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SYLLABUS UNIT-I Management accounting- Nature, Scope and Objectives-Distinction between financial accounting and management accounting-Distinction between

management accounting and cost accounting-Reporting to management Routine and special reports UNIT II Analysis and interpretation of Financial statements -Comparative statement, Common size statement, Trend analysis and accounting ratios- latest trend in presenting financial data. UNIT III Cash flow and Fund flow statement Importance steps in preparation, managerial uses. UNIT IV Cost-Volume-Profit analysis: Marginal cost and break even analysisdifferential costing-applications of marginal costing for managerial decisions UNIT V Budgeting and budgetary control preparation of various types of budgetsAdvantages and Limitations of budgetary control.

UNIT I Management Accounting: Meaning: Accounting which provides the necessary information to the management for discharging its functions. Management accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in the day- to day operation of undertaking. Definition: Management accounting is concerned with accounting information that is useful to management.

-Robert N.Anthony Such of its techniques and procedure by which accounting mainly seeks to aid the management collectively have come to be known as management accounting. Management accounting is accounting for effective management. Nature or characteristics of management accounting: 1. Forecasting : It is not confined only to the collection of historical data or facts but also attempts to highlight upon What should have been. 2. Supply information: It provides information to the manageme nt and not decision. 3. Increase in efficiency: It is basically concerned with the problem of choice. 4. Techniques and concepts : It uses special techniques and concepts to make accounting data more useful. 5. Cause and effect analysis: It attempts to examine the cause and Effect of different variables. This may be the reason that management accounting is called as science. 6. No fixed norms : No set of rules and formats like double entry system of book keeping. 7. Assists management : It assists management in several ways in its functions but does not replace it. 8. Achieving of objectives : The principal objective is to serve the needs of management.

Scope of management accounting: The scope is very wide and broad based and it includes with in its fold, a variety of aspects of business operations. 1. Financial accounting : Financial accounting is the general accounting which relates to the recording of business transactions in the books of primary entry, posting them into respective ledger accounts, balancing them and preparing a trail balance. hence management accounting cannot obtain full control and coordination of operations without a well designed financial accounting system. 2. Cost accounting : Costing is a branch of accounting. It is the process and technique of ascertaining costs. Planning, decision making and control are the basic managerial functions. 3. Budgeting and forecasting : Budgeting means expressing the plans, policies and goals of the enterprise for a definite period in future. Forecasting, on the other hand, is a prediction of what will happen as a result of a given set of circumstances.

4. Statistical methods : statistical tools such as graphs, charts, diagrams, pictorial presentation, index numbers etc. make the information more impressive, comprehensive and intelligible. 5. inventory control : It includes control over inventory from the time it is acquired till its final disposal. Inventory control is significant as it involves large sums. 6. Interpretation of data: analysis and interpretation of financial statements are important parts of management accounting. After analyzing, the interpretation is made and the reports drawn from these are presented to the management in a simple language. 7. Reporting: The interpreted information in the form of quantitative expression must be communicated to those who are interested in it. At the same time these data should be communicated within reasonable time. 8. Internal Audit: It needs devising a system of internal control by establishing internal audit coverage for all operating units. It helps the management to fix responsibilities to individuals. 9. Tax Accounting : Income statements are prepared and tax liabilities are calculated. The management is informed about tax burden from central government. 10.Methods and procedures : This includes maintenance of proper data processing and other office management services, reporting on best use of mechanical and electronic devices.

Objectives of management accounting; The primary objective is to enable the management to maximize profits or minimize losses. The fundamental objective of management accounting is to assist management in their functions. The other main objectives are, 1. Planning and policy formulation: planning is one of the primary functions of management. It involves forecasting on the basis of available information. 2. Help in the interpretation process : The main object is to present financial information. The financial information must be presented in easily understandable manner. 3. Helps in decision making : Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives. 4. Controlling: The actual results are compared with pre determined objectives. The management is able to control performance of each and every individual with the help of management accounting devices.

5. Reporting: This facilitates management to take proper and timely decisions. It presents the different alternative plans before the management in a comparative manner. 6. Motivating : Delegation increases the job satisfaction of employees and encourages them to look forward. so it serves as a motivational devise. 7. Helps in organizing : return on capital employed is one of the tools if management accounting. All these aspects are helpful in setting up effective and efficient organization. 8. Coordinating operations : It provides tools which are helpful in coordinating the activities of different sections. Functions of management accounting: The basic function of management accounting is to assist the management in performing its functions effectively. The other functions are, 1. Modification of data: Accounting data as such are not suitable for managerial decision making and control purposes. The modification of data in similar groups makes the data more useful and understandable. 2. Planning and forecasting: under the process of planning, management formulates policies and executes plans to achieve the desired objectives. 3. Financial analysis and interpretation: the accounting data is analyzed and interpreted meaningfully for effective planning and decision making. The interpretation is most important function of management accounting. 4. Communication: Management accounting is an important medium of communication. Different levels of management need different types of information. 5. Facilitate managerial control: Management accounting enables all accounting efforts to be directed towards the attainment of goals efficiently by controlling then operations of the company more effectively. 6. Use of qualitative information: mere financial data and its analysis and interpretation are not sufficient for decision making. 7. Decision making: management accounting supplies analytical information regarding various alternatives and the choice of management is made easy. 8. Coordinating: coordination is the essence of managerial activity. It helps to increase the efficiency of organizations.

Distinction between financial accounting and management accounting: Financial accounting is concerned with the recording of day to day transactions of the business. Management accounting is to provide the quantitative as well as the qualitative to the management. Basis Financial accounting Management accounting Objective It gives the periodical reports to Its assist the internal owners, creditors and government. management.

Nature

It concerned with historical It concerned with future plans records. and policies. Subject matter It deals the business as a whole. It deals only a limited coverage. Flexibility Here standards are fixed by Standards are fixed by external parties. management itself. Legal compulsion Statutory for every business. Adopted on voluntary basis. Periodicity of The period is longer Its prepared when its required. reporting Precision Transactions are very accurate. Sometimes approximate figures are used. Unit of account Recognizes whole business. Results of the divisions. Coverage Covers entire range of business in Non monetary items are monetary items. considered. Publication and Its very essential for the use of Its for management only. audit public Accounting It has principles and conventions No such principles. principles

Distinction between cost accounting and management accounting: Cost accounting deals primarily with cost data only. Management accounting involves both costs and revenues.

Basis Object Nature Principles Data used

Cost accounting To determine the cost of a product Based on past and present facts. Procedure are followed Only quantitative aspects are taken

Parties

Management accounting Provide information to the management Its for projection of future plans. No such procedures Both qualitative and quantitative aspects are considered Useful for both internal Only for management. and external parties

Tools of management accounting: The important tools and techniques are, Financial planning Analysis of financial statements Historical cost accounting Standard costing Budgetary control Marginal costing Decision making Ratio accounting Revaluation accounting Control accounting Advantages of management accounting: 1. Helps in decision making: Helps to make decisions like pricing, make or buy, acceptance of orders, selection of product mix etc,. 2.Helps in planning: Planning includes profit, budget, capital investment and financing. 3.Helps in organizing: It helps to develop organizational structure. 4.Facilitates communication: It provides up to date information to evaluate the performance. 5.Helps in coordinating: It helps to coordinate the department activities and to achieve their goals. 6.Evaluation and control of performance: It assists to find weak area to take corrective actions. 7.Interpretation of financial information: This will helps to quick decision making.

8.Economic appraisal: It includes social and economic forces. Limitations of management accounting: 1. Based on accounting information: It considers only the past financial data so, its not reliable. 2. Wide scope: It has wide scope so, the result will be i naccurate. 3. Costly; It applied only big concerns. 4. Evolutionary stage: Tools end techniques are not fully developed. 5. Opposition to change: It requires number of changes in the organization. 6. Intuitive decision: It helps to take scientific decision making. 7. Not an alternative to management: It will not replace the management and administration.

Financial statement analysis: Meaning:A financial statement is an organized collection of data according to logical and consistent accounting procedure. It refers to combination of statements like balance sheet, income statement, statement of retained earnings etc. its prepared from the accounting records maintained by the firm.

Importance:i. Its useful to shareholders to judge the prospects of company investments and to decide to sell or continue ownership. Useful for assessing the efficiency for different cost centers. Useful to the creditors to assess the current financial position of the concern in relation to their debts. Helpful to the banker to determine the financial strength and earning position of the concern. Its very informative for prospective investors in an enterprise. Useful to assess tax liability of business.

ii. iii. iv. v. vi.

vii.

Useful for economists, the company law board, public accounts committee and the estimate committee of government companies.

Limitations:i. ii. iii. iv. v. vi. vii. Only interim reports. Extract position can be know only when the business is liquidated. Only financial factors are being recorded, economic and social factors are omitted. Non- monetary factors do not taken in to account. Most of the values are based on the personal judgment of the accountant. Its prepared on the basis of historical cost. The fixed cost are shown on going concern concept but it may not be same when it is realized on their sales. The balance sheet will not show the changes in working capital.

Financial statement analysis:The term analysis means methodical classification of the data given in the financial statements. Financial statement analysis is a study of relationship among the various financial factors in a business disclosed by a single set of statements and study of the trends of these factors as shown in a series of statements. Comparative financial statements:Its a statement of the financial position of a business which provides information to assess the direction of changes in the business. In these statements figures for two or more periods are placed side by side to facilitate comparison. Generally balance sheet and income statement are prepared in the comparative form. Common size statements:-

Financial statements read with absolute figures are not easily understanding and even misleading. Therefore the figures are converted into percentages in common base.

Trend analysis:Trend analysis is helpful to make comparative study of financial statements for several years. Comparative statements: Problem 1. From the following profit and loss account and balance sheet for the year ended 2005 and 2006, you are required to prepare a comparative income statement and comparative balance sheet. PROFIT AND LOSS ACCOUNT 2005 2006 2005 2006 To cost of goods sold 6000 7500 By net sales 8000 10000 To oper. Exp. administrative 200 200 Selling 300 400 To net profit 1500 1900 8000 10000 8000 10000 BALANCE SHEET AS ON 31 Liabilities 2005 2006 Bills payable 500 750 Sun.creditors 1500 2000 Tax payable 1000 1500 6% debentures 1000 1500 10% pref.capital 3000 3000 Equity capital 4000 4000 Reserves 2000 2450 13000 15200 DEC Assets Cash Debtors Stock Land Buildings Plant Furniture

2005 1000 2000 2000 1000 3000 3000 1000 13000

2006 1400 3000 3000 1000 2700 2700 1400 15200

Solutions: COMPARATIVE INCOME STATEMENT For the years ended 31 dec 2005 and 2008 2005 2006 Net sales Less: Cost of goods sold Gross profit Less: operating Exp: Administrative exp Selling exp Total operating exp Operating profit 8000 6000 2000 200 300 500 1500 10000 7500 2500 200 400 600 1900

Inc/dec Amt +2000 +1500 500 100 100 400

% of inc/dec 25 25 25 33.3 20 26.7

COMPARATIVE BALANCE SHEET For the years ended 31 Dec 2005 and 2006 2005 2006 Assets:

Inc/dec

% inc/dec

of

Current assets: Cash Debtors Stock Total C.A Fixed Assets: Land Buildings Plant Furniture Total F.A Total assets Liabilities and capital: Current Liabilities: B/Payable S.creditors Tax payable Total C.L Long term liabilities: 6% debentures Total Liab. Capital & reserves: 10% pref.capi. Equity capi. Reserves Total shareholders fund Total liab. & capital

1000 2000 2000 5000 1000 3000 3000 1000 8000 13000

1400 3000 3000 7400 1000 2700 2700 1400 7800 15200

400 1000 1000 2400 -300 -300 400 -200 2200

40 50 50 48 -10 -10 40 -2.5 17

500 1500 1000 3000 1000 4000 3000 4000 2000 9000 13000

750 2000 1500 4250 1500 5750 3000 4000 2450 9450 15200

250 500 500 1250 500 1750 450 450 2200

50 33.3 50 41.7 50 43.75 22.5 5 17

Problem 2: From the following profit and loss account and balance sheet prepare a comparative/common size income statement and a comparative/common size balance sheet. PROFIT AND LOSS ACCOUNT 2005 2006 2005 2006 To cost of goods sold 500 640 By net sales 700 900 To oper. Exp. administrative 20 20 Selling 30 40 To net profit 150 200 700 900 700 900

BALANCE SHEET AS ON 31 Liabilities 2005 2006 Bills payable 50 75 Sun.creditors 150 200 Tax payable 100 150 15% 100 150 debentures 10% pref.capital 200 200 Equity capital 300 300 Reserves 200 250 1100 1325

DEC Assets Cash Debtors Stock Land Buildings Plant Furniture

2005 50 300 100 100 250 200 100 1100

2006 70 450 200 120 225 180 80 1325

Problem 3: The following are the profit & loss a/c and balance sheet of A Ltd., for two years. PROFIT AND LOSS ACCOUNT 2005 2006 To material cost 40 45 By sales revenue To conversion cost 20 20 By miscellaneous income To operating exp 10 8 To miscell.exp 5 7 To net profit 15 21 90 101

2005 80 10

2006 95 6

90

101

BALANCE SHEET AS ON 31 DEC Liabilities 2005 2006 Assets Share capital 80 100 Land & buildings Reserves & surplus 20 26 Plant& machinery Long term liabilities 20 20 Furniture& fittings Current liabilities 20 14 Current assets Miscall.assets

2005 25 50 10 55 140

2006 20 75 10 50 5 160

140

160

From the above, prepare the comparative & common size P&L a/c and balance sheet. Common size statements: Problem 4: from the following balance sheet, prepare a common size statement. 2005 2006 Assets:

Cash Debtors Stock Prepaid exp. Bills receivable Fixed assets Total Liabilities & capital: Share capital Long term debt Sun.creditors Other liabilities Total

27000 220000 100000 11000 10000 635000 10,03,000

31500 211000 126000 21000 10500 650000 10,50,000

658000 225000 42000 78000 10,03,000

700000 200000 50000 100000 10,50,000

Solution: COMMON SIZE BALANCE SHEET 2005 2006 Amt % Amt Assets: Current assets : Cash Debtors Stock Prepaid exp Bills receivable Total C.A Fixed assets Total assets Liabilities and capital: Current liabilities: s.creditors other liabilities Total C.L Long term liabilities: Long term debt Capital reserves

27000 220000 100000 11000 10000 368000 635000 10,03,000

2.7 21.9 10 1.1 1.0 36.7 63.3 100

31500 211000 126000 21000 10500 400000 650000 10,50,000

3 20.1 12 2 1 38.1 61.9 100

42000 78000 120000 225000 345000

4.2 7.8 12 22.4 34.4

50000 100000 150000 200000 350000

4.8 9.5 14.3 19 33.3

Share capital Total liabilities

658000 10,03,000

65.6 100

700000 10,50,000

66.7 100

Problem 5: From the following data prepare common size income statement. 2005 2006 2007 Cost of materials 200 250 150 Labour cost 175 150 200 Other conversion cost 175 140 150 Cost of goods sold 550 540 500 Sales revenue 950 1000 1200 Gross profit 400 460 700 Operating exp 180 200 300 Profit 220 260 400 Solution: COMMON SIZE INCOME STATEMENT Year 2005 2006 Amt % Amt % Sales revenue 950 100 1000 100 Cost of material 200 21.05 250 25 Labour cost 175 18.42 150 15 Other conv.cost 175 18.42 140 14 Cost of goods sold 550 57.89 540 54 Gross profit 400 42.11 460 46 Operating exp 180 18.95 200 20 Profits 220 23.16 260 26

2007 Amt 1200 150 200 150 500 700 300 400 % 100 12.5 16.67 12.50 41.67 58.33 25 33.33

TREND PERCENTAGES: Problem 6: From the following data relating trend percentage. Year 2002 2003 2004 2005 2006 2007 Solution: Year Purchases(Rs.) 2002 1672 2003 1789 2004 1873 2005 1923 2006 2123 2007 1463

to the purchase of a firm, prepare Purchase (Rs.in lakhs) 1672 1789 1873 1923 2123 1463 Trend percentage 100 107 112 115 127 87.5

Problem 7: From the following data prepare trend percentage, taking 2003 as a base. Year 2003 2004 2005 2006 2007 Sales 1881 2340 2655 3021 3768 Stock 709 781 816 944 1154 Profit 321 435 458 527 672

Problem 8: From the following data prepare trend percentage, taking 2000 as a base year. Year 2000 2001 2002 2003 2004 2005 2006 2007 Sales 30 35 28 36 40 25 60 42 Profit 6 8 5 8 9 4 12 10 Problem 7: From the following data prepare trend percentage, taking 2004 as the base year. 2004 2005 2006 2007 Cost of materials 200 220 250 200 Labour cost 150 120 150 180 Other cost 150 150 140 180 Cost of goods sold 500 490 540 560 Sales 1000 1100 1200 1100 Gross profit 500 610 660 540 Operating exp. 200 220 300 210 Profit 300 380 360 330

UNIT III: Fund flow statement: Meaning: Fund flow statement is a widely used tool in the hands of financial executives for analyzing the financial performance of a concern. Funds keep on moving in a business which itself is based on a going concern concept.

The fund flow statement is a financial statement which reveals the methods by which the business has been financed and how it has used its funds between the opening and closing balance sheet dates. this statement consists of two parts 1.sources of funds and 2. application of funds. The difference between the two shows the net change in the working capital during the period. Importance: Fund flow statement is a useful tool in the financial manger analytical kit. The purpose is to indicate where funds came from came from and where it was used during the certain period. 1) Determines the financial consequences of business operations. 2) The management can formulate financial policies. 3) It serves as a control device. 4) It point out the sound and weak financial position. 5) It point out the causes for changes in working capital. 6) It enables the bankers, creditors in assessing the degree of risk. 7) The management can rearrange the firm financing more effectively. 8) Various uses of funds can be known. 9) The statement compared with the budget concerned. 10)It reveals the increase and decreasing of funds.

Limitations: 1. It lacks the originality, its a rearrangement of accounts book. 2. It indicates only the past position not for future. 3. It indicates fund flow in a summary form not in continuously. 4. When both the aspects of a transaction are current, Its not considered. 5. When both the aspects of a transaction are non- current, it is also not considered. 6. It is not an ideal tool for financial analysis. Preparation of fund flow statement: Fund flow statements are prepared in two statements: 1. Statement of changes in working capital 2. Fund flow statement 1. Statement of changes in working capital:

The working capital does not change due to various transactions. The working capital position at the beginning of a period is changed to a different position at the end of that period. A statement of working capital is prepared to depict the changes in working capital. Working capital represents the excess of current assets over current liabilities.

Format for schedule of changes in working capital Particulars Current assets: Cash in hand Cash at bank Bills receivable S. debtors Temp.investments Stock Prepaid Exp. Accrued incomes Etc., Total A Current liabilities: Bills payable S. creditors O/s Exp. Bank O/D Short term loan Dividend payable Amt of p.yr Amt of Cr.yr Working capital Increase decrease

Total-B Working capital(A-B) Net inc/dec in W.C Total 2. Fund flow statement: This is second but most important part of fund flow statement. After preparing the statement of working capital, the statement of sources and application of fund is prepared. This statement is prepared in two formats: 1. T form or an account form 2. Report form Fund flow statement Amount Applications/outflows Trading loss Redemption of pre.shares Redemption of debentures Purchase of Fix.Ass Repayment of L.T.Loan Non trading Exp

Sources/inflows i.Trading profit ii.Issue of share capital iii.Issue of debentures iv.Sale of fix.assets v.Long term borrowings vi.Non trading income Dec in W.C

Amount

Inc in W.C Total Total -

Calculation of funds from operation: Sales are the major source of cash inflow and at the same time cost of goods sold and expenses are the main outflow of cash. The difference between these two is net income from operation. Adjusted profit and loss A/C depreciation By ope.bal. of P&l preli.exp By dividend received discount on shares By excess provision prem.on redemp By funds from operation transfer to reserves loss on sale of fix.assets cls.bal

To To To To To To To

To funds lost in ope.

Problem 1: from the following balance sheet prepare a schedule of changes in working capital. Liabilities s.capital Profit & loss a/c Creditors 2003 80000 14500 9000 103500 2004 90000 24500 5000 119500 Assets Land & buildings Machinery Stock Debtors 2003 50000 24000 9000 20500 103500 2004 50000 34000 7000 28500 119500

Solution; Statement of changes in working capital

Particulars Current assets: Stock Debtors Total CA Current liabilities: Creditors Net working capital (CA-CL) Net increase in WC Total

2003

2004

Working capital Increase Decrease 2000 -

9000 20500 29500 9000 20500 10000 30500

7000 28500 35500 5000 30500 30500

8000

4000 12000 12000

2000 10000 12000

Problem 2: From the following income statement ascertain the amount of funds from operation: Profit & loss a/c

To To To To To To To To To

salaries rent reserve for doubtful de bts interest and comm.. provision for depreciation provision for taxation loss on sale of plant discount on issue of shares net income

Rs. 10000 6000 4000 5000 6000 8000 2000 1000 8000 50000

By gross income By profit on sale of furniture By dividend

Rs. 45000 1000 4000

50000

Solution: Calculation of funds from operations Adjusted profit & loss a/c Rs reserve for doubtful debts 4000 By profit on sale of furniture provision for depr. 6000 By dividend provision for taxation 8000 By funds from operation loss on sale of plant 2000 discount on issue of shares 1000 net profit 8000 29000

Rs. 1000 4000 24000

To To To To To To

29000

Problem 3: From the following balance sheet prepare fund flow statement. Liabilities s.capital creditors profit & loss a/c 2003 300000 100000 15000 2004 400000 70000 30000 Assets Machinery Furniture Stock in trade Debtors Cash 2003 50000 10000 85000 160000 110000 415000 2004 60000 15000 105000 150000 170000 500000

415000

500000

Solution : Schedule of changes in working capital Particulars 2003

2004

Working capital

Increase Current assets: Stock Debtors Cash Total C.A Current liabilities: Creditors Total C.L Working capital (CA-CL) Net increase in W.C 85000 160000 110000 355000 100000 100000 255000 100000 355000 105000 150000 170000 425000 70000 70000 355000 355000 20000 60000 30000

Decrease 10000 -

110000 110000

10000 100000 110000

Fund flow statement Sources Rs. Issue of shares 100000 Funds from operation 15000 115000 Problem 4.

Application Purchase of machinery Purchase of furniture Net increase in WC

Rs. 10000 5000 100000 115000

Following is the balance sheet of a company for the year 2003 and 2004. Liabilities Share capital Profit & loss a/c Debentures Creditors Balance sheet 2003 2004 70000 74000 10740 11360 12000 6000 10360 11840 103100 Additional information; a) dividends were paid Rs.4000 b) land purchased Rs.10000 Prepare a fund flow statement. 103200 Assets Goodwill Land Stock Debtors Cash 2003 10000 20000 49200 14900 9000 103100 2004 5000 30000 42700 17700 7800 103200

Problem 5. From the following balance sheets on 31 dec, prepare fund flow statement. Balance sheets Liabilities s.capital general reserve profit & loss a/c s.creditors bills payable provision for taxation provision for doubtful debts 2003 100000 14000 16000 8000 1200 16000 400 155600 2004 100000 18000 13000 5400 800 18000 600 155800 Assets Goodwill Building Plant Investment Stock Bills receivable Debtors cash 2003 12000 40000 37000 10000 30000 2000 18000 6600 155600 2004 12000 36000 36000 11000 23400 3200 19000 15200 155800

Additional information; i) depreciation charged on plant was Rs.4000 and on building Rs. 4000 ii) provision for taxation of Rs. 19000 was made during 2004 iii) interim dividend of Rs. 8000 was paid during 2004.

Problem 6: From the following balance sheets on 31 dec, prepare fund flow statement. Balance sheets Liabilities s.capital 2003 100000 2004 200000 Assets Investment 2003 50000 2004 120000

profit & loss a/c s.creditors 5% debentures

125000 200000

20000 180000 100000

Stock Debtors Cash Fixed assets Profit & loss a/c (loss)

80000 15000 40000 200000 40000

100000 30000 50000 200000 -

425000

500000

425000 500000

Provision for depreciation on the last day of 2006 was Rs. 50000 and 2007 was Rs. 60000. during the year 2007 a machine costing Rs.30000 ( depreciation Rs. 10,000) was sold for Rs.16000.

Problem 7; From the following balance sheets on 31 dec, prepare fund flow statement. Balance sheets Liabilities s.capital general reserve profit & loss a/c s.creditors provision for taxation bank loans 2003 100000 25000 15250 75000 15000 35000 2004 125000 30000 15300 67600 17500 Assets Goodwill Land& Building Plant Stock Debtors Cash Bank 2003 100000 75000 50000 40000 250 2004 2500 95000 84500 37000 32100 300 4000

265250 Additional information;

255400

265250 255400

a) dividend Rs.11500 was paid b) depreciation written off on plant Rs.7000 c) income tax provision made during the year was Rs.16500.

Problem 8: From the following balance sheets on 31 dec, prepare fund flow statement. Balance sheets Liabilities s.capital profit & loss a/c current liabilities 2003 60000 34000 12000 425000 2004 65000 26000 3000 500000 Assets Goodwill Plant & machinery Current assets 2003 30000 60000 16000 425000 2004 25000 50000 19000 500000

1. Depreciation of Rs.20000 on plant & machinery was charged to profit & loss account. 2. Dividends of Rs.12000 were paid during the year.

Problem 9: From the following balance sheets of X ltd. prepare fund flow statement. Balance sheets Liabilities s.capital debentures general reserve profit & loss a/c provision for depreciation on machinery s.creditors bills payable 2003 300000 150000 100000 60000 2004 350000 250000 150000 70000 Assets Goodwill machinery Investment Discount on issue of debentures Cash at bank Debtors Stock 2003 100000 410000 30000 2004 80000 540000 80000

90000 75000 10000 785000

130000 110000 15000 1075000

5000 120000 80000 40000 785000

-130000 190000 55000 1075000

Additional information; i) During the year investment costing Rs.30000 were sold for Rs.28000. ii) A new machine was purchased for Rs.45000 and the payment was made in fully paid shares.

CASH FLOW STATEMENT Meaning: A cash flow statement concentrates to transactions that have a direct impact on cash. It deals with the inflow and outflow of cash between two balance sheet dates. Importance/Uses: 1. facilitates to prepare sound financial policies. 2. helps to evaluate the current cash position.

3. it helps to know the future cash position of a concern so as to enable a firm to plan . 4. it helps to taking loan from bank and financial institution. 5. It helps the management in taking short term financial decision. 6. cash is the soul and heart of the business. 7. the statement explains the causes for poor cash position Difference between cash flow statement and fun flow statement: Fund low statement It shows the changes in working capital No opening and closing balance Cash flow statement It shows the changes in cash. It is started with opening and ends with closing cash balance. It deals with only cash

It deals with all the components of working capital It is useful for long term financing

Useful for short term financing

Based on accrual basis of accounting

Based on cash basis of accounting

Concerned with the changes in working capital of two balance sheets

Depicts only the cash position

Limitations of cash flow statement: 1. Only reveals the inflow and outflow of cash. 2. A cash flow statement can not equate with the income statement. (non cash items are not considered) 3. Fund flow statement presents a more complete picture than cash flow statement. Computation of cash from operations: Cash from trading operations during the year is very important source of cash inflows. When all transactions are cash transactions, the net profit or loss as shown by the income statement may be taken as the amount of cash from operations.

Format for cash from operation Particulars Net profit Add: Non operating items(Dr): Depreciation Loss on sale of machinery written off Goodwill written off Preliminary expenses written off Transfer to provisions Increase in accounts payable Increase in outstanding expenses Decrease in prepaid expenses Less: non operating items(Cr): Income from investment Increase in accounts receivable Increase in prepaid expenses Decrease in outstanding expenses Cash from operation Rs. Rs.

Preparation of cash flow statement: Cash flow statement Inflows Opening balances: Cash Bank Issue of shares Issue of debentures Long term loans Sale of fixed assets Rs. Outflows redemption of preference shares repayment of debentures purchase of fixed assets repayment of long term loans payment of taxes cash lost in operations closing balance: Rs.

Dividend Cash from operations -------

cash bank -------

PROBLEM 1: After taking on to consideration the under mentioned items, jain Ltd. made a net profit of Rs 1,00,000 for the year ended 31 st December 2004. Rs. Loss on sale of machinery 10,000 Depreciation on building 4,000 Depreciation on machinery 5,000 Preliminary expenses written off 5,000 Provision for taxation 10,000 Goodwill written off 5,000 Gain on sale of buildings 8,000 Find out cash from operation. SOLUTION: Computation of cash from operation Net profit as per profit & loss a/c Add: Loss on sale of machinery Depreciation on buildings Depreciation on machinery Preliminary exp.written off Provision for taxation Goodwill written off Rs. Rs. 100000

10000 4000 5000 5000 10000 5000 80000

Less: gain on sale of building Cash from operations

39000 139000 8000 131000

Problem 2: From the following profit & loss a/c calculate cash from operations. Profit & loss a/c To salary 2000 By gross profit 5000 To depreciation 1000 By profit on sale Of building 5000 To loss on sale On furniture 500

To goodwill To net profit

1000 5500 _____ 10000 ______

_____ 10000 _____

ANS:3000

Problem 3: Compute cash from operations. 2003 Profit and loss appropriation a/c Bills receivable Provision for depreciation Outstanding rent Prepaid insurance Goodwill Stock ANS:10600. 10000 20000 18000 22000 40000 42000 1600 4000 2000 1800 24000 20000 12000 16000 2004

Problem 4: Calculate cash from operations from the following Profit made during the year Rs 300000 after considering the following items. a) Depreciation on fixed assets 20000 b) Transfer to general reserve 10000 c) Amortization of goodwill 10000 d) Profit on sale of land 7000 The following is the position of current assets and current liabilities. 2003 2004 Debtors Creditors Bills receivable Prepaid expenses ANS:325000. 15000 20000 7000 10000 18000 10000 5000 7000

PROBLEM 5: From the following balance sheets prepare a cash flow statement.

Liabilities Share capital Creditors Profit & loss a/c

2005 200000 70000 10000 280000

2006 250000 45000 23000 318000

Assets Cash Debtors Stock Land

2005 30000 120000 80000 50000 280000

2006 47000 115000 90000 66000 318000

ANS: cash from operation :13000, closing balance :47000 PROBLEM 6: The financial position of a company is given below; Liabilities Accounts payable Capital 2003 29000 739000 2004 25000 615000 Assets Cash Debtors Stock Building Other fixed assets 2003 40000 20000 8000 100000 600000 768000 2004 30000 17000 13000 80000 500000 640000

768000 640000 a) There were no drawings. b) There were no purchase or sale of either building or other fixed assets. Prepare a statement of cash flow. ANS: Cash lost in operation : -10,000,closing balance 30000. PROBLEM 7: The balance sheet as on 31.12.2003 and 31.12.2004 are as follows. Liabilities Share capital Debentures Creditors Prov.for doubtful debts Reserves & surplus 2003 70000 12000 10360 700 10040 103100 2004 74000 6000 11840 800 10560 103200 Assets Bank balance Debtors Stock Land Goodwill

2003 9000 14900 49200 20000 10000 103100

2004 7800 17700 42700 30000 5000 103200

i) dividend amounting to Rs.3500 was paid ii) land was purchased for Rs. 10000 and amount provided for the amortization of goodwill totaled Rs. 5000

iii) debenture loan was repaid Rs.6000 Prepare cash flow statement. UNIT IV Cost-Volume-Profit analysis: Marginal cost and break even analysis (Excluding the applications of marginal costing for managerial decisions) Cost-Volume-Profit analysis: The cost volume profit analysis helps the management in profit planning. It analyze the relationship between cost of production, volume of production and the sales value. It shows which product mix is most profitable and the effect of changes in the volume of output with cost and profit. Marginal Cost: Marginal cost is nothing but variable cost, comprising prime cost and variable overheads. Cost which vary in direct proportion to any changes in the volume of output is known as marginal cost. Break even analysis: It is a widely used technique to study cost volume profit relationship. In a narrow sense, break even analysis concerned with the break even point and in a broad sense, it refers to a system of analysis which is used to dete rmine the profit at any level of production. Break even point: BEP (in units) = fixed cost/contribution p.u BEP (in Rs) = fixed cost/p/v ratio Margin of safety: Margin of safety = Profit/p/v ratio (OR) Total actual sales - break even sales. Marginal cost equation: Sales = variable cost + fixed cost + profit Sales variable cost = Contribution Fixed assets + profit = contribution P/V ratio: P/V ratio = contribution/sales*100 P/V ratio = change in profit/change in sales *100 PROBLEM 1:

From the information, find out the amount of profit earned during the year, using marginal costing technique. Fixed cost Rs.10 per unit Selling price Rs.15 per unit Output level 150000 units ANS:250000 PROBLEM 2: Marginal cost Rs.2400 Sales Rs.3000 Calculate P/V ratio ANS: 20% PROBLEM 3: Calculate BEP (in units) and BEP (in Rupees) from the following data. Fixed cost Rs.300000 Variables cost per unit Rs.20 Selling price per unit Rs.30 ANS: 30000 units, Rs.900000 PROBLEM 4: From the following information calculate a) Break-Even point b) Sales required to earn a profit of Rs.10000 Sales Rs.30000 Variable expenses Rs.14000 Fixed expenses Rs.13000 ANS: a) Rs.24375 b)Rs.43125 PROBLEM 5: Margin of safety Rs.50000, representing 40% of sales,p/v ratio is 30% calculate, i) break even sale ii) fixed cost Problem 6: Margin of safety Rs.10000 which represents 40% of sales, p.v ratio 50% calculate, sales, break even sales, fixed cost and profit. ANS: a) 25000 b) 15000 c) 7500 d) 5000 Problem 7:

Variable cost Rs. 600000 Fixed cost 300000 Net profit 100000 Sales 1000000 a) p.v.ratio b) B.E.P c) Profit when sales amounted to Rs. 12,00,000 d) sales required to earn a profit of Rs.2,00,000. ANS: 40%,750000,180000,1250000. Problem 8: Calculate a) p/v ratio b) break even profit d) margin of safety. Total sales 360000 Selling price p.u 100 Variable cost p.u 50 Fixed cost 100000 e)if the selling price is reduced to Rs.90, by how much is the BEP and margin of safety. ANS: a) 50% b) 200000 c) 160000 d) 2500 units,225000 e)99000

Problem 9: The following data are obtained from the records of a co., I year II year Sales 80000 90000 Profit 10000 14000 Calculate the break even point. ANS:55000 Problem 10: i) profit volume ratio ii) fixed cost iii) profit when sales are Rs.100000 iv) sales required to earn a profit of Rs.20000 v) margin of safety period sales profit I 120000 9000 II 140000 13000 ANS: a) 20% b) 75000 c) 5000 d) 175000 e) 65000 Ratio Analysis Ratio Analysis: Ratio analysis is a technique of analysis and interpretation of financial statements.As compared to other tools, the ratio analysis provides useful conculsions about various aspects of the working of an enterprise. It is the process of analyzing and interpreting the various ratios for helping in decision making.

Advanteges of ratio analysis : 1. It summarises and simplifies the accounting data. 2. It acts as an index of the efficiency of the business. 3. It evaluates the firms performance over a period by comparing present and past ratio. 4. It helps the management to prepare budgets,formulate policies and prepare future plan of action. 5. It pointout the liquidity position to meet its short term obligations and long term solvency. 6. It provides inter-firm comparison ,which reveals the strong firms and weak firms.It helps the management to take corrective actions. 7. It facilitates intra-firm comparison,which shows the performance of different divisions of the firm. 8. It is an effective means of communication,since ratios have power to speak. 9. It can assess the liquidity,solvency and profitability of the business,which identifies the capabilities of business. Limitations of the ratio analysis: Lack of standard formula for workingout ratios makes it difficult to compare them. Limitations of financial statements affect the ratios. Ratios are only indicators,can not taken as final conculsions. It is very difficult to ascertain the standard ratio,because it is differs from firm to firm. It wil not consider the effects of price level changes. Different people interprets ratios in different ways. Ratios computed from past records will not predict the future plan, because of change in the policies of management.

Classification of ratio:

Classification by Function Solvency i) Short Term Current ratio

Liquid ratio ii) Long Term Proprietory ratio Debt Equity ratio Profitability: G.P.ratio N.P.ratio Operating profit ratio R.O.I.ratios Activity: Fixed Assets turnover Drs turnover Crs turnover Stock turnover Leverage: Financial Leverage Operating Leverage Classification by statement i)Balance Sheet Ratios(Financial Ratios) Current ratio Liquid ratio Proprietory ratio Debt- equity ratio Capital Gearing ratio ii)Profit and Loss Account Ratios(Profitability Ratios) Gross Profit ratio Net Profit ratio Operating ratio Return on Invesment ratio iii)Inter- Statement Ratios( Turnover Ratios) Fixed Assets turn over Debtors turn over Creditors turn over Stock turn over SHORT TERM RATIO: The firm has sufficient liquid resources to meet their short term liabilities. a)Current Ratio: Current Ratio is the most common ratio for measuring the liquidity.

Current Assets Current ratio = -------------------Current Liabilities b)Liquid Ratio :(Quick ratio or acid test ratio) It shows the relationship between liquid assets and liquid liabilities. Liquid Assets Liquid ratio = -----------------Liquid liabilities LONG TERM SOLVENCY RATIO: It is also known as Leverage ratio. Long term solvency ratio analyse the long term financial position of a firm. Bankers and creditors are interested in the liquidity of the firm .The ideal ratio is 1:3 a)Proprietary Ratio: This ratio establishes relationship between the shareholders funds to total tangible assets. Proprietors fund Proprietary Ratio= ----------------Tangible Assets Proprietors fund = Equity shares + Preferance share capital + Reserves and surplus b)Debt-Equity Ratio: ( External Internal equity ratio) The relationship between borrowed fund and capital fund is shown in debt equity ratio .The ideal ratio is 1:3 Debt Outside Funds Long term Debts Debt-Equity Ratio= --------- or ------------------------- or ---------------------------Equity Shareholders Funds Shareholders Funds

Capital Gearing Ratio: (levarage ratio) It is used to analyse the capital strecture of a company. It shows the mix of finance employed in the business. It indicates the proportion between owners fund (Equity shares) and non owners fund (Preference shares + Long term debt). Fixed Interest bearing securities Capital Gearing Ratio = -------------------------------------Equity shareholders Funds Profitability ratio: Profitability refers to the ability to earn profit. It is a measure of efficiency and control. It is the main base for liquidity and solvency.

a)Gross Profit Ratio: Gross profit ratio is highly significant .It is a useful test of profitability and management efficiency. Higher ratio is better Gross profit Gross Profit Ratio = --------------------- * 100 Net sales b)Net profit Ratio: It express the relationship between net profit and sales. High ratio is preferable.An increase in the ratio over the previous period indicates improvement in the operational efficiency of the business. Net profit Net Profit Ratio = ------------------- * 100 Net sales c)Operating ratio: It establishes the relationship between total operating expenses and sales.This ratio is a complemenary of net profit ratio . In case the net profit is 20% the operating ratio is 80% . Operating costs Operating ratio = ----------------- * 100 Net sales R.O.I Concept : Return on investment (R.O.I) is also called as Overall profitability ratio or Return on capital employed. Operating profit Return on investment = ----------------------- * 100 Capital Employed Operating profit = Net profit + Interest + Taxes Capital employed = Fixed Assets + Current Assets Current liabilities TURN OVER RATIOS: Turnover ratios are also called as Activity Ratios or Assest Management Ratios. Turnover ratios involves a relationship between sales and various assets. a)Stock( Inventory ) turnover Ratio: This ratio indicates , wheather investment in stock is efficiency used or not . Cost of Goods Sold Net Sales Stock Turnover Ratio = ----------------------------- (or) -------------------Average Stock Average stock

Cost of goods sold = Sales Gross profit Opening stock + Closing stock Average stock = ----------------------------------2 b)Debtors turnover Ratio : Debtors plays a vital role in current assets and to a great extend determines the liquidity of the firm .This ratio is also know n as Debtors velocity. Debtors turnover ratio : It shows the relationship between credit sales and accounts receivable of trade debtors and bills receivable. Net credit sales Debtors Turnover ratio = -------------------------------------------------------------Average Debtors + Average bills Receivable Debt (Average)collection period: It indicates the extend to which the debts have been collected. It explains the average number of days for which a firm has to wait before its receivables are converted into cash. Average Debtors + Bills Receivable Debtor Velocity= --------------------------------------------- * Month (or days) in a year Net Credit Sales Credit turnover ratio: It is also known as Credit Velocity . It can be analys ed under the following two ratios . Creditors turnover Ratio: It shows the relationship between credit purchase and accounts payable of trade creditors and bills payable. Net credit purchases Creditors turnover ratio = -----------------------------------------------Average Creditors + Average Bills payable Debt payment period : The ratio gives the average credit period enjoyed by the firm from its creditors . Average Creditors + Bills payable Creditors Velocity = ----------------------------------------------- * Month (or days )in a year.

Net Credit purchase d)Fixed Assets turn over Ratio: It shows the relationship between fixed assets and sales. It indicates the extend to which the sales value is invested in fixed assets. Fixed Asset Turnover ratio = Value of assets Depreciation.

Problem:1 From the Trading a\c Calculate a)Gross Profit Ratio Rs 1,00,000 3,50,000 9,000 2,01,000 6,60,0000

b)Stock Turnover Ratio Rs 5,60,000 1,00,000

To To To To

Opening Stock Purchase Wages Gross Profit

By Sales By Closing Stock

6,60,000

Problem : 2 Following is the Profit and Loss account of Prabha Ltd.., Rs 50,000 1,25,000 12,500 15,000 12,000 3,000 57,500 2,75,000 Rs 2,50,000 25,000

To To To To To To To

Opening Stock Purchase Manufacturing Exp. Office expenses Selling expenses Preliminary expense Net Profit

By Sales By Closing Stock

2,75,000

Calculate: a) Net Profit Ratio b)Operating Ratio c)Office Expense Ratio d)Selling Expenses Ratio Problem :3 The following is the Balance Sheet of a firm xyz

Share Capital

30,000

Fixed Assets

16,500

Creditors Bills Payable Bank O\D

8,000 2,000 3,500

Cash Book Debts Bills Receivables Stock Prepaid Expenses

1,000 6,000 2,000 17,500 500 43,500

43,500 Calculate: a)Current Ratio and b)Liquid Ratio

Problem:4 From the following Balance sheet,calculate a)Debt-equity Ratio b)Liquidity Ratio d)Fixed asset turnover Ratio c)Fixed assets to current assets Ratio

Liabilities Equity Shares Reserves Profit & Loss a\c Secured Loan Sundry Creditors Provision for Taxes

Rs 1,00,000 20,000 30,000 80,000 50,000 20,000 3,00,000

Assets Goodwill Fixed Assets Stock Sundry Debtors Advances Cash Balance

Rs 60,000 1,40,000 30,000 30,000 10,000 30,000 3,00,000

The Sales for the Year was Rs.5,60,000

Problem:5 From the following particulars , calculate (a) Current ratio (b) Liquid ratio (c) Proprietury ratio (d) Debt Equity ratio (e) Capital Gearing ratio Liabilities 5,000 Equity share of Rs.100 each 2,000 8% Preference Shares of Rs.100 each 4,000 9% Debentures of Rs.100 each Rs 5,00,000 2,00,000 4,00,000 Assets Land and Building Plant and Machinery Stock Debtors Cash and bank Pre-paid expenses Rs 6,00,000 5,00,000 2,40,000 2,00,000 55,000 5,000

Reserves Creditors Bank overdraft

3,00,000 1,50,000 50,000 16,00,000 16,00,000

Problem:6 The following are the summarized Profit and Loss Account for the year ending 31 st December and Balance Sheet as on the date: Dr. To To To To PROFIT AND LOSS ACCOUNT Rs Opening Stock 99,500 By Sales Purchase 5,45,250 By Closing Stock Incidental Expenses 14,250 Gross Profit 3,40,000 9,99,000 30,000 1,50,000 15,000 4,000 1,50,000 3,49,000

Rs 8,50,000 1,49,000

To To To To To

Selling and Distri.exp Administration exp. Financial exp. Loss on sale of asset Net profit

By Gross profit By Non- operating income By Profit on sales of shares

9,99,000 3,40,000 3,000 6,000

3,49,000

Liabilities 2,000 Preference Shares of Rs.100 each Reserves Current Liabilities Profit & Loss A\c

BALANCE SHEET Rs Assets 2,00,000 Land and buildings 90,000 Plant & Machinery 1,30,000 Stock in -trade 60,000 Sundry Debtors Cash and Bank 4,80,000

Rs 1,50,000 80,000 1,49,000 71,000 30,000 4,80,000

Problem: 7 The following figures relate to Umaya Traders for the year ended 31 st March 2007. TRADING AND PROFIT AND LOSS ACCOUNT

To Opening Stock To Purchase To Gross Profit

75,000 3,25,000 2,00,000 6,00,000

By Sales Less: Return By Closing stock

5,20,000 20,000

5,00,000 1,00,000 6,00,000 2,00,000

To Operating expenses: Administration Selling To Non- operating exp: Loss on sale of assets To Net profit

40,000 25,000 5,000 1,50,000 2,20,000

By Gross Profit By Non operating income: Dividend 9,000 Profit on sale of shares 11,000 20,000

2,20,000

BALANCE SHEET as on 31 st march 2007 Liabilities Rs Assets Rs 2,000 Preference Shares Land and 1,50,000 of Rs.100 each 2,00,000 buildings 80,000 Reserves 90,000 Plant & Machinery 1,00,000 Current Liabilities 1,50,000 Stock 1,40,000 Profit & Loss A\c 60,000 Debtors 30,000 Cash 5,00,000 5,00,000 Calculate : i) Gross Profit Ratio ii)Operating ratio iii)Operating profit ratio iv)Net profit ratio v) Expenses ratio vi)Stock turnover ratio vii)return on total resources viii)Turnover of fixed assets ix)Turnover to total assets. Problem:8 Calculate : a) Current asset

b)Liquid assets c) Inventory

Current ratio = 2.6:1 Liquid ratio = 1.5:1 Current liabilities = Rs.40,000 Problem:9 Find out current asset and current liability when current ratio is 2.4 and working capital is Rs.1,40,000. Problem :10 From the following particulars find out: i) Current Assets ii) Current Liabilities iii)Liquid Assets

iv) Stock

Particulars: Current ratio Acid Test Ratio Working capital

= 2.8 = 1.5 = Rs.1,62,000

Problem:11 From the following information make out a Balance Sheet with as much details as possible. Current Ratio 2.5 Liquid Ratio 1.5 Proprietary Ratio 0.75 (Fixed Assets / Proprietary) Working Capital Rs.60,000 Bank Overdraft Rs.10,000 Reserves & Surplus Rs.40,000 There is no long term or fictitious assets. Problem: 12 From the following information prepare a Balance Sheet. Working capital Rs.75.000 Reserves and Surplus Rs.1,00,000 Bank overdraft Rs.60,000 Current Ratio 1.75 Liquid Ratio 1.15 Fixed assets to Proprietors Fund 0.75 Long term liabilities Nil Problem :13 From the following details available prepare a summarized Balance Sheet of Jamal Ltd., as at 31 st December 2006. Current ratio Acid Test Ratio Fixed assets to net worth Reserves to share capital Current liabilities Cash and Bank balance Fixed assets 5:2 3:2 0.75:1 1:4 Rs.2,00,000 Rs.10,000 Rs.6,00,00

BUDGET AND BUDGETARY CONTROL Definition: Budget:

Budget is a financial and /or quantitative statement,prepared prior to a defined period of time ,of the policy to be pursued during that period for the purpose of a given objectives. -CIMA, England. Budgeting: Budgeting is a kind of future accounting in which the problems of future are met on the paper before the transactions actually occur. -W.J.Vatter. Budgetary Control: Budgetary control is the astablishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual wiyh budgeted results ,either to secure by individual action the objectives of that policy or to provide a firm basis for its revision. -CIMA,England. Objectives of budgetary control: The genegal objectives of budgetary control are: Forecasting and planning Co-ordinating various activities and functions. Control of performance and cost. The above main objectives can be expressed in terms of the following objectives. To combine the ideas of all levels of management in the preparation of budget To create good business practice by planning for future. To obtain more economical use of capital. To prevent waste and reduce expenses. To co-ordinate the activities of various departments. To fix responsibilities on different departmental heads. To plan and control expenditure on research and development. To ensure the availability cash and other liquid resources. To help in controlling cash and other liquid resources To assure a better return on capital employed To pinpoint to the management where a remedial action is required. To act as mean of communication. Advantages and Limitations of budgetary control: Advantages: It helps in maximising the profit through optimum utilization of the available resources

It gives a concrete shape to the objectives and policies of an organization. It results in co-ordinated effort of all persons involved. Better co-ordination and co-operation between various departments leads to better results. It helps to identify the variances ,thus pinpointing the centers of weakness and inefficiency .Hence ,the management can take remedial actions. It enables the organization to estimate its credit requirements in advance and plan accordingly for the working capital. It evaluates the performance. It is a guide to the management in the field of research and development in future. It can provide suitable basis for establishing incentive system and internal audit. The budgetary control and standard costing go hand-in-hand and the combination of the two gives most effective results. Limitations: It is an estimate only, which may or may not be accurate. The execution of budgets depends upon the efficiency of the executive personnel. It is time consuming, management can not expect too much during development period. It helps in decision making, but it cannot replace the management. Lack of co-ordination with in the organization leads to failure. It may loose its important under changing economic conditions. It requires specialized staff, which involves high cost. Steps involved in budgetary control; There are certain preliminary steps to be fulfilled to install an effective budgetary control system .They are a)Preparation of organization chart: The organizational chart must show the authorities , responsibilities of each executives of the organization .It shows the hierarchy of the firm. b)Creation of budget centers: A budget center may be a department or a section of the department .Separate budgets are prepared for each department and the departmental heads should have effective control over the execution of the budget to prevent unfavourable variation.

c)Establishment of Budget Committee: In small firms, the chief accountant(Budget officer) prepare the budgets and co-ordinate various activities .In big concerns, a budget committee is setup to formulate for preparing the budgets .The committee consists of various sectional heads , the chief executives and the budget controller the budgets are prepared by the sectional heads and submitted to the committee for approvel. d)Preparation of Budget manual: Budget manual is a written document , which specifies the objectives of the budgetary organization , responsibilities of executives and the procedures to be followed for budgetary control .It also specifies different forms and records to be used for the purpose of budgetary control. e)Fixation of budget period: The budget period depends on the nature of business and the control techniques .Most of the firms prefer one year as the planning period because ,a budget prepared for a long duration may not accurate as it difficult to forecast events for long period. f)Locating the key factor: Key factor is also known as limiting factor or Critical factor .It is the primary factor , which dominates the business operations .It should be assessed before preparing the budget to ensure that the functional budgets are reasonably capable of fulfillment .The key factors may be shortage of raw materials ,nonavailability of labour ,limited sales ,government restrictions, shortage of power supply under utilization of plant capacity ,etc g)Laying down the level of activity to be achieved: The level of activity is an important factor in production planning.this is to be decided by the management after taking into consideration of improving the net profitability of a product.

Classification of budgets:

On the basis of Function i)Sales ii)Production iii)Materials iv)Labour v)Overheads

On the basis Time

On the basis of Flexibility i)Fixed ii)Flexible

i)Long-term ii)Short-term iii)Current iv)Interim

On the basis of Nature of transactions i)Operating ii)Capital

vi)Cash vii)Capital expenditure viii)Plant utilization ix)Research x)Master Preparation of sales budget: The following factors should be taken into consideration while preparing the sales budget. i) Analysis of the previous year. ii) Estimation of salesman. iii) Plant Capacity. iv) Trade prospects and potential market. v) Seasonal fluctuations. vi) Availability of funds . vii) Competition and consume rs preference. viii) Government restrictions. ix) Advertising and cost of distribution.

Production budget : The production planning is essential to maintain sufficient stock for sales to keep the inventories within the reasonable limit,manufacture the goods economically and pro-rating it through out the year.The formula for the calculation of production is Production = Estimated Sales + Estimated Closing Stock - Estimated Opening Stock. (Sales + Closing stock Opening stock) Cash Budget: A cash (Financial)budget is a summary of statement of the firms expected cash inflow and outflow over a projected period.Cash budget gives an estimate of the anticipated receipts and payments of cash during the budget period. Cash budget can be prepared under three ways. a) Receipts and Payment Method (like cash book) b) Adjusted Profit and loss Account (like P&L a\c) c) Balance sheet Method Flexible budget:

It facilitates price fixation ,sending quotation ,finding out profits at different levels of capacities. A Flexible budget can be constructed in three format: a)Multi Activity Method b)Formula Method c)Graphic Method Master Budget: Master budget is also know as Summarised Budget or Finalised Profit Plan.It is a summary of all functional budgets in capsule from and gives overall estimated profit position of the budget period.

Problem: 1 A manufacturing company submits the following figures of a product for the first quarter of 2006: Sales (in units) January 30,000 February 25,000 March 35,000 Selling price per unit Rs.20 Target of 1 st Quarter 2007: Sales quantity increase 10% Sales price increase 10% Prepare Sale Budget for the first quarter of 2007.

Problem :2 A manufacturing company submits the following figures of product X for the first quarter of 2003: Sales (in units) January 2,50,000 February 2,40,000 March 2,60,000 Selling price per unit Rs.100 Target of 1 st Quarter 2004: Sales quantity increase 20% Sales price increase 10% Prepare Sale Budget for the first quarter of 2004. Problem : 3 Kalish Bros. submits the following figures of product X for the first quarter of 2007. Sales (in units) January 10,000 February 8,000

March

12,000

Selling price per unit Rs.10 It is estimated that by reducing the selling price by 10% and by intensive sales promotion measured , the sale of product X in the first quarter of 2007 will increase by 20%. A study of the past experience reveals that Kalish Bros.has lost about 3% of its billed revenue in each quarter because of returns (constituting 2% of loss of revenue) allowances and bad debts (1% loss). Prepare a sales budget incorporating the above information. Problem :4 A company produces and sales three items: (a) Snow Cream (b) Talcum Powder and (c) Hair oil. The company has divided its market into two zones:Zone A and B .The actual figures for the previous year sales were as under. Zone A Zone B Units Unit price Units Unit price Rs Rs a)Snow Cream 4,00,000 12.00 2,50,000 12.00 b)Talcum Powder 2,50,000 15.00 3,50,000 15.00 c)Hair Oil 3,00,000 16.00 3,00,000 16.00 For the current year i.e.2007, it is estimated that sale of snow cream will go by 10% in zone B and of hair oil by 25,000 units in Zone A.The company plans to introduce a pubilicity film for talcum powder in the T.V. Net work . The budgeting figures for talcum powder are to be increased by 20% in both the zones. The prices of snow cream and hair oil are to be maintained but for talcum powder ,a bonus cut of Re.1 will be announced. You are required to prepare quantitative-cum-financial budget for sales in the current year 2007. Problem:5 Prepare a production budget for three month ending March 31, 2004 for a factory producing four producing four products ,on the basis of the following information: Type of product Estimated Stock Estimated On January1, during 2004(Units) March (Units) 2,000 10,000 3,000 15,000 4,000 13,000 Sales Desired Closing January stock March ,2004 31,2004(Units) 5,000 4,000 3,000

A B C

5,000

12,000

2,000

Problem:6 Larsen Ltd ., plans to sell 1,10,000 units of a product during Jan-Mar 2004; 1,20,000 units during Apr-June 2004; 1,30,000 units during July-Sep 2004 and 1,50,000 units during Sep-Dec 2004 and 1,40,000 units during Jan Mar 2005 At the beginning of the first quarter of 2004 there are 14,000 units o f product in stock .At the end of each quarter,the company plans to have stock equal to one-fifth of the sales for the next quarter. How many units must be manufactured in each quarter of the current year? Problem:7 A company is drawing its production plan for the year 2004 respect of two of its Gama and Delta.The company s policy is not to carry W.I.P at the end of any month.However,its policy is to hold a closing stock of finished goods at 50% of the anticipated quantity of sales of the succeeding month.For the year 2007,the companys budgeted production is 20,000 units of Gama and 25,000 units of Delta. The estimated units to be sold in the first 7 months for the year 2006 - 2007 are as under. Particulars April May June July Gamma 900 1,100 1,400 1,800 Delta 2,900 2,900 2,500 2,100 You are required to prepare a production number of units to be manufactured. Aug Sept Oct 2,200 2,200 1,800 1,700 1,700 1,900 budget showing month-wise

Problem: 8 From the following information ,prepare a cash budget for the period from January to April: Expected Sales Expected Purchase Rs Rs January 60,000 48,000 February 40,000 45,000 March 45,000 31,000 April 40,000 40,000 Wages to be paid to workers will be Rs.5000 p.m.Cash balance on 1 st January may be assumed to be Rs.8,000.

Problem:9 From the following forecasts of income and expenditure prepare a cash budget for the three months commencing 1 st , when the bank balance was Rs.1,00,000. Sales Purchase Wages Factory Expenses Rs 3,900 4,200 5,100 5,100 6,000 Admin.and Selling Expenses Rs 10,000 14,000 15,000 17,000 13,000

April May June July August

Rs 80,000 76,500 78,500 90,000 95,000

Rs 41,000 40,500 38,500 37,500 35,000

Rs 5,600 5,400 5,400 4,800 4,700

Problem: 10 Prepare a Cash Budget for the month of May, June and July on the basis of the following information: i) Income and Expenditure forecasts: Month Sales(all Purchase(all Wages Manufacturing Office Selling credit) credit) expenses expenses Expenses Rs Rs Rs Rs Rs Rs March 60,000 36,000 9,000 4,000 2,000 4,000 April 62,000 38,000 8,000 3,000 1,500 5,000 May 64,000 33,000 10,000 4,500 2,500 4,500 June 58,000 35,000 8,500 3,500 2,000 3,500 July 56,000 39,000 9,500 4,000 1,000 4,500 August 60,000 34,000 8,000 3,000 1,500 4,500 st ii) Cash balance on 1 May Rs.8,000 iii) Plant costing Rs. 16,000 is due for delivery in July payable 10% on delivery and the balance after three months. iv)Advance Tax of Rs. 8,000 is payable in March and June each. v)Period of credit allowed (1) by suppliers 2 month and (2) to customers 1 month. vi)Lag in payment of manufacturing expenses month. vii) Lag in payment of all other expenses 1 month.

Problem : 11 Prepare a flexible budget for overheads on the basis of the following data. Ascertain the overhead rates at 50% ,60% and 70% capacity At 60% Capacity(Rs)

Variable overhead: Indirect material Indirect labour Semi- variable overheads: Electricity(40% fixed,60% variable) Repairs(80% fixed,20% variable) Fixed Overheads: Depreciation Insurance Salaries Total overheads Estimated direct labour hours

6,000 18,000 30,000 3,000 16,500 4,500 15,000 93000 1,86,000

Problem :12 Draw up a flexible budget for overhead expenses on the basis of the following data and determine the overhead at 70%,80% and 90% plant capacity.

At 70% At 80% Capacity Capacity Rs Rs Variable overhead: Indirect labour Stores including spares Semi-variable overheads: Power (30%fixed,70% variable) Repairsand maintenance (60%fixed,40% variable) Fixed Overheads: 12,000 4,000

At 90% Capacity Rs -

20,000 2,000

Depreciation Insurance Salaries Total Overheads Estimated direct labour hours:

11,000 3,000 10,000 62,000 1,24,000 hrs