MANAGEMENT ACCOUNTING

UNIT-I
PART-A
1. What is management accounting?
Management accounting provides information to the management to use it as a
base for decision making. The emphasis of management accounting is to redesign
accounting in a manner which is helpful to the management in framing the policies
and control of their execution.

2. Define management accounting.

Batty’s definition describes” Management Accounting as a combination of various
accounting systems and techniques which are designed to meet the needs of the
management.

3. Define Accounting.
Eric L.Kohler defines: the procedure of analysis, classification and recording
transactions in accordance with a preconceived plan for the benefit of (a)
providing a means by which an enterprise can be conducted in an orderly fashion
(b) establishing a basis for reporting the financial condition of an enterprise and
the results of its operations”
PART-B
1.What are the characteristics of management accounting?
i) Providing financial information:
The main emphasis of management accounting is to provide financial information
to management.
ii)Cause and effect analysis:
Financial accounting confines itself to presentation of P& L account and balance
sheet. Management accounting analyses the cause and effect of the facts and
figures thereon

iii) Use of special techniques and concepts:

Management accounting employs special techniques like standard costing,
budgetary control, marginal costing, fund flow responsibility accounting etc.
iv) Decision making:
Main objective of management accounting is to provide relevant information to
management to take various important decisions.
v) No fixed conventions:
Financial accounting has various established principles and rules preparing the
financial accounts. Management accounting has no such fixed rules.

2.What is the scope of Management accounting?

(i) Financial accounting:
Financial accounting deals with financial aspects by preparation of profit and loss
account and balance sheet. Management accounting rearranges and uses the
financial statements.
ii) Cost accounting: cost accounting is an essential part of management
accounting. Cost accounting through its various techniques reveals efficiency of
various divisions.

iii) Budgeting and forecasting: Budgeting is setting targets by estimating

expenditure and revenue for a given period. Targets are fixed for various
departments and responsibility is pinpointed for achieving the targets.

iv) Inventory control: This includes planning, coordinating and controlling

inventory from the time of acquisition to the stage of disposal.

v) Statistical Analysis: In order to make the information more useful statistical tool
and applied. These tools include charts, graphs, diagrams, index numbers etc.

3. Objectives and functions of management accounting:

i) Presentation of data:
Traditional profit and loss account and the balance sheet are not analytical for the
decision making.

ii) Aid of planning and forecasting: Management accounting is helpful to the

management in the process of planning through the techniques of budgetary
control and standard costing.
iii) Help in organizing: Organizing is concerned with establishment of relationship
among different individuals in the form. It included delegation of authority and
fixing responsibility.

iv) Decision making: Management accounting provides comparative data for

analysis and interpretation for effective decision making and policy formulation
v) Effective control: Standard costing and budgetary control and integral part of
management accounting. These techniques lay down targets; compare
performance, adherence to plans and progress of various sections of the
organization.
PART-C
1.What are the tools and techniques of management accounting
i) Financial policy and accounting: Every business concern has not plan for its
sources of funds. The fund can be raised out of different sources.Utlising a
particular source depends on cost of servicing the source, terms of repayment in
case of borrowings.
ii) Analysis of financial statement:
Analysis of financial statements is means to classify and present the data in a
manner useful to the management.
iii) Historical cost accounting:
Costs are recorded after being incurred for comparison with predetermined. The
actual are compared with budgets to reveal deviations and individuals responsible
for the same.

iv) Standard costing: Standard costing is an a important technique of cost control.

In standard costing the costs are determined in advance by systematic analysis.

v) Marginal costing: Under marginal costing, the cost of products is divided into
fixed and variable portions. While the variable costs are taken for decision making,
fixed costs are treated as period costs to be charged to costing profit and loss
account.
vi) Management Information system: An important function of management
accounting is reporting. This function has improved considerably with the
developing of electronic data processing data.
2. Difference between financial accounting and management accounting?
Financial Accounting
i)The purpose of financial accounting is to ascertain profit and loss by preparing
profit and loss and balance sheet
ii) Financial accounting records transactions as when they occur .
iii) Financial accounting is historical and ojective
iv) Financial accounting analyses data of the business as a whole
v) Financial accounting provides consolidated information of the whole enterprise

Management accounting
i) The purpose of management accounting is to provide information to the
management for decisions making on internal operations.
ii) management accounting is concerned with future plans and operations
iii) management accounting evaluates the performance of different
department, divisions and as per the requirement of the management
iv) the management accountant has flexibility in following different standards
set by the management
v) management accounting is of voluntary adoption y the management to
function effectively
vi) Prompt quick reporting is the main feature of management accounting
vii) management accounting does not have rigid principles
viii) the management accounting statements and reports are means for internal
purpose and they are not subject to audits
 UNIT-II
PART-A
1. What are financial statements?
Financial statements refer to formal and original statements prepared by a business
concern to disclose its financial information. Financial statements prepared for the
purpose of presenting a periodical review or report on the progress by the management.

2. What is common size statement?

Common size statements indicate the relationship of various items with some common
items. Income statements, the sale figure is taken as basis and all other figures are
expressed as percentage of sales.

3. Explain the meaning of trend Analysis of financial statements.

Trend signifies a tendency and as such the review and appraisal of tendency in
accounting variables are nothing but trend analysis. Trend analysis is carried out by
calculating trend ratios (percentage) plotting the accounting data on graph or chart.
Trend analysis is significant for forecasting and budgeting.

PART-B
1.The following are the income statement of jeevan ltd, for the year ending 31st
December 1998 and 1999. you are required to prepare a comparative income statement
for the two years.

Particulars 31.121998 31.12.1999

Rs Rs
Net sales 12,00,000
10,00,000
Cost of goods sold 5,50,000 6,05,000
Operating expenses:
Adminstration 80,000 1,00,000
Selling 60,000 80,000
Non-operating expenses:
Interest 40,000 50,000
Income-tax 50,000 80,000
solution:
Jeevan limited
Comparative Income statement
for the years ended 31st December 1998 and 1999
1998 1999 Increase or decrease in 1998
Rs Rs and 1999
Amount
percentage
Rs %
Net sales 10,00,000 12,00,000 2,00,000 20
Less: cost of 5,50,000 6,05,000 55000 10
goods sold
Gross profit 4,50,000 5,95,000 1,45,000 32.22
Operating
expenses:
Adminstration 80,000 1,00,000 20000 25
Selling 60,000 80,000 20000 33.33
Total
Operating 1,40,000 1,80,000 40,000 28.57
expenses
Operating
profit 3,10,000 4,15,000 1,05,000 33.87
A-B
Non
operating
expenses: 40,000 50,000 10000 25
Interest 50,000 80,000 30,000 60
Income tax

Total non
operating 90,000 1,30,000 40,000 44.44
expense (D)
Net profit (C- 2,20,000 2,85,000 65,000 29.55
D)
 PART-C
1. Dhandapani and co ltd furnishes the following balance sheet for the years 1997 and
1998.Prepare common size balance sheets.

Balance sheet
Liabilities 1997 1998 Assets 1997 1998
Rs Rs Rs Rs
Share 2,00,000 3,00,000 Buildings 4,00,000 4,00,000
capital
Reserves 6,00,000 7,00,000 Machinery 6,00,000 10,00,000
10%
debentures 2,00,000 3,00,000 Stock 2,00,000 3,00,000
Creditors 3,00,000 5,00,000 Debtors 2,00,000 2,50,000
Bills
payable 1,00,000 80,000 Cash at 1,00,000 50,000
Tax payable bank
1,00,000 1,20,000
15,00,000 20,00,000 15,00,000 20,00,000

solution:
Dhandapani & co ltd
Common size balance sheet as on 31st December 1997 and 1998

1997 1998
Assets Amount % Amount %
Current Assets:
Cash at bank 1,00,000 6.67 50,000 2.50
Debtors 2,00,000 13.33 2,50,000 12.50
Stock 2,00,000 13.33 3,00,000 15.00

Total current Assets

(A) 5,00,000 33.33 6,00,000 30.00
Fixed Assets:
Buildings 4,00,000 26.67 4,00,000 20.00
Machinery 6,00,000 40.00 10,00,000 50.00
Total fixed Assets 10,00,000 66.67 14,00,000 70.00
Total Assets (A+B) 15,00,000 100.00 20,00,000 100.00
Liabilities and capital:
Creditors 3,00,000 20.00 5,00,000 25.00
Bills payable 1,00,000 6.67 80,000 4.00
Tax payable 1,00,000 6.66 1,20,000 6.00
Total current 5,00,000 33.33 7,00,000 35.00
liabilities(A)
Long term liabilities:
10% Debentures 2,00,000 13.33 3,00,000 15.00
Total liabilities A+B=C 7,00,000 46.67 10,00,000 50.00
Capital & Reserves:
Share capital 2,00,000 13.33 3,00,000 15.00
Reserves 6,00,000 40.00 7,00,000 35.00
Total share holders’
funds (D) 8,00,000 53.33 10,00,000 50.00
Total Liabilities and
capital (C+D) 15,00,000 100.00 20,00,000 100.00
 UNIT –III
PART-A
1.What is Ratio?
Ratio can be defined as “ Relationship expressed in quantitative terms, between figures
which have cause and effect relationship or which are connected with each other in
some manner or the other”

2.What is Ratio Analysis?

Ratio analysis is an age old technique of financial analysis. “ the process of determining
and presenting the relationship of items and groups of items in the financial statements”

3. Explain the meaning, of R.O.I.

This is called “Return on Investment. It measures the sufficiency or otherwise of profit in
relation to capital employed.

4. What are the steps involved in Ratio Analysis?

i) Selection of relevant information
ii)Comparison of calculated Ratios
iii) Interpretation and Reporting

5. What are the modes of expressing ratios?

i) In proportions
ii) In Rate or time or coefficient
iii) In percentage.
PART-B
1. Calculate stock turnover ratio and stock turnover period form the following.
sales Rs.10,00,000, gross profit ratio 20% stock at the beginning of the year Rs.1,75,000,
stock at the end of the year Rs.1,45,000.
solution:
Cost of sales
stock turn over ratio = ---------------------
Average stock
Cost of sales = Sales – Gross profit
 1,00,000- (1,00,000*20%)
= 10,00,000-2,00,000 = Rs.8,00,000

Average stock = Opening stock + closing stock

__________________________
2
1,75,000+1,45,000
= ___________________
2
= Rs 1, 60,000
8,00,000
Stock turnover ratio =__________ = 5 times
1, 60,000
Days / months in the year
Stock turnover period:______________________________
stock turnover ratio

Stock turnover period in days =365/5 = 73 days

Stock turnover period in months= 12/5 = 2.4 months

2. You are given the following information:

Cash 18,000
Debtors 1,42,000
Closing stock 1,80,000
Bills payable 27,000
Creditors 50,000
Outstanding exp 15,000
Tax payable 75,000
calculate (a) current ratio (b) Liquidity ratio (c) Absolute liquidity ratio.
solution:
Current assets
(a) current ratio= _______________
Current liabilities
 current assets: Current liabilities:
cash 18000 Bills payable 27,000
Debtors 1,42,000 Creditors 50,000
Clsoing stock 1,80,000 Outstanding expenses 15,000
Tax payable 75,000
total= 3,40,000 total = 1, 67,000

3,40,000
current ratio= __________ = 2.036 times
1,67,000

liquid assets
b) Liquid ratio= _______________
current liabilities
liquid assets = current assets-stock and prepaid expenses
= 3,40,000-1,80,000 = 1,60,000
= 1,60,000/1,67,000 = 0.96

c)Absolute liquidity ratio = cash and bank balance+ Marketable securities

________________________________________
current liabilities
=18,000
------------- = 0.11
1,67,000

PART –C
1.Prepare a Balance sheet with as many details as possible from the following
information.
Gross profit ratio 20%
Debtors turnover 6 times
Fixed assets to net worth 0.80
Reserves to capital 0.50
current ratio 2.50
Liquid ratio 1.50
Net working capital Rs. 3,00,000
Stock turnover ratio 6 times
solution:
Liabilities RS Assets RS RS
Capital 10,00,000 Fixed assets 12,00,000
Reserves and surplus Current assets:
5,00,000 15,00,000 Closing stock 2,00,000
Current liabilties 2,00,000 Debtors 2,50,000
Liquid assets 50,000 5,00,000
17,00,000 17,00,000

i) Current ratio given = 2.50

current assets
current ratio=______________
current liabilities

working capital = current assets- current liabilities

= 2.5-1 =1.5
current assets = 3,00,000*2.5/1.5 = Rs.5,00,000

Current liabilities = 3,00,000*1/1.5 = Rs 2,00,000

ii) Calculation of liquid assets and stock

liauid ratio given = 1.50

liquid assets
Liquid ratio= _______________
current liabilities

liquid assets
1.5 = _______________
2,00,000
liquid assets = 2,00,000*1.5 = Rs.3,00,000
liquid assets = current assets-stock
3,00,000 = 5,00,000-stock
stock = 5,00,000-3,00,000
 = Rs. 2,00,000
iii) Calculation of Debtors
Stock turnover ratio given = 6 times
Cost of goods sold
stock turnover ratio ________________
Average stock

cost of good sold

6 = _________________
2,00,000
cost of goods sold = 2,00,000*6
= Rs . 12,00,000
Gross profit ratio given 20%
when sales=100 gross profit=20 cost of good sold = 80

sales = cost of goods sold = 100/80

= 12,00,000* 100/80 = Rs 15,00,000
Debtors turnover = Credit sales/ Average receivables

6 = 15,00,000/Average receivables
Average receivables = 15,00,000/6
= 2,50,000
iv) other liquid assets
liquid assets 3,00,000
less: Debtors 2,50,000
other liquid assets = 50,000

v) Calculation of fixed assets and net worth

Fixed assets to net worth given 0.80
Assuming there are no long tem debt and fictitious assets
Balance sheet equation= net worth+ current liabilities = fixed assets +current
assets
Assuming net worth as x
x+ 2,00,000 = 8x+5,00,000
x-8x = 5,00,000-2,00,000 2x= 3,00,000
 x= 3,00,000/2 Rs = 15,00,000
Net worth = 15,00,000
Fixed assets = 15,00,000*.8 = 12,00,000

vi) Calculation of capital and reserves

Reserves to capital given = 0.50
Net worth = 0.50+1= 1.5
Net worth = 1.5 = 15,00,000

capital = 15,00,000* 1/1.5 =Rs 10,00,000

Reserves = 15,00,000* 0.5/1.5 = Rs 5,00,000