MS-4_2009-ASSIGNMENT_SOLUTION

URVI INTERNATIONALMS-04

Assignment Code: MS-04/SEM-I/2009

Assignment reference material MS-04: ACCOUNTING AND FINANCE FOR MANAGERS

ASSIGNMENTCourse Code: MS-04

Course Title: Accounting and Finance for ManagersAssignment Code: MS-04/SEM-I/2009

Coverage: All BlocksAttempt all the questions

1. Accounting is an information system? Do you agree? Sub

stantiate your answer with reasons. How does an accountant

help in planning and controlling a large commercial

organization? Explain.

Ans. Accounting as an information system

Accounting is a service activity. Its function is to provide qualitative

information, primarily financial in nature, about economic entities and

that is intended to be useful in making economic decisions. It is

universally accepted that making available the qualitative accounting

information is an objective as these are the basis to make decision by

its users. The accounting information is expected by its users is

provided through financial statements. We can say that accounting

information refers to the financial statements so generated are the

Income statements, that is, profited loss profit and loss account and

position statement, that is, Balance Sheet. The people at the helm of

affairs of a business, there are many parties also interested in the

accounting information of the business. These persons are-

1. Owners

The contribution of capital in the business always involves risk. In view

of risk assumed the capital or owner is very much interested knowing

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the amount of profit earned or loss incurred by the business and also

about the assets and liabilities of the business.

2. Investors

We all know that investment involves risk. Therefore, a person, who wishes to

become a partner in firm, or buy the shares of the company or advance

money to the firm or company, is always interested in knowing how safe the

investment already made is and how safe and rewarding the proposed

investment will be. The financial statements, that is, accounting makes it

possible.

3. Creditors

Creditors are those persons or parties, who supply goods or services on

credit. Before granting credit, creditors would like to be satisfied about

the credit worthiness of business. The financial statements greatly help

them in assessing the financial capability of business besides

determining the limits up to which credit can be granted.

4. Lenders

In modern business, lenders also provide funds at the time of setting up the

business or at a later stage for the expansion and development. In practice

they only satisfy themselves about the repaying capacity of the company.

5. Employee of workers

Employee or workers may use the financial statements to know

whether the payment of bonus is as per the laws or not.

6. Government

The government makes use of financial statements for compiling

national accounts besides ascertaining the tax liability of the

business, timely deposit of statutory and other uses.


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7. Researchers

The financial statements are of immense use of the researchers also

undertaking researchers in the topical areas such as accounting theory,

business affairs and practices.

8. Managers

Managers have to take decisions such as the determination of selling price,

how can the cost be reduced, how can the selling expenses and other

expenses controlled, etc. These decisions can be taken on the basis of the

information available. This information is made available to them by the

financial statements.

Accounting is an information system that measures, processes, and communicates financial information about an economic entity to interested users of the information such as investors, managers and creditors.

Accounting information system(AIS) is an Subsystem of a Management Information System (MIS) that processes financial transactions to provide

(1) internal reporting to managers for use in planning and controlling current and future operations and for non-routine decision making;

(2) external reporting to outside parties such as to stockholders, creditors, and government agencies.

AISs cover all business functions from backbone accounting transaction processing systems to sophisticated financial management planning and processing systems.

Financial reporting starts at the operational levels of the organization, where the transaction processing systems capture important business events such as normal production, purchasing, and selling activities. These events (transactions) are classified and summarized for internal decision making and for external financial reporting.

Accounting Information system is a set of interrelated subsystems which collect record and process data to information which is used to make quality decisions. The AIS has changed the way accountants perform their tasks and introduced efficiency and effectiveness in their various fields of study e.g. Auditing, Management Consultants and others.

A system can be defined as a group of elements that are formed and interact to achieve goals or objectives. You spend all your life with systems – your home,


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your work, your family, the school you attended. An organisation is a system in which a number of people work together to achieve particular objectives.

Within each system there are smaller systems. The one everyone knows is the solar system. Within it, each of the planets is itself, a system. Within a business, there are sub-systems called departments which, themselves, can be broken down into smaller systems right down to individual employees.

All systems are themselves located within an environment – even the solar system, which has the universe as its environment. Input enters a system from something located in its environment. (The space shuttle entering the earth's atmosphere from outer space is an example of an input to the earth from its environment.) A system processes its input and then sends its output to something located in its environment. A business receives inputs to its system in the form, for example, of raw materials from suppliers, payments from customers, etc. It then converts the inputs into goods and services and sends its outputs (goods and services) into its environment (to its customers). It records these activities in its accounting information system.

Figure 1.1 shows examples of the data inputs and information outputs from an accounting information system.

Figure 1.1 A simple accounting information systemBusinesses continue to exist because managers take decisions about what they should do. In order to take a decision, a manager needs information. The information is provided to the manager from an information system. It is an item of output from the information system. The decision taken by the manager is input back into the information system. Changes are then made to information held within the information system, and then output from the information system to the recipient(s).

For example, a manager who is in charge of ordering raw materials will be told by the information system how much raw material is held by the organisation and how much will be needed. The manager then decides how much raw material to order and who to order it from. That decision is entered into the information system by the manager, the order is sent to the supplier by the information system and the information system is updated to show that an order has been placed.


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Business organisations have a number of systems, all of which must work together in an effective and efficient way. There are systems for purchasing, production, marketing, human relations, etc. The accounting system is just one of the systems within an organisation; They also have an information system. The information system receives data from its environment, processes it, and then sends the converted data into its environment in the form of information.

The accounting information system is part of the organization’s information system. Whereas the information system will process a mixture of quantitative (i.e. numerical) and qualitative (i.e. non-numerical) data, the accounting information system focuses almost entirely on processing quantitative data. The accounting system is just one of the systems within an organisation, all of which must work together in an effective and efficient way.

Role of Accountant in Planning and Controlling Accountant is a

practitioner of accounting which is the measurement, disclosure or provision

of assurance about financial information that helps managers, investors, tax

authorities and other decision makers make resource allocation decisions.The

accountant evaluates records drawn up by the book keeper and shows the

results of this investigation as losses and gains, leakages, economies, or

changes in value, so as to reveal the progress or failures of the business and

also its future limitations and Possibilities Accountants must also be able to

draw up a set of financial records and prescribe the system of accounts that

will most easily give the desired information; they must be capable of arriving

at a comprehensive view of the economic and level aspects of a business,

envisaging the effect of every sort of transaction on the profit and loss

statement and they must recognize and classify all other factors that enter

into determining of the true condition of the business (e.g. statistics or

memoranda relating to production; properties, and financial records

representing investments, expenditure fiscal changes and present standing).

Cost accounting shows the actual cost over a certain period of time, of

particular services render) or of articles produced; by this system unprofitable

ventures, services, departments and methods may be discovered. Accountant

handles the financial records of the financial records of the company and

preparation of financial statements, organized for the big decision makers of

the company in questions. For public ally owned companies this sort of


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information is typically accessible by the public. The primary requirement for

the financial accounting is to diminish the principle-agent problem by

monitoring reports, sales and an individual performance from within the

company. The information found on these specific details and figures on order

to present to the higher management team who are not always involves in

the day to day running of the business. In order to achieve this, the role of

financial accountant includes.

Record financial transaction recording profits, wages or any other

expenditures.

Preparation of financial information – forecasted cash flows, cost

investigation and profit/ budget targets.

Financial statements – balance sheets, profit & loss, cash flow

statements and bank statements.

Profit and loss accounts – specific periods of trade

Tax returns and planning

Supplier information giving the business trade credit.

Sales ledger – customers who use your company through credit, due/

outstanding payments.

All businesses vary and the uses and priorities chosen by the decision

makers inside the company are different within every corporation but

the main role of the accountant is to organize all of the money which

comes in and out of the company and coordinate the figures into easy

to understand format.An accountant acts as a controller. He checks up

the expenses and costs and also provide information how the company

can cover expenses and reduce the costs etc . so that profits could be

increased. This means that an accountant acts as a controller to control

expenses. An accountant is not a tax-specialist but he is able to show

the company the methods of saving tax legally. They certainly know

how to save clients from paying unnecessary tax. Most accountants

nowadays also help their clients with managing their businesses by


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giving them appropriate advice such as controlling the finances. We can

call today’s accountant as a controller or planner.

Q2. Prepare a cash flow statement from the following Balance Sheets as at 31-3-08 and 31-3-07. presented by PNX fertilizers Ltd.

Balance Sheet(Rs. in thousands)

31-3-08 31-3-07Equity share capital 8500 7000General Reserve 3800 4000Profit & Loss Account 0 250Share Premium Account 1500 750Shareholder’s Funds 13800 12000Secured Loans 4800 5000Unsecured Loans 5350 4000Loan funds 10150 9000Sources 23950 21000Fixed AssetsGross Block 22400 21000Accumulated Depreciation 3450 3200Net Block 18950 17800Capital Work-In-progress 1860 0

Investments 1650 2320Current Assets, Loans & AdvancesInventories 2,510 2,600Debtors 1,090 1,200Cash & Bank Balances 120 280Loans 1,700 200Advance Tax 0 500

5,420 4,780Creditors 1,050 1,200Outstanding expenses 30 0Tax Provision 0 500Proposed Dividend 3,400 2,800

4480 4500Net Current Assets 940 280Miscellaneous Expenditure 550 600Applications 23950 21000Other Information :1) Fixed assets costing Rs. 4,00,000, accumulated depreciation Rs. 3,00,000 were soldfor Rs. 1,50,000.2) Actual tax liability for 2006-07 was Rs. 5,00,000.


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3) Loans represent long term loans given to group companies.4) Interest on loan funds for 2006-07 was Rs. 14,21,000 and interest and dividend income were Rs.4,02,000.5) Investments costing Rs. 20,00,000 were sold for Rs. 25,00,000.

CASH FLOW STATEMENT

For year ended 31-3-08

Particulars Rs Rs

A. Cash flow Operating

activities.

Decrease in Profit & Loss A/c

Adjustments for

Profit on sale of fixed Assets

Profit on sale of investments

Proposed Dividend

Depreciation

Operating Profit before

Working capital changes

Adjustments for:

Add: Decrease in Debtors

Decrease in stock

Adjustments for:-

Less: Increase in Net Current

Assets

Outstanding expenses

Decrease in creditors

Increase in work in

Progress

50,000

5,00,000

6,00,000

5,50,000

1,10,000

90,000

6,60,000

30,000

1,50,000

18,60,000

(25,00,000

)

17,00,000

14,50,000

2,00,0001,65,000

(27,00,000)


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(-105,00,00)


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Particulars Rs Rs

Less: Income tax

Cash generated from

operating activities.

B) Cash Flows from

Investment Activities

Sale of fixed Assets

Sale of Investments

Interest & Dividend received

Outflow on fixed Assets

Outflow on loans

Net cash used in Investing

Activities

C) Cash flow from financing

Activities

Issue of share capital

Raising loan funds

Less

Applications

Add: Sources

Cash at 2007

Cash at 2008

5,00,000

1,50,000

25,00,000

40,20,00

18,00,000

15,00,000

15,00,000

11,50,000

(-5,50,000)

5,70,00027,000

33,00,00033,27,000

26,50,00059,77,00029,50,00030,27,000-31,87,000(1,60,000)

2,80,000

1,20,000


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Working Notes

1. Fixed Assets A/c

Profit on sale of Assets

Cost of Fixed Asset = Rs. 4, 00,000 - 3, 00,000

= Rs. 1, 00,000

Profit = Sale – Cost of Asset

= 1, 50,000 – 1, 00,000

= 50,000

2. Accumulated Depreciation Account


Particulars Rs Particulars Rs

To Balance b/d

To Profit on Sale

To Bank (Out flow)

21,00,00

0

50,000

1,80,000

By Accumulated

Depreciation

By Bank

A/c(Inflow)

By Balance c/d

3,00,000

1,50,000

224,00,000

228,50,0

00

228,50,000

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To Fixed Assets A/c

To Balance c/d

3,00,000

34,50,000

By Balance b/d

By P & L A/c

(balancing

figure)

32,00,000

5,50,000

37,50,00

0

37,50,000

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3. Investments Account

Q3. You are required to compute all possible Variances from the information that is being provided for XYZ Ltd. The firm maintains its books of Cost Accounts under standard costing system in which the W.I.P. is debited with actual costs and credited with standard costs.The standard cost card for Product P shows:Cost per Unit (Rs)Direct material 1 pc @ Rs. 1.50 1.50Direct –labour 3 hrs. @Re.1.00 3.00Factory overhead 3 hrs. @ Rs. 2.50 7.50

12.00Based on Budgeted Factory overhead Rs. 7,500 and Budgeted Labour Hours 3,000.The following cost and production data are available for the month of March, 1998 in respect of Product P.Cost data1. Actual materials used in Production 1,100 pcs @ Rs. 1.602. Analysis of Pay Roll shows direct labour hrs. 2,700 @ Rs. 1.203. Factory overhead as per Factory O.H. Control A/c Rs. 7,425(to be charged to Product P)Production dataUnits completed 950 units



To Balance b/d

To Profit & Loss A/c

(Profit on sale)

23,20,000

5,00,000

By Balance b/d

By P & L A/c

(balancing

figure)

25,00,000

16,50,000

41,50,00

0

41,50,000

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Units in closing W.I.P. 100 units 50% completedCost of units remaining in W.I.P.A/c is transferred to W.I.P. Inventory A/c


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Ans we can calculate the following variances when we have been

givenm the following data –

Standard data

Direct material cost - Rs. 1.50 for 12pc

Direct labour cost- Rs. 1 per hour i.e Rs 3 for 3 hours

Budgeted factory overhead - Rs 7500

Budgeted Labour hours - 3000 hours

Actual Data

Units produced – 950 units

Material cost – Rs 1.60

Actual Material used – 1100 p.c.

Direct labour hours- 2700 hours

Direct labour wage per hour – Rs 1.60

Factory overhead – Rs. 7425.

i) Direct Material Price Variance

Direct Material Price Variance = Actual Qty x (standard price – Actual

Price)

Actual Qty = 1100 Rs

Standard Price = Rs 1.50

DMPV = 1100 x (1.50 – 1.60)

= 1100 x (-.10)

= Rs -110(Adverse)

ii) Direct Material Cost Variance

Direct Material Cost Variance = Standard cost for – Actual cost

Actual output

Standard cost = Rs.1.50


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Actual Output = 950 units

Actual Rate = Rs 1.60

DMCV = 950 x 1x 1.50 – 1100 x 1.60

= 1425 – 1760

= -Rs 335 (Adverse)

iii) Direct Labour Cost Variance

Direct Labour Cost Variance = Standard cost for – Actual cost

(DLCV) Actual output

DLCV = (Standard rate x standard time - (Actual x Actual

for actual output) Rate Time)

Standard rate = Rs 1

Actual rate = Rs 1.20

Actual output = 950 units

Actual Time = 2700 units

DLCV = (1x 950 x 3)

= 2850 – 3240

= Rs – 390 Advances

iv) Direct Labour (wages) Rate Variance

DLRV = Actual Time x (Standard Rate – Actual Rate)

Actual Time = 2700 units

Standard Rate = Rs 1 per hour

Actual Rate = Rs 1.20 per hour

DLRV = 2700 x (1 – 1.20)

= 2700 x (-0.20)

= - Rs 540 (Adverse)

v) Direct Labour Efficiency (Time) Variance

Labour Efficiency = Standard Rated x Standard Time – Actual Time)

= 1 x 3000 – 2700


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= 300 hours (favorable)

vi) Overhead Variances

Factory overhead and variances = Budgeted Factory – Actual Factory

overheads overheads

Budgeted Factory overheads = Rs 7500

Actual Factory overheads = Rs 7425

Factory overheads Variances = 7500 – 7425

= Rs 75 (favorable)

vii) Overhead variances of Labours hours

Labour overhead variance = Budgeted hours – Actual labour hrs.

= 3000-2700

= 300 hours (favorable)

4. Collect information bout the different types of budgeting

prepared in your organization or any other organization of

your choice and discuss the relevance of these budgets to the

organization under consideration.

Ans . Introduction to the company

The Jai Bharat Machine Tools Ltd. was established in 1971. to start

with, 500 workers, 35 technicians and 15 technical officers were

working in the company. At present the total strength has gone to 3000

workers, 150 technicians and 30 officers.

Types of budgets in Jain Bharat Machine Tools Ltd

1. Rolling Budget

Jai Bharat Machine Tools Ltd maintains rolling budget which means it is

always available for a specified future period by adding a period

(month, quarter or year) to the period that just ended which is called

continuous or progressive budget.

2. Relevance


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Rolling budget is a budget prepared with a fixed planning horizon. To

achieve this, rolling budget is constantly being added to at the same

rate as time passing. It is very useful for Jai Bharat Machine Tools Ltd as

it requires forecasting for much shorter period.

3. Sales Budget

Jai Bharat Machine Tools Ltd prepares tools and sell them to other

companies. For estimating total sales, sales budget is prepared. Sales

budget is an estimated amount of anticipating sales allocated product,

territory or persons, prepared weekly, monthly or annually. Operating

plan for a period expressed in terms of sales volume and selling prices

for each class of machine component.

Relevance

Preparation of a sales budget is a starting point in budgeting since sales

volume influences nearly all other items. Jai Bharat Machine Tools ltd.

Prepare sales budget for every territory separately get estimates of

sales.

4. Production budget

Production budget is a schedule for expected units to be produced. It

sets forth the units to be produced and to satisfy budgeted and

inventory requirements. Expected production volume is determined by

adding desired ending inventory to planned sales and than subtracting

beginning inventory.

Relevance

It is important for Jai Bharat Machine Tools to budget production

expenditures in order to estimate working capital needs and to project

future effects on cash position and inventory level. The production

budget is comprehensive plan that takes into accounts all


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manufacturing jobs that will be worked on during a given fiscal year and

reveals the timing and amount of expenditures on these projects.

Neither cost of sales in the operating budget nor cash and inventory in

a Performa balance short can be projected until the production budget

is completed. The company is able to spread the budget by period

within fiscal year that is, monthly, quarterly etc. which is necessary to

identify the relative need for working capital in any one period.

5. Production Costs Budget

Costs are producing machine tools Jai Bharat Machine Tools Ltd. include

three elements – direct material, direct labour and overheads. The

company prepares two budgets for direct for direct materials – (i)

materials requirements budget (ii) materials procurement budget.

Relevance

Jai Bharat Machine Tools Ltd. is able to deal with the total quantity of

materials required during the budget period and also materials to be

acquired from the market during the budget period. Materials to be

acquired are estimated after taking into account the closing and the

opening inventories and the materials for which orders have already

been placed.

6. Direct Labour budget

Although Jai Bharat Machine Tools Ltd is a company of capital intensive

but there are 3000 workers in the company that have full indulgence in

production. The company prepares direct labour budget which is s

schedule for expected labour cost.


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Expected labour cost is dependent upon expected production volume,

that is production budget. Labour requirements are based on

production volume multiplied by direct labour cost per hour to deserve

budgeted direct labour cost.

Relevance

Once the production has been prepared by the company, labour budget

is prepared. It allows the company to know in advance possible labour

requirements.

Relevance

Overheads include the expenses related to factory, general

administration, selling and distribution etc. separate budgets are

prepared for factory overheads, administration overheads, and selling

and distribution overheads.

Relevance

Overheads budget provide following information to the company Jai

Bharat Machine Tools Ltd.

It provides a schedule of all cost of production other than direct

materials and direct labour.

It provides an estimate of overhead cost that will be incurred in the

next fiscal year.

It is based on a predetermined overhead rate.

7. Cash Budget

An esteem of the cash inflows and outflows for a business or individual

for a specific period of time. Cash budgets are often used to assess


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whether the entity has sufficient cash to fulfills regular operations and

or whether too much cash is being left in unproductive capacities.

Relevance

A cash budget is extremely important because it allows Jai Bharat

Machine Tools Ltd. to allow and determine how much credit it can

extend to customers before it. Begins to have liquidity problems. It is

beneficial in knowing the value of certain expenditures can yield

opportunities.

8. Master budget

Master budget is also known as final budget. A master budget

aggregates related budgets or a family of budgets which are produced

by Jai Bharat Machine Tools Ltd. A businesses is likely to range of

budgets for varying departments within the organization. The company

will have series of budgets covering production, inventory and

purchases, sales of units and marketing expenses. These types of

budgets and others are components of the Master budget which is over

all collection of budgets for the operation of the organization. Such

budgets are parallel Master and aggregate plans covered in the earlier

operations planning.

Master budget’s relevance

For Jai Bharat Machine Tools Ltd. Master budget is every important as it

is a summary of its plans that sets specific targets for sales,

production,

distribution and financing activities. It is generally culminates in a cash

budget, a budget income statement, and a budgeted balance sheet. It

represents that how coampny would accomplish its plans.


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Q5. Yenki Ltd. is considering two mutually exclusive projects A and B. Project A costs Rs. 30,000 and Project B Rs. 36,000. The NPV probability distribution for each project is as given below :Project A Project BNPV Estimate Probability NPV Estimate ProbabilityRs. 3,000 0.1 Rs. 3,000 0.26,000 0.4 6,000 0.312,000 0.4 12,000 0.315,000 0.1 15,000 0.2You are required to compute:i) the expected Net Present Value of Projects A and B.ii) The risk attached to each project i.e., Standard deviation of each probability distribution.iii) The Profitability Index of each project.Which project do you consider more risky and why?

Ans. (i) Net Present Value of Projects A and B

Project A

Let discounting factor as 10 %

NPV

Estimate

(Rs.)

(a)

Probability

(b)

Expected

NPV

(Rs)

(c) (a x b)

Present

Value

Factor

(d)

Present

value (Rs)

(e)

3,000

6,000

12,000

15,000

0.1

0.4

0.4

0.1

300

2400

4800

1500

0.909

0.826

0.751

0.683

272.70

1982.40

3604.80

1024.50

36,000 9,000 6884.40

Initial Cost of Project A = Rs. 30,000

Net Present Value = 30,000 – 6884.40

= Rs 23115.60

Project B


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NPV

Estimate

(Rs.)

(a)

Probability

(b)

Expected

NPV

(Rs)

(c) (a x b)

Present

Value

Factor

(d)

Present

value (Rs)

(e)

3,000

6,000

12,000

15,000

0.2

0.3

0.3

0.2

600

1800

3600

3000

0.909

0.826

0.751

0.683

545.40

1486.80

2703.60

2409.00

36,000 9,000 7144.8

Initial cost of Project B = Rs 36,000

Net Present Value = 36,000 – 7144.80

= Rs 2855.20

(ii) Standard deviation of probability distribution

PROJECT X NPV ENPV PROB (NPV-ENPV)2 X PROB

3,000.00

9,000.00 0.1 3,600,000.00

6,000.00

9,000.00 0.4 3,600,000.00

12,000.00

9,000.00 0.4 3,600,000.00

15,000.00

9,000.00 0.1 3,600,000.00

14,400,000.00 PROJECT Y NPV ENPV PROB (NPV-ENPV)2 X PROB

3,000.00

9,000.00 0.2 7,200,000.00

6,000.00

9,000.00 0.3 2,700,000.00

12,000.00

9,000.00 0.3 2,700,000.00

15,000.00

9,000.00 0.2 7,200,000.00

19,800,000.00

σX = Rs.3794.70σy = Rs.4449.70


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iii) The Profitability Index of each project. Which project do you consider more risky and why?

Profitability Index = PV of Cash inflow / PV of cash Outflow

PI of X = 6884.40/ 30000 = 0.22948PI of X = 7144.80/ 36000 = 0.19846

CV = σ / NPV

CVx = σ / NPV = 0.421CVy = σ / NPV = 0.494

Project Y is more risky because of higher coefficient of variation


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MS-4_2009-ASSIGNMENT_SOLUTION

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