MB0041 – Financial and Management Accounting

Master of Business Administration – MBA Semester 1

MB0041 – Financial and Management Accounting – 4 Credits

(Book ID: B1130)

Assignment

Set – 2 (60 Marks)

Q4). Explain the essential features of budgetary control?

Essential Features Of Budgetary Control

An effective budgeting system should have essential features to get best results. In this direction, the following may be considered as essential features of an effective budgeting.

Business Policies defined:

The top management of an organization strives to have an action plan for every activity and for each department. Every budget should reflect the business policies formulated from time to time. The policies should be precise and the same must be clearly defined. No ambiguity should enter the document. Clear knowledge should be provided to all the personnel concerned who are going to execute the policies. Periodic suggestions should be called for.

Forecasting: Business forecasts are the foundation of budgets. Time and again discussions should be arranged to derive the most profitable combinations of forecasts.  

Better results can be anticipated based on the sound forecasts. As far as possible, quantitative techniques should be made use of while forecasting

Formation of Budget Committee: A budget committee is a group of representatives of various important departments in an organization. The functions of committee should bes pecified clearly. The committee plays a vital role in the preparation and execution of budget estimated. It brings coordination among other departments. It aids in the finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair.

Accounting System: To make the budget a successful document, there should be proper flow of accurate and timely information. The accounting adopted by the organization should be proper and must be fine-tuned from time to time

Organizational efficiency: To make the budget preparation and its subsequent implementation a success, an efficient, adequate and best organization is necessary a budgeting system should always be supported by a sound organizational structure. There must be a clear cut demarcation of lines of authority and responsibility. There must also be a delegation of authority from top to bottom line.

Management Philosophy: Every management should set a healthy philosophy while opting for the budget. Management must wholehear4tedly support the activities which developing a budget. Encouragement should flow from top management. All the members must be involved to make it a workable preposition and a dream-driven document.

Reporting system: Proper feed back system should be established. Provision should be made for corrective measures whenever comparative measures are proposed.

Availability of statistical information: Since budgets are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data should be made available to each department.

Motivation: Since budget acts as a mirror, the entire organization should become smart in its approach. Every employees both executive and non-executives should be made part of the overall exercise. Employees should be persuaded than pressurized to appreciate the benefits of the budgets so that the fruits can be shared by all the members of the organization.

Q5). Briefly describe labor mix variance and yield variance.

Ans: Labour Mix Variance

This variance arises only when different types of workers (women and men workers, trained, semi-trained and untrained workers, are employed in manufacturing. If actual working force of different grades of workers is not in the pre-determined ratio, then the mix variance will occur. The variance shows to the management as to how much of the labor cost variance is due to the changes in the composition of labor force. It is calculated as follows:

LMV = (Revised standard hours – actual hours worked) x standard hourly rate Shorten (RSLH – ALH) x SR

Where revised standard hour = total time of actual worker / total time of standard workers x standard labor rate.

Illustration: The labor budget for a week is as follows:

40 skilled men at Rs.1.50 per hour for 80 hours

80 unskilled men at Re.1 per hour for 80 hours

Actual labor force was used are given below;

60 skilled men at Rs.1.50 per hour for 80 hours

60 unskilled men at Re.1 per hour for 80 hours

Calculate labor mix variance.

Solution:

Labour Yield Variance

This is due to the difference in the standard output specified and the actual output obtained. The formula is as follows:

LYV = (Actual output – Standard output) x standard cost per unit

Illustration: Actual output 460 units. Standard output 500 units. Standard rate of wages is Rs.9 per hour. The Standard time is 2 hour per unit.

Solution:

Q6). How is standard costing related to budgetary control?

Ans: Standard Costing Vs Budgetary Control

Similarities between Standard Costing & Budgetary Control

Both budgetary control and standard costing are important management tools of planning and control. They achieve same objective viz. proper allocation and utilisation of the resources. They use predetermined values and are feed forward process. They also serve as feed back systems by making possible the comparison of actual performance and desired performance. An organisation would benefit most from its control system when it uses both standard costing and budgetary control.

Standard costing and budgetary control are complementary. Standards are needed to establish budgets. Particularly the manufacturing budgets would be more effective if they are based on standards for materials, labour and overhead. Similarly, the budgeted level of output should be known in determining standard overhead costs. Although budgetary control and standard costing are interrelated and function better when used together, yet they are not interdependent. One can be used without the other. But the best results will be achieved if both are used together.

Differences between budgetary control and standard costing:

1.Scope: Budgetary control and standard costing differ in their scope. Budgetary control is used in all aspects of business and includes estimates of revenues as well as expenditures. Thus, budgets are prepared for activities such as production, purchase, sale and distribution, capital expansion, cash flows, research and development etc. Standard costing is generally confined to manufacturing costs alone.

2.Concept: A conceptual difference between budgetary control and standard costing is that standard cost is a unit concept and budgeted cost is a total concept. It may be helpful to think of a standard as a budget for the production of a single unit. A strict distinction between standard performance and budgeted performance, however, is not made by many companies, in practice.

3.Emphasis: Budgetary control puts more stress on the level of activity and the related cost level which should be attained if the firm is to perform as planned. Standard costing, on the other hand, lays emphasis on cost reduction.

4.Application: Standard costing is a systematic approach to attain cost control. Direct material and direct labour are continuously controlled with the help of standard costs. Overhead costs consist of innumerable small items and therefore, it is not practical to have an elaborate control system for each one of them. Overhead costs can be controlled periodically with the use of budgetary control. Thus, departmental overhead budgets are constructed to control overhead costs.

Q1). Compute the cash flow from operating activities

To		By
Cost of goods sold	4,00,000	Sales including cash sales 1,00,000	5,00,000
Office expenses	12,000	Profit on sale of land	30,000
Selling expenses	8,000	Interest on investment	20,000
Depreciation	6,000
Loss on sale of plant	4,000
Goodwill written off	3,000
Income tax	7,000
Net Profit	1,10,000
	5,50,000		5,50,000

Solution:

Q2). The following extract refers to a commodity for the half year ending 31st March 2008. Prepare a cost statement.

Purchase of raw materials	1, 20,000	Direct wages	1, 00,000
Rent, rate, insurance and Works expenses	40,000	Opening stock	20,000
		Raw materials	16,000
		Finished goods (1000 units)
Work in progress:	4, 800	Closing stock:	22, 240
opening	16, 000	raw material
closing		F. Goods (2,000 tons)
Carriage inwards	1, 440	Sale of finished goods	3, 00,000
Cost of factory	8,000.00

Advertising, discounts allowed and selling costs Re.1 per ton sold. Production during the year is 16,000 tons. Prepare a cost sheet.

Solution:

*To be valued only at number of units sold. Opening stock of finished goods + production minus closing stock = Number of units sold.

** Always to be valued at number of units sold. Number of units sold x Selling price per

Q3). Avon garments Ltd manufactures readymade garments and uses its cut-pieces of cloth to manufacture dolls. The following statement of cost has been prepared.

Particulars	Readymade garments	Dolls	Total
Direct material	Rs. 80,000	Rs. 6,000	Rs. 86,000
Direct labour	13,000	1,200	14,200
Variable overheads	17,000	2,800	19,800
Fixed overheads	24,000	3,000	27,000
Total cost	1,34,000	13,000	1,47,000
Sales	1,70,000	12,000	1,82,000
Profit (loss)	36,000	-1,000	35,000

The cut-pieces used in dolls have a scrap value of Rs 1,000 if sold in the market. As there is a loss of Rs. 1,000 in the manufacturing of dolls, it is suggested to discontinue their manufacture. Advise the management.

Solution:

 Discontinue manufacture of dolls

	Readymade garments	Dolls	Total
Total cost	134000	13000	147000
Profit (loss)	36000	-1000	35000