Name G M Firoz Khan

Roll No. 520931217

Program MBA

Subject Financial and Management Accounting [Set 2]

Code MB 0025

Learning Centre

Systems Domain –Indira Nagar, Bangalore [2779]

Set 2 MB0025

1. Budgetary Control is a technique of managerial control through budgets. Elaborate.

Modern business world is full of competition, uncertainty and exposed to different types of risks. The complexity of managerial problems has led to development of various managerial tools, techniques and procedures useful for the management in managing the business successfully. In this direction, planning and control plays an important role. Budgeting is the most common and powerful standard device of palling and control.

Budgetary control is a technique of managerial control through budgets. A budget is a quantitative expression of plan of action. . It is a pre-determined detailed plan of action developed as a guide for future operation. According to Wheldon “Budgetary control is the planning in advance of the various functions of business so that the business as a whole can be controlled”. Budgetary controls deals with planning, coordination, recording appraisal and follow-up of actions.

The procedure for preparing plan in respect of future financial and physical requirements is generally called “Budgeting”. It is a forward planning exercise. It involves the preparation in advance of the quantitative as well as the financial statements to indicate the intention of the management in respect of the various aspects of the business.

Budgetary control is applied to a system of management accounting control by which all operations and output are forecasted far ahead as possible and actual results when known are compared with the budget estimates.

Budgeting is a forward planning. It basically serves as a tool for management control. The objectives of budgeting may be taken as:

To forecast and plan for future to avoid losses and to maximize profits. To help the concern in planning the activities both physical and financial. To bring about coordination between different functions of the enterprise. To control; actual actions by ensuring that actual are in tune with targets

Budgetary control: When one relates control function to budget, we find a system what is generally termed as budgetary control. Control signifies such systematic efforts which help the management to know whether actual performance is in line with predetermined goal, policy and plans. It is basically a measurement tool. Yardsticks should be laid down. Standards must be set up.

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Therefore, the objectives can be summarized as follows:

To conform with good business practice by planning for the future. To coordinate the various divisions of a business. To establish divisional and departmental responsibilities. To forecast operating activities and financial position. To operate most efficiently the divisions, departments and cost center. To avoid waste, to reduce expenses and to obtain the income desired. To obtain more economical use of capital available for the efficient

operation. To provide more definite assurance of earning the proper return on capital

employed. To centralize management control. To show the management where action is needed to remedy a situation. To help in controlling cash. To help in obtaining better inventory control and turnover.

Steps In Budgetary Control

The procedure to be followed in the preparation and control of budget may differ from business to business. But, a general pattern of outline of budget preparation and control may go a long way to achieve the end results. The steps are as follows:

Formulation of policies: The business policies are the foundation stone of budget construction. Function policies should be formulated in advance. Long-range policies with short term projections should be made for the functional areas such as sales, production, inventory, cash management, capital expenditure.

Preparation of forecasts:

Based on the formulated policies, forecast should be made in respect of each function. Activity based concepts should be introduced at the micro level for each function Forecasts should not be considered as a mere estimates. Scientific methods should be adopted for forecasting. Analysis of various factors based on past, and present, future forecast should be made.

Preparation of budgets:

Forecasts are converted into written codified document. Such written documents can be used for coordination purposes. Function budgets will act as guidelines for implementation.

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Forecast combinations:

While developing the budgets, through a Master Budget various permutations and combination processes are considered and developed. Based on this, establishment of the most preferred one which will yield optimum benefits should be considered. All the factor components should be identified which are likely to cause disturbances while implementing the budgets

2. a. Given: Current ratio = 2.6 Liquid ratio = 1.4 Working Capital = Rs.1,10,000

Calculate (1) Current assets (2) current liabilities

(3) Liquid Asset (4) Stock

Given data is working capital, hence:

Working capital = Current assets - current liabilities ----- [1]

Current Ratio = CA / CL = 2.6

In the absence of any value, the current liability is always taken as 1 unit

2.6 = CA / 1 and cross multiplying , CA is 2.6

Substituting CA in [1],

Working capital = 2.6 - 1 = 1.6

For 1.6 WCR = Working capital value is Rs1,10,000

For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 = Rs.1,78,750

For 1 CLR, the current liability is 1,10,000 x 1 / 1.6 = Rs.68,750

Liquid Ratio =Liquid asset / current liabilities

1.4 = Liquid asset / 2,86,000

Liquid asset = 1.4 X 68,750

= 96,250

Liquid asset = Current asset – Stock

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Therefore,

Stock = Current Asset – Liquid Asset

= 1,78,750 – 96250

= Rs. 82,500

b. Calculate Gross Profit Ratio from the following figures:Sales Rs.5,00,000Sales return Rs.50,000Closing stock Rs.35,000Opening stock Rs.70,000Purchases Rs.3,50,000

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales.

[Gross Profit Ratio = (Gross profit / Net sales) × 100]

Cost Of Goods Sold [COGS] = Opening stock + Purchases – closing stock

= 70000 + 350000-35000

COGS = 385000 Rs.

Gross Profit = (Sales – Sales returns) - COGS

= (500000 – 50000) – 385000

= 450000 – 385000

Gross Profit = 65000 Rs.

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Net Sales = Sales – Sales returns

= 500000 – 50000

= 450000 Rs.

Gross Profit Ratio = (Gross profit / Net sales) × 100]

= (65000/450000) X 100

= 14.4%

3. From the following Balance Sheet of William & Co Ltd., you are required to prepare a Schedule of Changes in Working capital & Statement of Sources and Application of funds.

Balance Sheet

Liabilities 2002Rs.

2003Rs.

Assets 2002Rs.

2003Rs.

Capital 80,000 85,000 Cash in Hand

4,000 9,000

P&L a/c 14,500 24,500 Sundry Debtors

16,500 19,500

Sundry Creditors

9,000 5,000 Stock 9,000 7,000

Long-term Loans

- 5,000 Machinery 24,000 34,000

Building 50,000 50,000

Total 1,03,500 1,19,500 Total 1,03,500 1,19,500

Schedule of changes in working capital

Details Balance as onEffect on Working

Capital2002 2003 Increase Decrease

Liabilities        Sundry Creditors 9,000 5,000 - 4,000Long term loans 0 5,000   5000P&La/c 14500 24500 10000  

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Total liabilities [B] 23,500 34,500 10,000 9,000Assets        

Cash in Hand 4000 9000 5000  Sundry Debtors 16500 19500 3000  Stock 9000 7000   2000Machinery 24000 34000 10000  Total Assets (A) 53500 69500 10000 2000         Working Capital A-B 30,000 35,000    Net increase in Working capital 5000     9000           35,000 35,000 20,000 20,000

4. Bring out the difference between cash flow and funds flow statement.

Difference Between Cash Flow And Funds Flow Statement

The major differences between the two are :

1. FFS is related with accrual basis whereas CFS is on cash basis. For this the, it is necessary to convert the accrual to cash basis.

2. In FFS, a Schedule of changes in working capital de-linking the current assets and current liabilities are made. But in CFS, no schedule is prepared.

3. FFS shows the causes of the changes in net working capital. CFS shows the causes for the change in cash

4. In FFS, no opening or closing balances are recorded. But in CFS both are incorporated

5. FFS is not based on the Ledger mode. But CFS is prepared on the basis of Ledger principles.

6. In FFS, “To” and “By” are indicated. In CFS, these are not indicated.7. In FFS, net effect of receipts and disbursements are recorded. In CFS

only cash receipts and payments are recorded.8. FFS is concerned with the total provision of funds. CFS is concerned

with only cash.9. FFS is flexible but CFS is rigid10. FFS is more relevant for long range financial strategy. CFS

concentrates on short term aspects mostly affecting the liquidity of the business.

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5a. DELL computers sell 100 PCs at Rs.42,000. The variable expenses amount to Rs.28,000 per PC. The total fixed expenses is Rs.14,00,000. Prepare an income statement.

Income StatementNo. Of computers produced 100No. Of computers sold 100Unit selling price per computer 42000unit variable cost per computer 28000

Sales revenue =No. Of computers sold X unit selling price

4200000

Less variable cost (100 X 28000) -2800000Less Fixed expenses -1400000Profit or loss 0

b. Calculate BEP and MOS Sales at present are 55,000 units per annum. Selling price is Rs.6 per unit. Prime cost Rs.3 per unit. Variable overheads is Re.1 per unit. Fixed cost Rs.80,000 per annum.

Sales at present 50,000 units per annum. Selling price Rs.6 per unit, Prime cost Rs.3 per unit. Variable overheads Re.1 per unit. Fixed cost Rs.75, 000 per annum.

Solution:

BEP = Fixed cost / (SP – VC) per unit

= 80,000 / (6 – 4)

= 80,000 / 2

BEP = 40,000 units.

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BEP in rupees = BEP in units x selling price per unit

= 40,000 x Rs.6

= Rs.2, 40,000

MOS = Actual Sales – BEP Sales

= (55,000 x 6) – 2,40,000

MOS = Rs.90,000

6.What is cost variable analysis?

A variable cost changes in total in direct proportion to a change in the level of activity or cost driver. If activity increases, say by 20%, total variable cost also increases by 20 %. The total variable cost increases proportionately with activity. Variable cost fixed per unit but varies in total.

Cost Variable Analysis:

Break Even Chart is used in Cost variable analysis.

It is a graphic or visual presentation of the relationship between costs, volume and profit. It indicates the point of production at which there is neither profit nor loss. It also indicates the estimated profit or loss at different levels of production. While constructing the chart, the following assumption is normally considered.

a) Costs are classified into fixed and variable costs

b) Fixed costs shall remain fixed during the relevant volume range of graph.

c) Variable cost per unit will remain constant during the relevant volume range of graph

d) Selling price per unit will remain constant

e) Sales mix remains constant.

f) Production and sales volume are equal

g) There exists a linear relationship between costs and revenue.

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h) Linear relationship is indicated by way of straight line.

Break Even Analysis

It is an extension of or even part of marginal costing. It is a technique of studying cost volume profit relationship. Basically, the break even analysis is aimed at measuring the variations of cost with volume. It is a simple method of presenting the effect of changes in volume on profits. It is also known as CVP analysis. The various assumptions are:

a) All costs can be classified into fixed and variable

b) Sales mix will remain constant.

c) There will be no change in general price level

d) The state of technology, Methods of production and efficiency remain unchanged.

e) Costs and revenues are influenced only by volume

f) Cost and revenues are linear.

g) Stocks are valued at marginal cost

h) Unit produced and sold are same.

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