Professional Documents
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Management Accounting is concerned with the collection of data from both internal and
external sources.
It analyzes and interprets the data.
It helps in planning, controlling and decision making.
9. What are the differences between cost accounting and Management accounting?
Ans: The differences between Cost accounting and Management accounting are given below:
Points Cost accounting Management Accounting
Definition Cost accounting is a quantitative process of Management accounting analyzes and
collecting, recording, classifying, allocating provides cost information to the internal
and evaluating of financial and non- management for planning, controlling and
financial information. decision making.
Emphasis The main emphasis is on cost determination The main emphasis is on the efficient
and cost control. operation of business.
Objectives Cost ascertainment , Cost control, Decision To provide the relevant information to the
making management to take an appropriate
decision.
Double Double entry system is used for recording Double entry system is not used for
entry transactions. recording transactions.
system
Deals with It deals with current operations. It deals with long-term planning.
Data It uses quantitative cost data only. It uses both quantitative and qualitative
data.
Useful It is useful for both management and It is useful only to the management.
external parties.
Concerned It is concerned with short term planning It is concerned with long term planning.
with
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
10. Describe the methods of costing.
Ans: Different industries follow different methods for ascertaining cost of their products. The following
are the important methods of costing:
1. Job Costing: Job costing is concerned with the finding of the cost of each job or work order.
So, this is the part of specific order costing. This method is used in the factories which produce
the machine tool and other engineering products.
2. Batch Costing: Under batch costing, a batch of similar products is treated as a separate unit for
the purpose of ascertaining cost.
3. Contract Costing: Contract costing is applied for contract work. Such as, construction of
building, civil engineering contract etc.
4. Process Costing: Process costing is a process that converting raw materials into finished
product. It is also knows as continuous operating costing.
5. Unit costing: This method is used where a single article is produced by continuous
manufacturing activities.
6. Operating Costing: This method is used in those industries which provide services instead of
producing goods. That is why; it is also called service costing.
7. Operation Costing: This is suitable for those which are connected with mass production and
units are identical to each other.
8. Multiple Costing: It means combination of two or more of the above methods of costing.
9. Activity based Costing: Activity based costing focuses on fundamental cost objects. It is
suitable where amount of overhead is relatively high, product diversity and volume diversity.
6. Uniform Costing: Cost principles and practices are being uniformly followed by a number of
undertakings to control costs. It is a technique for studying comparative efficiency and
promoting efficiency.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Cost Sheet
1. It is a detailed statement that showing the total cost and profit or loss for the period.
2. Total expenditure, cost per unit, and the various stages of cost are shown on cost sheet
systematically.
3. State the differences between time rate system and price rate system.
Ans: The differences between Time rate system and Price rate system
In this system, minimum guaranteed time rate is Under this system, no guarantee of minimum
paid to every worker. payment to every worker.
Under this system. remunerations are not directly Remuneration of workers directly linked with
linked with productivity, productivity
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Under piece rate system, there is no consideration
This system emphasis on high quality of work
for the quality of work.
1. The Halsay scheme: The main features of this scheme are given below:
1. Standard time is fixed for each job
2. Time rate is guaranteed and the worker receives the guaranteed wages.
3. If the job is completed in less than the standard time, a worker get bonus of 50% of the
time saved.
The formula for calculating this scheme: Guaranteed wage + Bonus (50% of time saved)
Advantages:
1. It is simple to understand and operate
2. The efficient workers will be able to increase hourly rate of earnings by hours saved.
3. Inefficient workers are not penalized.
4. The employer will share 50% of the bonus due to time saved by the workers.
Disadvantages:
1. The earning per unit will come down with the increase in efficiency. The workers object
to share their bonus with the employer.
2. The incentive is not strong enough to induce the more efficient workers to work harder.
2. The Halsay weir Scheme: Under this scheme, a worker will get bonus of 30% of time saved.
Both Halsay and Halsay-weir Scheme are similar.
3. Rowan scheme: This scheme was introduced by David Rowan in 1901. Here, the bonus is
paid percentage base. It takes into account a proportion as follows:
Advantages:
1. The workers share benefit with the employer.
2. It is suitable for learners and beginners.
3. It provides safeguard against loose fixation of standard.
Disadvantages:
1. Efficiency beyond certain point is not rewarded.
2. A beginner and a more efficient worker may get the same amount of bonus.
3. It is more complicated than the Halsay system.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
5. Making a comparison between Halsey and Rowan scheme with imaginary examples.
Ans: In case Halsey scheme, the bonus is paid on the basis of time saved but in case of Rowan
scheme, bonus is paid as percentage basis. The following table is making the comparison between
these two premium bonus schemes:
Rate Time Time Time Time Bonus Total Earning Earnings per
per allowed Taken saved wages hour
hour (2) (3) (4) (5) = Halsey Rowan Halsey Rowan Halsey Rowan
(1) 13 (6) (7) (8)=5+6 9= 5+7 10=8311=93
2 10 10 NIL 20 -- -- 20.00 20.00 2.00 2.00
2 10 8 2 16 2.00 3.20 18.00 19. 20 2.25 2.40
2 10 6 4 12 4.00 4.80 16.00 16.80 2.67 2.80
2 10 5 5 10 5.00 5.00 15.00 15.00 3.00 3.00
2 10 4 6 8 6.00 4.80 14.00 12.80 3.50 3.20
2 10 2 8 4 8.00 3.20 12.00 7.20 6.00 3.60
Bonus earned: In case of bonus, the main points are summarized below:
1. In the Halsey scheme, the bonus increases steadily with increase in efficiency. But in
the Rowan scheme, the bonus increase up to a certain stage and then decreasing.
2. Rowan scheme provides better bonus than the Halsey scheme until the work is
completed in 50% of standard time.
3. When the work is completed within 50% of the standard time, the bonus is same under
both schemes.
4. When the work is completed is less than 50% of the standard time, bonus under Halsey
is greater.
Total Earnings: In case of total earnings, the following points are available:
Below 50% efficiency, earnings of rowan scheme are greater than Halsey scheme.
At 50% efficiency, earnings of both schemes are equal.
Above 50% efficiency, earnings of rowan scheme are lower than Halsey scheme.
Earnings per share: In the Halsey scheme the earning per hour increase at a fast rate.
Under the rowan scheme, it increases slowly.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Storing of Materials
1. Why efficient storing?
Ans: In small industries, the investment in material is up to 90% of total capital. Therefore, serious
losses may be occurred in companies due to inefficient storing. So, to obtain the maximum
advantage of a cost accounting system, there should be an efficient storing is required. Efficient
storing also provides-
2. Re-order level
Ans: Re-order level is the point which is fixed between maximum and minimum stock level. It is
the excess of ordering level ever the minimum level is sufficient to meet the requirement during the
lead time. It is also known as reorder point. When stock of materials reach at this point, the
storekeeper will purchase materials. The re-order level is higher than minimum stock level to guard
against abnormal usage and unexpected delay in supply. The formula for reorder level is given
below:
Re-order level = Maximum re-order period Maximum usage
5. Lead time
Ans: Lead time is the time that indicates the interval between placing an order and receiving
delivery.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
6. What is Economic Order Quantity (EOQ)? Why it is needed to determine?
Ans: EOQ stands for Economic Order Quantity. It represents the most favorable quantity to be ordered
each time when supplies are required.
In purchasing materials, an important problem is how much to buy at a time. If large quantities are
bought, the carrying costs would be high. On the other hand, if small quantities are bought, ordering
costs will be high. For solving this problem, economic order quantity method is used. The formula for
Economic order quantity is given below:
2
EOQ =
Where,
A = Annual usage in units
C = Carrying costs per unit of inventory
S = Ordering cost per unit
Overheads
1. Define overheads.
Ans: Any expenditure incurred over and above prime cost is known as overheads. Overheads include
the total cost of indirect materials, indirect labour and indirect expenses. The term indirect means that
which cannot be allocated but apportioned. So, overheads is the over the direct or over the factory
costs.
2. State the classification of overheads.
Ans: Any expenditure incurred over and above prime cost is known as overheads. Overheads cost can
be classified according to Functions, elements and behavior. These are described below:
1. Functionalize classifications: It includes the following classifications:
Production overheads: All costs incurred in the factory over the direct material cost, direct
labour and direct expenses are known as production overheads. Lubricant oil, repairs and
maintenance to plant and machinery, factory rent etc are the examples of production costs.
Administrative overheads: It refers to cost of management. Salaries of staffs, bank
charges, stationary, telephone, directors salary etc are the example of administrative
overheads.
Selling and distribution overheads: It is known as marketing costs. Selling, advertising,
transportation warehousing etc are the examples of selling and distribution costs.
2. Elementwise classifications: It includes the following classifications:
Indirect material: Consumable stores, fuel, lubricant oil, small tools for general use, loss,
deficiencies of stores etc.
Indirect labour: Salary of the foreman, supervisory staff and works manager, wages for
maintenance workers, payment for overtime, Employers contribution to provident fund
etc.
Indirect expenses: Repairs and maintenance to plant and machinery, factory rent,
depreciation of plant and machinery, rates and taxes, insurance, canteen expenses etc.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
3. Behaviorwise classifications: It includes the following classifications:
Variable overheads: It includes indirect material, indirect labour, power and fuel,
salesmens commission etc.
Fixed overheads: It includes rent and rates, insurance, depreciation of machinery and
buildings, office expenses, bank charges interest on capital etc.
Semi-variable/fixed overheads: They represent partly variable and partly fixed overheads.
Examples are repairs and maintenance, depreciation of plant and machinery, salary payable
to a supervisor, telephone expenses.
Bismillahir Rahmanir Rahim
1. Materials: Raw materials which are required for each process are debited to process account.
The output of the first process becomes the raw materials of the second process.
2. Labour: Labour cost that paid to labour should be debited in the process account.
3. Direct Expense: Each process account should be debited with the direct expenses. It includes
depreciation, repairs, insurance etc.
4. Production Overhead: Expenses such as rent, telephone, lighting, gas, water etc which are
known as production overheads. These expenses are to be allocated to each process on certain
basis.
The following example can help to understand the concept of joint product and by product-
In oil exploration project, produces like petrol, diesel, kerosene and gas. Out of these, petrol and diesel
are the main products and kerosene and gas are the by-products.
1. Treatment by neglect: When value of scarp is negligible, it may be excluded from costs.
2. Credit to overheads: The sales value of stock is deducted from overheads to reduce the
overhead rate.
3. Charging scarp account with cost: When scarp is identifiable with a particular job and its value
is significant, the scarp account should be charged with full cost. The profit or loss of the scrap
account will be transferred to costing profit and loss account.
Control:
Control means the maximum effective utilization of raw material. Scarp control does not start at the
production department but it starts from the stage of producing. Thus, the most suitable type of
materials, the right type equipment and personnel would help to set maximum quantity of finished
products. A standard allowance of scarp should be fixed and actual scarp should be collected and
reported the department which is responsible for it. A periodic scarp report would serve for this purpose.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
1. Define CVP analysis. Which factors affect the profit according to CVP analysis?
Ans: CVP analysis stands for Cost-Volume-Profit analysis. It is a powerful tool that helps managers to
understand the relationship among cost, volume and profit. CVP analysis focuses on how profits are
affected by the following factors:
1. Selling price: Selling price affects the profit of a firm. If selling price increases with lower level
of cost, the profit of the firm increases. On the other hand, if selling price decreases with higher
level of cost, the profit decreases.
2. Sales Revenue: Seles revenue also affects the profit of a firm. If sales revenue increases with
lower level of cost, the profit of the firm increases. On the other hand, if sales revenue decreases
with higher level of cost, the profit decreases.
3. Unit variable cost: Unit variable cost is an important factor that affects profit. If unit variable
cost increases, the contribution margin and net profit of the firm decreases. On the other hand, if
unit variable cost decreases, the contribution margin and net profit increases.
4. Total fixed cost: Total fixed cost is also affects the profit of the firm. If fixed cost increases, the
net profit of the firm decreases. On the other hand, if fixed cost decreases, the net profit
increases.
5. Mixed of products sold: If mixed of products sold increases with the lower cost, the profit of
the firm increases. On the other hand, if mixed of products sold decreases, profit decreases.
2. What are the relationship among contribution margin, fixed cost and net operating income?
Ans: There is a close relationship among contribution margin, fixed cost and net operating income.
Contribution margin is the amount remaining from sales revenue after deducting variable expense. It is
the amount that covers fixed expense and profit for the period. If the contribution margin is not
sufficient to co cover the fixed expense, loss occurs for the period.
If contribution margin is higher with a lower fixed cost, the net operating income will be increased. On
the other hand, if contribution margin is lower with a higher fixed cost, the net operating income will be
decreased.
3. How change in sales volume affects contribution margin, and net operating income?
Ans: Contribution margin is the differences between sales revenue and variable costs. After deducting
the fixed costs from contribution margin, we get net income. That is why, the change in sales volume
and fixed costs affect the contribution margin and net operating income. This can be cleared by the
following imaginary example:
Sales per unit 250
Variable expense per unit 150
Fixed expense 35000
If the firm produce one unit, then,
Sales revenue 250
- Variable cost 150
Contribution margin 100
- Fixed costs 35000
Net income (34900)
If the firm produces two units
Sales revenue 500
- Variable cost 300
Contribution margin 200
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
- Fixed costs 35000
Net income (34800)
If enough units can be sold to 35000 in contribution margin, then all the fixed expense will be covered.
Then these units are known as break even points in which the profit is 0. After the break points, if the
firm increases its sales volume, the amount of contribution margin and net income also increases.
So, form the above we can say that the change in sales volume affects the contribution margin and net
profits.
The margin of safety can also be expressed by percentage by the following ways:
Margin of safety percentage =
6. What are the differences between contribution margin and net operating income?
Ans: The differences between contribution margin and net operating income are given below:
Points Contribution margin Net operating income
Meaning Contribution margin is the difference Net operating income is the differences
between sales revenue and variable cost. between contribution margin and fixed cost.
Nature It is not actual income for a firm It is the actual income for a firm.
Effect The lower the variable cost, the higher the The lower the fixed cost, the higher the net
contribution margin. operating income.
Value If sales revenue is lower than variable If contribution margin is lower than fixed
cost, the contribution margin is negative cost, the net operating income is negative and
and vice versa. vice versa.
7. State the assumptions of CVP analysis.
Ans: The assumptions of CVP analysis are given below:
1. Selling price is constant. The price of a product or service will not change as volume changes.
2. Costs are linear and can be divided into variable and fixed elements. The variable cost is constant
per unit and fixed cost is constant in total range.
3. In multiproduct companies, the sales mix is constant.
4. In manufacturing companies, inventories do not change. The number of units produced equals
the number of units sold.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Transfer Price
6. Which types of organization use market price approach to transfer price and why?
Ans: The market price approach is designed for using highly decentralized organization. It means that it
is used those organizations where divisional managers have enough right to take decision. In this
organization, the various divisions can be viewed as independent and they have independent profit
responsibility. The use of market price is to create competitive market conditions.
Financial Budget
1. Expected Cash Receipts from Customers
2. Expected Cash Payments to Suppliers
3. Cash Budget
4. Budgeted Income Statement
5. Budgeted Balance Sheet
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
1. Define Decentralization.
Ans: Decentralization is the transfer of authority from central to local managers. In a
decentralization organization, decision making authority is spread throughout the organization. In a
decentralization organization, lower level managers and employees participate in decision making.
2. State the advantages and disadvantages of decentralization.
Advantages of Decentralization:
1. Lower level managers solve day to day problem. It reduces the burden on top executives
and they can concentrate on bigger issues.
2. Empowering lower level managers to make decisions and puts the most detailed and up-to-
date information.
3. By eliminating delay in decision making, organization can respond more quickly to
customers and changes the operating environment.
4. Granting decision making authority helps lower-level managers for higher level positions.
5. Decentralization can increase the motivation and job satisfaction of lower level managers.
Disadvantages of decentralization
1. Lower level managers may make decisions without fully understanding the big picture.
2. If lower level managers make their own decisions, coordination may be lacking.
3. The objectives of lower level managers may clash with the objectives of entire
organization.
4. Spreading innovative ideas may be difficult in a decentralized organization.