BBA 402

MANAGEMENT ACCOUNTING
QUESTION 1
Management accounting is wide arena of accounting. The phrase Management
Accounting includes two words, Management and Accounting. It refers to Accounting for
the Management. Management accounting is the procedure to develop management
reports and accounts that present precise and timely financial and statistical information
required by managers to make day-to-day and short-term decisions. Management
accounting can be seen as accounting associated with management. Basically it is
deep study of managerial characteristic of financial accounting, "accounting in relation
to management function". It demonstrates how the accounting function can be reoriented so as to fit it within the structure of management activity. The prime task of
management accounting is to reform the whole accounting system so that it may serve
the operational needs of organization. Alleyne,P. and Weekes-Marshal, D, (2011)
explained management accounting practices as array of methods considered for
businesses so as to support the organisations infrastructure and management
accounting processes. It is associated with tax accounting, financial accounting,
managerial accounting and internal auditing. Johnson and Kaplan (1987) stated that
management accounting systems evolved to encourage and assess the efficiency of
internal processes and not to measure the overall profits of the organization. Drury
(1996) avowed that further advances in management accounting were associated with
the scientific management movement.
In complex business, it is imperative to perform systematic management planning.
Delegation of authority and decentralization of decision-making process has become
important to conduct business. The functions of management are no longer private. A
system of information is required to assist the management to investigate, evaluate and
verify the functioning of each division or unit for decision-making to accomplish the
goals of the business. Management Accounting has great importance to fulfil the needs
of the management. Management Accounting measures and reports appropriate

information to the management and facilitates in accomplishing corporate objectives. It

is significant that the information given to the management should be pertinent and
issue based to facilitate the management to focus on the real issue to reach at a
specific conclusion. Management accounting on the basis of the information available
decide its goal and tries to realize the way through which it can reach the objective.
Need of management accounting: Management accounting is required to recognize
the financial situation of the business, it reports to those inside the organisation for
planning, directing, motivating, and controlling and performance evaluation. It gives
special emphasis on decision affecting the future. It is needed to prepare plan.
Management accounting offers better Services to Customers. The cost control device is
management accounting that facilitates in reduction in prices of the Product. It helps in making
judgment. It is process of measuring performance. The techniques of budgetary control
standard costing enable the measurement of performance. In standard costing, standards are
decided and then actual cost is compared with standard cost. It facilitates the management to
find out deviations between standard cost and actual cost. Management accounting increase
efficiency of the business. The targets of different departments of the enterprise are determined
in advance and the accomplishment of these goals is taken as a device to gauge their
competence. Management accounting serves as effective management control. The Tools and
techniques of the management accounting are supportive to the management in planning
controlling and coordinating activities of the business, getting of standard and assessing actual
performance. Through management accounting, firms get maximum profits. In this process,
every possible effort are made to control unnecessary expenses. Management accounting gives
safety and security from trade cycle. The Information received from the management accounting
gives information over the past trade cycle. The management tries to determine the Causes of
trade cycle and its influence. Consequently, management accounting tries to defend the
organization from the effect of trade cycle.

QUESTION 2
Budgetary control
Steps in Budgetary control
Planning
1. About three to four months before the current year-end, the Budget Office issues all
available information concerning top management policies and plans for the future to
the various controllers and managers, and initiates the planning for the coming year.
2. The Sales MD with the aid of market surveys, trend and statistical studies, forecasts
sales in physical units and value.
3. These are studied by the Production MD and, assuming they have the production
capacity available, they forecast the quantities of materials and labour hours and
probable production overheads to produce the forecast volume.
If the present capacity is too small or if there are other limiting factors such as materials
shortage or specialist labour shortage, then urgent high-level discussions must be held
to resolve the difficulties or to adjust the budget for sales.
With the aid of financial and cost information, the production controller produces the
estimated cost of achieving the proposed sales budget together with the cost of
producing items for stock.
4. Forecasts of selling and distribution overhead and administrative and occupancy
overhead, and financial overhead are made by the departmental heads concerned
based on the forecast activity.
5. All the above forecasts are embodied in a master budget to show the net operating
profit from the proposed activity.
6. The budget officer interlocks the various budgets so as to disclose the budgeted:

7. If the budgeted Profit and Loss and Balance Sheet are not acceptable, alternative
proposals must be prepared.
Monitoring
8. When the overall forecast is acceptable to the Board, it is broken down into shortterm periods of, say, one month, and then issued to the controllers and managers as
firm budgets for the coming year.
9. As soon as the year starts, sales, production costs and overheads are recorded with
the same detail as was contained by the budgets.
10. At short intervals, usually monthly, actual results are compared with the budgets
and:
11. The reports should show:
Action
12. As a result of the above reporting, actions authorised by management are
implemented with a view to:
Budgetary Control Importance
Budgeting is a significant part of both planning and the controlling processes and is
widely used by managers to plan, monitor and control various activities at every level of
the organization. Thus budgets can be highly useful and functional. Some of the
functional benefits of preparing and using budgets as control techniques are given by
D.T. Otley. These are as follows:
1. To Use the Forecasting Techniques
It is the importance of budgetary control that with this, we can use the forecasting
techniques. Three departments work hard for calculating best estimation of future.
Accounting department provides old data.
2. Fix the Responsibility of Departments

Department's scientific name is cost center. Manager makes budget and show the
target of company and employees are given the powers to perform these targets. After
checking the variance in budget through budgetary control process, manager can fix the
responsibility of each department and its employees in a particular cost center.
3. Effective Utilization of Company's resources
Company can only effective use its resources, if someone stops misuse of money and
fund of company. If budgetary control is used in company, at that time, no action will be
taken before making budget
4. Excel yourself
After using budgetary control techniques in your business, you will definitely learn the
skills of excel yourself because we all know that a budget is based on estimates, it may
or may not be true. But continually practise of making good budget and apply in
organisation, manager can learn skills and experience for increasing the efficiency in
every work of company. Meaning of this, manager will get positive approach through
budgetary control.

5. Budgets help managers in integrating personnel efforts within the organization

towards a common goal. By properly appropriating adequate budgets to different
activities within the organization, all activities can be synchronized and all efforts can be
coordinated to achieve the organizational objectives.
6. Budgets act as controlling devices to correct any deviations. If the expenditures for a
given activity exceed the allotted budget at any point in time, this will signal a deviation
from the prescribed course, requiring attention and action by the management. If for
example, a departmental manager is given a budget of $ 500 per month for specified

QUESTION 3
What is absorption costing?
Absorption costing means that all of the manufacturing costs are absorbed by the units
produced. In other words, the cost of a finished unit in inventory will include direct
materials, direct labor, and both variable and fixed manufacturing overhead. As a result,
absorption costing is also referred to as full costing or the full absorption method.
Absorption costing is often contrasted with variable costing or direct costing. Under
variable or direct costing, the fixed manufacturing overhead costs are not allocated or
assigned to (not absorbed by) the products manufactured. Variable costing is often
useful for management's decision-making. However, absorption costing is required for
external financial reporting and for income tax reporting Absorption costing is defined as a
method for accumulating the costs associated with a production process and apportioning them
to individual products. This type of costing is required by the accounting standards to create an
inventory valuation that is stated in an organization's balance sheet.

Features of absorption costing

The key costs assigned to products under an absorption costing system are:

Direct materials. Those materials that are included in a finished product.

Direct labor. The factory labor costs required to construct a product.

Variable manufacturing overhead. The costs to operate a manufacturing facility,

which vary with production volume. Examples are supplies and electricity for
production equipment.

Fixed manufacturing overhead. The costs to operate a manufacturing facility,

which do not vary with production volume. Examples are rent and insurance.

You should charge sales and administrative costs to expense in the period incurred; do
not assign them to inventory, since these items are not related to goods produced, but
rather to the period in which they were incurred.
What is the difference between Marginal Costing and Absorption Costing?
Though, marginal costing and absorption costing are two traditional costing
techniques, they have their own unique principles that draw a fine line that separates
one from another.
In marginal costing, contribution is calculated, whereas this is not calculated under
absorption costing.
When valuing the stocks under marginal costing, only the variable costs are
considered, whereas valuation of stock under absorption costing includes costs incurred
for the production function also.
Generally, the value of inventory is higher under absorption costing than marginal
costing.
Marginal costing is often used for internal reporting purposes (facilitate the decision
making of managers), while absorption costing is required for external reporting
purposes, such as income tax reporting.
Contribution must be calculated under marginal costing system, whereas gross profit
will be calculated under absorption costing method.

QUESTION 4
Working Capital Financing-Types
There are three strategies or approaches or methods of working capital financing
Maturity Matching (Hedging), Conservative and Aggressive. Hedging approach is an
ideal method of financing with moderate risk and profitability. Other two are extreme

strategies. Conservative approach is highly conservative with very low risk and
therefore low profitability. Aggressive approach is highly aggressive having high risk and
high profitability.
We will compare these three approaches on 6 parameters viz. liquidity, profitability, risk,
asset utilization, and working capital.

Factors

Term Significance

Liquidity

It is extremely important in
business for smooth operation of
the day to day business activities
and to grab occasional
opportunities thrown by the
business.

Profitability

Risk
Asset
utilization

Working
capital

Conservative

Liquidity is high,
because of heavy usage
of long term funds. It can
take advantage of
sudden opportunities.
Under normal
circumstances,
profitability is less in this
strategy because of too
much of idle and costly
Profitability is the final goal of any funds. Higher rate and
business. Each and every step of a bigger magnitude of
manager should finally boil down interest cost reduces the
to profitability.
profitability.

Aggressive
Hedging
Liquidity is low due to
greater dependability on
short term funds even for
a part of long term
Liquidity is balanced i.e.
assets. It does not keep neither high nor low. It
idle funds and therefore attempts to strike a
saves interest cost on
balance between liquidity
them.
and cost of idle funds.
Because of cut to cut
management, a balance
is achieved between
interest cost and loss of
profitability. Moderate
Since, the interest cost is profitability is maintained
minimized in this
here. It is greater than
approach, higher
conservative and lesser
profitability is obtained. than aggressive.

There is very low risk of

bankruptcy as higher
There is high risk of
level of liquidity is
bankruptcy due to
Risk is balanced here.
maintained in the
extremely tight liquidity The firm will bow down to
Risk here refers to the risk of
business in this
position being
bankruptcy only in
bankruptcy.
approach.
maintained.
extremely bad situation.
Too high level of current Similarly, too low level of
Asset utilization here is the
assets makes its
current assets makes the
utilization of current assets.
utilization ratio low.
utilization ratio high.
Moderate
More working capital is Very low working capital Moderate working capital
required to execute the is maintained. Low
is maintained to stay
Working capital is the capital used conservatism. Higher
working capital increases somewhere between
to fill the gap between current
working capital avoids all risk but saves the
conservative and
assets and current liabilities.
risks.
interest cost.
aggressive strategies.

Estimation of Working Capital

Current Assets
Raw material 80*(104000/12)*1 =

693333

Work-in-progress 170*(104000/12)*1/2= 736666.6667

Finished goods 170*(104000/12)*1=
Debtors

1473333.333

200*(104000/12)*2*(3/4) = 2600000

Total

5503333

Current Liabilities
Labour

30*(104000/12)*1.5= 390000

Overheads

60*(104000/12)*1= 520000

Creditors

80*(104000/12)*1 = 693333

Total

1603333

Working Capital= Current Assets-Current liabilities= 5503333-1603333= Rs.3900000

QUESTION 5
STATEMENT OF CHANGE IN WORKING CAPITAL
Particulars
Current Assets
Inventory
Sundry Debtors
Bills Recievable
Bank
Cash

2010

2011

82600
120000
80000
50000
8400
341000

72400
128000
72100
48300
11800
332600

-10200
8000
-7900
-1700
3400
-8400

40000
140000

68000
122000

28000
-18000

Changes in working capital

(less) Current
Liabilities
Bills payable
Sundry Creditos

Provision for
Taxation
Working Capital

20000
200000
141000

18000
208000
124600

-2000
8000
(16400)

STATEMENT OF FUNDS FLOW

Sources of funds

Amount Application of Funds

Capital introduced

25000 Land and Building Purchased

Profit
Bank Loan taken

28600 Decrease in Working Capital

28000

Amount

Closing cash (including Bank)

81600

QUESTION 6
Dividend policy-Meaning
Dividend policy is the set of guidelines a company uses to decide how much of its
earnings it will pay out to shareholders. Some evidence suggests that investors are not
concerned with a company's dividend policy since they can sell a portion of their
portfolio of equities if they want cash. This evidence is called the "dividend irrelevance
theory," and it essentially indicates that an issuance of dividends should have little to no
impact on stock price. That being said, many companies do pay dividends, so let's look
at how they do it. Dividend policy is concerned with financial policies regarding
paying cash dividend in the present or paying an increased dividend at a later stage.
Whether to issue dividends, and what amount, is determined mainly on the basis of the
company's unappropriated profit (excess cash) and influenced by the company's longterm earning power. When cash surplus exists and is not needed by the firm, then
management is expected to pay out some or all of those surplus earnings in the form of
cash dividends or to repurchase the company's stock through a share
buyback program. If there are no NPV positive opportunities, i.e. projects

5000
16400
60200
81600

where returns exceed the hurdle rate, and excess cash surplus is not needed, then
finance theory suggests management should return some or all of the excess cash to
shareholders as dividends.
Dividend decision-significance
The firm has to balance between the growth of the company and the distribution to the
shareholders

It has a critical influence on the value of the firm

It has to also to strike a balance between the long term financing decision( company
distributing dividend in the absence of any investment opportunity) and the wealth

maximization
The market price gets affected if dividends paid are less.
Retained earnings helps the firm to concentrate on the growth, expansion and

modernization of the firm

To sum up, it to a large extent affects the financial structure, flow of funds, corporate
liquidity, stock prices, and growth of the company and investor's satisfaction.
Dividend Policy Types
There are basically 4 types of dividend policy. Let us discuss them on by one:
1.) Regular dividend policy: in this type of dividend policy the investors get dividend at
usual rate. Here the investors are generally retired persons or weaker section of the
society who want to get regular income. This type of dividend payment can be
maintained only if the company has regular earning.
Merits of Regular dividend policy:

It helps in creating confidence among the shareholders.

It stabilizes the market value of shares.

It helps in marinating the goodwill of the company.

It helps in giving regular income to the shareholders.

2) Stable dividend policy: here the payment of certain sum of money is regularly paid
to the shareholders. It is of three types:
a) Constant dividend per share: here reserve fund is created to pay fixed amount of
dividend in the year when the earning of the company is not enough. It is suitable for the
firms having stable earning.
b) Constant pay out ratio: it means the payment of fixed percentage of earning as
dividend every year.
c) Stable rupee dividend + extra dividend: it means the payment of low dividend per
share constantly + extra dividend in the year when the company earns high profit.
Merits of stable dividend policy:

It helps in creating confidence among the shareholders.

It stabilizes the market value of shares.

It helps in marinating the goodwill of the company.

It helps in giving regular income to the shareholders.

3) Irregular dividend: as the name suggests here the company does not pay regular
dividend to the shareholders. The company uses this practice due to following reasons:

Due to uncertain earning of the company.

Due to lack of liquid resources.

The company sometime afraid of giving regular dividend.

Due to not so much successful business.

4) No dividend: the company may use this type of dividend policy due to requirement
of funds for the growth of the company or for the working capital requirement.