Unit Price)
Material Usage Variance: It is the variance, which is due to the difference between
the standard quantity of material and actual quantity of material.
= Standard Price per Unit (Standard Quantity-Actual Quantity)

(h) What are the points of similarity and points of difference between budgets and

standard costs?

Ans. Budgetary control and standard costing both are the techniques of cost accounting.
In both the techniques we used to make planning and control. In the we can compare the
actual performance with the predetermined objectives.in this way both the techniques are
similar. There few points of difference in these techniques.

1. Standards are based on technical assessments whereas budgets are based on past actual
adjusted to future trends.
2. Budgetary control deals with the operations of the firm as a whole and standard
costing is applied to manufacturing of a product.
3. Standards are basically set for production and budgetary control is for all the incomes
and expenditures of the business.
4. Budgets set for the upper limit of expenses, which a firm can make for actual
expenditure and standards are set for the targets to achieve.
5. Budgets are expected costs to be forecasted for the requirement of material, cash and
other resources and standard costs are not to tell the expected cost but rather what the costs
should be under specific conditions.

(j) How does Activity Based Costing differ from the traditional costing approach?

Ans. It is the costing in which costs are first traced to activities and then to the products. This
system of costing assumes that activities are responsible for the incurrence of costs and
products create the demands for activities. In the historical system of costing firstly the costs
are charged to departments and plants then to units. But according to this approach costs are
charged to product based on individual product for every activity.

Q 1. (a) Define Management Accounting.

Ans. According to CIMA terminology,“ marginal costing is the ascertainment of marginal
cost and of the effect on profit of changes in volume or types of output by differentiating
between fixed cost and variable costs. In this costing only variable costs are charged to
operations, processes or product, leaving all indirect costs to be written off against profits in
the period in which they arise.” So in marginal costing we deal with variable costs because it
will increase with the increase in number of production and vice-versa. Variable costs are
charged to production and fixed costs are recovered from production.

(b) What are the various components of cost?

Ans. By components of cost mean the different parts of cost of a product. To calculate the
cost of the product basically we have three main components. Material is the first main
component because material covers basically half of the cost of the product. Labour is also
very important component of cost because company pay wages and salary to employees to
convert raw material into finished product. Expenses is the third component of cost after
calculating cost of material and labour cost of expenses should be included in products cost to
get a correct cost price of the product.

(c) Define break-even point.

Ans. Break-even point. Break-even point is that point where a organization neither earning
nor profits. In other words we can say that no profit no loss situation. When a company sell
its products not more than the cost of the product is called company working at break-even
point. When contribution is sufficient to cover the cost price then that situation is called as no
profit no loss situation.
With the help of marginal costing equation it can be understood in the following
manner:
S-V = F + P/L

Break-even point (in units) = fixed cost

Contribution margin per unit
OR
Break-even point (in sales value) = Fixed cost
P/V Ratio

(d) What is debt equity ratio?

Ans. This is the very important ratio, which is helpful to determine the long-term solvency
position of the firm. This ratio shows the relationship between borrowed funds and internal
owner’s fund. Formula of debt-equity ratio:

= Total long-term debt

Shareholder’s fund
Total long-term debt = All long term liabilities including redeemable preference capital.
Shareholder’s fund = equity share capital + non-redeemable preference share capital+ credit
balance of profit &loss a/c and free reserves – fictitious assets.

(f) How is a trading a/c different from profit and loss a/c?
Ans. Trading and profit and loss a/c is basically prepared to check the profit or loss of the
business. Every businessman wants to see the position of the business at he end of the year to
make plans for the future. Trading a/c deals with all the direct expenses and direct incomes of
the business. From trading a/c we can calculate gross profit or gross loss of any organization.
But gross profit does not give the true picture of the firm. To have a true and clear picture of
the firm profit and loss a/c help the management in this we record all the indirect expenses
and indirect incomes of the business and in the end it shows net profit or net loss of the
business. A company can plan for the coming time on the basis of past profits or losses of the
firm.

(g) What is meant by zero base budgeting?

Ans. This is a technique of budgeting. This technique was proposed by peter payal of
Texas instruments inc., U.S.A. prior to these historical budgets were prepared on the basis
of past records. The efficiency of the present budget was dependant on the efficiency of
past budgets. In the conventional budgets experts usually calculates the increments of
present with the past. In zero base budgeting it is not based on incremental approach.
Rather zero is taken as base. In ZBB base is taken as zero to remove the past mistakes.
CIMA defined it as,” as a method of budgeting whereby all the activities are revaluated
each time a budget is set. Discrete levels of each activity are valued and a combination
chosen to match funds available.”

(h) What are benefits of budget?

Ans. In every business planning is the most important function to perform. Planning of
different firms depends upon so many factors. Planning is done for comparing the actual
performance with standard performance. Budgets are also prepared in advance. Budgets are
prepared to check the availability of finance according to the demand of project. So
budgetary control is also essential tool of management to control cost and maximizes profits.
Advantages of budgets:
1. Budgets help in effective utilization of resources.
2. It helps in maintaining good results of the business.
3. It reduces cost by increasing the span of control on the employees.
4. It helps in preparing future policies of the business.
5. It requires a definite assignment of responsibility for each function of the
business.

(i) What is meant by target costing?

Ans. Earlier we used to study cost of the product to fix the selling price of the product.
But now in the modern accounting cost of the product is being fixed on the basis of the
capacity of the customer to pay the price. Target costing is a method of determining the
cost of a product and service based on the target price that a customer is willing to pay.
The main objective of target costing is to lower the cost of the product to achieve the
required profit. The quality of the product should be up to the mark. It also helps the
employees to boast the morale to achieve the target profits of the firm.
(j) What is the purpose of ratio analysis?
Ans. Ratio analysis is the power full tool of the financial analysis. A ratio can be defined as,
“the term accounting ratios is used to describe significant relationships which exit
between figures shown on a balance sheet, in a profit and loss account, in a budgetary
control system or in any other part of the accounting organization.”
In simple words ratio is the numerical relationship between two variables, which are
connected with each other in some way or the other. A ratio can be used as a yardstick for
evaluating the financial position and performance of a concern because the absolute
accounting data cannot provide meaningful understanding and interpretation.

(e) Explain the concept of ‘Working Capital Flow.’

Ans. There are two types of capital requirements in the organization. One is fixed capital
and the working capital. Fixed capital is required for fixed assets of the organization.
Working capital is necessary for the day-to-day expenses of the firm. The difference in
between current assets and current liabilities is called as working capital. Working capital
flow should be according to the requirements of the firm if a firm produces on a large
scale then requirement of working capital should also be high.

Working capital = Current Assets - Current Liabilities.

(f) The classification of cost as controllable and uncontrollable.

Ans. (a) Controllable cost.
These costs are those which can be influenced by the action of a specified member of
an under taking. Controllable costs incurred in a particular responsibility center can
be influenced by the actions of the executive head of that responsibility center.
(b) Uncontrollable cost.
These are the costs, which cannot be influenced by the action of a specified member
of an undertaking are known as uncontrollable costs. The difference in both the costs
is not very clear, and sometimes it is left to individual judgment.

(g) List the advantages and disadvantages of budgeting.

Ans. Advantages of budgeting:
1. Budgeting helps in effective utilization of resources.
2. It helps in maintaining good results of the business.
3. It reduces cost by increasing the span of control on the employees.
4. It helps in preparing future policies of the business.
5. It requires a definite assignment of responsibility for each function of the
business.
Disadvantages of budgeting:
1. A budgeting system is not helpful in short time period.
2. There may be conflicts among the departmental managers because every one will try to
achieve his targets by anyhow.
3. A large degree of accuracy required for budgeting is difficult to achieve.
4. To prepare a budget organizations need expert people for that and it is not possible for
small concerns to spend money for budgets.
(h) Distinguish between Labour rate variance and Labour efficiency variance.
Ans. Labour rate variance: it is variance arises from difference of standard cost of
labour rate decided and actual rate paid to the worker. It is calculated as below.

Labour rate variance = standard cost of labour – actual cost of labour.

Labour efficiency variance: It is the difference of labour cost variance arises due to the
difference between the standard labour hours specified for the output achieved and actual
labour hours spent. It is calculated as below.

Labour efficiency variance = Standard Rate( Standard Time for Actual output –
actual time worked).

(b) Differentiate between financial accounting and cost accounting.

Ans. The main differences between financial accounting and cost accounting are given as
under:
Points of distinction Financial accounting Cost accounting
1. Purpose It gives information in a It provides the information
general way. it tells about the about proper planning,
profit and loss a/c and about controlling and decision-
financial position of business making.
In financial accounting we It provides a detailed system
Control are concerned with recording of controlling on material,
of transactions only not with labour, and overheads costs.
controlling. With the help of standard
costing and budgetary
Information control.
In financial accounting only In cost accounting non-
monetary information is monetary information like
4. Fixation of selling recorded. units are also be recorded.
price Financial accounting is not Cost accounting provides
helpful in fixing the price of the detail data, which is very
products. helpful in fixation of prices.

(d) What is the purpose of preparing fund flow statements?

Ans. Financial statements do not give the complete financial information. These
statements give the information of funds on a particular date. The purpose of preparation
of fund flow statements is to know about from where funds are coming and where being
invested. The funds flow statements is generally prepared from the data identifiable and
profit and loss account and balance sheets. Fund flow statement is also called as sources
and application of funds. It shows the detail of funds business received from sources and
the amount of funds the business used for different purposes in the year.

Acc. To FOURLKE,” A statement of sources and application of funds, is a technical

advice designed to highlight the changes in financial position of business enterprise
between two dates.”

(e) Differentiate between absorption costing and marginal costing.

Ans. The following are the various points of difference between absorption and marginal
costing.

Absorption costing Marginal costing

1. All fixed and variable costs are 1. In marginal costing we include only
included for the calculation of cost. variable costs.

2. Difference between sales and total

cost is profit.
2. Difference between sales and
marginal cost is contribution and
difference between contribution and
fixed cost is profit.
3. Absorption cost is not helpful in
taking managerial decisions.
3. Marginal costing is very helpful in
taking managerial decision in the
4. In absorption costing costs are organization.
classified on functional basis like
production cost, selling cost etc.
4. In this cost are classified as fixed
cost and variable cost.

(f) What are overheads? Give two examples.

Ans. Cost of a product is may be divided into two portions direct and indirect cost. The
total of indirect costs is called as overheads. CIMA defines indirect cost as expenditure of
material, labour, and indirect services. Indirect costs are not directly traceable to a product
because they are incurred for two or more than two products. Broadly speaking any
expenditure over and above prime cost is known as overheads. Without proper study of
indirect expenditures we cannot calculate exact cost of the product. The terms ‘burden’,
‘supplementary costs’ are used for overheads. There are so many examples of overheads
like manufacturing overheads, selling overheads, research overheads, and administrative
overheads.
 (g) What are the objectives of Zero Base Budgeting?

Ans. This is a technique of budgeting. This technique was proposed by peter payal of
texas instruments inc., U.S.A. prior to these historical budgets were prepared on the basis
of past records. The efficiency of the present budget was dependant on the efficiency of
past budgets. In the conventional budgets experts usually calculates the increments of
present with the past. In zero base budgeting it is not based on incremental approach.
Rather zero is taken as base. In ZBB base is taken as zero to remove the past mistakes.
CIMA defined it as,” as a method of budgeting whereby all the activities are revaluated
each time a budget is set. Discrete levels of each activity are valued and a combination
chosen to match funds available.”

(h) What is the rationale of Activity Based Costing?

Ans. It is the costing in which costs are first traced to activities and then to the products.
This system of costing assumes that activities are responsible for the incurrence of costs
and products create the demands for activities. In the historical system of costing firstly
the costs are charged to departments and plants then to units. But according to this
approach costs are charged to product based on individual product for every activity.

b) Name various tools used in financial analysis.

Ans. 1. Comparative statements.
2. Statement of changes (fund flow and cash flow statements)
3. Trend analysis.
4. Common size statements.
5. Ratio analysis.

c) Differentiate between cost accounting and management accounting.

Ans.
Cost Accounting
5. It analysis costs for controlling
maximizing efficiency
6. It uses the principles and practices
of cost accounting.
7. It helps to managers for planning
Management Accounting
5. It assists the management in
planning, decision-making, and
control.
6. It uses the principles and practice of
both cost accounting and financial
accounting.
7. It helps to management in decision
 and controlling the operations. making before formulating plans
and policies.
8. It is the complement of 8. It is an extension of managerial
management accounting. aspects of cost accounting.

d) Name the various financial statements prepared by an organization.

Ans. 1. Comparative statements.
2. Statement of changes (fund flow and cash flow statements)
3. Trend analysis.
4. Common size statements.
5. Ratio analysis.

e) What are the duties of management accountant?

Ans. 1. Maintenance of Books of Accounts.
2. Auditing of Accounts
3. Taxation
4. Financial Services

f) Differentiate between absorption costing and marginal costing.

Ans. The following are the various points of difference between absorption and marginal
costing.

Absorption costing Marginal costing

4. All fixed and variable costs are 5. In marginal costing we include only
included for the calculation of cost. variable costs.

5. Difference between sales and total

cost is profit.
6. Difference between sales and
marginal cost is contribution and
difference between contribution and
fixed cost is profit.
6. Absorption cost is not helpful in
taking managerial decisions.
7. Marginal costing is very helpful in
taking managerial decision in the
4. In absorption costing costs are organization.
classified on functional basis like
production cost, selling cost etc.
8. In this cost are classified as fixed
cost and variable cost.
g) Explain activity based costing.
Ans. It is the costing in which costs are first traced to activities and then to the products.
This system of costing assumes that activities are responsible for the incurrence of costs
and products create the demands for activities. In the historical system of costing firstly
the costs are charged to departments and plants then to units. But according to this
approach costs are charged to product based on individual product for every activity.
Activity based costing is a recently developed and more refined approach for charging
overheads to products and computing product costs. ABC provides cost information that
is useful for decision-making. This system is emerged due to managerial need of more
accurate product cost information to meet the intense worldwide competition. Activity
based costing emphasizes the need to obtain a better understanding of the behavior of
overhead costs and thus ascertain what causes overhead costs and how they are related to
products.

h) Name any five concepts of accounting.

Ans. 1. Money Measurement Concept.
2. Going concern concept
3. Cost concept
4. Realization concept
5. Accounting period concept

i) What is budgetary control?

Ans. Every business firms have main objective to maximize the profits and to minimize the
cost. An organization cannot run properly without a good budgetary system. Budgetary
control system is very helpful in bringing economy in business. Budgetary control is applied
to a system of management and accounting control by which all the operations and output are
forecasted in a proper manner to achieve the best possible profits.

j) Discuss various assumptions used in break-even analysis.

Ans. These are the following are the few assumptions for break-even analysis.
1. Fixed costs remain unchanged at all levels of activity.
2. Variable cost change in direct proportion to the volume of output.
3. All indirect cost can be divided into fixed and variable elements.
4. Selling price remains constant irrespective of volume of production or sales changes.
5. Prices of raw materials, labour etc., remains constant.

Q 1. (a) Give objectives of cost accounting.

Ans. Cost is the price of expenditure incurred on a produced item. The term cost refers to the
amount of resources given up in exchange for some goods and services. The term cost has
different meanings to different people, but in cost accounting, it is used in a special sense.
Cost represents an expenditure made to secure an economic benefit, generally on the uses of
resources that promise to produce revenue.
Objectives of cost control:
1.It analysis costs for controlling and maximizing efficiency
2.It uses the principles and practices of cost accounting.
3.It helps to managers for planning and controlling the operations.
4.It is the complement of management accounting.
5.It helps in the preparation of budgets and implementation of budgetary control.

(c) Define fund flow statement.

Ans. Financial statements do not give the complete financial information. These statements
give the information of funds on a particular date. The purpose of preparation of fund flow
statements is to know about from where funds are coming and where being invested. The
funds flow statements is generally prepared from the data identifiable and profit and loss
account and balance sheets. Fund flow statement is also called as sources and application of
funds. It shows the detail of funds business received from sources and the amount of funds
the business used for different purposes in the year.
Acc. To FOURLKE,” A statement of sources and application of funds, is a technical
advice designed to highlight the changes in financial position of business enterprise
between two dates.”

(d) What is meant by marginal costing?

Ans. According to CIMA terminology,“ marginal costing is the ascertainment of marginal
cost and of the effect on profit of changes in volume or types of output by differentiating
between fixed cost and variable costs. In this costing only variable costs are charged to
operations, processes or product, leaving all indirect costs to be written off against profits in
the period in which they arise.” So in marginal costing we deal with variable costs because it
will increase with the increase in number of production and vice-versa. Variable costs are
charged to production and fixed costs are recovered from production.

(f) What is the difference between gross profit and net profit?
Ans. Gross profit: Gross profit is the difference of direct income and direct expenditure of
the business. It is very necessary to find out the profit or loss account. For this trading and
profit and loss account is being prepared. If the credit side of trading account is more than the
debit side the difference will be gross profit of the firm.

Net profit: Gross profit do not give the true picture of the firm because there are so many
other indirect expenses also in the business which should be deducted from the gross profit of
the business. Profit and loss a/c give the true picture of net profit of the firm. Again if credit
side of P&L a/c is more than debit side then the difference will be net profit of the firm.

(g) What is meant by profit variance?

Ans. Profit variance is explained as the difference between the budgeted profit and actual
profit. This will include the total of variances appropriate to standard cost of sales and sales
margin variances and variances due to any changes, which have not been included in standard
of production.

(i) Differentiate between cost control and cost reduction.

 Ans. Cost control is basically to control the cost up to the standard cost. In this
accountant. It is the control on all the items of expenditure and making comparison with
predetermined standard or budgets. This technique follows few steps for proper control.
Determination of cost standards, finding deviation with actual cost, taking corrective
action. But in cost reduction accountant concentrates on reducing the price of the product.
We can reduce the cost by improving efficiency in production. In this we can also prepare
budgets for reducing the cost of the product.

(j) What are the advantages of ratio analysis?

Ans. Ratio analysis is the power full tool of the financial analysis. A ratio can be defined as,”
the term accounting ratios is used to describe significant relationships which exit
between figures shown on a balance sheet, in a profit and loss account, in a budgetary
control system or in any other part of the accounting organization.”
Advantages of ratio analysis:
1. It helps in simplifying the financial statements.
2. Ratios are very helpful for inter firm comparison.
3. It is also very helpful in intra-firm comparisons.
4. It plays an important role in planning of the business.

(f) Overheads.

Ans. There are two types of expenses in the organization direct and indirect expenses.
Overheads may be defined as the aggregate of cost of indirect materials, indirect labour
and other expenses. In general terms, overheads comprise all expenses except direct
expenses. So overheads are those expenses, which are incurred for the general
organization as a whole. These are the following few groups in which we can divide the
overheads (i) Administration Overheads (ii) Manufacturing Overheads (iii) Selling
Overheads (iv) Distribution Overhead (v) Research and Development Overheads.

(g) Margin of Safety.

Ans. Margin of safety is the difference between actual sales and sales at break even level.
By break-even sale we mean no profit no loss situation. At break even sales level every
organization covers its all the fixed expenses and in excess of break even level will result
in profit to the organization. Higher the margin of safety shows the soundness of the
business vice - versa.

Margin of Safety = Actual Sales – Sales at break even level.

Margin of safety can also be calculated with the following fomula:

Net Profit
Margin of Safety = P/V Ratio

(h) Key factor.

Ans. Key factor is that factor which limits production. It may be shortage of labour,
material, finance, plant capacity etc. Every organization has key factors and there should
be some experts to make some decision over come from those problems. When a firm has
two or more than two products to produce then in such a case, a decision has to be taken
regarding fruitful production. When resources are scares, the selection of profitable
product will be on the basis of contribution per unit. The profitability can be calculated
with the following formula:

Contribution
Key Factor

(i) Material usage variance.

Ans. In every organization control is very important function to perform. Variance is

deviation in between actual cost and standard cost. When actual cost is less than standard
cost then that ia called as favorable variance and such a variance is usually a sign of
efficiency vice-versa. In material variance material usage variance is important to
calculate.

Standard price per unit ( Standard Quality – Actual Quality)

(j) Monetary Items.

Ans. Monetary items are those items, which are directly related with money only. In
accounting we record only those transactions, which have some value in return. The
transactions, which are non-monetary in nature, cannot be recorded in books of accounts.
We have number of items, which possess some monetary value i.e., raw material,
machinery, furniture etc. accounting has nothing to do with non-monetary transactions
because these transactions are not relevant from accountings viewpoint.