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Advanced Management Accounting -M

Bachelor of commerce (bcom) (University of Calicut)

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AMC Group of Educational Institutions, Manissery

Department of Commerce

e- resources for students

[Link] First Semester

(Question Bank with Answers)

Advanced Management Accounting

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Contents

Page No.

Short Questions……………………………………………………………………………… 3

Short Essay Questions…………………………………………………………………….. 8

Essay Questions…………………………………………………………………………….. 32

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Short Questions

1) Define Marginal Costing ?

Ans: Marginal costing is the ascertainment, by differentiating between fixed

costs and variable costs , of marginal cost and of the effect on profit of
changes in volume or type of [Link] costing is the technique of
presenting cost data wherein variable costs and fixed costs are shown
separately for managerial decision [Link] separation of variable cost
from fixed cost helps in decision [Link] costing is also called
variable costing.

2) what is CVP analysis ?

Ans: C-V-P analysis is an extension of marginal [Link] is used to evaluate

how costs and profits are affected by changes in the volume of the
[Link] volume of production changes ,cost also
[Link] profit [Link] three factors,namely cost,volume
and profit are [Link] analysis of three different factors -
Cost,Volume and profit is known as Cost Volume Profit Analysis.

3) what is a Break - Even chart ?

Ans: Break even chart is a graphical presentation of Break Even [Link]

is used for studying the cost - volume - profit [Link] indicates BEP
and also shows the estimate profit or loss at different levels of
[Link] is the point at which total sales line cuts the total cost line.
It shows BEP and also the estimated profit or loss at varying levels of activity
and it presents the information in an easily understandable manner.

4) What is Contribution ?

Ans: Contribution is a very important concept in marginal [Link] is the

basic of decision making and control. It is the profit in marginal costing. It
refers to excess of sales over variable cost. It is not the final profit. It is the
marginal profit. Contribution is also known on ' contribution margin ' or '
gross margin '. Contribution covers fixed cost and profit. If contribution is

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more than the fixed cost,there is a profit. If contribution is less than the
fixed cost,there is a loss.

5) What is P/V ratio ?

Ans: As already stated P/Vratio ( Contribution Margin Analysis) is a

technique of Cost Volume Profit [Link] is the ratio of contribution to
[Link] shows the relationship between contribution and [Link] term 'P'
represents Profit that is equivalent to contribution when calculating BEP
(rupees).The term 'V' refers to volume of sales.

6) What is Break Even Point ?

Ans: The Calculation of B.E.P is the foundation stone of break even

[Link] even point is the point or level of activity at which the total
cost is equal to total revenue. It is the point of no profit no loss. Thus it is an
equilibrium or balancing point. It is the point at which losses cease and
profits begin. If sales go up beyond the BEP, firm makes a profit. If sales
come down, firm incurs a loss.

7) What is Angle of incidence ?

Ans: Angle of incidence is the angle formed at [Link] is the angle between
sales line and total cost line at the [Link] is also known as [Link] indicates
the rate at which profits are being [Link] angle indicates higher rate of
profit and lower BEP.A lower BEP is an indication that the firm can
withstand even if the sales [Link] does not go into loss immediately and
remains ,at least,with a small amount of [Link] angle indicates a lower
rate of profit and higher [Link] improve this angle,contribution should be
increased either by raising the selling price and /or by reducing variable
cost.

8) What is Margin of Safety ?

Ans: Margin Of Safety is the excess of actual or present sales over the BEP
[Link] refers to the amount by which sales revenue can fall before a loss is
[Link] is the volume of sales beyond the break even [Link] indicates
the strength or weakness of an enterprise .A large margin of safety indicates

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the soundness of the [Link] may be expressed in unit,sales revenue or

as a percentage of sales.

9)What is Cash Break Even Point ?

Ans: Cash break even point is the level of output or same at which the cash
inflows will be equal to cash total [Link] is the level of output where there is
no cash profit and no cash [Link] this purpose fixed costs are divided into
Cash fixed costs (rent,rates,wages and salaries,insurance etc...) and non
cash fixed costs (depreciation,advertisement,research and development cost
etc...).All variable costs are assumed to be in terms of Cash.

10) What is Cost Break Even Point ?

Ans: Cost Break Even Point is calculated when two or more alternative plans
or methods of production are [Link] is a point where the costs of
operating two alternatives is [Link] break even point helps in identifying
which alternative is more profitable to operate or at a given level of output.

11 . What is the meaning of standard costing?

(Ans) . Standards costing

costing is a pre- determined cost for evaluating the actual

performance. It is a planned cost for a unit of products or services rendered.
A standard cost is a target cost which should be attained. The costing
terminology of CIMA, london , defined standards cost as “ predetermined
cost based on a technical estimate for material, labour and overhead for a
selected period of time and for a prescribed set of working conditions".
standard cost may be described as 'commonsense cost'. In short, standard
cost is a pre- determined cost.

12 . Define Historical approach?

(Ans) . Historical approach

In setting standard, past records have a role. In the historical

approach, the standards are based on average past performance for the
same or similar operation. Use of historical past data to set up standards is
based on the fact that recent past information can provide valuable insight
into what is expected in expected in features. The level of efficiency, normal
waste, normal idle time, machine breakdown [Link] be assessed from past
records.

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13 . What are the features of standard costing?

(Ans) . Features of standard costings

● It is used in addition to other methods of costing.

● It is a technique of costing based on the preparation and use of
standard costs.
● Standard costs are set for various elements of total cost.
● It makes a comparison of actual cost with standard cost.
● The main purpose of standard costing is controlling costs by analysing
the causes of variance.
● Variance are reported to the Management for the purpose of taking
remedial action.

14 . What is Standards for direct labour cost

(Ans) . Standards for direct labour cost

Determination of direct labour cost standards involves
determination of standard time and standard [Link] fixing the
standard labour time, the following step may be taken :
● Standardization and classification of products.
● Time and motion studies.
● Work and methods analysis.
● Preparation of estimates or trial runs
The standard labour rate is usually determined by the
cost accountant after consulting the personal manager .whil
fixing the standard labour rate, the following factors may be
considered :
● Existing labour rates.
● Rates paid by similar firms.
● Labour laws.
● Influence of trade union.
● Skill required for the job.

15 . What is Standards manual?

( Ans) . Standard manual :

A detailed manual should be prepared for the guidance of the

staff. This manual is called standard manual . This document gives details
regarding the constitution of standard committee, duties and responsibilities
of the standards committee, periodicity of mettings, forms and records
required for setting standards, guidelines regarding setting of standards,
performance for reporting about standards as well as variances.

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16 . What are the benefits of variance analysis?

(Ans) . Benefits of variance analysis

● It indicates the areas where variance arises. This facilitates

Management by exception.
● It identifies the causes for variances. This helps to assign the
responsibility for the variance to a particular [Link] others
wards ,it helps to pinpoint responsibilities for the variance.
● It can be used as an effective tool of cost control .in other words, it
helps to ensure cost contt.
● It helps to compare the performance of different departments.
● It help in feature planning and in formulating policies.
● It helps in developing team spirit among the managerial personnel.

17 . What are the differences between standard costing and historical

costing?

(Ans) . Differences between standard costing and historical costing

Historical costing Standard costing

● Actual costs ● Predetermined costs
● Past costs ● Future costs
● Always recorded in accounts ● May or many not be recorded
● Aims at ascertaining actual in accounts
cost ● Aims at cost control
● Not much useful for ● More useful in managerial
managerial decision- making decision making

18 . What are the advantages of standard costing? Write the five

advantage of standard costing.

(Ans) . Advantages of standard costing

● Valuable aid to Management : standard costing is a valuable aid to

management in formulating price and product policies. It also helps in
discharging managerial functions .
● Management by exception : standard costing facilitates the
application of management by excepting . By studying the variance,
management can pay more attention to weak areas that require
control.
● Quick reporting : standard costing facilitates timely presentation of
cost report to management for the purpose of decision making.

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● Economy : standard costing reduced clearical [Link] does not

require the maintenance of detailed cost record.
● Cost control : standard costing is an effective tool of cost control. Cost
control can be achieved by comparing actual cost with standard cost
and taking corrective action through analysis of variance.

19 . What is basic standards ?

(Ans) . Basic standards

Those standards which [Link] revisions. CIMA terminology

defines current standard as " a standard established for use over a short
period of time related to current condition". In short, current standards are
prepared for current period.

20. What is expected standards?

(Ans) . Expected standards

This is the standard which is actually expected during a specified

budget period. In setting this standard, a reasonable allowence is made fore,
more realistic than Ideal standard.

Short Essay Questions

1. What are the different types of risk?

Ans:

A. Systematic risk: Every enterprise is a part of the economy, We know

that society is dynamic. Hence, change occur in the economic, political and
social systems constantly. These changes affect all companies and all
securities but in varying degrees For example , economic and political
instability adversely affects all industries and companies.

1. Market risk: market risk is an important type of risk. Market prices of

investments or securities fluctuate widely within a short span of time .
Change in market price causes change in return from investment.

a) Equity risk: The market price of shares varies due to changes in demand
and supply. Equity risk is the risk of loss because of fall in the market price
of shares.

b) Interest rate risk: It is the risk of losing money because of a change in

the interest rate.

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C) currency risk: It is the risk of losing money because of a movement in

exchange rate

2. Purchasing power risk:when an investor purchases a security , he

foregoes the opportunity to buy some goods or services. It means that he
postpones his consumption. Meanwhile, if there is inflation in the
economy,the prices of goods and services would increases.

B. Unsystematic risk: The returns from securities may vary because of

certain factors affecting only the company issuing such [Link] risk
is known as unsystematic [Link] arises from managerial inefficiency,
technological change in production process, changes in consumer
preference, labour trouble etc.

1. Business risk: Every company operates within a particular operating

environment. This operating environment is classified into two- internal
environment and external [Link] environment refers to the
conditions within the company.

2. Financial risk: this refers to the variability of profit to equity

shareholders due to the debt capital. It is associated with the capital
structure of the company.

C. Other type of risk: in addition to the above types, there are some other
types of risks. It is the risk of not getting back the amount that is lent. It is
also known as credit risk.

1. Default risk: The borrower main fail to pay the interest and principal
amount within the stipulated time.

2. Liquidity risk: this refers to a situation wherein it may not be e possible

to sell the asset or stock.

2. What are the merits and demerits of risk adjusted discount rate
method?

Ans: An estimation of the present value of cash for high risk investments is
known as risk-adjusted discount rate. A very common example of risky
investment is the real estate. Risk adjusted discount rate is representing
required periodical returns by investors for pulling funds to the specific
property. It is generally calculated as a sum of risk free rate and risk
premium. The variation of risk premium is depending on the risk aversion of
investor and the perception of investor about the size of property’s
investment risk.

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Merits;

● It is simple to understand and easy to calculate

● It provides compensation for the risk factor
● It can be used along with both the NPV and IRR
● It takes into account the risk averse attitude of investor

Demerits

● There is no scientific way of determining the risk premium.

● This method is subjective and Controversial. How match weight should
be assigned to risk premium depends upon personal judgement
● It is the future cash flow of a project which is subject to risk. Therefore,
adjustment should be made in the cash flows and not in the discount
rate. Hence this technique is not scientific.
● Assume that risk increases with time at a canstant rate. This is not
valid

3 : What are the merits and demerits of sensitivity analysis

Ans: Sensitivity analysis is the study of how the uncertainty in the output of
a mathematical model or system (numerical or otherwise) can be divided
and allocated to different sources of uncertainty in its inputs.A related
practice is uncertainty analysis, which has a greater focus on uncertainty
quantification and propagation of uncertainty; ideally, uncertainty and
sensitivity analysis should be run in tandem.

In case cash inflow are very sensitive in various cases, cash inflow estimates
are made under three difference assumptions or situations.

1. Pessimistic

2 Most -likely

3. Optimistic

Pessimistic cash flows are estimated under negative conditions of the future.

Merits:

● It tells about the sensitivity of a project to changes in different factors

● it is helpful to locate and assess the impact of risk on a project's
profitability
● It indicates which variables and assumptions are most critical
● it helps identify areas on which a managerial attention should be
focused

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Demerits:

● It is difficulty to identify key factors and the change in their values

● This is not a precise technique
● it does not consider the effect of a combination of changes on various
factors on the profitability of the project

4. Explain Simulation Technique? Advantages and disadvantages.

Ans: as already stated, capital expenditure decision involve large

investments and time. They are irreversible decision. Thus capital
expenditure decisions involved greater risks. By applying simulation
technique, it is possible to to minimise total risks. It enables to ascertain
deep probable outcomes before implementing the project.

Monte Carlo simulation s a risk analysis technique. In this technique,

probable future events are simulated in order to generate estimated rates of
return and risk indices. It can be done manually but mostly done on
computers. In this process, random values for each variables such as
number of units to be sold, selling price, picture and variable costs etc..Are
identified. These values are proposed to compute the NPV. This process of
identifying the random values and calculating NPV is repeated many times.

Advantages

● Simulation can be used to investigate the behaviour of problems

which are too complex
● The basic principles of the simulation technique are fairly simple.
Therefore, it is more attractive to people who are not expert in
quantitative techniques.
● It is a micro analysis of big and complicated system by braking into
each sub-system and studying the the interface of the various sub-
system
● Time will be saved in computer simulation
● Simulation allows us to study the interactive effect of individual
components aur variable in order to determine which are important.

Disadvantages

● Simulation is not an optimising technique. It simply allows us to

select the best of the alternative systems examined
● Reliable results are possible only if the simulation is continued for a
long period.
● A computer is essential to cope with the amount of calculation is
simulation modelling

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● To develop a simulation model means consumption of voluminous

data. This may be very costly
● The simulation model does not produce answers by [Link]
must generate all of the conditions and constraints for solutions they
want to examine

5. What is merits and demerits of decision tree analysis?

Ans:A Decision Tree Analysis is a graphic representation of various

alternative solutions that are available to solve a problem. The manner of
illustrating often proves to be decisive when making a choice. A Decision
Tree Analysis is created by answering a number of questions that are
continued after each affirmative or negative answer until a final choice can
be made.

Merits

● It shows a bird's eye view of all the possibilities associated with a

proposed project.
● ETA tells the management about the future adverse possibilities in
advance
● It brings into light the degree of risk and uncertainty involved in the
investment decisions.
● It introduces precision in decision- making by expressing all outcomes
or events in quantitative terms

Demerits
● When there are too many alternatives,the construction of decision
tree becomes difficult. It will be just like a bush with many branch
forks
● It is a time consuming technique. It should be applied only in case
of major investment decisions
● It is difficult to make assumptions and Assign probabilities to
various events active various levels in a decision tree. There may be
inconsistency in assigning probabilities to various events

6. What is Standard Deviations Method?

Ans:

The standard deviation of a random variable, sample, statistical population,

data set, or probability distribution is the square root of its variance. It is
algebraically simpler, though in practice, less robust than the average

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absolute deviation.A useful property of the standard deviation is that unlike

the variance, it is expressed in the same unit as the data.

standard deviation of a population or sample and the standard error of a

statistic (e.g., of the sample mean) are quite different, but related. The
sample mean's standard error is the standard deviation of the set of means
that would be found by drawing an infinite number of repeated samples
from the population and computing a mean for each sample. The mean's
standard error turns out to equal the population standard deviation divided
by the square root of the sample size, and is estimated by using the sample
standard deviation divided by the square root of the sample size. For
example, a poll's standard error (what is reported as the margin of error of
the poll), is the expected standard deviation of the estimated mean if the
same poll were to be conducted multiple times. Thus, the standard error
estimates the standard deviation of an estimate, which itself measures how
much the estimate depends on the particular sample that was taken from
the population.

[Link] is Co-efficient of Variation Method?

Ans: What Is the Coefficient of Variation (CV)?

The coefficient of variation (CV) is a statistical measure of the dispersion of

data points in a data series around the mean. The coefficient of variation
represents the ratio of the standard deviation to the mean, and it is a useful
statistic for comparing the degree of variation from one data series to
another, even if the means are drastically different from one
[Link] FINANCE & ACCOUNTING FINANCIAL ANALYSIS

The coefficient of variation (CV) is a statistical measure of the dispersion of

data points in a data series around the mean. The coefficient of variation
represents the ratio of the standard deviation to the mean, and it is a useful
statistic for comparing the degree of variation from one data series to
another, even if the means are drastically different from one
[Link] the Coefficient of Variation. The coefficient of
variation shows the extent of variability of data in a sample in relation to the
mean of the population. In finance, the coefficient of variation allows
investors to determine how much volatility, or risk, is assumed in
comparison to the amount of return expected from investments. Ideally, if
the coefficient of variation formula should result in a lower ratio of the
standard deviation to mean return, then the better the risk-return trade-off.
Note that if the expected return in the denominator is negative or zero, the
coefficient of variation could be misleading.

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coefficient of variation is helpful when using the risk/reward ratio to select

investments. For example, an investor who is risk-averse may want to
consider assets with a historically low degree of volatility relative to the
return, in relation to the overall market or its industry. Conversely, risk-
seeking investors may look to invest in assets with a historically high degree
of volatility.

8) Define Marginal Costing and what are it's Characteristics and

Assumptions?

Ans) Meaning and Definition of Marginal Cost

Marginal cost is the additional cost of producing an additional units. The

institute of cost and management accounts, London defines 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 one unit".Thus
marginal cost is the amount by which total cost changes when there is a
change in output by one unit. In short marginal cost is the change in total
cost due to change in quantity of output by one unit. Marginal Cost is also
known as variable cost because an increase of one unit in production will
cause an increase in variable cost only. Thus,

Marginal cost= Direct Material Cost + Direct Labour Cost + Direct

Expenses + variableOverheads

In short marginal cost is equal to prime cost plus variable Overheads.

Meaning and Definition of Marginal Costing

Marginal Costing is a technique of Costing in which variable cost of product

is given more importance as compared to fixed cost of the product According
to institute of costs and Management Accountants, London, Marginal
Costing is " the ascertainment, by differentiating between fixed costs and
variable costs, of Marginal cost and of the effect on profit of changes in
volume or type of output ". Thus, Marginal Costing is the technique of
presenting cost data wherein variable cost and fixed Costs are shown
separately for managerial decision making. Marginal Costing is also known
as variable Costing.

Characteristics of Marginal Costing

[Link] Costing is not a method of Costing. It is a technique for

managerial decision making.

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[Link] costs are classified into fixed and variable. Only variable costs are
charged to products.

[Link] costs are charged against profits of the period in which they are
incurred.

[Link] stocks of finished product and work-in-progress are valued at

marginal cost or variable cost.

[Link] price is equal to variable cost plus contribution. Contribution is the

difference between sales revenue and variable cost.

[Link] profitability of product or department is based on contribution made

by each production department.

Assumptions of Marginal Costing

[Link] costs can be divided into two categories - fixed and variable.

[Link] costs remain constant at all levels of activity.

[Link] total variable costs vary but variable cost per unit does not vary.

[Link] price remains constant at different levels of activity.

[Link] of material, rates of labour etc. remain unchanged.

[Link] of production is the only factor which influences the costs.

[Link] is no stock.

9) Explain Advantages and Disadvantages of Marginal Costing?

Ans) Advantages

Easy and simple : Marginal Costing technique is simple to understand and

easy to operate. There is no problem of apportionment of fixed Costs.

Simple valuation of stock : stock can be valued easily. This is because

stock is valued on the basis of Marginal cost.

Better cost control : it is possible to control cost more effectively when it is

classified into fixed and variable components.

No problem of under or over absorption of overhead : As fixed Costs are

completely ignored, the problem of under or over absorption of overhead
does not arise.

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Ascertainment of profitability : it can show the comparative profitability of

various products.

Profit planning : The technique marginal costing provides data relating to

cost -- volume - profit relationship.

Decision - making : It helps the management in taking various decision

such as make or buy, sales mix, export, capacity utilization, shut down
decision etc.

Pricing policy : Marginal Costing is very helpful in fixing selling prices

under different situation like recession, depression, introduction of new
product etc.

Disadvantages

Difficulty in separating costs : it is difficult to classify all costs into fixed

and variable elements.

Difficulty in application : it is difficult to apply the technique of Marginal

Costing in contracts ship building etc.

Under valuation of stock : Under marginal costing, stock is valued at

marginal cost value of stock does not include fixed cost.

Short run analysis : Fixed cost may remain constant in the short run. But
it tends to vary in the long run.

Time factor ignored : Marginal Costing ignores the time factor completely.

Wrong basis for pricing: In marginal costing selling prices are determined
on the basis of contribution alone.

More emphasis on sales : Marginal Costing gives more importance to

selling function. Production function is also equally important.

10) Explain Cost - Volume - profit analysis.

Ans) Cost - Volume - Profit Analysis

The profit of a firms depends upon many factors. The important factors
determining profit are selling price, sales volume, variable cost per unit,
fixed cost, sales mix etc.

Meaning

C-V-P analysis is an extension of Marginal Costing. It is used to evaluate

how costs and profits are affected by changes in the volume of production.
When volume of production changes, cost also changes. Consequently profit

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changes. Thus the three factors, namely cost, volume and profit are
interconnected. An analysis of three different factors - cost, volume and
profit is known as cost volume profit analysis. As per the CIMA Official
Terminology, C-V-P analysis is defined as " the study of the effects on future
profit of changes in fixed cost, variable cost, sales price, quantity and mix ".
In short, C- V-P analysis is an analysis of three factors, namely cost, volume
and profit. Volume affects costs and in turn costa affect the profit. Hence the
name C-V-P analysis.

OBJECTIVE AND USED OF C-V-P ANALYSIS

* To forecast the profit accurately

* To help management in determining the pricing policies.

* To evaluate the performance of the business.

* To facilitate the preparation of flexible budgets.

* To achieve cost control and cost reduction.

* To determine break even point.

Techniques of C-V-P analysis

a) Contribution margin analysis

b) Break even analysis

c) Profit volume analysis

d) Margin of safety analysis

Elements of CVP Analysis

1. Marginal cost equation

2. Contribution

3. Break even analysis

4. Margin of safety

5. Profit volume ratio

6. Break even chart

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7. Angle of incidents

11) State the importance of contribution?

Ans) contribution

Contribution is a very important concept in Marginal Costing. It is the basis

of decision making and control. It is the profit in Marginal Costing. It refers
to excess of sales over variable cost. It is not the final profit. It is the
Marginal profit. Contribution is also known on 'Contribution margin' or '
gross margin '. Contribution covers fixed cost and profit. If contribution is
more than the fixed cost, there is a profit. If contribution is less than the
fixed cost, there is a loss. Contribution can be expressed either as 'per unit'
or in 'total'.

Importance or uses of contribution

1. It helps in fixing the selling price.

2. It enables to determine break even point.

3. It helps to find out the probability of various products, department etc.

4. It help to determine key factor.

5. It indicates the profit potential of a business enterprise.

6. It highlights the relationship among cost, sales and profit.

7. It guides the management in selecting the profitable product mix or

method of production.

8. It helps the management in taking 'making or buy' decision.

9. It enables the management decided whether to introduce a new product

in the market.

12) Explain Break Even Analysis?

Ans) Break even analysis is the most widely used technique of cost volume
profit analysis. Break even analysis establishes the relationship between
revenues and costs with respect to volume. It indicates the level of sales at
which total cost are equal to total revenues. The terms break even analysis
is interpreted in narrow as well as in broad sense. In it's narrow sense, it is
concerned with finding out the break even point (BEP). BEP is the point at

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which total sales revenue is equal to total cost. It is the point of no profit no
loss. In it's broad sense, it means a system of analysis which is used to
determine the probable profit at different levels of activity. It shows the
behaviour of cost and profit at varying levels of activity. Many people think
that cvp analysis and break even analysis are one and the same. It is not so.
The scope of CVP Analysis is quite wide. Break even analysis is only a part
of CVP Analysis.

Assumptions

1. All costs can be separate into fixed and variable elements.

2. Variable costs vary in direct proportion to volume of output.

3. Fixed cost will remains constant at all volume of output.

4. Selling price per unit remains constant.

5. The general price level does not change

6. The firm is able to sell all the units produced.

7. The only factor that affects costs and revenues is volume.

Advantages

* It is useful in forecasting sales and profit.

* it helps in the inter-firm comparison of profitability.

* it is used in profit planning

* it is used to determine margin of safety

* it assist in the formulation of price policies

* it is applied in make or buy decision

Disadvantages

* it is very difficult or impossible to separate costs into fixed and variable.

* semi - variable costs are completely ignored

* it has limited application in the long range planning

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13) Explain Break Even Chart?

Ans)Break even chart is a graphical presentation of break even analysis. It is

used for studying the cost-volume-profit relationship. It indicates BEP and
show the estimated profit or loss at different levels of production. BEP is the
point at which total sales line cuts the total cost line.

Assumptions

1. Cost can be classified into fixed and variable cost.

2. Fixed costs remain fixed at all levels of activity.

3. Selling price per unit remains constant.

4. No change in sales mix.

[Link] units produced are sold.

Advantages

* it is used to study the cost volume profit relationship.

* it indicates profitability of products.

* it serves as a tool of cost control.

Disadvantages

* The assumption that fixed Costs remain constant will not hold good in the
long run.

* it does not consider the capital employed, market conditions, govt. Policy
etc.

* The assumption that product mix remains same may not hold good in the
long run.

14) Explain Marginal Costing and Decision - Making ( Applications of

Marginal Costing or CVP Analysis )?

Ans) Marginal Costing and Decision - Making

One of the basic functions of management is to make decision. Decision -

making process involves selection of a course of action or alternative from
among various alternatives. There are many techniques which help

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management in the process of decision - making. One of the important

technique is marginal costing. Some of the important areas where Marginal
Costing technique will be applied are as follows:

1. Make or Buy Decision :

The Marginal Costing technique can be used to decide whether to make a

particular product/component or buy it from outside. Such a decision can
be arrived at only by comparing the marginal or variable cost of
manufacturer and the outside price.

2. Alternative Method of Production:

Sometimes a manufacturer is faced with the problem of comparing

alternative methods of manufacturer and choosing the best method. Here
also Marginal Costing can be applied. The alternative giving the greatest
contribution per unit will be more profitable.

3. Buy or Lease:

Some of the assets are costly. Companies may find it difficult to buy such
costly machines or equipments. Sometimes it is profitable to take the asset
on lease instead of buying it.

4. Shut Down Decision:

Sometimes a plant is forced to be closed down temporarily. The decision

whether to shut down or not is to be taken when the nature of business is
seasonal, cut-throat competition is there and other unfavorable condition
exist in the market.

5. Replace or Retain Decision:

The decision to replace or retain plant and equipment is a capital

investment or long-term decision and should be taken very carefully.

6. Accepting Bulk Orders, Additional Orders, Export Orders and

Exporting in New Markets:

Sometimes a company may accept bulk orders, additional orders and orders
from foreign or new market with a view to utilize the idle capacity or to
explore new market.

7. Pricing Under Different Situations:

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Fixation of selling prices is one of the important function of management.

Generally prices are determined by market conditions and other economic
factors. However in actual practice, prices are fixed according to situations.

a) Pricing under normal conditions

b) Selling price below the Marginal cost

c) Pricing under stiff competition and trade depression

8) Selection of a suitable sales mix:

When a firm manufacturers more than one products a problem arises as to

which product mix will yield the maximum profit. Marginal Costing helps
the management in selecting the best sales mix.

9) Problem of key factor:

Sometimes the firm may not be able to sell all the products manufactured.
In some cases, it may not be able to produce to the extent of sales potential.
This is due to the scarcity of some factors of production such as raw
materials, skilled labour, power, finance etc.

15. Define Standard Costing. Differentiate between standard costing

and historical costing.

Ans :- When standard costs are used for the purpose of cost control, the
technique is known as standard costing. Thus, standard costing is
technique of cost ascertainment and cost control. It is the preparation of
standard costs and applying them to measure variations from standard
costs and analysing causes of variations with a view to maintain maximum
efficiency.

HISTORICAL COSTING STANDARD COSTING

1. Actual costs 1. Predetermined costs

2. Past costs 2. Future costs
3. Always recorded in accounts 3. May or may not be recorded in
accounts
4. Aims at ascertaining actual cost 4. Aims at cost control
5. Not much useful for managerial 5. More useful in managerial
decision making decision making

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16. What is meant by interpretation of ariance? What are the various

causes of variance?

Ans :- Interpretation of variance simply refers to analysing the possible

causes of Variance and making them understandable.

There are many possible reasons for cost variances arising due to
efficiencies and inefficiencies of operations, errors in standard setting,
changes in exchange rates etc. The possible causes of cost variances are
listed below:

Variance Favourable Unfavorable

a) Material price Paying a lower price than Paying a higher price
expected for direct materials. than expected for direct
materials.
b) Material usage Using less direct materials Using more direct
than expected. materials than expected
c) Labour rate Paying a lower rate than Paying a higher rate
expected for direct labour. than expected for direct
labour.
d) Idle time Producing a unit in less time Producing a unit more
than expected . time than expected.
e) Labour Output produced more Lost time in excess of
efficiency quickly than expected. standard allowed.
f) Overhead exp. Saving in cost . More Increase in cost of
economical use of services. services used. Excess
use or change in type of
services used.
g) Overhead Excess of actual time worked Excessive idle time.
volume over budget. Shortage of plant
capacity.

17. What are the advantages of standard costing?

Ans :- [Link] control: Standard costing is an effective tool of cost control.

Cost control can be achieved by comparing actual cost with standard cost
and taking corrective action through analysis of variance.

[Link] aid to management: Standard costing is a valuable aid to

management in formulating price and product policies.

[Link] of performance: Standard costing provides a yardstick

against which actual cost can be compared to measure efficiency.

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[Link] by exception: Standard costing facilitates the application of

management by exception

[Link] reporting: Standard costing facilitates timely presentation of cost

reports to management for the purpose of decision making.

[Link]: Standard costing reduces clerical labour . It does not require

the maintenance of detailed cost records.

[Link] of resources: Standard costing ensures the effective

utilisation of resources and by machine by eliminating wastes.

[Link] of price: Standard costing helps in fixing selling price in advance

if production.

18. Explain Labour variance?

Ans :- The labour variance or wage variance is similar to material varia5.

When standard cost of labour differs from actual wage cost, the labour
variance arises. The following are the important labour variances:

a) Labour cost variance: Labour cost variance is also called wage variance.
It is the difference between standard cost of labour allowed for actual output
achieved and the actual cost of labour.

b) Labour rate variance (Labour rate of variance): This is similar to material

price variance. It is that part of the labour cost variance, which arises due to
the difference between standard rate specified and the actual rate paid.

c) Labour efficiency variance: It is also called labour usage or quantity

variance. It is that portion of labour cost variance which arises due to
difference between standard hours specified for the actual output and the
actual hours spent.

d) Idle time variance: Idle time variance is that portion of labour cost
variance which arises due to the abnormal idle time of workers on account
of sickness, power failure, machine breakdown etc.

e) Labour mix variance: Labour mix variance is a part of labour efficiency

variance. It arises when there is a change in the composition of labour force.

f) Labour yield variance: This is like material yield variance. It is the

difference between standard labour output and actual output or yield.

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19. What is meant by investigation of variances? What are the different

techniques of investigation variance?

Ans :- A cost benefit analysis is necessary to decide whether or not an item

should be taken up for investigation. There are certain techniques to decide
whether variances should be investigated or not. Following techniques are
generally used in investigation of variances:

a) Simple rule of thumb model: The simple rule of thumb investigation

method Managers use simple models based on arbitrary criteria such as
investigating if the absolute size of the variance is greater than a certain
amount or if the variance exceeds the standard costs by some
predetermined percentage.

b) Trend analysis: Where the trend of a variance is consistent, it may be

concluded that the process is under control. If a variance is significant but
following a trend, it implies that the standard is not consistent with current
circumstance.

c) Statistical control chart: It can be used to monitor variance. Past

observations of an operation when it is under control are used to determine
the mean usage and standard deviation.

d) Decision tree approach: Probabilities of the effectiveness of investigation

can be applied to the decision tree inorder to determine whether an
economic advantage would arise.

e) Game theory approach: This technique helps in recognising that the

process may be under control even though a variance is reported.

20. What is the difference between standard costing and budgetary

control?

Ans :-

Basis for Standard costing Budgetary control

comparison
Meaning The costing method in Budgetary Control is the
which evaluation ofsystem in which budgets
performance and activity isare prepared and
done by making acontinuous comparisons
comparison between actual are made between the
and standard costs, is actual and budgeted
Standard Costing. figures to achieve the
desired result.
Basis Determined on the basis of Budgets are prepared on

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data related to production the basis of

management's plans.
Range It is limited to cost details It includes cost and
financial data
Concept Unit concept Total concept
Scope Narrow Wide
Reporting of Yes No
variance
Effect of temporary The short term changes will The short term changes
changes in not influence the standard will be shown in the
conditions costs. budgeted costs.
Comparison Actual costs and standard Actual figures and
cost of actual output budgeted figures
Applicability Manufacturing concerns All business concerns

21. What are the limitations of Standard Costing?

Ans :- Standard costing suffers from the following limitations:

a) Difficulty in fixing Standards: It is difficult to establish accurate cost

standards. This is requires high technical skill.

b) Frequent revisions: As business conditions always change, it becomes

essential to revise the standards. Revision of standards is costly and some
firms may ignore it.

c) Unsuitable: Standard costing is not suitable for job order industries and
industries producing non standardized products.

d) Failure: Standard costing would be a failure if management doesn't have

interest and faith in it

e) Labour problems: If the standards set are not accurate and are
unreliable, it may lead to psychological effects.

f) Requires co-operation at all levels: Standard costing can be effective

only if employees at all levels co-operate in the operation of the system.

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22) Define Performance Measurement? What are the characteristics

and purposes of Performance measurement?

A) Performance measurement

According to Moulin, "Performance measurement is the process of

evaluating how well organizations are managed and the value they deliver
for customers and other stakeholders".

Characteristics of Performance measurement

● Measures should evaluate progress towards goals and objectives of the

organization.
● They should be reasonably objective and easily ascertainable.
● There should balance long term and short term considerations.
● They should reflect key activities of the management.
● The employees should be aware of the performance measurements.
● The measures should be understandable to the employees.
● All persons or divisions whose performance would be measured should
be provided with information relating to the result in time and on
regular basis.

8. The measures should be used consistently and on regular basis.

Purposes of Performance measurement

● To evaluate how well the organization is performing.

● To help managers ensure that their subordinates are doing the right
thing.
● To help in budgeting.
● To motivate the people in accomplishing the goals.
● To celebrate the achievement of goals.
● To help in promoting the competence and value of government in
general.
● To learn reasons behind poor or good performance.
● To improve performance.

23. What is Return on Investment? What are the merits and demerits?

A) ROI is widely used to measure divisional as well as overall corporate

performance. It considers the level of investment along with the income
generated from that investment.

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When a firm invests money in a business,it naturally expects adequate

return on its investment. Therefore the firm wants to know how much profit
is earning on its [Link] is for knowing this,ROI is [Link]
measures the overall [Link] establishes the relationship between
profit or return and [Link] is also called accounting rate of return,It
is computed follows:

ROI= Profit before interest and Tax / Capital Employed × 100

Merits of ROI

● It measures overall profitability.

2. It measures success of business.

3. It helps to compare the performance of different divisions of a firm.

4. It helps in investment decisions.

5. It is useful for planning the capital structure.

6. It can be used for determining the price of a product.

7. It serves as foundation for optimum utilization of the assets of a firm.

Demerits of ROI

● The concept of profit as used in ROI is not clear.

● It is effective for comparison of divisional performance only when
different divisions follow the same accounting policies regarding
valuation of stock, charging depreciation etc .
● It may lead divisional managers to reject new investments or projects
that could be profitable for the company as a whole.
● The divisional managers tries to maximize ROI of his own division
without considering the overall value ( or net worth) of the
organization.
● It encourages managers to focus on the short run at the expense of
the long run.
● When assets become fully depreciated, the measures of investment
become very low. This makes comparison difficult.

24. What is Performance Budgeting? Explain the features and steps?

A) Performance Budgeting

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Performance Budgeting refers to a budget in terms of functions,

programmes and performance units ( Functions, activities and projects )
reflecting the revenues and expenditures of an Organization or Government.

Features of Performance Budgeting

● It is based on functions, programmes and activities.

● The total operations are subdivided into functions or tasks or
activities.
● For each task or activity the objective is determined.
● For measuring the work or task, suitable methods or normsare
established.
● Targets are set for each programme or activity both in terms of money
value and Physical quantities.
● It introduces a system approach to budgeting.
● It is widely used in public sector enterprises and in Government
departments

Steps in Performance budgeting

● Establishing responsibility centres.

● Classifing the total work in terms of various functions, programmes
and activities.
● Fixing targets (Monitory and Physical)for each responsibility centre.
● Measuring actual performance.
● Evaluating performance by comparing actual results with the targets.
● Reporting of performance and taking corrective actions.

25. What are the defferences between Traditional Budgeting and Zero
Based Budgeting?

A) Differences between Traditional Budgeting and Zero Based Budgeting

Traditional Budgeting ZBB

Begins with previous year's actuals. Begins with zero as base.
Focuses on money. Focuses on goals and objectives.
Accounting oriented. Desicion oriented.
Resources are allocated not on the Resources are allocated on the basis
basis of cost benefit analysis. of cost benefit analysis.
Routine approach. Straight forward approach.
Not priority based. Priority based.
Prepared annually. Prepared once in five years.

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26. What is Activity Based Budgeting?What are the advantages of ABB?

A) Activity Based Budgeting

It is a method of budgeting where activities that incur costs are

recorded, analyzed and researched. It is more rigorous than traditional
budgeting processes, which tend to merely adjust previous budgets to
account for inflation or business development.

Advantages of ABB

1. Evaluation

Activity based budgeting method evaluates each and every cost driver. It
takes into consideration all the steps involved in an activity. The irrelevant
activities are eliminated and only the necessary activities form a part of the
business.

2. Competitive edge

Activity based budgeting system eliminates all sort of unnecessary

activities. This helps the business to see its cost. The saved cost results in
the production of goods and services at lower cost than that of competitors.
It also helps the organization to gain a competitive edge in the market.

3. Business as a unit

This budgeting techniques helps in viewing the business as a single unit

and not in the form of departments. The managers or the top management
prepare the budget for the business unit as a whole and not keeping in mind
any single department as done in the case of other methods of budgeting.

4. Elimination of bottlenecks

Budgets under activity based budgeting are prepared after deep research
and analysis. This study removes all the unnecessary activities of the
business. By doing so, the business eliminates all sorts of bottlenecks
associated with an activity and business functions are carried out more
smoothly.

5. Improves relationship

Activity based budgeting system helps in improving the relationship

between the organization and its customers. The main aim of this budgeting
method is to eliminate unnecessary activities and serve with the customers
with the best quality at best price. The enforces the employees of the

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company to serve the customers in the best way possible and ensure
customer satisfaction.

27. What is Total Quality Management? What are the principles of

TQM?

A) Total Quality Management describes a management approach to long

term success through customer satisfaction. In a Total Quality Management
effort, all members of an organization participate in improving processes,
products, services, and the culture in which they work.

Total : It means everybody in the organization is involved.

Quality : It means meeting customer requirements.

Management : It means top management leads the drive to achieve quality.

In short, TQM means quality can and must be managed.

Principles of TQM

● Quality can and must be managed.

● Everyone has a customer and is a supplier.
● Processes, not people are the problem.
● Every employee is responsible for quality.
● Problems must be prevented, not just fixed.
● Quality must be measured.
● Quality improvements must be continuous.
● The quality standard is defect free.
● Goals are based on requirements, not negotiated.
● Management must be involved and must lead.
● Plan and organize for quality improvement.

28. What is Responsibility Accounting? Explain the features.

Responsibility Accounting is a system of control where responsibility is

assigned for the control of costs. The persons are made responsible for the
control of costs. Proper authority is given to the persons so that they are
able to keep up their performance.

Features of Responsibility Accounting System

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● Fixation of responsibility : Under this system responsibility of various

executives are fixed in accordance with the objectives of the
organization.
● Assignment of cost : The costs are assigned to responsibility centers
and area of each center is well defined. Under it costs are
accumulated, recorded and reported in such a way that they can be
associated with the person who is heading that center.
● Division of costs : The cost of eating responsibility center has to be
divided according to the nature of expenses into fixed and variable
expenses. Such division of costs facilitates comparison of standards
with that of actual expenditure.
● Performance report : Responsibility Accounting is a control device. A
control system to be effective should be each that deviation from the
plans must be reported at the earliest. Then only corrective action can
be taken in time. The deviations can be known only when performance
is reported.
● Controllable and uncontrollable costs : A distinction is made between
controllable and uncontrollable costs and for each responsibility
center, the extend of responsibility is defined.
● Accounting function : The emphasis is given on the accounting
function, which constitutes the basic framework for the information
system.
● Human aspect : Goals and objectives are achieved through people.
Hence, responsibility accounting system should motivate people. It
should be used in positive sense. Its aim is not to place blame.
Instead, it is to evaluate the performance of the individuals and
provide feedback so that future performance can be improved.
● Participative management : The responsibility accounting system
becomes more effective if participative or democratic style of
management is followed. The plans are laid or budgets are formulated
after consulting the subordinates. This will motivate the workers.

Essay Questions

1) What is Break even analysis?Discuss its assumptions and uses.

Ans Break even analysis is the most widely used technique of cost volume
profit analysis. Break even analysis establishes the relationship between
revenue and cost with respect to volume. It indicates the level of sales at
which total costs are equal to total revenues.

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The term break even analysis is interpreted in narrow as well in broad

sense. In its narrow sense, it is concerned with finding out the break even
point. BEP is the point at which total sales revenue is equal to total cost. It
is the point of no profit no loss.

In its broad sense,it means a system of analysis which is used to determine

the probable profit at different levels of activity. It shows the behavior of cost
and profit at varying levels of activity.

The break even analysis may be expressed in graph such as break even
chart or profit graph or in a statement form as follows:

Marginal cost statement

Sales xxx

Less :Marginal cost

Direct material xxx

Direct labour xxx

Variable overhead xxx xxx

Contribution xxx

Less: Fixed co xxx

Profit / Loss xxx

ASSUMPTIONS

[Link] costs can be separated into fixed and variable elements

[Link] costs vary in direct proportion to volume of output

3. Fixed cost will remain constant at all volume of output

[Link] price per unit remains constant

[Link] case of multiple products, sales mix remains constant

6. Productivity per worker and efficiency of plant etc remain unchanged

[Link] general price level does not change

8. The firm is able to sell all the units produced

ADVANTAGES

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[Link] is useful in forecasting sales and profits

[Link] helps in the inter firm comparison of profitability

[Link] brings out the effect of increase or decrease in fixed and variable costs
on profit

4. It helps to find out the volume of sales which gives a desired return on
capital employed

5. It is used in profit planning

[Link] is used to determine margin of safety.

[Link] helps to determine the selling pricprices which gives a desired profit.

2) What is CVP analysis and explain the techniques of CVP analysis.

Ans Cost Volume Profit analysis is an extension of marginal costing. It is

used to evaluate how costs and profits are affected by changes in the volume
of production. When volume of production changes,cost also changes.
Consequently profit changes.

Thus the three factors, namely, cost ,volume and profit are
[Link] analysis of three different factors - cost,volume and
profit is known as CVP analysis.

As per the CIMA official terminal, cvp analysis is defined as "study of the
effects on future profit of changes in fixed cost,variable cost,sales price,
quantity and mix"

In short CVP analysis is an analysis of three factors namely cost ,volume

and profit.

The main objectives and uses of CVP analysis are

● To forecast the profit accurately

● To help management in determining the pricing policies
● To evaluate the performance of the business
● To facilitate the preparation of flexible budgets
● To achieve cost control and cost reduction
● To determine break even point

TECHNIQUES OF CVP ANALYSIS

There are two basic techniques of CVP analysis. They are

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a) contribution margin analysis

b)Break even analysis

The other two techniques are profit volume analysis and margin of safety
analysis.

CONTRIBUTION MARGIN ANALYSIS

By analyzing the contribution margin, it is possible to study the relationship

among cost,volume and profit. For this profit volume ratio is to be
computed.

Contribution is a very important concept in marginal costing. It is the basis

of decision making and control. It is the profit in marginal costing. It refers
to excess of sales over variable cost.

Contribution is also known as contribution margin or gross margin.

Contribution = sales- variable cost

BREAK EVEN ANALYSIS

Break even analysis establishes the relationship between revenue and cost
with respect to volume.

All costs can be separated into fixed and variable elements. The only factor
that affects cost and revenue is volume. Ficmxed cost remains constant.
Selling price per unit remains constant.

MARGIN OF SAFETY

Margin of safety is the excess of actual or present sales over the BEP sales.

Margin of safety =present sales or actual sales- BEP sales

If it is to be expressed as a percentage of sales ,the following formula is

used:

Actual sales - BEP sales ×100

Actual sales

OR

Profit x100

Total contribution

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Margin of safety can be increased or improved by

● Increasing the selling price

● Reducing the variables cost
● Increasing production and sales
● Reducing the fixed cost
● Switching the production to more profitable products.

3) What do you mean by Marginal costing? State its assumptions,

advantages and disadvantages.

Ans Marginal cost is the additional cost of producing an additional unit. It

is also known as variable cos because an increase of one unit in production
will cause an increase in variable cost only.

According to Institute of Costs and Management Accountants, London,

Marginal costing is the ascetainment by differentiating between fixed costs
and variable costs, of marginal cost and of the effect on profit of changes in
volume or type of output.

Marginal costing is the technique of presenting cost data wherein variable

costs and fixed costs are show mm separately for managerial decisions
making.

ASSUMPTIONS

● All cost can be divided into two categories fixed and variable
● Fixed cost remain constant at all levels of activity
● The total variable costs vary but variable cost per unit does not vary
● Selling price remains constant at different levels of activity
● Price of material,rate of labour etc remain unchanged
● Volume of production is the only factor which influences the cost
● There is no stock

ADVANTAGES

● Marginal costing technique is simple to understand and easy to

operate. There is no problem of apportionment of fixed cost
● Stock can be valued easily.
● It is possible to control cost more effectively when it is classified into
fixed and variable components
● As fixed costs are completely ignored the problem of under or over
absorption of overhead doesnot arise
● The technique of marginal costing provides data relating to cost
volume profit relationship.

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● It helps the management in taking various decisions.

DISADVANTAGES

● It is very difficult to classify all costs into fixed and variable elements
● It is difficult to apply the technique of marginal costing in all
contracts. It is not applicable in capital intensive industries where
fixed costs are very high.
● It ignore the time factor completely.
● It give more importance to selling [Link] function is also
equally important.

4. Discuss various methods of measuring the performance of a

company?

Ans) Techniques of Performance Measurement

The techniques have been divided into 2 categories, they are :

1. Traditional Methods

The traditional methods are based on earnings. Managers have been

using these traditional methods to measure the financial performance. Some
of the main traditional measures used in performance measurement are ;

1.1. Ratio Analysis

It is aa quantitative method of gaining insight into a company's

liquidity, operational efficiency, profitability by studying its financial
statements such as the balance sheet and income statement.

a. Return on assets

b. Return on liquidity

c. Earnings per share

1.2. Net Income

Net income also called Net earnings, is calculated as sales_ cost of goods
sold. It appears on a company's statement and is also an indicator of a
company's profitability.

1.3. Market Value Added

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It's the difference between current market value of the company's

stock and the initial capital that was invested in the company by both
bondholders and stockholders.

1.4. Cash Flow Statement

It is a financial statement that shows how changeschanges in

balance sheet accounts and income affect cash and cash equivalents, and
breaks the analysis down to operating, financing and investing.

1.5. Funds Flow Statement

It is prepared to analyse the reasons for changes in the financial position

of a company between two balance sheets.

1.6. Financial Statement Analysis

It is the process of reviewing and analysing a company's financial

statements to make better economic decisions to earn income in future.

a. Comparative statements

b. Common size statements

[Link] Costing

It is the accounting system in which variable costs are charged to charge

units and fixed costs of the period are written off in full against the
aggregate contribution.

1.8. Break Even Analysis

It is based on categorising production costs between those which are

"variable" and those that are "fixed".

1.9. Standard Costing

Variances are recorded to show the difference between the expected and
actual cost.

1.10. Budgetory Control

It means regularly comparing actual income or expenditure to identify

whether or not corrective action is required.

2. Modern Techniques

a. The Balanced Scorecard

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b. TPM process

c. 7- step TPM process

d. Total Measurement Development Method ( TMDM)

e. Activity_Based Costing and Management

f. Economic Value Added (EVA)

g. Quality Management

h. Customer Value Analysis

5. What is ROI. What are its advantages and disadvantages?

Ans) Return On Investment (ROI)

ROI is a performance measure used to evaluate efficiency of an investment

or compare the efficiency of a number of different investments. ROI tries to
directly measure the amount of return on a particular investment, relative to
the investment's cost.

Advantages of ROI

● Easy comparability with internal and external benchmarks and other

divisions who use ROI.
● Controls for size and deference across plants and divisions
● Reduces tendency to overinvest in project by managers
● Motivates managers to increase sales, decrease costs and minimize
asset investment
● Better measure of profitability
● Achieving goal congruence
● Comparative analysis
● Performance of investment division
● ROI as indicator of other performance ingredients
● Matching with accounting measurements

Disadvantages Of ROI

● Satisfactory definition of profit and investment are difficult to find

● ROI may influence a divisional manager to select only investments
with high rates of return
● Discourages managers from investing in projects that reduce a
division's ROI
● Does not incorporate measures of risk

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● Financial accounting causes investment in assets should be

understated
● A good or satisfactory return is defined as an ROI in excess of
some minimum desired rate of return, usually based on the firm's
cost of capital.

6 What is EVA. What are its objectives? What are the merits and
limitations?

Ans) Economic Value Added (EVA)

Economic value added (EVA) is a measure of a company's

financial performance based on the residual wealth calculated by deducting
it's cost of capital from its operating profit, adjusted for taxes on a cash
basis. EVA is the incremental difference in the rate of return over a
company's cost of capital.

Objectives Of EVA

● The foremost objective of the EVA is the true performance

measurement of an organization after taking into consideration the
stakeholders' perspective.
● The main objective of the EVA is to determine which business units'
best utilize their assets to generate returns and maximize shareholder
value; it can be used to access a
● company, a business unit, a single plant, office, or even an assembly
line.
● EVA aims at determining a company's true profit, once taxes and cost
of supporting capital have been taken into account.
● EVA aims to ascertain the financial health of the organization and it's
capacity to generate shareholder ‘value' respectively.
● EVA aims at the financial assessment of an organization which is
important for the company's long range success and planning.
● EVA help the managers in setting organizational goals on the basis of
financial assessment and keeping into consideration the main motive
of shareholders wealth maximization.

Advantages Of EVA

● The adjustments made avoid the distortion of results by the

accounting policies in place and should therefore result in goal
congruent decisions.
● The cost of financing a division is bought home to the division's
manager.

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Limitations of EVA

● Requires numerous adjustments to profit and capital employed

figures.
● Does not facilitate comparisons between divisions since EVA is an
absolute measure.
● There are many assumptions made when calculating the WACC.
● Based on historical data where as shareholders are interested in
future performance.

7) What is Break even analysis?Discuss its assumptions and uses.

Ans Break even analysis is the most widely used technique of cost volume
profit analysis. Break even analysis establishes the relationship between
revenue and cost with respect to volume. It indicates the level of sales at
which total costs are equal to total revenues.

The term break even analysis is interpreted in narrow as well in broad

sense. In its narrow sense, it is concerned with finding out the break even
point. BEP is the point at which total sales revenue is equal to total cost. It
is the point of no profit no loss.

In its broad sense,it means a system of analysis which is used to determine

the probable profit at different levels of activity. It shows the behavior of cost
and profit at varying levels of activity.

The break even analysis may be expressed in graph such as break even
chart or profit graph or in a statement form as follows:

Marginal cost statement

Sales xxx

Less :Marginal cost

Direct material xxx

Direct labour xxx

Variable overhead xxx xxx

Contribution xxx

Less: Fixed cost xxx

Profit xxx

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ASSUMPTIONS

[Link] costs can be separated into fixed and variable elements

[Link] costs vary in direct proportion to volume of output

3. Fixed cost will remain constant at all volume of output

[Link] price per unit remains constant

[Link] case of multiple products, sales mix remains constant

6. Productivity per worker and efficiency of plant etc remain unchanged

[Link] general price level does not change

8. The firm is able to sell all the units produced

ADVANTAGES

[Link] is useful in forecasting sales and profits

[Link] helps in the inter firm comparison of profitability

[Link] brings out the effect of increase or decrease in fixed and variable costs
on profit

4. It helps to find out the volume of sales which gives a desired return on
capital employed

5. It is used in profit planning

[Link] is used to determine margin of safety.

[Link] helps to determine the selling pricprices which gives a desired profit.

8) What is CVP analysis and explain the techniques of CVP analysis.

Ans Cost Volume Profit analysis is an extension of marginal costing. It is

used to evaluate how costs and profits are affected by changes in the volume
of production. When volume of production changes,cost also changes.
Consequently profit changes.

Thus the three factors, namely, cost ,volume and profit are
[Link] analysis of three different factors - cost,volume and
profit is known as CVP analysis.

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As per the CIMA official terminal, cvp analysis is defined as "study of the
effects on future profit of changes in fixed cost,variable cost,sales price,
quantity and mix"

In short CVP analysis is an analysis of three factors namely cost ,volume

and profit.

The main objectives and uses of CVP analysis are

● To forecast the profit accurately

● To help management in determining the pricing policies
● To evaluate the performance of the business
● To facilitate the preparation of flexible budgets
● To achieve cost control and cost reduction
● To determine break even point

TECHNIQUES OF CVP ANALYSIS

There are two basic techniques of CVP analysis. They are

a) contribution margin analysis

b)Break even analysis

The other two techniques are profit volume analysis and margin of safety
analysis.

CONTRIBUTION MARGIN ANALYSIS

By analyzing the contribution margin, it is possible to study the relationship

among cost,volume and profit. For this profit volume ratio is to be
computed.

Contribution is a very important concept in marginal costing. It is the basis

of decision making and control. It is the profit in marginal costing. It refers
to excess of sales over variable cost.

Contribution is also known as contribution margin or gross margin.

Contribution = sales- variable cost

BREAK EVEN ANALYSIS

Break even analysis establishes the relationship between revenue and cost
with respect to volume.

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All costs can be separated into fixed and variable elements. The only factor
that affects cost and revenue is volume. Ficmxed cost remains constant.
Selling price per unit remains constant.

MARGIN OF SAFETY

Margin of safety is the excess of actual or present sales over the BEP sales.

Margin of safety =present sales or actual sales- BEP sales

If it is to be expressed as a percentage of sales ,the following formula is

used:

Actual sales - BEP sales ×100

Actual sales

OR

Profit x100

Total contribution

Margin of safety can be increased or improved by

● Increasing the selling price

● Reducing the variables cost
● Increasing production and sales
● Reducing the fixed cost
● Switching the production to more profitable products.

9) What do you mean by Marginal costing? State its assumptions,

advantages and disadvantages.

Ans Marginal cost is the additional cost of producing an additional unit. It

is also known as variable cos because an increase of one unit in production
will cause an increase in variable cost only.

According to Institute of Costs and Management Accountants, London,

Marginal costing is the ascetainment by differentiating between fixed costs
and variable costs, of marginal cost and of the effect on profit of changes in
volume or type of output.

Marginal costing is the technique of presenting cost data wherein variable

costs and fixed costs are show mm separately for managerial decisions
making.

ASSUMPTIONS

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● All cost can be divided into two categories fixed and variable
● Fixed cost remain constant at all levels of activity
● The total variable costs vary but variable cost per unit does not vary
● Selling price remains constant at different levels of activity
● Price of material,rate of labour etc remain unchanged
● Volume of production is the only factor which influences the cost
● There is no stock

ADVANTAGES

● Marginal costing technique is simple to understand and easy to

operate. There is no problem of apportionment of fixed cost
● Stock can be valued easily.
● It is possible to control cost more effectively when it is classified into
fixed and variable components
● As fixed costs are completely ignored the problem of under or over
absorption of overhead doesnot arise
● The technique of marginal costing provides data relating to cost
volume profit relationship.
● It helps the management in taking various decisions.

DISADVANTAGES

● It is very difficult to classify all costs into fixed and variable elements
● It is difficult to apply the technique of marginal costing in all
contracts. It is not applicable in capital intensive industries where
fixed costs are very high.
● It ignore the time factor completely.
● It give more importance to selling [Link] function is also
equally important.

[Link] is corporate governance.? Enumerate various features and

objectives of corporate governance.

Corporate governance

ANS; J. Wolfenson, president of the world bank defined 'corporate

governance is about promoting corporate fairness transeperancy and
accountability.'

● Features.

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1. systamatic. :corporate governance is very systematic. It is based on

laws procedure, practices, rules etc.

2. Universal application :it is used by the companies all over the world.

[Link] ;Good corporate governance ensure a company is

managed in the interest of its stakeholders, not just for the benefit of few
top mangers.

4 . Power and influence :Good corporate governance prevents any single

individual from having too much power in an organisation.

5. Transparency :Transparency means that the board of directors must

disclose all relevant information to the managers.

6. Protection to the managers right :The bord of directors must protect

the rights of the stakeholders.

7. Accountability :The CEO & the bord of directors must be made

accountable for their actions to the stakeholders and the entire society.

8. Based on ethics : It is based on ethics,morel principles and values.

OBJECTIVES

● Transparency and full disclosure. : one of the most important

objectives in the organisation is ensure higher degree of transparency
and full disclosure of transactions in the company accounts.

*Accountability : corporate governance is to encourage

accountability of the management to the company directors and the
accountability of the directors to the shareholders.

*Equitable treatment of shareholders : The structure of corporate

governance must be designed to treat all shareholders equally.

* self evaluation : corporate governance allows firms to evaluate their

behaviour before they are scrutinised by regulatory bodies.

* increasing shareholders wealth ; The main aim of corporate

governance is to protect the long term interest of the shareholders.

11. Explain the role of shareholders in corporate governance.

Investors are the proprietors of the company. They have certain rights in the
company. Investors differ according to the type of stock and the relevant
law in the country.

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1*.VOTING RIGHT : shareholders have right to vote on variety of corporate

matters including voting in officers, companies acquisition and mergers or
liquidation of companies assets. Voting power includes electing directors
and proposals.

2*. RIGHT TO TRANSFER OWNERSHIP : The right to transfer of

ownership means shareholders are allowed to trade their stock on exchange.
The right to transfer of ownership provides liquidity for investment.

3*. RIGHT TO INSPECT : All share holders shall be allowed to

inspect the corporate books and records of the company,including minutes
of board meetings and stock registries.

4*.RIGHT TO INFORMATION : The shareholders shall be provided

periodic reports which disclose personal and professional information about
the directors and officers of the company.

5*. RIGHT TO DIVIDENT : All shareholders have the right to receive

dividends. Divident amt determined by the corporate officers and not by the
ownership interest of the shareholders. The amt can fluctuate yearly

6*.RIGHT TO SUE : Shareholders also have the right to sue for the wrong
doing of corporation.

7*. APPOINTMENT OF AUDITORS : Shareholders also have the right to

appoint the company auditors. The appointment is generally done for 5
years and further can be ratified passing resolution in the annual general
meeting.

8*.APPOINTMENT OF DIRECTORS : Shareholders play important role in

the appointment of directors. They have right to appoint various type of
directors such as additional directors, alternative directors, and nominee
directors.

9*. RIGHT TO GET COPIES OF FINANCIAL STATEMENTS. : Share

holders have the right to get copies of financial statements. It is the duty of
the company to send the financial statements of the company to all
shareholders eighter in a quarterly or annual statements.

12. State the important principles of corporate governance.

CORPORATE GOVERNANCE IS ABOUT PROMOTING CORPORATE

FAIRNESS, TRANSPARENCY, AND ACCOUNTABILITY.

PRINCIPLES

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1*.PRINCIPLES OF ACCOUNTABILITY : Corporate accountability refers

to the obligations and responsibilities to give an explanation for the
companies actions and conduct. This principle say that management is
acceptable to the board ;& board is accountable to the shareholders.

2*PRINCIPLES OF FAIRNESS : This principle tells about impartiality or

lack of bias. The corporate should ensure fair treatment to all
stakeholders including minority shareholders and foreighn shareholders.

3*.PRINCIPLES OF EQUITY :The corporate governance framework should

be protect shareholders right and ensure editable treatment of all
shareholders including minority and foreign shareholders. All
shareholders have the opportunity to obtain effective redress.

4*.PRINCIPLES OF TRANSPERANCY: Transparency means openness, a

willingness by the company to provide clear information to shareholders and
other stakeholders. It ensures that stakeholders can have confidence in the
decision making.

5*.FIDUCIARY PRINCIPLES :This is the another principle of CG. The board

of directors are given authority to act on behalf of the company. They should
therefore accept full responsibility. Bord members should act on a fully
informed basis,in good faith.

6*. PRINCIPLES OF INDEPENDENCE : It requires independence of the

part of the top management of the corporation. Board directors must be
strong. Without top management of the company being independent, good
corporate governance is only a dream.

7*.PRINCIPLES OF CONFIDENTIALITY : Corporate governance requires

that the discussion between the management and the supervisory body. It is
very important that full and comprehensive confidentiality be maintained.

8*. PRINCIPLES OF DECIPLINE : Corporate principles is a

commitment by a company's senior management to comply the rules and
regulations that is usually recognised and accepted to be correct and
proper.

9*. PRINCIPLES OF RESPONSIBILITY : Responsible management would

be able to lead the company in the right direction. It allows the
organisation to take corrective action and for penalising mismanagement.

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10*. PRINCIPLE OF SOCIAL RESPONSIBILITY : A well managed

company aware of, and respond to social issues, a placing a high
priority on ethical standereds.

12. What is MDP? Explain the step involved in management

development programme?

MANAGEMENT DEVELOPMENT PROGRAM

MDP is a course designed to strengthen the relationship between

managers at all levels. This enables employees at a managerial level gain the
ability to motivate other there by allowing them to effective manage their
teams.

Characteristics of management development are;

[Link] oriented : Management development is growth oriented. It

focuses it's activities responsibilities. After management development,
employees get opportunity of higher responsibility which assist for personal
growth.

[Link] oriented: The main objective of management development is to

develop the human competencies for the future job responsibilities.

[Link] on managerial employees : management development focus only

to the managerial level employees. It prepares the educational programs to
enhance inter personal skills, and technical skills to the managerial
employees.

[Link] process : beyond training management development is a

educational program which stands in learning process. It focusses on overall
personality development for business communication, environmental and
industry analysis, business planning maintaining human and business
relation etc.

5. Proactive : management development is advance thinking. This aims to

prepare human resources ready for any type of emergencies. It is not
conducted only after realizing the need.

[Link] motivation : management development is basis of personal growth.

So each manager wants to participate in such type of management
development programs. External motivation is not necessary for
management development as in training.

[Link] process : management development is not spontaneous

learning process. It starts with analysis of organizational objective s, future
scopes, stratego and succession planning. As manager require involving in

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many managerial activitiee, they need to acquire different skills which are
not possible in single program. So managerial development must be
arranged as continuous learning process.

The steps involved in management development programs

are;

[Link] organisational objective:

The first step in management development program is to identify the

organization objective. The objective tell where we are going and will develop
a framework from which the executive needs can determined.

[Link] development needs:

Next step is ascertaining development needs which requires forecasts

it's needs for present and future growth. This is based up on a
comprehensive job analysis with particular reference to the kind o
management work performedperformed, the kind of executives needed and
the kind of education, experience training, special knowledge, skills,
personal tracits etc required for such work

[Link] of presey management work:

Appraisal of present management talent is made with a view to

determining qualitatively the type of personnel available with in an
organization it self. The performance of a management individual is
compared with the standard expected of him. His personal tracits are also
analysed. So that a value judgement may be made of his potential for
advancement.

[Link] power inventory:

Now a management power inventory is prepared for the purpose of

getting complete information about each management individuals bio-data
and educational qualifications the results of tests, and performance
appraisal from these it can be known that several capable executive are
available for training for higher position.

[Link] power inventory:

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A analysis of the information will bring to the attentionattention of the

management potential obsolescence of some of the present executive the
inexperience or shortage of managers in certain functions and skill
deficiencies relative to the future needs of the organizations.

[Link] development program:

The planning of individual development programmes in undertaken to

meet the needs of different individuals, keeping in view the differences in the
attitudes and behavior and in their physical intellectual and emotional
quality.

[Link] of training and development programmes:

The job down by the personnel department. A comprehensive and

well conceived programme is prepared containing concentrated brief course
in difference field viz.

[Link] development programmes:

Evaluation of training is any attempt to obtain information on the

effects of a training programme and assess the value of training.

[Link] for you mean by organization behaviour? Discuss the nature

and scope of organisation behaviour?

ORGANISATIONAL BEHAVIOUR

What needs emphasis here is that people occupy pride of place

everywhere, be it management, organisation or management functions,
people generally possess physical strength, skills of some kind,
administration or executive skills and organising abilities. These qualities
must be harnessed and used if managerial tasks, were to be accomplished
and organisations goals were to be realised. It is here that orgnisational
behaviour become relvance.

According to Fred luthans, "organisational behaviour is understanding,

predicting and controlling human behaviour at work".

According to Baron and Greenberg, "organisational behaviour covers a

wide range of topics, such as human behaviour, change, leadership, teams,
etc. "

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Nature and scope of organisational behaviour are;

Organisational behaviour as mentioned earlier, is the study of

human behaviour in organisation. The subject ecompasses the study of
individual behaviour, inter individual behaviour and the behaviour of
organisations themselves.

Nature and Scope of Organisational Behaviour;

[Link] Approach:

Organisational behaviour integrates knowledge from various

related discipline such as psychology, sociology, anthropology, political
science and economics. Organisation behaviour is not discipline but a
separate field of study. It integrates behavioural sciences like psychology,
sociology, anthropology, social psychology etc. So it is a part of science.

[Link] Oriented:

Organisational behaviour involves rational thinking and not an

emotional feeling about people. The major objective of organisation
behaviour is to explain and predict human behaviour in organisations. In
that sense it is action oriented.

[Link] Human and Technical Values:

Organisation behaviour tried to balance between human and

technical values at work. It seeks to achieve productivity by building and
maintaining employees divinity, growth and satisfaction rather than at the
expense of these values.

[Link] and Art:

Organisation behaviour is both science and art. The knowledge

about human behaviour in organisations indicates it as a science. The skill
is required to apply that knowledge to recognize the individual differences in
managerial style shows it as an art. Thus OB is both science and art.

[Link] Applied Science:

Organisational Behaviour is an applied science because it oriented

towards understanding the force that affect behaviour so that their affects
may be predicted and guided towards effective functioning of organisation.

[Link] Science:

organisation behaviour is an inexact science because it is an new

field of enquiry. Little progress has been made to provide specific answers to

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specific organisational problems. It is possible to predict relationship

between variables on a board scale but it is difficult to apply predictive
models on an individual basis. Hence exact results cannot be expected.
Thus becomes an inexact science.

[Link] Approch to Management:

Organisational behaviour is directly connected with the human side

of management, but it is not the whole of management. Organisational
behaviour is related with the conceptual and human dimensions of
management.

[Link] Approach:

There are very few absolutes in organisational behaviour. The

approach is directed towards developing managerial actions that are most
appropriate for a specific situation.

9.A Systems Approach:

Organisational behaviour is a systematic vision as it takes in to

account the variables affecting organisational functioning.

[Link] at Multiple Levels:

Behaviour occurs at different levels such as individual,

organisation a nd in groups. These three levels interacts each other. In other
words, the behaviour of individuals are affected by the group behaviour,
group behay is affected by organisation behaviour and so on.

[Link] Method:

Organisational behaviour follows the scientific method and

makes use of logical theory in its investigation and in answering the
research questions. It is empirical, interpretive, critical and creative science.

[Link] With Environment:

Organisational behaviour is concerned with issues like

compatibility with environmental. Eg: person-culture fit, gross culture
management etc.

[Link] Science:

OB is normative science. A normative science suggests only the

cause and effect relationshi.

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[Link] personal behaviour covers such aspects as personality,

attitude, perception, learning opinion, motive, job [Link]

[Link] is benchmarking? Explain different type of bench marking?

BENCHMARKING

In business, bench marking is aprocess in which a company compares

it's products and methods with those of the most successful companies in
its field, in order to try to improve its own performance. Benchmarking is
systamatic and continuous measuremrnt improvement process.

Advantage of Benchmarking are;

● Dril down in to performance gaps to identify areas for improvement.

● Develop a standardized set of process and metrics.
● Enable a mindset and culture and continuous improvement.
● Set performance expectations.
● Moniter [Link] and manage change.

Types of Benchmarking;
There are 7 type of Benchmarking;
[Link] benchmarking:
Want to boost the overall performance of your business;well this
is the kind of benchmarking you should use; Strategic benchmarking
analysis general approaches and long term strategies that have
facilitated high performance to be successful. It entails considering
high level facets such as developing new products or service, core
compentencies and boosting capabilities for handling the changes in
the external setting.
[Link] or competitive benchmarking:
This kind of benchmarking is used when business considered
their position for performance characteristics of critical service/
products. Benchmarking partners are sought from the same market
segment. For performance or competitive benchmarking is often
carried out through 3rd parties or trade associations to protect
confidentiality.
[Link] Benchmarking:
Functional benchmarking entail business looking to
benchmark with partners sought from various areas of activity or
business sectors to determine ways of refining similar work processes
or functions. This in turn, can result in novelty and dramatic
improvements.

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[Link] benchmarking:
In this kind of benchmarking, the benchmarking partners are
drawn from the best practice organisation that carried out similar
nature or work or deliver similar services. Process of benchmarking
entails creating process maps to assist analysis and comparison. It
however, often resuy in temporary benefits.
[Link] benchmarking:
External benchmarking entails analysing factors outside the
business that are recognised as the finest in class. It provides learning
opportunities from business at the leading edge. It can however,
consume a significant amount of time and resources to ascertain the
Comparability of information and data, the development of the
comprehensive recommend it and the authenticity of findings.
[Link] benchmarking:
The kind of benchmarking entails benchmarking operations or
business from the same organisations for instance, on company
having business units in various regions or countries.
7. International benchmarking:
Best experts are identified and examined elsewhere in the
world. This is probably because they are very few benchmarking
partners within the same region or count to generate reliable results.

Disadvantage of benchmarking:
● It is a time taking technique.
● Increase dependency: The companies tend to depend on other
companies strategies to become successful.
● Lack of information:Sometimes the company is unable to
gather adequate information for benchmarking.

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