PAN African e-Network Project

Diploma in Business Management

Sem - 1 

Accounting for Managers

Session - 9

Dr. Adarsh Arora

PAN African eNetwork Project

Diploma in Business Management (DBM) 

Accounting for ManagersLecture – 9

Dr. Adarsh Arora

Topics Covered• Classification of overheads• Nature and scope of management accounting• Planning decisions• Control decisions• Difference between mgmt. & financial accounting • Diff. between cost & mgmt accounting• Diff. between financial & cost accounting• Use of Marginal Costing• Working of Marginal Costing• The Break Even Point• Margin of Safety• Cost – Volume – Profit analysis

• Budget & Advantages of budgets• Types of budgetary control• Budgetary control methods• Features of a good budget• Types of budget• Cost reduction and control• MCQ’s

DEFINITION & CLASSIFICATION OF OVERHEAD

The costs attributable to a cost center or cost unit can be classified into two categories – direct and indirect.

The costs which can be directly identified with a cost unit or cost center is called as Direct/Prime Cost.

The aggregate of indirect costs such as material cost, indirect wages and indirect expenses is called overhead. In other words, any expenditure over and above prime cost is known as overhead.

Cost classification • It involves two steps:

(i) the determination of the class or groups into which the overhead costs are subdivided;

(ii)the actual process of classification of the various

expenses. The classification of overhead costs depends on the type and size of business, nature of product or services rendered and the management policy.

The various types of classifications are:- • Functional Classification, • Classification with regard to behavior of the expenditure,

and • Element-wise classification.

FUNCTIONAL CLASSIFICATION OF OVERHEADS • Classification of overhead expenses with reference to

major activity centers of a concern is called functional classification. As per this classification the overhead expenses can be classified as follows:-

1. Manufacturing or Production or Works Overhead • All the indirect expenses incurred by the operations of

the manufacturing divisions of a concern are classified as manufacturing overhead.

• Examples of such expenses are depreciation, insurance charges on fixed assets like plant and machinery, stores, repairs and maintenance of fixed assets, electricity charges, fuel charges, factory rent, etc.

2. Administration Overhead • All the expenses incurred towards the control and

administration of an undertaking are called Administration Overhead.

• Example:- Office rent, salaries and wages of clerks, secretaries and accountants, postage, telephone,

general administration expenses, depreciation and repairs of office building, etc.

3. Selling and Distribution Overhead • The cost incurred towards marketing, distribution and

sales is called selling and distribution overhead. It includes sales, office expenses, salesmen’s salaries and commission, showroom expenses, advertisement charges, samples and free gifts, warehouse rent, packaging expenses, transportation cost, etc.

4. Research and Development Expenses • The costs incurred for researching on new and improved

products, new application of materials or improved methods is called research costs. Development costs are incurred towards commercial application of the discoveries made.

CLASSIFICATION WITH REGARD TO BEHAVIOR OF EXPENDITURE

Based on the behavior, the overheads can be classified into

(a)Fixed overhead,

(b)Variable overhead, and

(c)Semi-variable overhead.

1. Fixed overhead • Those costs remain constant regardless of the changes

in the volume of activity. Examples: rent, depreciation, etc.

2. Variable overhead • Variable overhead cost varies with changes in volume of

activity. Example, material cost, labor cost, etc.

3. Semi variable overhead • Semi variable overhead remains fixed up to a certain

activity level, but once that level is exceeded, they vary with the volume. Examples: salary of an employee (fixed amount plus overtime depending on the overtime hours), telephone charges.

TYPES OF DEPARTMENTS

The main departments of a manufacturing concern are:- • Production departments:- The process of

manufacturing is carried on in these department. • Service departments:- Service departments render a

particular type of service to the other departments. For example, repairs and maintenance, electricity, etc.

• Partly producing departments:- A department may normally be service department, but sometimes does some productive work, so it becomes partly producing department. For example, a carpentry shop which is mainly responsible for the repairs and upkeep of sundry fixtures and fittings may occasionally be required to manufacture packing boxes for direct charges to out-turn, will be a partly producing department.

NATURE OF MANAGEMENT ACCOUNTING

ROLE AND SCOPE OF MANAGEMENT ACCOUNTING  

Definition

Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information that assists managers in specific decision-making within the framework of fulfilling the organizational objectives.

Types of Decisions • The decisions, managers are concerned with, can be

categorized into:-• Planning Decisions • Control Decisions 

PLANNING DECISIONS

Planning Decisions are concerned with establishment of goals for the organization and choosing plans to accomplish these goals.

Typical planning decisions for which Management Accounting information is needed include:-

• Should a new product line be marketed? • Should the production and sale of an existing product

line be terminated? • How many units of each product should we produce this

year? • Should production facilities be expanded?

• What are our cash needs for the year? Should we negotiate an overdraft facility with a bank?

• How much should we spend on advertising, research and development?

• Which is more economical: purchasing a part from a supplier or manufacturing it in our plant? (This decision is commonly referred to as the “make or buy” decision).

CONTROL DECISIONS

Control decisions are sequel of implementing the plans and monitoring the actual results. If goals are not being achieved corrective steps must be taken to achieve the goals. If the plans or goals are difficult or impossible to achieve, they have to be revised to attainable levels.

Typical control decisions that require Management Accounting information include:-

• What can be done to make actual sales equal budgeted sales?

• How can labor be used more efficiently so that actual costs do not exceed planned costs?

• Can alternative production methods be used to bring the cost per unit down from Rs.10 to Rs.5?

• Can the product be sold at Rs.15.50 per unit while the profit per unit remains unchanged and cost per unit rises by 25%?

• How to sell more than 1000 units per month so that the planned profit can be generated without increasing the selling price?

COMPARISON BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING

There are broadly three branches of accounting:-

1. Financial Accounting,

2. Cost Accounting and

3. Management Accounting.

Difference between Management & Financial Accounting

1. Internal vs. External Uses

Management accounting focuses on providing information for internal users such as supervisors, managers etc.

Financial accounting concentrates on providing information to the external users - stockholders, creditors, etc.

2. Emphasis on the Future

Since a large part of the overall responsibilities of a manager involves planning, a manager’s information needs have a strong orientation towards the future. Summaries of past costs and other past data are relevant only up to a point.

On the other hand, Financial Accounting is concerned with

the record of the financial history of an organization. It has little to do with estimates and projections for the future.

Generally Accepted Accounting Principles (GAAP) • Financial Accounting statements are prepared in

accordance with GAAP, as they provide consistency and comparability and are relied on by outsiders for information regarding the company.

• Management Accountants on the other hand, are not governed by GAAP. Managers set their own rules on the form and content of information. Whether these rules conform to GAAP is immaterial.

3. Relevance and Flexibility of Information

Financial Accounting information is expected to be objectively determined, and to be verifiable. For internal

uses, the manager is often more concerned about receiving information that is (a) relevant to a particular decision situation, and (b) flexible enough to be used in a variety of decision-making situations. Objectivity and verifiability assume secondary importance.

4. Emphasis on Precision

Audited financial statements have to be precise to the last paisa. As far as a manager is concerned, when information is needed, timeliness is more important than its precision. The more timely information comes to a manager, the more quickly problems are attended to and solved.

In managerial accounting, estimates and approximations may be more useful than numbers that are accurate to

the last paisa. For this reason, managers are often willing to trade off some accuracy in information to timeliness of information.

5. Organizational Focus

Financial accounting is primarily concerned with the reporting on business activities of a company as a whole.

Management accounting, by contrast, focuses less on the company as a whole and more on the parts or segments of a company.

6. Use of Other Disciplines

Management accounting extends beyond the boundaries of traditional accounting practices and draws heavily from other disciplines such as economics, cost accounting,

finance, statistics, operations research and organizational behavior.

Financial accounting on the other hand is bound by conventional accounting systems and practices.

7. Freedom of Choice

Financial accounting is mandatory for business organizations. They should compulsorily maintain financial records as per various legal statutes like Companies Act, Income Tax Act, etc. By contrast,

Management Accounting is not mandatory.

COST ACCOUNTING AND MANAGEMENT ACCOUNTING

The terms “cost accounting” and “management accounting” have sometimes been used synonymously by many accountants in recent years. But these two systems of accounting are not the same.

Despite the fact that the subject matter of cost accounting has broadened over the years, it is, however, concerned mainly with the techniques of product costing and deals with only cost and price information.

By nature, management accounting refers to reports prepared to fulfill the needs of management.

The accounting statements and reports in management accounting are situation-specific.

That is, management accounting reports attempt to fill the information needs of managers with respect to a specific problem, situation, or decision.

Management accounting is not confined to the area of product costing, cost and price information. In management accounting, the objective is to have a data pool which will provide any and all information that management may need.

Now-a-days, the terms “cost accounting” and “management accounting” are used interchangeably.

Difference between Financial Accounting and Cost Accounting

The point of difference between cost accounting & financial accounting may be summarized as follows:-

1. Objective:- • Financial accounting aims at safeguarding the interest of

the business & its proprietors & others connected with it, by providing suitable information to various parties- internal as well as external.

• Cost accounting on the other hand, renders information for the guidance of the management for proper planning organizational control & decision making.

2. Mode of presentation: • Financial accounts are prepared according to some

accepted accounting concepts & conventions. They are kept in a manner so as to comply with the requirements of the companies Act, Income Tax Laws & other statutes.

• Whereas maintenance of cost records is purely voluntary & therefore there are no statutory forms regarding their presentation.

3. Recording:

In case of financial accounts stress is on the ascertainment & exhibition of profits earned or losses incurred in the business.

• In cost accounts the emphasis is more on aspects of

planning & control, therefore transactions are recorded in an objective manner i.e. according to the purpose for which costs are incurred.

4. Analyzing Profit:- Financial accounting reveals the profits of the business as a whole, while cost accounting shows the profit made on each product, job or process.

5. Periodicity of reporting:- Financial accounting is largely concerned with the transitions between undertaking & the third parties and therefore it has to observe the accounting period convention which is usually a year. Accounts are prepared & presented at the end of the year only.

While cost accounting is mainly concerned with the people in the organization & cost reports are frequently

submitted to the management & concerned departments, whenever it is required.

USE OF MARGINAL COSTING IN DECISION MAKING PROCESS

CONCEPT OF MARGINAL COSTING • Many factors cause changes in costs and hence in

profits. Costs change because of inflationary trends in the economy, changes in the labor market, technological advances, or changes in size or quality of production facilities.

• Each of these represents a unique, sporadic change. Regular, recurring events also cause costs to change. One of the most significant causes of variations is a change in the volume of activity.

Marginal Cost Defined• The essence of Marginal Costing or Variable Costing

technique lies in considering fixed costs on the whole as separate, quite distinct from variable costs which only are relevant to decision making.

• Variable costs only are matched with revenues under different conditions of production and sales to compute what is known as ‘contribution’ towards recovery of fixed costs and yielding of profits.

• Marginal Costing, according to the economic connotation of the term, is described in simple words as the cost of producing an additional unit of output and it does not arise if the additional unit is not produced.

Illustration :-

If variable costs per unit are Rs.9 and fixed costs are Rs.2,50,000 per annum, an output of 40,000 units per annum results in the following expenditure:

Variable cost of 40,000 units @ Rs.9/unit 3,60,000

Fixed Cost 2,50,000

Total Cost for output of 40,000 units 6,10,000

Variable costs of 40,001 units @ Rs.9/unit 3,60,009

Fixed Cost 2,50,000

Total Cost Total Cost for output of 40,001 units 6,10,009

Less: Total Cost for output of 40,000 units 6,10,000

Marginal cost 9

The Institute of Cost and Management Accountants, London, has defined Marginal Costing as “the ascertainment of marginal costs, by differentiating between fixed costs and variable costs, and of the effect on profit of changes in volume or type of output.”

In this technique of costing only variable costs are charged to operations, processes or products, leaving all fixed costs to be written off against profits in the period in which they arise.

Basic Characteristics of Marginal Costing • The concept of marginal costing is based on the

important distinction between product costs and period costs, the former being related to the volume of output and the latter to the period of time rather than the volume of production.

• Marginal Costing regards only variable (marginal) costs as the product costs. Variability with volume is the criterion for the classification of costs into product and period categories. Fixed costs are treated as period costs.

• Prices are determined on the basis of marginal cost by adding ‘contribution’ which is the excess of sales or selling price over marginal cost of sales.

It is a technique of analysis and presentation of costs which help management in taking many managerial decisions and is not an independent system of costing such as process costing or job costing.

Working of Marginal Costing • According to traditional costing system, fixed costs of

production are assigned to products to be subsequently released by way of expenses as part of cost of goods sold or are carried forward as part of the cost of inventory depending upon whether a period’s production was sold or not during the same period.

• Such an approach to the treatment of fixed costs has brought into vogue various methods of allocation of overheads to different departments on an equitable basis and their proper apportionments to units produced.

• Marginal costing removes all the difficulties involved in the allocation, apportionment and recovery of fixed costs.

• It is able to accomplish this by excluding fixed costs from product costs and by writing them off entirely against operations of the period.

• Consequently, when the volume of output differs from the volume of sales, the net income reported under marginal costing will differ from that reported under absorption costing.

DISTINCTION BETWEEN MARGINAL COSTING AND ABSORPTION COSTING

• Under marginal costing, the distinction between direct/variable cost and period cost determines when costs are matched with revenues. Direct or variable costs are assigned to products and matched with revenues when revenues from the related products are recognized while period costs are matched with revenues of the period in which the costs were incurred.

• But this is in contrast to what is known as “absorption costing” in which fixed manufacturing costs are also treated as part of production cost and inventory values arrived at accordingly. Adoption of this system not only influences inventory value, but also reflects on the profit figure.

• Also in absorption costing, arbitrary apportionment of fixed costs, over the products, results in under or over absorption of such costs. Since marginal costing excludes fixed costs the question of under or over-absorption of fixed costs does not arise.

• Moreover, in absorption costing, managerial decision-making is based upon “profit” which is the excess of sales value over total cost while in marginal costing, the managerial decisions are guided by ‘contribution’ which is the excess of sales value over variable cost.

VALUE OF MARGINAL COSTING TO MANAGEMENT

Marginal costing is a valuable technique to the management for the following reasons:

1. It integrates with other aspects of management accounting example cost-volume-profit analysis, flexible budgeting and standard costing.

2. Period reports are more easily understood. Management can more readily understand the assignment of costs to products if these are limited to marginal cost because such costs are readily identifiable with the cost unit.

3. It emphasizes the significance of key factors affecting the performance of the business in the profits-planning and decision-making areas. Contribution to these factors is an important statistic for management.

4. The impact of fixed costs on profits is emphasized because the total amount of such cost for the period appears in the income statement.

5. Marginal income figures facilitate relative appraisal of products, territories, classes of customers and other segments of the business without having the results obscured by allocation of joint fixed costs.

6. The profit for a period is not affected by changes in absorption of fixed expenses resulting from building or reducing inventory. Other things remaining equal (selling prices, costs, sales mix, etc.) profit moves in the same direction as sales when marginal costing is in use.

7. There is a close relationship between variable costs and the controllable costs classification. This relationship assists the control function.

8. It assists in the provision of relevant costs for decision-making. Without marginal cost data, the information for management may be misleading. This is the case, for example, in decision concerned with:

a. The acceptance of special orders.

b. The possible elimination of a product.

c. The possible outside purchase of components as compared with their internal manufacture.

d. It assists short-term decision-making, particularly those decisions concerned with product short-term pricing.

9. Thus, managers would recognize the value of marginal cost for profit-planning, control and decision-making, but point to the fact that for decision-making purposes fixed

costs may be incremental relative to a decision situation as well as marginal cost.

THE BREAK-EVEN POINT

MARGIN OF SAFETY

This is the difference between sales & the break-even point. If the distance is relatively short, it indicates that a small drop in production or sales will reduce profits considerable.

If the distance is long, it means that the business can still make profits even after a serious drop in production. It is important that there should be a reasonable margin of safety, otherwise a reduced level of production may prove dangerous.

The margin of safety can be found by using the following formula:-

Margin of safety = Profit/P/V ratio

or

Margin of safety = (Profit * Sales) / (Sales- Variable cost)

 

Contribution:-

As stated earlier, the difference between selling price & variable cost(i.e. the marginal cost) is known as ‘contribution or ‘gross margin’ or ‘contribution margin’. In other words, fixed cost costs plus the amount of profit is equivalent to contribution.

It can be expressed by the following formula:-

Contribution = Selling Price – Variable Cost

= Fixed Cost + Profit

COST-VOLUME-PROFIT ANALYSIS

CVP analysis involves the analysis of how total costs, total revenues and total profits are related to sales volume, and is therefore concerned with predicting the effects of changes in costs and sales volume on profit. It is also known as 'breakeven analysis'.

• Applying Cost Volume Profit Analysis • Cost Volume Profit CVP analysis is applied in the

following situations: • Planning and forecasting of profit at various levels of

activity. • Useful in developing flexible budgets for cost control

purposes.

Helps the management in decision-making in the following typical areas:-

• Identification of the minimum volume of activity that the enterprise must achieve to avoid incurring loss.

• Identification of the minimum volume of activity that the enterprise must achieve to attain its profit objective.

• Provision of an estimate of the probable profit or loss at different levels of activity within the range reasonably expected.

• The provision of data on relevant costs for special decisions relating to pricing, keeping or dropping product lines, accepting or rejecting particular orders, make or buy decision, sales mix planning, altering plant layout, channels of distribution specification, promotional

activities, etc. • Guide in fixation of selling price where the volume has a

close relationship with the price level. • Evaluates the impact of cost factors on profit.

BUDGET • A budget is a plan expressed in quantitative, usually

monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material resources.

• In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets.

• Capital budgets are directed towards proposed expenditures for new projects and often require special financing.

• The operating budgets are directed towards achieving short-term operational goals of the organization, for

instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental of functional budgets.

The main characteristics of a budget are:• It is prepared in advance and is derived from the long-

term strategy of the organization.• It relates to future period for which objectives or goals

have already been laid down.• It is expressed in quantitative form, physical or monetary

units, or both.• Different types of budgets are prepared for different

purposed e.g. Sales Budget, Production Budget,

Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets are afterwards integrated into a master budget, which represents an overall plan of the organization.

ADVANTAGES OF BUDGETS

A budget helps us in the following ways:- • It brings about efficiency and improvement in the working

of the organization.• It is a way of communicating the plans to various units of

the organization. By establishing the divisional, departmental, sectional budgets, exact responsibilities are assigned. It thus minimizes the possibilities of buck passing if the budget figures are not met.

• It is a way or motivating managers to achieve the goals set for the units.

• It serves as a benchmark for controlling on-going operations.

• It helps in developing a team spirit where participation in budgeting is encouraged.

• It helps in reducing wastage and losses by revealing them in time for corrective action.

• It serves as a basis for evaluating the performance of managers.

• It serves as a means of educating the managers.

Types of Control

There are two types of control, namely

budgetary and financial.

It concentrates on budgetary control only. This is because financial control was covered in detail in chapters one and two.

Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as:

"The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision".

Budgetary Control Methods

a) Budget:

A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.

It helps to co-ordinate the activities of the organisation.

An example would be an advertising budget or sales force budget.

b) Budgetary control:

A control technique whereby actual results are compared with budgets.

Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

Budgetary control and responsibility centres;

These enable managers to monitor organisational functions.

A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.

There are four types of responsibility centres:

a) Revenue centres

Organisational units in which outputs are measured in monetary terms but are not directly compared to input costs.

b) Expense centres

Units where inputs are measured in monetary terms but outputs are not.

c) Profit centres

Where performance is measured by the difference between revenues (outputs) and expenditure (inputs). Inter-departmental sales are often made using "transfer prices".

d) Investment centres

Where outputs are compared with the assets employed in producing them, i.e. ROI.

Advantages of budgeting and budgetary control

There are a number of advantages to budgeting and budgetary control:

• Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.

• Promotes coordination and communication. • Clearly defines areas of responsibility. Requires

managers of budget centres to be made responsible for the achievement of budget targets for the operations

under their personal control. • Provides a basis for performance appraisal (variance

analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.

• Enables remedial action to be taken as variances emerge.

• Motivates employees by participating in the setting of budgets.

• Improves the allocation of scarce resources. • Economises management time by using the

management by exception principle.

Characteristics of a Good budget

A good budget is characterised by the following: • Participation: involve as many people as possible in

drawing up a budget.• Comprehensiveness: embrace the whole organisation.• Standards: base it on established standards of

performance.• Flexibility: allow for changing circumstances.• Feedback: constantly monitor performance.• Analysis of costs and revenues: this can be done on the

basis of product lines, departments or cost centres.

Types of Budget • Firstly, determine the principal budget factor. This is also

known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour.

a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product and also in sales value. Methods of sales forecasting include:

• sales force opinions• market research• statistical methods (correlation analysis and examination

of trends)• mathematical models.

b) Production budget: expressed in quantitative terms only and is geared to the sales budget.

The production manager's duties include: • analysis of plant utilisation• work-in-progress budgets.

If requirements exceed capacity he may: • Subcontract• plan for overtime• introduce shift work• hire or buy additional machinery• The materials purchases budget's both quantitative and

financial.

c) Raw materials and purchasing budget: • The materials usage budget is in quantities.• The materials purchases budget is both quantitative and

financial.

Factors influencing a) and b) include: • production requirements• planning stock levels• storage space• trends of material prices.

d) Labour budget: is both quantitative and financial. This is influenced by:

• production requirements• man-hours available• grades of labour required• wage rates (union agreements)• the need for incentives.

e) Cash budget: a cash plan for a defined period of time. It summarises monthly receipts and payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are:

• to maintain control over a firm's cash requirements, e.g.

stock and debtors • to enable a firm to take precautionary measures and

arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises

• to show the feasibility of management's plans in cash terms

• to illustrate the financial impact of changes in management policy, e.g. change of credit terms offered to customers.

Cost Reduction and Control• Control is the process by which management ensures

that the company is confirming to prescribe plans and policies in working towards the attainment of corporate objectives.

• The central features of control is not coercion as is so often thought, nor is it the detail study of past mistakes, but rather the focusing of attention on current and future activities to ensure that they are performed in accordance with management wishes.

• The existence of a control process enables management to know from time to time where the company stand in relation to a predetermined and desirable future position.

• Progress towards objectives must be observed, measured, and directed if these objectives are to be achieved-this is the function of control.Control and planning are complementary they are the two sides of the same coin.

DFFERENCE BETWEEN COST CONTROL AND COST REDUCTION

Cost Control is concerned with keeping costs at their planned level (i.e.; confirming in so far as possible with existing standard and plans).

In contrast, cost reduction is concerned with setting cost levels at minimum acceptable level by looking as ways of improving the levels at the minimum acceptable level by looking at ways of improving the standards that provide the benchmarks for cost control.

Cost reduction may be achieved by value engineering techniques, method study, work measurement techniques, incentive scheme, revised layouts, etc.

If management misguidedly sets cost standards that are beyond attainable by current methods, etc, this will not lead to cost reduction: poor morale is a more likely to outcome, with resultant labour problems.

Conversely, if loose standards are set (i.e.; standards that can be attained by a poor level of performance) cost control may be effective, but the overall level of costs will be at a most inefficient level.

It has been established that control must be exercised over the level of cost performance, and this require a consideration of both direct and indirect costs.

MCQ’sQ1 Management accounting analyses accounting data with

the help of:-

a) Auditors

b) Statutory forms

c) Tools & Techniques

d) None of these 

Q2 Management Accounting is suitable for:-

a) Large industrial & trading concerns

b) small business

c) Co-operative societies

d) Non-profit organizations

Q3. Which of the following can improve the margin of safety?

a) Lowering the fixed cost

b) lowering the variable cost so as to improve marginal contribution.

c) increasing volume of sales, if there is available capacity.

d) All (a), (b) & (c) above

Q4. Break even sales is

a) The sales required to earn a particular amount of profit.

b) The sales at which there is neither profit nor loss.

c) The sales equal to amount of fixed expenses incurred by the company.

d) None of the above.

Q5 Under Resale Price Method price of the product is determined by:

a) Adding profit margin to selling price for the product.

b) adding an appropriate markup to the cost of the product

c) by subtracting an appropriate gross markup from the sale price to an unrelated third party

d) none of the above

Q6 Cost Centre is:

a) A responsibility centre in which inputs, are measured in monetary terms.

b) A responsibility centre in which outputs are measured in monetary terms.

c) A responsibility centre in which assets employed, are measured in monetary terms.

d) All of the above

Thank You

Please forward your query To: aarora@amity.edu