Short Note_Management Accounting

Q. What is Common Misconceptions in pricing?

Common Misconceptions in pricing: Pricing is an accounting practice of a once in a lifetime experience for most practice owner. Because it is such a common event, sellers/buyers need to be aware of the key misconceptions about the process. These are as:

1. The seller/buyer needs to stay around for months or years to assist the product in the transaction.

2. The best offer of an accounting practice is another accounting firm.

3. The average pricing for practices determines the value of a specific practice.

Q. What is Management Report?

Management Report: Management report is a statement made by management and it is used to compare the actual results achieved with the budgeted forecast levels. This report helps the management to see where they went wrong and they apply other measures to improve the business. It may be presented orally or in written form. In business management report, situations are analysed, conclusions drawn, alternative considered and recommendations made.

Q. Write the difference between Lease Finance Vs. Hire Purchase finance.

Difference between Lease Finance Vs. Hire Purchase finance are provided below:

Ownership of the Asset: In lease, ownership lies with the lessor. The lessee has the right to use the equipment and does not have an option to purchase. Whereas in hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid.

Depreciation: In lease financing, the depreciation is claimed as an expense in the books of lessor. On the other hand, the depreciation claim is allowed to the hirer in case of hire purchase transaction.

Rental Payments: The lease rentals cover the cost of using an asset. Normally, it is derived with the cost of an asset over the asset life. In case of hire purchase, installment is inclusive of the principal amount and the interest for the timeperiod the asset is utilized.

Duration: Generally lease agreements are done for longer duration and for bigger assets like land, property etc. Hire Purchase agreements are done mostly for shorter duration and cheaper assets like hiring a car, machinery etc.

Tax Impact: In lease agreement, the total lease rentals are shown as expenditure by the lessee. In hire purchase, the hirer claims the depreciation of asset as an expense.

Q. What is Variance Analysis?

Variance Analysis: Variance analysis is usually associated with explaining the difference between actual costs and the standard costs allowed for the good output. For example, the difference in materials costs can be divided into a materials price variance and a materials usage variance. The difference between the actual direct labor costs and the standard direct labor costs can be divided into a rate variance and an efficiency variance. The difference in manufacturing overhead can be divided into spending, efficiency, and volume variances. Mix and yield variances can also be calculated.

Q. Compare the difference between Cash Flow Statement Vs. Cash Budget.

The cash flow statement looks at the past while the cash budget is for planning for the future.

Cash Flow:

1) Cash flow statement shows the cash inflow

2) Preparation done of the past events

3) Use as a tool of analysis & determine likely flow of cash

4) It starts with cash & cash equivalents & end with cash & cash equivalents.

5) Basically, it prepared for financial accounting period.

Cash Budget:

1) All expected cash receipts & estimates

2) Presentation done on forthcoming events

3) Surplus cash receipts planned for profitable investments

4) It starts with cash on hand & banks

5) It may prepare for a month, quarter, half year or annual.

Q. Define Performance Budgeting.

Performance Budgeting: Performance budgeting was designed as an improvement on incremental budgeting. It is based on incremental line-item budgeting but incorporates efficiency measures into the budgetary process. Middle managers must list not only the specific expenditures on various line items but also basic operational activities in relation to money spent.

Performance budgeting provides information to managers on the activities of a given unit enables managers to assess the efficiency of a given department/agency or office/branch over different years enables managers to compare the efficiency of different bureaucratic units and apportion funding accordingly.

Q. What do you meant by Production and Operating Cycle?

Production and Operating Cycle: The period during which the objects of labor (raw products and materials) remain in the production process, from the beginning of manufacturing through the output of a finished product. In addition to the working time, the production cycle includes interruptions in production owing to physical, chemical, and biological (natural) processes (for example, the period required for tanning leather); the character of the objects of labor; or the technology and organization of production.

An operating cycle is the length of time between the acquisition of inventory and the sale of that inventory and subsequent generation of a profit. The shorter it is, the faster a business gets a return on investment (ROI) for the inventory it stocks. As a general rule, companies want to keep their operating cycles short for a number of reasons, but in certain industries, a long one is actually the norm. These cycles are not tied to accounting periods, but are rather calculated in terms of how long goods sit in inventory before sale.

Q. What do you meant by Assumption of breakeven analysis?

The model of breakeven analysis is developed on the following assumptions:

Relevance range: It is assumed that a company is operating within a relevant range. The relevant range is the range of an activity over which the fixed cost will remain fixed in total and the variable cost per unit will remain constant.

Fixed costs: Total fixed costs are assumed to be constant in total. Fixed costs per unit will decrease with the increasing number of units produced.

Variable costs: Variable costs per unit are assumed to be constant. Total variable costs will 

increase with the increasing number of units produced.

Sales revenue: Sales revenue per unit is assumed to be constant and the total revenue will increase with the increasing number of units produced.

Q. What do you meant by Planning for profits?

Planning for profits: Profit planning is the process of developing a plan of operation that makes it possible to determine how to arrange the operational budget so that the maximum amount of profit can be generated. There are several common uses for profit planning, with many of them focusing on the wise use of available resources. Along with the many benefits of this type of planning process, there are also a few limitations.

The actual process of profit planning involves looking at several key factors relevant to operational expenses. Putting together effective profit plans or budgets requires looking closely at such expenses as labor, raw materials, facilities maintenance and upkeep, and the cost of sales and marketing efforts.

Q. Write down the different forms of bank credit.

Bank Credit: The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan.

Two of the major characteristics that vary among bank loans:

1. The term of the Loan: The "term" of the loan refers to the length of time you have to repay the debt. Debt financing can be either long-term or short-term

2. Security or Collateral required for a loan: Debt financing can also be secured or unsecured.

Specific types of bank credits/loans:

Working capital: For the ongoing cash needs of the business.

Credit cards: Higher-interest, unsecured revolving credit.

Short-term commercial loans: For one to three years.

Longer-term commercial loans: Generally secured by real estate or other major assets.

Equipment leasing: For assets you don't want to buy outright.

Letters of credit: For businesses engaged in international trade.

Q. What do you meant by Hire Purchase finance?

Hire Purchase finance: A hire purchase, also known as a lease purchase, closed-end lease, lease-to-own or rent-to-own, is a business arrangement between a seller and a customer where the customer gets possession and use of the goods in return for a fixed number of specified monthly payments, but the seller retains ownership title rights until the customer has made the final payment. At that point, ownership title passes to the customer.

A hire purchase resembles an installment purchase, but with the crucial difference that title to the property stays with the seller during the hire term. The customer enjoys the economic benefits of ownership but also assumes the risks of damage or loss. The seller is able to account for the hire purchase as the equivalent of a sale. Normally, title to the property passes to the customer at the end of the agreement's term, but a hire purchase also can be structured so the customer takes ownership after a final balloon payment.

Q. Compare the difference between Variable working capital Vs Permanent working capital.

Variable working capital Vs Permanent working capital: Working Capital is considered as the lifeblood and nerve center of any business. In the present day modern industrial world the term Working Capital refers to the short term funds required for financing the entire duration of the operating cycle of a business known as “Accounting Year”.

Permanent or Fixed Working Capital: It is the minimum amount required to ensure effective utilization of fixed facilities and for maintaining the circulation of Current Assets. There is always a minimum level of Current Assets, which is continuously, required by the firm to carryout its normal business operations such as raw materials, work-in-progress, and finished goods and cash balance. This minimum level of Current Assets, which is permanently blocked, is called permanent or fixed Working Capital It is further be classified as regular Working Capital and reserve Working Capital. Regular Working Capital, as the name implies, refers to the Working Capital required for regular conduct of operations. Reserve Working Capital is the excess over the requirements for regular Working Capital, which may be provided for contingencies, such as strikes and rise in prices.

Temporary or Variable Working Capital: It is the amount of Working Capital required to meet the seasonal demands and some special exigencies. It can be further classified as seasonal Working Capital and special Working Capital. The capital needed to meet the seasonal needs of the business is termed as seasonal or variable working capital. It is that part of the Working Capital which is required to meet special exigencies, such as special campaign, conducting research and new product launch, which is known as special Working Capital.

Q. What is Project Profile?

Project Profile: A project profile is a simplified description of an eventual project. In addition to defining the purpose and ownership of the project, it presents a first estimate of the activities involved and the total investment that will be required, as well as the annual operating costs and, in the case of income generating projects, the annual income.

It is simplified in a number of senses; costs may still not be well defined, minor items may be excluded, and assumptions as to the demand for the output of the investment, whether it be a childcare facility, a bridge, or canned vegetables, are probably just that – assumptions.

Q. Describe the limitations of breakeven analysis.

Limitations of breakeven analysis:

1) Breakeven analysis assumes that fixed costs, variable costs and sales revenue behave in a linear manner. However, some overhead costs may be stepped in nature rather than remain constant. The previously straight sales revenue line and total cost line tend to curve beyond a certain level of production. As a result, a lower selling price is set to stimulate further sales and lower variable costs can be obtained due to mass production.

2) It is assumed that all production is sold. The breakeven chart does not take the changes in stock level into account.

3) Breakeven analysis can provide vital information for small and relatively simple companies that produce large volume of the same product. It is not so useful for the companies producing multiple products. Its applications tend to be limited especially in those jobbing companies where each item produced is different.

Q. What is Standard Costing?

Standard costing: Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records, and then periodically recording variances that are the difference between the expected and actual costs. This approach represents a simplified alternative to cost layering systems, such as the FIFO and LIFO methods, where large amounts of historical cost information must be maintained for items held in stock.

Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company. The core reason for using standard costs is that there are a number of applications where it is too time-consuming to collect actual costs, so standard costs are used as a close approximation to actual costs.

Q. Describe the objectives of budgeting.

Objectives of budgeting: Many companies go through the budgeting process every year simply because they did it the year before, but they do not know why they continue to create new budgets. The main objectives of budgeting are:

Provide structure: A budget is especially useful for giving a company guidance regarding the direction in which it is supposed to be going.

Predict cash flows: A budget is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have irregular sales patterns. These companies have a difficult time estimating how much cash they are likely to have in the near term, which results in periodic cash-related crises.

Allocate resources: Some companies use the budgeting process as a tool for deciding where to allocate funds to various activities, such as fixed asset purchases.

Model scenarios: If a company is faced with a number of possible paths down which it can travel, and then you can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction.

Measure performance: A common objective in creating a budget is to use it as the basis for judging employee performance, through the use of variances from the budget.

Q. Discuss the factors affecting working capital requirements.

Factors affecting working capital requirements:

1. Nature of Business: The requirement of working capital depends on the nature of business. In the case of manufacturing business it takes a lot of time in converting raw material into finished goods.

2. Scale of Operations: There is a direct link between the working capital and the scale of operations. In other words, more working capital is required in case of big organizations while less working capital is needed in case of small organizations.

3. Business Cycle: The need for the working capital is affected by various stages of the business cycle. During the boom period, the demand of a product increases and sales also increase.

4. Seasonal Factors: Some goods are demanded throughout the year while others have seasonal demand. Goods which have uniform demand the whole year their production and sale are continuous. Consequently, such enterprises need little working capital.

5. Production Cycle: Production cycle means the time involved in converting raw material into finished product. The longer this period, the more will be the time for which the capital remains blocked in raw material and semi-manufactured products.

Q. Define Cost-Volume-Profit relationships.

Cost-Volume-Profit relationships: Cost volume profit analysis is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume and profit in an organization by focusing on interactions among the following five elements:

1. Prices of products

2. Volume or level of activity

3. Per unit variable cost

4. Total fixed cost

5. Mix of product sold

Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire.

Q. Describe the industrial sickness and its causes.

Industrial sickness: Industrial sickness is defined as "an industrial company which has, at the end of any financial year, accumulated losses equal to, or exceeding, its entire net worth and has also suffered cash losses in such financial year and the financial year immediately proceeding such financial year".

Internal causes for sickness:

1) Lack of finance

2) Bad production policies

3) Marketing and Sickness

4) Inappropriate personnel management

5) Ineffective Corporate management

External causes for sickness:

1) Personnel Constraint

2) Marketing Constraint

3) Production Constraint

4) Finance Constraint