Spring / February 2012

Master of Business Administration MBA Semester 1 MB0041 Financial and Management Accounting 4 Credits
(Book ID: B1130) Assignment Set 2 (60 Marks) Q1. Illustration 1: Compute the cash flow from operating activities Profit and Loss Account

Hint: Net cash from operating activities= 76000

Answer: Statement showing cash flows from operating activities

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Spring / February 2012

Q2. The following extract refers to a commodity for the half year ending 31st March 2008. Prepare a cost statement.
Purchase of raw materials Rent, rate, insurance and Works expenses Work in progress: opening closing Carriage inwards Cost of factory 1, 20,000 40,000 4, 800 16, 000 1, 440 8,000 Direct wages Opening stock Raw materials Finished goods (1000 units) Closing stock: raw material F. Goods (2,000 tons) Sale of finished goods 1, 00,000 20,000 16,000 22, 240 3, 00,000 .

Advertising, discounts allowed and selling costs Re.1 per ton sold. Production during the year is 16,000 tons. Prepare a cost sheet. Hint: Total cost or cost of sales= 255000 Profit= 45000 Sales= 300000 Answer:Cost Sheet for the period 31st March 2008

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Spring / February 2012 Opening stock or raw materials Add: Purchases of raw materials Add : carriage inwards Less: Closing stock of raw materials Raw materials consumed Direct Wages Prime Cost Works Expenses Cost of factory Rent, rate and insurance Add: opening WIP Less: Closing WIP Factory / Works cost Office and administration expenses Cost of production Inventory valuation Opening stock of finished goods Less : Closing stock of finished goods to be valued at cost of Production Cost of Goods Sold Selling and Distribution Expenses Advertisement and discount allowed Total Cost or cost of sales Profit Sales 20,000 1,20,000 1,440 (22,240) 1,19,20 0 1,00,00 0 2,19,20 0 8,000 40,000 4,800 (16,000) 2,56,00 0 Nil 2,56,00 0 16,000

(32,000) 2,40,00 0 15,000 2,55,00 0 45,000 3,00,00 0

Q4. Describe the essential features of budgetary control. Answer: An effective budgeting system should have essential features to get best results. In this direction, the following may be considered as essential features of an effective budgeting.

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Spring / February 2012 a) Business Policies defined: The top management of an organization strives to have an action plan for every activity and for each department. Every budget should reflect the business policies formulated from time to time. No ambiguity should enter the document. b) Forecasting: Business forecasts are the foundation of budgets. Time and again discussion should be arranged to derive the most profitable combinations of forecasts. Better results can be anticipated based on the sound forecasts. c) Formation of Budget Committee: A budget committee is a group of representatives of various important departments in a organization. The function of committee should be specified clearly. The committee plays a vital role in the preparation and execution of budget estimates. d) Accounting system: To make the budget a successful document there, should be proper flow of accurate and time information. The accounting adopted by the organization should be proper and must be fine- tuned from time to time. e) Organizational efficiency: To make the budget preparation and its subsequent implementation a success, and efficient adequate and best organization is necessary a budgeting system should always be supported by a sound organizational structure. f) Management Philosophy: Every management should set a healthy philosophy while opting for the budget. Management must whole heartedly support the activities which developing a budget. g) Reporting system: Proper feedback system should be established. Provision should be made for corrective measure whenever comparative measures are proposed. h) Availability of statistical information: Since budget are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data should be made available to each department. i) Motivation: Since budget acts as a minor, the entire organization should become smart in its approach. Every employee, executive and non- executive should be made part of the overall exercise Q5. Briefly describe labor mix variance and yield variance. Answer:Labour Mix Variance This variance arises only when different types of workers (women and men workers, trained, semi-trained and untrained workers, are employed in manufacturing. If actual working force of different grades of workers is not in the pre-determined ratio, then the mix variance will occur. The variance shows to the management as to how much of the labour cost variance is due to the changes in the composition of labour force. It is calculated as follows: LMV = (Revised standard hours actual hours worked) x standard hourly rate Shorten LMV = (RSLH ALH) x SR Where revised standard hour = total time of actual worker / total time of standard workers x standard labor rate.

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Spring / February 2012 Labour Yield Variance This is due to the difference in the standard output specified and the actual output obtained. The formula is as follows: LYV = (Actual output Standard output) x standard cost per unit Q6. How is standard costing related to budgetary control? Answer:Standard Costing Vs Budgetary Control Similarities between Standard Costing & Budgetary Control Both budgetary control and standard costing are important management tools of planning and control. They achieve same objective viz. proper allocation and utilisation of the resources. They use predetermined values and are feed forward process. They also serve as feed back systems by making possible the comparison of actual performance and desired performance. An organization would benefit most from its control system when it uses both standard costing and budgetary control. Standard costing and budgetary control are complementary. Standards are needed to establish budgets. Particularly the manufacturing budgets would be more effective if they are based on standards for materials, labour and overhead. Similarly, the budgeted level of output should be known in determining standard overhead costs. Although budgetary control and standard costing are interrelated and function better when used together, yet they are not interdependent. One can be used without the other. But the best results will be achieved if both are used together. Differences between budgetary control and standard costing: 1. Scope: Budgetary control and standard costing differ in their scope. Budgetary control is used in all aspects of business and includes estimates of revenues as well as expenditures. Thus, budgets are prepared for activities such as production, purchase, sale and distribution, capital expansion, cash flows, research and development etc. Standard costing is generally confined to manufacturing costs alone. 2. Concept: A conceptual difference between budgetary control and standard costing is that standard cost is a unit concept and budgeted cost is a total concept. It may be helpful to think of a standard as a budget for the production of a single unit. A strict distinction between standard performance and budgeted performance, however, is not made by many companies, in practice. 3. Emphasis: Budgetary control puts more stress on the level of activity and the related cost level which should be attained if the firm is to perform as planned. Standard costing, on the other hand, lays emphasis on cost reduction.

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Spring / February 2012 4. Application: Standard costing is a systematic approach to attain cost control. Direct material and direct labour are continuously controlled with the help of standard costs. Overhead costs consist of innumerable small items and therefore, it is not practical to have an elaborate control system for each one of them. Overhead costs can be controlled periodically with the use of budgetary control. Thus, departmental overhead budgets are constructed to control overhead costs.

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