B B A 3rd SEM - ML Hada

Q No 1: Define the following with example (5 Marks)

Direct Material Cost, Direct Labor Cost, Indirect Material Cost, Factory Overhead

Ans:

Direct materials are the main materials used in the manufacturing of a product. It is easily recognized in the product. For example, piece of wood is the direct materials in manufacturing of a chair. Direct labor is the cost that is paid to the labor for manufacturing of a product. For example, wages that is paid to the carpenter for manufacturing of the chair is the direct labor cost

Indirect material is the other miscellaneous materials that are used in the manufacturing of a product. For example, cost of color for paining the chair, small nails used in the chair. The cost of indirect materials is also small. The cost of indirect materials is not easily recognized with the product. Apart from Direct materials and direct labors, there are also small expenses happens in the manufacturing process of a product, which are called Factory overheads. For example, Electricity expenses, greasing expenses they all are small expenses and are called factory overheads

Q No 2: Discuss the advantage and limitations of budget (5 Marks)

Ans:

Business organizations prepare budget generally for 3 months period with the objectives of smooth running of business. Following are some major advantages or objectives of preparation of budget

Advantages/objectives of Budget

a) To plan policy of business: The business has a policy of Sales and its collection, purchase and its payments, expenses, minimum cash balance, closing stock policy of inventory etc. These policies are planned through budget

b) To set policy for departments: Business has Sales department, procurement department, cash department. Budget helps in defining policies and binding all the departments with their respective responsibility

c) To control the performance: Budget helps to facilitate comparison of the standard with the actual performance

Limitations of Budget

a) Use of estimated data: Budgets are prepared on the basis of estimated data, sometimes the estimated forecasting becomes very far from the reality

b) Expensive: It takes a lot of time and efforts along with huge expenses to collect the data for budgeting, so a small organization cannot afford it

c) Lack of flexibility: Budgets are prepared involving different departments and people taking a long time. And organization has to follow all the standard set in the budget and cannot be changed easily

Q No 3: Define the concept of Product Mix CVP Analysis. How weighted average contribution margin is calculated? Illustrate with example (5 Marks)

Ans:

Generally a company does business with multi products (more than one product). In such a situation, we need to do CVP analysis keeping in mind all the products, which is called Product Mix CVP analysis

In the case of multi products, contribution margin of each products are multiplied by their respective weight or percentage of sales, which is called weighted average contribution margin. Weighted average contribution margin is calculated as follows

Particulars Product A Product B Total

Sales in units 6000 4000 10000

SPPU Rs 40 Rs 50

VCPU Rs 30 Rs 30

CMPU Rs 10 Rs 20

From the above information, weighted average contribution margin is calculated as follows

Products Sales Mix CMPU S mix x CMPU

A 6000/10000=0.60 10 6

B 4000/10000=0.40 20 8

Weighted Avg CMPU = 14

Q No 4: What is meant by labor turnover (5 Marks)

Ans:

In an organization, labors are considered most important human resource who are directly involved in production process. The organization provides monetary benefits like monthly salary, dearness allowances, incentives or bonus and also non monetary benefits like transport facility, residential facility etc to motivate the workers or labors so that they work for organization in a better possible way and also to keep good workers in the organization for a long time. In spite of these all, labors leave the organization and join another. When labor leaves the organization, it is called labor turnover and the rate of labor turnover in one year is called labor turnover ratio

Q No 5: Briefly describe the allocation, apportionment and absorption of overheads (5 Marks)

Ans:

Generally organizations are divided logically into different departments for smooth operation of business. For example Production Department A (where Men’s garments are manufactured), Production Department B (where women’s wearing is manufactured), Production Department C (where children garments are manufactured) and also one Service department (suppose store department). These departments have some expenses or costs which are specific for the particular department. For example, suppose there are separate managers for each department. Then salary to the department manager is specific for the particular department. The salary of department manager is easily identified for the particular department. When items of overhead can be identified with specific departments, these are allocated to the particular department. This process of identification of whole items of overhead to specific departments is called “allocation of overheads”

Some overheads are not identified with specific department. They are common or mixed for more than one department or for all departments. Such overheads are distributed among its related departments. The process of distribution of overheads among different related departments on a certain basis is called “apportionment of overheads” For example, suppose a factory has three departments as in above example. The organization pays factory rent Rs 100,000 monthly. The rent covers for all the departments. Then the rent paid for the factory premises are distributed among all three departments on a certain basis. The process of distribution of factory rent among all three departments is called “apportionment of overhead”

The overhead charge determined through allocation and apportionment are finally charged to the product. The process of charging overheads to the final product is called “absorption of overhead”

Q No 6: Describe in brief ABC analysis as a tool of inventory management (5 Marks)

Ans:

Organizations, specially manufacturing organizations have high investments in inventory. Therefore organizations implement different methods of inventory control system. ABC analysis is a technique of inventory management. Under the ABC analysis, inventory is categorized or divided into three parts. They are category A, category B and category C. Inventories are categorized on the basis of very Costly and less costly and similarly on the basis of Big volume small value and small volume big value. The ABC analysis provides a good control and efficient management of inventory

Q No 7: What is BEP? Explain the application and usefulness for a manufacturing company (5 Marks)

Ans:

Break Even Point (BEP) is a level of sales volume at which there is no loss no profit to the organization. In other words, BEP is such a volume of sales where Sales revenue and costs are equal. Followings are the application or importance of BEP analysis for a manufacturing company

a) Helps to determine break-even point: The BEP technique helps to determine break-even point and company could know the minimum quantity/volume of sales that must be sold for survival

b) Helps to see the effects of changes: The BEP analysis helps to determine the effect of changes in selling price, variable costs etc in the profitability of the company

c) Helps to determine optimum product mix: The BEP analysis helps to select the best alternative among different possible product mix for profit maximization of the company

Q No 8: Define budget the main feature (5 Marks)

Ans:

Following are some of the major features of a commercial budget

a) Prepared in advance: Budget is a forecasting or estimates of future business activities

b) Comprehensive: Budget is a summary of overall business activities like sales, purchase, expenses, financing etc

c) Plan & Policy: Budget is also an expression of financial and business policy of the company

Q No 9: What is cost? Write the types of cost on the basis of element. (5 Marks)

Ans:

In simple term the term cost is defined as price that is paid for something to acquired or to get manufactured. Cost is classified on different basis. Following are the types of costs on the basis of its elements

a) Material cost: Materials are required to manufacture any product. They are called Raw Materials. Further materials are sub classified into two parts; direct materials and indirect materials

b) Labor or Wages: Workers are required to work in the side of machine and for other purposes. The wages that are paid to the workers is called Labor cost. There is also two types of labor costs, direct labor cost and indirect labor cost

c) Other expenses: All other expenses that happens is called Other expenses or miscellaneous expenses

Q No 10: What are the uses of CVP analysis? Explain with example. (5 Marks)

Ans:

CVP analysis is very useful for business organization. Following are some of its major uses, importance

a) Helps to determine break-even point

b) Helps to estimate Sales volume to earn a desired amount of profit

c) Helps to select the best alternatives for profit maximization

d) Helps to select the optimum product mix ratio

Q No 11: Define fixed cost, variable cost and semi variable cost with suitable example. (5 Marks)

Ans:

On the basis of Behavior of costs, costs are classified into fixed, variable and semi variable

Fixed costs: The costs which are constant in total amount in all levels of production units are called Fixed Cost. For example, Rent for factory building

Variable costs: The costs which are constant in per unit are called variable costs. For example, direct materials, direct wages etc

Semi Variable costs: The costs which are constant neither in total amount nor in per units are called semi variable costs. For example: Electricity bill etc

Q No 12: What do you mean by inventory control system? What is the use of EOQ? ( 5 Marks)

Ans:

Company has a big investment of capital for holding inventory. Therefore company must practice a proper control system for inventory management. Inventory control system is always helpful to reduce losses, damages and misappropriation of materials. EOQ is one of the tools for inventory control management

EOQ helps to determine an ordering quantity that will minimize the total cost of inventory management (ordering and carrying costs)

Q No 13: Explain the term management accounting and differentiate between cost and management accounting (10 Marks)

Ans:

Management accounting is a modern concept of accounting. It provides necessary information to the management or managers of a company and helps in the decision making process. It provides information for effective and efficient performance for planning, organizing, directing and controlling

Difference between Cost accounting and management accounting

1. Meaning: Accounting which is concerned to ascertainment of costs is called cost accounting. Accounting which is concerned to help management to perform its functions (planning, organizing, directing and controlling) is called management accounting

2. Objective: Main objective of cost accounting is to ascertainment and control the costs. Main objective of management accounting is to provide information to management to facilitate decision making

3. Data: Cost accounting considers the quantitative data only. Management accounting considers quantitative as well as qualitative data

Q No 14: Management accounting provides necessary information for decision making. Justify the statement along with major functions of management accounting. (10 Marks)

Ans:

It is true that management accounting provides necessary information that are helpful for the management to carry out various management decisions. Management accounting provides data and information to the management for formulating both short term and long term plans. It provides the data in such way that are useful for comparative study of financial statements. It also enables the interpretation of financial statements which can be used for various managerial purposes. Following are some major functions of management accounting

Objectives and functions of Management accounting

a) Help to formulate plans: Management accounting helps the management to make a plans based on the past data and current situations

b) Help to control performance: Management accounting helps to compare the actual performance with the budgeted target and in such a way facilitate to know the deviation between actual performances with the budgeted targets

c) Help to motivate employees: Management accounts helps in setting goals, planning in advance, course of action etc for a department and employees. Such activities help to keep employees motivated

d) Help to solve business problems: management accounting uses the different tools and techniques like Decision among alternative choices, setting a reasonable selling price, CVP analysis, budgeting etc. These tools and techniques help to solve business problems

Q No 15: What do you mean by cost accounting? Briefly explain about the objectives with major limitations. (10 marks)

Ans:

Cost accounting is a specific branch of accounting which deals I classification of costs, allocation of costs, appropriation of costs and absorption of costs. Cost accounting is actually internal reporting system. It helps to provide different information to the management to assist in the decision making process. Following are some of the major objectives and limitations of cost accounting

Objectives & Functions of cost accounting

a) To determine cost: The main objective of cost accounting is to ascertain the different kinds of costs that take place during manufacturing of a product

b) To control cost: Cost accounting controls costs by using different tools and techniques like standard costing, budgeting techniques etc

c) To help in fixation of selling price: By using different tools and techniques like job costing etc, cost accounting helps in fixing the selling price of a product and services

Limitations of cost accounting

a) Lack of uniformity: Cost accounting is an informal approach of accounting. There is not any standard procedure to handle the raw data. Therefore different cost accountant comes with the different outcomes, which could vary from each others

b) Costly: There are various different formalities for collection of data for processing. They are costly. So small size business could not afford

c) Lack of double entry system: Cost accounting does not follow double entry system. Therefore it is not possible to check its accuracy

Q No 16: Explain objectives of cost accounting. Differentiate between cost and financial accounting (10 Marks)

Ans:

Following are some of the major objectives of cost accounting

Objectives & Functions of cost accounting

a) To determine cost: The main objective of cost accounting is to ascertain the different kinds of costs that take place during manufacturing of a product

b) To control cost: Cost accounting controls costs by using different tools and techniques like standard costing, budgeting techniques etc

c) To help in fixation of selling price: By using different tools and techniques like job costing etc, cost accounting helps in fixing the selling price of a product and services

Difference between cost accounting and financial accounting

a) Meaning: Cost accounting is a process of ascertainment of different kind of costs. Financial accounting is a process of recording daily transactions of a company and determining profit and loss and ascertainment of financial position of a business

b) Objective: The main objective of cost accounting is to provide information to management for planning, controlling, policy making and decision making etc. The main function of financial accounting is to find out profit and loss position and determining financial position of a business

c) Users: The users of cost accounting are the internal management. The users of the financial accounting are the external bodies like shareholders, government, general public etc

d) Period of reporting: There is not any fix period of reporting of cost accounting. It is reported whenever data are required to the management. But date of reporting of financial data is fixed. It is reported every year at the end

Q No 17: Give your answer in one sentence (1 Marks each)

LIFO: Method of Inventory Issue. First In Last Out
Re Order Quantity: It is the quantity for one or each order
Gantt’s approach: It is a method of wage payment
ABC Analysis: Method of inventory control, under which inventory is categorized as A, B and C
Apportionment: It is a process of distributing the common cost for each of the related products or departments
Bonus Scheme: It is an incentive or bonus under method of wage payment
Store Ledger: Ledger for recording in and out of inventory
Margin of safety: It is the excess of Sales over the break-even sales
Over absorption: While preparing Absorption Costing Income statement, if Fixed Mfg Cost is absorbed more than the actual amount of Fixed Mfg Cost, it is called over absorption of Fixed Mfg Cost
What is abnormal wastage: When actual output is less than normal output
What is bin a card: A card which is attached or hanged in each location of warehouse where material is stored, it is called bin card
What is incentive wage system: When a labor is paid extra amount for a good performance, it is called incentive wage system
What is economic order quantity: It is an ordering quantity in a single order, which keeps the cost of keeping up material minimum
What is margin of safety ratio: It is a margin of safety amount in proportion with the actual sales
Contribution margin: It is sales minus variable cost
Production budget: It is a budget which determines the optimum quantity of production units

Work certified: It is the certified portion of Work In Progress

EOQ: It is an ordering quantity which keeps the costs minimum
Semi Variable cost: When a certain portion of a cost is fixed and the rest is variable, then it is called semi variable cost
PV Ratio: Profit Volume ratio determines the contribution margin
Time rate system of wage payment: Method of wage payment on the basis of time or per hour
Contribution margin ratio: Contribution margin ratio determines the contribution margin
Over and under absorption: When fixed cost is absorbed more than actual, it is over absorption and when fixed cost is absorbed less than actual, it is called under absorption

Labor Turnover: In an organization, new labor are recruited and existing labor leave the organization because of many reasons. In this way, joining new labor and leaving existing labor in a year is called Labor Turnover

Over and Under absorption: While preparing Income Statement under Absorption Costing, sometimes Fixed Mfg overheads is absorbed more if actual Production units are more than the normal capacity. It is called "Over absorption". If the actual production is less than the normal capacity then the situation is called "Under absorption"

ABC Analysis: It is technique of Inventory management. Under the system, inventories are categorized into 3 categories, A, B and C. Inventories are categorized on the basis of Value and Volume.

MOS: It stands for Margin of Safety. MOS is the additional units of actual Sales over and above the break even sales quantities. In other words, MOS is excess of actual sales over break even sales

Abnormal Loss and Gain: If the actual loss is more than the normal loss or expected loss, the additional loss is called "Abnormal Loss" And if the actual loss is less than the normal loss or expected loss, then such save in the unit of loss is called "Abnormal gain"

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