PAPER-12 : MANAGEMENT ACCOUNTING

SUGGESTED ANSWERS

SECTION – A

1.

(i) (A)
(ii) (C)
(iii) (C)
(iv) (A)
(v) (D)
(vi) (C)
(vii) (C)
(viii) (C)
(ix) (D)
(x) (B)
(xi) (A)
(xii) (C)
(xiii) (B)
(xiv) (B)
(xv) (C)

SECTION – B

2. (a)

Some of the broad areas considered to be part of 'management accounting' is summarized in the
following lines:
 Budgeting, planning and forecasting
 Measuring organisational, divisional and departmental performance
 Comparing results and performance within and between organisations
 Assisting in the process of increasing effectiveness and efficiency
 Assessing the performance of past and future capital investments
 Advising on decisions about product mix, markets to be served and selling prices
 Advising on decisions on whether to outsource products, components, activities and services
 Advising on decisions involving the investment of scarce funds between a range of possible
alternatives
 Assisting in the making of a wide range of strategic decisions
The above mentioned are some of the relatively precarious activities of the higher-level management.

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The fundamental activities of management accounting would include:
 calculating the profitability of products, services and operations,
 allocating costs to products,
 setting inter-divisional transfer prices.
There are also some functions of the management accountant which are focused on delivering critical
information to the top-level management for initiating the process of increasing effectiveness and efficiency.
Techniques such as activity-based cost management and theory of constraints are examples of such
specialized activities.
Some authors also prefer to include capital budgeting decision within the scope of management accounting
especially when there is a strategic aspect to it.

2. (b)

Total cost and Operating Income using ABC

Cake Pizza Soft Drinks Total
(₹) (₹) (₹) (₹)
Total cost: 27,60,000 52,20,000 17,70,000 97,50,000
Operating income 2,64,750 31,500 2,13,750 5,10,000

3.
Incremental Gain ₹ 50000

Decision: M/s Bishalgarh Limited should invest in Product Promotion Campaign as the same will increase
overall profit of the Company by D 50000.

4. (a)
600 Units to be sold in 2023-24 to earn same amount of profit per unit of the last year (2022-23).

4. (b)

Products M(D) N(D)

Total Variable Cost of producing in-house 125 175
Extra cost of buying in each component 60 84
Extra cost of buying per machine hour 30 28

Priority should be given to the In-house production of component M in order to minimize the extra cost of
buying-in.

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5.
Cash Budget for the three months period January 2024 to March 2024 (₹)
Particulars Jan, 24 Feb,24 Mar,24
Receipts:
Opening balance 135000 380000 619410
Sales 538000 533910 591140
Total Receipts (A) 673000 913910 1210550
Payments:
Creditors for direct material
75000 65000 90000
Lag in payment - 1 month
Direct Labour 35000 30000 45000
Direct Expenses 17000 14000 25000
Factory Overhead 35000 42500 37500
Admin Overhead 56000 68000 53000
Gratuity & Benevolent fund payment of Mr. R. Rajendran - - 800000
EMI for Vehicle loan 75000 75000 75000
Total Payments (B) 293000 294500 1125500
Closing balance of Cash (A-B) 380000 619410 85050

6. (a)

(i) Efficiency Variance = ₹ 3600 (A)

(ii) Capacity Variance = D 5100 (F)
(iii) Idle Time variance = D 4500 (F)
(iv) Volume Variance = D 6000 (F)
(v) Budget / Expenditure Variance = ₹ 5000 (A)
(vi) Fixed Overhead Cost Variance = ₹ 1000 (F)

6. (b)
(a) Production Budget
Particulars AB+ CD+
Production 55 210

(b) Material Requirement Budget

Particulars A B C D
Product AB+ 44 11 -- --
Product CD+ -- -- 105 105

(c) Purchase Budget

Particulars A B C D
Purchases (By weight in Tons) 49 41 205 55
Cost per ton 500 400 100 200
Purchases (₹) 24,500 16,400 20,500 11,000

Total Purchases = ₹ 72400

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7. (a)

Economic Value Added (EVA) = D 131094

Comment:
The Positive EVA of ₹131094 indicates that M/s Srilok Polymer Limited has surpassed the expectation of its
Shareholders.

7. (b)

(i) Labour time to do logo engraving in the 64 pcs of MS End Fittings is 104.64 minutes.
Labour cost for 64 units = ₹ 174.40
(ii) labour time required to execute repeat order is 63.04 Minutes
Labour cost for repeat order of 64 units = ₹ 105.07

8. (a)

Table showing Probabilistic Budget & Expected Value

Expected Profit
Profit after tax (PAT)
Sales Volume Joint Probability (JP) (₹)
(₹)
PAT x JP
110080 0.06 6604.80
180000
295840 0.18 53251.20
P = 0.3
357760 0.06 21465.60

151360 0.10 15136.00

200000
357760 0.30 107328.00
P = 0.5
426560 0.10 42656.00

233920 0.04 9356.80

240000
481600 0.12 57792.00
P = 0.2
564160 0.04 22566.40

Expected Value (EV) 336156.80

Comment: It can be observed that an expected profit estimate will be ₹ 336,156.80.

8. (b)
Meaning of Cost Centre
A Cost Centre is defined as a function or department within an Organization which is not directly generating
revenues and profits to the company but is still incurring expenses to the company for its operations. The
contributions made by the cost centres in terms of profits is indirect. For example, a Company’s human
resource and Accounts departments could be considered as Cost Centres because these units do not generate
revenues or charge for services, but they do incur cost.

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Cost Centre vs. Profit Centre
A Cost Centre is different from Profit Centre in the following way
Cost Centre Profit Centre
A Profit Centre is an organizational unit whose
manager is responsible for generating revenues
A Cost Centre is an organizational unit whose
and managing expenses related to current
manager has the authority only to incur costs and
activity. Thus, Profit Centre should be
is specifically evaluated on the basis of how cost
independent organizational unit whose
are controlled.
managers have the ability to obtain resources at
the most economical prices.
The objective of Cost Centre is the control over The objective of Profit Centre is to maximise
the incurrence of expenses. the Centre's profit.

The Area of Operation of Cost Centre is The Area of Operation of Profit Centre is
comparatively narrow. comparatively wide.
Cost Centres managers are responsible for cost Profit Centres managers are responsible for both
only, costs and revenues.

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