Managerial Accounting -- Page 1

ASSIGNMENT

Q.3. Write an essay on ‘Depreciation’.

Answer:
Depreciation can be defined as the loss in the value of an asset due to wear and
tear and obsolescence. Every Fixed asset is liable to lose its value, once it is used for
production purposes.

According to Chartered Institute of Management Accountant (CIMA), London,

“Depreciation is the diminution in intrinsic value of the asset due to use and / or lapse of
time.”

Normally, all fixed assets, except for land depreciate, in value over a specific period of
time. The reason is that unlike other fixed assets like machinery, furniture it does not
have a finite economic value.
The entry for depreciation in the books of accounts is:

Depreciation A/c
To Fixed Asset A/c

Following are the main causes of depreciation: -

(i) Wear & Tear - All fixed assets depreciate in value because of their constant use.
This is in the form of normal wear and tear. This is applicable to all tangible
assets like machinery, furniture etc.
(ii) Efflux of Time – Some assets have a definite life period like a lease; on the
expiry of the period the asset will cease to exist.
(iii) Obsolescence – This refers to the loss in the value of an asset due to the asset
becoming obsolete. In other words the asset becomes out dated with the advent
of new technology / invention / improvement in existing technique of production.
(iv) Accidents – Accidental loss may be permanent but is not continuing and gradual.
(v) Fall in Market Prices – A change in the market conditions results in change of the
market prices of the asset but does not affect the book value of the fixed asset.

Objectives of charging Depreciation: -

(i) To ascertain the profit or loss properly – The first objective is to ascertain profit
or loss properly. If depreciation is ignored, the loss that is occurring in respect
of fixed asset is also ignored. Depreciation should, therefore, be debited to the
Profit and Loss A/c before profit is ascertained.
(ii) To show the asset at its Proper value – To continue to show the fixed assets at
cost, when their value has fallen because of wear and tear will be improper, as it
will represent a financial position that is better than the actual. If depreciation is
not allowed, the Balance Sheet would fail to show the true financial position of
the business.
(iii) To retain funds out of profits for replacement – The amounts debited in the Profit
and Loss A/c as depreciation are retained in the business (as no payment is made
like other expenses). These are available for replacement of the asset when its life
is over.
 Managerial Accounting -- Page 2

Methods of depreciation

1. Straight Line Method -

Depreciation = Cost of Asset – estimated scrap value

Estimated life of asset in years
According to this method, the asset is depreciated by an equal amount throughout
the life of the asset. Here, depreciation is calculated by subtracting the estimated
scrap value from the cost of the asset and dividing the amount obtained by the
estimated life of the asset (in years). The amount of depreciation thus obtained
remains constant throughout the life of asset and is deducted from the value of
the asset every year. The value of the asset reduces to zero at the end of the
estimated life span of the asset. The major advantage of using this method is that
it is very easy to calculate and record in the books of accounts. The disadvantage
of this method is that the book value of the asset becomes zero but still the assets
are used in business.

2. Written-down Value (Reducing Balance) Method: -

According to this method, depreciation is charged on the balance of the cost of

the asset after deducting the depreciation previously charged. A higher amount of
depreciation in the initial years and gradual decrease therein is counter balanced
by lower amount of repairs and maintenance costs in initial years and increase
therein. If this method is used the value of the asset will never become zero.
 Managerial Accounting -- Page 3

Q12. Explain the advantages and disadvantages of Standard Costing as a cost control
technique. How Standard Costing is related to Budgetary Control?

Answer:

Standard Costing

The determination of actual cost or historical cost incurred in a particular job,

process or service in the course of business is vital for the success of the business.
However, this actual cost can be ascertained only after the completion of the process, job
or service. This hampers the application of cost controlling techniques. It also restricts
various management decisions on matters like price fixation or submission of quotations.
Moreover the determination of actual cost involves maintaining various records and
documents thereby making the process expensive. To overcome these, a Standard Cost is
calculated. Standard cost is a predetermined cost, which is calculated from the
management’s standards of efficient operation and the relevant necessary expenditure.
In relation to this, Standard Costing can be defined as the preparation and use of
standard costs, their comparison with actual costs and the management and analysis of
variances to their causes and points of incidence.

Advantages of Standard Costing

1. Standard Costing facilitates the process of price fixation, filing of tenders and
offer quotations.
2. Standard Costs can also be used as a measure of efficiency in performance,
thereby assisting cost control function.
3. Standard Costing facilitates implementation of budgetary control techniques.
4. Standard Costing helps in fixation of responsibility for each individual or
department. It also helps to direct the delegation of authority.
5. Standard costs acts as a motivation factor to work with greater effort to achieve
the desired standards.
6. Standard costing assists the management to focus on only those areas where there
is a deviation from the set standards.

Disadvantages of Standard Costing: -

1. The standards set may become inflexible to the changes in the manufacturing
conditions.
2. The desired level of performance even after setting up of standards is not
guaranteed.
3. If the set standards are not achieved, frustration sets in thereby hampering
performance.
4. It is difficult to distinguish between controllable and uncontrollable variances due
to the play of random factors.
5. Lack of interest in standard costing on the part of management makes the system
ineffective hampering the objective of cost control.
6. It is not suitable for small enterprises because production is not properly
scheduled.
7. It is not suitable for industries where the production of products goes beyond a
single accounting year.
 Managerial Accounting -- Page 4

Standard Costing and Budgetary Control

• Both are cost controlling tools

• Both involve setting standards, measuring actual performance and comparison of
actual performance with predetermined standards.
• Both involve maintaining favorable variations and remove unfavorable
variations.
• Budgetary control and standard costing are independent techniques but they
complement each other.
• Budgets covers areas like sales, production, purchase etc. whereas standard
costing is restricted to production and manufacturing costs.
• Budgets are limits on expenses above which actual expenditure should not
exceed whereas standard costs are the minimum standards to be achieved. There is
always scope for improved performance even if standard costs are met.
• Budgets are based on future / estimated costs but standard costs are ideal costs
under ideal situations for ideal performance.
 Managerial Accounting -- Page 5

Q13. What do you mean by Uniform Costing? Explain the various areas covered by
Uniform Costing. Explain the prerequisites for the success of Uniform Costing as a
cost control technique.

Answer:
Uniform Costing refers to using similar costing principles and practices for
organizations in the same industry. It is nothing but uniform cost accounting techniques
that applies usual accounting methods like process accounting, job accounting, standard
costing, budget costing and marginal costing. This technique if applicable to a group of
organizations in the same industry enables cost and accounting data of the member
undertakings to be complied on a comparable basis so that useful and crucial decisions
can be taken. It also attempts to establish uniform methods so that comparison of
performances in various undertakings can be made to the common advantage of all the
constituent units.

Advantages: -

1. It injects a spirit of healthy competition instead of cutthroat competition among

members.
2. It can be used by management as a controlling tool. Actual performance can be
measured against industry norms.
3. The R&D work done by large enterprises can be made available to smaller units.
4. It also provides relevant data to various government offices thereby assisting
them in the implementation of price control mechanism or to give protection or
subsidy to a particular industry etc.
5. Weaker units in the industry can take advantage of the efficient methods of
production and production control of better-managed units so as to increase their
own efficiency.

Disadvantages: -

1. The cost of implementation of uniform costing in smaller units may not justify
the advantages there from.
2. Different units in the industry may follow different practices and methods of
production due to factors like location, capital investment, condition of plant etc.
thereby making the implementation of uniform costing system impossible.
3. It may create conditions, which are likely to develop monopolistic tendencies
within the industry. Prices may be raised arbitrarily and supplies curtailed.
4. Information by some enterprises may be withheld on grounds of secrecy making
the statistics unreliable.
 Managerial Accounting -- Page 6

Areas covered by Uniform Costing: -

• Costing Techniques implemented i.e marginal costing, standard costing etc

• Methods employed for valuation of inventories.
• Methods employed for inventory control.
• Methods of cost accounting to be implemented viz. job costing, process costing,
unit costing and so on.
• Procedure employed for classification and codification of accounts.
• Methods followed for remunerating workers.
• Items not to be included in cost accounts.
• Method used for the calculation of depreciation i.e. Straight line, written down
value etc
• Process implemented for dealing with material scrap, wastages, spoilages and
defectives.
• Methods followed for apportionment and absorption of overheads and treatment
given to under or over-absorption of overheads.
• Process for dealing with certain specific types of costs like bonus, idle time
wages etc.
• Treatment of research and development costs.

Prerequisites for the success of Uniform Costing: -

• There should be spirit of mutual trust and policy of given and take.
• There should be free exchange of ideas and methods used in production.
• Large enterprises should be ready to share improvements, achievements of
efficiency and technical know how.
• There should not be any information that is not disclosed that may hamper the
process of uniform costing.
• There should be no intention of rivalry, unhealthy competition or sense of
jealousy.
 Managerial Accounting -- Page 7

Q5. What do you mean by Bank Reconciliation Statement? Why is it prepared? Give a
standard format of a Bank Reconciliation Statement.

Answer:
Transaction with a bank forms a major part of daily business. Every business in
this modern world has a Current A/c with a bank. As a record of the transactions with the
bank, it maintains a Bank Passbook or Bank Statement. Bank Passbook or Bank
Statement is an extract of the account in the name of business as it appears in the books
of the bank. A similar account is also maintained in the books of the business. Since
both the Bank Passbook and the Bank A/c in the books of accounts of business record the
same transactions, the balance of the bank passbook should match with the balance as per
the books of business. However, in reality this does not happen always. There may be
transactions in the books of business that do not match with the bank passbook and vice
versa, creating a difference in the balances. To rectify this a Bank Reconciliation
Statement is prepared.

Following are the reasons for difference in the bank passbook and bank a/c in the books
of business, thereby creating a need for the bank reconciliation statement: -

(i) Cheques issued but not presented for Payment – When a cheque is issued
for payment, the entry in the cashbook is made immediately. But the
bank will make the entry only when the cheque is presented for payment.
Hence there is a gap of some days between the entry in the cashbook and
bank passbook.
(ii) Cheques paid into the Bank not yet cleared – As soon as a cheque is sent
to the bank, an entry is made in the cashbook immediately. However, the
bank will credit the customer’s account only when payment is received
from the concerned bank, thereby, creating a discrepancy in the balances.
(iii) Interest allowed by the Bank – The interest allowed by the bank is
credited to the customer’s a/c as soon as it becomes due. But an entry in
the cashbook is made only after intimation from the bank, thereby
creating a difference in balances.
(iv) Interest and Expenses charged by the bank – As in the above case,
interest and charges levied by the bank are entered in the cashbook only
after the customer sees the passbook.
(v) Interest and dividends collected by the bank – Sometimes, the bank
collects the interest and dividends on investments directly, on behalf of
the customer. The customer makes an entry only after intimation from
the bank, thereby creating a difference in the balances.
(vi) Direct payments by the banks – There are certain payments like
insurance premium that may be made directly from the bank. However,
this is entered in the books of business only after the customer sees the
passbook.
(vii) Dishonor of a bill discounted with the bank – If the bank is not able to
receive payment on promissory notes discounted by it, it will debit the
customer’s account together with any charges that it may have incurred.
The customer makes an entry only when he sees the passbook, hence,
creating a difference in balances.
(viii) Bills Collected by the bank on behalf of the customer – If goods are sold,
the discount may be sent through the bank. If the bank is able to collect
 Managerial Accounting -- Page 8

the amount, it will credit the customer’s account. The customer may
make an entry only on receiving the passbook on a later date.
(ix) Clerical Errors Committed – A difference in the balances in the bank
passbook and the cashbook may also result from clerical errors
committed by the staff executives.

Bank Reconciliation Statement

As on __________

Particulars Amount (Rs.) Amount (Rs.)

Balance as per Cashbook
Add Cheques issued but not presented
Amount credited in Passbook but not in
Cashbook
Deposits made in the account directly
Wrong credits given by bank
Sub-total
Less Cheques deposited but not cleared
Interest / Bank charges debited by bank
Direct payments made by bank not
Entered in cashbook
Cheques dishonored not recorded in
Cashbook
Wrong Debits given by bank
Sub-total
Balance as per Bank statement or Pass Book
 Managerial Accounting -- Page 9

Q4. What do you mean by Financial Statements? What are the limitations of the
Financial Statements? Give the standard format of the Financial Statement and
explain each item appearing in the Financial Statement.

Answer:
Financial Statements are prepared and presented for the external users of
accounting information. A complete set of Financial Statements includes (i) a balance
sheet (ii) a profit and loss account, and (iii) a schedules and notes forming part of balance
sheet and profit and loss account.
Financial Statements are a means of communicating accounting information, which is
generated in the various accounting processes to the external users of accounts. These
external users include investors, employees, lenders, suppliers and trade creditors,
customers, government and public at large. Financial Statements meet the common
information needs of all of them. They provide the financial effects of past events only
and do not provide all the information, which the external users may need for decision-
making.

Limitations of Financial Statements: -

1. Persons like shareholders, investors etc., are more interested in knowing the
likely position in the future. The financial statements are not of much help as the
information given in these statements is historical in nature and does not reflect
the future.
2. Financial statements are the outcome of accounting concepts and involve personal
judgment. Stock valuation, treatment of deferred revenue expenditure, provision
of depreciation etc., are based on personal judgment and therefore not free from
bias.
3. The financial statements can be drawn on the basis of different accounting practices.
Profits earned or loss incurred will be different when different practices are
followed.
4. Financial statements represent the position in monetary terms only. It excludes those
things, which cannot be expressed or recorded in monetary terms. These
statements do not include a very important asset, namely, human resources, in its
position statement.
5. While studying financial statements of different units, the size of the units and the
difference in the accounting procedures adopted by them have to be kept in mind.
They may not be reflected in the financial statements but one has to enquire into
them before analyzing the statements.
6. The number of parties interested in the financial statements is large and their interests
differ. The financial statements cannot meet the purpose of all parties interested
in them.
7. The financial statements alone do not help in estimating the future position. There
are other factors also which have to be considered.
 Managerial Accounting -- Page 10

Trading Account
For the year ended on _ _ _

Particulars Amount Particulars Amount

Opening Stock Sales
Less Sales returns
Purchases Closing Stock
Less Purchases return
Carriage inward
Wages paid
Power and Fuel
Consumable Stores
Manufacturing Expenses
Gross Profit Transferred to
P7L A/c
Total Total

Profit and Loss Account

For the year ended _ _ _

Particulars Amount Particulars Amount

Office Salaries Gross Profit b/d
Postage & Telephone Discount received
Traveling & Conveyance Commission received
Legal Charges Interest received
Office rent Rent received
Depreciation Profit on sale of assets
Audit Fees Net Loss (if applicable)
Insurance
Repairs & Renewals
Advertisement
Carriage outward
Free samples
Bad Debts
Interest and Bank Charges
Loss on sale of assets
Partner’s Salaries
Interest on capital
Provision for taxation
Net Profit
Total Total
 Managerial Accounting -- Page 11

Balance Sheet
As on _ _ _

Liabilities Amount Assets Amount

Capital Land
Less Drawings
Loans from Banks Building
Sundry Creditors Machinery
Advance from Customers Furniture
Outstanding Expenses Vehicles
Income received in advance Computers
Current assets
Stock
Sundry Debtors
Cash Balance
Bank Balance
Prepaid Expenses
Accrued Income
Total Total

Depreciation: Depreciation refers to the reduction in the value of an asset due to wear and tear
and obsolescence. It is calculated to ascertain the true value of an asset. The journal entry for
depreciation is
Depreciation a/c Dr.
To Fixed asset account.

Manufacturing expenses: Manufacturing expenses include all those expenses incurred in the
conversion of raw materials in to finished goods. This includes carriage inwards, wages, power
and fuel etc. All these expenses are made in the course of manufacturing process. The journal
entry for these expenses is:
Manufacturing expenses a/c Dr.
To Expenses a/c

Sales: This is the total amount of sales made in the accounting year. From this, the sales return
is subtracted. A sale is made on either cash basis or credit basis. For cash basis journal entry is:
Cash a/c Dr.
To Sales a/c
If sale is on credit basis journal entry is:
Party a/c Dr.
To Sales a/c

Office & Administrative Expenses: Administrative expenses include expenses like salaries,
stationery, postage, traveling & conveyance, office rent, repairs & renewals, interest, bank
 Managerial Accounting -- Page 12

charges etc. Although these expenses are not directly related to the manufacturing process but
these are indispensable to the working of the business. These are incurred for day to day running
of the business. The journal entry for these expenses is
Administrative expenses a/c Dr.
To Expenses a/c

Selling & Distribution Expenses: These expenses include expenses like advertisement, carriage
outward, free samples, bad debts, discount on sales, sales commission etc. These are incurred as a
result of the sales process. The journal entry passed for these expenses is:
Selling & Distribution expenses a/c Dr.
To Expenses a/c

Opening stock: This indicates the stock in hand of raw materials, work in progress and finished
goods with the business at the start of the accounting year. It is valued at cost price or market
price whichever is less. The Journal entry passed for this is: -
Trading a/c Dr
To Opening Stock a/c

Closing stock: This indicates the stock in hand of raw materials, work in progress and finished
goods with the business at the end of the accounting year. It is valued at cost price or market price
whichever is less. The Journal entry passed for this is: -

Closing stock a/c

To Trading a/c

Capital: Capital is one of the factors of production, which is required to purchase other assets
used in the production process.

Drawings: This represents the amount of cash or value of goods withdrawn by the proprietor or
partner for their personal use.
Loans from banks: All loans taken by the business constitute a liability for the business, hence is
recorded on the left-hand side of the balance sheet. This amount represents the amount borrowed
by the business.

Current liabilities: This represents the liabilities, which are supposed to be paid off within a
short span of time say one year. These include sundry creditors; advance received from
customers, outstanding expenses, income received in advance, taxes.

Fixed assets: These include all those assets the benefits of which are likely to be received over a
long period of time. These assets form the infrastructure of the business. Some of the fixed assets
are land, building, machinery, furniture, vehicles etc.
Investments: This represents all the investments made by the organization outside the business.
These include stocks & shares, loans given etc.

Current assets: Current Assets are the assets, which can be converted into cash in a short period
of time. The purpose of holding current assets is to sell the current asset. They change their form
frequently during the business cycle. These include cash & bank balances, stock, sundry debtors,
prepaid expenses, accrued income etc.
 Managerial Accounting -- Page 13

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

Answer:
Accounting is a systematic way of recording and classifying various transactions
of business in order to ascertain the profit or loss of business for a specific period of time.
Accounting can be defined “as the art of recording, classifying and summarizing in terms
of money transactions and events of financial character and interpreting the results
thereof.”

In the words of the Committee on Terminology of the American Institute of Certified

Public Accountants:

“Accounting is the art of recording, classifying and summarizing in a significant manner

and in terms of money, transaction and events which are, in part at least, of a financial
character, and interpreting the results thereof.”

The above definition brings out the following as features of accounting:

Identifying Financial Transactions – Accounting records on those transactions and

events, which are of financial character. A transaction can be defined as financial
happening that affects the finance of the business. If a transaction has no financial
character then it will not be measured in terms of money and will not be recorded. A
financial transaction can be cash transaction or credit transaction. When cash is paid
immediately on entering into a transaction, it is called cash transaction and if one
promises to pay the price later, it is called a credit transaction.

Recording – Accounting is considered as an art of recording business transactions in a

systematic way. Recording is done in a book called ‘Journal’. This may be further sub-
divided into subsidiary books like cashbook, sales book, purchase book etc. The number
of subsidiary books to be maintained depends upon the size and nature of business and
type of transaction.

Classifying – Classifying is the process of grouping of transactions of one nature at one

place. This is done by opening accounts in a book called ‘Ledger’. Transactions
pertaining to different persons, whether customers or suppliers, are recorded separately in
the name of each person in a ledger.

Summarizing – Summarizing is the art of classified data in a manner which is

understandable and useful to management and other interested parties. This involves
preparation of final accounts, which includes Trading and Profit and Loss accounts and
Balance Sheet.

Analysis and Interpretation – Analysis of accounting statements will help the

management to judge the performance of business operations and for preparing the future
plans. The results of analysis and interpretation are communicated to the proprietor and
other interested parties such as creditors, investors, employees etc.
 Managerial Accounting -- Page 14

Streams of Accounting
The changing business techniques in this modern competitive world have given
rise to specialized branches of accounting, which could cater to the changing
requirements. There are three main streams of accounting:
1. Financial Accounting
2. Cost Accounting
3. Management Accounting
Financial Accounting – The Accounting system concerned only with the financial state of
affairs and financial results of operations is called Financial Accounting. It includes
ascertainment of profit earned and loss incurred and position of the business at the end of
accounting period and providing financial information required by the management and
other parties interested in them.

Cost Accounting – In view of the limitation of financial accounting in respect of

information relating to the cost of individual products, cost accounting was developed.
The main purpose of Cost Accounting has been to analyze the expenditure involved so as
to ascertain the cost of various products manufactured and fix their prices. It also helps in
exercising control over the cost being incurred. Cost accounting basically involves
estimating cost in advance and detailed analysis.

Management accounting – The third stream of accounting recently developed is

Management accounting. The main purpose of management accounting is to provide
necessary information about funds, costs, profits etc. as will enable management to
discharge its function properly.