Managerial Accunting-Updated (Cash Budget) 1

IIUC- Dhaka Campus
MBA Program
Course Outline on Managerial Accounting
Course Objective:
The main objective of studying the course is to acquire both the theoretical &
technical knowledge on the various aspects of “Managerial Accounting”. The
major aspects include concepts significance role of managerial accounting , Cost
Behavior Analysis , Cost –Volume Profit Analysis ,Variable Costing vs.
Absorption Costing ,Budgeting ,Relevant Costing ,Standard Costing &Variance
Analysis , Responsibility Accounting ,Performance Measurement etc. The learners
would get ample opportunities to develop their analytical &professional skills after
solving practical oriented problems & case studies on the aforesaid main aspects .
These skills may be used to take various managerial decisions in a sound manner
while one is employed / serving in the managerial positions of any organizations
whether business, service, trading, govt. &other non-govt. etc.
Detailed outline
1. Introduction :
Concept of Managerial Accounting (MA) & its significance

difference between MA & FA –Role of MA –Business
Environment –Professional ethics.
2. Cost terms ,Concepts &Classification:

Cost concept –classification of cost & its basis product vs.
period costs –Manufacturing vs. Non Manufacturing costs.
3. Cost Behavior Analysis &Use :

Concepts of CB & CA scenario –Variable, Fixed &Mixed
costs –high low analysis problems &solutions.
4. Cost Volume Profit Analysis (CVPA) :

Concepts of CVPA –Assumption & Usefulness ,Contribution
Margin & CM Ratio- Break –Even Point, Its computation
&graphic presentation –Target Profit Analysis –Margin of
Safety –problems and solutions.
5. Variable Costing (VC) & Absorption Costing (A/C):
Concepts of VC & A/C, Comparison –Income Statement
under VC & AC – Reconciliation –Reasons for difference in
Income – Problems & Solutions.
6. Master Budget (MB) & Flexible Budget(FB):

Concepts of MB –types of MB –operating and financial
advantages of MB –preparation of sales, purchase and
production budgets, cash budget–problems &solutions.
07.Relevent Costing :
Relevant and irrelevant costs –reasons for isolating RC –
Make or Buy & Replacement decisions –special orders –
problems and solution.
08.Standard Costing & Variance Analysis :

Concepts –purpose –types of variance –computation of
variances –variances report – problems and solutions.
09. Responsibility Accounting:

Concepts and significance – responsibility centre –cost
center -investment centre – profit centre –segment reporting
and ROI analysis –segmented statements –problems and
solutions;
10.Performance Measurement :
Concepts and significance- measurement criteria –
profitability and productivity –types of productivity –
productivity vs. profitability –problems and solutions
Text Book: Managerial Accounting (Tenth Edition)

By, Garrison Noreen
Reference Book : Cost Accounting- a managerial approach
by C.T. Horngren.
Name of Course Teacher: Dr. Md .Jahirul Hoque

Designation- Professor of DBA, IIUC-DC
Phone – 8127366, 01716524423
Chapter-1
Introduction
01. Concepts;
Managerial accounting (MA) is concerned with providing information to
managers for their use internally in the organization. Financial accounting is
concerned with providing information to stockholders, creditors and others
outside of the organization.
02. Significance;
Essentially, the manager carries out three major activities in an organization;
planning, directing and motivating, and cont rolling. All three activities
involve decision making.
03. Difference between MA & FA;

In contrast to financial accounting , managerial accounting ;a) focuses on the
needs of the manager,2)places more emphasis on the future ,c) emphasize s
relevance and flexibility rather then precision ,d) emphasizes the segment
of an organization , e) is not governed by GAAP and f) is not mandatory.
04. Just in time system;

a) The characteristics of the JIT approach include the following;
# Reducing the number of suppliers and requiring suppliers to

make frequent deliveries of defect –free goods.
# Creating a continuous flow of product through the plan, minimizing
the investment in raw materials, work in process, and finished goods.
#Making production operation more efficient by redesigning
workstations and improving the plant layout by creating individual product flow
lines.
# Reducing setup time.
# Reducing defects.
#Cross training employees so that all are multiskilled and can perform all
functions required at a particular workstation.-
b) A successful JIT system requires suppliers who are willing to make

frequent deliveries of defect –free goods in small quantities. This often requires
weeding out unreliable suppliers and working intensively with a few, ultra-reliable
suppliers.
05. Ethical Standards (Solution to P. 1-7);
a) Failure to report the obsolete nature of the inventory would violate the
Standards of Ethical conduct as follows;
Competence
 Perform duties in accordance with relevant technical

standards.
 Prepare complete reports using reliable information.
By failing to write down the value of the obsolete inventory, Perlman

would not be preparing a complete report using reliable information. In
addition, generally accepted accounting principles (GAAP) require the
write down of obsolete inventory.
Integrity
 Avoid conflicts of interest.

 Refrain from activities that prejudice the ability to perform duties
ethically.
 Refrain from subverting the legitimate goals of the organization.
 Refrain from discerning the profession.
Members of the management team, of which Perlman is a part, are responsible for
both operations and recording the results of operations. Since the team will benefit
from a bonus, increasing earnings by ignoring the obsolete inventory is clearly a
conflict of interest. Perelman would also be concealing unfavorable and subverting
the goals of the organization. Furthermore, such behavior is a discredit to the
profession.
Objectivity
 Communication of information fairly and objectively.

 Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of financial
statements.
b) As discussed above, the ethical course of action would be for Perelman to insist
on writing down the obsolete inventory. This would not, however, be an easy thing
to do. Apart from adversely affecting her own compensation, the ethical action
may anger her colleagues and make her very unpopular. Taking the ethical action
would require considerable courage and self – assurance.
06. Professional Ethics ;

a) Competence requires qualification, experience, training and
understanding.
b) Responsibility and accountability; should go together
.responsibility without accountability is meaningless.
c) Objectivity; objectivity ensures communicating information.
d) Integrity; should be a man of high integrity which includes
morality.
e) Pleasant behavior; behavioral aspect must be pleasant.
f) Dutiful.
g) Regularity; Must maintain regularity in duties.
h) Loyalty of organization; must be loyal.
i) Confidentiality of the organization; must maintain
confidentiality.
07. Business environment;
a) TQM; Both from the views of customers and enterprises.

b) JIT; provide necessary inventory looking at the minimum level.
c) Re-engineering; process engineering ensuring a business process.
d) E-commerce; introducing IT in commerce.
e) Global business: international business.
Problem 1-8, Ethics: Just in Time
Requirement 01:
Considering the IMS’s standards of ethical conduct Charlie cannot ignore the situation described
about WIW, a publicly owned corporation.
Firstly, as part the standard of ethical conduct management account must “avoid actual or
apparent conflicts of interest and advice all appropriate parties of any potential conflict”. Charlie
has a responsibility to disclose all the relevant information regarding A-1 and advice the
concerned management about the situation.
Secondly, J.B told Charlie that WIW has been trying to implement “Just in Time” system. So, as
WIW’s controller Charlie’s responsibility is to make sure the proper implementation of JIT
approach. As per the situation described on WIW, Charlie is informed that A-1 is more of a
jobber than a warehouse. A-1 cannot delivery the order fully from his won warehouse and in
addition, some of the orders were late and not complete. So, the present arrangement with A-1
neglects most of the benefits t5hat can acquire from the JIT.
Requirement 02:
Charlie should follow some specific steps to resolve this matter is mentioned below:
First Step: Charlie has to verify whether the collected information is correct or not.
Second Step: He should verify whether the mark up percentage & the figure of profit are
obtained or not if WIW is delivered directly from manufacturer other than getting delivery from
A-1.
Third Step: He should verify the situation again with J.B before informing the concerned
management anything about the relationship between J.B and A-1. He needs to be confirmed that
J.B is ignoring the interest of the company for that relationship though A-1 is not fit as supplier
for JIT approach.
Forth Step: If J.B refuse to follow this course of action, Charlie’s only alternative is to submit a
memorandum to the board of Directors. J.B should be notified of this action in advance. The
memorandum should present only the fact. If the board approves the continued relationship with
A-1 Charlie may possible conclude that his concerns about an apparent conflict of interest do not
represent an actual conflict. This presumes t6hat legal counsel has advised the board that the
arrangement with A-1 doesn’t violet any loss and that the company has made adequate
disclosure in its public feelings. Only Charlie can makeup the decision as to weather or not he
can continue at WIW under these circumstances.
Final Step: After trying every possible step if Charlie fails to establish a proper system in WIW
he has to decide whether he will continue with this company or not.
Case Study: 01
Mr. Thomas and Mrs. Linda are the president and assistant controller respectively of a sugar mill
of a country which has 20 stores spread over the whole country. Both Mr. Thomas and Mrs.
Linda have been working in the mill for the last fifteen years. Mrs. Linda has been given the
responsibilities of inspecting the stores for the last ten years and asked to give a report on
inventory.
While inspecting the stores Linda has discovered a sizable number of inventories not recorded in
the stores account during the period. In the mean time she has discussed the matter with the other
members of the management team and sought their opinions on the matter. The members of the
management team had advised her just to ignore the matter as obsolete inventory. Other wise, all
the members including Linda will have to face adverse impact on their compensation.
Required;
a) What would be the responsibility of Linda in respect of the obsolete inventory? Examine in the
context of the following standards of ethical conducts;
I. Competence,
II. Integrity and
III. Objectivity
b) What difficulties Mrs. Linda will face while recording the obsolete inventory in her report? How
she would overcome those.
Chapter -2
Cost terms, Concepts and Classifications
01. Concepts and Classification;

A product cost is any cost involved in the purchase or the manufacture
of goods. In the in the case of manufactured goods, this costs consists of
direct materials, direct labor and manufactured overhead. A period cost
is a cost that is taken directly to the income statement as an expense in
the period in which it is incurred.
02. Since product cost follow units of product into inventory, they are
sometimes called inventoriable cost, the flow is from direct materials,
direct labor and manufacturing overhead into work in process. As goods
are completed, their cost is removed from work in process and
transferred into finished goods. As goods are sold, their cost is removed
from finished goods and transferred into cost of goods sold in an
expense on the income statement.
03. A variable cost is a cost that varies, in, total. In direct production to
change in the level of activity. A variable cost is a constant per unit of
product. A fixed cost is a fixed in total, but will vary inversely on a per
unit basis with changes in the level of activity.
04. When fixed costs are involved, the cost of a unit of product will
depend on the number of units being manufactured. As production
increases, the cost per unit will fall as the fixed cost is spread over more
units. Conversely, as production declines, the cost per unit will rise,
since a constant fixed cost figure will be spread over fewer units.
05. A differential cost is a cost that differs between alternatives in a

decision. An opportunity cost is the potential benefit that is given up
when one alternative is selected over another. A sunk cost is a cost that
has already been incurred and cannot be altered by any decision taken
now or in the future.
06. Differential costs can be either variable or fixed. For example, the
alternatives might consist of purchasing one machine rather than another
in order to make a product. The difference in the fixed costs of
purchasing the two machines would be a differential cost.
07. Exercise-2.9
A few of these costs may generate lively debate .for example, some may argue
that the cost of advertising a Madonna rock concert is a variable cost since the
number of people who come to the rock concert depends upon how much
advertising there is .However, one can argue that if the price is within reason, any
Madonna rock concert in New York City will be sold out and the function of
advertising is simply to let people know the event will be happening. Moreover,
while advertising may affect the number of persons who ultimately buy tickets,
the advertising costs don’t go up.
Cost behavior
Variable Fixed
1. X-ray film used in the radiology lab at Virginia
Mason Hospital in Seattle …………………………… x
2. The cost of advertising a Madonna rock
concert in New York city ………………………….. x
3. Depreciation on the Planet Hollywood
restaurant building in Hong Kong ……………………. x
4.The electrical cost s of running a roller coaster
at Magic Mountain …………………………………… x
5. Property taxes on your local cinema …………………… x
6. Commission paid to salespersons at
Nordstroms ……………………………………………….. x
7.property insurance on a Coca- Cola bottling
plant ………………………………………………………… x
8. The cost of synthetic materials used to make
Nike running shoes …………………………………………. X
9. The cost of shipping Panasonic televisions to
retail stores ……………………………………………….. x
10. The cost of leasing an ultra-scan diagnostic
machine at the American hospital in Paris …………….. X
08. Exercise-2.5
Cost Behavior Selling and Product

Variable Fixed Administrative Cost Cost
1. Hamburger burns at a
McDonald’s outlet ……….. x x
2. Advertising by a dental
Office ……………………… x x
3. Apples processed and canned
by a Del Monte Corporation. x x
4. Shipping canned apples from a
Del Monte plant to customers. x x
5. Insurance on a Bausch and
lomb factory producing
contract lenses ……………. X x
6. Insurance on IBM’s corporate
Headquarter ……………… x x
7. Salary of a supervisor
overseeing production of
computer board at
Hewlett-Packard …………… x x
8. Commissions paid to
Encyclopedia Britannica
salespersons ……………….. x x
9. Depreciation of factory
lunchroom facilities at a
General Electric plant ………. x x
10. Steering wheels installed
in BMWs …………………… x x
09. Problem-2-14
Name of the Cost Variable Fixed Product cost Period Opp. Sunk
Cost Cost Direct Direct Mfg, (selling& cost cost
mat. labor O/H adm.cost)
Rental revenue
Foregone,$30,000
Per year X
Direct materials cost,
$ 80 per unit X X
Rental cost o
Warehouse , $500
Per month X X
Rental cost of
Equipment, $
4000 per month X X
Direct labor cost ,
$60 per unit X X
Depreciation of
annex space ,
$8000 per year X X X
Advertising cost ,
$50000 per year X X
Supervisors salary,
$1500 per month X X
Electricity for
machines,$120
per unit X X
Shipping cost ,
$9 per unit X X
Return earned on
investment , $3000
per year X
10. Problem;2-20
Cost Item Cost Behavior Units of Product

Variable Fixed Direct Indirect
1. Electricity used in operating
machines …………………. X X
2. Rent on a factory building … X X
3. Cloth used in drapery production X X
4. Production superintendents salary X X
5. Wages of labors assembling a product X X
6. Depreciation air purification equipment
used in furniture production ………. X X
7. Janitorial salaries …………………… X X
8. Peaches used in canning fruit……….. X X
9.Lubricants needed for machines ……. X X
10. Suger used in soft drink production … X X
11. Property taxes on the factory ………. X X
12. Wages of workers painting a product … X X
13. Depreciation of cafeteria equipment X X
14. Insurance on a building used in
producing TV sets ……………….. X X
15.Picture tubes used in TV sets ……… X X
Chapter-3
Cost Behavior; Analysis and Use
01. Concepts;
Cost behavior refers to how a cost will react or respond to changes in

the level of business activity.
Cost Behavior Scenario

Type of cost Total costs Per unit cost
Fixed costs No change Decrease or increase
Variable costs Increase / Decrease No change
a) Variable cost ; A variable cost is one that remains constant on a per unit basis,
but which changes in total indirect relation to change in volume.
b) Fixed cost; A Fixed cost is one that remains constant in total amount, but
which changes, if expressed on a per unit basis, inversely with changes in volume .
c) Mixed cost; A mixed cost is a cost that contains both variable and fixed costs
elements.
Allocation of Mixed cost:
High-low Method: Under this method the variable cost element is found out from
the mixed cost by applying the following the variable rate formula
Valuable rate=Change in cost ÷ Change in equity
After finding out variable cost, fixed cost can be found out by deducting variable
cost from total mixed cost
Exercise 5-5:
Requirement 01.
Units Produced and sold

$60,000 $80,000 $100,000
Variable costs 150000 200000 250000
Fixed costs 360000 360000 360000
Total cost 510000 560000 610000
Cost per unit:
Variable cost 2.50 2.50 2.50
Fixed cost 6.00 4.50 3.60
Total cost per unit 8.50 7.00 6.10
Requirement-02
Income statement for 9000 units
Sales revenue (9000@7.5) 675000
Less: Variable cost (9000@2.50) 225000
Contribution Margin 450000
Less: Fixed Costs 360000
Net Income 90000
Exercise 5-11
1. Identification of Company’s expenses (see sheet)

2. Separation of Mixed Expenses under High-Low Method
Units Shipping Exp Salary etc
High level of Activity 4500 56,000 143,000

Low level of Activity 3000 44,000 107,000
Change 1500 12000 36000
A. Valuable Cost Element:

Valuable rate=Change in cost ÷ Change in equity
1. Shipping Expense: 12000 ÷ 1500=$8
2. Salary expense: 36000 ÷ 1500= $24
B. Fixed Cost Element:
Shipping Expense Salary Expense
Cost of High level 56000 143000
less; VC
45000 units @ $8 36000
45000 units @ $24 108000
FC 20000 35000
C. Cost formula:
Shipping Expense: $ 20000 plus $8 per unit or

Y=$20000 + 8X
Salary Etc: $ 35000 plus $24 per unit or

Y=$35000 + 24X
Frankel Ltd
Income Statement for the month ended June
Sales in unit 4500
Sales revenue $ 630000
Less: Variable costs:
Cost of goods sold 252000
Shipping 36000
Salary etc 108000 346000
Contribution Margin 234000
Less: Fixed costs:
Advertising 70000
Shipping 20000
Salary etc 35000
Insurance 9000
Depreciation 42000 176000
Net Income $58000
2. Problem; 5-15
1. Costs of goods sold …………………….Variable

Advertising expenses …………………… Fixed
Shipping expenses ……………………… Mixed
Salaries and commission ……………….. Mixed
Insurance expenses……………………… Fixed
Depreciation expenses…………………… Fixed
2. Analysis of the mixed expenses;

Unites Shipping Expenses Salary and Comm.
Expenses
High level of activity …………...5000 A$38000 A$90000
Low level of activity …………….4000 34000 78000
Change …………………………...1000 A$ 4000 A$ 12000
A. Variable cost element;
Variable rate= Change in cost

Change in activity
1.Shipping expenses; A$4000

1000units
=A$4 per unit.
2. Salaries and comm. expense;= A$12000
1000units
=A$12 per unit.
B.Fixed cost element;

Shipping Expenses Salary and Com.Expenses
Cost of high level of activity… A$38000 A$90000
Less variable cost element;
5000 units x A$4 ……. 20000
5000 units x A$12 …….. 60000
Fixed cost element …………... A$18000 A$30000
C.The cost formulas are;

Shipping expense; A$18000 per month plus $ 4 per unit or
Y= A$18000+A$4X
Salary and Com.Expenses; A$30000 per month plus A$12 per unit or
Y= A$30000+A$12X
Morrisey &Brown, Ltd.

Income statement
For the month ended September 30
Sales in units …………………………………… 5000
Sales revenue (@A$100) ………………………... A$500000
Less variable expenses;
Cost of goods sold (@A$60) ……………………. A$300000
Shipping expenses (@A$4) …………………….. 20000
Salary and Com.Expenses (@A$12) …………… 60000 380000
Contribution margin ……………………………… 120000
Less fixed expenses;
Advertising expenses ……………………………... 21000
Shipping expense ………………………………… 18000
Salary and Com.Expenses ……………………….. 30000
Insurance expenses ………………………………. 6000
Depreciation expenses …………………………… 15000 90000
Net income ………………………………………… A$30000
03. Problem;
1. Maintenance cost at the 90000 machine-hour level of activity can be isolated as follows;
Level of activity
60000M 90000MH
Total factory overhead cost ……………… $174000 $246000
Deduct;
Utilities cost @$0.80/MH* ……………. (48000) (72000)
Supervisory salaries ………………... (21000) (21000)
Maintenance cost ……………………… $105000 $153000
*$48000/60000MH=$0.80/MH
2. High-low analysis of maintenance cost;

Machine hours Machine cost
High activity level ………………. 90000 $153000
Low activity level ………………. 60000 105000
Changes ……………….. 30000 $48000
Change in cost
Variable rate; Change in activity
= 48000
30000MH
= $1.60/MH
Total fixed cost;

Total maintenance cost at the high activity level………… $153000
Less variable cost element (90000MHx$1.60) ………….. 144000
Fixed cost element ……………………………………… $9000
Therefore, the cost formula for maintenance is; $9000 per month plus $1.60 per machine-
hour or
Y=$9000÷$1.60X
3. Variable Rate per Fixed

Machine-Hour Cost
Maintenance cost ………………. $1.60 $9000
Utilities cost ………………….. 0.80
Supervisory salaries cost ……… 21000
Total $2.40 $30000
Thus, the cost formula would be; Y=$30000÷$2.40X.
4. Total overhead cost at an activity level of 75000 machine-hours;

Fixed costs ……………………………………… $30000
Variable costs ($2.40 x75000MH) ………………. 180000
Total overhead costs …………………………………. $210000
Chapter-4
Cost Volume Profit (CVP) Analysis
01. Concept of (CVP) analysis;
It is study of the effects of output/ sales volume, sales revenue, expenses

(Costs) &net income (profit).
Assumptions ; Total costs consist of variable costs & fixed costs.
Variable costs ; Costs that change in direct proportion to changes in
volume of output. Examples – material cost, direct wages etc.
Fixed costs ; Costs that do not change directly with changes in
volume of output.
02. Assumption of CVPA;
 Total cost should be divided into VC & FC.

 Costs are linear and can be accurately divided
into variable and fixed elements. The variable element is constant per
unit and the fixed element is constant in total over the entire relevant
range.
 In multiproduct companies, the sales mix is
constant.
 In manufacturing companies inventories do
not change. The number of units produced equals the number of units
sold.
03. Usefulness of CVP Analysis;
CVP is one of the important financial management tools & techniques. It is

used in profit planning. In order to know the target profit of a company;
margin of safety, no profit & no loss point both in terms of quality and amount
of that company; CVPA is used.
CVP analysis involves finding the most favorable combination of variable

costs, fixed costs, selling price, sales volume and mix of products sold. Trade
offs are possible between types of costs as well as between costs and selling
price. Sometimes trade-offs are desirable and sometimes they are not. CVP
analysis provides the manager with powerful tools for identifying those
courses of action that will improve profitability.
04. BEP;
It is that level of sales at which revenue equals to expenses & net income
becomes zero.
Computation; Two approaches—
a) Equation Technique;
 BEP in quantity = Sales – Variable Costs- FC

Or; Sales =VC+ FC
Or; (Sales per unit x Q) = (VC per unit x Q) +FC
 BEP in amount = Q x Sales per unit.
b) Contribution Margin Approach;
Contribution Margin =Sales –VC

FC
 BEP in unit= CM per unit
Or FC
S .PU –VC PU
FC
 BEP in amount = CM. Ratio
Or FC
CM/ Sales
Or FC
1- VC pu/ S pu
Where CM Ratio = CM
Sales
C) Changes in Costs- Must is adjusted.
d) Changes in CM – Must be adjusted
e) Changes in Sales -- Must be adjusted
05. Sales in case of target net profit;
a) CM Approach
 Sales in Unit =FC+ Target NP(TNP)

CM per unit
 Sales in Amount=FC + TNP
CM Ratio
b) Equation Technique
 Sales in unit= VC + FC +TNP

Or; (S. pu x Q) = (VC pu x Q) + FC + TNP
 Sales in Amount = Sales in Quantity x S pu
06.Problem ;
Voter Company’s contribution format income statement for the most recent
year is given below;
Total Per Unit Percent of Sales
Sales (20000 units) …….. $1200, 000 $60 100%
Less variable expenses …... 900,000 45 ?%
Contribution margin …… 300,000 $15 ?%
Less fixed expenses ………. 240,000
Net operating Income …… $60,000
Requirement;
a) Compute the company’s CM ratio and variable expenses ratio.

b) Compute the company’s break even point in both units and sales
dollars.
c) Assume that sales increase by $400,000 next year .if cost behavior
pattern remain unchanged .How much will the companies net
operating income increase? Use the CM ratio to determine your
answer.
d) Assume that next year management wants the company to earn a
minimum profit of $90,000.how many units will be sold to meet
this target profit?
e) Compute the company’s margin of safety in both dollar and
percentage form
.
Solution;
a)
CM ratio =Contribution margin
Selling price
=$15÷$60
=25%
Variable Expense Ratio= Variable expense x 100

Selling price
= ($45÷$60) x 100
= 75%
b)
Break Even Sales = Variable expenses+ Fixed expenses +Profits
$60 Q= $45Q +$240000+$0
$15Q=$240,000
Q = $240,000/0.25
Q=16,000 units.
BEP in Amount = 16000 units x $60 PU

= $960000
c)
Increase in sales ……………… $400000
Multiply by the CM ratio …….. X 25%
Expected increasing in contribution margin $100000
Since the fixed expenses are not expected to change, net operating income will
increase by the entire $100000 increasing in contribution margin computed
above.
d)
Equation method;
Sales = Variable expenses+ Fixed expenses +Profits
$60Q= $45Q +$240000 + $90000
$ 15Q = $330000
Q= $330000/$15 per unit
Q= 22000 units.
Contribution margin method;

= Fixed expenses +Target profit
Contribution margin per unit
= $240000+$90000
$15per unit
=22,000units
e)
Margin of safety in dollars = Total sales- Break –even sales
=$1200000-$960000
=$240000
Margin of safety percentage = Margin of safety in dollars

Total sales
=$240000/$1200000
=20%
07. Concept of CM Ratio;
The contribution margin (CM) ratio is the ratio of contribution margin to

total sales revenue. The CM ratio shows the change in contribution margin
that will result from increase and decreases in sales revenue. a dollar
increases in contribution margin will result in a dollar increase in net income
.therefore for planning purpose a knowledge of a products CM ratio is
extremely helpful in projecting potential contribution margin and potential
net income.
08. Concept of MS:
The margin of safety is the excess of budgeted sales over the break-even
volume of sales. It states the amount by which sales can drop before losses
begin to be incurred.
Exercise 6-6: Solution;
1. a) BEP in units: FC ÷ CM (PU) where CM $ 12

= $ 150000 ÷ $ 12
=12500 units
b) BEP in amount: SP (PU) x Units
= $40 x 12500
=$ 500000
2. Total CM at BEP in $ 150000 since CM is equal to fixed expenses at BEP.
or. CM 12500 units x $12 PU = $ 150000
3. Target Sales= ( Fixed Expenses + Target Profit) ÷ Unit CM
= (150000+18000) ÷ 12
= 14000 units
Income Statement
Total Unit
Sales ( 14000 units @ $40) $ 560000 $ 40
Less: Variable expense(14000@$28) 392000 28
168000 12
Less: Fixed expense 150000
Net Income 18000
4. Margin of Safety (MS)
a) In $ MS= Total Sales – BE Sales
= $ 600000-500000
= $ 100000
b) MS ( in %)= MS ÷ TS
= $ 100000 ÷ $ 600000
= 16.67%
5. CM Ratio= CM ÷ Sales
= 180000 ÷ 600000
= 30%
New Sales: $ 600000 + $80000= $ 680000
Expected Total CM ( 680000@ 30%)=204000
Present Total CM ( 600000 @ 30%) = 180000
Increased CM or NI = 24000
Income Statement
Total
Sales $
680000
Less: Variable expense(70 % of sales) 476000
CM 204000
Less: Fixed expense 150000
Net Income 54000
Less present NI 30000
Increased NI 24000
Note: Variable exp. Ratio=VE ÷ Sales

= 420000 ÷ 600000
=70%
09. Exercise;6-6
a)
$30Q=$12Q+$216000+$0
$18Q=$216000
Q=$216000/$18
Q=12000units, or at $30 per unit, $360000
Alternative solution;
Break-even point= Fixed expenses
Unit contribution margin
=$216000/$18
= 12000 units or ar$30 per unit, $360000
b)
The contribution margin is $216000 since the contribution margin is equal to
fixed expenses at the break-even point.
c)
Target sales = Fixed expenses + Target profit
Unit contribution margin
=4216000+ $90000
$18
=17000 units.
Total Unit
Sales (17000units x $30) …………. $510000 $30
Less variable expenses (17000 units x $12) 204000 12
Contribution margin ……………………. 306000 $18
Less fixed expenses …………………….. 216000
Net income ……………………………... $90000
d)
Margin of safety in dollar terms;
Margin of safety = Total sales – Break –even sales

$450000-$360000=$90000
Margin of safety in percentage terms;

Margin of safety in dollars
Total sales
=$90000/$450000
=20%
e)
The CM ratio is 60%
Expected total contribution margin ($500000 x 60%) $300000

Present total contribution margin ($ 450000 x 60%) 270000
Increased contribution margin $ 30000
$50000 incremental sales x 60%
=$ 30000
Since in this case the company’s fixed expenses will not change, quarterly
net income will also increase by $30000.
10. Exercise;
1. Variable expenses;
$40 x (100%- 30%)
=$28
2.
a) Sales price $40 100%
Less variable expenses 28 70
Contribution margin $12 30%
Let Q = Break –even point in units.

$40Q = $28Q +$180000+$ 0
$12Q =$180000
Q = $ 180000/$12
Q = 15000 units.
In sales dollar;
15000 units x $40
= $600000
Let X =Break-even point in sales dollars.
X = 0.70X + $180000+ $0
0.30X = $180000
X = $180000÷0.30
X =$600000
In units;
$600000/$40
= 15000 units.
b) $40Q = $28Q + $180000+ $60000

$12Q = $240000
Q = $240000/$12
Q = 20000 units
In sales dollars;
20000 units x $40
= $800000
11. Exercise;
1. The contribution margin per person would be
Price per ticket $35

Less variable expenses
Dinner $18
Favors and program 2 20
Contribution margin per person $15
The fixed expenses of the dinner-dance total $6000. The break-even point
would be;
Sales = variable expenses+ fixed expenses +profits

$35Q = $20Q + $ 6000 + $ 0
$15Q = $6000 1
Q = $6000/$15
Q = 400 persons; or, at $35 per person, $14000
Alternative solution
Fixed expenses $6000

Unit contribution margin $15
= 400 persons.
Or, at $35 per persons, $14000.
2. Variable cost per person ($18+$2) $20

Fixed cost per person ($ 6000/300) 20
Ticket price per person to break-even $40
Chapter-5
Variable Costing (VC)&Absorption Costing (A/C)
01. Concepts;
Under V/C fixed manufacturing O/H are excluded from cost of product .but
under A/C such O/H are included in cost of products. In other words, V/C
signifies that fixed factory O/H is not inventoried. In contrast, A/C indicates
that inventory values include fixed factory O/H.
02. Comparison;
A. Variable costing
Costs to Account for Inventoried Costs on B/S Exp.on Income Statement
D.M Initially applied as goods Become Expired
D.W . --------- to Inventory as are sold ---- when Inventory is
Variable F. O/H Unexpired costs sold.
Fixed F. O/H ………Expires Immediately………..Becomes Expired

immediately .
B.Absorption Costing
Costs to Account for Inventoried Costs on B/S Exp.on Income Statement
D.M Initially applied as goods Become Expired
D.W . --------- to Inventory as are sold ---- when Inventory is
Variable F. O/H Unexpired costs sold.
Fixed F. O/H
03. Income Statement under V/C Method;
In this method, Income Statement is prepared on the basis of variable costing

approach when C.M is found out first & the income is determined.
04. Income Statement under A/C Method ;
In this method, Income Statement is prepared on the basis of absorption

costing approach when income is found out first & then income is determined.
05. Difference between these two methods;
 Unit product cost varies.

 Fixed F/O/H does not appear as a separate item
in A/C income statement. But under V/C, fixed O/H is included in two
places one, as a part of the cost of goods sold & as a production volume
variance.
 The format for A/C income statement separate
& costs into the major categories of manufacturing & non
manufacturing. In contrast, under V/C income statement separate costs
into fixed & variable. In A/C revenues less manufacturing costs is G.P.
But in V/C revenue less variable costs is C.M.
06. Reasons for differences in Income;
Valuation of inventories is different.

 Under V/C, inventories are valued according to only
variable (standard) factory O/H rate.
 Under A/C, inventories are valued according to
variable & fixed factory O/H rate (i.e.’ full cost rate).
07. Reconciliation of income between V/C & A/C;
Differences between income under V/C & income under A/C can be
reconciled as follows;
Fixed O/H rate x Change in inventory units (both opening &ending)
Where, F.O/H Rate= Budgeted fixed O/H

Expected volume of production
Exercise 7-1:
1. a) Computation of Unit product cost:
Production: $
Direct Materials 18
Direct Labor 7
Variable M. O.H 2
Fixed M. O. H 8
Unit Product Cost 35
b) Income Statement under A.C
$ $
Sales (16000 @50) 800000
Less: Cost of Goods Sold
Beginning Inventory 0
Cost of goods manufactured(20000@$35) 700000
Goods available for sale 700000
Less: Ending inventory(20000-16000)x$35 140000 560000
Gross Margin 240000
Less: Selling and Admin. expense
Fixed Selling & Admin. O/H 110000
Variable Selling & Admin. O/H 80000 190000
Net Income 50000
2. a) Computation of Unit product cost:

Production: $
Direct Materials 18
Direct Labor 7
Variable M. O.H 2
b) Income Statement under V.C

$ $
Sales (16000 @50) 800000
Less: Variable expense
Cost of goods sold(16000@$27) 432000
Selling and Admin O/H(16000@$5) 80000 512000
CM 288000
Less: Fixed expense
Manufacturing O/H 160000
Selling & Admin O/H 110000 270000
Net Income 18000
Reconciliation Statement:
NI as per AC 50000
NI as per VC 18000
Difference 32000
Difference is explained as follows:
Fixed Manufacturing Overhead Rate (160000÷20000) = $8
Change in Inventory= 4000 units @ $8= $ 320000
Exercise 7-2:
Solution
Computation Unit Product Cost Under VC.
Production: $
Direct Materials 10
Direct Labor 4
Variable M. O.H 2
Income Statement under VC

$ $
Sales (40000 @33.75) 1350000
Less: Variable expense
Cost of goods sold(40000@$16) 640000
Selling and Admin O/H(40000@$3) 120000 760000
CM 590000
Less: Fixed expense
Manufacturing O/H 250000
Selling & Admin O/H 300000 550000
Net Income 40000
Reconciliation Statement:
NI as per AC 900000
NI as per VC 40000
Difference 50000
Difference is explained as under:
Fixed Manufacturing Overhead Rate = $5
Change in Inventory= (0-10000) units= 10000 units
Difference=10000 units x FM O/H Rate
=10000 X $5
=$50,000
08. Practical problem # 16.31
Solution
Income statement under V/C

$ $
Sales …………………………………… 1054000
Direct materials …………………... 285000
Direct labor ………………………… 174200
Factory O/H ……………………… 36000
Selling &Admen. Costs ……………. 118400 613600
Less
Opening Inventory at Standard ………….. 440400
Rate (2000 X 44) ………………………… 88000
Add ending inventory at standard ……….. 352400
Rate (1000 X 44) ………………………….. 44000
Contribution margin ………………. 396400
Less fixed costs;
Factory O/H …………………………. 95000
S & A O/H ………………………….. 75000 170000
Operating income …………………………… 226400
Income statement under A/C

$ $
Sales 1054000
Less cost of goods Manufactured;
Direct materials …………………... 285000
Direct labor ……………………… 174200
Factory O/H (Fixed & variable) 131000
(95000+36000) 590200
463800
Less operating inventory at absorption rate (44+7)
i.e. (2000 X 51) 102000
361800
Add ending inventory at absorption rate
(1000 X 51) 51000
Gross profit ……………………………………… 412800
Less non-manufacturing costs;
Sales & admin. Costs (75000+118400) …….. 193400
Operating income ……………………………….. 219400
Reconciliation Statement
Operating income under V/C 226400

Operating income under A/C 219400
Differences to be explained $7000
Fixed O/H rate $7
Change in inventory units;
Operating inventory 2000
Ending inventory 1000
Fixed O/H rate X change in inventory $7 x1000 7000
09. Exercise;7-5
a) The unit product cost under absorption costing would be ;

Direct materials ………………………… $6
Direct labor ……………………… 9
Variable manufacturing overhead ………. 3
Total variable costs ……………………. $18
Fixed manufacturing O/H (300000/25000 U) 12
Unit production cost ………………… 30
b) The absorption costing Income statement;

Sales (20000units X $50) …………….. $1000000
Less cost of goods sold;
Beginning inventory …………… $0
Add cost of goods manufactured
(25000 units x $ 30) ………… 750000
Goods available for sale ………………….. 750000
Less Ending inventory
(5000 units x $30) ……………. 150000 600000
Gross margin ……………………………..
400000
Selling & administrative expenses ………. 270000
Net income ……………………………….. $130000
11. Exercise; 7-7
1. Sales (35000 units at $25) …………… $875000

Variable cost of goods sold
(35000 units at $12) ………………. $420000
Variable Selling & administrative expenses
(35000 units at $12) ………………….. 70000 490000
Contribution margin …………………….. 385000
Fixed manufacturing O/H ……………… 160000
Fixed Selling & administrative expenses 210000 370000
Net income …………………………….. $15000
Direct materials ……………….. $5

Direct labor …………………… 6
Variable manufacturing overhead 1
Total variable manufacturing cost $12
2. The difference in net income can be explained by the $20000 in fixed

manufacturing O/H differed in inventory under the absorption costing
method;
Variable costing net income ……………. $15000
Add; Fixed manufacturing O/H differed in inventory
under the absorption costing; 5000units X $4 in
fixed manufacturing cost per unit ………… 20000
Absorption costing net Income ……. $35000
11. Exercise;
1.
a. Direct materials ……………….. $20
Direct labor …………………… 8
Fixed manufacturing O/H
($100000/10000units) ………. 10
Unit production cost …… $40
b. Sales (8000 units x $75) …………… $600000

Less cost of goods sold;
Beginning inventory ……………… $ 0
Add cost of goods manufactured
($ 10000 units x $40) …………. 400000
Goods available for sale ………… 400000
Less Ending inventory (2000 units x $ 40) 80000 320000
Gross margin …………………. 280000
Less Selling & administrative expenses 248000
Net income ……………………... $32000
Variable (8000 units x $6) $48000
Fixed 200000
Total $248000
2.
a. Direct materials $20
Direct labor 8
Unit product cost $30
12. Exercise; 7-10
1. The unit product costs under the variable costing method would be
computed as follows ;
Direct materials $4
Direct labor 7
Unit product cost $12
With this figure, the variable costing income statements can be prepared;
Year 1 Year 2
Sales …………………….. $1000000 $1250000
Variable cost of goods sold (@$12) 480000 600000
Variable Selling & administrative expenses (@$2) 80000 100000
Total variable expenses 560000 700000
Contribution margin ………….. 440000 550000
Fixed manufacturing O/H 270000 270000
Fixed Selling & administrative expenses 130000 130000
Total fixed expenses 400000 400000
Net income $ 40000 $ 150000
Year 1 Year 2
2. Variable costing net income $40000 150000
Add; fixed manufacturing overhead deferred
in inventory under absorption costing
(5000 units x $6per unit) 30000 ---
Deduct; fixed manufacturing overhead released
from inventory under absorption costing
(5000 units x $6 per unit) --- 30000
Absorption costing net income $70000 $120000
Chapter -6
Master Budget (MB) and Flexible Budget
01. Concept of MB:
A budget that immerses the planned activities of all the sub units of an enterprise like sales,
purchases, productions, finance etc is called MB. A budget is a pre lustration of plans is terms of
numerical figures according to predetermined period.
02. Components of MB:

A) Operating Budgets:
• Sales budget
• Purchase budget
• Production budget
• Cost of production budget
• Cost of goods sold budget
• Operating expenses budget
• Budgeted income statement
B) Financial Budgets:
• Capital budget
• Cash budget
• Budgeted balance sheet.
03. Advantages of MB:
• Means of communicating management plans.
• Forces FM to think ahead their plans.
• Provides a means of allocating financial resources effectively.
• Aids FM in coordinating their efforts effectively.
• Defines properly the goals &objectives that can serve as benchmarks for evaluating
actual performances.
• Can uncover potential bottlenecks before they occur.
04. Preparation of main MB:
4.1. Sales Budget:

It is the starting point of budgeting because production & inventory levels, purchases &
operating expenses all are geared to the rate of sales activities. It is a statement of cash and credit
sales & collection of cash from credit sales.
4.2. Purchase Budget :

It is a statement of desired ending inventory plus cost of goods sold less opening inventory. It
shows cash &credit purchases and payments for credit purchases.
4.3. Production & Cost of production Budget:
It is a statement of sales plus closing inventory less opening inventory. All this should be in
terms of quantity. Whenever, quantity of production will be multiplied by the rate of cost of
production per unit, we shall get cost of production.
Exercise: 9-1
Requirement-1:
Schedule of expected Cash Collection:
Particulars July August September Total
May Sales ( $430000x 10%) 43000 43000
June Sales
$540000 x 70% 378000
$540000 x 10% 54000 432000
July Sales
$600000 x 20% 120000
$600000 x 70% 420000
$600000 x 10% 60000 600000
August Sales
$900000 x 20% 180000
$900000 x 70% 630000 810000
September Sales
$500000 x 20% 100000 100000
Total Cash Collection 541000 654000 790000 1985000
Requirement 2:
Accounts Receivable on September 30:
From August Sales (900000 x 10%) =$90000
From September Sales (500000x 80%) = $400000
= $490000
Exercise: 9-7
Quarter
Particulars Year
Cash Balance Beginning 9 5 5 5 24
Add collections 76 90 125 100 391
Total Cash Available 85 95 130 105 415
Less Disbursement
Purchase of inventory 40 58 36 32 166
Operating expense 36 42 54 48 180
Equipment Purchase 10 8 8 10 36
Dividends 2 2 2 2 8
Total disbursement 88 110 100 92 390
Expenses ( Deficiency) cash available (3) (15) 30 13 25
Financing:
Borrowing 8(3+5) 20 - - 28
Repayment - - (25) (7) (32)
Total financing 8 20 (25) (7) (4)
Cash Balance Ending 5 5 5 6 21
Exercise: 9-14
Requirement: 01
Schedule of expected cash collection
Particulars April May June Total
From Accounts Receivable $141000 $7200 148200
From Budget Sales:
April Sales
$200000 x 20% 40000
$200000 x 75% 150000
$200000 x 4% 8000 198000
May Sales
$300000 x 20% 60000
$300000 x 75% 225000
285000
June Sales
$250000 x 20% 50000 50000
Total Cash Collection 181000 217200 283000 681200
Requirement 2:
Months
Particulars Total
April May June
Cash Balance Beginning 26000 27000 30000 83000
Add. cash collection 181000 217200 283000 681200
Total cash collection 207000 244200 313000 764200
Less cash disbursement
Merchandising purchase 108000 120000 180000 408000
Payroll 9000 9000 8000 26000
Lease Payment 15000 15000 15000 45000
Advertising 70000 80000 60000 210000
Equipment Purchase 8000 ------- -------- 8000
Total cash Disbursement 10000 224000 263000 697000
Excess/ Deficit Cash (3000) 20200 50000 67200
Financing
Borrowing 30000 30000
Repayments (30000) (3000)
Interest (1200) (1200)
Total financing 30000 31200 (1200)
Cash Balance ending 27000 20200 18800 66000
Requirement: 03
If the company needs $20000 minimum cash balance to start each month, then loan can not be
repaid in full by June 30. If the loan is repaid in full, the cash balance will drop only to $ 9000 on
June 30 as shown above. Some portion of loan will have to be carried over to July.
5. Exercise 9-5
1. April May June Total

February sales:
$230000 x 10% $23000 $ 23000
March sales:
$2600000 70%
10% ………. 182000 $26000 208000
April sales
$300000 x 20%
70% 10% ……. 60000 210000 $30000 300000
May sales
$500000 x 20%
70% …………… 100000 350000 450000
June sales
$200000 x 20% 40000 40000
Total cash
collection $265000 $336000 $420000 $1021000
2. Accounts receivable at June 30:

From May sales: $500000 x 10% ……………….. $50000
From June sales: $200000 x (70% + 10%) ….... 160000
Total accounts receivable …………………… &210000
6. Problem 9-13
1. Schedule of expected cash collection:

Month
July August September Quarter
From accounts receivable:
May sales
$250000 x 3 % …………. $ 7500 $7500
June sales
$300000 x 70% 3% 210000 $9000 219000
From budgeted sales:
July
$400000 x 25%
70% , 3% ………… 100000 280000 $12000 392000
August
$600000 x 25%, 70% 150000 420000 570000
September
$320000 x 25% ……… 80000 80000
Total cash collections …… $317500 $439000 $512000 $1268500
2. Cash budget:
Month
July August September Quarter
Cash balance beginning ………. $44500 $28000 $ 23000 $44500
Add receipts:
Collection from customers 317500 439000 512000 1268500
Total cash available ……… 3621000 467000 535000 1313000
Less cash disbursements:
Merchandise purchases 180000 240000 350000 770000
Salaries and wages 45000 50000 40000 135000
Advertising ………. 130000 145000 80000 355000
Rent payments ……… 9000 9000 9000 27000
Equipment purchases 10000 - - 10000
Total cash disbursements 374000 444000 479000 1297000
Excess (deficiency) of
receipts over disbursement (12000) 23000 56000 16000
Financing:
Borrowings ………………… 40000 -- -- 40000
Repayments ………………… -- -- (40000) (40000)
Interest ……………………. -- -- (12000) (12000)
Total financing ………. 40000 -- (41200) (12000)
Cash balancing ending $28000 $23000 $14800 $14800
3. If the company needs$20000minium cash balance to start each month, than the loan cannot be
repaid in full by September 30. If the loan is repaid in full, the cash balance will drop to only
$14800 on September 30 ,as shown above . Some portion of the loan balance will have to be
carried over to October, at which time the cash inflow should be sufficient to complete
repayment.
Cash Budgeting
Concepts of Cash Budget and Cash Budgeting
Cash budget is a schedule of estimated cash receipts, cash disbursements and cash balances of a
firm over specified period of time. It is an important technique of cash planning and control. The
task of preparing cash budget is known as cash budgeting. The net cash position, surplus or
deficiency of a firm as it moves from one budgeting sub – period to another is highlighted by the
cash budget. Therefore, the financial management of a firm should project the future cash
receipts, cash disbursements with various cash balances, subtract the disbursements from the
receipts to determine net cash flows and then select that cash balance which maximizes the
present value of the net cash flows. Such projection of cash receipts (cash inflows) and cash
disbursements (cash outflows) is known as cash budgeting.
Purposes of Cash Budget

The main purpose of a cash budget is to determine the requirements of cash in advance for a
particular period of time in order to smooth running of a firm. To achieve the main purpose the
following specific purposes should be considered :
i) To coordinate the timings of cash needs,
ii) To pin point the period(s) when there is likely to be excess cash,
iii) To enable a firm having sufficient cash to take advantage of cash discount on its
accounts payable
iv) To help arrange requisite funds on the most favorable terms and prevent the
accumulation of excess funds.
Elements of Cash Budget
The following are the main elements of cash budgeting system:
i) Selection of time period to be covered by the budget. It is known as planning horizon.
It should be determined in the light of the circumstances and requirements of a
particular case.
ii) Selection of the factors that have a bearing on cash flows.
Cash flows may be two types which are presented below:
Operating Cash Flows:
Inflows Outflows
1. Cash sales of Inventories 1. Accounts Payable
2. Collection of Accounts Receivables 2. Purchase of Raw Materials
3. Disposal of Fixed Assets 3. Payroll
4. Overhead Expenses
5. Maintenance Expanses
6. Purchase of Fixed Assets
Financial Cash Flows

Inflows Outflows
1. Loans 1. Tax Payments
2. Sale of Securities 2. Repayment of Loan
3. Interest Receipts 3. Repurchase of share
4. Dividend Receipts 4. Interest Paid
5. Rent Receipts, 5. Dividend Paid
6. Refund of tax 6. Rent Paid
Preparation of Cash Budget and Format for a Cash Budget

After the time span of the cash budget has been decided and the pertinent operating and financial
cash flows have been identified, the final step is the preparation of cash budget. While preparing
cash budget one has to consider the flowing main points:
i) Target or minimum cash balance which a firm desires to maintain in order to run its
business smoothly,
ii) Net cash flows which is determined by estimating the cash disbursements and cash
receipts expected to be generated each period.
The flowing figure 14.1 presents the Format for a Cash Budget
Particulars Months
A. Cash Inflows
1. Cash sales of Inventories
2. Collection of Accounts
Receivables
3. Disposal of Fixed Assets
4. Loans
5. Sale of Securities
6. Interest Receipts
7. Dividend Receipts
8. Rent Receipts,
9. Refund of tax
B Cash Outflows
1. Accounts Payable
2. Purchase of Raw Materials
3. Payroll
4. Overhead Expenses
5. Maintenance Expanses
6. Purchase of Fixed Assets
7. Tax Payments
8. Repayment of Loan
9. Repurchase of share
10. Interest Paid
11. Dividend Paid
12. Rent Paid
C Net Cash Flows (A- B)
D Beginning Cash Balance
E… Ending Cash Balance
F. Target/Minimum Cash Balance
G. Surplus (deficit) Cash (E – F)
Methods
There are three methods of preparation of cash budget namely : i) Maintaining Target/Minimum
Cash Balance, ii) Scheduling of Receipts and Disbursement Method and iii) Combination of (i)
and (ii). The following paragraphs follow discussion on each of the methods:
i) Maintaining Target/Minimum Cash Balance: Under this method, the firm desires
to maintain a target or minimum cash balance in order to conduct its business without
interruption. As a result, if the net cash flows and the beginning cash balance together
which comprise the ending cash balance exceeds the target cash balance, that
exceeding amount is treated as surplus cash balance. On the other hand, if the ending
cash balance is lower than the target cash balance that shortfall amount is considered
as deficit cash balance.
ii) Scheduling of Receipts and Disbursements Method : Under this method, the net
cash flow is determined by deducting total cash disbursements from total cash
receipts. Whenever the total receipts exceed the total disbursement, the exceeding
balance is called positive net cash flow. On the other hand, when total cash
disbursement exceed the total receipts the exceeding balance is termed as negative
cash flow which is unexpected for a firm.
iii) Combination of (i) and (ii) methods : Under this method, both the target method
and scheduling method are followed simultaneously. This method is regarded as the
best one since it considers both the target and scheduling methods.
Problems and Solutions
Unilever Ltd. wants to prepare a cash budget for the months of September through December.
From the following information prepare the cash budget and state if the company will need to
invest excess funds or borrow funds during these months :
1. Sales were $50,000 in June and $60,000 in July. Sales have been forecasted to be $65,000,
72,000, $63,000, $59,000 and $56,000 for the months of August, September, October, November
and December respectively. In the past, 10% of sales were on cash basis and the collections were
50% in the first month, 30% in the second month and 10% in the third month following the sales.
2. Every 4 months 500 of dividends from investments are expected. The first dividend payment
was received in January.
3. Purchases are 60% of sales, 15% of which are paid in cash, 65% are paid 1 month later and the
rest is paid 2 months after purchase.
4. $8,000 dividends are paid twice a year in March and September.
5. Monthly rent is $2,000.
6. Taxes are paid $6,500 payable in December.
7. A new equipment will be purchased in October for $2,300.
8. $1,500 interest will be paid in November.
9. $1,000 loan payments are paid every month.
10. Wages and salaries are $1,000 + 5% of sales in each month.
11. August’s ending cash balance is $3,000.
12. The company would like to maintain a minimum cash balance of $10,000.
Solution
Unilever Ltd.
Cash Budget for the Months of September to December
(In Dollar)
Particulars September October November December
A. Cash Receipts/Inflows :
Cash sale (10% of sales) 7,200 6,300 5,900 5,600
Collections of Accounts Receivables(i)
50% in the 1st month following sales 32,500 36,000 31,500 29,500
30% in the second month following 18,000 19,500 21,600 18,900
sales
10% in the 3rd month following sales 5,000 6,000 6,500 7,200
Cash Dividend (3rd Installment) 500 - - -
Total Cash Receipts 63,200 67,800 65,500 61,200
B. Cash Disbursements/Outflows
15% cash purchases (ii) 6,480 5,670 5,310 5,040
65% are paid one month later 28,080 24,570 23,010 21,840
20% are paid two months after 8,640 7,560 7,080 6,720
Dividend payment 8,000 - - -
Rent 2,000 2,000 2,000 2,000
Taxes - - - 6,500
Purchase of Equipment - 2,300 - -
Interest - - 1,500 -
Loan repayment 1,000 1,000 1,000 1,000
Wages and Salaries 4,600 4,150 3,950 3,800
Total Cash Disbursement 58,800 47,260 43,850 46,900
C. Net Cash Flows (A - B) 4,400 20,540 21,650 14,300
D. Beginning Cash Balance(iii) 3,000 7,400 27,940 49,590
E. Ending Cash Balance 7,400 27,940 49,590 63,890
F. Minimum Cash Balance 10,000 10,000 10,000 10,000
G. Surplus (Deficit) Cash (E- F) (2,600) 17,940 39,590 53,890
Summary :
The company will need to invest surplus funds during October, November and December. But it
will need to borrow fund during September in order to meet its deficit cash.
Notes :
(i) a. In September, 50% are collected from August’s sale and so on for other months.
b. In September 30% are collected from July’s sales and so on for other months.
c. In September 10% are collected from June’s sales and so on for other months.
(ii) Total purchases for September, October November and December are 60% of the sales of the
respective months i.e., $43,200, 37,800, 35,400 and 33,600.
(iii) August’s ending cash balance is the beginning balance for September and so on for other
months
Review Questions
Short Questions
1. Define cash budget and cash budgeting.
2. What are the purposes of cash budget? Explain.
3. Discuss the elements of cash budget.
4. Show the format for a cash budget.
Broad Questions
1. What are the methods of preparation of cash budget? Explain in detail.
2. Describe the main elements of cash budget.
3. How do you prepare a cash budget?
Review Problem
Problem – 1
Consider the balance sheet of Beximco Textile Ltd. The company has received a large order and
anticipates the need to go to its Bank to increase its borrowing. As a result, it has to forecasts its
cash requirements for January, February and March. The company collects 20% of its sales in
the month of sale, 70% in subsequent month and 10% in the second month after sale. All sales
are on credit.
(in ‘000)
Tk. Tk.
Cash 50 Accounts Payable 360
Accounts Receivable 530 Bank Loan 400
Inventories 545 Accruals 212
Net Fixed Assets 1836 Long – term debt 450
Common Stock 100
Total 2961 Retained Earnings 1439
Total 2961
Purchases of raw materials are made in the month prior to the sale an amount to 60% of sales in
subsequent month. Payments for these purchases occur in the month after the purchase. Labor
costs are expected to be 1,50,000 in January, 2,00,000 in February and 1,60,000 in March. Other
expenses are expected to be 1,00,000 par month. Actual sale are as follows (in ’000):
November 500, December 600, January 600, February 1,000, March 650, April 750.
Required :
a) Preparation of cash budget for the month of January, February and March.
b) Determine the amount of additional bank borrowings necessary to maintain a minimum
cash balance of 50,000 taka.
Chapter -7
Relevant Costing
01.Concepts of Relevant Information (RI)

The predicted future costs & revenues will differ among alternative courses of actions Note that
R.I. is a prediction of future & not a summary of the past. Historical cost (past cost) has no direct
bearing on a decision. So, these costs are not relevant. Because a decision can not affect past
data. Decision always affects the expected future data, only those that will differ from alternative
to alternative are relevant to the decision .Any item that will remain the same regardless of the
alternative selected in irrelevant. For instance, if a departmental manager’s salary will be the
same regardless of the products stocked or not; the salary is irrelevant to the selection of
products.
02.Example
Cost of direct material of an ashtray goes as follow;
Aluminum Copper Difference
Direct Materials $.20 $.30 .10
Here, the relevant cost is the expected future cost of copper compared with expected future cost
of aluminum.
Again, consider cost of direct material which will remain same regardless of material used .So
labor cost is irrelevant.
03. Avoidable & Unavoidable costs

Avoidable costs; Cost that will not continue if an ongoing operating is changed for deleted are
relevant. Avoidable costs include departmental salaries & other costs that could be eliminated by
not operating specific dept.
Unavoidable costs; Costs that continue even if an operation is halted are not relevant because
they are not affected by a decision to delete the dept.
04.Make or Buy or Replacement or Not decision
b) Opportunity , outlay & differential costs ;
 An opportunity cost is the maximum available contribution to profit forgone by

using limited resources for a particular purpose. Such definition indicates that
opportunity cost in not the usual outlay cost recorded in Accounting.
As example, Salary forgone by a person who quits a job to start a new business
 Differential costs ; (Incremental costs )
The difference in total cost between two alternatives known as D.C or I.C
c) Make or Buy Decision;
Companies often must decide whether to make a product or service or Buy it from outside
supplies .They apply relevant cost analysis to such a decision .
What quantitative factors are relevant to such a decision? A key factor is whether there are
idle facilities or not.
The key to make or Buy Decision is identifying the additional costs for making (or costs
avoided by buying)
d) Replacement or not of old machine ;
 Book value of old machine is irrelevant. Depreciation is also irrelevant.

 Disposal value is relevant.
 Gain or loss on disposal; Combination of I&R.
 Costs of new machine are relevant.
Exercise: 13-4
1. Analysis of Make or Buy Decision:
Per unit differential cost Costs of 15000 units
Particulars
Make Bye Make Bye
Cost of Buying 20 300000
Cost of Making
Direct Materials 6 90000
Direct Labor 8 120000
Variable M O/H 1 15000
Fixed M. O/H-traceable 2 30000
Total cost 17 20 255000 300000
So, Difference is favor of making $ 3

Comment: No, outside suppliers offer is not accepted.
Particular s Make Bye

Cost of Buying ( As above) 300000
Cost of Making ( as above) 255000
Segment Margin foregone on new 65000
product ( Opportunity cost)
320000 300000
So, Difference in favor of Buying from outside Suppliers

Comment: Thus the Co. should accept the offer & Purchase from outside suppliers.
Exercise: 13-10
Per unit differential cost Costs of 20000 units
Particulars
Make Bye Make Bye
Cost of Buying 23.50 470000
Cost of Making
Direct Materials 4.80 96000
Direct Labor 7.00 140000
Variable M O/H 3.20 64000
Fixed M. O/H-traceable 4.00 80000
Total cost 19.00 23.50 380000 470000
The remaining $6 fixed manufacturing overheads would not be relevant, since it would continue
even if the specific part were purchased.
The $ 150000 rental value of the space being used to produce part R-# represent an opportunity
cost of continuing to produce internally.
Thus complete analysis goes as follows:
Particular s Make Bye

Cost of Buying ( As above) 470000
Cost of Making ( as above) 380000
Segment Margin foregone on new product 150000
( Opportunity cost)
Total cost 530000 470000
Net Advantage in favor of Buying 60,000
Comment: Thus the Co. should accept the offer & bye from the outside suppliers.
05. Exercise;
No the bilge pump product line should not be discontinue. The computations are;
Contribution margin lost if the line is dropped DR (460000)

Fixed cost that can be avoided if the line is dropped;
Advertising …………………………… DR270000
Salary of the product line manager ……… 32000
Insurance of inventories …………. 8000 310000
Net disadvantage of dropping the line ……… DR (150000)
The same solution can be obtained by preparing comparative income statement;
Keep product Drop product Difference net income

Line Line increase or decrease
Sales …DR850000 DR 0 DR (850000)
Variable manufacturing expenses 330000 0 330000
Sates commission 42000 0 42000
Shipping 18000 0 18000
Total variable expenses 390000 0 390000
Contribution margin … 460000 0 (4600000)…
Advertising 270000 0 270000
Deprecation of equipment 80000 80000 0
General factor overhead 105000 105000 0
Salary of product line manager 32000 0 32000
Insurance on inventories 8000 0 8000
Purchasing department expenses 45000 45000 0
Total fixed expenses 540000 230000 310000
Net loss DR (80000) DR (230000) DR (150000)
06.Exercise;
1.
per unit
differential cost 15000 units
Make Buy Make Buy
Cost of purchasing …………… $35 $525000
Direct materials ……………….. $14 $210000
Direct labor ……………….. 10 150000
Variable manufacturing overhead 3 45000
Fixed manufacturing O/H traceable 2 30000
Fixed manufacturing O/H common - -
Total costs $29 $35 $435000 $525000
Difference in favor of continuing
to make the parts ……………… $6 $90000
Only the supervisory salaries can be avoided if the parts are purchased. The
remaining book value of the special equipment is a sunk cost; hence the $4 per unit
depreciation expense is not relevant to this decision. Based on this data, the
company should reject the offer and should continue to produce the parts
internally.
2. Make Buy
Cost of purchasing (part-1) …………… $525000
Cost of making (part -1) ……………. $435000
Opportunity cost- segment margin
foregone on a potential new product line 150000
Total cost ……………….. $585000 $525000
Difference in favor of purchasing
from the outside supplier ……………….. $60000
Thus the company should accept the offer and purchase the parts from the outside supplier.
The costs that are relevant in a make or buy decision are those costs that can be avoided as a
result of purchasing from the outside. The analysis for this exercise is;
. Per unit
Differential cost 30000 units
Make Buy Make Buy
Cost of purchasing …………… $21.00 $630000
Cost of making;
Direct materials ……………….. $3.60 $108000
Direct labor ……………….. 10.00 300000
Variable overhead 2.40 72000
Fixed O/H ………………… 3.00 90000
Total costs …………….. $ 19.00 $21.00 $570000 $630000
The remaining $6 of fixed overhead cost would not be relevant. Since it will continue
regardless of whether the company makes or buy the parts.
The $ 80000 rental value of the space being used to produce part s-6 represents an
opportunity cost of continuing to produce the internally. Thus, the completed analysis would
be
Make Buy
Total cost as above ....................... $570000 $630000
Rental value of the space (opportunity cost) 80000
Total cost including opportunity cost $650000 $630000
Net advantage in favor of buying ....... $20000
07. Exercise;
Keep the Drop the Difference net
flight flight income Increases
or decreases
Ticket revenue ................................... $14000 $0 $(14000)
Less Variable expenses ..................... 1050 0 1050
Contribution margin .......................... 12950 0 (12950)
Less flight expenses
Salaries, flight crew ......................... 1800 1800 0
Flight promotion .......................... 750 0 750
Depreciation of aircraft ..................... 1550 1550 0
Fuel for air craft ................................. 6800 0 6800
Liability insurance ............................ 4200 2800 1400
Salaries, flight assistance ...................... 500 0 500
Baggage loading ....................................... 1700 1700 0
Overnight cost for flight crew ..................... 300 0 300
Total flight expenses ................................... 17600 7850 9750
Net loss ............................................................. $(4650) $(7850) $(3200)
Chapter -8
Standard costing &Variance Analysis
Concepts
 Standard refers to benchmark or predetermined. Hence
standard in relation to costs refers to benchmark or predetermined
costs of production. Standard costs are determined on the basis of
budgeted costs. As for example, budgeted Direct material cost,
Direct Labor costs, & Overheads costs. Determination of standard
costs is known as Standard Costing.
 Variance refers to the difference between Standard & Actual. So
variance related to Cost of Production is the difference between
Standard costs & Actual costs. Whenever, actual cost are higher
than the standard costs; the variance is called Unfavorable (U). On
the other hand, if actual costs are lower than the standard costs; the
variance is called as favorable (F).
Purpose of Standard Costing & Variance Analysis
The main purpose of Standard Costing & Variance Analysis is to
control costs of production of the various elements of cost i.e. Direct
material cost (DMC), direct labor cost (DLC) and overhead costs
(O/H C). The control process involves comparison of actual costs
with standard costs. After comparison, if variance is U, then
necessary corrective action needs to be undertaken.
Types of Variance:
Based on three elements of costs, the cost variances are classified
into three types.
 Material Variance: They are known as Material Cost variance
(MCV). MCV is the difference between standard cost of the
materials that should have been incurred and the cost of materials
that has been actually incurred.
It is divided into 2 sub variances.
 Material price variance (MPV) = It is difference between price to
be paid for materials and actual price,
 Material Usage Variance (MUV) = It is difference of actual usage
of materials and the standard usage
 Labor Variance: They are known as Labor Cost variance
(LCV). LCV is the difference between standard labor cost and
actual labor cost.
It is divided into 2 sub variances.
 Labor Rate Variance (LRV) = It is difference between standard
wages rate and actual wages rate,
 Labor Efficiency / Usage Variances (LEV / LUV) = It is difference
actual efficiency of labor and the standard efficiency of labor.
i. Overhear Variance:
 They are known as Overhead Cost variance (OHCV). OHCV is the
difference between standard overhead cost and actual overhead
cost. It is two types i.e Variable Overhead Variance & Fixed
Variance.
Determination of Variances (Formulas Used)
 Material Cost Variance (MCV) = Total Standard Costs (TSC) –
Total actual costs (TAC)
 Material Price Variance (MPV) = (Standard Price – Actual Price)
Actual Quantity
 Material Usage Variances (MUV) = (Standard Quantity – Actual
Quantity) Standard Price
 Labor Cost Variance (LCV) = Total Standard Costs (TSC) – Total
Actual Costs (TAC)
 Labor Rate Variance (LRtV) = (Standard Rate – Actual Rate)
Actual Hour
 Labor Usage / Efficiency Variance (LUV/LEU) = (Standard Hour
– Actual Hour) Standard Rate.
Problem:
A firm makes a product with the following standards
Particulars Taka
Direct Materials (2kg @ Tk 2 per kg) 4.00
Direct Labor (2 hr @ 2.50per hr) 5.00
Variable overheads (Tk 2 per DL hr) 4.00
Total 13.00
In May 1990 the production manager receives a very favorable report

from the purchase dept. The firm bought direct materials for Tk 1.50 per
kg. In June the materials purchased were used with the following results.
Budgeted production 8000 units
Actual production 7200units
Direct labor (16200 hrs) Tk 40000
Variable Overhead Tk 33000
Materials used 1 15840 kg
Required:
A. Determine the relevance Materials and labor Variance.
B. Prepare the Variance report showing the probable reasons for the
Variance.
Solution
Computation of relevant variances:
Direct Material variance:
1. Material Price Variance =(Standard Rate – Actual Rate) ×Actual
Quantity
= (Tk2 – Tk1.50) × 15840
= Tk7920 ( F )
2. Material Usage Variance = (Standard Quantity – Actual Quantity) ×
Standard Rate
= [(7200 × 2kg) - 15840] ×Tk2
= Tk2880 (U)
3. Material Cost Variance = [Total Standard Material Cost - Total

Actual Material cost]
= (14400 × 2) – (15840 × 1.50)
= Tk 28800 –Tk 23760 = Tk 5040 ( F )
Computation of relevance variable:
Direct Material variance:
Confirmation:
Direct Material Cost Variance = Direct Material
Price Variance + Direct Material Usage Variance
Solution
Computation of relevance variable:
Direct Labor Variance:
D.L Rate Variance = (Standard wage rate – Actual wage rate) × Actual
hour
= (Tk2.50 – Tk2.469) × 16200
= Tk500 (F)
Actual wage rate = tk 40000/16200=2.469 tk
Labor Efficiency Usage Variance =(Standard hour – Actual Hour)
× Standard wage rate
= (14400 - 16200) × 2.50
= Tk4500 (U)
Standard Hour = (7200units × 2hrs) = 14400hrs
Labor cost Variance = (Total Standard labor Cost – Total Actual
labor Cost)
= (14400 × 2.50) – Tk40000
= Tk4000 (U)
Types of Variances Nature of Main Reason Responsibility
Variance
Material cost variance F Lower Actual Material Price Purchase Manager
Material Price variance F Lower Actual Material Price Purchase Manager
Material usage variance U High Material use Production Manager
Labor cost variance U High actual use Production Manager
Labor Rate variance F Lower labor/ wage rate Production Manager
Labor Efficiency Variance U Higher actual hours Production Manager
Solution
Computation of Relevance Variable:

Direct Labor Variance:
Confirmation:
Labor cost Variance = Direct Labor Rate Variance + Labor Efficiency
usage Variance
Exercise:1
1.Number of helmets ……………. 35000
Standard kilograms of plastic per helmet x 0.6
Total standard kilograms allowed … 21000
Standard cost per kilograms ……… x RM8
Total standard cost ………………. RM168000
Actual cost incurred (given) RM171000
Total standard cost (above) 168000
Total material variance – unfavorable RM 3000
2.Material price variance = AQ (AP -SP) 22500kgs. (RM7.60 per

kg – RM8.00 per kg) = RM9000 F
RM171000/22500kgs = RM7.60per kg
Material quantity variance = SP (AQ – SQ)
RM8 per kg. (22500kgs – 21000 kgs) = RM 12000 U
Exercise-2
Material price variance = AQ (AP -SP)
20000lbs. ($2.35per lb -$2.50 per lb) =$3000 F
$2.50per lb (20000lbs – 18400 lbs) = $4000U
Exercise-3
Labor rate variance = AH (AR - SR)
750hrs ($13.90per hour - $12.00per hour) = $1425 U
10425/750hrs = $13.90 per hour
Labor efficiency variance = SR (AH-SH)
$1200per hour (750 hrs – 800 hrs) = $600F
Exercise-4
Number of units manufactured ……… 20000
Standard labor time per unit …………… x 0.3
Total standard hours of labor time allowed 6000
Standard direct labor rate per hour x $12
Total standard direct labor cost $72000
18 minutes /60 minutes per hour = 0.3 hours
Actual direct labor cost …………………. $73600
Standard direct labor cost ……………. 72000
Total variance – unfavorable $ 1600
Actual hours of input Actual hours of input Standard hours

allowed
at the Actual Rate at the standard rate for output at the
standard rate
(AH x AR) (AH x SR) (SH x SR)
$73600 5750 hrs x1200 per 6000hrs x $12000
hr = $69000 per hr = $72000
Exercise-5
Variable overhead spending variance = AH (AR – SR)
5750 hrs ($3.80 per hr - $4.00 per hr) = $ 1150 F
$21850/5750 hrs = $3.80 per hr
Variable overhead efficiency variance = (AR –SR)
$4.00 per hr (5750 hrs – 6000 hrs) = $ 1000 F
01. Exercise
1. Number of helmets ……………. 35000

Standard kilograms of plastic per helmet x 0.6
Total standard kilograms allowed … 21000
Standard cost per kilograms ……… x RM8
Total standard cost ………………. RM168000
Actual cost incurred (given) RM171000
Total standard cost (above) 168000
Total material variance – unfavorable RM 3000
2. Material price variance = AQ (AP -SP)
22500kgs. (RM7.60 per kg – RM8.00 per kg) = RM9000 F

RM171000/
22500kgs = RM7.60per kg
RM8 per kg. (22500kgs – 21000 kgs) = RM 12000 U
02. Exercise;
Material price variance = AQ (AP -SP)

20000lbs. ($2.35per lb -$2.50 per lb) =$3000 F
Material quantity variance = SP (AQ – SQ

$2.50per lb (20000lbs – 18400 lbs) = $4000U
03. Exercise;
Labor rate variance = AH (AR - SR)

750hrs ($13.90per hour - $12.00per hour) = $1425 U
10425/750hrs = $13.90 per hour
Labor efficiency variance = SR (AH-SH)

$1200per hour (750 hrs – 800 hrs) = $600F
04. Exercise;
Number of unites manufacturer ……… 20000

Standard labor time per unit …………… x 0.3
Total standard hours of labor time allowed 6000
Standard direct labor rate per hour x $12
Total standard direct labor cost $72000
18 minutes /60 minutes per hour = 0.3 hours
Actual direct labor cost …………………. $73600

Standard direct labor cost ……………. 72000
Total variance – unfavorable $ 1600
2.
Actual hours of input Actual hours of input Standard hours allowed
at the Actual Rate at the standard rate for output at the standard rate
(AH x AR) (AH x SR) (SH x SR)
$73600 5750 hrs x1200 per 6000hrs x $12000
hr = $69000 per hr = $72000
05. Exercise;
Variable overhead spending variance = AH (AR – SR)

5750 hrs ($3.80 per hr - $4.00 per hr) = $ 1150 F
$21850/5750 hrs = $3.80 per hr
Variable overhead efficiency variance = (AR –SR)

$4.00 per hr (5750 hrs – 6000 hrs) = $ 1000 F
Chapter -9
Responsibility Accounting
Concept:
Cost Center: A cost center is a business segment whose manager has control
over costs but not over revenue or in investment fund. As for example, Prime cost
center, overhead cost center etc.
Profit Center: In contrast to a cost center, a profit center is any business segment
whose manager has control over both cost and revenue. As for example,
Production cost center, cost f sales enter, gross profit center, net profit center etc.
Investment Center: An investment center is any segment of an organization

whose manager has control over cost, revenue and investments in operating assets.
As for example, Fixed asset investment center and current asset investment center
Responsibility Center: Responsibility Center is broadly defined as any part of an

organization whose manager has control over cost, revenue or investment funds.
Cost centers, profit centers and investment centers are all known as responsibility
center.
Segmented Financial Statement: Those Financial Statements which are

prepared segment wise of an organization. Such segment, may be product segment,
market segment etc. As for example, Segmented Income statement, segmented
balance sheet etc.
Return on Investment (ROI): ROI can be found out as follows:

Computation of ROI=
Margin X Turnover
Net operating Income Sales

= Sales X Average Operating
Assets
Residual Income (RI): RI is the excess of net operating income over minimum
required return on operating assets:
Segmented Income Statement
Exercise: 12-5
01.
Total Co. South Central North
$ % $ % $ % $ %
Sales 1500000 100 400000 100 600000 100 500000 100
Less Variable Expense 588000 39.2 208000 52 180000 30 200000 40
CM 912000 60.8 192000 48 420000 70 300000 60
Less: Traceable fixed 770000 51.3 240000 60 330000 55 200000 40
Expense
Segment Margin 142000 9.5 (48000) (12) 90000 15 100000 20
Less: Common F.E. (175000) (11.7)
(not Traceable)
(945000-770000)
Net loss (33000) (2.2)
02. Incremental Sales (600000 x 0.15) $90000

CM Ratio 70%
Incremental CM 63000
Less: Advertising 25000
Incremental NOI $38000
Yes the increased advertising program is recommended since it would lead to an incremental Net
operating Income of $ 38000
Exercise: 12-7
01. Completion of ROI=

Margin X Turnover

X
Sales Average Operating Income
Eastern Division:
90000 1000000
X
1000000 500000
= .09 X 2
=18%
Western Division:
105000 1750000
X
1750000 500000
= .06 X 3.5
=21%
02. From the data available, it can be said that Western Division Manager is doing better job as
compared to DM of Eastern. This is so because of higher ROI of Western Division 21% than that
of Eastern Division 18%.
Exercise: 12-9
01. Computation of ROI=

Margin X Turnover

X
Sales Average Operating Assets
Perth Division:
630000 9000000
X
900000 3000000
= .07 X 3
= 21%
Darwin Division:
1800000 20000000
X
20000000 10000000
= .09 X 2
= 18%
02. Computation of Residual Income:
Average Operating Asset

Perth Division Darwin Division
Average Operating Asset (a) 30,00,000 1,00,00,000
Net Operating Income 6,30,000 18,00,000
Minimum Required
Return on operating Asset 16% on (a) (480000) (1600000)
Residual Income 150000 200000
03. No. The Darwin Division is simply larger than the Perth Division in terms of operating asset
& for this reason one would expect that it would have a greater amount of residual income.
01. Exercise; 12-5
1.
Total company East Central West
Sales …………………. $1000000 100% $250000 100% $400000 100% $350000 100%
Less variable expenses 390000 39.0 130000 52 120000 30 140000 40
Contribution margin …… 610000 61 120000 48 280000 70 210000 60
Less traceable fixed expenses 535000 53.5 160000 64 200000 50 175000 50
Divisional segment margin 75000 7.5 $(40000) (16%) $80000 20% $35000 10%
Less common fixed expenses
not traceable to divisions 90000 9.0
Net income (loss) ………. (15000) (1.5)
$6 25000-$ 535000 = $90000
2.
Incremental sales ($3500000 x 20%) $70000
Contribution margin ratio x 60%
Incremental contribution margin ………….. 42000
Less incremental advertising expenses ……… 15000
Incremental net income ………………….. $27000
Yes, the advertising program should be initiated.

02. Exercise;
1. ROI computation;
ROI = Margin x Turnover

= Net operating income x sales
Sales average operating assets
Queensland division = $360000 x $7000000

$4000000 $2000000
= 6% x 3.5%
= 21%
03.
The manager of the New South Wales division seems to be doing doing
job. Although his margin of the Queensland division. His turn over is
higher (a turn over of 3.5 as compared to a turnover of two for the
Queensland division). The greater turnover more than offsets the lower
margin, resulting in a 21%ROI as compared to an 18% ROI for the other
division.
04. Exercise;12-13
1.
Osaka division = $210000 x $3000000

$3000000 $1000000
= 7% x 3%
= 21%
Yokohama division = $720000 x $9000000
$9000000 $4000000
= 8% x 2.25%
=18%
2. Osaka Yokohama
Average operating assets $1000000 $4000000
Net operating income $210000 $720000
Minimum required return on
average operating assets- 15% x (a) 150000 600000
Residual income …… $60000 $120000
3. No. the Yokohama division is simply larger than the Osaka division
and for this reason one would expect that it would have a grater amount
of residual income.
05. Exercise;12-16
1.
Asia = $600000 x $12000000
$12000000 $3000000
= 5% x 4%
= 20%
Europe = $560000 x $14000000
$14000000 $7000000
= 4% x 2%
=8%
North America = $800000 x $25000000
$25000000 $5000000
= 3.2% x5%
=16%
2. Asia Europe North America

Average operating assets $3000000 $7000000 $5000000
Required rate of return x 14% x 10% x 16%
Required operating income $420000 $700000 $800000
Actual operating income $600000 $560000 $800000
Required operating income 420000 700000 800000
Residual income $ 180000 $ (140000) $ 0
Chapter -10
Performance measurement
01. Concepts;
Performance refers to job or activities & measurement refers to evaluation or

assessment. So by P.M. is meant evaluation or assessment of job of an
organization.
02. Types of performances;
Performances are of 2 types namely; financial & non financial.

a) Financial performance refers to performance which is subject to
measurement financially or quantitatively. As for example, profit / loss,
sales, purchase etc. performance of an organization.
b) Non financial performance refers to refer to performance which is subject to
qualitative measurement only. As for example, managers efficiency, quality
of product.
03. Types of measurement;
A. Profitability measurement;
Ratios Standard Norm
a) Profit margin = Net Profit x 100 = 5%- 6%
Sales
b) Return on investment = Net Profit x 100 = 10%- 12%

Investment
c) Return to Equity = Net Profit x 100 = 13%- 15%

Equity
d) Return on Capital Employed = Net Profit x 100 = 15%-16%
Capital Employed
B) Productivity Measurement;
Productivity refers to production / output in relation input . that is production /
output divided by input like raw materials ( units &costs ),labor (hours &costs)etc .
Is known as productivity.
Measures of productivity;
Resources Possible outputs Possible Inputs

Labor Standard Labor Hours Actual Labor Hours
Value of output Cost of raw materials
Output in Units Raw materials in units
Sales Revenue Raw materials cost
Materials Output in Units Raw materials in units
No. of good Units Total No. of units
Capital Sales revenue Cost of sales
Sales revenue Total Machine Hours
04.Practicle Problem (P.8-39)page 325 &326
Solution;
1. Labor productivity in terms of physical measures

For 19 X 4 = Sales Revenue
Pounds of L.P
= 720000
1360000
=0.53 times
For 19 X 7 = Sales Revenue X Inflation
Pounds of L.P
= 1394000 X 1.4
1525000
=1.27 times
Comparison; = 1.27-0.53 X 100
0.83
= 139.6%(increase)
2. Labor productivity in terms of financial measures

Direct labor cost
= 720000
316000
= 2.28 times
For 19 X 7; = Sales Revenue X Rate of Inflation
Direct labor cost
= 1394000 X 1.4
498000
=3.92
Comparison; = 3.92-2.28 X 100
2.28
= 71.9%(increase)
3. productivity measures in terms of Direct Labor Hours ;

Direct labor Hours
= 720000
45100
= 15.96 times
For 19 X 7; = Sales Revenue X Rate of Inflation
Direct labor Hours
= 1394000 X 1.4
46600
=41.83 times
Comparison; = 41.83 – 15.96 X100
15.96
= 162.09% (Increase)
05.Productivity defined ;
Productivity refers to a comparison between the output and input. More

specifically it is the ratio between input and output. in other word it is a measure
over time comparing the performance of this year with previous year which
shows the improvement achieved by the organization and reflect the return of
resources employed. In order to measure productivity output/ value added can be
compared with capital or with labor or with all the input factors taken together.
The comparison between the labor and the value of output/ value added is labor
productivity and the comparison between capital and the value of output/ value
added is capital productivity .taking all these productivity concepts into
consideration total productivity may be defined as the ratio of the value of total
output/ value added to the value of all input factors.
Productivity analysis is important for productivity improvement. In enterprises

productivity is measured to help analyzing effectiveness and efficiency. It’s
measurement can stimulate operational improvement; the very announcement,
installation and operation of a measurement system can improve labor
productivity, sometimes by 5 to 10 percent with no other organizational change
or investment. Productivity indices help to indices help to establish realistic
targets and checkpoints for diagnostic activities during an organization
development process, pointing to bottle –necks and barriers to performance.
These are also useful in inter- country and inter-firm comparisons. Furthermore
there can be no improvement in industrial relations or proper correspondences
between productivity, wages levels and gain – sharing policies without a sound
analysis system
.
06. Models and techniques of productivity analysis;
There are many models of productivity measurement and analysis in enterprises.

The following major categorization of models is possible in on the basis of
approaches or concepts on which they have been constructed.
a) Production function models.
b) Financial ratios as measurement of productivity.
c) Production based models.
d) Product – oriented models.
e) Surrogate models.
f) Economic utility models.
g) System approach based models.
Each of the above models has its merits when seen in the proper perspective. But
there is no single universal model for productivity measurement and analysis.
Before selecting any model one should go through the model to see whether the
model fulfils the following characteristics for a sound productivity measurement
model.
• It should provide simple and unambiguous signals to
improve performs (productivity , profit ,quality);
• It should breakdown change in profit to reflect the
contribution from each recourse use in production
(labor, capital ,materials ,energy)
• It should broken-down the contribution to profit change
from each resource into productivity terms and a price
recovery term;
• It should transform the above measures of change in
profit into corresponding measures of change in
profitability, change in cost per unit of output and
change in performance index numbers.
• It should be consistence signals for profit improvement
regardless of the units in which the measure in express.
07.. Quick Productivity Appraisal (QPA) Approach;
It is a systematic assessment of the company’s profitability and productivity

performance. The purpose of this approach is two fold;
# To isolate problem areas and identify priority areas for improvement.
# To establish productivity indicators for the whole organization.
QPA consists of the three components;
a) Company performance appraisal (CPA)
b) Qualitative assessment.
c) Inter-firm comparison.
CPA; the approach suggests a flow of company performance.
Qualitative Assessment; Qualitative assessment can be done by evaluating
profitability and productivity trends.
Inter-firm comparison ; It is an exchange of information regarding costs,
performance , efficiency and other relevant data between firms engaged in similar
activities .
08. Productivity and Profitability Relationship;
Profitability refers to profit earning capacity of an enterprise. It is one of the best

measurements of evaluating of overall performance of an enterprise. But
measurement of productivity alone cannot identify the causes of productivity
changes. Profitability may be changed due to productivity or price cost movement.
Therefore it is necessary to segregate profitability into productivity and price
recovery. Considering the relationships among 3ps (Productivity, Profitability and
Price recovery) profitability is defined as the product of productivity and price
recovery. The following demonstrates this relationship:
Output Value = Output Quantity x Unit Price
Profitability = Productivity x Price Recovery
Input Value = Quantity Used x Unit Cost

Where:
Profitability = Output Value

Input Value
Productivity = Output Quantity
Quantity Used
Price Recovery = Unit Price
Unit Cost
09. Trends in producitivity:
The economic performance of the company is discussed in this section with the
help of productivity. generally the trend exhibited by total producitivity indicates
the overall performance of the company , labor productivity shows how well the
labor force has been used and capital productivity evaluation shows how well
available capital is allocated and managed . In order to get the picture of above
productivity performance, primary productivity ratio is to be calculated. But
primary ratios are not enough to identify the priority area for improvement. For
this purpose it is important to look into the secondary producitivity ratios too.
Productivity Analysis Chart
Primary Ratios
Total Productivity Value added
Labor + capital
Labor Productivity Capital Productivity
1) Value added
Total working-hours worked
2) Value added Value added Value added
Number of workers Total assets Fixed assets
3) Value added
Salaries/Wages
Secondary Producitivity Ratios

Value added Value added Value added Value added Value added Value added
Direct/salaries Indirect salaries Inventory Accounts Plant & Machinery Building
&wages &wages Machinery receivable construction
10. Productivity / Profitability Relationship:
IF THEN
Case Profitability Productivity What will happen What should be done
1 HIGH LOW Financial condition will Maintain or increase
be sound and stable productivity further
2 HIGH LOW High profitability may not Improve productivity
be sustained on a long-
term basis .In the long run
low productivity will eat
up profits.
3 LOW HIGH The company may soon Improve profitability;
be operating at a loss and strengthen market strategy,
may be on the bring of a market research, market
shut down. promotion, advertising and
pricing policy.
4 LOW LOW Shut down / bankruptcy. Improve productivity and
strengthen market.
11.Capital / Labor Relationship:
THEN
IF
Case Labor Capital C/L What happens What should be done
productivity productivity ratios
1 / / / Good Maintain or increase

productivity productivity further
performance
2 / / \ Good Maintain or increase
productivity productivity further
performance
3 / \ / Unfavorable Increase capital
productivity productivity
performance
4 \ / / Satisfactory Increase labor
productivity productivity by a)
performance developing identifying
other jobs for displaced
labor. b) Retraining
displaced labor for
other jobs.
5 \ \ / Poor First increase capital
productivity productivity .Adapt
performance available manpower to
machines.
6 / \ \ Satisfactory Increase capital
performance
7 \ / \ Unfavorable Increase labor
performance
8 \ \ \ Poor First increase labor
productivity productivity, and then
performance increase capital
productivity.
Ti

Managerial Accunting-Updated (Cash Budget) 1

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Managerial Accunting-Updated (Cash Budget) 1

Uploaded by

Copyright:

Available Formats

IIUC- Dhaka Campus

Concept of Managerial Accounting (MA) & its significance

2. Cost terms ,Concepts &Classification:

3. Cost Behavior Analysis &Use :

4. Cost Volume Profit Analysis (CVPA) :

6. Master Budget (MB) & Flexible Budget(FB):

08.Standard Costing & Variance Analysis :

09. Responsibility Accounting:

Text Book: Managerial Accounting (Tenth Edition)

Name of Course Teacher: Dr. Md .Jahirul Hoque

03. Difference between MA & FA;

04. Just in time system;

# Reducing the number of suppliers and requiring suppliers to

b) A successful JIT system requires suppliers who are willing to make

 Perform duties in accordance with relevant technical

By failing to write down the value of the obsolete inventory, Perlman

 Avoid conflicts of interest.

 Communication of information fairly and objectively.

06. Professional Ethics ;

07. Business environment;

a) TQM; Both from the views of customers and enterprises.

Problem 1-8, Ethics: Just in Time

01. Concepts and Classification;

05. A differential cost is a cost that differs between alternatives in a

Cost Behavior Selling and Product

Cost Item Cost Behavior Units of Product

Cost behavior refers to how a cost will react or respond to changes in

Cost Behavior Scenario

Units Produced and sold

1. Identification of Company’s expenses (see sheet)

High level of Activity 4500 56,000 143,000

A. Valuable Cost Element:

Shipping Expense: $ 20000 plus $8 per unit or

Salary Etc: $ 35000 plus $24 per unit or

1. Costs of goods sold …………………….Variable

2. Analysis of the mixed expenses;

A. Variable cost element;

Variable rate= Change in cost

1.Shipping expenses; A$4000

B.Fixed cost element;

C.The cost formulas are;

Morrisey &Brown, Ltd.

2. High-low analysis of maintenance cost;

Total fixed cost;

3. Variable Rate per Fixed

Thus, the cost formula would be; Y=$30000÷$2.40X.

4. Total overhead cost at an activity level of 75000 machine-hours;

01. Concept of (CVP) analysis;

It is study of the effects of output/ sales volume, sales revenue, expenses

 Total cost should be divided into VC & FC.

03. Usefulness of CVP Analysis;

CVP is one of the important financial management tools & techniques. It is

CVP analysis involves finding the most favorable combination of variable

Computation; Two approaches—

 BEP in quantity = Sales – Variable Costs- FC

 BEP in amount = Q x Sales per unit.

b) Contribution Margin Approach;

Contribution Margin =Sales –VC

05. Sales in case of target net profit;

 Sales in Unit =FC+ Target NP(TNP)

 Sales in unit= VC + FC +TNP

 Sales in Amount = Sales in Quantity x S pu