MANAGEMENT ACCOUNTING END TERM 2009

SECTION A

1.               What Does Common Size Balance Sheet Mean?

A company balance sheet that displays all items as percentages of a common base figure. This type of financial statement can be used to allow for easy analysis between companies or between time periods of a company.

2.  Planning , Organising ,Directing ,Controlling

3.  A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. 

                In accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization.

                       Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors.

5.  Earnings Per Share

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

EPS = Net Income - Dividends on Preference Share / (Equity Shares)

8.  Budget Period

     THE INTERVAL OF TIME, USUALLY 12 MONTHS, INTO WHICH THE PROJECT PERIOD IS DIVIDED FOR BUDGETARY AND FUNDING PURPOSES.

9. A Controllable cost is "a cost which can be influenced by its budget holder"
eg: All Variable costs like raw material costs


Uncontrollable Cost - Beyond our Control
eg : All fixed Costs like rent,insurance etc

10. Differential analysis

Decision making technique in which evaluation is confined to only those factors which are different or unique among possible alternatives.

It usually involves four steps:

(1) compute all costs associated with each alternative,

 (2) ignore the sunk costs,

 (3) ignore costs that remain largely constant among the alternatives, and

(4) select the alternative offering the best cost-to-benefit ratio.

 Also called incremental analysis or relevant cost analysis.

12. Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people.

16.   The main limitations of budgeting are as under:

Budget plan: Since budget plans are based on estimates, the success or otherwise depend on the accuracy of basic estimates or forecasts. Due to this while making estimates, judgmental decision may accrue. The results need to be interpreted very cautiously.

Rigidity: Since the estimates are quantitative expression of all relevant data, there is likely that finality attachment may become very clear. Such consideration may result in rigidity. Rigidity may become a setback for the changing business conditions.

Replacement: Budgeting is not a substitute for management. It is essentially a tool of management. Under no circumstances, it should be concluded that the budgeting is alone sufficient to ensure success and to guarantee future profits.

Costly: The installation of budgeting system to an organization involve too much of costs. Its scientific approach will definitely call for huge cost allocation. Small concerns cannot afford to take over huge costs for the establishment of business systems.

Since the costs and revenues and operational activities do not match in many occasions, the entire exercise will become costly. The system should be adopted only when benefits exceed the costs.

18.   Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis.

Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:

The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.

The components of Cost-Volume-Profit Analysis are:

·        Level or volume of activity

·        Unit Selling Prices

·        Variable cost per unit

·        Total fixed costs

·        Sales mix