FORE School of Management, New Delhi

Programme: PGDM (FM 03)

Assignment

Name of the Course: Management Accounting Academic Year: 2020-2021

Faculty: Dr. Gaurav Gupta Office Contact No.: 011-46485531
Section: F Email: [email protected]
Instructions: Attend all the questions.

Q. 1 How will you use management accounting in corporate decisions? Elaborate with
examples. (15 Marks)

Management accounting is a different type of financial accounting which helps the

organizational management in achieving better planning and control over the organization which
eventually helps in achieving the goals. It is relevant for all kinds of organizations in providing
financial and statistical information that is useful for managerial decisions. Unlike financial
accounting, management accounting does not follow any rules as it made from the internal
management and hence does not follow a specific set of principles or format. The report includes
aspects that need to be measured for assisting in the process of decision making.That means that
the possibilities are almost endless.

It has a significant importance in corporate as it focuses on forecasting and long term decision
making and hence is widely used by them to help them achieve better control and quality
decision making.

The data collected encompasses all fields of accounting that informs the management of business
operations relating to the costs of products or services purchased by the company. Performance
reports are used to note the deviation of actual results compared what was budgeted.

Managerial accounting is very effective in highly competitive and fast-paced business

environments where quick decisions need to be made. These decisions are helpful when it comes
to sales, budgeting and cash flow management. It will use operational data to make sense of the
situation quickly which will help the managers react effectively.

The objective of this type of accounting practice is to use the budget to help make short term
operational decisions that will help increase the operational efficiency of the organization.

 Taking important strategic decisions about the business

Based on the information presented in management accounting, the management
can take decisions about continuing a product or modifying the sale strategy. Since
management accounting is not regulated by any law, the management can decide
the areas that require more analysis, investigation and accordingly draw up
strategies.
  Planning for the future business activities
Managers can do analysis and plan the activities of the organization. For example,
if the recent data shows a dip in the sales for a certain region, then the sales
manager can advise his team and plan some action to rectify the situation.

 Evaluation and monitoring of performance

Monitoring and evaluation helps improve performance and achieve results. Its goal
is to improve current and future management of outputs, outcomes and impact.

 Assisting in decision-making
It supplies necessary information to the management which may be useful for its
decisions. The historical data is studied to see its possible impact on future
decisions. The implications of various decisions are also taken into account.

 Proper utilization of resources

Management utilizes all the physical & human resources productively. This leads
to efficacy in management. It provides maximum utilization of scarce resources by
selecting its best possible alternate use in industry from out of various uses.

 Make the basis for financial reports

Management accounting provides various periodical reports, which the basis for
the financial reports to achieve the goal of the organization.

 Asset safeguarding
It provides reasonable assurance regarding prevention or timely detection of
unauthorized acqui sition , use or disposition of the company’s assets that could
have a material effect on the financial statements.

Examples:

Cost Analysis

Imagine a case where the management is unsure whether they must focus more on marketing
of a product line or not for the poor sales. To evaluate this decision, the management
accountant can examine the costs that differ between advertising alternatives for each product,
that is, cost analysis can be done which can be used to determine whether to continue or
discontinue operations.

Activity-based Costing Techniques

In case a company is not making profit, they can do an activity based costing to determine the
activities and the costs associated with the manufacture of each product. This can help the
management optimized that specific product
Q.2 What points you need to consider while making budget for long-term in cement
manufacturing industry?
Justify with examples. (15 Marks)

The long-term budgets prepared for a long period of five to ten years. They are concerned with
planning the operations of a firm over a considerably long period of time. The financial
“controller” exclusively for the top management usually prepares long-term budgets. These
budgets are very useful in terms of physical units (i.e.quantities) or percentages, since accrued
values may be difficult to forecast over such long-period. Capital expenditure, research and
development budgets, etc, areexamples of long-term budgets.

The budgeting process is used in the performance budgeting for the construction of phase. Which
includes pre-commission activities. Besides meeting the essential requirements of managerial
control. The budgeting exercise also covers thelong-term capital budgeting, which is presented in
the from of annual plan.

OBJECTIVES OF THE BUDGETARY SYSTEM:

To prepare annual budgets in such a manner those managers at various levels in the organization
carry out periodical exercise in respect of each contact or responsibility center for physical
planning and matching resources broke up into monthly targets or cash flows.
To introduce and operate responsible for achievement of specified targets with the resources
allocated for the purpose.
To bring about effective co-ordination of all activities of the organization of all activities of the
organization and to gear up service divisions to meet effectively the requirement of projects.

BUDGET PERIOD AND PHASING

The budget period or annual budgets should correspond with the financial year. The budget
should be drawn up for the ensuring financial year in the form of budget estimates financial year
in the form of Revised Estimates (R.E) in addition, the budget are to be reviewed on monthly
basis by project review teams, in the light of actual expenditure and projections in the budget
period. Budgets should indicate monthly phasing of expenditure and targets for the first and
quarterly phasing for the second half of the year. At the time of review of the budget estimates to
frame revised estimates the quarterly phasing should be broken up into monthly phasing. 39
While drawing up the actual budget in October every year, the long-term capital budget for on
going and new schemes should be formulated as a part of the exercise for preparation of Annual
plan. The long term capital budget should indicate for a period of six years following the budget
period project wise annual phasing of the capital expenditure and physical schedules resource
based network.

BUDGET HEADS: For uniform accounting, it is essential that costs are collected for each
system of the factory tough this may involve splitting up of payments against contracts which
embrace more than one system. Allocation of the cost as system wise affords a sound basis for
cost accounting, inter-firm comparisons and provides valuable inputs to databank. Budget
provisions are related to project estimated and monitoring of actual expenditure where as control
cables for part control and instrumentation system. Factory piping which include pipelines, for
ash water mains, compressed air system and civil works piping. Auxiliary pumps for water
treatment plant and civil works system. If there are any contracts not covered in the budget heads
provision for such contracts should be shown against the appropriate system head by adding code
number.
Budgets are classified as under

ion
st

OBJECTIVES INCLUDE:

 To control actual performance with reference to standards / norms adopted in the budget,
ascertain the deviations analyze and establish the reasons.
 To identify constraints in generation and tamely action for estimation of constraints.
 To monitor the generation of internal resources so as to ensure availability of adequate
funds.
 To prepare revenue budget so as to forecasting the periodical profitability of the
organization.
 To develop standards / norms of performance in the various areas of operation and
maintenance based on the experience.
 To involve managers at various in the process of developing performance budget so as to
introduce the concept of responsibility accounting and participate management.

Q.3 From the following information of Product No.999, calculate

1).Material Cost Variance
2).Material Usage Variance
3).Material Price
(10 Marks)

Materia Standard Stan Actual Actual

l Quantity dard Quantity Price
(Kgs) Pric (Kgs) (Rs)
e(Rs
)
X 20 5 24 4
Y 16 4 14 4.50
Z 12 3 10 3.25
Total 48 48
Answers

Material Budgeted/ Standard Actual

Quantity Price Quantity Price
(Kgs) (₹) Amount(₹) (Kgs) (₹) Amount(₹)
X 20 5 100 24 4 96
Y 16 4 64 14 4.5 63
Z 12 3 36 10 3.25 32.5
Total 48 200 48 191.5

Sl.No: Particulars Basis Amount

1 Material Price Variance (S.P. - A.P.) x A.Q.
X => (5 - 4) x 24 = 24 (Fav)
14.5
Y => (4 - 4.5) x 14 = 7 (Unfav)
Favourable
Z => (3 - 3.25) x 10 = 2.5 (Unfav)
2 Material Usage Variance (S.Q. - A.Q.) x S.P.
X => (20 - 24) x 5 = 20 (Unfav)
6
Y => (16 - 14) x 4 = 8 (Fav)
Unfavourable
Z => (12 - 10) x 3 = 6 (Fav)
3 Material Cost Variance M.P.V. + M.U.V.
X => 4 (Fav)
8.5
Y => 1 (Fav)
Favourable
Z => 3.5 (Fav)

Material price and cost variance are favourable while usage material usage variance is not
favourable

Q. 4 Justify the significance of CVP analysis with suitable real life examples in the
manufacturing industry (10 Marks)

Cost- volume- profit analysis is the systematic examination of the inter-relationship between
selling prices, sales and production volume, cost, expenses and profits. It is a commonly used tool
providing management with useful information for decision making.

The managers use this technique extensively to determine B.E.P., Margin of safety, Profits
/Losses at various levels of output, etc. It is an important tool of short term planning and
forecasting of business activities and is useful in taking short-run decisions and formulating
business policies. More especially cost -volume-profit analysis is used by managers to plan and
control more effectively and also to concentrate on the relationship among revenues, cost, volume
changes, taxes and profit. It is also known as break-even analysis

Costvolume-profit analysis will also be employed on making vital and reasonable decision when a
firm is faced with managerial problems which have cost volume and profit implications. Such
problems are in the areas of profit planning, product planning, make or buy decision, expansion or
contraction product line, utilization of productive capacity in a period of economic boom or
depression.It analyses how the changes in costs and volume affect their operating expenses and
net income. CVP works by comparing different relationships, such as the cost of operating and
producing goods, the amount of goods sold, and profits generated from the sale of those goods.
By breaking down costs into fixed versus variable, CVP analysis gives companies strong insight
into the profitability of their products or services.

CVP analysis is also used to determine the sales volume required to achieve a specified profit
level. Therefore, the analysis reveals the break-even point where the sales volume yields a net
operating income of zero and the sales cut off amount that generates the first dollar of profit.The
break-even point in a business is considered to be reached when the total costs become equal to
the total revenues, thus generating neither profit nor loss. These calculations help in determining
how many units need to be sold at the given price point to break even or to produce the first
amount of profit. It is also used in analysing how much revenue is needed to justify new
investments.

Source: https://psu.pb.unizin.org
OBJECTIVES INCLUDE:

(1) To forecast profit accurately, it is absolutely essential to determine the relationship between
costs and profits on one hand and volume on the other. It aims at measuring variations in cost
with volume.Profit planning considers the projected level of output, optimum product
combination, estimated revenue, total cost of production and is thus based on C.P.V. analysis.

(2) It is used in setting up flexible budgets which show costs at various levels of activities.

(3)It helps management in the evaluation of performances for control purposes.

(4) It analysis may be helpful in formulating pricing policies by projecting the effect that various
price structures have on costs and profits, especially when the demand for the product is elastic.

(5) It helps to ascertain the amount of overhead costs that could be charged to product costs at
different levels of operation.

(6) It helps in making short-run tactical decisions, e.g., shift working, acceptance of special
order, choice of sales-mix, etc.

Example:

Suppose a toy manufacturing company wants to produce a new variant of toy and has forecasted
the following information.
Let’s assume it to be
Sales: 5000 units.
Selling price per unit: Rs. 50
Variable cost per unit: Rs. 30
Fixed cost Rs. 35000
Therefore, contribution per unit = 50 - 30 = Rs. 20
BEP in units = 35000/20 = 1750 units
1750 * 50 = Rs. 87500
BEP in sales value = 35000 * 250000 / 87500 = Rs. 100000
Margin of safety Represents the strength of the business.
Margin of Safety = Actual Sale – BEP Sale Margin of safety % = (Sales - BEP) / Sales * 100
Margin of safety = (5000 - 1750) 5000 = 65 %
Hence even if the sales decrease by 65%, the business won’t face any loss.