Commerce ePathshala NOTES
(IGNOU)
Important Questions & Answers
IGNOU
: BCOM
BCOE
142 – MANAGEMENT ACCOUNTING
Q – Define Management Accounting. State it’s Objectives.
Ans.
The
Institute of Management Accountants USA has defined Management Accounting as “A
value-adding continuous improvement process of planning, designing, measuring
and operating both non-financial information systems and financial information
systems that guides management action, motivates behavior, and supports and
creates the cultural values necessary to achieve an organization’s strategic,
tactical and operating objectives”.
As
per American Accounting Association “The application of appropriate
techniques and concepts in processing historical and projected economic data of
an entity to assist management in establishing plans for reasonable economic
objectives and in making of rational decisions with a view towards these
objectives”.
As
per International Federation of Accountants (IFAC):
Management Accounting may be defined as “The process of identification,
measurement, accumulation, analysis, preparation, interpretation, and
communication of information both financial and operating used by management to
plan, evaluate and control within an organization and to assure use of and
accountability for its resources”.
As
per CIMA, London: “Management Accounting is an integral part
of management concerned with identifying, presenting and interpreting
information used for: (a) creating strategy; (b) planning and controlling
activities; (c) decision making; (d) optimizing the use of resources; (e)
disclosure to shareholders and others external to the entity; (f) disclosure to
employees; (g) safeguarding assets.
OBJECTIVES
OF MANAGEMENT ACCOUNTING
The basic objective of Management Accounting is to
enable Management to carry its duties efficiently that ultimately leads to
maximization of profit in an organization. It helps the Management in planning,
organizing, directing and controlling. With the help of creating budgets and
formulating strategies for organization as a whole, it helps to reduce the
deviation between budgeted and actual targets achieved. The main objectives of
the Management Accounting are as follows:
1)
Helps in planning and formulating management policies:
Planning includes forecasting, setting objectives, creating strategies for
achieving them. It helps in preparation of statements on the basis of past
performance and data available for future forecast.
2)
Interpretation of financial data available: Management
Accounting presents financial data in a simplified format. It includes charts,
graphs and diagrams to present it in an easy manner to be understandable by the
top management.
3)
Helps in decision making: Management Accounting makes the
decision making scientific by using techniques. It uses the data from cost
accounting and Financial Accounting, analyses it for making a sound decision.
For Example, it helps in ascertaining the profitability of a product, exercise
effective control on it and implement cost reduction programs.
4)
Helps in controlling performance: Management Accounting
helps in controlling by using different techniques like standard costing and
budgetary control. It controls the cost of each department and individual by
different techniques. It defines each unit as responsibility center and that
unit is held responsible for deviation. It helps them to understand the weak
areas and take corrective action to improve situation.
5)
Helps in organizing: It helps in creating effective and efficient
organizational framework. Management accountant uses budgeting techniques and
return on capital employed to control cost and responsibility. It leads to
decentralization to rationalization of organizational structure.
6)
Helps in reporting: Management Accounting informs the
management about the current position of the organization from time to time
through timely reposting. It helps the managers to take the required actions
timely and correctly. Performance of different departments is reported regularly.
7)
Helps in coordination of operations: Management Accounting
helps in evaluating the performance and coordinating the operations. It helps
management in coordinating activities by preparing functional budgets and then
coordinating by creating a master budget.
Q – Describe the Scope of Management accounting.
Ans.
SCOPE OF MANAGEMENT ACCOUNTING
Management Accounting emphasises upon internal control
in an organization. It extends the analysis of Financial Accounting and cost
accounting by using different budgetary techniques. Its scope can be explained
as follows:
1)
Provides accounting information: Management Accounting is
based on data provided by financial and cost accountant. It provides required
information to managers at different levels. It provides the information in a
simplified manner to meet the dynamic needs of the management.
2)
Cost effect analysis: Other branches of accounting like
Financial Accounting and cost accounting provide only the final data but do not
consider responsibility centers. Management Accounting is more focused on cause
and effect relationship between variables.
3)
Compilation of data for management planning: Management
Accounting presents and compiles the relevant historical data in such a manner
as it helps in identifying the trends in past period and to assist in problem
solving.
4)
Assists in decision making: It helps in decision making first by
providing the relevant information to the management which can be used for
decision making. Secondly, by analyzing the impact of all the possible decision
is considered into account for taking a final decision.
5)
Achieving the objectives: Management Accounting helps in
creating the plans and setting the objectives. It compares the actual
performance with the standard performance, finds the deviations and takes
corrective actions.
6)
Increase in efficiency: Management Accounting uses the
accounting information to identify efficiency within the organization. It
ultimately helps in improving the performance and making the organization efficient.
7)
Helps in forecasting and gaining feedback: Management
Accounting is a futuristic concept which helps in forecasting for future plan
of action. It helps in receiving feedback by identifying deviations and setting
responsibility accounting.
Q – State the advantages of Management Accounting.
Ans. ADVANTAGES OF MANAGEMENT ACCOUNTING
Basic advantage of Management Accounting is to take
correct policy decisions and improved efficiency of management. The prime
objective is to assist the management to increase the quality of the management
decision. The major advantages of management accounting are as follows:
Effective
Decision Making: This is the prime objective or the basic
purpose of having management accounting. It uses different techniques from
different disciplines like charts, table and different accounting techniques.
It helps to justify the decisions taken by top management.
Future
Planning: Management Accounting is a continuous process. It
collects and report data on the basis of need of the managers. So, managers use
the data for analysis and decision making on day-to-day basis.
Increase
Efficiency of the Company: Management Accounting creates
accountability and improves efficiency of the company. It helps to identify and
remove deviations. It strives to increase the efficiency of the company.
Planning:
Management Accounting provides the relevant information to management on
continuous basis in the form of budgets, forecast and variance analysis. It
helps management in decision making and business activity.
Effective
Control and Regulations: Management Accounting helps to ensure
effective control over the performance by providing efficient system of
planning and budgeting. It makes the comparison of actual with the standards
and makes the process easier and reliable.
Motivation
to Employees: Management Accounting leads to overall
improved performance of an organization and thus it improves the image of the
company. It sets standards for the organization and employees as well which
keeps them motivated and improves their performance.
Optimal
Utilization of Resources: Management Accounting helps in the
efficient utilization of resources. By creating different budgets and setting
standards, it helps in reducing the wastage of resources and efforts.
Keeps
the Management Informed: Management Accounting helps the
management to remain informed about the progress from time to time. It helps
them to take the remedial actions simultaneously to remove deviations and if
necessary, to take corrective action.
Q – Define Cost Control. State the Advantages & Disadvantages of
Cost Control.
Ans.
Concept of Cost Control
Cost control is prime function of cost accounting.
Under cost control, cost accountant measures actual costs, compare it with the
standards and find the deviations. Then redial actions are taken to reduce the
variances. It involves various actions taken to keep the cost within budgeted
standards and not rising beyond the limit. Cost Control focuses on decreasing
the total cost of production
Advantages
of Cost Control
The advantages of cost control are mainly as follows:
· Cost
control helps to achieve expected return on the capital invested in a company,
by resolving deviations between actual and expected standards.
· Cost
control leads to improved standards of production with the limited resources of
the company.
· Cost
control reduces the prices or tries to maintain it by reducing the cost.
· Cost
control leads to economic use of resources.
· It
increases profitability and competitive position of a company.
· It
enhances credit worthiness of the company. vii) It prospers and increases
economic stability of the industry.
· It
increases the sales of the company and maintains the level of employment.
Disadvantages
of Cost Control
The disadvantages of cost control are mainly as
follows:
· It
reduces the flexibility and process improvement in a company.
· It
restricts innovation by emphasizing to reaching the preset standards
· It
requires skilled personnel to set standards.
· It
lacks creativity as it is concerned with following the current standards
· It
does not lead to improvement in standards.
Q – State the Techniques of Cost Control.
Ans.
Techniques of Cost Control
1.
Budgetary control: The budgetary control is process of
continuous comparison. It works with creating budgets and continuous comparison
of these budgets with the actual. It is finding the reasons for deviations and
revising the budgets with needs. It helps in planning coordination and
controlling.
2.
Standard costing: Standard costing is setting a standard
cost and using this standard cost with actual and analyze the variances. It
helps in identifying the causes of variances and cost estimation.
3.
Inventory control: Inventory control is regulating purchase,
and usage of material to maintain the production without blocking the extra
funds into it. It tries to reduce the wastage of the material and leads to
effective utilization of it.
4.
Ratio analysis: Ratio analysis identifies the relationship
among different variables. It helps to identify the trends in an organization.
Ratio analysis is also used for comparison of different organizations on
different aspects. It is mainly used for comparing the performance with other
organizations and external standards.
5.
Variance analysis: Variance analysis is a method of cost
control. It involves the identification of the amount of variance and to
analyze the reasons of these variances. A variance is which varies from the
standards set. It can be favourable or unfavourable.
Q – State the difference between Cost Control & Cost Reduction.
Ans. Difference Between Cost Control and Cost Reduction
The following are the main differences between Cost Control and Cost
Reduction:
1. Cost Control focuses on
decreasing the total cost of production while cost reduction focuses on
decreasing per unit cost of a product.
2. Cost Control is a temporary
process in nature. Unlike Cost Reduction which is a permanent process.
3. The process of cost control
will be completed when the specified target is achieved. Conversely, the
process of cost reduction is a continuous process. It has no visible end. It
targets for eliminating wasteful expenses.
4. Cost Control does not
guarantee quality maintenance of products. However, cost reduction assured 100%
quality maintenance.
5. Cost Control is a preventive
function because it ascertains the cost before its occurrence. Cost Reduction
is a corrective function.
Q – State the techniques of Cost Management.
Ans.
Techniques of Cost management
Managing a business has containing cost of utmost
importance. Below are mentioned some of the techniques through which the
overall cost of the business can be controlled and maintained within the
required limits.
Time management
The
one who owns the business definitely knows the value of time for his / her
business. However, it is important to pass down the relevance across the
hierarchy of business to view the desired results. It is very essential to make
the employees understand the value of time and how to be efficient to do more
work in the same time span. This is one of the methods that will help increase
the productivity without adding to the labour cost.
Inventory management
One
of the major cost as well as ways of generating revenues is through
inventories. First and foremost one needs to chalk out the inventory
requirements, the quantity check that needs to be stored, vendor costs, etc. as
all of this helps in knowing the requirements of the business and helps avoid
stocking excess inventory and deploy the capital elsewhere rather than tying up
in the inventory stocks.
Outsourcing
Outsourcing
is one way that helps take employees on third party roles especially when it is
for one time projects. This saves the employer from taking the cost onto his
books. This is definitely done keeping in mind that the outsourcing partners
are of the standards that do not hamper the quality of services to the
customers of the business. Besides the employees, certain projects also can be
outsourced, which helps in saving the additional employee costs onboard as well
as get access to outside talent and technology, helping in optimizing the
resources.
Updated market sense
It
is very important to be updated with the trends in the markets as it is game of
survival of the fittest. One has to be constantly in touch with the vendors and
see that renewal of the contracts keep happening with the trend in prices. This
will help in negotiating for the best prices available rather than dragging on
the set prices of long term contracts.
Control of headcount
The
second most important cost to a business is the employee cost. Although we take
employees as assets or the backbone of the business, one needs to keep in mind
that they also have cost associated with them. Besides the regular pays and
salaries, workplace, licenses, softwares are the additional costs added per
employee. That is why, it is essential that the manager knows how to reduce the
employee costs, either by taking less number of people onboard, or by taking
more of low cost employees rather than few high costs ones.
Q – State the distinction between Reserve & Provision.
Ans.
Distinction between Provision and Reserve
1) A provision is a charge
against the profits which reserve is simply an appropriation of profits.
2) A provision is created
to meet a known liability whose amount is uncertain while reserve is created to
strengthen the financial position and the meet contingency, if any.
3) A provision is shown as
a deduction out of the assets concerned whereas reserve is shown separately on
the liabilities side.
4) The sum so set aside as
provision is never invested outside business whereas reserves may be invested
outside business.
5) Provision is part of
divisible profits but the same cannot be made available for the purpose of
distributing dividend while reserves (revenue) are always available to be
distributed as dividends.
6) Provisions have to be
created whether there is profit or loss while reserve is created only when
there is profit.
Q – State the Uses of Financial State Statements.
Ans.
USES OF FINANCIAL STATEMENTS
The financial statements
are useful in many ways in the process of decision making. They are the basis
of decision making for its users, namely management, investors, creditors,
government authorities, etc. Let us now discuss the usefulness of financial
statements.
1)
Economic
Decision-making
Sound economic decisions
(of external users) require assessment of the impact of current business
activities and development on the earning power of the company. Information
about economic resources and obligations of a business enterprise is needed to
form judgement about the ability of theenterprise to survive, to adopt. to
grow, to prosper amid changing economic conditions. In this process, the
financial statements provide information in evaluating the strength and
weaknesses of the enterprise and its ability to meet it’s commitments.
2)
Investors
Decisions Adequate
disclosure in the
financial statements is expected to have favourable effect on security process
of the company. An informed investor is always in a position to take
appropriate and timely decision on investment or disinvestment. Financial
statements and annual reports provide necessary information regarding
profitability, dividend policy, net worth, intrinsic value of shares. Earnings
Per Share (EPS) to assess future prospects to substantiate their investment
decisions. The group is not only interested in present health of the enterprise
but the future fitness as well. Bankers and financial institutions and foreign
institutional investors are always worried about the future solvency of the
invested firms.
3)
Employees’
Decisions
Employees’ decisions are
usually based on perceptions of a company’s economic status acquired through
financial statements. Employees and their trade unions use the financial
statements to assess risk and growth potential of a company, which helps to
settle industrial disputes, avert lockout and strike or to negotiate with the
management for wage hike, bonus, higher compensation, more fringe benefits,
better working conditions and so on. Labour unions and individual employees use
financial statements as the basis for collective bargaining and settlement.
This develops sense of belongingness among the workers.
4)
Creditors
and Financiers
Short-term creditors make
use of the financial statements mainly to ascertain the ability of the firm to
pay its current liabilities on time and the value of stock and other asset
which can be accepted as security against credits granted. Long-term creditors
and financiers are more concerned about the firm’s ability to repay the
principal amount as and when due. From the financial data provided by the
periodic statements, it is possible to make projections about the generation of
funds and cash flows, which may assure the safety of investment in debentures
and loans.
5)
Customers’
and Competitors’ Decisions
Customers and the public
in general may use financial statements to predict and forecast future prospect
of the company. This information may be important in estimating the value of
warranty or in predicting the availability of supporting services or continuing
supplies of goods over an extended period of time. Likewise, competitors may
analyse financial statements (from competition point of view) to judge the
ability of competitor to withstand competition and it’s absorbing capacity.
6)
Managerial
Decisions
Financial statements
provide necessary information base for taking all managerial decisions. In the
absence of accounting information neither the objectives of the enterprise can
be laid down nor measurement and evaluation of performance is possible nor
corrective measures can be taken.
Q – State various liquidity Analysis Ratio.
Ans.
Liquidity Analysis Ratios
A firm needs liquid assets
to meet day to day payments. Therefore, liquidity ratios highlight the ability
of the firms to convert its assets into cash. If the ratios are low then it
means that money is tied up in stocks and debtors. Thus, money is not available
to make payments. This may cause considerable problems for firms in the short
run. It is often viewed that a value less than 1.5 implies that the company may
run out of money as its cash is tied up in unproductive assets.
Liquidity ratio helps in
assessing the firm’s ability to meet its current obligations. The following
ratios come under this category:
i)
Current ratio;
ii)
Quick ratio; and
iii)
Net Working Capital Ratio.
i)
Current
Ratio
The current ratio shows
the relationship between the current assets and the current liabilities.
Current assets include cash in hand, cash at bank and all other assets which
can be converted into cash in the ordinary course of business, for instance,
bills receivable, sundry debtors (good debts only), short-term investments,
stock etc. Current liabilities consists of all the obligations of payments that
have to be met within a year. They comprise sundry creditors, bills payable,
income received in advance, outstanding expenses, bank overdraft, short-term
borrowings, provision for taxation, dividends payable, long term liabilities to
be discharged within a year. The following formula is used to compute this
ratio:
Current Ratio = Current
Assets / Current Liabilities
ii)
Quick
Ratio
The acid test ratio is
similar to the current ratio as it highlights the liquidity of the company. A
ratio of 1:1 (i.e., a value of approximately I) is satisfactory. However, if
the value is significantly less than 1 it implies that the company has a large
amount of its cash tied up in unproductive assets, so the company may struggle
to raise money in the short term.
Quick Ratio = Quick Assets
/ Quick Liabilities
Quick Assets = Current
Assets – Inventories
iii)
Net
working Capital Ratio
This working capital
ration can give an indication of the ability of your business to pay its bills
Generally a working capital ratio of 2:1 is regarded as desirable. However, the
circumstances of every business vary and you should consider how your business
operates and set an appropriate benchmark ratio. A stronger ratio indicates a
better ability to meet ongoing and unexpected bills therefore taking the
pressure off your cash flow. Being in a liquid position can also have
advantages such as being able to negotiate cash discounts with your suppliers.
A weaker ratio may indicate that your business is having greater difficulties
meeting its short-term commitments and that additional working capital support
is required. Having to pay bills before payments are received may be the issue in
which case an overdraft could assist. Alternatively building up a reserve of
cash investments may create a sound working capital buffer. Ratios should be
considered over a period of time (say three years), in order to identify trends
in the performance of the business.
The calculation used to
obtain the ratio is:
Net Working Capital = Net
Working Capital /Total Assets
Net Working Capital =
Current Assets – Current Liabilities
Q – State the Limitations of Ratio Analysis.
Ans.
LIMITATIONS OF RATIO ANALYSIS
By now you should have
mastered the techniques of ratio analysis and its application at the various
situations. However, before you start apply jug the ratios you should be
careful enough to be aware of some of its limitations while being used.
1) You should be aware
that many companies operate in more than one industry take for instance
companies like LandT, HLL, PandG etc. which does not operate in only one
business segment but in diversified businesses. So care should be taken to
ensure that segment level ratios are compared.
2) Inflation has distorted
balance sheets, in the sense that, the financial statements do not account for
inflation which implies that they do not represent - the real picture of the
scenario. However, given not so high inflation it would not affect the analysis
much.
3) Seasonal factors can
greatly influence ratios. Hence, you should make sure that you control for the
seasonal differences. Better would be to perform the ratio analysis on a quarterly
basis to get the complete picture for the whole year.
4) With the kind of
accounting scams breaking every other day, it’s not unusual to find that
Window-dressing could have been done. Though small investors have no control on
this and very little chance to get to know about the creative accounting that
is taking place one should not however loose sight into any sort of
discrepancies in the accounting.
5) It’s quite possible
that different companies within an industry may use different accounting practices
which would make it difficult to compare the two companies. In that situation
it should be made sure that the changes are accounted for and made sure that it
would not affect the analysis.
6) It could also be
possible that different companies may use different fiscal years. Say for
instance one company may use the calendar year as its account closing year
while some others may use the fiscal year. In that process care should be taken
to compare the respective months or years adjusting for the differences in the
accounting year.
7) The age of the company
may distort ratios. So it should be take into account companies you are
comparing have some basic similarities. The longer the company had stayed in
business the ratios would be quite different from the new entrants in the same
industry. Such factors have to be accounted for.
8) However, there is also
possibility that innovation and aggressiveness may lead to “bad” ratios. So one
should not blindly depend on the numeric ratio figures but try and understand
why the company has bad ratios in any particular year before jumping into wrong
conclusions.
9) There could also be
possibility that the benchmark used for analyzing the ratios mess may not be
appropriate. The industry average may not be an appropriate or desirable target
ratio. One has to carefully pick the industry averages or the benchmark ratios.
As industry averages can be very rough approximations.
10) The other downside of
the ratio analysis is that ratios should not be interpreted “one-way,” e.g. a
higher ratio may only be better up to a point. So one should not assume that
this will hold good in future. A company having a Profit margin of 10% in 2003
does not necessarily indicate that it would have atleast 10% profit margin in
the year 2004.
Q – State the Advantages & Limitations of Budgeting.
Ans.
ADVANTAGES OF BUDGETING
The following are the
advantages of budgeting:
a) Budgeting leads to
maximum utilisation of resources with a view to ensuring maximum return.
b) Budgeting increases the
awareness about business enterprise at all levels of management in the process
of fulfillment of targets.
c) Budgeting is helpful in
better co-ordination between different functions/activities of
business/organisation and hence, better understanding between different
functions.
d) Budgeting is a process
of self-examination and self-criticism which is essential for the success of
any organisation.
e) Budgeting makes a path
for active participation and support of top management.
f) Budgeting enables the
organisation to prefix its goals and push up the forces towards their
achievements.
g) Budgeting stimulates
the effective use of resources and creates an attitude of cost consciousness
throughout the organisation.
h) It creates the bases
for measuring performances of different departments as well as different
functions of the production activities.
LIMITATIONS
OF BUDGETING
In spite of the above
advantages, budgeting has the following limitations:
a) Forecasting, planning
or budgeting is not an exact science and a certain amount of judgment is
present in any budgeting plan.
b) The basic requirement
for the success of budgeting is the absolute support and enthusian provided by
the top management. If it is lacking at any time, the whole system will
collapse.
c) Budgeting should be
followed up by effective control action, this is often lacking in many
organisations, which defeats the very purpose of budgeting.
d) The installation of
budgeting system is an elaborate process and it takes time. e) It is only a
source and not a target and hence, can’t take the place of management, while it
is only a tool of management. Thus, the budget should be regarded not as a
master, but as a servant. f) It requires the experienced man-power, technical
staff, analysis, control etc., hence, it is costly affair.
Q – State the Objectives of Budgeting.
Ans.
OBJECTIVES OF BUDGETING
It is a well-known fact
that a planned activity has better chances of success than an unplanned one.
The budgeting is a forward planning and effective control tool. Thus, the
objectives of the budgeting are:
a) To control the cost and
increase revenue and thereby maximise profit, so as to know profit at different
level of production and best production level.
b) To run production
activities in efficient manner by lay behind the chances of interruption in
production process due to lack of material, labour etc.
c) To bring about
coordination between different functions of an enterprise, which is essential
for the success of any enterprise.
d) To incorporate measures
of calculation of deviations from budgeted results and analysis of the same,
whereby responsibility can be fixed and controlling measures/action can be
taken.
e) To ensure that actions
taken are in accordance with the targets and if required to take suitable
corrective action.
f) To predict short-term
and long-term financial positions for better financial position and management
of working capital in better manner.
Q – State the Difference between Fixed Budgeting & Flexible
budgeting.
Ans.
DIFFERENCE BETWEEN FIXED AND FLEXIBLE BUDGETING
The differences can be
outlined as follows:
1) Fixed budgeting is
inflexible and remains the same irrespective of the volume of business
activity, whereas flexible budgeting can be suitably recast quickly to suit
changed conditions.
2) Fixed budgeting assumes
the conditions would remain static, whereas, flexible budgeting is designed to
change according to a change in the level of activity.
3) Under fixed budgeting,
costs are not classified according to fixed, variable and semi-variable, while,
under flexible budgeting, costs are classified according to nature of their
variability.
4) Under fixed budgeting,
actual and budgeted performances can’t be correctly compared if the volume of
output differs, while under flexible budgeting, comparisons are realistic since
the changed plan figures are placed against actual ones.
5) Under fixed budgeting,
cost cannot be ascertained if there is a change in the circumstances, while,
under flexible budgeting, costs can easily be ascertained at different levels
of activity. The task of fixing prices becomes smooth.
Q – Explain Zero Based Budgeting.
Ans.
ZERO BASED BUDGETING (ZBB)
The technique of zero
based budgeting suggests that an organisation should not only make decisions
about the proposed new programmes but it should also, from time to time, review
the appropriateness of the existing programmes. Such review should particularly
done of such responsibility centres where there is relatively high proportion
of discretionary costs.
Zero based budgeting, as
the term suggests, examines a programme or function or responsibility from “
scratch.” The reviewer proceeds on the assumption that nothing is to be
allowed. The manger proposing the activity has, therefore, to prove that the
activity is essential and the various amounts asked for are reasonable taking
into account the volume of activity. Nothing is allowed simply because it was
being done or allowed in the past. Thus, it means writing on a clean slate.
Peter A. Pyhrr defined the
zero based budgeting as “an operating planning and budgeting process which
requires each manager to justify his entire budget requests in detail from
scratch (hence zero basis). Each manager states why he should spend any money
at all. This approach requires that all activities be identified as decision
packages which would be evaluated by systematic analysis ranked in order of
importance.”
Thus, a cost-benefit analysis
is done in respect of every function or process. It has to be justified while
framing budgets. The assumption underlying zero base budgeting is that the
budget for the previous period was zero, therefore whatever costs are likely to
be incurred or spending programmes are chalked out, justification or the full
amount is to be given. Under conventional system of budgeting, however, the
justification is to be submitted by the manager only in respect of the increase
in the demand for allotment of funds in excess over the budget for the previous
period. Thus, instead of functionally oriented spending approach,
programme-oriented and decision-oriented approach is followed under zero based
budgeting.
Q – State the Advantages & Disadvantages of Budgeting.
Ans.
Advantages of ZBB
1) This system is decision
oriented.
2) The techniques is
relatively elastic, because budgets are prepared every year as zero base.
3) It reduces wastage,
eliminates inefficiency and reduces the overall cost of production because every
budget proposal is on the basis of cost-benefit ratio after careful evaluation
of different alternatives and the one which is ‘best’ is approved.
4) It provides for a
greater possibility of goal congruence.
5) It takes into
consideration inflationary trends, competitor games and consumer behaviour. 6)
It vastly improves financial planning and management information system in view
of its revolutionary approach.
Disadvantages
of ZBB
1) It is possible to
quantify and evaluate budget proposals involving financial matters but
computation of cost-benefit analysis is not possible in respect of non-finance
matters.
2) The cost of
administration of zero based budgeting is high.
3) It may be difficult to
search out various alternatives for the same activity.
4) Some decision packages
are inter-related which may be difficult to rank.
5) Ranking the decision is
a scientific technique. Every manager can’t be expected to have the necessary
technical expertise in this matter.
6) Zero based budgeting
dismisses that the past is irrelevant and thereby challenges the fundamental
theory of continuity. Budgeting is a continuous process of estimating and
forecasting about the future and is based on past happenings.
Q – State the Objectives of Standard Costing.
Ans.
OBJECTIVES OF STANDARD COSTING
1)
Cost Control: The most important objective of standard
cost is to help the management in cost control. It can be used as a yardstick
against which actual costs can be compared to measure efficiency. The
management can make comparison of actual costs with the standard costs at
periodic intervals and take corrective action to maintain control over costs.
2)
Management by Exception: The second objective of standard
cost is to help the management in exercising control over the costs through the
principle of exception. Standard cost helps to prescribe standards and the
attention of the management is drawn only when the actual performance is
deviated from the prescribed standards. It can concentrate its attention on
variations only.
3)
Develops Cost Conscious Attitude: Another objective of
standard cost is to make the entire organisation cost conscious. It makes the
employees to recognise the importance of efficient operations so that costs can
be reduced by joint efforts.
4)
Fixing Prices and Formulating Policies: Another object of
standard cost is to help the management in determining prices and formulating
production policies. It also helps the management in the areas of profit
planning, product- pricing and inventory pricing.
5)
Management Planning: Budget planning is undertaken by the
management at different levels at periodic intervals to maximise the profit
through different product mix. For this purpose it is more convenient using
standard costing than actual costs because it is done on scientific and
rational manner by taking into account all technical aspects.
Q – State the Advantages & Disadvantages of Standard Costing.
Ans.
ADVANTAGES OF STANDARD COSTING
An Overview The
introduction of Standard Costing system may offer many advantages. It varies
from one business to another. The following advantages may be derived from
standard costing in the light of the various objectives of the system:
1)
To Measure Efficiency: Standard Costs provide a yardstick
against which actual costs can be measured. The comparison of actual costs with
the standard cost enables the management to evaluate the performance of various
cost centres. In the absence of standard costing, efficiency is measured by
comparing actual costs of different periods which is very difficult to measure
because the conditions prevailing in both the periods may differ.
2)
To Fix Prices and Formulate Policies: Standard costing is
helpful in determining prices and formulating production policies. The
standards are set by studying all the existing conditions. It also helps to
find out the prices of various products. It helps the management in the
formulation of production and price policies in advance.
3)
For Effective Cost Control: One of the most advantages of
standard costing is that it helps in cost control. By comparing actual costs
with the standard costs, variances are determined. These variances facilitate
management to locate inefficiencies and enables the management take remedial
action against those inefficiencies at the earliest.
4)
Management by Exception: Management by exception means that
each individual is fixed targets and every one is expected to achieve these
given targets. Management need not supervise each and everything and need not
bother if everything is going as per the targets. Management interferes only
when there is deviation. Variances beyond a predetermined limit may be
considered by the management for corrective action. The standard costing
enables the management in determining responsibilities and facilitates the
principle of management by exception.
5)
Valuation of Stocks: Under standard costing, stock is valued at
standard cost and any difference between standard cost and actual cost is
transferred to variance account. Therefore, it simplifies valuation of stock
and reduces lot of clerical work to the minimum level.
6)
Cost Consciousness: The emphasis under standard costing is
more on cost variations which makes the entire organisation cost conscious. It
makes the employees to recognise the importance of efficient operations so that
efforts will be taken to reduce the costs to the minimum by collective efforts.
7)
Provides Incentives: Under standard costing system, men, material
and machines can be used effectively and economies can be effected in addition
to enhanced productivity. Schemes may be formulated to reward those who achieve
targets. It increases efficiency, productivity and morale of the employees.
Limitations
of Standard Costing
In spite of the above
advantages, standard costing suffers from the following disadvantages:
1.
Difficulty in Setting Standards: Setting standards is a
very difficult task as it requires a lot of scientific analysis such as time
study, motion study etc. When standards are set at high it may create
frustration in the minds of workers. Therefore, setting of a correct standards
is very difficult.
2.
Not Suitable to Small Business: The system of standard
costing is not suitable to small business as it requires lot of scientific
study which involves cost. Therefore, small firms may find it very difficult to
operate the system.
3.
Not Suitable to All Industries: The standard costing is
not suitable to those industries which produces non-standardised products.
Similarly, the application of standard costing is very difficult to those
industries where production process takes place more than one accounting
period.
4.
Difficult to Fix Responsibility: Fixing responsibility is
not an easy task. Variances are to be classified into controllable and
uncontrollable variances because responsibility can be fixed only in the case
of controllable variances. It is difficult to classify controllable and
uncontrollable variances for the variance controllable at one situation may
become uncontrollable at another time. Therefore, fixing responsibility is very
difficult under standard costing.
5.
Technological Changes: Standard costing may not be suitable
to those industries which are subject to frequent technological changes. When
there is a change in the technology, production process will require a revision
of standard. Frequent revision of standards is a costly affair and therefore,
the system is not suitable for industries where methods and techniques of production
are subject to fast changes. In spite of the above limitations, standard
costing is a very useful technique in cost control and performance evaluation.
It is very useful tool to the industries producing standardised products which
are repetitive in nature.
Q – Explain the methods of disposition of Variances.
Ans.
DISPOSITION OF VARIANCES
The organisation, where
standard costing system is not in use, accounting records contain only actuals
and there will be no variances. When standard costing system is used then
accounting records contain both standard costs and actual costs. The management
should take corrective measures for the disposal of variances which arise at
the end of the accounting period. The accountants suggests several methods for
treating the variances which were as follows:
Allocation
of Variances to Inventories : According to this method,
the variances are distributed over stocks of raw materials, wage costs,
overheads or finished stock valued at cost. In such a case the real costs only
enter the account books and consequently they are reflected in the financial
statements. The adjustment of variances is made only in the general ledger and
not in subsidiary books. The distribution of variances will not be done to
products. As variances are not actuals, losses should not be taken to Profit
and Loss Account. The standard costs and variances that are observed are
displayed for control purposes to the management.
Transfer
to Profit and Loss Account : According to this method
the stocks of inventories, work in progress and finished goods are valued at
standard cost and variances are transferred to the Profit and Loss Account.
This method ensures that valuation of stock is done uniformly and all forms of
variances represent conditions of inefficiency waste and below standard
performance. When variance are shown differently, it will have effect on profit
or loss and attracts the attention of managements.
Transfer
to the Reserve Account : Under this method, variances are
carried forward to the next financial year as deferred item by crediting the
same to a reserve account to be set off in the subsequent year or years. The
favourable and adverse variances may cancel each other in the course of
reasonable time. This method is useful in cases where reasonable fluctuations
occurs and the variance may be disposed off during the course of time. .
Combination
of (1) and (2) methods : Though the above first two methods
easy to follow, management upon their needs choose a combination of the above
two methods. The variances which are controllable and arise out of over sight
or carelessness of officials can be transferred to profit and loss a/c, and the
uncontrollable can be absorbed by the cost of inventories.
Q – State the Limitations of Marginal Costing.
Ans.
LIMITATIONS OF MARGINAL COSTING
The marginal costing has
the following limitations :
1)
Difficulty in cost Analysis : Separation of costs into
fixed and variable becomes very difficult under certain circumstances and in
certain business situations. The accuracy of marginal costing results depends
upon how accurately costs are classified.
2)
Inappropriate basis of pricing : In marginal costing,
there is a danger of too many sales being made at marginal cost or marginal
cost plus some contribution, resulting in under recovery of fixed overheads.
This situation will arise during depression or increasing competition.
3)
Under valuation of inventory : In marginal costing,
inventories are valued at variable costs. It may create problems in inter firm
transfer of goods at marginal costs resulting in higher profits. Employees may
demand higher salaries and other benefits. Exclusion of fixed costs from
inventory cost seems to be against the accepted accounting procedure.
4)
Same marginal cost per unit : This assumption is partly
true within a limited range of activity. Scarcity of labour and material brings
change in price, trade discount of bulk purchases, changes in the productivity
of men etc. will influence the marginal cost per unit.
5)
Not suitable to all concerns : This technique may not be
suitable in those industries which have large stock of work-in-progress e.g.
contact and ship building industry. If fixed expenses are not included in
valuation of work-in- progress losses may occur in the initial years till the
contract is completed. On completion of the contract, huge profit will be depicted.
6)
New Technology : With the development of science and
technology, new cost efficient machines are available resulting in reduction in
labour costs and increased fixed costs. The system of costing, which ignores
significant portion of cost i.e. fixed cost, can’t be very effective.
Q – State the Assumptions in Break-even Analysis.
Ans.
ASSUMPTION IN BREAK EVEN ANALYSIS
Break even analysis is
based on certain assumption, which are:
1) All costs can be
segregated in two parts i.e., fixed and variable.
2) Fixed costs remains
constant at various levels of activity.
3) Variable costs changes
directly with production. It means variable cost per unit remains constant.
4) Selling price per unit
remains constant at all various levels of activity.
5) Technological methods
and efficiency of men and machines will not be changed.
6) Production and sales
are perfectly synchronized i.e., no inventory exists in the beginning or at the
end of the period.
7) Either there is only
one product or if several products are being produced and sold then sales mix
remains constant.
8) Break even analysis
assumes linear relationship in total costs and total revenues.
9) Break even analysis
ignores the capital employed in the business.
The above assumptions are
also the limitations of this analysis e.g. selling price per unit and variable
cost per unit remains constant at any level of activity. The production and
sales can be increased upto the maximum plant capacity so long as contribution
is positive. This assumption is valid if it is not necessary to reduce the
selling price per unit to increase the sales.
Q – State the Managerial Uses of Marginal Costing.
Ans.
MANAGERIAL USES OF MARGINAL COSTING
Marginal Costing is a
useful tool to management in taking various policy decisions, profit planning
and cost control. Following are a few of the managerial problem where marginal
costing is helpful in decision making:
1)
Price Fixation
2)
Accepting Special Order and Exploring
Additional Markets
3)
Profit Planning
4)
Key Factors or Limiting Factor
5)
Sales Mix Decisions
6)
Make or Buy Decisions
7)
Adding or Dropping Decisions
8)
Suspension of Activities
1) Price Fixation
Under marginal costing,
fixed costs are ignored and price is determined on the basis of variable costs
(marginal). In normal business conditions, the price fixed must cover full
costs otherwise firm will incur losses. In certain circumstances like trade
depression, dumping, seasonal fluctuation in demand, highly competitive market
etc. pricing is fixed with the help of marginal costing rather than full
costing.
1.
Accepting
Special Order and Exploring Additional Markets
In case of spare capacity,
a firm can increase its total profits by accepting an special order above the
marginal cost and at a price lower than its regular selling price. The
additional contribution earned from the special order will be the additional
profit to the firm. When additional order is accepted at a price below
prevailing price to utilise idle capacity, it should be carefully seen that it
will not affect the normal market and goodwill of the company. The special
order from a local dealer should not be accepted as it will affect the
relationship with other dealers.
2.
Profit
Planning
Marginal costing is very
helpful in determining the level of activity to achieve the planned profits.
The separation of costs in to fixed and variable aid management further in
planning and evaluating the profit resulting from a change in volume, a change
in selling price, a change in fixed costs and variable costs.
3.
Key
Factors or Limiting Factor
Marginal Costing The
marginal costing technique provides that the product with highest contribution
per unit is preferred. This inference holds true so long as it is possible to
sell as much as it can produce. But sometimes an organisation can sell all it
produces but production is limited due to scarcity of raw material, labour,
electricity, plant capacity or capital.
4.
Sales
Mix Decision
In marginal costing,
profit is calculated by subtracting fixed cost from contribution. It means
management should try to maximise the contribution. When a business firm
produces variety of product lines, then problem of best sales mix arises. The
best sales mix is that which yields the maximum contribution. The products
which gives the maximum contribution are to be retained and their production
should be increased keeping in view the demand. The products, which yield less
contribution, should be reduced or closed down depending upon the situation.
5.
Make
or Buy Decision
A particular component
used in the main product may be purchased or may be manufactured in its own
factory by utilising the idle capacity of the existing facilities. In such make
or buy decision, the marginal cost of manufacturing in the unit is compared
with the purchase price from the market. If marginal cost is less than the
purchase price, then the component should be manufactured in its own unit,
otherwise it should be purchased from the market. Fixed expenses are not taken
in the cost of manufacturing on the assumption that they have been already
incurred, the additional cost involved is only variable cost.
6.
Adding
and Dropping
An organisation may have a
number of product lines or departments. Certain product lines or departments
may turn out to be unprofitable with the passage of time or due to
technological developments. Production of such products or departments can be
discontinued. The marginal costing approach assist in these situations to take
a decision. It helps in the introduction of a new product line and work as a
good guide for deciding the optimum mix keeping in mind the available resources
and demand of the product. The contribution of different products or
departments is to be compared and the product or department whose P/V ratio is
the lowest is to be dropped out. The following illustration explains how
marginal costing technique helps the management in decision making.
Q – State the Decision Making Process.
Ans.
Decision-Making Process
Decision-making is a
process of selecting any of the alternatives available after evaluation of all
the options. Selection of one alternative out of two or more should maximize
the profits of the concern. Decision-making is very much related with future planning
with a particular goal. In this process, available information regarding the
options should be analyzed properly to make a beneficial decision for the
benefit of the organization. Before taking decision firstly one should
recognise the problem, secondly identify the various alternatives, thirdly
evaluate different alternatives with helps of cost benefit analysis and finally
adopt the most profitable course of action. Differential cost analysis is a
very useful technique to the management in formulating policies and making the
following decisions:
1)
Selling Price Decisions
2)
Exploring New Markets
3)
Make or Buy Decisions
4)
Expand and Contract
5)
Sales Mix Decisions
6)
Alternative Methods of Production
7)
Plant Shut Down Decisions
8)
Acceptance of Special Order
9)
Adding or Dropping a Product Line
10) Replacement
of Machinery Let us study each one of these in detail.
Selling
Price Decisions
Pricing process is
different in different industries. It differs according to the nature, cost and
demand of the product. Every producer accepts the different criterion for
pricing his product. Effect of changes in selling price can easily be
understood with the help of the following illustration.
Exploring
New Markets
Decisions regarding new
market can be taken if the home market is not affected. If we sell the
commodity to the foreign market at lower price and they re-export to our
existing customers at lesser price what we charge to our customers, then there
cannot be a decision in favour of new market even if profit or contribution is
increased. It is advisable only when other things being remain same in the home
or present market. To make use of the existing capacity, export and new market
is the best alternate. With the following illustration, one can understand
about the new market decision.
Make
or Buy Decisions
Decisions about, whether a
manufacturer of goods or services should produce goods or services within the
factory or purchase them from the market. This type of decision is needed when
the concern organization is producing the item, which is also available in the
market at cheaper rate. If, purchased from the open market, retrenchment of
workers becomes inevitable or may not be able to reduce the fixed costs of the
factory. During the processing of the alternatives available other than cost
factor should also be considered.
Expand
and Contract
In any factory, if there
is scope of expansion and there is a possibility to purchase the same item on
contract basis from the market then we would look at the total cost of both the
alternate.
Sales
Mix Decisions
The relative contribution
of quantities of products or services constitutes total revenues. It becomes
difficult to analyze the profitability of the product when more than one
product is produced. To establish most profitable sales mix it becomes
necessary to get the most profitable sales mix by considering all the
alternatives. Look at following example.
Alternative
Methods of Production
The decision to be taken
is of the nature of selecting one machine out of one or more available in the
market for production or to purchase the ready goods for further processing
from the market. In these cases, cost is considered and the decision is taken
in favour of the lowest cost occurring sector. Look at illustration 6 and see how
a decision will be taken out of alternative methods of production.
Plant
Shut Down Decisions
This type of decision is
being taken when the nature of business is seasonal, cut-throat competition and
other un-favourable conditions of the market are there. While taking the
decision of ‘Shut Down’ of the going concern the behaviour of costs should be
considered.
Acceptance
of Special Order
If any producer is not
utilizing plant’s full installed capacity and he receives special order for the
product and that will not make any adverse impact on our present sale then the
offer will be accepted if it increases contribution.
Adding
or Dropping a Product Line
It is obvious to add or
drop a product line to increase the profitability of the business. For this
purpose it is needed to analyze all the details available. Profitability should
be assessed in the existing framework and then the profitability of all the
alternatives should be compared and then the decision should be taken.
Replacement
of Machinery
It becomes necessary to
replace the old machinery by a new because of the obsolescence of the old one
or the renovation of the old one. Objective of replacing the old machinery by a
new machine is to reduce the cost of production and to increase the revenue.
While deciding the replacement of machinery factors like operating cost,
technological development, return on capital, demand for the product,
opportunity cost of the capital, availability of raw material, labour etc.,
should be taken into consideration.
Q – State the Cost-oriented method of Pricing.
Ans.
Cost-oriented Methods Pricing Decisions
Cost provides the base for
a possible price range; some firms may consider cost-oriented methods to price
a product. Let us discuss these methods in detail
1.
Cost
plus pricing
Cost plus pricing involves
adding a certain percentage to cost in order to fix the price. For instance, if
the cost of a product is Rs. 200 per unit and the marketer expects 10 per cent
profit on costs, then the selling price will be Rs. 220. The difference between
the selling price and the cost is the profit. This method is simpler as
marketers can easily determine the costs and add a certain percentage to arrive
at the selling price.
2.
Mark-up
pricing
Mark-up pricing is a
variation of cost pricing. In this case, markups are calculated as a percentage
of the selling price and not as a percentage of the cost price. Firms that use
cost-oriented methods use mark-up pricing. Since only the cost and the desired
percentage markup on the selling price are known, the following formula is used
to determine the selling price: Average unit cost/Selling price
3.
Break-even
pricing
In this case, the firm
determines the level of sales needed to cover all the relevant fixed and
variable costs. The break-even price is the price at which the sales revenue is
equal to the cost of the goods sold. In other words, there is neither profit
nor loss.
4.
Target
return pricing
In this case, the firm
sets prices in order to achieve a particular level of return on investment
(ROI).
5.
Early
cash recovery pricing
Some firms may fix a price
to realize early recovery of the investment involved, when market forecasts
suggest that the life of the market is likely to be short, such as in the case
of fashion-related products or technology-sensitive products. Such pricing can
also be used when a firm anticipates that a large firm may enter the market in
the near future with its lower prices, forcing existing firms to exit. In such
situations, firms may fix a price level, which would maximize shortterm
revenues and reduce the firm’s medium-term risk.
Q – State the Uses of Responsibility Accounting.
Ans.
USES OF RESPONSIBILITY ACCOUNTING
Responsibility accounting
which focuses on managerial levels is an important aid in the management
control process. It has several uses and confers many benefits. These are
listed below:
i)
Performance
Evaluation : This is perhaps the biggest benefit. With
responsibility localized, it is possible to rate individual managers on a cost
basis. When a manager is held responsible for whatever he does, he become extra
vigilant. Responsibility accounting system provides the manager with
information that helps controlling operations and evaluating the performance of
subordinates.
ii)
Delegating
Authority : Large business firms can hardly survive
without proper delegation of authority. By its very nature, responsibility
accounting makes it happen. Decentralisation of power is its key point and;
hence, delegation of authority follows.
iii)
Motivation
:
Responsibility accounting is the use of accounting information for planning and
control. When the managers know that they are being evaluated, they are
prompted to put their heart and soul in meeting the targets set for them. It
acts as a great stimulus. As a matter of fact, responsibility accounting is
based on the motivating individual managers to maximum performance. The targets
provide goals for achievement and serve to motivate managers to increase
revenues or decrease costs.
iv)
Corrective
Action : If performance is unsatisfactory, the person
responsible must be identified. It is only after identification of the erring
subordinate that the corrective action can be taken. Under responsibility
accounting, as areas of authority are clearly laid down, such corrective action
becomes easier. The control action to be effective must occur immediately after
identification of the causes of the problem. The longer control action is
deferred, the greater the unfavourable financial effect.
v)
Management
by Objectives : The heads of divisions and departments are
assigned definite objectives before the commencement of the period. They are
held answerable for the attainment of these targets. Shortfalls are punished
and excesses rewarded. Such a system helps in establishing the principle of management
by objectives (MBO).
vi)
Management
by Exception : Performance reporting here, is on
exceptions or deviations from the plan. The idea runs throughout the
responsibility accounting. It helps managers by spending their time on major
variances with greatest potential improvements. The concentration of managerial
attention on exceptional or unusual items of deviation rather than on all is
the key to success of the system.
vii)
High
Morale and Efficiency: Once it is clear that rewards are
linked to the performance, it acts as a great morale booster. Great
disappointment will be caused if an operating foreman is evaluated on the
decisions in which he was not a party
Q – State the essentials of success of responsibility accounting.
Ans.
ESSENTIALS OF SUCCESS OF RESPONSIBILITY ACCOUNTING
Responsibility accounting
by itself, does not give any benefits. Its success is dependent on certain
conditions. These are:
1) Support of all levels
of management through “Participative budgeting”. Budgeted performance is basic
to responsibility accounting. Most managers will be responsive to a budget
which they have helped to develop. If the budget of the responsibility centre
is produced by a process of negotiation between its manager and immediate
supervisor, he will work to attain it. He will more actively pursue the goals
and accept the resulting performance measures as equitable. Effective
motivations and control based on appropriate performance measures does not
occur by accident. They must be carefully considered during the design of the
system.
2) The system is based on
individual manager’s responsibility. It is the manager who incur costs and
should be held accountable for each expenditure.
3) Separation of costs
into controllable and non-controllable categories.
4) Restructuring the
organization along the decision-making lines of authority.
5) An organization plan
which establishes objectives and goals to be achieved.
6) The delegation of
authority and responsibility for cost incurrence through a system of policies
and procedures.
7) Motivation of the
individual by developing standards of performance together with incentives. 8)
Timely reporting and analysis of difference between goals and performance by
means of a system of records and reports.
9) A system of appraisal
or internal auditing to ensure that unfavourable variances are clearly shown.
Then, follow-up and corrective action need be applied.
In responsibility
accounting revenues and expenses are accumulated and reported by levels of
responsibility with a view to comparing the actual costs with the budgeted
performance data by the responsible manager. The whole effort is towards
satisfying the ‘data requirements for responsive control’.
Q - Comment of the Following.
1. Inflation Accounting
2. Environment Accounting
3. Social Accounting
Ans.
1.
INFLATION
ACCOUNTING
Inflation rate is the
percentage change in the price level from the previous period. The primary
objective of inflation accounting is to correct conventional historical cost
accounts for the understatement of inventory and plant used in production, i.e.
the cost of goods sold and depreciation, in order to prevent erosion of capital
during inflation. That is, inflation accounting is used to provide information
that is useful to present and potential investors and creditors and other users
in making decisions (and) in assessing the amounts, timing, and uncertainty of
prospective cash receipts from dividends or interest and the proceeds from the
sale, redemption, or maturities of securities or loans. Inflation accounting
was of interest when many developing economies were suffering inflation rates
of 25% or more. Now that rates are in single figures, the debate on the need of
inflation accounting is subdued. Some of the related objectives are:
a.
To show the real profit and loss for the
period under consideration as against the profit or loss on the basis of
historical cost;
b.
To show the real value of the assets and
liabilities instead of historical cost; and
c.
To ensure that sufficient funds will be
available to replace the various assets when the replacement becomes due.
This objective is
generally achieved by the current cost method, which is also much more
responsive to the general objectives of financial reporting. There are
alternative methods like Current Purchasing Power Method, Constant Dollar
Accounting Method, etc. Under the current cost accounting method, fixed assets,
stocks, stocks consumed, etc. are shown in the financial statements at their
value to the business and not at the depreciated value or original cost.
Depreciation for the year is calculated on the current value of the fixed
assets. All these things normally leads to reduction in profit worked out under
this method compared to normal historical based profit. Since the discussion
beyond this input is out of the scope of the subject, interested students are
advised to refer to Statement of Standard Accounting Practice (SSAP) 16.
2.
ENVIRONMENTAL
ACCOUNTING
Environmental accounting
is defined as the accountants’ contribution towards environmental sensitivity
in organizations. It gained prominence in the 1990s. The emphasis on the social
responsibilities of the accountancy profession is not new, having been led to
prominence by the social accounting debate of the 1970s. The social
consciousness of the accountancy profession was started to receive its
attention. It focused on extending accountability to numerous stakeholders by
necessitating disclosure of social information in corporate annual reports. The
accountability function of accounting was believed to be fulfilled by reporting
(financial and social) information that stakeholders would find useful in their
decision making process.
This led to the appearance
of environmental, employee and ethical information on a voluntary basis in
modern day corporate annual reports. Unfortunately, social accounting as
discussed in the earlier section, failed to make its way into the mainstream
accounting agenda, largely due to lack of mandatory standards to guide it and
value judgments associated with determination of social responsibilities of an
organization. In spite of this, there has been renewed interest in social
accounting in the 1990s, triggered by the urgency associated with reducing
environmental problems that exist today
3.
Social
Accounting
Social accountability is
about being answerable to the people affected by your actions. Leading
organizations now engage relevant stakeholders, including employees, suppliers,
consumers, regulators, NGOs and communities, in open, consequential dialogue at
all levels of business decision-making and activity. They also volunteer
information to these stakeholders on their social performance, thereby making
themselves accountable to these interest groups. Social and ethical accounting,
auditing and reporting is still relatively new in many developing or third
world nations, but is gaining acceptance internationally as the primary
demonstration of social accountability. A social report is the result of a
thorough evaluative process focused on the social impact of a business on all
its various stakeholders.
Social accounting and
audit is a framework which allows an organisation to build on existing
documentation and reporting and develop a process whereby it can account for
its social performance, report on that performance and draw up an action plan
to improve on that performance, and through which it can understand its impact
on the community and be accountable to its key stakeholders. The social
accounting process should be driven by a rigorous methodology that involves the
collection, analysis and interpretation of quantitative and qualitative data.
The accounting systems should be standardized to facilitate verification by a
third party. A social report represents the disclosure of the company’s social
performance in the same way that the annual report discloses financial
performance.
Social accounting is not
just a public relation exercise but a strategic intervention that, in addition
to disclosing social performance, serves to steer the company in a
transformation process. This strategic effect is achieved by adhering to the
principle of full disclosure. Both negative and positive performances are
declared in the final report. Consequently the corporation is compelled to
perform and the social report has a level of legitimacy that run-of-the-mill PR
efforts do not have.
Q – Define Activity based Costing. State It’s Advantages &
Disadvantages .
Ans.
Activity Based Costing
Activity based costing
(ABC) is an ‘approach to the costing and monitoring of activities which
involves tracing resource consumption and costing final outputs. Resources are
assigned to activities, and activities to cost objects based on consumption
estimates. The latter utilise cost drivers to attach activity costs to outputs.
CIMA Official Terminology
It refers to a methodology
that measures the cost and performance of activities, resources and cost
objects. It assigns costs to activities based on their consumption of resources
and then allocates costs to cost objects based on their required activities.
(Turney, 1996)
Advantages of Activity-Based Costing
a)
Accurate cost estimates: It provides realistic, accurate and
reliable product cost determination. It recognises the principle that
activities generate costs, not products.
b)
Knowledge about cost behaviour: Activity Based costing
distinguishes the real nature of cost behaviour and aids in reducing costs by
classifying activities that do not add value to the product.
c)
Tracing of activities for the cost object: It applies
multiple cost drivers, many of which are transaction based rather than product
volume.
d)
Identification of inefficiency in the process:
It is helpful in identifying inefficient processes and aims for improvement in
the system.
e)
Profitable to service industry: This type of costing is
very beneficial for service industry and organizations including hospitals,
hotels and banks which are very different from manufacturing organizations.
Service organizations have limited scope for direct costs; almost all the costs
are overheads.
f)
Determination of profit margins: It helps to ascertain the
profit margins more accurately for products.
g)
Tracing the overhead costs: This technique helps in tracing the
costs to various activities involved in processes, departments, support
services, customers, etc. besides the product costs.
h)
Helpful in identification of wasteful activities:
This helps in discovering the processes having unnecessary and wasteful costs.
Disadvantages
of Activity-Based Costing
a)
Time consuming: This method takes quite some time for
collection and preparation of data. b) Selection of drivers: It is challenging
in implementation while selection of cost drivers, distribution of common
costs, varying cost driver rates, etc.
c)
Costly and complex: The method requires accumulating and
analysing data making it costlier and complex.
d)
Difficult to allocate source: In this method, data
source is not easily available in comparison to the normal accounting methods.
e)
Non-conformance to accepted principles: The reports do not always
adhere to the generally accepted accounting principles. This makes it difficult
for the external reporting.
f)
Not suitable to all organizations: This type of costing may
not be helpful for organizations where overhead is meagre in the total
operating costs and for small organizations.
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