MBAR Accounting for Managers

Internal Assignment No. 1                         Paper Code:     MBA – 201

Q. 1.    Answer all the questions.

(i)                 Write two objectives of financial statement analysis.

ANS- Objectives of financial statement analysis are as follows

1.Assessment Of Past Performance- Past performance is a good indicator of future performance. Investors or creditors are interested in the trend of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance.

2.Assessment of current position- Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a business firm and the different liabilities due against the enterprise.

(ii)               What do you mean by Revenue Centre?

ANS- A revenue center is a distinct operating unit of a business that is responsible for generating sales. For example, a department store may consider each department within the store to be a revenue center, such as men's shoes, women' shoes, men's clothes, women's clothes, jewelry, and so forth. A revenue center is judged solely on its ability to generate sales; it is not judged on the amount of costs incurred. Revenue centers are employed in organizations that are heavily sales focused.

A risk in using revenue centers to judge performance is that a revenue center manager may not be prudent in expending funds or incurring risks in order to generate those sales. For example, a manager could begin selling to lower-quality customers in order to generate sales, which increases the risk of bad debt losses. Consequently, the use of revenue centers should be restricted. A better alternative is the profit center, where managers are judged on both their revenues and expenses.

(iii)             What is Depreciation? How it is calculated?

ANS- In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset  becomes zero or negligible.

How to calculate depreciation in small business? There three methods commonly used to calculate depreciation. They are:

1. Straight line method

2. Unit of production method

3. Double-declining balance method

Three main inputs are required to calculate depreciation:

1. Useful life – this is the time period over which the organization considers the fixed asset to be productive. Beyond its useful life, the fixed asset is no longer cost effective to continue the operation of the asset.

2. Salvage value – Post the useful life of the fixed asset, the company may consider selling it at a reduced amount. This is known as the salvage value of the asset.

3. The cost of the asset – this includes taxes, shipping, and preparation/setup expenses. Unit of production method needs the number of units used during production. Let’s take a look at each type of Depreciation method in detail.

(iv)             Differentiate between assets and liabilities.

ANS- Assets are the property and other tangible things possessed by a company, which are used for the production of goods and services.Assets are what you own. According to accounting standard, assets are resources controlled by an entity as a result of past event from which future economic benefits are expected to flow to the entity.

Liabilities are what you owed to other people. Liabilities are the present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

(v)               What is the use of preparing Sales Budget?

ANS- Purpose of preparing Sales Budget:-

1.         Planning :-

The company formulates marketing and sales objectives; the budget determines how these objectives will be met through a detailed breakdown of the sales budget among products, territories and customers.

2.         Co-ordination:-

The budget establishes what the cost of various heads be thereby maintaining a desired relationship between expenditure and revenues. The budget enables sales executives to coordinate expenses with sales. It also restricts the sales executives form spending more that their share of eth funds helping to prevent expenses from getting out of control.

3.         Evaluation:-

Sales department budgets become tools to evaluate the department’s performance. By meeting the sales & cost goals set forth in the budget, a sales manager may prove himself to be a successful executive.

Note: Answer any two questions. Each question carries 5 marks (Word limits 500)

Q. 2.    Discuss all the concepts of accounting.

ANS- There are a number of conceptual issues that one must understand in order to develop a firm foundation of how accounting works. These basic accounting concepts are as follows:

Accruals concept. Revenues are recognized when earned, and expenses are recognized when assets are consumed. This concept means that a business may recognize sales, profits and losses in amounts that vary from what would be recognized based on the cash received from customers or when cash is paid to suppliers and employees. Auditors will only certify the financial statements of a business that have been prepared under the accruals concept.

Conservatism concept. Revenues are only recognized when there is a reasonable certainty that they will be realized, whereas expenses are recognized sooner, when there is a reasonable possibility that they will be incurred. This concept tends to result in more conservative financial statements.

Consistency concept. Once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis. By doing so, the financial statements prepared in multiple periods can be reliably compared.

Economic entity concept. The transactions of a business are to be kept separate from those of its owners. By doing so, there is no intermingling of personal and business transactions in a company's financial statements.

Going concern concept. Financial statements are prepared on the assumption that the business will remain in operation in future periods. Under this assumption, revenue and expense recognition may be deferred to a future period, when the company is still operating. Otherwise, all expense recognition in particular would be accelerated into the current period.

Matching concept. The expenses related to revenue should be recognized in the same period in which the revenue was recognized. By doing this, there is no deferral of expense recognition into later reporting periods, so that someone viewing a company's financial statements can be assured that all aspects of a transaction have been recorded at the same time.

Materiality concept. Transactions should be recorded when not doing so might alter the decisions made by a reader of a company's financial statements. This tends to result in relatively small-size transactions being recorded, so that the financial statements comprehensively represent the financial results, financial position, and cash flows of a business.

Q. 3.    Define Zero Base Budgeting. What are the steps involved in this?

ANS- This budget is the preparation of budget starting from Zero or from a clean state. As a new technique it was proposed by Peter Pyher of Texas Instruments Inc., U.S.A. This technique was introduced in the budgeting in the state of Gorgia by Mr. Jimmy Carter who was then the Governor of that state. When Mr. Carter later on became President of the U.S.A., ZBB was tried in federal budgeting as a means of controlling state expenditure.

The use of zero-base budgeting (ZBB) as a managerial tool has become increasingly popular since the early 1970s. It is steadily gaining acceptance in the business world because it is proving its utility as a tool integrating the managerial function of planning and control.

The important steps in ZBB are:

(i) Identification of decision units in order to justify each item of expenditure in their proposed budget.

(ii) Preparation of Decision Packages. Each package is a separate and identifiable activity. These packages are linked with corporate objectives.

(iii) Ranking of decision packages based on cost benefit analysis.

(iv) Allotment of funds based on the above resulting by following pyramid ranking system to ensure optimum results.

Decision packages are self-contained modules or proposals seeking funds. Each decision package will clearly explain the activity, the need for the item, the amount involved, the benefit of implementing the proposal, the loss that may be incurred, if it is not done etc.

Internal Assignment No. 2

Q. 1.    Answer all the questions.

(i)                 What is full disclosure convention?

ANS- For a business, the full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial information can make informed decisions concerning the company.

The required disclosures can be found in a number of places including the following:

the company's financial statements including any supplementary schedules and notes (or footnotes).

Management's Discussion and Analysis that is included in a publicly-traded corporation's annual report to the U.S. Securities and Exchange Commission.

Quarterly earnings reports, press releases and other communications.

(ii)               Name the various material variances.

ANS- Material variance has two definitions, one relating to direct materials and the other to the size of a variance. They are:

Related to materials. This is the difference between the actual cost incurred for direct materials and the expected (or standard) cost of those materials. It is useful for determining the ability of a business to incur materials costs close to the levels at which it had planned to incur them. However, the expected (or standard) cost of materials can be a negotiated figure or only based on a certain purchase volume, which renders this variance less usable. The variance can be further subdivided into the purchase price variance and the material yield variance.

Related to size of variance. A variance is considered to be material if it exceeds a certain percentage or dollar amount. This approach to the material variance is commonly used by auditors, who (for example) may ask to see explanations of all variances exhibiting a change of at least $25,000 or 15% from the preceding year. A variation on the concept is to consider a transaction material if its presence or absence would alter the decisions of a user of a company's financial statements.

(iii)             What is the objective of preparing Trial Balance?

ANS-Trial Balance is a statement of debit and credit balances taken out from all ledger accounts including cash book. The golden rules that “Accounting equation remains balanced all the time” and “For every business transaction there is an equal debit and credit” shall always prevail in the whole accounting theory. Therefore, total of all debits balances must be equal to total of all credit balances.

Objectives of Preparing the Trial Balance:

The trial balance is prepared to achieve the following objectives:

(i) To ascertain arithmetical accuracy:

 (ii) To facilitate detection of errors:

 (iii) To facilitate preparation of financial statements:

 (iv) To facilitate auditors:

(iv)             State the formula for calculating PV Ratio.

ANS- Profit-volume ratio indicates the relationship between contribution and sales and is usually expressed in percentage.

The ratio shows the amount of contribution per rupee of sales. Since, in the short-term, fixed cost does not change, the profit-volume ratio also measures the rate of change of profit due to change in the volume of sales.

The formula to calculate P/V ratio is:

A high P/V ratio indicates high profitability so that a slight increase in volume, without increase in fixed cost, would result in high profits. A low P/V ratio, on the other hand, is a sign of low profitability so that efforts should be made to improve P/V ratio.

(v)               Write the adjustment entry for “Manager’s Commission on Net Profit”.

ANS- Sometimes the manager is entitled for a commission on profits which is usually calculated at a fixed percentage of the profits. Let us take an example.

Suppose, a firm has earned Rs. 300000 as profits in the financial year 2016-17 without charging the commission, which is 10 % of the profits. Then the manager's commision will be Rs. 30000. 

The manager's commision will be treated as an outstanding expense and it is shown as an expense at the debit side of profit and loss account and also as a current liability it will be shown in the balance sheet. 

Therefore, the adjustment entry for manager's commission will be as follows.

Profit & Loss A/c                  Dr.                              30000

To Manager's commission Payable A/c                                   30000

(Being the Manager's commission payable)

Commission paid to the Manager is a current liability and hence, it will be shown in the balance sheet on the liabilities side. 

Note: Answer any two questions. Each question carries 5 marks (Word limits 500)

Q. 2.    What are the different types of budgets prepared in an organization?

ANS- Budgets help businesses track and manage their resources. Businesses use a variety of budgets to measure their spending and develop effective strategies for maximizing their assets and revenues. The following types of budgets are commonly used by businesses:

Master Budget- A master budget is an aggregate of a company's individual budgets designed to present a complete picture of its financial activity and health. The master budget combines factors like sales, operating expenses, assets, and income streams to allow companies to establish goals and evaluate their overall performance, as well as that of individual cost centers within the organization. Master budgets are often used in larger companies to keep all individual managers aligned.

Operating Budget- An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time period. To create an accurate picture, operating budgets must account for factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Operating budgets are generally created on a weekly, monthly, or yearly basis. A manager might compare these reports month after month to see if a company is overspending on supplies.

Cash Flow Budget- A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it's managing its cash wisely. Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future. A construction company, for example, might use its cash flow budget to determine whether it can start a new building project before getting paid for the work it has in progress.

Financial Budget- A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company's financial health and present a comprehensive overview of its spending relative to revenues from core operations. A software company, for instance, might use its financial budget to determine its value in the context of a public stock offering or merger.

Static Budget- A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales.

Q. 3.    Write a note on Activity Based and Target Costing.

ANS- Activity-based costing (ABC) is an accounting method that identifies the activities that a firm performs and then assigns indirect costs to products. An activity-based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods.

Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as management and office staff salaries are sometimes difficult to assign to a particular product produced. For this reason, this method has found its niche in the manufacturing sector.

The ABC system of cost accounting is based on activities, which is any event, unit of work or task with a specific goal — such as setting up machines for production, designing products, distributing finished goods or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, power consumed, purchase orders, quality inspections or production orders.

Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. If it cannot manufacture a product at these planned levels, then it cancels the design project entirely. With target costing, a management team has a powerful tool for continually monitoring products from the moment they enter the design phase and onward throughout their product life cycles. It is considered one of the most important tools for achieving consistent profitability in a manufacturing environment.

The primary steps in the target costing process are:

• Conduct research.
• Calculate maximum cost.
• Engineer the product.
• Ongoing activities.

Target costing is an excellent tool for planning a suite of products that have high levels of profitability. This is opposed to the much more common approach of creating a product that is based on the engineering department’s view of what the product should be like, and then struggling with costs that are too high in comparison to the market price.