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  1. 1. Department : MBAName of the Subject : Management Accounting Part A Unit 1 1 What is meant by Management Accounting? Explain the functions of Management Accountant? Any system of accounting which assists management in carrying out its functionsmore efficiently may be termed as Management Accounting. The term Management Accountingrefers to accounting for the management i.e., necessary information to the Management fordischarging its functions. Management Accounting is the presentation of accounting information in such a way asto assist Management in the creation of policy and in the day-to-day operation of undertaking.The functions of management are Planning, Organizing, Directing, and Controlling.Functions of management Modification of data Planning and forecasting Financial analysis and Interpretation Communication Facilitate Managerial Control Use of Qualitative Information Decision-Making Coordinating2. Explain the nature and scope of Management Accounting? It is concerned with accounting information, which is useful to management in maximizing profits or minimizing losses. The following are main characteristics or Nature of the Management Accounting Forecasting Supply Information Increase in efficiency Techniques and Concepts Cause and Effect Analysis No Fixed Norms Assists Management Achieving of ObjectivesSCOPE OF MANAGEMENT The scope of management accounting is very wide and broad based and it includes within itsfield, a variety of aspects of business operations. The main aim is to help management in itsfunctions of Planning, Organizing, Directing, and Controlling. The following are some of theareas of specialization included within the ambit of Management Accounting. Financial Accounting Cost Accounting Budgeting and ForecastingM. Daniel Rajkumar B.Com., MBA [P.hd]
  2. 2. Statistical Methods Inventory Control Interpretation of data Reporting Internal Audit Tax Accounting Methods and procedures 3. List out the Tools of Management Accounting? Management Accounting is concerned with accounting information that is useful to management. Management Accounting, as an accounting service to management through its various functions, has to employ a number of tools, techniques and methods. No one technique can satisfy all managerial needs. With gradual development of this subject, a number of tools and techniques have been developed either replacing the old ones or in addition to them. The important techniques used in Management Accounting are follows: Financial Planning Analysis of Financial statements Historical Cost Accounting Standard Costing Budgetary Control Marginal Costing Decision Accounting Revaluation Accounting Ratio Accounting Control Accounting Internal Auditing Management Information System 4 What is meant by Financial Accounting? Explain the differences between Financial Accounting and Management Accounting? Financial Accounting is concerned with the recording of day-to-day transactions of the business. Finally the concerns find out profit or loss for a balance sheet. The main concern of management accounting is to provide necessary information quantitative as well as qualitative to the management for planning and control. Financial accounting and management accounting are closely interrelated since management accounting draws out a major part of the information form financial accounting and modifies the same of managerial use. Despite the close inter relationship that exists, there are certain points of difference between the two and they are discussed below. Objective Nature of data used Subject matter Flexibility Legal compulsion Periodicity of Reporting Precision Unit of AccountM. Daniel Rajkumar B.Com., MBA [P.hd]
  3. 3. Coverage Publication and Audit Accounting principles Methodology 5 What is a Balance Sheet? Why it is prepared? What are its Main features? Balance sheet is an information-giving tool of the organization as on date. This is prepared to find out the as on date Total Assets of the Company And Total Liability of the company. Main features: Easy to identify the financial position of the company Assets and Liabilities of the company Used to analyse the financial performance of the company 06 What is Current Assets give few examples for Current Assets and Long-Term Liabilities“The goods of the merchant yield him no revenue profit till he sells them for money and themoney yields him as little it is again exchanged for goods” Current Assets are the assets acquired through cash and easily convertible in to cashduring the normal course of business. The normal course takes a period of a year. Theaccounting period is of one year. In other words, Current Assets are those resources of the firmwhich are either held in the form of cash or are expected to be converted into cash with in theaccounting period or the operating cycle of the business.The following generally include inCurrent Assets: Cash in hand and at Bank Book debts or Debtors or Accounts receivable Bills Receivables (or Notes Receivables) Stocks- Raw materials, Work-in-progress, Finished Goods Government and other marketable securities Advance PaymentsLong-Term Liabilities Share Capital Reserves and Surplus Term Loans7. What is meant by a ‘Ratio Analysis”. Explain Short-term and Long-term liquidityratios? Ratio is only a comparison of the numerator with the denominator. The term ratio refers tothe numerical or quantitative relationship between two figures, and obtained by dividing theformer by the later. Ratios are designed to show how one number is related to another. It isworked out by dividing one number by another Ratio Analysis is an important and age old technique of financial analysis. The data givenin financial statements, in absolute form, are dump and are unable to communicate anything.Ratios are relative form of financial data and very useful technique to check upon the efficiencyof a firm. Some ratios indicate the trend or progress or downfall of the firm.M. Daniel Rajkumar B.Com., MBA [P.hd]
  4. 4. Liquidity Ratios 1. Short-term Liquidity Ratios Current Ratio Liquidity /Quick Ratio Cash position Ratio Stock Ratio Debtors Velocity Creditors Velocity 2. Long-term Liquidity Ratios Proprietary Ratio Debt-Equity Ratio Leverage Ratio Security Ratio Interest Coverage Ratio8. Explain how ratio analysis is helpful in analyzing the performance of an undertaking? The following of the Importance of Ratio Analysis Aid to Measure General Efficiency Aid to Measure Financial Solvency Aid in Forecasting and planning Facilitate decision-making Aid in corrective Action Aid in intra firm Comparison Act as Good communication Evaluation of efficiency Effective Tool9 Explain the various Tools involved in analysis and interpretation of FinancialStatements A Financial Analyst can adopt the following tools for analysis of the financial statements. These are also termed as methods of Financial Analysis Comparative Financial Statements Common size Statements Trend Ratios or Trend Analysis Statement of changes in Working Capital Fund Flow Analysis Cash Flow Analysis 6Ratio Analysis 10 What is meant by Capital budgeting? Explain the process of Capital budgeting process? Capital Budgeting is the process of making investment decisions in the capital expenditure or Fixed Assets.Capital Budgeting is long term planning for making and financing proposed capital outlaysAccording to Lynch “Capital budgeting consists in planning development of available capital forthe purpose of maximizing the long-term profitability of the concernM. Daniel Rajkumar B.Com., MBA [P.hd]
  5. 5. Process of Capital Budgeting Identification of Investment Proposals Screening Proposals Evaluation of Various Proposals Establishing Priorities Final Approval Implementing Proposals Performance Review11 What are the various methods evaluating projects? Explain all discounting methods? A Number of appraisal methods may be recommended for evaluating the capital expenditure proposals. The most important and commonly used methods are Traditional Methods: Pay - back period Method or Pay-out or Pay-off Method Improvements in Traditional Approach to Pay -back period Method Rate of Return Method or Accounting Method Time Adjusted Methods or Accounting Methods: 1. Net present Value Method 2. Internal Rate of Return 3. Profitability Index12 Explain the non-discounting methods of evaluating a project Non-discounting Factors Pay - back period Method or Pay-out or Pay-off Method Improvements in Traditional Approach to Pay -back period Method Rate of Return Method or Accounting Method 13.What is Capital Rationing? Capital Rationing is a situation where a firm has more investment proposals than it can be finance. Many concerns have limited funds. Therefore, all profitable investment proposals may not be accepted at a time. In such event the firm has to select from amongst the various competing proposals, those which give the highest benefits. There comes the problem of rationing them. Thus capital rationing may be defined as situation where the management has more profitable investment proposals requiring more amount of finance than the funds available to the firm. In such a situation, the firm has not only to select profitable investment proposals but also to rank the projects from the highest to lowest priority14.What is time Value of Money? How it is useful in Capital Budgeting Techniques? The value of money is changing every day. Today’s 1 Rupee will not be the same tomorrow. It is also called Time Adjusted Method Discounting is just opposite of compounding. In compound rate of interest, the future value of presented money is ascertained whereas in discounting, the present value of future money is calculated. The rate at which the future cash flows are reduced to their present value termed as discount rate. The methods are Net Present Value MethodM. Daniel Rajkumar B.Com., MBA [P.hd]
  6. 6. Internal Rate of Return Profitability Index NumberUnit 515. What is meant by a Budgetary Control? Explain the nature and objectives ofBudgetary Control? “Budgetary Control means the establishment of budgets relating to the responsibilities of executives to the requirements of a policy , and continuous comparison of actual with the budgeted results either to secure by individual action the objective of that policy or to provide basis for its revision.” Budgetary control embraces all this and in addition includes the science of planning the budgets themselves and the utilization of such budgets to effect an overall management for the business planning and control.” Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities , comparing actual performance with the budgeted; and acting upon results to achieve maximum profitability. Establishment : Budgets are prepared for each department and then the plans and objectives are presented before the management. Co-ordination :The budgetary control co-ordinates the plans of various departments and master budget is prepared. Continuous Comparison : The essential feature of budgetary control is to conduct continuous comparison of actual performance with budgeted figures, revealing the variations. Revision : Budget are revised , if necessary according to changed conditions. 16 What is meant by Zero Based Budgeting? Explain the process of ZBB? ZBB is a managerial tool has become increasingly popular during 1970’s in US introduced by Ex-President Jummy Carter . Afresh budgeted figure is to be determined keeping the circumstances and requirements, alternatives must be considered and the results evaluated. Process:- Ever budget starts with a zero base. No previous figure is to be taken as a base figure for adjustments Each activity is to be examined afresh. Every budget allocation to be justified in light of expected circumstances. Alternatives are to be given due consideration.17 Explain different types of budgets available for a business concern? CLASSIFICATION ACCORDING TO TIME Long term budgets Short term budgets Current budgets CLASSIFICATION ACCORDING TO FLEXIBILITYM. Daniel Rajkumar B.Com., MBA [P.hd]
  7. 7. -Fixed Budget -Flexible Budget CLASSIFICATION ACCORDING TO FUNCTION 1) Sales Budget 2) Production Budget 3) Material Budget 4) Labour Budget 5) Works Overhead Budget 6) (a)-Administration Overheads budget (b)Selling and distribution budget 7) Capital Expenditure budget 8) Cash Budget 9) Zero Base Budget. 18. Distinguish between Standard Costing and Budgetary Control? Both standard costing and budgetary control aim at the objective of maximum efficiency and managerial control. Standard costing and budgetary control have the comparing actual performance with the predetermined standards, analyzing and reporting of variances.M. Daniel Rajkumar B.Com., MBA [P.hd]
  8. 8. BUDGETARY CONTROL STANDARD COSTINGIt is extensive in application, deals with the It is intensive; applied to manufacturing ofoperation of dept or business as a whole. productBudgets are prepared for sales, production, It is determined by classifying recording andcash etc., allocating expenses to cost unitIt is a part of financial account , projection of It is a part of cost account , a projection of allall financial accounts cost accountsControl is exercised by taking into account Variances are revealed through differentbudgets and actuals. Variances not revealed accountsBudgeting can be applied in parts Cannot be applied Not expensiveMore expensive and broad in nature Relates only to element of costCan be operated with standards Cannot be operated without budgets19. What is cash Budget? What are its advantages? This budget represents the amount of cash receipts and payments, and a balance duringthe budgeted period. It is prepared after all the functional budgets and prepared by the chiefaccountant either monthly or weekly giving the following hints It ensures sufficient cash for business requirements It proposes arrangements to be made overdraft to meet any shortage of cash It reveals the surplus amount, and the effect of the seasonal fluctuations of cash position.The objective of cash budget is the proper co-ordination of total working capital, sale,investment and credit.020 Explain the elements of Cost? Explain the basis of allocation? Prime Cost Direct Material Direct Expenses Direct Wages Works Cost/Factory Cost Office and Administration Cost Selling and Distribution Cost 021. Explain the concept of Standard Costing? Prof.L.Kohler, “Standard is a desired attainable objective, a performance, a goal, a model”. Standard may be used to a predetermined rate or a predetermined amount or a predetermined cost. The I.C.M.A. terminology as, “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence” 022 Explain the concept of Variance Analysis? Variance means, “To vary” meaning to differ. In cost Accounting Variancemeans deviation of the actual cost from the standard cost. In standard costing, standard costsare predetermined and refer to the amounts which ought to be incurred. These becomes theyardsticks against which actual costs can be compared.Important factors Favorable Factors Unfavorable FactorsM. Daniel Rajkumar B.Com., MBA [P.hd]
  9. 9. Controllable Factors Uncontrollable Factors 23. What is meant by Marginal Costing? Explain The Institute of Cost Works Accounts of India defined marginal cost as “the amount at any given volume of output by which aggregate costs are changed, if the volume of output is increased or decreased by a unit. Here a unit may be a single article, a batch of articles, an order, a stage of production capacity, a process or a department. To ascertain the marginal cost, we need the following elements of cost: Direct Materials, Direct Labour Other Direct Expenses, and Total Variable Overheads. That is, Marginal cost = Prime Cost + Total Variable Overheads OR Marginal cost = Total Cost - Fixed Cost 024. What is meant by Cost-Volume-Profit analysis? Explain The Cost -Volume-Profit (CVP) analysis is of three variables, Viz., Cost,Volume, and Profit, an assumption is made to measure variations of costs and profit withvolume. Profit as a variable is the reflection of a number of internal and external conditions,which exert influence on sales revenue and costsTo know the Cost Volume Profit relationship, a study of the following is essential Marginal Cost Formula Break-Even analysis Profit Volume Ratio Profit Graph Key factor and Sales mix etc., 025. Explain the concepts direct costing and absorption costing? Directing costing: The cost is involving directly to the Manufacturing of goods. Absorption Costing All costs- fixed and variable are charged to product Profit= Sales- Cost of Goods Sold It does not reveal the cost volume profit relationship Closing inventories are valued at full cost. Absorption costing reveals more profit since the inclusion of fixed costs in inventories Costs are included in the products, this leads to over or under-absorptionUnit 726. What is meant by Funds Flow Analysis? Explain the uses of it? The meaning of “Flow” means change. Thus flow of funds means change in fundor changes in Working CapitalUse of fund flow statementM. Daniel Rajkumar B.Com., MBA [P.hd]
  10. 10. The inflows into working capital for the whole year as consequence of raising of capital, raising of loans, sale of fixed assets, sale of investments and operational inflow due to profits. Funds from operation have to be adjusted. Depreciation of fixed assets, amortization of fictitious assets, loss on sale of fixed assets, provisions and reserves are added and gain on sale of fixed assets is to be deducted. Outflows from working capital as a consequence of purchase of fixed assets, payment of dividends, payment of Taxes, payment of preference capital and long term debts, payment of debentures etc.,27. Explain the different types of report that are used for the internal management of anenterprise.According to Object or Purpose: External Reports Internal ReportsAccording to Functions: Operating Reports Financial ReportsAccording to Frequency: Regular or Routine report Special Reports According to Contents: Production Reports Sales Reports Cost Reports28. What are the uses of accounting information for managerial decision-making? Information is the basis for Decision-making in an Organization. The efficiency ofmanagement depends, to a larger extent, upon the availability of regular and relevantinformation to those who exercise the managerial function. A regular system of reporting isconsidered as a better guarantee of efficiency and operation than reliance on personal qualities.Thus it essential that an effective and efficient reporting system is developed as part ofaccounting method. Helps in finalizing Accounts Capital Budgeting Tax planningM. Daniel Rajkumar B.Com., MBA [P.hd]
  11. 11. 29. Explain the process of Reporting to Management?Top Level Management: Periodic Report about Profit and Loss account and Balance sheet Statement of Funds Flow and Cash Flow at regular Interval Report plant utilization Report of Cost of Production’ Report on research and development activities Periodic report on sales, Credit collection, selling and distribution etc.Middle Level Management: Reports on Material Price and Usage Variances Reports on Labour rate and efficiency variances Report on idle time, wastage of materials etc., Reports on stock levels, Reports on sales, Production etc., Reports on orders booked, orders executed and orders still to executedLower Level Management: Reports of Over-Time Materials Usage Variance Labour Efficiency Variance Material Spoilage Report Accident Report etc.,M. Daniel Rajkumar B.Com., MBA [P.hd]