Subject: Management Accounting Reg.

Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

Q5. What do you mean by Bank Reconciliation Statement? Why is it prepared?

Give a standard format of a Bank Reconciliation statement

Bank Reconciliation statement.

Bank reconciliation statement is the statement, which is prepared to reconcile both

the passbooks with the bank and the cash book. Both the bankbooks in the books of
business and passbook as per the books of bank record the same transaction, the balance
as per the books of bank should match with the balance as per passbook. However in real
life these balances may not match with each other and these results in preparation of the
statement. Below are the reason why both the books doesn’t match

i) Cheque issued but not debited: In this case cheque would have been issued but
bank wouldn’t have received these cheques for clearance as such balance as per
bank book may be higher.
ii) Cheques deposited but not cleared: The business might have issued some cheques
in the bank account but the bank might not have received the payment for the
same and hence the amount is not yet credited to the bank account as such balance
as per bank book may be higher.
iii) Bank charges: Bank debits periodical charges from the account, which would
result in the decrease of balance. This entry wouldn’t have been made in
bankbook of the business, which will show a higher balance.
iv) Cheque dishonored: If the cheque deposited by the organization get dishonored an
intimation is sent to business organization which takes entry immediately but by
that time bank book shows higher balance.
v) Direct payments made by the customers in the customer in the bank, results in
increase in the bank book and the balance as per pass book will be low.
vi) Sometimes business gives standing instruction to bank to make recurring
payments like rent, bill which reduces the balance in bank book and increases
balance in pass book.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

vii) Sometimes interest on investments is received by bank, which results in higher

balance of bankbook when compared to pass book.
viii) There are some clerical errors also made by bank where a wrong debit or credit
would have been made.

Preparation of Bank Reconciliation Statements

A bank reconciliation statement can be prepared by taking either of the balance of

bankbook or pass book and arriving at either of bank book or pass book and vice versa.
For preparing the bank reconciliation statement, entries on the payment side of bankbook
are compared with the withdrawal column of passbook or bank statement and the entries
with the deposit column of bank book statement or passbook. If entries on the payment
side or receipt side of bankbook appear on the withdrawal or deposit column of bank
statement or pass book respectively, bank reconciliation statement is affected due to those
amounts which appear on the payment side of bank book but are not there in withdrawals
column of bank statement or pass book or amounts which appear on the receipts side of
bank book but are not there in the deposits column of bank statement or pass book.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

Format for bank Reconciliation statement: -

Bank Reconciliation statement as on

Bank balance as per pass book
Add:
a. Cheques deposited but not cleared
b. Interest / Bank charges debited by bank
c. Direct payments made by bank not entered in bank
book.
d. Cheques dishonored not recorded in bank book
e. Wrong debits given by bank

Sub Total
Less:
a. Amount credited in pass book but not in bank book
b. Deposits made in the account directly.
c. Wrong credits given by bank.
Sub Total
Bank Balance as per Bankbook.

Q1. Explain the term accounting. What are the different streams of accounting?
How are they related to each other?

According to American Institute of certified public accountants, “Accounting is

the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are of a financial character and interpreting the
results there of “. The process of recording the business transactions in a defined set of
records, which in technical words are called as book of accounts, is referred to as book

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

keeping. Accounting refers to the process of analyzing recorded in the books of accounts
with the ultimate intention of knowing what is the result of operations of business activity
is there a profit or loss and another is where does the business stands on a particular given
point of time. Accounting is more managerial in nature and it requires professional
expertise.

Streams of Accounting:
The process of accounting gets split into three streams
i). Financial Accounting
ii) Cost Accounting
iii) Managerial Accounting

Financial Accounting
It is the process of systematic recording of the business transactions in the various
books of accounts maintained by the organization with the ultimate intention of preparing
the financial statements there form.
Financial statements are in two forms. One is the profit and loss statement
explaining the profitability of the business and balance sheet which shows the companies
position as on that particular date. The nature of financial accounting transactions has
following features
a. Only those transactions which can be expressed in terms of money are considered
b. Financial accounting is historical in nature
c. Financial accounting is meant for people who are external to organization
d. Financial statements are legal requirements.
e. ‘ Going Concern principle’ is followed while preparing financial statements.
f. The process of financial accounting is affected due to various accounting policies
followed by accountants.
g. Financial accounting describes and discloses performance and status of business on a
whole. It does not show different financial statements for different departments

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

Cost Accounting:
Is the process of classifying and recording of the expenses in a systematic manner
with the intention of ascertaining the cost of a cost Centre, with the intention of
controlling cost.
Institute of cost and Management Accountants, London has defined cost
accounting as the ‘ application of costing and cost accounting principles methods and
techniques to the science, art and practice of cost control and ascertainment of
profitability as well as the presentation of information for the purpose of managerial
decision making’.
a. Cost accounting views the organization as components of departments or job or
process and ascertaining cost for each of it.
b. Cost accounting has basically three objectives
i. Ascertainment of cost and profitability
ii. Process of controlling cost
iii. Presentation of information for making managerial decision.
c. Cost accounting meant for internal purpose
d. Cost accounting is not a legal requirement
e. Cost accounting takes both historical and future transactions into considerations
f. Cost accounting is supposed facilitate professional decision making on the part of
manager

All the three streams of accounting are interrelated for the purpose of decision-making
management accounting use the data from financial accounting. Financial accounting is
primarily protects the interest of the outsiders dealing with organization in various
capacities like investors, supplier, customer, bank, financial institution, govt. authorities.
The reports generated by management accounting are meant for the use by management
for effective decision making. Cost accounting and management accounting are similar to
each other in many respects. Both the streams of accounting primarily aim at the effective
decision making on the part of management. The various techniques which are used by

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

management accounting viz. Marginal costing, Budgetary control, standard costing,

uniform costing etc. are basically regarded as the advanced methods of cost accounting. A
such cost accounting may be considered to be a part of management accounting.
Management accounting is an management accounting. Management accounting is an
extension of managerial aspects of cost accounting with the ultimate intention to protect
the interest of the business.

Management Accounting:
This process of accounting is newly emerging concepts in the field of accounting.
It is a process of analysis and interpretation of financial date with the help of financial
accounting and cost accounting with a intention to draw conclusions to assist the
management in the process of decision making. Institute of chartered accountants of
England and whales has defined management accounting as ‘ any form of accounting
which enables a business to be conducted more effectively.
Main objectives of management accounting are to enable the management to plan
effectively. To measure the actual performance and reporting the same to various levels of
management to indicate the effectiveness of organizational methods used. Computation
of deviation of actual from the plans and standard act.

Q2. Explain step by step process of financial accounting with the intention to
prepare the financial statements.

Process of Financial Accounting:

The first step in accounting is journalizing, refers to the process of recording the
business transaction in the journal that is referred to as the book of original entry or the
book of prime entry.
If the volume of transaction is very large, recording all the transaction in the
journal may prove to be voluminous job. Hence the transactions of the similar nature may
be entered into a separate subsidiary book and the net effect of the similar transaction
may be transferred into the main records.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

In the practical circumstances, following subsidiary books are used very frequently
a. Cash book – Records all the cash transactions i.e. cash receipts and cash payments
b. Purchases Daybook – Records all the credit purchases transaction.
c. Sales daybook – This records all the credit transactions.
d. Purchase returns register – Records the transaction of return of good to the supplier
from whom purchases were made on credit basis.
e. Sales returns register – Records all the transactions of return of goods by the customer
to whom sales were made on credit basis.
f. Journal proper: Records all the residual transaction, which cannot be entered into any
other subsidiary book.
Ledger Posting: If journal or subsidiary books are the books, which record of the
transaction in the chronological order, ledger is the book where the transactions of the
similar nature are pooled together under one ledger account.
Ledger or general ledger as its referred in practical circumstances maintains all
types of accounts i.e. personal, read and nominal. As such, the transactions are first
entered into journal or subsidiary book when they take place and from there they are
transferred to ledger and this process is called ledger posting.

Balancing of ledger Accounts: To ascertain the net effect of all the transactions
recorded in the ledger account, the account is required to be ‘balanced’. Both the sides of
ledger totals of both the sides has to be calculated. If the total of debit side more than the
credit side then the account has to be credit side is more than the debit side then it will be
closed by writing ‘ to balance c/d’. After balance is placed on the appropriate side, ensure
that totals of both the sides match with each other.

Trial Balance:
It is a summary of all the balance in all the accounts listed in the general Ledger
and cash / Bankbook of an organization at any given date. Tallying of the trial balance is
the evidence of the fact that all the transactions have properly been posted in the general

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

ledger. Tallying generally ensures the arithmetical accuracy of the process of ledger
posting.

Preparation of final accounts from trail balance:

a. Profitability statement: It is refereed as ‘profit and loss account’ in more simple
language. This statement discloses the profit and loss of the operations. P and L
account is prepared for a specified period of time like P&L a/c for the year ending
31mar03. Profitability statements takes all the expenses and incomes, loss and profits
into consideration for the accounting year.
b. Balance sheet: The Purpose of financial statement is to disclose the financial position
of an organization in terms of its assets and liabilities at any given point of time.
Balance sheet is a listing of assets & liabilities of an organization at any given point
of time. Whichever source are used by an organization for raising the required
amount of funds create an obligation create the properties or assets for the
organization. Hence liabilities are refereed as ‘ Source of funds’ and the assets as ‘
application of funds’.

Profit & loss account can have following four components:

a. Manufacturing account: This part of profit & loss account discloses the results of
manufacturing operation carried out by organization
b. Trading account: The final result disclosed by the trading account is the gross profit
earned by organization.
c. Profit & Loss Account: Discloses the profit &loss account of the business transaction
of the organization. The final result of this account is profit after tax earned by the
organization.
d. Profit and loss appropriation account. This part of profit and loss account, which is
mainly applicable to company form of organization, discloses the manner in which
the PAT earned by the organization is appropriated.

Balance Sheet:

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

Balance sheet has two sides – a. Liabilities b. Assets

Liabilities include capital, long term liabilities and current liabilities. Assets includes
fixed assets like building, land, machinery, vehicles etc., it also includes investment and
current assets like stock, sundry debtors, cash & Bank balances, prepaid suspense etc.,

Adjustments: While preparing the final accounts from the trial balance, it should be
remembered that the trail balance might not reflect all the transaction which have the
impact on profitability for the relevant period or the state of affairs of the organization on
a particular date. All these affects such transactions need to be considered and passing the
adjustment entries does the same. Adjustment entries always have two effects as per the
double entry principles.

Q12. Explain the advantages and disadvantages of standard costing as a cost control
technique. How standard costing is related to budgetary control?

Standard Costing is very important managerial tool for cost control. The chief
advantages of standard costing are summarized as follows:
a. Standards set provide yardsticks against which actual costs are compared to ascertain
efficiency or inefficiency of actual performance. Thus it helps in cost reduction.
b. Analysis of variances will assist in fixing responsibility for inefficiencies.
c. The principle of management of exception can be successfully applied by the
concerns, which follow technique of standard costing.
d. Setting standard requires detailed study of various operations so that they may be
made efficient. This method result in improvements of methods of production of
sales, with resultant lower costs for example, setting of standards or labor may require
the use of time and motion study with consequent improvement in the performance of
the labor.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

e. Standard costing provides a valuable guidance to the management in the formulation

of price and production policies. It helps management in preparing price lists,
planning production of new products and furnishing costs estimates at higher levels.
f. Standard costs, being pre determined cost are useful in planning and budgeting.
g. Standard costing makes all the executives cost conscious which increase efficiency
and productivity all around.
h. Standard costing makes the work of valuation of inventory easier because the
inventory is valued at predetermined costs.

Disadvantages of Standard Costing:

a. The technique of standard costing may not be applicable in case of small concerns
because establishment of standards requires high degree of skills. Thus fixation of
standards may prove costly which a small organization may not afford.
b. For fixing responsibilities, variance should be segregated into controllable and
uncontrollable variances because executives can be made responsible for controllable
variances, which arise from their action. But the division of variance into controllable
and uncontrollable variances is a difficult task.
c. The techniques of standard costing may not be very effective in the industries, which
deal with non-standardized products and the jobs, which change according to
customers requirements. In such cases standards are to be frequently revised so as to
render them comparable with actual results.
d. It is veery difficult to establish standard of cost of material, labor and overhead. So
sometimes inaccurate and out of date standards are set which do more harm than any
benefit as they provide wrong yardsticks. If the standard set is very high, its
achievement results in frustration and built up of resistance from the employees. On
the other hand if the standards set is very low it will be easily achieved without
putting any extra effort.
e. Lack of interest in standard costing on the part of the management makes the system
ineffective and can’t be used as a proper means of cost control.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

f. In the course of time, even in a short period the standards become rigid. It may not be
possible to maintain the standard to keep pace with the change in manufacturing
conditions. Revision of standards is costly.

Standard Costing & Budgetary Control Compared:

The management for the purpose of controlling the costs uses both the tools. Both
the techniques involve the process of setting the targets or standards, measurements of
actual performance, comparison of actual performance with targets or standard set
computation and analysis of variation and the attempts to maintain favorable and remove
unfavorable variation. The technique of budgetary control can be used effectively if the
system of standard costing is prevailing. Thus both the techniques complement each other
but are not necessary dependent upon each other.
a. System of budgetary control may be operated even if no standard costing system is in
use in the concern.
b. Budgets are the ceilings or limits on expenses above, which actual expenditure should
not normally exceed and if it does, the planned profits will be reduced. Standard costs
are minimum targets to be attained by the actual performance.
c. Budgets may be prepared in the various areas of activities like sales, productions, and
purchases. Capital investment etc. Standard costing relates to function of production
and manufacturing costs.
d. A more searching analysis is required in case of budgetary control variances.
Variances in case of budgets may point out efficiency or inefficiency. But variances in
case of standard costing provide material for further probe and investigation.
e. The scope of standard costing is much wide that that of budgetary control. Adherence
to budgeted performance may indicate that the business is out of difficulties.
f. Budgets are based upon the future or estimate costs which may be used for
forecasting the requirements of various factors of production like material, labor,
finance etc. standard cost are planned or ideal costs under the ideal situations as to
operating efficiency, capacity level attainment and so on. Standard costs may not be
necessarily useful for forecasting purposes.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

Q10. Explain the terms Marginal cost and Marginal costing. State the various
application areas of Marginal costing for the managerial decision making.

Marginal Cost is the amount at any given volume of output by which aggregate
cost are changed if the volume of output is increased or decreased by one unit. It relates
to the change in output in the particular circumstances.
Marginal Costing is the ascertainment of marginal costs and of effect on profit of changes
in volumes or type of output by differentiating between fixed costs and variable costs. In
this technique of costing only variable costs are charged to operations, processes or
products, leaving all indirect costs to be written off against profits in the period in which
they arise.
Marginal Costing are classified as fixed costs and variable costs. Semi-variable costs are
also classified in their individual components of fixed costs and variable costs. Fixed
costs are written off during the period of incurrence and hence do not find the place in
product cost determination or inventory valuation. Profitability of the products or
departments is decided in terms of marginal contribution.
Marginal Costing and cost volume profit relationship helps in maximizing the profits. It
helps in studying the relationship existing among these factors and its impact on the
amount of profits.

Practical Application of Marginal Costing:

a. Evaluation of Performance: The performance of various segments of a business say a
department or a product or a branch can be evaluated with the help of marginal
costing and the evaluation of the performance will be based upon the contribution
generating capacity of these segments.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

b. Marginal Costing through the calculations of p/v ration enables the management to
plan the activities in such a way that the profits can be maximized or to maintain a
specific level of profits. As such, this technique helps the planning of profits.
c. Fixation of selling price: The technique of marginal costing may be applied in the
area of price fixation in such a way that price should cover atleast the variable cost.
As in the short run, the fixed cost is a stagnant cost, it can be ignored, though it can
not be ignored in the long run because of the simple fact, that it is a cost. In the short
run, the prices fixed above the variable cost. In the short run, the prices fixed above
the variable cost may generate some positive contribution, which may help in the
recovery of fixed cost. However, if the fixed cost is ignored in the long run, it may
put the business into serious troubles, as the business will never be able to earn the
profits.
d. Make or buy decision: If the management is facing problem to decide whether a
component or a product should be manufactured in house which can be purchased
from an outside source as well, the technique of marginal costing may render useful
assistance.
e. Optimizing product Mix: Product mix refers to the proportion in which various
products of a company can be sold. If a concern is dealing in a number of products, a
problem, which usually arises, is to decide a mix or proportion in which the sales of
the various products should be made so that the profits can be maximized. Studying
the contribution generated by the various products individually can solve such a
problem and by selecting that mix which generates the maximum total contribution.
f. Cost Control: Marginal Costing is necessarily a technique of cost classification and
cost presentation. The segregation of total costs as fixed costs and variable costs are
the controllable costs at the lower level of management where as fixed costs can be
controlled only on the top level of management and that too to a limited extent only.
Classification of costs as fixed costs and variable cost enable the management to
concentrate on the controllable costs. At the same time, the fixed costs are not
completely ignored. The only thing is that they are collected and reported separately

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

as an amount deducted from total contribution. As such, the fixed costs can also be
controlled as they can be programmed and estimated in advance.
g. Flexible Budget preparation: Marginal Costing technique and more particularly the
classification of costs as fixed and variable, facilitates the preparation of flexible
budgets which is discussed in details through budgetary control.

Q13. What do you mean by uniform costing? Explain the variance areas covered by
uniform costing. Explain the prerequisites for the success of uniform costing as a
cost control technique.

Uniform Costing means usage of it costing principles and methods by several

undertakings. It tries to apply usual accounting methods like process costing, job costing,
and standard costing budgetary costing and marginal costing. The main feature of
uniform costing is that, whenever a particular method of costing is applied it is applied
uniformly in a number of concerns in the same industry or in different industries but
similar in nature. The main advantage of this technique is that a comparison of
performance can be established in various undertakings.
Uniform costing can be applied in the below concerns where
• A organization having number of branches.
• Organizations in the same industry are bound together through a trade association.
• Industries are similar such as gas, electricity, cotton, jute and woolen textiles.

Various areas covered by uniform costing:

• Methods of cost accounting to be implemented Viz. job costing, process costing, unit
costing and so on.
• Costing techniques employed ie. Marginal costing standard costing etc.
• Methods followed for valuation of inventories.
• Methods of remunerating the workers.

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 Subject: Management Accounting Reg. Number: 200313028

Name: P. Shankar Course: PGDBA (Finance)

• Methods for appointment and absorption of overheads and treatment given to under
or over absorption of overheads.
• Treatment given to certain specific types of costs like bonus, idle time wages and
soon
• Methods of pricing the issues from stores viz. FIFO, LIFO, weighted average and
soon.
• Methods followed for inventory control.
• Methods followed for charging depreciation Viz. Written down value, straight-line
etc.
• Treatment given to material scrap wastes spoilage and defectives.
• Treatment given to research and developments cost.
• Definition of the term capacity for setting overhead absorption rates.
• Procedure for classification and codification of accounts
• Items to be excluded from cost accounts

Requisites to be excluded from cost accounts:

The entire success of uniform costing will depend upon the following :
• There should be a spirit of mutual trust and policy of give and take.
• There should be free exchanged ideas and methods.
• Bigger units should be ready to share with small ones, improvements, and
achievements of efficiency and know how.
• There should not be any hiding or with holding of information
• There should not be rivalry, competition or sense of jealously among the members.

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