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Department : MBA

Name 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 functions
more efficiently may be termed as Management Accounting. The term Management Accounting
refers to accounting for the management i.e., necessary information to the Management for
discharging its functions.
Management Accounting is the presentation of accounting information in such a way as
to 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
Coordinating

2. 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 Objectives

SCOPE OF MANAGEMENT
The scope of management accounting is very wide and broad based and it includes within its
field, a variety of aspects of business operations. The main aim is to help management in its
functions of Planning, Organizing, Directing, and Controlling. The following are some of the
areas of specialization included within the ambit of Management Accounting.
Financial Accounting
Cost Accounting
Budgeting and Forecasting

M. Daniel Rajkumar B.Com., MBA [P.hd]

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 Account


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 the
money yields him as little it is again exchanged for goods”
Current Assets are the assets acquired through cash and easily convertible in to cash
during the normal course of business. The normal course takes a period of a year. The
accounting period is of one year. In other words, Current Assets are those resources of the firm
which are either held in the form of cash or are expected to be converted into cash with in the
accounting period or the operating cycle of the business.
The following generally include in

Current 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 Payments
Long-Term Liabilities
Share Capital
Reserves and Surplus
Term Loans

7. What is meant by a ‘Ratio Analysis”. Explain Short-term and Long-term liquidity
ratios?
Ratio is only a comparison of the numerator with the denominator. The term ratio refers to
the numerical or quantitative relationship between two figures, and obtained by dividing the
former by the later. Ratios are designed to show how one number is related to another. It is
worked out by dividing one number by another
Ratio Analysis is an important and age old technique of financial analysis. The data given
in 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 efficiency
of a firm. Some ratios indicate the trend or progress or downfall of the firm.


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 Ratio
8. 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 Tool

9 Explain the various Tools involved in analysis and interpretation of Financial
Statements

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 outlays
According to Lynch “Capital budgeting consists in planning development of available capital for
the purpose of maximizing the long-term profitability of the concern


Process of Capital Budgeting
Identification of Investment Proposals
Screening Proposals
Evaluation of Various Proposals
Establishing Priorities
Final Approval
Implementing Proposals
Performance Review
11 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 Index

12 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
priority

14.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 Method


Internal Rate of Return
Profitability Index Number
Unit 5

15. What is meant by a Budgetary Control? Explain the nature and objectives of
Budgetary 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 FLEXIBILITY


-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.


BUDGETARY CONTROL STANDARD COSTING
It is extensive in application, deals with the It is intensive; applied to manufacturing of
operation of dept or business as a whole. product
Budgets are prepared for sales, production, It is determined by classifying recording and
cash etc., allocating expenses to cost unit
It is a part of financial account , projection of It is a part of cost account , a projection of all
all financial accounts cost accounts
Control is exercised by taking into account Variances are revealed through different
budgets and actuals. Variances not revealed accounts
Budgeting can be applied in parts Cannot be applied Not expensive
More expensive and broad in nature Relates only to element of cost
Can be operated with standards Cannot be operated without budgets

19. What is cash Budget? What are its advantages?
This budget represents the amount of cash receipts and payments, and a balance during
the budgeted period. It is prepared after all the functional budgets and prepared by the chief
accountant 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 Variance
means deviation of the actual cost from the standard cost. In standard costing, standard costs
are predetermined and refer to the amounts which ought to be incurred. These becomes the
yardsticks against which actual costs can be compared.
Important factors
Favorable Factors
Unfavorable Factors


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 with
volume. Profit as a variable is the reflection of a number of internal and external conditions,
which exert influence on sales revenue and costs
To 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-absorption
Unit 7

26. 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 fund
or changes in Working Capital

Use of fund flow statement


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 an
enterprise.

According to Object or Purpose:
External Reports
Internal Reports
According to Functions:
Operating Reports
Financial Reports
According to Frequency:
Regular or Routine report
Special Reports
According to Contents:
Production Reports
Sales Reports
Cost Reports

28. What are the uses of accounting information for managerial decision-making?
Information is the basis for Decision-making in an Organization. The efficiency of
management depends, to a larger extent, upon the availability of regular and relevant
information to those who exercise the managerial function. A regular system of reporting is
considered 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 of
accounting method.
Helps in finalizing Accounts
Capital Budgeting
Tax planning


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 executed

Lower Level Management:

Reports of Over-Time
Materials Usage Variance
Labour Efficiency Variance
Material Spoilage Report
Accident Report etc.,


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