ACCOUNTING FOR MANAGERS

I MBA I SEM

Answer Key

1.Financial Accounting Provide information about business in terms of financial

performance and financial position. It Evaluate the performance of entire
business. Both the internal and external parties can use these accounts
information’s effectively. Preparation of this accounting is mandatory for
company as per the law (E.g.: Income tax act, company act, etc)

2 Dual Aspect Concept:As per this concept, every business transaction has a dual
affect. For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect. For example, if Ram starts
business with cash Rs. 1,00,000/- there are two aspects of the transaction: “Asset
Account” and “Capital Account”. The business gets asset (cash) of Rs. 1,00,000/-
and on the other hand the business owes Rs. 1,00,000/- to Ram.

3.What is Financial Statement?

Financial statement is the output of the accounting, prepared at the end of the year,
it is called as final accounting, it is consisting of

 Trading and Profit & loss a/c or income statement

 Profit &loss appropriation account or retained earnings statement or surplus
statement
 Balance sheet or position statement
 Statement of changes in financial position
 Cash flow statement
 Fund flow statement
5.Business was taken over from 1.1.2012 Incorporated on 1.4.2012 • Therefore pre incorporation
period = Jan + Feb + March = 3 months (i,e. period between the business taken over and
incorporated) • Post incorporation period = April to Dec = 9 months.
6. Financial Ratios- current Ratio, Liqudity Ratio,Debt Equity Ratio,

7.Fund flow analysis is considered as an important tool for financial analysis and control. Fund
flow analysis serves as a valuable aid to financial manager or creditor in evaluating the use of
funds by firm and in explaining how these uses are financed.

Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current
asset to long term liabilities or vice-versa. Fund refers to working capital. Funds flow statement
is an assertion of sources and uses of funds. It describes changes in net working capital between
two balance sheet dates.

8.Elements of Costs

9.Process costing is a method of assigning production costs to units of output. In process

costing systems, production costs are not traced to individual units of output. Costs are
assigned first to production departments. Then assign the costs to units of output as they
move through the departments. The process costing method is typically used for processes
that produce large quantities of homogeneous products.

10.Activity based costing is a managerial accounting method that traces overhead costs to
activities and then assigns them to objects. In other words, it’s a way to allocate indirect,
overhead costs to products or departments that generate these costs in the production process.

11.What is Standard Costing?

Standard cost: the planned cost for a particular level of activity.
Standard cost is a Pre-determined cost which is calculated from Efficient business operations and
the relevant necessary expendituresIt is one of the costing techniques used for fixing price and
for controlling cost through variance analysis.Standard Costing is a technique which uses
standards for costs and revenues for the purpose of control through variance analysis

12.Calculate Material cost variance

Calculate Material cost variance
Material cost variance= (St. price x St Qty)- Actual Price x Actual Qty)
Material cost variance= (2 x 400)- 1.50 x 460)= Rs.110(F)

13.Distinguish between financial accounting and management Accounting?

NO: Financial Accounting Management Accounting
1 Provide information about business in Provide information to the management.
terms of financial performance and (Internal parties). Which can be used
financial position. within the organization.

2 Established principles & rules are No such account principles are followed
followed. .
3 Evaluate the performance of entire Evaluate the performance of different
business. division in an organization.
4 Both the internal and external parties can Only internal parties can use these
use these accounts information’s information’s for enhancement.
effectively.
5 Its purely based on past Its purely based on present
Preparation of this accounting is Preparation of this accounting is not
mandatory for company as per the law mandatory until the requirement arise.
(E.g.: Income tax act, company act, etc)

16.compare Fund Flow Statement with Cash Flow Statement

NO: Fund Flow Statement Cash Flow Statement
 1 Summarize / disclose sources of Disclose sources of cash, uses of cash &
working capital, uses of working capital changes in cash position. ( Cash is one of
& changes in working capital position the components of W/C.
2 Preparation of this accounting Not Compulsory for company to prepare and
mandatory for company. present it in their Annual report .

3 An indicator of short –term solvency. Does not indicate short –term solvency .

4 It is useful for decision making in long It is useful for decision making in short
run. run.

5 It’s a tool for preparing capital Tool for preparing cash budgeting.
budgeting.

6 The flow in the statement need not be The flow in the statement means real cash
real cash flow. flow.

17.Calulate Fund From Operation

Net profit 55000

Add
Depreciation on Plant 25000
Good Will Written Off 10,000
Loss on Sales on Plant 5,000
Provision For Tax 15000
Proposed Dividend 14000
124000
Less
By Profit on Sale of Furniture 12, 000
By Interest on Investment 8000

Funds From Business Operation 1,04,000

18.
19.Make or Buy decisions
Direct Material Rs.2
 Direct Labour Rs.2.50

Other variable cost 0.50

Total Variable cost 5.00

When The Product is available in the market at Rs.5.60

a) The company should continue to make the Parts when the products is available at
Rs.5.60 ( Variable cost is Less than the market price)because the total Variable cost is
Rs.5.00 here fixed cost need not be taken into account because it is period cot it is no
way connected with production

When the Product is available in the market at Rs. Rs.4.60

b) The company should buy Parts when the products is available at Rs.4.60 (market price is
Less than the Variable cost)

23. Balance sheet

Balance sheet as on……..
Liabilities Rs. Rs. Assets Rs. Rs.
Capital 10,00,000 Fixed assets 12,00,000
Reserves and 5,00,000 Current assets:
surplus
Net worth 15,00,000 Closing stock 2,00,000
Current liabilities 2,00,000 Debtors 2,50,000
Other liquid 50,000
assets
5,00,000

17,00,000 17,00,000

Working notes:
(1) Calculation of current assets and current liabilities:

Current given ratio = 2.50 (or) 2.50/1

Current ratio = current assets/current liabilities
`.. When current liabilities are 1, current assets are 2.5.
Working capital = Current assets-current liabilities
= 2.5-1=1.5
Working capital = 3,00,000=1.5
Current assets = 3,00,000*2.5/1.5 = Rs. 5,00,000
 Current liabilities = 3,00,000*1/15=Rs. 2,00,000
(2) Calculation of liquid assets and stock
Liquid ratio given = 1.50 (or) 1.50/1
Liquid ratio = liquid assets/current liabilities
1.5 = Liquid assets/2,00,000
Liquid assets = 2,00,000*1.5= Rs. 3,00,000
Liquid assets = current assets-stock
3,00,000 = 5,00,000-stock
Stock = 5,00,000-3,00,000
= Rs. 2,00,000
(3) Calculation of debtors
(4) Stock turnover ratio given = 6times
Stock turnover ratio = cost of goods sold/Average Stock
6 = cost of goods sold/2,00,000
Cost of goods sold = 2,00,000*6
=Rs. 12,00,000
Gross profit ratio given 20%
When sales = 100, Gross profit = 20; cost of goods sold =80
Sales = cost of goods sold*100/80
= 12,00,000*100/80= Rs. 15,00,000
Debtors turnover = Credit sales/Average receivables
6 = 15,00,000/Average receivables
Average receivables = 15,00,000/6
= Rs. 2,50,000
(5) Other liquid assets
Liquid assets 3,00,000
Less:Debtors 2,50,000
Other liquid
Assets 50,000
(6) Calculation of fixed assts and ‘Net worth’.
Fixed assts to Net worth given 0.80
Assuming there are no long-term debt and fictitious assets,
Balance sheet equation= Net worth + Current liabilities = Fixed
Assets + Current assets
Assuming Net worth as x,
X+2,00,000 = 8x+5,00,000
x-8x = 5,00,000-2,00,000 ( 2x= 3,00,000)
x = 3,00,000/2 = Rs. 15,00,000
Net worth = 15,00,000
Fixed assets = 15,00,000*8= 12,00,000
(7) Calculation of capital and reserves
 Reserves to capital given = 0.50 (or) 0.50/1
If capital is 1, reserves are 0.50
Net worth = 1.5 = 15,00,000
Capital = 15,00,000*1/1.5 = Rs. 10,00,000
Reserves = 15,00,000*0.5/1.5 = Rs. 5,00,000

24.Process X Account
Particulars Cost per Total Particulars Cost per Total
unit Cost unit Cost
To Raw Material 6.00 30,000 By Process Y A/C 15.00 75000
To other Materials 1.00 5000
To direct wages 5.00 25000
To direct Expenses 0.50 2500
To indirect Expenses 2.50 12,500
(30000X 25/100
15.00 75000 15.00 75000

Process Y Account
Particulars Cost per Total Particulars Cost per Total
unit Cost unit Cost
To process X A/C 15.00 75 000 By Process ZA/C 23.60 118000
Output 5000units
transferred
To Raw Material 2.00 10,000
To direct wages 4.00 20000
To direct Expenses 0.60 3000
To indirect Expenses 2.00 10,000
(30000X 20/100
23.60 118000 23.60 118000
Process Z Account
Particulars Cost per Total Particulars Cost per Total
unit Cost unit Cost
To process Y A/C 23.60 118000 By Finished stock A/C 30.10 150000
Output transferred
To Raw Material 1.00 5,000
To direct wages 3.00 15000
To direct Expenses 1.00 5000
To indirect Expenses 1.50 7.500
(30000X 15/60
30.10 150000 30.10 150000
25.Budgetary Control

• Budgeting is tool of planning

• Planning involves specification of the basic objectives that the organization
will pursue and the fundamental policies that will guide it
• Budgets to convert goals and strategies into annual operating plans

Meaning: Budgetary control is the process of preparation of budgets for

various activities and comparing the budgeted figures for arriving at
deviations.

Objectives of Budgetary Control:

 Planning.
 Coordination.
 Efficiency and Economy.
 Increase in Profitability.
 Anticipation of Future capital expenditure.
 Control.
 Deviations.

Advantages of Budgetary Control:

 Maximization of Profit: Budgetary control aims at

increasing the overall profits of the organization.
  Effective Coordination: Performance and working of
various activities is effectively coordinated through
budgetary control.
 Shutting down of unprofitable products and Activities:
Budgetary control reveals inefficiencies in products,
processes and departments.

The Sai Deep Ltd. was incorporated on 1st August 1996, to take over the running business of
Krishna Bros. with effect from 1st April 1996. The company received the certificate for
commencement of business on 1st October 1996. The following P&L A/c was prepared for the
year ended 31.3.1997.
Profit and Loss Account for the year ended 31.03.1997

Particulars Amt. (Rs.) Particulars Amt. (Rs.)

To Office Salaries 21,000By Gross Profit b/d 80,000
To Partners Salaries 6,000By Share Transfer Fee 1,000
To Advertisement 4,400
 To Printing & Stationery 1,500
To Travelling expenses 4,000
To Office Rent 9,600
To Electricity Charges 900
To Auditors Charges 600
To Directors Charges 1,000
To Bad Debts 1,200
To Commission on Sales 4,000
To Preliminary Expenses 700
To Debenture Interest 1,600
To Interest on Capital 1,800
To Depreciation 2,100
To Net Profit 20,600
81,000 81,000
Additional information :
(1) Total Sales for the year, which amounted to Rs. 8,00,000 arose evenly up to the date of
certificate of commencement, whereafter they recorded an increase of 2/3 during the year. Gross
profit was at an uniform rate of 10% of selling price throughout the year and a commission of
0.5% was paid on sales.

(2) Office Rent was paid @ Rs. 8,400 p.a. up to 30th September 1996, and thereafter it was paid
@ Rs. 10,800 p.a.
(3) Travelling Expenses include Rs. 1,600 towards sales promotion
(4) Bad Debts written off –
(a) A debt of Rs. 400 taken over from the vendor.
(b) A debt of Rs. 800 in respect of goods sold in September 1996 Depreciation
includes Rs. 600 for assets acquired in the post-incorporation period.
Show the “pre” and “post” incorporation results and also state how the results of pre- and post-
incorporation is dealt with.
Solutrion :
M/S SAIDEEP LIMITED.
Dr. Profit and Loss account for the year ended 31.3.96 Cr.
Expenses Basis Pre PostIncome Basis Pre Post
To Office salary Time 7,000 14,000By Gross Profit Sales 20,00060,000
To Partners’ salary Actual 6,000 –By Share trans. fee Actual – 1,000
To Advertisement Sales 1,100 3,300By Bal. transferred
To Printing & to Goodwill A/c 2,800 –
 Stationery Time 500 1,000
To Sales promotion Sales 400 1,200
To Travelling exp. Time 800 1,600
To Office rent Time 2,800 6,800
To Electricity chgs. Time 300 600
To Director’s fees Actual – 1,000
To Auditors’s fees Time 200 400
To Bad debts Time 400 800
To Commission on
sales Sales 1,000 3,000
To Preliminary Exp. Actual – 700
To Debenture int. Actual – 1,600
To Int. on Capital Actual 1,800 –
To Depreciation Time 500 1,600
To Bal. b/d – 23,400
22,800 61,000 22,80061,000

Working Notes :
1. Pre-incorporation loss – It has been transferred to Goodwill A/c.
2. Sales ratio —
Pre - incorporation Post- incorporation
Apr
. May June July Aug. Sept. Oct. Nov. Dec.Jan Feb Mar
1 1 1 1 1 112/ 12/ 12/12/ 12/ 12/
3 3 3 3 3 3
Pre-incorporation sales = 4. Post incorporation sales = 12; Hence, Sales ratio = 4:12 i.e. 1:3
Let average sales of first six months be Rs. 3 per month —
So, average sales of remaining six months (Rs. 3 + 2/3 of Rs. 3, i.e., Rs. 3+2 = Rs. 5 p.m.
Sales ratio = 12 : 36
Rs. 3 per
4 months = month = A × 3 =12
Rs. 3 per 6 @ Rs. 5 p.m. = i.e. , 6 × 5 = 30 that
8 months = month = i.e. 2 × 3= is
30 + 6 = 36
12 : 36 = 1 : 3
3. Allocation of office rent
—
Pre-incorporation Post-incorporation
8,400 × 4 ÷ 12 = 5,400 Oct. to
April to July 2,800 10,800 × 6 ÷ 12 = Mar.
1,400 Aug. to
Aug. to March 8,400 × 2 ÷ 12 = Sept.
Aug. to Mar 6,800
4. Allocation of depreciation —
Pre-inc. Post-inc.
On post inc. assets — 600
Bal. Rs. 1,500 on time ratio 4 : 12 500 1,000