Management Accounting Objective questions
Answer
:
There
are three streams of accounting:
o
Financial Accounting: is the process in which
business transactions are recorded systematically in the various books of
accounts maintained by the organization in order to prepare financial
statements. Theses financial statements are basically of two types: First is
Profitability Statement or Profit and Loss Account and second is Balance Sheet.
o
Cost Accounting: is the process of
classifying and recording of expenditure incurred during the operations of the
organization in a systematic way, in order to ascertain the cost of a cost
center with the intention to control the cost.
o
Management Accounting: is the process of analysis,
interpretation and presentation of accounting information collected with the
help of financial accounting and cost accounting, in order to assist management
in the process of decision making, creation of policy and day to day operation
of an organization. Thus, it is clear from the above that the management
accounting is based on financial accounting and cost accounting.
Answer
:
Financial
Accounting is the process in which business transactions are recorded
systematically in the various books of accounts maintained by the organization
in order to prepare financial statements. These financial statements are
basically of two types: First is Profitability Statement or Profit and Loss
Account and second is Balance Sheet.
Following
are the characteristics features of Financial Accounting:
o
Monetary Transactions: In financial accounting only
transactions in monetary terms are considered. Transactions not expressed in
monetary terms do not find any place in financial accounting, howsoever
important they may be from business point of view.
o
Historical Nature: Financial accounting considers
only those transactions which are of historical nature i.e the transaction
which have already taken place. No futuristic transactions find any place in
financial accounting, howsoever important they may be from business point of
view.
o
Legal Requirement: Financial accounting is a legal
requirement. It is necessary to maintain the financial accounting and prepare
financial statements there from. It is also obligatory to get these financial
statements audited.
o
External Use: Financial accounting is for those
people who are not part of decision making process regarding the organization
like investors, customers, suppliers, financial institutions etc. Thus, it is
for external use.
o
Disclosure of Financial Status: It discloses the financial
status and financial performance of the business as a whole.
o
Interim Reports: Financial statements which are
based on financial accounting are interim reports and cannot be the final ones.
o
Financial Accounting Process: The process of financial
accounting gets affected due to the different accounting policies followed by
the accountants. These accounting policies differ mainly in two areas:
Valuation of inventory and Calculation of depreciation
Answer
:
Management
Accounting is the process of analysis, interpretation and presentation of
accounting information collected with the help of financial accounting and cost
accounting, in order to assist management in the process of decision making,
creation of policy and day to day operation of an organization. Thus, it is
clear from the above that the management accounting is based on financial
accounting and cost accounting.
Following
are the objectives of Management Accounting:
o
Measuring performance: Management accounting measures two types of
performance. First is employee performance and the second is efficiency
measurement. The actual performance is measured with the standardized
performance and a report of deviation from the standard performance is reported
to the management for the effective decision making and also to indicate the
effectiveness of the methods in use. Both types of performance management are
used to make corrective actions in order to improve performance.
o
Assess Risk: The aim of management accounting is to assess risk in
order to maximize risk.
o
Allocation of Resources: is an important objective of Management
Accounting.
o
Presentation of various financial statements to the Management.
Answer
:
Limitations
of Management Accounting:
o
Management Accounting is based on financial and cost accounting,
in which historical data is used to make future decisions. Thus, strength and
weakness of the managerial decisions are based on the strength and weakness of
the accounting records.
o
Management Accounting is useful only to those people who are in
the decision making process.
o
Tools and techniques used in management accounting only provide information
and not ready made decision. Thus, it is only a supplementary service.
o
In Management Accounting, decision is based on the manager’s
institution as management try to avoid lengthy courses of scientific decision
making.
o
Personal prejudices and bias affect the decisions as the
interpretation of financial information is based on personal judgment of the
interpreter.
Answer
:
Following
is the scope of Management Accounting:
o
Financial Accounting
o
Cost Accounting
o
Revaluation accounting
o
Control Accounting
o
Marginal Costing
o
Budgetary Control
o
Financial Planning and
o
Break Even Analysis
o
Decision accounting:
o
Reporting
o
Taxation
o
Audit
Question 6. What Are The Various Techniques Used To Discharge The
Function Of Management Accounting?
Answer
:
Following
are the technique used to discharge the function of management accounting:
o
Marginal Costing
o
Budgetary Control
o
Standard Costing
o
Uniform Costing
Answer
:
o
Financial Accounting reports are used by outside parties such as
creditors, shareholders, tax authorities etc. whereas Management Accounting
reports are used by managers inside the organization for planning, directing,
controlling and taking decisions.
o
In Financial Accounting, only historical financial transactions
are considered and do not consider non financial transactions whereas in
Managerial Accounting emphasis is on decisions affecting the future, thus it
may consider future data as well s non financial factors.
o
Maintenance of financial accounting records and preparation of
financial statements is a legal requirement whereas Management Accounting is
not at all legal requirement. Moreover, these systems have their own reporting
formats.
o
In Financial Accounting, precision of information is required
whereas in Management Accounting timeliness of information is required.
o
In Financial Accounting, only summarized data is prepared for the
entire organization whereas in Management Accounting detailed reports are
prepared about products, departments, employees and customer.
o
Preparation of Financial Accounting is based of Generally Accepted
Accounting Principles whereas Management Accounting does not follow such
principles to prepare reports.
o
Financial reports generated by the Financial Accounting are
required to be accurate whereas accuracy is not the prerequisite of management
accounting.
Answer
:
Management
Accounting is the process of analysis, interpretation and presentation of
accounting information collected with the help of financial accounting and cost
accounting, in order to assist management in the process of decision making,
creation of policy and day to day operation of an organization. Thus, it is
clear from the above that the management accounting is based on financial
accounting and cost accounting.
Answer
:
o
Measuring performance: Management accounting measures two types of
performance. First is employee performance and the second is efficiency
measurement. The actual performance is measured with the standardized
performance and a report of deviation from the standard performance is reported
to the management for the effective decision making and also to indicate the
effectiveness of the methods in use. Both types of performance management are
used to make corrective actions in order to improve performance.
o
Assess Risk: The aim of management accounting is to assess risk in
order to maximize risk.
o
Allocation of Resources: is an important objective of Management
Accounting.
o
Presentation of various financial statements to the Management.
o
Outstanding Expenses
o
Income Received in Advance
Answer
:
A
budget is a financial document or an action plan which is prepared and used to
project future income and expenses. It outlines an organisation’s financial and
operational goals. It can also include non- monetary information with the
monetary information. They need to be made and approved in advance of the year
in which they are to be used or implemented.
Following
are the characteristics of a good budget:
o
It is expressed in quantitative or monetary terms.
o
It is prepared for a fixed period of time It is prepared before
the period in which it commences.
o
Practical to implement.
o
It spells out the objects and the policies to be pursued in order
to achieve the objective of the organisation.
o
Many people are involved in drawing up a budget.
o
Flexible enough to allow changes in the changing environment.
o
Prepared on the basis of established standards of performance.
o
Analysis of cost and revenues.
o
On the basis of budget report performance of the organisation is
constantly monitored.
Answer
:
Budgetary
Control is a methodical control technique whereby budgets are prepared relating
the responsibilities of budget holders. It is a continuous comparison of actual
results with budgeted results, to ensure that the objectives of the company’s
policy are achieved; or to provide a basis for the change of those objectives.
In simple terms, it is the analysis of the plans which the organisation has
made; what was the result when those plans were implemented practically. After
practical implementation of the budget if any variation is seen in the actual
result to the budget result then the reasons for the variations are fount out
and corrective actions are taken to correct variations.
Following
are the characteristics of Budgetary control:
o
It deals with the establishment of the budgets.
o
A control technique where actual results are extracted from the organisation’s
operations and compared with the budget prepared.
o
Any differences or variations are computed and made the
responsibility of key individual who can either take actions for maintain the
favourable variations or revise the budgets.
Answer
:
The
gross margin ratio is also known as the gross profit margin or the gross profit
percentage.
The
gross margin ratio is computed by dividing the company's gross profit dollars
by its net sales dollars.
To
illustrate the gross margin ratio, let's assume that a company has net sales of
Rs800,000 and its cost of goods sold is Rs600,000. This means its gross profit
is Rs200,000 (net sales of Rs800,000 minus its cost of goods sold of Rs600,000)
and its gross margin ratio is 25% (gross profit of Rs200,000 divided by net
sales of Rs800,000).
A
company should be continuously monitoring its gross margin ratio to be certain
it will result in a gross profit that will be sufficient to cover its selling
and administrative expenses.
Since
gross margin ratios vary between industries, you should compare your company's
gross margin ratio to companies within your industry. However, you should keep
in mind that there can also be differences within your industry. For example,
your company may use LIFO while most companies in your industry use FIFO.
Perhaps your company focuses its sales efforts on smaller customers who also
require special administrative services. In that case, your company's gross
margin ratio should be larger than your industry's in order to cover the higher
selling and administrative expenses.
Answer
:
Vertical
analysis reports each amount on a financial statement as a percentage of
another item. Vertical analysis of an income statement results in every income
statement amount being presented as a percentage of sales
Horizontal
analysis looks at amounts on the financial statements over the past years..
This allows you to see how each item has changed in relationship to the changes
in other items. Horizontal analysis is also referred to as trend analysis.
Answer
:
A
current asset is cash and any other company asset that will be turning to cash
within one year from the date shown in the heading of the company's balance
sheet. (If a company has an operating cycle that is longer than one year, an
asset that will turn to cash within the length of its operating cycle is
considered to be a current asset.)
Current
assets are generally listed first on a company's balance sheet and will be
presented in the order of liquidity. That means they will appear in the
following order: cash (which includes currency, checking accounts, petty cash),
temporary investments, accounts receivable, inventory, supplies, and prepaid
expenses. (Supplies and prepaid expenses will not literally be converted to
cash. They are included because they will allow the company to avoid paying
cash for these items during the upcoming year.)
Answer
:
The
debt to total assets ratio is an indicator of financial leverage. It tells you
the percentage of total assets that were financed by creditors, liabilities,
debt.
The
debt to total assets ratio is calculated by dividing a corporation's total
liabilities by its total assets. Let's assume that a corporation has Rs100
million in assets, Rs40 million in liabilities, and Rs60 million in
stockholders' equity. Its debt to total assets ratio will be 0.4 (Rs40 million
of liabilities divided by Rs100 million of assets), or 0.4 to 1. In this
example, the debt to total assets ratio tells you that 40% of the corporation's
assets are financed by the creditors or debt (and therefore 60% is financed by
the owners). A higher percentage indicates more leverage and more risk.
Another
ratio, the debt to equity ratio, is often used instead of the debt to total
assets ratio. The debt to equity ratio uses the same inputs but provides a
different view. Using the information above, the debt to equity ratio will be
.67 to 1 (Rs40 million of liabilities divided by Rs60 million of stockholders'
equity).
Answer
:
A
current liability is an obligation that is 1) due within one year of the date
of a company's balance sheet and 2) will require the use of a current asset or
will create another current liability. If a company's operating cycle is longer
than one year, current liabilities are those obligation's due within the
operating cycle.
Current
liabilities are usually presented in the following order:
o
the principal portion of notes payable that will become due within
one year
o
accounts payable
o
the remaining current liabilities such as payroll taxes payable,
income taxes payable, interest payable and other accrued expenses
The
parties who are owed the current liabilities are referred to as creditors. If
the creditors have a lien on company assets, they are known as secured
creditors. The creditors without a lien are referred to as unsecured creditors.
The
amount of current liabilities is used to determine a company's working capital
(current assets minus current liabilities) and the company's current ratio
(current assets divided by current liabilities).
Answer
:
The
quick ratio is a financial ratio used to gauge a company's liquidity. The quick
ratio is also known as the acid test ratio.
The
quick ratio compares the total amount of cash + marketable securities +
accounts receivable to the amount of current liabilities. If a company has cash
+ marketable securities + accounts receivable with a total of Rs1,000,000 and
the company's total amount of current liabilities is Rs1,200,000, its quick
ratio is 0.83 to 1. (Rs1,000,000 divided by Rs1,200,000 = 0.83)
The
quick ratio differs from the current ratio in that some current assets are
excluded from the quick ratio. The most significant current asset that is
excluded is inventory. The reason is that inventory might not turn to cash
quickly.
Answer
:
The
financial ratio accounts receivable turnover is a company's annual sales
divided by the company's average balance in its Accounts Receivable account
during the same period of time.
For
example, if a company’s sales for the most recent year were Rs6,000,000 and its
average balance in Accounts Receivable for the same twelve months was Rs600,000,
its accounts receivable turnover ratio is 10. This indicates that on average
the company’s accounts receivables turned over 10 times during the year, or
approximately every 36 days (360 or 365 days per year divided by the turnover
of 10).
Whether
the accounts receivable turnover ratio of 10 is good or bad depends on the
company's past ratios, the average for other companies in the same industry,
and by the specific credit terms given to this company's customers.
It is
important to note that the accounts receivable turnover ratio is an average,
and averages can hide important details. For example, some past due receivables
could be "hidden" or offset by receivables that have paid faster than
the average. If you have access to the company's details, you should review a
detailed aging of accounts receivable to detect slow paying accounts.
Answer
:
Net
working capital or working capital is defined as current assets minus current
liabilities. Therefore, a change in the total amount of current assets without
a change of the same amount in current liabilities will result in a change in
the amount of working capital. Similarly, a change in the total amount of
current liabilities without an identical change in the total amount of current
assets will cause a change in working capital.
For
instance, if the owner makes an additional investment of Rs20,000 in her
company, the company's total current assets will increase by Rs20,000 but there
is no increase in its current liabilities. As a result, the company's working
capital increases by Rs20,000. (The other change is an increase in the owner's
capital account.)
If a
company borrows Rs50,000 and agrees to repay the loan in 90 days, the company's
working capital has not increased. The reason is that the current asset Cash
increased by Rs50,000 and the current liability Loans Payable also increased by
Rs50,000.
The
use of Rs30,000 to buy merchandise for inventory will not change the amount of
working capital. The reason is that the total amount of current assets will not
change. The current asset Cash decreases by Rs30,000 and the current asset
Inventory increases by Rs30,000.
If a
company sells a product for Rs3,400 which is in its inventory at a cost of Rs2,500
the company's working capital will increase by Rs900. Working capital increased
because 1) the current asset accounts Cash or Accounts Receivable will
increase by Rs3,400 and Inventory will decrease by Rs2,500; 2) current
liabilities will not change. Owner's equity will increase by Rs900.
The
use of Rs100,000 for the construction of a storage building will reduce working
capital because the current asset Cash decreased and a long-term asset Storage
Building has increased.
Answer
:
I
would use the liability account Accounts Payable for suppliers' invoices that
have been received and must be paid. As a result, the balance in Accounts
Payable is likely to be a precise amount that agrees with supporting documents
such as invoices, agreements, etc.
I
would use the liability account Accrued Expenses Payable for the accrual type
adjusting entries made at the end of the accounting period for items such as
utilities, interest, wages, and so on. The balance in the Accrued Expenses
Payable should be the total of the expenses that were incurred as of the date
of the balance sheet, but were not entered into the accounts because an invoice
has not been received or the payroll for the hourly wages has not yet been
processed, etc. The amounts recorded in Accrued Expenses Payable will often be
estimated amounts supported by logical calculations.
Answer
:
The
current ratio is a financial ratio that shows the proportion of current assets
to current liabilities. The current ratio is used as an indicator of a
company's liquidity. In other words, a large amount of current assets in
relationship to a small amount of current liabilities provides some assurance
that the obligations coming due will be paid.
If a
company's current assets amount to Rs600,000 and its current liabilities are Rs200,000
the current ratio is 3:1. If the current assets are Rs600,000 and the current
liabilities are Rs500,000 the current ratio is 1.2:1. Obviously a larger
current ratio is better than a smaller ratio. Some people feel that a current ratio
that is less than 1:1 indicates insolvency.
It is
wise to compare a company's current ratio to that of other companies in the
same industry. You are also wise to look at the trend of the current ratio for
a given company over time. Is the current ratio improving over time, or is it
deteriorating?
The
composition of the current assets is also an important factor. If the current
assets are predominantly in cash, marketable securities, and collectible
accounts receivable, that is more comforting than having the majority of the
current assets in slow-moving inventory.
Answer
:
Working
capital is the amount of a company's current assets minus the amount of its
current liabilities. For example, if a company's balance sheet dated June 30
reports total current assets of Rs323,000 and total current liabilities of Rs310,000
the company's working capital on June 30 was Rs13,000. If another company has
total current assets of Rs210,000 and total current liabilities of Rs60,000 its
working capital is Rs150,000.
The
adequacy of a company's working capital depends on the industry in which it
competes, its relationship with its customers and suppliers, and more. Here are
some additional factors to consider:
o
The types of current assets and how quickly they can be converted
to cash. If the majority of the company's current assets are cash and cash
equivalents and marketable investments, a smaller amount of working capital may
be sufficient. However, if the current assets include slow-moving inventory
items, a greater amount of working capital will be needed.
Answer
:
The
average collection period is the average number of days between 1) the date
that a credit sale is made, and 2) the date that the money is received from the
customer. The average collection period is also referred to as the days' sales
in accounts receivable.
The
average collection period can be calculated as follows: 365 days in a year
divided by the accounts receivable turnover ratio. Assuming that a company has
an accounts receivable turnover ratio of 10 times per year, the average
collection period is 36.5 days (365 divided by 10).
An
alternate way to calculate the average collection period is: the average
accounts receivable balance divided by average credit sales per day.
If a
company offers credit terms of net 30 days, the company may find that its
average collection period is actually 45 days or more. Monitoring the average
collection period is important for a company's cash flow and its ability to
meet its obligations when they come due.
Answer
:
A
debtor is a person or entity that owes money. In other words, the debtor has a
debt or legal obligation to pay an amount to another person or entity.
Answer
:
The acid
test ratio is similar to the current ratio except that Inventory, Supplies, and
Prepaid Expenses are excluded. In other words, the acid test ratio compares the
total of the cash, temporary marketable securities, and accounts receivable to
the amount of current liabilities.
Let's
illustrate the acid test ratio by assuming that a company has cash of Rs7,000 +
temporary marketable securities of Rs20,000 + accounts receivables of Rs93,000.
This adds up to Rs120,000 of quick assets. If its current liabilities amount to
Rs100,000 its acid test ratio is 1.2:1.
The
larger the acid test ratio, the more easily will the company be able to meet
its current obligations.
Answer:
A pro
forma financial statement is one based on certain assumptions and projections.
For
example, a corporation might want to see the effects of three different
financing options. Therefore, it prepares projected balance sheets, income
statements, and statements of cash flows. These projected financial statements
are referred to as pro forma financial statements.
Answer
:
Accounting
ratios (also known as financial ratios) are considered to be part of financial
statement analysis. Accounting ratios usually relate one financial statement
amount to another. For example, the inventory turnover ratio divides a
company's cost of goods sold for a recent year by the cost of its inventory on
hand during that year.
For a
company with current assets of Rs300,000 and current liabilities of Rs150,000
its current ratio is Rs300,000 to Rs150,000, or 2 to 1, or 2:1. This ratio of
2:1 can then be compared to other companies in its industry regardless of size
or it can be compared to the company's ratio from an earlier year.
Other
examples of accounting ratios include:
o
Quick ratio
o
Current ratio
o
Debt to equity ratio
o
Acid-test ratio
o
Contribution margin ratio
o
Interest coverage ratio
o
Debt to total assets ratio
o
Gross margin ratio
o
Return on assets ratio
o
Profit margin (after tax) ratio
o
Total assets turnover ratio
o
Fixed asset turnover ratio
o
Times interest earned ratio
o
Liquidity ratio
o
Working capital ratio
o
Dividend payout ratio
o
Free cash flow ratio
Question
28. What Is Cash Flow Management?
Answer:
Cash
management refers to a broad area of finance involving the collection,
handling, and usage of cash. It involves assessing market liquidity, cash flow,
and investments.
At
its simplest, cash flow management means delaying outlays of cash as long as
possible while encouraging anyone who owes you money to pay it as rapidly as
possible.
Question
29. What is a Fund Flow Statement? Why
should a business prepare it?
Answer:
Funds
flow statement is a statement which is prepared in order to determine the
sources and application of funds. Fund flow statement is commonly used in
business plans and proposals to show investors about the flowing of their funds
through the organization. This is not used in annual reports. It is used by
bankers who want to know how borrowed funds will flow through company
operations. It is used to show the management how the cash is flowing through
the company operations.
Question
30. What are the limitations of a
Funds Flow Statement?
Answer:
Fund flow statement has
certain limitations such as:
1. This kind of statement is prepared using balance sheet and these statements are based on historical cost so realistic comparison of profitability is not possible.
2. Cash position is not prepared and it is not revealed by funds flow statement.
3. While preparing funds flow statement operating, financial and investing activities are not classified.
Question 31. What are the basic principles of preparing a Funds Flow Statement?
1. This kind of statement is prepared using balance sheet and these statements are based on historical cost so realistic comparison of profitability is not possible.
2. Cash position is not prepared and it is not revealed by funds flow statement.
3. While preparing funds flow statement operating, financial and investing activities are not classified.
Question 31. What are the basic principles of preparing a Funds Flow Statement?
Answer:
Funds
flow statement, which shows the changes in financial position. It is governed
by the basic principle which uses two parts one uses statement of sources and
another uses the use of funds. It can be compared to balance sheet which has
been drawn by taking these parameters into affect. In this when sources of
funds exceed the application of funds, it increases the working capital or when
application of funds exceeds it decreases the working capital.
Question
32. What columns are there in a Funds
Flow Statement? What are the components of each column?
Answer:
The
columns in Funds Flow Statements are:-
1) Balance column- which contains the balance for each day.
2) Total- which contains the total funds
3) Variance- which contains the variable data after comparison.
The component of each column contains:
1) Source of funds during the period
2) Application of funds during the period
1) Balance column- which contains the balance for each day.
2) Total- which contains the total funds
3) Variance- which contains the variable data after comparison.
The component of each column contains:
1) Source of funds during the period
2) Application of funds during the period
Question 33.What is a Cash Flow Statement? How is it different from a funds
flow statement?
Answer:
Cash
Flow Statement is the statement which shows changes in inflow & outflow of
cash during the period. There are two methods of the cash flow representation:-
1)
Direct Method: includes operating Activities, Investment Activities and
Financial Activities
2) Indirect Method: uses net income as base & makes adjustments to that income (cash & non-cash) transactions.
In various aspects Cash flow statement is different from Funds flow statement. Cash flow statement allows investors to understand how a company's operations are running, where its money is coming from, and how this money will be spent by the company. On the other hand, fund flow statement shows the future activities of the company.
Cash flow statement is an analysis tool used by large and medium scale companies for Inflow and Outflow of money during a particular period of time whereas Fund flow shows the flow of money from different activities where the flow has to be represented during the funds calculations.
2) Indirect Method: uses net income as base & makes adjustments to that income (cash & non-cash) transactions.
In various aspects Cash flow statement is different from Funds flow statement. Cash flow statement allows investors to understand how a company's operations are running, where its money is coming from, and how this money will be spent by the company. On the other hand, fund flow statement shows the future activities of the company.
Cash flow statement is an analysis tool used by large and medium scale companies for Inflow and Outflow of money during a particular period of time whereas Fund flow shows the flow of money from different activities where the flow has to be represented during the funds calculations.
Question 34. What Is Variance
Analysis?
Answer
:
Variance
analysis is the quantitative investigation of the difference between actual and
planned behavior. This analysis is used to maintain control over a business.
For example, if you budget for sales to be $10,000 and actual sales are $8,000,
variance analysis yields a difference of $2,000.
Variance
analysis is especially effective when you review the amount of a variance on a
trend line, so that sudden changes in the variance level from month to month
are more readily apparent.
Question 35. What Are The Most
Commonly-derived Variances Used In Variance Analysis?
Answer
:
Here
are the most commonly-derived variances used in variance analysis:
Purchase
price variance.
Labor
rate variance
Variable
overhead spending variance
Fixed
overhead spending variance
Selling
price variance
Material
yield variance
Labor
efficiency variance
Variable
overhead efficiency variance
Question
36. What Is Labor Efficiency Variance?
Answer :
Labor
efficiency variance: Subtract the standard quantity of labor consumed from the
actual amount and multiply the remainder by the standard labor rate per hour.
Question 37. What
Is The Formula To Estimate Labour Mix Variance Is?
Answer
:
The
formula to estimate Labour Mix variance is:
(Standard
rate per hour - Actual rate per hour) * Actual Hours
Question 38.
Which Variance Is Also Known As Gang Composition Variance?
Answer
:
Labour
mix variance is also known as Gang composition variance.
Question
39. What Is The Formula Used For Calculation Of Labour Rate Variance Is?
Answer
:
The
formula used for calculation of labour rate variance is:
(Standard
rate per hour - Actual rate per hour) * Actual Hours
Question
40. How Labour Cost Variance Is Measured ?
Answer
:
Labour
cost variance is measured as:
Total
standard labour cost of actual output - Total actual cost of actual output
Question 41. What Is Marginal
Costing?
Answer :
Marginal
Costing is ascertainment of the marginal cost which varies directly with the
volume of production by differentiating between fixed costs and variable costs
and finally ascertaining its effect on profit.
The
basic assumptions made by marginal costing are following:
Total
variable cost is directly proportion to the level of activity. However,
variable cost per unit remains constant at all the levels of activities.
Per
unit selling price remains constant at all levels of activities.
All
the items produced by the organisation are sold off.
Question 42. What Are The
Limitations Of Marginal Costing?
Answer :
The
limitations of Marginal Costing:
The
classification of total costs into fixed and variable cost is difficult.
In
this technique fixed costs are totally eliminated for the valuation of
inventory of finished and semi-finished goods. Such elimination affects the
profitability adversely.
In
marginal costing historical data is used while management decisions are related
to future events.
Question 43. What Is Cost
Volume-profit Relationship?
Answer :
Cost
Volume-Profit (CVP) relationship is an analysis which studies the relationships
between the following factors and its impact on the amount of profits.
Selling
price per unit and total sales amount • Total cost which may be in any form
i.e. fixed cost or Variable cost.
Volume
of sales
Question
45. Explain P/v Ratio And Contribution?
Answer
:
P/V
Ratio:
P/V
Ratio (Profit Volume Ratio) is the ratio of contribution to sales which
indicates the contribution earned with respect to one rupee of sales. It also
measures the rate of change of profit due to change in volume of sales. Its
fundamental property is that if per unit sales price and variable cost are
constant then P/V Ratio will be constant at all the levels of activities. A
change is fixed cost does not affect P/V Ratio. It is calculated as under:
(Contribution
* 100) / Sales
(Change
in profits * 100) / (Change in sales)
Question
46. Explain Break Even Point. How Does Bep Help In Making Business Decision?
Answer
:
Break
Even Point (BEP) is a volume of sales where there is neither loss nor profit.
That means contribution is enough to cover the fixed costs.
Question
47. Explain Margin Of Safety?
Answer
:
Margin
of Safety is the amount of sales which generates profit. In other words, sales
beyond Break Even Point are known as Margin of Safety. It is calculated as the
difference between total sales and the break even sales. It can be expressed in
monetary terms or number of units
Question
48. What Is Flexible Budget Preparation?
Answer
:
Flexible
Budget preparation: As the marginal costing particularly classifies costs as
fixed and variable costs which facilitates the preparation of flexible budgets.
Question
49. Explain Make Or Buy Decision?
Answer
:
Make
or Buy decision : Marginal cost analysis helps the management in making or
buying decision.
Question
50. What Is Contribution?
Answer
:
Contribution: It is the difference
between sales revenue and variable cost (also known as variable cost). Variable
cost is the important cost in deciding profitability as fixed costs are ignored
by marginal costing.
Question
51. Ascertainment Of Profit Under Marginal Cost?
Answer
:
‘Contribution’
is a fund that is equal to the selling price of a product less marginal cost.
Contribution
may be described as follows:
Contribution =
Selling Price – Marginal Cost
Contribution = Fixed Expenses + Profit
Contribution – Fixed Expenses = Profit
Contribution = Fixed Expenses + Profit
Contribution – Fixed Expenses = Profit
Question 52. What
Is Role Of Fixed Costs?
Answer
:
Fixed
costs are sunk costs. What is sunk cannot be retrieved in the same condition.
Fixed costs cannot be reversed, without loss. Machinery purchased, already,
cannot be sold, without loss, in terms of money. Fixed costs that are incurred
are not relevant for our decision-making. Costs that will be incurred, in any
event, should not be considered in the decision-making. In other words, the
existing fixed costs, which cannot be saved, do not influence the decision as
those costs are already incurred and cannot be reversed, whether the firms
makes or buys.
Question 53. What
Are ‘sunk Costs’? Why They Are So Called?
Answer
:
‘Sunk
costs’ are fixed costs. What is sunk cannot be retrieved. In a similar manner,
fixed costs, once incurred, cannot be reversed.
Question 54. Why Fixed Costs Are Ignored In
‘make Or Buy’ Decisions?
Answer :
Fixed costs are already incurred and so they do not influence the future
‘Make or Buy’ decisions. Hence, they are ignored for comparison. Only variable
costs, in both options, are compared and that option is chosen, where the
variable costs are lower.
What
is budget control?
Budgetary
control is a system of procedures used to ensure that an
organization's actual revenues and expenditures adhere closely to its financial
plan
Question
55. Do You Know What Is A Cash Budget? What Are The Different Methods To
Prepare It?
Answer
:
Cash
budget is the budget which is prepared under the finance budget. It is an
estimation of the expected cash receipts and cash payments during the budget
period. By preparing cash budget it becomes possible for the organisation to
predict whether at any point of time there will be excess or shortage of cash.
Question 56. Can You Please
Compare Fixed And Flexible Budgets?
Answer :
A
fixed budget is established for a specific level of activity whereas flexible
budget is prepared for various levels of activity.
Fixed
budget cannot be changed after the period commences, whereas a flexible budget
can be changed after the period commence.
Fixed
budget is more suitable for fixed expenses whereas flexible budget takes both
fixed as well as variable expenses in account.
Question 57. Explain Principles
And Objectives Of The Budgetary Control?
Answer :
Duties
and responsibilities of the various executives
Organisation
chart
Duties
of budget office and budget committee
Accounts
codes and budget centre codes
Budget
diagrams
Question
58. Explain What Is Budget?
Answer
:
A
budget is a financial document or an action plan which is prepared and used to
project future income and expenses. It outlines an organisation’s financial and
operational goals.
Question
59. Explain Finance Cash Budget?
Answer
:
Finance
Cash budget is the budget which is prepared under this functional area. It is
an estimation of the expected cash receipts and cash payments during the budget
period.
Question
60. Walk me through an income
statement.
Answer
:
An
income statement has information about the performance of a company, as
observed over a period of time. The main components of an income statement are
usually revenues earned, expenses, and net income. Revenues may take into
account any sales, royalties and interest earned. Meanwhile, expenses include
the costs that the company has incurred. The net income or the “bottom line”
indicate overall profits or losses.
What
are the components of a balance sheet? Why should they be analysed?
Balance
sheets provide an outline of a company’s assets and liabilities in the form of
resources, whether physical or financial, that the company possesses. Assets
refer to both current and noncurrent assets. This includes cash and cashable
assets as well as fixed assets like property and intangible assets like patents
and copyrights. The liabilities section includes current liabilities, which are
due within a year, and long-term liabilities.
Financial analysts need to look at the total number of assets and accounts to determine the strength of the company. Similarly, the presence of liabilities indicates possible debt and expenses, which need to be taken into account during financial analysis.
Financial analysts need to look at the total number of assets and accounts to determine the strength of the company. Similarly, the presence of liabilities indicates possible debt and expenses, which need to be taken into account during financial analysis.
Question
61. How is a cash flow statement
different from an income statement?
Answer
:
A
cash flow statement is similar to an income statement, except that it only
shows the money that has been generated by the company. Unlike income
statements, it does not account for aspects like depreciation.
Define
EPS.
EPS
stands for earnings per share, which is calculated as a company’s profit
divided by the shares of its common stock. The formula used calculates EPS as
the net income minus preferred dividends, divided by outstanding shares. The
result indicates how profitable a company is at a given point of time. Higher
EPSs are generally interpreted as increased profitability.
Question
62. How can you evaluate a company’s
financial health?
Answer
:
The
main pointers of a company’s financial health are its liquidity, leverage and
profitability. Liquidity indicates the availability of cash and other relevant
assets to cover current expenses and debt, while leverage refers to the
proportion of investor money versus money contributed by creditors.
Profitability, as the term suggests, refers to the financial return earned
against the money invested.
16.
Can you give me the formula for the acid test ratio?
The
acid test ratio, or the quick assets ratio, is used to measure the liquidity of
a company by calculating the proportion of its quick assets against any
maturing debts. The formula for it is: Total Current Assets – Inventories /
Total Current Liabilities. Alternatively, one can divide the sum of all liquid
assets by total current liabilities.
Question
63. What is the debt to equity
ratio?
Answer
:
The
debt to equity ratio is an essential metric used in corporate finance, related
to risk and leveraging. It measures the degree to which a company’s operations
are funded through debt as compared to its own funds. It also indicates the
company’s ability to cover all outstanding debts using shareholder equity in
case of a downturn. The debt to equity ratio is calculated by dividing total
liabilities by its total shareholder equity.
Question
64. What is ROE and what is it
generally used for?
Answer
:
ROE
is the return on equity ratio, which can also be called the Net Income/Owners’
Equity. This is usually recommended by financial analysts to evaluate a
company’s profitability levels. The ratio shows how the company is using equity
investment, and also works as a metric to compare with industry standards or
competition.
Question
66. How would you define horizontal
analysis?
Answer
:
Horizontal
analysis is a comparative financial statement which shows changes in
corresponding items over a period of time. It compares statements for two or
more periods, and is a good tool to observe and analyse contemporary trends.
Question
67. What are the 5 major categories of
ratios?
Answer
:
The
five (5) major categories in the financial ratios list include the following :
Liquidity
Ratios.
Activity
Ratios.
Debt
Ratios.
Profitability
Ratios.
Market
Ratios.
Question
68. What is the quick ratio formula?
Answer
:
Quick
ratio is calculated by dividing liquid current assets by total current
liabilities. Liquid current assets include cash, marketable securities and
receivables
Question
69. What if quick ratio is less than
1?
Answer
:
A
company that has a quick ratio of less than 1 may not be
able to fully pay off its current liabilities in the short term, while a
company having a quick ratio higher than 1 can instantly
get rid of its current liabilities.
Question
70. What is liquidity?
Answer
:
Liquidity
is a company's ability to convert its assets to cash in order to pay its
liabilities when they are due.
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