Cost and Management Accounting(NET Paper 2)

Anuj BhatiaBBA (Gold Medalist), M.Com (Gold Medalist), CA(Inter.), CMA(Inter.), GSET, UGC NET-JRF, Ph.D (Pur.)]

Research Scholar,Department of Business Studies,Sardar Patel University

• Cost and Management Accounting : • Ratio Analysis, • Funds Flow Analysis,• Cash Flow Analysis, • Marginal costing and Break-even analysis, • Standard costing, • Budgetary control, • Costing for decision-making • Responsibility accounting

Ratio Analysis• Ratio Analysis is the relationship between two terms of

financial data expressed in the form of ratios and then interpreted with a view to evaluating the financial condition and performance of a firm.

• Ratio Analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than similar type of business.

Example : Firm A earns a profit of Rs. 50,000 while Firm B earns a profit of Rs. 1,00,000. Which of them is more efficient? We could tend to believe that firm B is more efficient than firm A. But in order to understand correctly , we need to find out their sales figure. Say firm A’s sales are Rs. 5,00,000 while firm B’s sale are Rs. 50,00,000. Now let’s compare the percentage of profit earned by them on sales. For A: 50,000 X 100 = 10 % 5,00,000 For B: 1,00,000 X 100 = 2 % 50,00,000 This clearly shows that firm A is doing better than Firm B.This example shows that figure assumes significance only when expressed in relation to other related figures.

Objective of  Ratio Analysis :

The main objective of analyzing financial statement with the help of ratios are: • The analysis would enable the calculation of not only the present

earning capacity of the business but would also help in the estimation of the future earning capacity.

• The analysis would help the management to find out the overall as well as the department – wise efficiency of the firm on the basis of the available financial information.

• The short term as well as the long tem solvency of the firm can be determined with the help of ration analysis.

• Inter – firm comparison becomes easy with the help of ratios.

Advantages of Ratio Analysis:

• Help in Financial statement analysis• Simplified accounting figures• Helps in calculating operation efficiency of the business enterprise• Facilities inter- firm comparison• Makes intra- firms comparison possible• Helps in forecasting 

Limitations of Ratio Analysis• Historical Analysis• Price Level Change• Not Free from bias• Window dressing• Qualitative factors ignored• Different accounting practices render ratios incomparable

LIQUIDITY RATIOSCurrent RatioCurrent ratio establishes the relationship between current assets and Current liability. It measures the ability of the firm to meet its short term obligation as and when they become due. It is calculated as: Current ratio= Current Assets

Current liabilitiesGenerally , a current ratio of 2:1 is considered satisfactory. Interpretation: It provides a measure of degree to which current assets cover current liabilities. The higher the ratio , the greater the margin of safety for the short term creditors. However, the ratio should neither be very high nor very low. A very highcurrent ratio indicates idle funds , piled up stocks, locked amount in debtors while a low ratio puts the business in a situation where it will not be able to pay its short- term debt on time.

Quick Ratio / Acid test ratio/Liquid ratioQuick ratio establishes the relationship between quick/ liquid assets and current liabilities. It measures the ability of the firm to meet its short term obligations as and when they become due without relying upon the realization of stock. It is calculated as:

Quick ratio = Quick Assets Current Liabilities

Interpretation: Quick ratio is considered better than current ratio as a measure of liquidity position of the business because of exclusion of inventories. The idea behind this ratio is that stock are sometimes a problem because they can be difficult to sell or use. That is , even through a supermarket has thousand of people walking through its doors every day, there are still items on its shelves that don’t sell as quickly as the supermarket would like. Similarly, there are some items that will sell very well.

Solvency Ratios Solvency ratio are used to judge the long term financial soundness of any business. Long term Solvency means the ability of the Enterprise to meet its long term obligation on the due date. Long term lenders are basically interested in two things: payment of interest periodically and repayment of principal amount at the end of the loan period. Usually the following ratios are calculated to judge the long term financial solvency of the concern. 1. Debt equity ratio;2. Total Assets to Debt Ratio;3. Proprietary ratio;4. Interest Coverage Ratio.

Debt-Equity Ratio Debt Equity Ratio measures the relationship between long-term debt and shareholders’ funds. It measures the relative proportion of debt and equality in financing the assets of a firm. It is computed as follows: Debt-Equity ratio = Long-term Debt’s/ Share holder funds Where –Long- term Debt = Debentures + Long – term loans Shareholders Funds = Equity Share Capital + Preference Share Capital + Reserves and Surplus– Fictitious Assets

Total Assets to Debt Ratio This Ratio established a relationship between total assets and long debts. It measures the extend to which debt is being covered by assets. It is calculated as

Total Assets to Debt Ratio = Total assets Long-term Debt

Interpretation: This ratio primarily indicated the use of external funds in financing the assets and the margin of safety to long-term creditors. The higher ratio indicated that assets have been mainly financed by owners’ funds , and the long- tem debt is adequately covered by assets. A low ratio indicated a grater risk to creditors as it means insufficient assets for long term obligations.

Proprietary RatioProprietary ratio establishes a relationship between shareholders funds to total assets . It measures the proportion of assets financed by equity. It is calculated as follows : Proprietary Ratio = Shareholders Funds/ Total assetsInterpretation: A higher proprietary ratio indicated a larger safety margin for creditors. It tests the ability of the shareholders’ funds to meet the outside liabilities. A low Proprietary Ratio , on the other hand , indicated a grater risk to the creditors. To judge whether a ratio is satisfactory or not, the firm should compare it with its own past ratios or with the ratio of similar enterprises or with the industry average.

Interest Coverage Ratio Interest Coverage Ratio established a relationship between profit before interest on long-term debt and taxes and the interest on long term debts. It measures the debt servicing capacity of the business in respect of fixed interest on long term debts. It generally expressed as ‘ number of times’.It is calculated as follows:Interest Coverage Ratio = Net Profit before Interest and Tax Interest on long term debt Interpretation : It reveals the number of times interest on long-term debt is covered by the profits available for interest. It is a measure of protection available to the creditors for payment of interest on long term loans. A higher ratio ensures safety of interest payment debt and it also indicates availability of surplus for shareholders.

Activity (or Turnover) Ratios 

The Activity (or Turnover) Ratios measures how well the facilities at the disposal of the concern are being utilized. They are known as turnover ratios as they indicates the speed with which the assets are being converted or turned over into sales. A proper balanced between sales and assets generally reflects tat assets are being managed well. They are expressed as ‘number of times’. Some of the important activity ratios are: 1. Stock Turn-over;2. Debtors (Receivable) Turnover;3. Creditors (Payable) Turnover;4. Fixed Assets Turnover;5. Working Capital Turnover.

Stock (or Inventory) Turnover Ratio It establishes a relationship between cost of goods and average inventory. It determines the efficiency with which stock is converted into sales during the accounting period under consideration. It is calculated as: Stock Turnover Ratio = Cost of Goods Sold/ Average StockWhere - Average stock = (opening + closing stock) /2 and Cost of goods sold = Net Sales - gross profit orCost of goods sold = opening stock + net purchases + direct expenses – closing stock

Debtors Turnover Ratio or Receivables  Turnover Ratio It establishes a relationship between net credit sales and average debtors or receivables. It determine the efficiency with which the debtors are converted into cash.It is calculated as follows :Debtors Turnover ratio = Net Credit sales/ Average Accounts Receivable Where Average Account Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and Bills Receivable)/2 Note: Debtors should be taken before making any provision for doubtful debts.Interpretation : The ratio indicated the number of times thereceivables are turned over and converted into cash in an accounting period. Higher turnover means that the amount from debtors is being collected more quickly. Quick collection from debtors increases the liquidity of the firm. This ratio also helps in working out the average collection period as follows:

Debt collection period This shows the average period for which the credit sales remain outstanding or the average credit period enjoyed by the debtors. It indicates how quickly cash is collected from the debtors.It is calculates as follows: Debt collection period = 12 months/52 weeks/365 days    Debtors’ turnover ratio

Creditors Turnover Ratio or Payable Turnover Ratio This ratio establishes a relationship between net credit purchases and average creditors or payables. It determine the efficiency with which the Creditors are paid. It is calculated as follows : Creditors turnover ratio = Net credit purchase / Average accounts payable. Where Average accounts payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2

Debt payment period/Creditors collection period This shows the average period for which the credit purchases remain outstanding or the average credit period availed of. It indicate how quickly cash is paid to the creditors. It is calculated as follows:  Debt collection period = 12 months/52 weeks/365 days

Creditors’ turnover

Fixed Assets Turnover RatioThis ratio establishes a relationship between net sales and net fixed assets. It determined the efficiency with which the firm is utilizing its fixed assets. It is computed followsFixed Assets Turnover= Net sales/ Net Fixed Assets Where Net Fixed Assets =Fixed Assets- Depreciation Interpretation: This ratio reveals how efficiently the fixed assets are being utilised.It indicates the firms’ ability to sales per rupee of investment in fixed assets. A high ratio indicates more efficient utilization of fixed assets.

Working Capital Turn Over Ratio This ratio establishes the relationship between net Sale and working capital. It determines the efficiency with which the working capital is being utilised. It is calculated as followers:working capital Turnover = Net Sale/ working Capital Interpretation: This ratio indicates the firms’ ability to generate sales per rupee of working . A higher ratio would normally indicate more efficient utilized of working capital ; through neither a very high nor a very low ratio is desirable.

Profitability RatiosEvery business must earn sufficient profits to sustain the operations of the business and to fund expansion and growth. Profitability ratios are calculated to analysis the earning capacity of the business which is the outcome of utilisation of resources employed in the business. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilised. Following are the important Profitability ratio • Gross Profit Ratio• Net profit Ratio • Operating Ratio• Operating Profit Ratio• Return on Investment (ROI) or Return on Capital Employed (ROCE)• Earnings per Share • Price Earning Ratio.• Dividend Payout Ratio

 Gross Profit Ratio Gross profit ratio establishes relationship between Gross Profit and net sale. It determines the efficiency with which production, purchase and selling operations are being carried on.  It is calculated as percentage of sales. It is computed as follows: Gross Profit Ratio = Gross Profit/Net Sales × 100

Net Profit Ratio or Net Margin This ratio establishes the relationship between net profit and net sale . It indicates managements’ efficiency in manufacturing, administering and selling the product. It calculates as a percentage of sale. it is computed as under: Net Profit Ratio = Net profit / Net Sales × 100Generally, net profit refers to Profit after Tax (PAT).

Operating Ratio Operating Ratio establishes relationship between operating cost and net sales. It determine the operational efficiency with the production , purchase and selling operations are being carried on. It is calculated as follows: Operating Ratio = (Cost of Sales + Operating Expenses)/ Net Sales × 100 Operating expenses include office expenses, administrative expenses, selling expenses and distribution expenses.

Operating Profit Ratio Operating Profit Ratio establishes the relationship between Operating Profit and net sales. It can be computed directly or as a residual of operating ratio. Operating Profit Ratio = Operating Profit/ Sales × 100 Where Operating Profit = Sales – Cost of Operation

Return on Capital Employed or  Return on Investment (ROCE or ROI) This ratio establishes the relationship between net profit before Interest and Tax and capital employees. It measures how efficiently the long-term funds supplied by the long-term creditors and shareholders are being used. It is expressed as a percentage.Thus, it is computed as follows: Return on Investment = Profit before Interest and Tax/Capital Employed × 100

Where capital employed = Dept + equity                            OrCapital Employed = Fixed Assets + Working Capital

Earnings Per ShareThis ratio measures the earning available to an equity shareholders per share. Itb indicates the profitability of the firm on a per share basis.The ratio is calculated as - Earning Per Share = Profit available for equity shareholders/ No. of Equity Shares In this context, earnings refer to profit available for equity shareholders which is worked out as Profit after Tax – Dividend on Preference Shares.

Price Earning Ratio This ratio establishes a relationship between market price per share and earning per share. The objective of this ratio is to find out the expectations of the shareholders. This ratio is calculated as – P/E Ratio = Market price of a Share/Earnings per Share Interpretation : It indicates the numbers of times of EPS the share is being quoted in the market. It reflects investors’ expectation about the growth in the firms’ earning and reasonableness of the market price of its shares. P/E ratios vary from industry to industry and company to company in the same industry depending upon investors perception of their future.

Dividend Payout Ratio This refers to the proportion of earning that are distributed against theshareholders. It is computed as – Dividend Payout Ratio = Dividend Per Share Earnings Per Share

Cash Flow Statements

Meaning of Cash Flow Statement• Cash flow is made up of two words i.e. Cash and Flow, whereas Cash means

cash balance in hand including cash at bank balance, and Flow means changes (which may be + or – increase or decrease) in the cash movements of the business.

• Cash Flow Statement deals with only such items, which are connected with cash i.e., items relating to inflow and outflow of cash. In other words, it is prepared to study the changes in cash, or to show impact of various transactions on the cash. In short, it is a statement, which is prepared to show the flow of cash in the business during a particular period. It thus, tells about the changes in cash position of a business. The changes may be related either with the cash receipts or cash payments or disbursements of cash. Thus, Cash Flow Statement is a summary of cash receipts and payments whereby reconciling the opening cash balance with the closing cash including bank balances in done.

Objectives of CFS• To Help the Management in Making Future Financial Policies • Helpful in Declaring Dividends etc.• Cash Flow Statement is Different than Cash Budget• Helpful in devising the cash requirement• Helpful in finding reasons for the difference• As per AS-3, Cash Flow Statement • Helpful in predicting sickness of the business

IMPORTANT DEFINITIONS AS PER ACCOUNTING STANDARD-3 (REVISED)

• Cash comprises cash on hand and demand deposits with banks.

• Cash Equivalents are short-term, highly liquid investments that are readily convertible into the known amount of cash and which are subject to an insignificant risk of change in value. An investment normally qualifies as cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition Examples of cash equivalents are : (a) treasury bills,(b) commercial paper, (c) money market funds and (d) Investments in preference shares and redeemable within three months can also be taken as cash equivalents if there is no risk of the failure of the company.

• Cash Flows are inflows and outflows of cash and cash equivalents. AS-3 requires a Cash Flow Statement to be prepared and presented in a manner that it shows cash flows from business transactions during a period classifying them into :

(i) Operating Activities; (ii) Investing Activities ; and (iii) Financing Activities.

• Operating Activities : Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.

• Investing Activities : Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

• Financing Activities : Financing activities are the activities that result in change in the size and composition of the owners’ capital (including preference) share capital in the case of a company) and borrowing of the enterprise.

STANDARD COSTING & VARIANCE ANALYSIS

STANDARD COST & STANDARD COSTING Standard cost is a “predetermined cost which is calculated from management standard of efficient operation and the relevant necessary expenditure.” - I.C.M.A ENGLAND Standard costing is “the preparation of standard costs their comparison of actual costs and the analysis of variances to their causes and points of incidence”

- I.C.M.A ENGLAND

OBJECTIVE OF STANDARD COSTING The main objectives of standard costing are: -To control the factors which affect production. - to supply reports promptly to the management showing the progress of production and how expenditure to date compares with estimates so that corrective actions may be taken in time, and - To disclose the effect of temporary increase or decrease in the volume of output and sales or revenues.

TECHNIQUES OF STANDARD COSTING The technique of standard costing involves:- The ascertainment of standard costs. - The use of standard costs. - Their comparison with the actual cost and the measurements of variances. - the location of responsibility for the variances and the corrective action to be taken. - the analysis of variances for ascertainment the reasons for the same.

VARIANCE ANALYSISThe main aim of the standard costing is the control of the cost. So the management is provided with the information about situations where in the actual results are not as they were planned to be. Hence management is informed of only the deviations or variances from the original plans, their favourable or unfavorable nature and the causes of such deviations. In this context standard costing subscribes to the principles of “management by exception”.Variance is the difference between standard cost and actual cost. It is expressed by a simple formula as follows:Variance = actual cost – standard cost.

MATERIAL COST VARIANCE (MCV)This is the difference between the standard cost of materials specified for the output achieved and the standard cost of the materials usedMaterial Cost Variance = Total std. – Total Actual Cost.

MCW = (SQ*SP) – (AQ * AP)Where :

SQ = Standard QuantitySP = Standard PriceAQ = Actual QuantityAP = Actual Price

MATERIAL PRICE VARIANCE (MPV)This is the difference between the standard price specified and the standard price paid.MPV = AQ (SP – AP)

CAUSES of MPV• Change in basic purchase price of material.• Change in quantity of purchase or uneconomical size of purchase

order.• Rush order to meet shortage of supply or purchase in less or more

favourable market.• Failure to take advantage of off – season price, the failure to

purchase when price is cheaper.• Failure to obtain cash and trade discounts or change in the discount

rates.

MATERIAL USAGE VARIANCE (MUV)This is the difference between the standard quantity specified and actual quantity used.MUV = SP (SQ – AQ)Material usage variance is subdivided into• Material mix variance• Material yield variance or scrap variance

MATERIAL MIX VARIANCE (MMV)• This is the portion of the direct material usage variance which is due

to the difference between the standard and the actual composition of a mixture.

• When the ratio of mix is different but the total quantities of standard mix and the total quantities of actual mix are the same.

• MMV = SP (SQ – AQ)

MATERIAL YIELD OR SCARP VARIANCE• This is the portion of the direct material usage variance which is due

to the difference between standard yield specified and actual yield obtained.MYV = SP * Abnormal Loss / Gain

OrMYV = SP (SY – AY)

MATERIAL YIELD OR SCARP VARIANCEThis is the portion of the direct material usage variance which is due to the difference between standard yield specified and actual yield obtained.

MYV = SP (SY – AY)

CAUSES FOR MATERIAL USAGE VARIANCE• The causes of material usage variance are:• Variation is usage of materials due to inefficient or careless use or economic use of materials.• Change in specification or design of product.• Inefficient and inadequate inspection of raw materials.• Purchase of inferior material or change in quality of materials.• Inefficiency in production resulting in wastages.• Use of substitute materials.• Theft or pilferage of materials.

LABOUR COST VARIANCE (LCV)• It is the difference between standard direct specified for the activity

achieved and the actual direct wages paid.• LCV – SLC – ALC (Standard Labour Cost – Actual Labour Cost)

• LABOUR RATE OF PAY VARIANCE (LRV)• This is that portion of labour cost variance which is due to the

difference between the standard rate of pay specified and the actual rate paid.LRV = AT (SR - AR)

= Actual time (standard rate – actual rate)

CAUSES FOR LABOUR COST VARIANCE• Direct labour rate variance occur due to the following:

• Change in basic wage structure or change in piece work rate. This will give rise to the variance till such time the standards are not revised.

• Employment of workers of grades and rates of pay different from those specified due to shortage of labour of the proper category, or through mistake, or due to the retention of surplus labour.

• Payment of guaranteed wages to workers who are unable to earn their normal wages if such guaranteed wages form part of direct labour cost.

• Use of a different method of payment e.g. payment of day – rates while standards are based on piece work method of remuneration.

• Higher to lower rates paid to casual and temporary workers employed to meet seasonal demands or urgent or special work.

LABOUR EFFICIENCY VARIANCE (LEV)• This is also that portion of labour cost variance which is due to the

difference between the standard labour hours specified for the outputs achieved and the actual labour hours expended. This is otherwise known as labor time variance. Labour spending variance, labour usage variance, labour quantity variance.

• LEV = SR (ST – AT)

CAUSES FOR LABOUR EFFICIENCY VARIANCE• The causes giving rise to direct labour efficiency variance as follows:• Lack of proper supervision or stricter supervision that specified.• Poor working conditions• Delay due to, waiting for materials tools, instructions etc. if not

treated as idle time.• Defective machine tools, and other equipment's.• Machine break down if not booked to idle time.• Work on new machines requiring less tike then provided for as long

as the standard is not revised.• Basic inefficiency of workers due to low morale, insufficient

training, faulty instructions, incorrect scheduling of jobs etc.• Use of non standard material requiring more or less operation

wages.

• LABOUR MIX VARIANCE (LMV)It is due to the difference in the standard output specified and

actual output obtained.

LYV = Standard labor cost per unit (actual output – standard output)

COST-VOLUME PROFIT ANALYSIS 

Today the manager is a principal factor in the success or failure of any business enterprise. The primary function of management is to make a profit for the firm. Essentially, profit is generated by effective sales and/or distribution of products or services.

Any decision-making organization actively concerned with profits will find itself involved in the analysis of costs and revenues. Since the firm must first recover its costs before it can make a profit.

There are definite relationships between costs, revenues and profits. There are three levels of activity that are of the greatest concern to the management of any profit-seeking business.

Break-even pointThe activity level at which the firm has exactly enough revenue to recover all costs.The firm is operating at a loss.The revenue that is penetrated is not sufficient to recover all costs that have been incurred (Total costs > Total Revenue ).The firm may be operating at profit.The revenue of the firm completely recovers the costs and has funds left over.

In Decision making process, it is more useful to classify costs as follows :

Fixed Cost : A cost that remains constant (within a specified range) regardless of the level of operations. (Taxes, salaries for executive personnel)

Variable Cost (Direct costs) : are cost which fluctuate in direct proportion with the level of manufacturing output or unit sales.

Sunk Costs : are previous investments which have no effect on a current decision. Total Cost  =  Total Fixed Cost  +  Total  Variable  Cost

Assumptions of Break Even Point: The concept of break even point is based on the following assumptions.1. Production and sales are the same, which means that as much as is produced is sold out in the market.Thus there is no inventory remaining at the end.2. Fixed cost remains same irrespective of the production volume.3. Variable cost varies with the production. It changes in the same proportion that of the production.Hence it has a linear relationship with the production. In other words, variable cost per unit remainsthe same.4. Selling price per unit remains same irrespective of the quantity sold.

The break even point is the point at which,a) There is no profi t, no lossb) Contribution margin is equal to total fi xed costc) Total fxed cost is equal to total revenued) All of the above.

• A large margin of safety indicates• a) Over capitalization• b) The soundness of business• c) Overproduction• d) None of these

• The selling price is Rs.20 per unit, variable cost Rs.12 per unit, and fixed cost Rs.16, 000, the breakeven-point in units will be,

• a) 800 units• b) 2000 units• c) 3000 units• d) None of these

• The P/V ratio of a product is 0.4 and the selling price is Rs.40 per unit. The marginal cost of the

• product would be,• a) Rs.8• b) Rs.24• c) Rs.20• d) Rs.25

• Under the marginal costing system, the contribution margin discloses the excess of,

• a) Revenue over fixed cost• b) Projected revenue over the break-even-point• c) Revenues over variable costs• d) Variable costs over fixed costs.

• Contribution margin is known as,• a) Marginal income• b) Gross profit• c) Net income• d) Net profit.

Budgetary Control• MEANING AND DEFINITION OF BUDGET• A budget is a future activity. It is a chart of future incomes and

expenses. It is a coordinating financial plan for a business enterprise. It includes estimates of sales, production, purchases, labor cost, overheads and financial position.

• According to Shubin, “a budget is a comprehensive overall plan in which management, on the basis of estimated sales volume and receipts, establishes cost and expense allowances for future operations. In this way effectively integrating and directing activities towards carefully determined.

• MEANING AND DEFINITION OF BUDGETARY CONTROL:• Budgetary control is a process which covers making of a

business budget, comparison of the actual performance with the budgeted one and detecting the errors and mistakes committed so that an attempt may be made to rectify them in future.

• According to Moore and Jakedine, "Budgetary control is using budget as a tool of controlling the actual operation of business.”

• Sales Budget: A Sales Budget shows forecast of expected sales in the future period [the period is well defined] and expressed in quantity of the product to be sold as well as the monetary value of the same. A Sales Budget may be prepared product wise, territories/area/country wise, customer group wise, salesmen wise as well as time wise like quarter wise, month wise, weekly etc. The following factors are taken into consideration while preparing a sales budget.

• Production Budget: This budget shows the production target to be achieved in the next year or the future period. The production budget is prepared in quantity as well as in monetary terms. Before preparation of this budget it is necessary to study the principal budget factor or the key factor.

• Material Purchase Budget: This budget shows the quantity of materials to be purchased during the coming year.

• Cash Budget: A cash budget is an estimate of cash receipts and cash payments prepared for each month. In this budget all expected payments, revenue as well as capital and all receipts, revenue and capital are taken into consideration. The main purpose of cash budget is to predict the receipts and payments in cash so that the firm will be able to find out the cash balance at the end of the budget period.

• Master Budget: All the budgets described above are called as ‘Functional Budgets’ that are prepared for planning of the individual function of the organization. For example, budgets are prepared for Purchase, Sales, Production, Manpower Planning, and so on. A Master Budget which is also called as ‘Comprehensive Budget’ is a consolidation of all the functional budgets. It shows the projected Profit and Loss Account and Balance Sheet of the business organization.

• Zero Base Budgeting: Zero Base Budgeting is method of budgeting whereby all activities are revaluated each time budget is formulated and every item of expenditure in the budget is fully justified. Thus the Zero Base Budgeting involves from scratch or zero.

• Zero based budgeting [also known as priority based budgeting] actually emerged in the late 1960s as an attempt to overcome the limitations of incremental budgeting. This approach requires that all activities are justified and prioritized before decisions are taken relating to the amount of resources allocated to each activity. In incremental budgeting or traditional budgeting, previous year’s figures are taken as base and based on the same the budgeted figures for the next year are worked out. Thus the previous year is taken as the base for preparation of the budget.

• A budget is A] an aid to management B] a postmortem analysis C] a substitute of management.D] all of the above

• A budget is a projected plan of action in • A] physical units • B] monetary terms • C] physical units and monetary units.

• The document which describes the budgeting organizations, procedures etc is known as

• A] Budget center • B] Principal Budget Factor • C] Budget Manual• D] All of the above

• The scarce factor of production is known as, • A] Key factor • B] Linking factor • C] Critical factor• D] Production factor.

MCQ:• Accounting Ratio are important tools by:A. ManagersB. ResearchersC. InvestorsD. All of the above

• Capital Employed refers to:A. Equity Share CapitalB. Net WorthC. Shareholders fundsD. None of the above

• ROI may be improved by:A. Increasing turnoverB. Reducing expensesC. Increasing capital utilizationD. All of the above

• Return of asset and ROI belongs to A. Liquidity ratiosB. Profitability ratiosC. Solvency ratiosD. turnover

• XYZ ltd has a debt equity ratio of 1.5:1 as compared to 1.3:1 of industry average. It means the firm has

A. Higher liquidity B. Higher financial riskC. Higher profitabilityD. Higher capital employed

• Debt to total assets is .2 . The debt to equity ratio would beA. .8B. .25C. 1D. .75

• Which of the following helps anaylsing ROE to share holdersA. ROAB. EPSC. ROID. All of the above

• ABC has a current ratio of 1.5 and WC of Rs.500000 , what are current assets?

A. 500000B. 1000000C. 1500000D. 2000000

• All listed companies are required to prepare A. Cash flow statement.B. Fund flow statement..C. Statement of affairs.D. All of these.

• Which of the following cash flow from investment activityA. Interest receivedB. Interest paidC. Dividend paidD. income tax paid

• Which of the following would increase working capital.A. Issue of bonus shareB. Issue of right shareC. Conversion of debt into capitalD. All of the above

• In order to test the liquidity of the business which ratio is usedA. Inventory turn over ratioB. Acid test ratioC. Debt equity ratioD. All of the above

• Given , stock turn over 6 times , sales Rs 300000 • Gross profit 20% • Closing stock is Rs. 4000 more than opening stock• The opening stock is –A. 36000B. 38000C. 40000D. 42000

• If the current ratio is 2.5 , quick ratio is 1.5 and NWC is Rs, 15,000, the value of inventory is-

A. 10,000B. 15,000C. 37500D. 52500

If the total assets is • If the total assets is 260000, total debt is 1,80,000, CL is Rs.

20,000 then Debt –Equity ratio will be-A. 4:1B. 3:1C. 2:1D. 1:1

• If average collection period is 15 days and average accounts receivable is Rs. 45,000, what will be the annual credit sales?

A. 10,80,000B. 16,20,000C. 6,75,000D. 187500

• A co. has PBT of Rs. 2,00,000. if the ICR is 5, what is the total interest charged?

A. 20,000B. 33,333C. 40,000D. 50,000

A predetermined calculation of how much costs should be under specified working conditions is called:A. Standard costB. Pre determined costC. Estimated costD. Actual cost

• The managements time saved by reporting only deviations from the predetermined standards is called

A. MBOB. Standard costingC. Budgetary controlD. Management by exceptions

• co

• Costs are segregated into controllable and non-controllable in A. Activity based costingB. Integrated accountingC. Responsibility accountingD. Cost accounting

• Responsibility centre is a __________ group of control centreA. Personalized B. Customized C. SpecializedD. Mechanized

• Responsibility accounting is a method of accounting in which cost are identified with

A. Cost centersB. Machine centersC. PersonsD. Deparments

• A responsibility center whose performance is measured by ROI is known as

A. Investment center B. Cost centerC. Revenue centerD. Profit center