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  1. 1. Short Answer Questions1. Define accounting. Why is it called language of business? Accounting is defined as ―an art of recording, classifying and summarizingtransactions and events in a significant manner and in terms of money. It iscalled language of business because the financial performance and thefinancial position of any company need to be conveyed to the stakeholders ofany business concern. This can be done by systematically preparing thefinancial statements and presenting to the interested parties.2. State the significance of prudence principle?It is also termed as ‗Conservatism convention‘, according to which ―anticipateno profit but provide for all possible losses‖, such as Provisions for Bad debtsand discount on debtors, so that the profits are not inflated.Hence secret reserves are not permitted.3. Distinguish ‘grouping’ and ‘marshaling’ of assets and liability.Grouping means putting together items in Balance Sheet of similar natureunder a common heading.Marshalling refers to order in which assets and liabilities are shown in B/Seither in order of liquidity or permanency.4. What is meant by dual aspect of accounting system?Dual aspect of Accounting describes that every transaction should have twoaspects. Two aspect of transaction are Debit and Credit. Every ‗debit‘ has acorresponding credit so the total of all debits must be equal to total of allcredits.5. What is journal and imprest system of petty cash book?The advance paid in the beginning of the period and reimbursement of theamount spent for petty expenses, so that the same amount will bemaintained for meeting the petty expenses, is referred as ―imprest‖ System.In journal system, recording of transaction not only be inconvenient but alsoconsume a lot of valuable time of the cashier. At the end of month, Pettycashier submits a statement of account of expenses incurred by him and getsa fresh advance.6. Define fixed cost and variable cost?Fixed Costs are the costs that don‘t change with changes in the activity levele.g. salaries & rent.Variable costs are the costs that are sensitive to changes in level of activitye.g. raw materials direct labour..7. Why a flexible budget is considered superior to fixed budget?Flexible budget is superior to fixed budget for following reasons:a. Fixed budget does not change with level of activity but flexible is meant for any change in level of activity.b. Fixed budget is an unrealistic yardstick in case of level of output does not match with planned budgeting.c. Flexible budget is more suitable in case of new Venture because of uncertainties in demand.
  2. 2. 8. Determine margin of safety from the information given below: Total Fixed cost – Rs. 4500; Total variable cost – Rs.7500; Total sales – Rs.15000 and units sold – 5000 Sales at BEP: Fixed Expenses/P/v Ratio 7500*3 = 4500 units 5 Contribution: Sales – Variable Exp. =15000-7500 =7500 P/v Ratio = C/S = 7500/4500 = 5/3 MOS = Actual Sales – Sales at BEP 5000-4500 = 500 units. 9. Write a short note on the terms ‘cost’ and ‘costing’. Cost is the value of resources used up when carrying out the task or particular activity. It consists of material, labour and resources. Costing are the techniques or method applying for ascertaining costs. It covers many aspects like labour overhead and marginal or absorption costs. 10.State the importance of budgeting. a. Helps Enforce Planning. b. Better Coordinate Activities. c. Helps in Evaluating Performance. d. Helps in Controlling. e. Helps in Allocating Resources. f. Helps in Motivating Managers & Employees. 11.What do you understand by ‘financial statement analysis? Financial statements analysis is the process of identifying the financial strength & weakness of the firm by properly establishing relationship between items of the Balance Sheet and Profit & Loss A/C. It is to assess and interpret the result of past performance and current financial position. 12.State the importance of EPS and ROI. ROI reflects the total earnings produced by the total assets of the firm. It represents the before tax and interest expenses return on invested capital. ROI: PBDIT/Total Assets or Investments. EPS represents the return per shares issued by the company. It is directly connected to profitability. EPS: Net Profit / No. of shares. 13.List any two advantage of trend analysis. a. Understanding the changes in financial statements from year to year is easier when Percentages changes are available. b. Using previous year‘s data Percentage change can identify the future pattern of movements in given data. 14.How does cash flow statement differ from fund flow statement? a. Cash flow is concerned only with change in cash position while Fund flow is concerned with change in working capital position. b. Cash flow is more useful to the management as a tool of financial analysis in short periods as compared to Fund flow. c. Another distinction between them is techniques of their preparations.
  3. 3. 15.Explain accounting cycle.Accounting Cycle is described as follows:a. Record the transaction in journal or Special journals with voucher.b. To post the transaction from journal to Ledger for further analysis and having balances of each account.c. Prepare the trial balance with the ledger‘s balances.d. To make adjustment and closing entries.e. Prepare Final Accounts or Financial statements.16.explain accrual conceptIt states that Revenues are recognized when they simply become receivables.Accrual Concept focuses on the economic impact of transactions. It makes adistinction between the actual receipt of cash and the right to receive cash. Inthis case firm maximizes Assets.17.what are the two limitation of financial accountinga. Accounting information is sometimes based on estimates.b. Accounting information cannot be used as only test of managerial performance on basis of more profit.c. Fixed assets are recorded in the accounting records at the original cost.18.explain kaizen costingKaizen is Japanese word which means Change for Better. It refers to continualand gradual improvements made through innovation at large investments intechnology. It is the technique of cost reduction during the manufacturingprocess.19.what is the objective if financial accountinga. It enables the management to find out the overall as well as department wise efficiency of the firm.b. To know the short term and long term solvency of firm.c. It is used in inter firm comparison for further change in decision making would you calculate return on investmentROI tells about the overall profitability of the company in relation to totalinvestment in company. It is calculated as:ROI = Operating Profit or PBDIT ___________________________ Total Assets / Total Investment21.write a two limitation of historical Cost accountinga. Market value or current value of fixed asset undergoes frequent changes and financial statements will have to be changed every year.b. Recording at market value is both costly and time consuming.c. They are not affected by decision and irrelevant for decision making.22.what is trend analysisTrend Analysis is an important and useful technique of financial statementanalysis. It ascertains a relationship between of each year‘s data to the baseyear‘s data. It involves figuring out the price index level or growth rate withrespect to previous year or year that has been a standard (Base Year).
  4. 4. 23.what are indirect cost Costs that are not identifiable with the end product are called indirect costs and include the following: Lubricants, Scrap, Indirect Material, and Depreciation. Indirect costs are called often overhead expenses .24.Difference between marginal costing and absorption costing a. Marginal cost values stock at variable cost basis while in Absorption stock is valued at full cost. b. In long run decision making based on marginal cost approach nay result in contribution failing to cover fixed cost and losses being incurred but absorption does not allow that. c. Marginal costing aids profit planning whereas Absorption is useful to identify inefficient utilization of production resources. 25.what are fixed budget a. This is the budget which is designed to remain unchanged irrespective of level of activity. b. It is prepared for definite production and capacity level. c. It is not adjusted according to activity level and not effective tools of cost control. 26.What are decision packages? Each separate activity of the organization is identified and called a decision package. It comes under Zero Based Budgeting (ZBB) and identifying activity is part of Activity Based Costing (ABC).It is a document that identifies and describes a specific activity to evaluate it and decide whether to approve or disapprove. 27.What is margin of safety? Margin of safety has great importance in BEA. It is difference between actual sales to sales at breakeven point. MOS = Actual Sales – Sales at BEP MOS= Profit/P/v Ratio. 28.Define a double entry system. Double Entry accounting first introduced by Luca Fra Paccoli‖ an Italian mathematician. Every ‗debit‘ has a corresponding credit so the total of all debits must be equal to total of all credits. 29.What is business entity concept? The business concern is artificially formed as a separate legal entity, taking the form of a Proprietorship concern or a Partnership firm or a Private limited Company or a Public Limited Company. Thus the Proprietor or Partners or Promoters is/are considered distinct from his/their own business. Without such a distinction the affairs of the firm will be mixed up with the private affairs of the Proprietor or Partners or Promoters and the true picture of the firm will not be available. Hence the business concern (entity) is to be considered different from the owner/s also referred as Separate entity concept.
  5. 5. 30.Discourse accounting as a information system.An accounting system consists of personnel, procedures, devices and recordused by an organization which helps in development and structure ofaccounting information and communicating this information to decisionmakers. Design and capabilities of these systems vary greatly fromorganization to organization. In very small business, the accounting systemmay consist of little more than a cashbook and a cheque book and may be anannual interaction with the chartered accountant for filing tax return. In verylarge business.31.Explain the concept of target costing.It is defined as "a cost management tool for reducing the overall cost of aproduct over its entire life-cycle with the help of production, engineering,research and design". A target cost is the maximum amount of cost that canbe incurred on a product and with it the firm can still earn the required profitmargin from that product at a particular selling price.Target costing involves setting a target cost by subtracting a desired profitmargin from a competitive market price. To compete effectively, organizationsmust continually redesign their products (or services) in order to shortenproduct life cycles.32.What is current purchasing power of accounting method.Changes in price level should be reflected in the financial statement throughcurrent purchasing power (CPP). For measuring changes in price level andincorporating and true changes in financial statements, index numbers areused. Price Index is used to convert the values of various items in Financialstatements.33.What is meant by operating activities?Operating Activities are those which are carried from getting input to convertin output and getting revenues. This are directly related to earn profit andrelated to part of production. They generally result from the transactions andevents that enter into determination of profit.34.Mention the purpose of preparing cash flow statement. a) It is very useful in understanding the cash position of a firm. b) It helps management to understand the past behavior of the cash cycle and to control the usage of cash in future. c) The repayment of loans. d) The cash flow statement is helpful in making short-term financial decision relating to liquidity, and the way and means position of firm.35.How labor mixed variance calculated. LMV is the different in labour cost due to change in composition of the labour force. In order to calculate this variance, the total actual hours spent is compared with the revised standard hours. The revised standard hour are calculated as follows: Actual hours (total).standard ratio LMV = SR (RSH – AH)
  6. 6. 36.What is meant by expense center?An expense centre is responsibility centre in which inputs not output aremeasured in monetary terms. Expense or Cost centre a department inorganization in which manager is held responsible only for cost incurred andmaintain systematic records.37.What is objective of preparing common size financial statement.Financial statements when presented in absolute figures, it is hard tounderstand and interpret. So each item is converted into percentage of totalassets or capital.We can find how much percentage of cost is incurred in generating so muchrevenue.38.Difference between standard cost and estimated cost. Standard cost: (1). It is a regular system of account based upon estimation and time schedule. (2). It is used for effective cost control and to take proper action to maximize efficiency. Estimate cost: a) It used as statistically data which leads to lot of guess work. b) It can be used where costing is in operation.39.Mention two usage of management accounting.a. Planning & Policy formulation.b. Helps in interpretation process.c. Helps in decision making and controlling.d. Helps in reporting, motivating and organizing.40.Explain cash budget.This budget represents the amount of cash receipts and payments and abalance during given period. It is prepared for getting useful information onbasis of monthly or weekly. a. It ensures sufficient cash. b. It reveals surplus amount and the effect of fluctuations on cash position.41.Write an accounting equation. What does it signify? An accounting equation is a statement of equality between the resources and the sources which finance the resources and is expressed as follows: Sources of Funds = Uses of Funds Or Equities = Assets Owner‘s equity + Outsiders liability = Assets42.Write three principle of accounting.The Going Concern Concept: The entity will continue to operate in the future.The Cost Principle: Assets and services acquired should be recorded at theiractual cost.Measurement Concept: The monetary unit is the principle means formeasuring assets and equities.
  7. 7. 43.explain the convention of conservation .Convention of Conservatism:-―Anticipate no profits but provide for all possible losses‖Policy of ‗caution‘ & ‗playing safe‘. It is also called Prudence Principle.Accountant should record not only actual loss but also losses that likely tooccur. E.g. Provision for bad debts, redemption reserve.44.What are cost driver.Determination of Cost Drivers completes the last stage of the ABC model.Cost Drivers trace, or link, the cost of performing certain Activities to CostObjects.For example, taking orders for existing customers may be linked to specificcustomers based on the number of orders taken, if each order takesapproximately the same amount of time. If order taking time varies based onthe customer, this cost may be linked based on another driver or multipledrivers.45.How are outstanding expenses treated in final account.These are the expenses incurred within the accounting year but the paymenthas not been made. O/S or unpaid expenses should be added to theconcerned expenses A/C in P&L a/c and will be shown as a current liability inB/S.46.What is common size statement?This technique of taking the highest figure as the base figure and convertingevery other figure in that statement to a percentage of the same is known asvertical analysis. This helps us in finding out what has been the relativechange as a percentage of the base figure so that we can look at anyperformance lacunas and understands the reason for the same as alsocompare with other companies. Involves expressing comparison inpercentages of the current period and past period.47.Explain the term funds.The term funds as cash and they concerned themselves with the movementsin the cash account. Funds may be defined in different ways depending uponthe purpose of analysis .however; the following are most commonly useddefinitions: a. Funds mean cash, b. Funds mean net working capital, and c. Funds mean all financial resources.48.What is human resources accounting.Human Resource Accounting is ―the process of identifying and measuring dataabout human resources and communicating this information to interestedparties‖. HRA, thus, not only involves measurement of all the costs/investments associated with the recruitment, placement, training anddevelopment of employees, but also the quantification of the economic valueof the people in an organization.
  8. 8. 49.What is significance of P/E ratio? PRICE EARNING RATIO: PE Ratio indicates the number of times the Earning per Share is covered by its market price.P/E RATIO = Market Price per Equity Share/Earning Per Share This ratio tells us about how much the market discount they earnings. Obviously, the higher the ratio the better.50.Difference between social cost and social benefit.Social Cost: It may include the effect on social community who might have tolive in the shadow of its premises and how it engages with its customers,workplace, and impacts on environment.Social Benefits: customers. Services, users or clients can be involved in thesocial process. It can be used in strategic planning with great deal of flexibilitywithin the framework.51.Explain the term cost object.A cost object is tangible input for a product or service provided like labourand material. Cost of employing labour can be directly fixed as for employinglabour as ―per man per hour‖ or ―per man per day‖. So the labour is costobject as it is directly associate with it.52.What is opportunity cost?Opportunity costs are alternative costs or the returns from the next bestalternative use of the firms resources which the firm foregoes in order to availof the returns of the next best use of the same resources e.g.: suppose abusinessman can buy a lathe machine or a paper pressing machine with thehelp of limited capital which can earn him rs 50,000 and rs 70,000. if hechooses the latter he would have foregone the opportunity of earning rs50,000,thus ,his opportunity cost is rs 50,000.53.Difference between period cost and product cost.Product cost is the cost of purchasing or manufacturing inventory. Until thegoods are sold, product cost represent inventory and they reported as assetin B/S.Costs which are associated with time periods rather than with the purchase ormanufacture like selling and general expenses. These are charged directly toexpense account on assumption that benefit is recognized when cost isincurred.54.Difference between direct cost and indirect cost.Direct cost – expenses incurred directly in producing the goods or services.It is incurred for and may be conveniently identified with a particular costcenter or cost unit. Material, labour and direct expenses.Indirect costs - Not directly chargeable to production of goods. These costsare those costs, which are incurred for the benefit of a number of cost centersor cost unit and therefore, cannot be conveniently. Salary of manager, officeRent and selling and distribution expenses.55.What is meant by ‘margin of safety’ and ‘angle of incidence’?MARGIN OF SAFTY: It is the difference between the total sales and break-even sales. It may be expressed in monetary term or as a percentage.MOS= (Actual sales- break- even sales)
  9. 9. ANGLE OF INCIDENCE: this is an angle formed between the cost line andrevenue line where they intersect each other.. It indicate rate of profit earnedby the business.56.Write a short note on profit center.Profit Centre is that department where the manager is held responsible forboth costs (inputs) and revenues (outputs) and thus for profit. Despite thename, a profit centre can exist in nonprofits organizations.A centre, whose performance is measured in terms of both - the expense itincurs and revenue it earns, is termed as a profit centre.57.Name any four non operating items.a. Depreciation.b. Goodwill written off.c. Loss on sale of Machinery.d. Preliminary expenses written off.e. Gain on Sale of Assets.58. What is Human Resource Accounting?Human Resource Accounting is ―the process of identifying and measuring dataabout human resources and communicating this information to interestedparties‖. HRA, thus, not only involves measurement of all the costs/investments associated with the recruitment, placement, training anddevelopment of employees, but also the quantification of the economic valueof the people in an organization.59. What is Benchmarking?Benchmarking is the continual search for the most effective method ofaccomplishing a task by comparing existing methods and performance levelswith those of organization or with subunits within the same organization.These practices are referred to best practices. Benchmarking is also calledCompetitive Benchmarking.60. What is Reengineering?It is the contrast to the concept of Kaizen Costing, which involves small &incremental steps toward gradual improvement but Reengineering involves agiant leap. It is the complete redesign of a process with an emphasis onfinding creative new ways to accomplish an objective. It is starting fromscratch to redesign a business process.61. Given the following details, Determine the ‘Margin of Safety’ sales.Profit earned Rs. 24000, Selling price per unit Rs.10; Marginal costper unit Rs.7. MOS = Profit/P/v Ratio P/V Ratio = Contribution/Sales 10-7/10 = 3/10 MOS = 24000*10/3 = 80000 units.62. What is Semi variable cost?
  10. 10. It is a cost that comprises both fixed and variable elements. For example atelephone cost consists of a fixed rental charge and variable cost associatedwith calls made.63. Define Financial Audit. It is the audit of financial statements and aims to know whether financialstatements are prepared according to Accounting Principles and Conventions.Whether financial statements present a true & fair view of business results.64.From the information given below, calculate Stock Turnover Ratio.Opening stock – Rs.29000; Closing stock –Rs.31000, sales Rs.300000; Gross profit 25% on cost S.T.R. = Cost of goods sold / Average Stock. Average Stock = (Opening stock + Closing Stock)/2 G.P. is 25 % on Cost = 20 % on Sales (Remember Note) G.P. = 300000 * 20 % = 60000 Cost of Goods Sold = Sales – G.P. = 240000 S.T.R. = 240000/30000 = 8 times.65. Define Cost Audit.ICMA defines it as the verification of cost accounts and a check on theadherence to cost accounting plan. Cost Audit is verifying correctness of costaccounts, cost reports, cost data and costing methods.66. Write short notes on : a. Journal b. LedgerA journal is defined as a book containing a chronological record oftransactions. It is the book in which transactions are recorded first of allunder double entry system.Ledger is book which contains various accounts. Ledger is set of accounts. Itcontains all accounts whether Real, Nominal or personal. It is in Two forms.a. Bound Ledger b. Loose Leaf Ledger67. Define Management Audit.It is detailed & critical review of all aspects of management including all facetsof operations, internal controls, policies & plans within an organization alsoknown as Operational Audit.68.What is an Entity?An accounting entity is an organization that stands apart from otherorganizations and individuals as a separate economic unit.Owner is distinct from entitySeparate legal Entity69.What is an account? State the name of different types of account.An account is standardized format used to maintain the separate recordedand to accumulate date for each of the individual items in order to facilitatethe preparation of periodic financial statements and to provide a continuouscheck on the accuracy of the recording transaction.
  11. 11. Types of Accounts1. Personal Accounts2. Real Accounts3. Nominal Accounts70.How does an asset differ from Liabilities?Assets:It is something a company owns which has future economic value.Land, Building, equipments, Goodwill are examples of assets.Liabilities:It is something a company owes.MoneyServiceProduct71.How does an expense differ from revenues? Revenues: They are amounts received or to be received from customers for sales of products or services. Sales, Performance of services, Rent, Interest Expenses: They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. Salaries and wages, utilities, Supplies used, Advertising.72.What do you mean by Owners Equity?It is what‘s left of the assets after liabilities have been deducted.The same as net assetsThe owner‘s claim on the entity‘s assets73. Differentiate Operating Ratio & Operating Profit Ratio. Operating Ratio establishes the relationship between the cost of goods soldplus other operating expenses to net sales.Operating ratio = Cost of Goods Sold + Operating Expenses * 100 Net SalesOperating Profit Ratio express relationship between operating profits and netsales. It is computed as: Operating Profit Ratio = (Operating Profit / Net Sales) *10074.What are the sources of Funds?a. Issue of Share Capitalb. Issue of Debentures for cash or any other asset.c. Sale of long term investment.d. Receipts of dividend income, rent income, interest.75.A firm has opening and closing debtors of Rs.40,000 and Rs. 75,000 respectively and credit sales of Rs. 3,45,000. Calculate the debtor’s turnover ratio.Debtors turnover ratio = credit sales/average debtors
  12. 12. =3, 45,000 / 57,000 = 6 time per year.76.A firm has opening and closing inventory of Rs. 56,000 and Rs. 44,000 respectively. The firm has sold goods for Rs. 5, 00,000 at gross profit margin of 20% calculate the inventory turnover ratio.Inventory turnover = cost of goods sold / average inventory = 5, 00,000 – 1, 00,000 / ½ (56, 000+44, 000) = 4, 00,000 / 50,000 = 8 times per year.77.What do you mean by GAAP (Generally Accepted Accounting Principles)?Generally accepted accounting principles (GAAP) - a term that applies to thebroad concepts or guidelines and detailed practices in accounting, including allthe conventions, rules, and procedures that make up accepted accountingpractice at a given time.78.What are the steps involved in Accounting Cycle? 1. Analyze the transaction 2. Journalize the transaction 3. Post the transaction to accounts in ledger 4. Prepare the trial balance 5. Prepare financial statements79.Define type of Activities in Activity Based Costing.• Unit level: Performed each time a unit is produced• Batch level: Performed each time a batch is produced• Product level: Performed to support production of different type of product• Customer Level: Performed to support servicing customers• Facility level: Residuary head80. What is Balanced Score Card Approach. A balanced scorecard is a performance measurement and reporting systemthat strikes a balance between financial and operating measures, linksperformance to rewards, and gives explicit recognition to the diversity oforganizational goalsThis enhances the learning process because managers learn the results oftheir actions and how these actions are linked to the organizational goals
  13. 13. Long Answer Questions1. Explain three most significant accounting conventions. The Matching Convention:When an event affects the revenues and expenses, the affect on each should berecognized in the same accounting period.The sale of the products has two aspects:1. Revenue aspect2. Expense aspect.Revenues earned because the sale is going to fetch you some money andexpenses incurred for producing that product or providing that services. Correctmeasurement of the net effect of the sale and expenses in any accounting periodcan only be made when you match the relevant expenses to its related sales.Otherwise it will allow a lot of freedom for not showing the true profitability of thebusiness.The Consistency convention:The accounting policies and methods followed by the company should be thesame every year.The consistency concept states that once an entity has decided on one method, itshould use the same method for all the same character unless it has a soundreason to change the method. This is done because frequent changes in themanner of handling same type of events, would make it very difficult for theexternal users to compare financial statements over different periods. The termconsistency as used here refers to consistency over a period of time and not thelogical consistency.The Materiality Convention:Insignificant events would not be recorded if the benefit of recording them doesnot justify the cost.In law, there is something called ‗de minims non curat lex‘ , which means thatthe court will not consider trivial matters. Similarly the accounting does notattempt to record events so insignificant that the work of recording them is notjustified by the usefulness of the results.But there are no definite rules that separate material information from immaterialinformation. So the materiality concept may be taken to mean that althoughinsignificant events may be disregarded but there must be full disclosure of allimportant information.2. What is target costing? Discuss its methodology.Target costing is a pricing tool used by the firms. It is designed as a ―costmanagement tool for reducing the overall cost of a product over its entire lifewith the help of production, engineering, research and design. ―A Target cost isthe maximum amount of cost that can be incurred on a product and with it thefirm can still earn the required profit margin from that product at a particularselling price‖.Methodology:The following 10 steps are required to install a comprehensive target costingapproach with an organization.
  14. 14. 1. Re-orient culture and attitudes. The first and most challenging step is re- orient thinking toward market-driven pricing and prioritized customer needs rather than just technical requirements as a basis for product development. This is a fundamental change from the attitude in most organizations where cost is the result of the design rather than the influencer of the design and that pricing is derived from building up an estimate of the cost of manufacturing a product.2. Establish a market-driven target price. A target price needs to be established based upon market factors such as the company position in the market place (market share), business and market penetration strategy, competition and competitive price response, targeted market niche or price point, and elasticity of demand. If the company is responding to a request for proposal/quotation, the target price is based on analysis of the price to win considering customer affordability and competitive analysis.3. Determine the target cost. Once the target price is established, a worksheet (see example below) is used to calculate the target cost by subtracting the standard profit margin, non-recurring development costs, and any uncontrollable corporate allocations. The target cost is allocated down to lower level assemblies of subsystems in a manner consistent with the structure of teams or individual designer responsibilities.Target Cost calculation work sheet Manufacturers suggested retail price - 495- Standard dealer margin (30%) - (148.50)- shipping & distribution costs - (15)- profit margin (20%) - (66.30)- allocated non-recurring development cost - (35)= Business unit target cost - 230.20- overhead (45%) - (103.59)= Direct target Cost (labour & material) - 126.614. Balance target cost with requirements. Before the target cost is finalized, it must be considered in conjunction with product requirements. The greatest opportunity to control a products costs is through proper setting of requirements or specifications. This requires a careful understanding of the voice of the customer, use of conjoint analysis to understand the value that customers place on particular product capabilities, and use of techniques such as quality function deployment to help make these tradeoffs among various product requirements including target cost.5. Establish a target costing process and a team-based organization. A well-defined process is required that integrates activities and tasks to support target costing. This process needs to be based on early and proactive consideration of target costs and incorporate tools and methodologies
  15. 15. described subsequently. Further, a team-based organization is required that integrates essential disciplines such as marketing, engineering, manufacturing, purchasing, and finance. Responsibilities to support target costing need to be clearly defined. 6. Brainstorm and analyze alternatives. The second most significant opportunity to achieve cost reduction is through consideration of multiple concept and design alternatives for both the product and its manufacturing and support processes at each stage of the development cycle. These opportunities can be achieved when there is out-of-the-box or creative consideration of alternatives coupled with structured analysis and decision- making methods. 7. Establish product cost models to support decision-making. Product cost models and cost tables provide the tools to evaluate the implications of concept and design alternatives. A target cost worksheet can be used to capture the various elements of product cost, compare alternatives, as well as track changing estimates against target cost over the development cycle. 8. Use tools to reduce costs. Use of tools and methodologies related to design for manufacturability and assembly, design for inspection and test, modularity and part standardization, and value analysis or function analysis. These methodologies will consist of guidelines, databases, training, procedures, and supporting analytic tools. 9. Reduce indirect cost application. Since a significant portion of a products costs (typically 30-50%) are indirect, these costs must also be addressed. The enterprise must examine these costs, re-engineer indirect business processes, and minimize non-value-added costs. But in addition to these steps, development personnel generally lack an understanding of the relationship of these costs to the product and process design decisions that they make. Use of activity-based costing and an understanding of the organizations cost drivers can provide a basis for understanding how design decisions impact indirect costs and, as a result, allow their avoidance. 10. Measure results and maintain management focus. Current estimated costs need to be tracked against target cost throughout development and the rate of closure monitored. Management needs to focus attention of target cost achievement during design reviews and phase-gate reviews to communicate the importance of target costing to the organization.3. What ratios would you calculate to assess the liquidity position andsolvency position of a firm?Working capital: Current assets-Current liabilities.Current ratio: current assets/current liabilitiesAcid Test ratio or Quick ratio: Quick assets/Current liabilities =Current assets-Inventory-PrepaidExpenses/Current LiabilitiesCash Ratio: Cash+ Marketable securities+ Net receivable and debtors/ CurrentLiabilities.
  16. 16. Receivable Turnover or Debtors Turnover ratio:Net credit sales [total sales-cash sales-sales return]/ Average Debtors or averageaccounts receivable (times)Debt Collection Period: 12months/Debtor TurnoverInventory Turnover Ratio:Cost of Goods Sold/Average Inventory (times)Cost of Goods Sold= Sales- Gross profit orCost of Goods Sold=Opening Stock+ Purchase+ Direct expenses-Closing stock.4. What is the objective of preparing Fund Flow Statement? In what way itis different from a Balance Sheet?Objectives: Fund Flow Statement is an essential tool in Financial Managementdecision making. The basic purpose of this statement is to indicate where fundscome from and where it was used during a certain period. Following are the basicobjectives of preparing this statement:1. It determines the financial consequences of business orientation.2. It acts as a central device when comparing with budgeted figures.3. It points out the weak financial position of the company.4. It points out the causes for changes in working capital.5. it enables the banker, financial institution or creditor in on seeing the degree ofrisk.6. The management can rearrange the finance more effectively on the basis of thisstatement.7. Various uses of fund can be known after comparing them with the uses ofprevious years. Improvement or downfall in the firm can be assessed.Distinction between Fund Flow Statement and Balance Sheet: FUND FLOW STATEMENT BALANCE SHEET1. It is dynamic in nature. 1. It is static in nature. It is prepared at the end of the accounting period and portrays the financial position of the firm on a particular date.2. It incorporates items causing changes 2. It includes the balance of real andin working capital. personal account and shows the total resource.3. It is a management tool for financial 3. It reveals the financial position of aanalysis and helps in decision making. firm and one can examine the soundness of the firm.4. The preparation of this statement is a 4. I t is the end product of all accountingpost Balance Sheet exercise. operation for a particular period of time.5. What problems do adoption of Price Level Accounting or InflationAccounting serves?One of the key factor in selling product under competitive market condition isproduct pricing. The significance of pricing goes much beyond the simple question of
  17. 17. determining product profitability. Adoption of price level accounting serves somemajor problems. They are:1. The system is not acceptable to Income tax authorities.2. Too much calculation makes complications.3. Changes in prices are never ending process.4. The amount of depreciation will be lower in time of deflation.5. The profit calculated on the system of price level accounting may not be a realisticprofit.6. What is the scope of Cost Accounting? Discuss briefly different types ofcost.Scope of Cost Accounting:1. It enables the management to ascertain the cost of product, jobs, service or unitsof production so as to develop cost standards.2. Cost data are useful in the determination of selling price or quotation.3. The object is to minimize the cost of manufacturing. Comparison of actual costwith standard reveals the interdependencies variance.4. The central theme is to provide information, largely in the areas of cost, which willbe useful in controlling the operation of a business in a broad sense.Different Types of Cost:Fixed cost - cost which does not vary and remains constant within a given period oftime and range of activity in spite of fluctuations in rent, supervisorsalary, interest on loan.Variable cost – varies directly in proportion to every increase or decrease in thevolume or output of production. eg. raw material, direct labour.Semi-Variable costs – contains a fixed and variable element eg. utilities.Step costs – remain constant over a range of activity. eg. production supervisor ifsecond shift is added.Product cost – cost which become part of the cost of the product rather than anexpense of the period. eg. Cost of raw materialsPeriod costs – costs which are not associated with production eg. Salesmensalaries, commission etc.Direct cost – expenses incurred directly in producing the goods or servicesIndirect costs - Not directly chargeable to production of goodsCommitted costs – unavoidable fixed costs like depreciation, rent, salaries etc.,Discretionary costs – costs set at a fixed amount for a specific time period eg.,advertisement budget, research 7 development expenditure etc.Relevant costs – costs which could be changed by managerial decisions ( closingdown of non-profitable retail shop)Irrelevant costs- costs not affected by the managerial decisions (prepaid rent forthe shop, unrecovered costs which will be scrapped)Shut down costs – certain fixed costs continue to be paid at times of less or noproductionSunk costs –historical or past costs already incurred for future indefinite period oftime (investment on fixed assets)Imputed costs (or hypothetical costs) – are ‗notional‘ costs which do not involvein any cash outlay (rent of own property, salary to proprietor/ partner, interest oncapital)Differential cost- difference in total costs between two alternativesIncremental costs – choice of an alternative results in increase in total costs, suchincrease is incremental cost
  18. 18. Decremental costs- such decrease in costsOpportunity costs – cost sacrificed by selecting the alternate choiceProduction, selling & distribution costs7. Define Budget and Budgetary control. Discuss the advantages ofbudgetary control in an organisation.Budget:―Budget is an estimate of future needs arranged according to an orderly basis,covering some or all of the activities of an enterprise for definite period of time infuture to attain the objective.‖-George R. Terry.Budgetary control:―Budgetary control means the establishment of budgets relating to theresponsibilities of the executives of the requirements of the policy and continuouscomparison of actual with budgeted results either to secure by individual action theobjective of that policy or to provide basis for its revision‖Advantages:The advantages or benefits of budgetary control are as follows:1. Budgets fix the goals and targets without which operations lack directions.2. Reduction in cost and elimination of efficiency is achieved automatically.3. The budgets facilitate to maintain order efforts and brings about efficiency inresults.4. An effective system of budgetary control results in coordinate effort of all personsinvolved.5. It enables the management to decentralize responsibility without losing control ofthe business since it pin-point efficiency.6. Budgetary control and standard costing goes hand by hand. It promotes mutualcooperation and team sprits among the persons involved.7. It ensures that the capital employed at a particular level is kept at a minimumlevel.8. It facilitates an intelligent and planned forecast for future.9. It is a good guide to management for making future plans.10.It aims to maximization of profit through cost control and proper utilization ofrecourses.11. It brings to light the inefficiency and weaknesses on comparing actualperformance with budget. Thus management can take remedial measures.12. It is a guide to management in the field of research and development in future.13. It evaluates the performance.14. Since budget provides advance information, financial crisis can be avoided.15. It acts as a safety signal for the management. It prevents wastages of all types.8. Explain the role of an accountant.The role of an accountant is as follows:1. To establish, coordinate, administer as an integral part of management, anadequate plan for the control of operation.2. To compare performance with operating plan and standards and to report andinterpret the results of operation to all level of management.3. To consult with all segment of management responsible for policy or actionconcerning any phase of the operation of the business as it relates to the attainmentof objectives.4. To administer tax policies and procedures.5. To supervise and coordinate preparation of reports of government agencies.
  19. 19. 6. To assure fiscal protection for the assets of the business through adequateinternal control and proper insurance coverage.7. To continuously appraise economic and social forces and government influencesand interpretation their effect upon business.8. Providing help in the design of an information system.9. Helps in budget preparation.10.Coordinating budget making and report preparation activities.11.Preparing the performance report, control report, special managerial report anddivision making.12 Interpretating accounting data based on the particular requirements of themanagers in a gives situations.9. What is meant by Fund Flow Statement? How it is prepared?Fund Flow Statement is a financial statement which reveals the methods by whichthe business has been financed and how it has use its funds between opening andclosing balance sheet dates. Thus a fund flow statement is a report on movementfunds explaining where from works capital originated and where into the same goesduring an accounting period.Preparation of Fund Flow Statement:The fund flow statement requires preparation of two statements:1. Statement changes in working capital2. Funds from Operation3. Fund Flow StatementSchedule of changes in working capital:Many business enterprises prefer to prepare schedule of changes in working capital,while preparing a funds flow statement, on a working capital basis. This schedule inchanges in working capital provides information concerning the changes in eachindividual current assets and current liabilities accounts. This schedule is a part offund flow statement and increase in working capital indicated by schedule changes inworking capital will be equal to the amount of changes in working capital as found byfund flow statement. The format of schedule of changes in Working capital is asfollows: Schedule of changes in Working CapitalItems As on current As on Increase Decrease year previous year
  20. 20. A. Current Assets: Cash Ba n k debtors Stock Prepaid expensesTotal CAB. Current liabilities: Bank overdraft Creditors Outstanding exp.Total CLNet increase/Decrease in WC Funds from OperationBy preparing adjusted profit and loss accuontDr.Cr. Particulars Particulars Rs Rs.To goodwill written off By balance b/dTo transfer to General By gain on sale of assetsreserve By Funds From operationsTo depreciationTo provision for taxTo proposed dividendsTo loss on sale of assetsTo Preliminary exp.To balance c/d Fund Flow Statement
  21. 21. Sources of fund Rs Application of funds RsFunds From Operations Funds Lost in operationsSale of Fixed Assets Payments of DividendIssue of Shares (Equity & Preference) Payment of TaxIssue of Debentures Purchase of Fixed AssetsLong-Term borrowings Payment of long-term loansDecrease in Working Capital Redemption of debentures Redemption of Increase in Working capital 11.Define Budgeting. State the objectives of budgeting.Budgeting:Budgeting is defined as ―The entire process of preparing the budget is known asbudgeting‖ –Batty.Objectives:1. To obtain more economic use of capital2. To prevent waste and reduce expenses.3. To facilitate various departments to operate efficiently and economically.4. To plan and control the income and expenditure of the firm5. To create a good business practice by planning future.6. To fix responsibilities on different departments or heads. 7. To coordinate thevarious activities of various departments.8. To ensure the availability of working capital.9. To smooth out seasonal variations buy developing new products.10.To ensure matching of sales with productions.11. What is meant by CVP (Cost Volume Profit) analysis? What are theassumptions used in it? Limitations of Cost Volume Profit analysis.Cost profit volume analysis is a systematic method of examining the relationshipsbetween selling price, total sales revenue, volume of production expenses andprofits. This analysis simplifies the real world conditions that a business enterpriselikely to face.Assumptions used in CVP analysis:1. CVP analysis focuses on prices, revenues, volume, cost, profits and sales mix andon the interrelationship between them during the short run.2. In CVP analysis, all expenses classified into fixed and variable. Semi-variableexpenses have to be divided into their fixed and variable elements.
  22. 22. 3. CVP analysis may be used in setting selling prices, selecting the product mix tosell, choosing among alternatives marketing strategies and analysis the effects ofcost increase or decrease on the profitability of the business enterprise.Limitations:There are certain limitations faced by CVP analysis. These are:1. The function of profit projection is virtually important to financial analyst, but it isnot without it shortcomings. Clear assignment of costs to either a fixed or variablecategory is not always possible. The interpretations of several analysts probablydiffer.2. Direct labour is usually classified as a variable cost. Any change in productionvolume will have a direct effect on labour in the same direction. If managementdecides on a temporary shutdown of operations, the effect on the variability oflabour cost may not correspond directly. If for example the company wishes to retainit highly experienced and skilled personnel during the shutdown period so as not tolose them, the fluctuating nature of direct labour changed.3. Another major weakness of cost volume profit analysis as a planning or controllingdevice occurs in a manufacturing business. The assumption by the analyst the salesand production volumes will always be the same may be valid in theory but not infact.4. Analysis covering an extended period o time required a common denominator forall component periods so that data examined will be equivalent. Where costs andprices have changed drastically, adjustments based on current costs and pricesproduce a more uniform result.12. What is meant by Balance Sheet? Gives it specimen.Balance Sheet:A Balance Sheet, also commonly referred as statement of financial position, is astatement of assets and liabilities of business enterprises at a particular date. TheBalance Sheet summarizes and reveals the financial position of an enterprise on aparticular date, by showing what It own and what it owes. Because the balance sheetis a snapshot of an instant in time, it is a status report rather than flow report.Specimen of Balance Sheet: Balance Sheet As at…………………. Liabilities Amt(Rs) Assets Amt(Rs)
  23. 23. Current liabilities Current Assets Bank overdraft ------ Cash in hand ------- Outstanding expenses ------ Cash at bank ------- Bills payable ------ Prepaid expenses ------- Sundry creditors ------ Sundry debtors ------- Income received in ------ Accrued income ------- advance Bills receivable ------- Fixed non-current ------- Stock(closing) ------- liabilities ------- Non-current Loan ------- Assets[Fixed Capital ------- Assets] ------- Opening balance Investments ------- Add: Net profit ------- Furniture, Fittings, (Less loss) Loose tools ------- Less: Drawings Plant and Machinery ------- Building ------- Land ------- Goodwill13. Explain the various steps involved in Activity Based Budgeting.Various steps involved in Activity Based Costing are:1. Identify resources: Resources represents the expenditures of an organisation.Eg. Include production labour, sales and marketing labour, occupancy and utilities,equipments and supplies. Activity Based Costing links these cost to products,customers or services.2. Identify activities: Activities represents the work performed in an organisation.ABC activities for sales department in a typical organisation might include:a. Making sales call to existing customers.b. Making sales calls to potential customers.c. Making customer service calls.d. Training product representation.e. Distributing samples.f. Attending trade shows and other events.
  24. 24. g. Evaluating products and improving product knowledgeABC accounts for these costs based on what activities caused them to occur. Bydetermining the actual activities that occurs in various departments, it is thenpossible to more accurately relate these costs to customers, products and services.3. Identify cost objects: ABC provides profitability by one or more cost objects,usually represented by products, customers and/or services. Cost Object profitabilityis utilized to identify money losing customers, to validate separate divisions orbusiness units, or to measure the performance of individual projects, jobs, orcontracts. Defining the outputs to be viewed is an important step in a successful ABCimplementation.4. Determine resources drivers: Resources drivers provide the link between theexpenditure of an organisation and the activities performed within the organisation.For example, the total salary of a customer service representative would likely beallocated to the Activities performed based on the amount of time spent performingthe Activity. If 50% of her time is spent performing the activity, taking orders forexisting customers, 50% of her salary (including all costs such as benefits, taxes,and insurance) would be allocated to this Activity.5. Determine cost drivers: Determine cost drivers completes the last stage of themodel. Cost drivers trace or link, the cost of performing certain activities or costobjects.For example, taking orders for existing customers may be linked to specificcustomers based on the number of orders taken, if each order takes approximatelythe same amount of time. If order taking time varies based on the customer, thiscost may be linked based on another driver or multiple drivers.14. What is meant by Financial Analysis? Discuss its tools in brief.Financial Analysis:According to Lev, ―Financial Statement Analysis is an information processing systemdesigned to provide data for decision making models, such as the portfolio selectionmodel, bank lending decision model and corporate management models―.Tools:A financial analyst can adopt the following tools for analysis the financial statement.These are also termed as methods of financial statement-1.Comparative Financial Statements:The percentage analysis increases and decreases in corresponding items incomparative financial statement is called horizontal analysis2. Common Size Statement:It involves expressing comparison in percentages. Common size statement may beprepared in order to compare percentage of a current period with past period tocompare individuals business, or to compare one business with industry percentagespublished by trade associations.3. Trend ratios or Trend Analysis:Using the previous years data of a business enterprise, trend analysis can be done toobserve percentages changes over time in selected data. In this, percentage changesare calculated for several successive years instead of between two years.4. Statement showing changes in Working capital:Many business enterprises prefer to prepare schedule of changes in working capital,while preparing a funds flow statement, on a working capital basis. This schedule inchanges in working capital provides information concerning the changes in eachindividual current assets and current liabilities accounts. This schedule is a part offund flow statement and increase in working capital indicated by schedule changes in
  25. 25. working capital will be equal to the amount of changes in working capital as found byfund flow statement.5. Fund Flow and Cash Flow Analysis:Fund Flow Statement is a financial statement which reveals the methods by whichthe business has been financed and how it has use its funds between opening andclosing balance sheet dates. Thus a fund flow statement is a report on movementfunds explaining where from works capital originated and where into the same goesduring an accounting period.Cash Flow Statement concentrate to transactions that have a direct impact on cash.It deals with the inflow and outflow cash between balance Sheet dates.6. Ratio Analysis:Financial ratios provide the analyst with a means for making meaningful comparisonof a firm‘s financial data over tine and with other firms. Thus, financial ratiosrepresent an attempt to standardized financial information in order or facilitatemeaningful comparisons.15. What do you mean by Social Accounting? What are the key principles ofSocial Accounting? Explain the process involved in this.Social Accounting:Social accounting is a method by which a business seeks to place a value on theimpact on society of its operations. This might include the following impacts on theenvironment: waste; the effect on society of the packaging it produces; and howmuch fuel it uses in its company cars. It can also include the effect on the localcommunity who might have to live in the shadow of its premises, and how it engageswith the community, its customers and workforce.Key principles:1. Multi-perspective: encompassing the views of people and groups that are important to the organisation.2. Comprehensive: inclusive of all activities of an organisation.3. Comparative: able to be viewed in the light of other organizations and addressing the same issues within same organisation over time.4. Regular: done on an ongoing basis at regular intervals.5. Verified: checked by people external to the organisation.6. Disclosed: readily available to others inside and outside of the organisation.Process involved in Social accounting:Step 1 Planning: In the first stage of social accounting, the organisation clarifies itsmission, objectives and activities as well as its underpinning values. It also analysesits stakeholders through completing a ‗stakeholder map‘. These exercises help theorganisation to make explicit what it does, why and how it does it, and who it workswith and whom it seeks to benefit.Step 2 Accounting: In this phase, an organisation decides the ‗scope‘ or focus ofthe social accounts, especially if it will build a comprehensive picture over time. Theorganisation then sets up ways of collecting relevant information over a period oftime to report on performance and impact against its values and its objectives,
  26. 26. encompassing both quantitative and qualitative. The information is then broughttogether and analyzed.Step 3 Reporting and audit: The information that was collected, collated andanalyzed in Step 2 is brought together in a single document, which serves as a draftof the social accounts. People from outside the organisation (a Social Audit Panel)then review this document to check that the report is based on information that hasbeen properly gathered and interpreted. When the Panel is satisfied with the reportand its findings, the organisation can make its report available to the stakeholdersand wider public in full or as a shorter summary. Social Accounting and Audit isreally about examining the ‗social, environmental and economic‘ performance andimpact of an organisation. There are a variety of key terms which are included in theglossary as part of the new, revised manual.16. What do you mean by Human Resource Accounting? State its purposes.What is the usefulness of Human Resource Accounting?Human Resource Accounting:Human Resource Accounting is ―the process of identifying and measuring dataabout human resources and communicating this information to interested parties‖.HRA, thus, not only involves measurement of all the costs/ investments associatedwith the recruitment, placement, training and development of employees, but alsothe quantification of the economic value of the people in an organization.HRA Needs  Knowledge / Information /Skills  Intellectual capacity  Employees Attitudes  Experience  Employee TurnoverPurposes of this accounting:HRA serves the following purposes in an organisation:1. It furnishes cost/value information for making management decisions aboutacquiring, allocating, developing, and maintaining human resources in order to attaincost-effectiveness;2. It allows management personnel to monitor effectively the use of humanresources;3. It provides a sound and effective basis of human asset control, that is, whetherthe asset is appreciated, depleted or conserved;4. It helps in the development of management principles by classifying the financialconsequences of various practices.Usefulness:HRA is a management tool which is designed to assist senior management inunderstanding the long term cost and benefit implications of their HR decisions so
  27. 27. that better business decisions can be taken. If such accounting is not done, then themanagement runs the risk of taking decisions that may improve profits in the shortrun but may also have severe repercussions in future.HRA also provides the HR professionals and management with information formanaging the human resources efficiently and effectively. Such information isessential for performing the critical HR functions of acquiring, developing, allocating,conserving, utilizing, evaluating and rewarding in a proper way. These functions arethe key transformational processes that convert human resources from ‗raw‘ inputs(in the form of individuals, groups and the total human organization) to outputs inthe form of goods and services. HRA indicates whether these processes are addingvalue or enhancing unnecessary costs.Human capital also provides expert services such as consulting, financial planningand assurance services, which are valuable, and very much in demand. BasicallyHRA can be tracked through two methods—cost-based analysis and value-basedanalysis. The cost-based approach focuses on the cost parameters, which may relateto historical cost, replacement cost, or opportunity cost. The value-based approachsuggests that the value of human resources depends upon their capacity to generaterevenue.17. Define Responsibility accounting. Discuss the advantages of responsiblyaccounting. What is Balanced Score Card Approach.Responsibility Accounting:Eric Kohier defines Responsibility Accounting as ―a method of accounting in whichcosts are identified with persons assumed to be capable of controlling them, ratherthan with products or functions. It differs from activity accounting, in that it does notin itself require an organizational grouping by activities and sub-activities or providesa systematic criterion of system design.‖PurposeSocial responsibility includes; 1. Financial (Profits) 2. Social (people) 3. Environmental ( Planet)Advantages:1. It introduces sound system of control - a system of closer control.2. Each and every individual in the organization is assigned some responsibility andthey are accountable for their work.3. Everybody knows what is expected of him. Nobody can shift responsibility toanybody else if something goes wrong.4. It is effective tool of cost control and cost reduction applied with budgetary controland standard costing.5. It facilitates the management to set realistic plans and budgets.6. It is not only a control device but also facilitates decentralization of decision-making.7. It measures the performance of individuals in an objective manner.8. It fosters a sense of cost-consciousness among managers and their subordinates.9. It helps the management to make an effective delegation of authority andrequired responsibility as well.
  28. 28. 10. Under the system of Responsibility Accounting, detailed information is collectedabout costs and revenues, on a continuous basis and the data is helpful in planningfor future costs and revenues.11. Timely corrective action can be taken and better control over costs can beachieved.Balanced Score Card:A balanced scorecard is a performance measurement and reporting system thatstrikes a balance between financial and operating measures, links performance torewards, and gives explicit recognition to the diversity of organizational goals. Oneadvantage of the balanced scorecard approach is that line managers can see therelationship between non-financial measures, which they often can relate more easilyto their own actions, and the financial measures that relate to organizational goals.Another advantage of the balanced scorecard is its focus on performance measuresfrom each of the following four components of the successful organization.1. Financial Strength2. Customer Satisfaction3. Business Process Improvement4. Organizational LearningThis enhances the learning process because managers learn the results of theiractions and how these actions are linked to the organizational goals.18. What is the study of Variance Analysis? How it helps in cost control.Variance analysis is the process of analyzing variances by sub-dividing the totalvariance in such a way that management can assign responsibility for of standardperformance.Variance Analysis are important tools of cost control and cost reduction and theygenerate an atmosphere of cost consciousness in the organisation. In short, the usesof variances are:1. Comparison of actual with standard cost which reveals the efficiency orinefficiency of performance.2. it its a tool of cost control and cost reduction.3. It helps the management to apply the principle of management by exception.4. It helps the management to maximize the profits by analyzing the variances intocontrollable and uncontrollable; the controllable variances are further analyzed so asto bring a cost reduction, indirectly more profit.5. Future planning and programs are based costing and variance analysis need acomplete study of organisation. Thus, the factors of profits can be known and futureplan made.6. Within an organisation, a cost consciousness is created along with the team spirit.The variance analysis and fact finding further boost the profits of the organisation.19. What is meant by Inflation Accounting? Give its uses.Inflation Accounting:Inflation or price level accounting is a method of measuring the impact of changes ingeneral purchasing power of the dollar. Inflation is measured and reported in thefinancial statement. Purchasing power gains and losses on monetary item arereflected in this.Uses of Inflation Accounting:1. Since assets are shown in current value, Balance Sheet exhibits a fair view of thefinancial position of a firm.2. Depreciation is calculated on the value of assets to the business and not on theirhistorical cost- a correct method. It facilitates easy replacements.
  29. 29. 3. Profit and loss account will not overstate business income.4. Inflation accounting shows current profits based on current prices.5. Financial ratios based on figures, adjusted to current value are more meaningful.6. Profit or loss is determined by matching cost and the revenue at current valueswhich are comparable – a realistic assessment of performance.7. Inflation accounting gives correct information, based on current price to theworkers and shareholders.20. Discuss the advantages and disadvantages of Zero Based budgeting.Advantages of Zero Based Budgeting:1. It represents a move towards allocation of resources by need and benefit and thusresults in more efficient allocation of resources.2. It identifies and eliminates the wastages and obsolete operations.3. It ensures that the best possible methods of performing jobs are and that newideas emerge.4. It creates a questioning attitude rather than one which accepts that currentpractices represents the value for money.5. It increased the staff involvement which may lead to improve motivation andgreater involvement in the job.6. It increases the communication within the organisation.7. Managers become more aware of the costs of inputs which help them to identifypriorities.8. The documentation of decision packages provides management with a deep,coordinated knowledge of all organizational activities.9. It is useful especially for service departments where it can be difficult to identifyoutput.Disadvantages of Zero Based Budgeting:1. The costs involved in preparing a vast number of decision packages in a large firmare very high.2. It is very time-consuming and large amount of additional paper work are involved.3. Managers develop fear and feel threatened by ZBB and therefore may oppose newideas and change.4. The ranking of decision packages and allocation of resources is subjective to acertain degree, which can result in departmental conflict.5. Administration and communication of ZBB process may become critical problems;because more managers become involved in this process than in most budgeting andplanning procedures and these problems are further compounded in largeorganization.21. Describe the importance and uses of Break Even Analysis.Importance:A break even analysis is performed to identify the level of operation at which theentity had covered all costs but has not yet earned any profit. The break-even pointidentifies the volume of activity at which total revenues equal total cost. This is animportant point to the management because it represents a minimum acceptablelevel of operations and it indicates that profitable operations can only results whenthe level of activity exceeds the break-even point.Uses:The break-even point is helpful to management for forecasting, evaluatingmanagerial efficiency and decision making.As a forecasting tool, the break-even point can aid in determining the following:1. The requirement of the sales department that justify a proposed investment inplant expansion.
  30. 30. 2. The effect of increases and in decreases in sales volume.3. The probable cost per unit of manufactured goods at various production levels.4. The evaluation of changes in production methods.5. The planning of profit objectives.Managerial efficiency may be evaluated by comparing actual break-even results withpredetermined levels. If properly considered by management, the level of break-even point can be important tools when used in conjunction with the analysis of salesmix and the conversion of variable costs to fixed costs.22. Is accounting an information system? Differentiate between FinancialAccounting and Management accounting.An accounting system consists of personnel, procedures, devices and records usedby an organisation which helps in developing and structure of accounting informationand communication this information to decision makers. Design and capabilities ofthese systems are varying greatly from organisation to organisation. In very smallbusinesses, the accounting systems may consists of little more than a cashbook andcheque book and may be an annual interaction with the chartered accountant forfilling tax returns. In very large business, accounting system would includecomputers, expensive ERP software like SAP, highly trained employees andaccounting reports that provides the backbone for controlling the daily operation ofevery department. Still the basic purpose of the accounting system remains thesame, to meet the organizations need for accounting information as efficiently aspossible.Accounting should be viewed as an information system for simple reason that itwould help focus attention on the information provided by it. Accounting helps users
  31. 31. in taking better decision by providing relevant, timely and cost-effective informationon the financial and operational parameters.Difference between Financial and Management accounting: Financial Accounting Management Accounting Purpose To provide investors, creditors To provide managers with and other external parties with information useful for planning, useful information about the evaluating and rewarding financial performance and cash performance and sharing with Types of flow prospects of an enterprise. other outsider parties. To Reports apportion decision making Primarily financial statements- authority over firms resources. statements of financial position Many different types of or balance sheet, profit and loss reports, depending on the accounts, cash flow statements nature of the business and the and related notes and specific information needs of Standards for supplemental disclosure that management. Presentations provide investors, creditors and other users information to Reporting support external decision Rules are set within each Entity making prices. organisation to produce Generally accepted accounting information most relevant to Time period principles, including those the needs of management. covered formally established in the A component of company‘s authoritative accounting value chain such as a business literature and standards segment supplier, customers, Users of industry practice product line, department or information Usually the company is viewed product. as whole. Any period year, quarter. Month, week, days even a Usually a year, quarter or work shift. Some reports are month. Most reports focus on historical in nature; others completed periods. Emphasis is focus on estimates of results placed on the current period, expected in future periods. with prior periods often shown Management, customers, for comparison. auditors, suppliers and others Outsiders as well as managers. involved in an organization For financial statements, these value chain. outsiders include stockholders, creditors, prospective investors, regulatory authorities and the general public.23. Discuss the three most important concepts of accounting. 1. Business Entity Concept: The business concern is artificially formed as a separate legal entity, taking the formof a Proprietorship concern or a Partnership firm or a Private limited Company or aPublic Limited Company. Thus the Proprietor or Partners or Promoters is/areconsidered distinct from his/their own business. Without such a distinction the affairs
  32. 32. of the firm will be mixed up with the private affairs of the Proprietor or Partners orPromoters and the true picture of the firm will not be available. Hence the businessconcern (entity) is to be considered different from the owner/s also referred asSeparate entity concept. 2. Money measurement concept:The transactions to be recorded in the books of accounts have to be expressed inmonetary terms only for the purpose of measuring and assessing the actual incomeearned or loss incurred in a business. For example: the efficiency of a managerwhich resulted in improvement in business cannot be recorded in the books becauseit cannot be quantitatively measured. Hence only those events having money valuecan be entered in the books of accounts. 3. Going Concern concept:This assumes that the business will continue to exist forever. Any business is notstarted with an intention of closing it down in the near future. This concept affirmsthat it will be continuing its business without the intention or necessity of winding upof its business and to permanently continue its business keeping in view earningreturns on the investment made.24. In a certain period the company sold 8000 units at Rs.15 per unit andincurred a loss of Rs.5 per unit. In another period the company sold 20000units and incurred a profit of Rs. 4 per unit. What would be the Break EvenPoint in terms of Rupees and Units.Solution:Period Sales Profit and loss Contribution Fixed costI 120000 -40000II 300000 80000 P/v ratio = Change in profit / Change in sales*100 = 80000-(-40000) / 300000-120000 *100 =120000 / 180000*100 = 67% Contribution (1) = 120000*67% =80400 And (2) = 300000*67%=20100 Fixed cost:- Contribution = FC+ Profit and loss So FC = Contribution-profit FC (1) = 80400-(-40000) =120400 FC (2) = 201000-80000 =121000 BEP = FC / P/v ratio = 121000/67*100 = 180597 BEP (Unit) = 180597/15=12039 Units.25. Discuss accounting as an information system. Accounting is often referred to as the language of business. The primary aim of language to serve as a means of communication. Accounting is used to
  33. 33. communicate financial and other information to people, organization, government etc about various aspects of business and non business activities. An Accounting system consists of personnel , procedures, devices and records used by an organization which helps in development and structure of accounting information and communicating this information to decision makers. Design and capabilities of these systems vary from organizations to organizations. Input Process Output Accounting Concepts and Profit & Loss A/C Convention Balance Sheet Cash / Fund Flow Business Transaction statements and events (collection of Data)26 . The Trial balance shows the following details ; Bad debts 3000 Reserve for Bad 4500 Assets Debtors 75000 Adjustments: (i) Further Bad Debts Rs. 1000 (ii) Maintain reserve for doubtful debts @ 5% (iii) Maintain reserve for discount on debtors @ 2% Show the Profit & loss account and Balance sheet after the above adjustments made, relating to bad debts ; discount on debtors and net debtors. Solution: Trading & Profit & Loss AccountDr. Cr.Particulars Detail Amount Particulars Amount
  34. 34. To Bad Debts 3000Add: Further bad debts. 1000Provision for doubtful debts5 % on (75000-1000) = 37003700Reserve for discount on 1406debtors 91062 % on 70300 (75000- 4500 46064700)Less: Old provision Balance SheetLiabilities Amount(Rs.) Assets Details Amount (Rs) Debtors 75000 Less: Further 1000 Bad Debts New Provision 3700 of Debts. Provision of 1406 65894 Discount on Debtors.27. Define the Limitation of Financial Ratios. Limitation of financial ratios: Financial statement analysis through ratios is useful because they highlight relationship between items in the financial statements. However, they have a number of limitations which should be kept in mind while preparing or using them. (1) Ratios are based on accounting figures given in the financial statements. However, accounting figures are themselves subject to deficiencies, approximations, diversity in practice or even manipulation to some extent. (2) Ratio have inherent problem of comparability. companies otherwise similar may employ different accounting methods, which can cause problems in comparing certain key relationship. (3) Inflation may limit the utility of accounting ratios. Due to inflation, historical cost-based financial and accounting figures do not reflect current value figures, especially in the case of assets purchased at different dates by the different enterprises.
  35. 35. (4) Accounting ratios are not totally dependable and they must be used after giving due weightage to general economic conditions, industry situation, position of firms within the industry, mode of operations, size of firm, diversity of product which can make the business enterprises completely dissimilar and thus affect the computation of accounting ratios. (5) The different methods of computations also influence the utility of accounting ratio. The different concept used for determining numerator and denominator in a particular accounting ratio will not help in drawing reliable conclusions even in identical situations.28. Who are the users of accounting Information? Accounting is of primary importance to the managers. However, other persons such as creditors, prospective investors, employees, etc. are also interested in the accounting information. 1. Proprietors. A business is done with the objective of making profit. Its profitability and financial soundness are, therefore, matters of prime importance to the proprietors who have invested their money in the business. 2. Managers. In a sole proprietary business, usually the proprietor is the manager. In case of a partnership business either some or all the partners participate in the management of the business. They, therefore, act both as managers as well as owners. 3. Creditors. Creditors are the persons who have extended credit to the company. They are also interested in the financial statements because they will help them in ascertaining the enterprise will be in a position to meet its commitment towards them both regording payments and principals. 4. Prospective investors. A person who is contemplating an investment in a business will like to knopwn about its profitability and financial position. 5. Employees.The employees are interested in the financial statement on accounts of taxation, labour and corporate laws. 6.Citizen An ordinary citizen may be interested in the accounting records of the institutions with which he comes I contact in his daily life e.g. bank, temple, public utilities such as gas, transport, electricity companies. In a broader sense, he is also interested in the account of a Government Company, a public utility concern etc. as a voter and a tax payer.29. Differentiate between Book-keeping and accounting. Book-keeping Accounting 1. Is a part of accounting 1. Actual process of preparing & presenting the accounts 2. Concerned with record Keeping &
  36. 36. maintenance Of accounting records. 2. Requires higher level of knowledge 3. Routine & clerical in nature 3. Analytical in nature 4. Involves identifying, measuring 4. Recording & classifying analyzing & Involves summarizing interpreting transactions 5. Is primary stage 5. Is secondary stage 6. Is to maintain primary records 6. Is to ascertain net results of operations and financial position.30. from the following information regarding a standard product, compute(1) Price (2) usage and (3) mix variance: Standard Actual Quantity Unit Total Quantity Unit Total (kilos) Price Rs. (kilos) Price Rs. Rs. Rs.Material A 4 1.00 4.00 2 3.50 7.00Material B 2 2.00 4.00 1 2.00 2.00Material C 2 4.00 8.00 3 3.00 9.00Total 8 2.00 16.00 6 3.00 18.00Solution1. Price variance= Actual quantity * (Standard price – Actual Price)Material A =2 * (Re.1- Rs. 3.50)= Rs. 5 (Adverse)Material B =1 * (Rs.1 – Rs. 2) = Rs. –Material C = 3* (Rs. 4 – Rs.3) =Rs. 3 (Favorable) =Rs. 2 ( Adverse)2. Usage Variance= Standard price * (Standard quantity – actual quantity)Material A =Re.1 * (4-2) =Rs.2 (Favorable)Material B =Rs.2 * (2-1) =Rs.2 (Favorable)Material C =Rs.4 * (2-3) =Rs.4 (Adverse) =Nil31. Discuss ratios are the shortcut in Financial Statement Analysis Or Discuss the importance of ratios.By using the ratio we can know the following information of a firm:A. Liquidity of the firm:
  37. 37. The liquidity of a business defined as its ability to meet maturing debt obligations.That is, does or will the firm have the resources to pay the creditors when the debtcomes due?There are two ways to approach the liquidity question.1. We can look at the firm‘s assets that are relatively liquid in nature and comparethem to the amount of the debt coming due in the near term2. We can look at how quickly the firm‘s liquid assets are being converted into cash.B. Financing of assets:Two primary ratios used to answer this question are the debt ratio and times interestearned.C. Management generating adequate operating profits on the firm’s assets:We have several choices as to how we measure profits, operating profits, or netprofits. As net profit includes the unwanted effects of the firms financing policies, thisleaves operating profits as our best choice in measuring the firm‘s operatingprofitability.D. If the owners (shareholders) receiving an adequate return on theirinvestmentWe want to know if the earnings available to the firm‘s owners or common equityinvestors are attractive when compared to the returns of owners of similarcompanies in the same industry.Don‘t jump to conclusions that the ratios are the ultimate tools of financial analysisand would give you straight answers regarding the financial health of the company.They would not. Almost any ratio analyzed by itself can give you misleadingindications.Financial ratios can be divided into five basic categories. These categories consist ofliquidity ratios, efficiency ratios, and leverage ratios. Profitability ratios and marketvalue ratios.32. Discuss the advantages and limitations of Standard CostingAdvantages:Advantages of Standard costing all as under:a. Standards are the building blocks used to compile budgets.b. Actual costs can be compared with standard costs in order to measureperformance.c. The setting of standards should results in the best resources and methods beingused, which will increase efficiency.d. It highlights areas of strength and weakness.
  38. 38. e. Standard costs can be used to value stock and as a basis for setting wageincentives schemes.f. It operates through the management by exception principals, where only thosevariances, that are outside certain tolerance limits, are investigated therebyeconomizing on managerial time.g. Standard costing simplifies bookkeeping, as information is recorded at standard,instead of a number of historic figures.h. Control action is immediate, for, as soon as material is issued from store in orderto make a product it can be compared with the standard material which should havebeen for the actual productions.i. Managers are made responsible for standards.Limitations:a. heavy load of input data is required which is expensive.b. Standard costing is only applicable in organizations where processes or jobs are ofa repetitive nature.c. Unless standards are set which are accurate respect to labour efficiency, quality,and price of material, any comparison with actual will be meaningless.d. because of uncertainty , especially that related to inflation, standards needs to becontinually updated and revised.33. What is posting? State relationship between Journal and Ledger.Posting:-Posting is the process of transferring debits and credits from the journal and otherbooks of original entry to their respective account in the ledger. The aim of posting isto make a classified and summarized record of business transactions in appropriateaccounts.Rules regarding posting:1. Separate accounts should be opened in the ledger for the posting the differenttransaction recorded in the book of original entity.2. All the transaction pertaining to one account should be posted in the sameaccount.3. Two aspect of the business transaction namely- debit aspect and credit aspect-should be posted on the debit side and credit side of the account respectively.Relationship between Journal and ledger:Journal and ledger are the most important books maintained in an enterprise. Theyare closely interrelated. Business transactions are recoded first in Journal and otherbooks of original entry and then from these books they are transferred to ledger.Journal records transactions in a chronological order while the ledger records thetransactions in a classified from. Journal, being the book of original entry or morereliable as compared to ledger.A journal is not useful in answering a question such as, what is the balance of cashat a certain date. This question is answered by referring to the ledger, whichsummarizes the cumulative effect of recorded transactions in separate accountaccounts. This is accomplished by transferring or posting information from thejournal into appropriate accounts in the ledger.35. What are the objectives of Human Resource Accounting? Discuss itsutility. Human Resource Accounting is ―the process of identifying and measuring dataabout human resources and communicating this information to interested parties‖.
  39. 39. HRA, thus, not only involves measurement of all the costs/ investments associatedwith the recruitment, placement, training and development of employees, but alsothe quantification of the economic value of the people in an organization.Objectives:HRA serves the following purposes in an organization:1. It furnishes cost/value information for making management decisions aboutacquiring, allocating, developing, and maintaining human resources in order to attaincost-effectiveness;2. It allows management personnel to monitor effectively the use of humanresources;3. It provides a sound and effective basis of human asset control, that is, whetherthe asset is appreciated, depleted or conserved;4. It helps in the development of management principles by classifying the financialconsequences of various practices.Utility of Human Resource Accounting:1. It through lights on the strength and weakness of the existing workforce in anorganization. This is in turn, helps the management in recruitment planning where tohire people or not.2. It provides valuable feedback to managers regarding the effectiveness of theHuman Resource policies and practices.3. It helps potential investors judge a company better on the strength of the humanassets utilized therein. If two companies offer the same rate of return on capitalemployed, information on human resources can help investors decide whichcompany to be picked up as an investment.4. It helps management in taking appropriate decisions regarding the use of humanassets in an organization that is whether to hire new recruits or promote peopleinternally.36. A factory is currently working at 50% capacity and the product cost per unit is given below: Material - Rs. 100; Labour – Rs. 30; factory overheads (40% fixed) – Rs. 30 ; Administrative overheads (50% fixed) – Rs.20. The product is sold at Rs.240 per unit and the factory produces 10000 units at 50% capacity level. Estimate the profit and total cost if the factory works at 60% by preparing a flexible budget. At 60% working, raw material cost increases by 20% and selling price falls by 10%. Solution: Flexible Budget 50% (10000 units) 60% (12000 units)Particulars Cost per unit Total Cost Cost per unit Total CostMaterial 100 1000000 120 1440000Labour 30 300000 30 360000Factory Overhead (30 Rs.)