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Accounting for Management

Written By Admin on Wednesday, January 16, 2013 | 10:06 AM

1.    Define Management Accounting?
Ans:- “ Management Accounting is concerned with accounting information that is useful to Management”.   “ Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management Accounting”.
2.    What is Convention (principle) of Consistency?
Ans:- “ The consistency requires that once a company had decided on one method, it will treat all subsequent events of the same character in the same fashion unless it has a sound reason to do otherwise”.   If there is any change, its effect should be clearly stated in the financial statements.
3.    What is revenue expenditure?

Revenue expenditure are Recurring in nature. The amount of expenditure is small.

4.    What do you mean by Accounting cycle?

Ans:- The accounting cycle is a periodic process by which a firm's financial position - as expressed in the accounting records - is formally updated to summarize transactions that have been recorded during the accounting period. Much of the fundamental terminology of accounting is related to the accounting cycle. Basic accounting terms related to the accounting cycle include:
Journal, Ledger, Debit, Credit, Normal Balance, Posting, Temporary account, permanent account, Contra account, Adjusting entry, Book value, Trial balance, Pre-closing trial balance, Closing entry, Post- closing trial balance, Reversing entry.
5.   Give Four examples of intangible asset? 
Good will, copy rights, patents (exclusive rights), Royalty.
6.   What is the formula
for calculating average collection period?
Average collection period =_______365________________       
                                                      Debtor Turnover 
Debtor Turn over =   Sales / Debtor

7.   How cash flow statement is different from fund flow Statement ?

Fund flow statement                                         Cash Flow statement

1.   It is dynamic in nature                                       It is static in nature
2.   It incorporates items causing                           It includes the balance of real and
    Changes in working capital and                         personal accounts resources.
    Show the toal
3. It helps for decision making position                 It reveals the financial
  Of the firm

8. Define activity based costing ?
Activities identified and overheads are apportioned based on activities.

9. What is Target Costing?
Target costing is first fixing the price and calculates the costs.   Target costing is a disciplines process for determining and realizing a total cost at which a proposed product with specified functionality must be produced to generate the desired profitability at its anticipated selling price in the future.

10. What is production Budget?
Production Budget = Sales + Closing Stock – Opening Stock

11. Give Four uses for marginal costing?
Make or Buy, Export order , Sales Mix, Profit planning

12.   Define Financial accounting?

Financial Accounting is defined as “ The art of recording, classifying and summarizing in a significant
manner and in terms of money transactions and events which are in part at least of a financial character and the interpreting the results thereof”. Financial accounting focuses on reposing to external parties.

13. What do you mean by Inflation Accounting?
Accounting that takes into account the price level changes is popularly known as Inflation accounting and it is a method devised to show the effect of changing cost and prices on the affairs of the company during the course of relative accounting period.

14. Define Inventory Turnover Ratio?
Kohler defines inventory turnover ratio as “a ratio which measures the number of times a firm’s average inventory is sold during a year”

i) Inventory Turnover Ratio =   Cost of Materials consumed / Cost of Average Stock

15. Define Process Costing ?

Process costing is a method of costing which is used to ascertain the cost of output at each stage of production.   Charles T Harngren Says “ Process costing deals with the mass production of like units that usually pass in continuous fashion through a series of production steps called operations or process”.

16. What do you mean by Margin of Safety?

Margin of safety is the difference between the total sales (Actual or projected) and the breakeven sales.   It may be expressed in monetary terms (value) or as a number of units (volume). It can also be expressed as profit P / V ratio.

17. What do you mean by Cash from operation?

A business generates cash inflows through its normal business operations which is usually the most important
and routine source of cash.   It is internal source for cash.   It is a hypothetical situation where all expenses, incomes and revenues are paid or received in cash.   In such a case,   the net profit revealed by profit and loss account represents ‘cash from operations’.

18. What do you mean by Material Mix Variance?

(Revised Std Qty – Actual quantity) standard price per unit

Revised Standard Qty = (Standard Qty / Total Std Qty) Total actual Qty.

19. Define incremental Analysis ?

Incremental analysis is the technique of comparing one course of action to another by determining the differences expected to arise in revenue and in costs.

20. What do you mean By Responsibility Accounting ?

Responsibility accounting is an underlying concept of accounting performance measurement systems.   The basic idea is that large diversified organizations are difficult,   if not impossible to manage as a single segment, thus they must be decentralized or d\separated in to manageable parts. These parts or segments are referred to as responsibility centers that include” 1) revenue centers, 2) Cost centers, 3) Profit centers and 4) investment centers.

21. What is the relationship between management, cost and financial accounting?
Ans:- Management Accounting measures and reports financial and non financial information that helps managers make decisions to fulfill the goals of an organization.   Financial accounting focuses on reposing to external parties.   It measures and records business transactions and provides financial statements
that are based on generally accepted accounting principles (GAAP). Cost accounting measures and reports financial
and no financial information relating to the cost of acquiring or utilizing resources in an organization.

22. Who are the users of Balance sheet and profit and loss Account?
The users of Balance sheet and Profit & Loss Account are: Share holders, Investors, suppliers, managements and employees.

23. What are the basic records used before preparing Trading, profit and loss a/c and balance sheet?
The basic records used before preparing Trading, Profit & loss a/c and balance sheet are – Journal, Ledger and Trial balance.

24. State any four methods of depreciation?
Fixed installments methods
Written down value method
Annuity Method
Depletion Method

25. Form the following details of a concern, calculate liquidity ratios?
Current Assets Rs. 1,90,000
Quick Assets Rs. 1,50000
Current Liabilities Rs. 75,000

Liquidity Ratio = Liquid Assets / Current Liabilities

= 150000 / 75000
=2 : 1

26. Draw a specimen form of funds Flow Statement

Sources of Funds                 Rs.                 Application of Funds                               Rs.

Issue of Share Capital     ---------     Redemption of Pref Shares     ---------
Issue of Debentures     ---------     Redemption for Debentures     ---------
Raising of Long term Loan    ---------     Redemption of Loans     ---------
Sale of Fixed Assets     ---------     Purchase of fixed assets     ---------
Non trading Receipts     ---------     Payment of tax     ---------
Funds from operation     ---------     Payment
of Dividend     ---------
Decrease in working capital    ---------           Increase in working capital     ---------
                                                                  Funds out flow from operation     ---------

27. Distinguish between variable, fixed and semi variable costs ?

Variable costs are costs varying in proportion to the level of production and sales

Fixed Costs are fixed in nature. Irrespective of the level of actively

Semi – Variable are those costs included some portion of fixed and the remaining are variable

28. What is Break-Even Point?

The point which breaks the total cost and the selling price evenly to show the level of output on sales at thich there shall be no profit or no loss it called Break Even Point.

29. Write a short note on make or buy Decision.
In “make or buy” decision, the management compares the quotation fixed by the supplier with the marginal cost of the particular product.   If the outside supplier’s rate is lower than the marginal cost then, the management can decide to produce the product in their firm itself otherwise it can be purchased from the outside supplier.

30. What is Cash Budget?
Cash Budget represents the amount of cash receipts and payments, and a balance during the budgeted period, the object of cash budget is to coordinate the total working capital, sale, investment and credit.
31. Define Financial Accounting?

The American Institute of certified public accountants (AICPA) defined accounting as “Accounting is the art of
classifying and summarizing in a significant manner and in terms of money transactions and events
Which are in part at least of a financial character and interpreting the results thereof”.

32. What do you mean by Inflation Accounting?

According to M.A.Sahaf, Inflation accounting is an accounting technique which aims to record business transactions at current values and to neutralize the impact of changes in the price on the business transaction.

33. Define Inventory turnover ratio?

A ratio showing how many times a company's inventory is sold and replaced over a period.

Generally calculated As:
=   Sales   /   Inventory   
However, it may also be calculated as:
= cost of Goods sold / Average inventory

34. Define Process Costing?

Process costing:   This method of costing is applicable where goods or services result from a sequence of continuous or repetitive operations or processes and products are identical and cannot be segregated

35. What do you mean by Margin and Safety?
MARGIN OF SAFETY (MOS): It refers to the difference between the actual sales and break even sales.   It represents a cushion to the creditors of the firm.
MOS = Actual sales – Break even sales (or) Profit (in   Rs)   (or)   Profit (in units)
        P/V ratio     Contribution per unit
36. What do you mean by Cash from Operation?

The calculation of cash from operations covers all the items covered in funds from operations and also covers the changes in the current assets (except cash and bank balances) and current liabilities.   In
essence, it can be said that this statement clubs both the statement of changes in working capital can calculation of funds from operations.

37. Define Target Costing?

Target costing :   It is an integrated approach to determine product features, product price, product costs and product design, that helps to ensure a company will earn reasonable profit on new products.   The components of the target costing process include (1) Target cost, which is the cost of the resources that should be consumed to create a product, that can be sold at a target price (2) Target price – it is the estimated price for a product or service that potential customers will pay.   (3) Target Operating Income per unit – It is the operating income that a company aims to earn per each unit of a product or service sold.   (4)   Target cost per unit – It is the estimated long run cost per unit of a product or service that enables a company to achieve its target operating income per unit, when selling at the target price. 

38. What do you mean by Material Mix Variance?
It can be defined as that portion of direct material usage variance which is the difference between the actual quantities of ingredients used in a mixture at standard price and the total quantity of ingredients used at the weighted average price per unit of ingredients as shown by the standard cost sheet.

39. Define Incremental Analysis?

It involves calculating the incremental costs and incremental revenues arising out of decision alternatives and taking a decision after appropriate analysis
of the same.

40. What do you mean by Responsibility Accounting?
‘a   system of management accounting under which accountability is established according to the responsibility delegated to various levels of management and a management information and reporting system instituted to give adequate feed back in terms of the delegated responsibility’.

41. Give any four managerial applications of accounting information?
Computer-based or manual system that transforms data into information useful in the support of decision making. MIS can be classified as performing three functions:
(1) To generate reports-for example, financial statements, inventory status reports, or performance reports needed for routine or non-routine purposes.
(2) To answer what-if questions asked by management. For example, questions such as "What would happen to cash flow if the company changes its credit term for its customers?" can be answered by MIS. This type of MIS can be called Simulation.
(3) To support decision making. This type of MIS is appropriately called Decision Support System (DSS). DSS attempts to integrate the decision maker, the data base, and the quantitative models being used.
42. Explain sectional balancing system?
ANS: In small scale business only one ledger are maintained. In large business houses many ledgers are maintained for record keeping it is very difficult to maintain records in one book so to avoid problems self balancing ledgers are maintained this process is called sectional balancing system.
43. Give any two limitations
of cash flow analysis.
Ans: 1) cash flow statement discloses only inflow and out flow of cost alone.
      2) Non cash items are excluded in cash flow analysis.
44. Define imputed costs?
Ans: imputed cost is non cash cost which is calculated in cost sheet for decision making.
45. Give any four common bases of apportioning factory overheads.
Factory overheads of production departments (inclusive of appropriate apportioned share from other services departments) are to be applied to production / jobs.   Some common bases of absorption of factory overheads are: (i) Units of production (ii) Direct Materials cost, (iii) Direct labour cost, (iv) Prime cost method.
46. Explain Zero base budget.
Ans: The purpose of management control is to ensure better performance and utilization of scare resources. Zero base budgeting provides a solution for it.
47. Define a cost centre.
Ans: cost center is a location, person or item of equipment for which costs may be ascertained and used for the purpose of cost control.  
48. Explain direct material cost variances
Ans: this is an overall difference in standard direct material cost and the actual direct material cost. this variance may exits because of difference in either the price of the material or the quantity that is purchased.
49. Explain profit/volume ratio.
Ans: It is also known as contribution to sales ratio. It is one the most important ratio of studying the profitability the operation of the business and establishes the relationship between contribution and sales.
P/v ratio = contribution
50. Who are the basic users of balance sheet and profit and loss account?
Ans: Investors, lenders, creditors, debtors, employees, government, analysist, public in large.
51. What are the basic records used for preparing the trading, profit and loss account, balance sheet?
Ans: journals, ledgers, trial balance
52. What are the four methods of depreciation?
Ans: straight line method, written down value method, annuity method, sinking fund method, revaluation method.
53. What Is Profit And Loss Account?

Ans: After preparing the trading account, every business has to prepare the profit and loss account which shows the net profit earned by the company during the current year.

54. What is fixed assets turn over ratio?
Ans: this ratio determines the efficiency of utilization of fixed assets and profitability of the business concern.
      FTR=cost of sales/net fixed assets

55. What is cost-volume profit analysis?

Ans: cost volume profit analysis is the analysis of three variables cost, volume, profit. This analysis measures variation of cost and volume and their impact on profit. Profit is affected by several internal and external factors which influences sales revenue and costs
Heiser puts it in the following words” The most significant single factors in planning of average business is relationship between the volume of business, its costs and profits”.
1. Fixed cost
2. Variable cost.
3. Contribution
4. p/v ratio
5. Break even analysis
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1 comment:

  1. Learn how to find missing figures in the Company cash flow statements and techniques of fixing the missing figures in Cash Flow Statement.


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