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MCO-05: Accounting for Managerial Decisions

MCO-05: Accounting for Managerial Decisions

IGNOU Solved Assignment Solution for 2021-22

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Assignment Code: MCO-05/TMA/2021-22

Course Code: MCO-05

Assignment Name: Accounting for Managerial Decisions

Year: 2021-2022

Verification Status: Verified by Professor

Attempt all the questions:

Q1. (a) Distinguish among variable, fixed and semi-variable costs. Why is this distinction important? (10)

Ans) The distinction amongst variable, fixed and semi-variable costs are given below:

Fixed Costs

The fixed cost is a cost that does not change in the short term, regardless of how the volume of production or sales changes. This cost is usually a continuous expense for a business's basic operation, or in other words, it is a business's basic operating cost that is necessary and cannot be avoided. The value of fixed cost determines the product's cost and, as a result, the company's profit and loss. Regardless of the level of output, these costs stay constant. When presented on a per unit basis, however, fixed cost varies. In other words, if manufacturing volume increases, fixed cost per unit falls, and vice versa.

Fixed costs include rent and lease, production management pay, employee salaries, and so on. It's also worth noting that fixed costs don't always stay fixed. Only up to a certain degree of production activity do they remain fixed. If there is a change in production capacity that necessitates the construction of extra buildings and equipment, people, and so on, the cost will change as well. As a result, fixed costs are set within a reasonable production range. For example, whether we manufacture 1000 or 10,000 pieces of a particular product in a given period, the factory building's rent and the production manager's salary will remain the same.

Variable Costs

Variable costs are those that fluctuate proportionally or directly with the level of output. When the volume of output rises, the total variable cost rises with it, and when the amount of output falls, the variable cost falls with it. The variable cost per unit, on the other hand, will be unaffected. Variable expenses include direct materials, direct labour, power, sales commissions, and so on.

As a result, as sales rise, variable costs will rise as well. The cost of flour, for example, is a variable cost in a bakery. Similarly, the raw materials and output of the business will affect the variable cost in other businesses. Massage therapy, for example, may involve the usage of oil, as well as the expense of laundry one or two towels. This is what the variable cost will be. As a result, variable costs are those costs that vary directly in response to changes in production/output volume. As a result, the variable cost is defined as the cost that changes in relation to the number of units produced. Direct expenses, direct labour, direct material, and so on are examples of variable costs.

Variable expenses have the following characteristics:

  1. Variable cost varies in direct proportion to output volume.

  2. Regardless of the level of activity, the cost per unit will stay constant.

  3. It is simple to allocate and distribute funds to various cost centres.

  4. Because variable costs are only incurred when production occurs, they can be managed by functional managers.

Semi-variable Costs

These expenses are both fixed and variable. These are the costs that change, but not in a linear relationship with production. Fixed costs, which make up a portion of semi variable costs, are not intended to alter in reaction to variations in activity levels. As a result, semi-variable expenses change in the same direction but not in direct proportion to changes in production volume. Semi-variable costs include things like phone bills, power consumption, depreciation, and repairs. There is a minimum rent for telephone bills, and after a certain number of calls, the charges are based on the number of calls made. Similarly, power expenses contain a set portion of the minimum fee that will be charged even if the power is not consumed, and a variable charge that will be charged based on the amount of power consumed. As a result, phone and electricity charges rise in tandem with increased consumption, but not in the same way.

(b) How cash flow statement is different from income statement? What are the additional benefits to different users of accounting information from cash flow statement? (10)

Ans) The net profit or loss from business activity for a given accounting period is reflected in the income statement. The cash flow statement, on the other hand, keeps track of the total changes in the company organization's cash and cash equivalents over the course of a financial year. The official record of financial activity and the overall situation of the corporate organisation is referred to as a financial statement. It is the end point of the accounting process, which includes the income statement, balance sheet, and cash flow statement. It aids interested parties in understanding the profitability, liquidity, performance, and position of the company. Check out the provided article, which explains all of the key differences between an income statement and a cash flow statement.

Significant Differences Between the Income Statement and the Cash Flow Statement

In terms of the distinction between cash flow and income statement, the following points are noteworthy:

  1. The most significant distinction between an income statement and a cash flow statement is that the income statement is based on an accrual basis (due or received), but the cash flow statement is based on actual cash receipt and payment.

  2. The income statement is separated into two categories: operational and non-operating activities, whereas the cash flow statement is divided into three categories: operating, investing, and financing.

  3. The income statement is useful in determining the company's profitability, while the cash flow statement is valuable in determining the company's liquidity and solvency, which indicates current and future cash flows.

  4. The income statement is based on the accrual system of accounting, which takes into account all of the income and expenses for a given fiscal year. The cash flow statement, on the other hand, is based on the cash system of accounting, which only analyses actual money inflows and outflows in a given financial year.

  5. By taking into account multiple records and ledger accounts, the income statement is created. In contrast, the income statement and balance sheet are used to create the cash flow statement.

  6. Depreciation is included in the income statement, but because it is a non-cash item, it is not included in the cash flow statement.

  7. All business organisations are required to prepare an income statement and a cash flow statement. The two statements are used by readers of financial statements (stakeholders, such as creditors, investors, suppliers, competitors, and employees) to learn about the company's performance, stability, and solvency situation. Internal and tax audits are also conducted using these assertions.

Benefits of a Cash Flow Statement

  1. The Cash Flow Statement is used to determine the exact amount of cash inflows and outflows from various corporate operations. It aids in comparing prior cash budgets with current cash requirements in order to determine future cash requirements. It provides reliable information on the business's cash transactions.

  2. The cash flow statement is primarily utilised in developing a cash budget for future demands and in determining the business's periodic cash requirements.

  3. It identifies the most significant adjustments that must be made in order for the company's financial position to improve, and it prioritises crucial activities for management to consider.

  4. It gives information on various investment and financing cash transactions that occur throughout the year and aids in the evaluation of the company's financial structure. When compared to ratio analysis, the cash flow statement aids in determining the profitability of the business.

Q2. (a) What do you understand by zero base budgeting? How is it different from traditional budgeting? (10)

Ans) As the name implies, zero-based budgeting is a budgeting technique that demands the formulation and explanation of each budget from the ground up. Every time the budget is produced, it is a procedure in which all of the activities are appraised. It is developed without any reference to previous budgets or actual events. Simply said, it's a budgeting technique in which each expense component requires detailed justification, as if the budget's actions were being carried out for the first time. As a result, the manager bears the burden of evidence in explaining why money is being spent on a particular activity as well as what will happen if the suggested activity is not carried out and no money is spent. The budget allotment is zero if approval is not granted. Activities must be evaluated in decision packages that are quantified by systematic analysis and rated according to their importance in Zero-Based Budgeting.

Example of Zero-based Budgeting

Consider the case of a construction equipment company that implements a zero-based budgeting process that necessitates a closer examination of manufacturing department costs. Every year, the cost of some parts utilised in the company's final products that are outsourced to another manufacturer rises by 5%. Those parts can be made in-house by the company's employees. After considering the benefits and drawbacks of in-house production, the corporation discovers that it can produce the parts for less money than the outside provider.

Rather of just increasing the budget by a specific percentage to hide the cost rise, the company can identify a situation in which it can select whether to manufacture the part itself or purchase it from an external source for its end goods.

Traditional budgeting may make it difficult to identify cost drivers within departments. Zero-based budgeting is a more detailed method of identifying and justifying expenditures. However, because zero-based budgeting is more involved, the costs of the process must be evaluated against any potential savings.

Advantages of Zero-based Budgeting

Zero-based budgeting has a number of advantages as an accounting technique, including focused operations, lower costs, budget flexibility, and strategic execution. When executives consider how each dollar is spent, the top revenue-generating operations become more apparent. Meanwhile, fewer expenses may arise from zero-based budgeting, which avoids resource misallocation that might occur over time as a budget develops incrementally. The following are the key distinctions between traditional and zero-base budgeting:

  1. Traditional budgeting is a method of planning and budgeting in which the prior year's budget is used as a starting point. Zero-based budgeting, on the other hand, is a budgeting technique in which the activities are re-evaluated and thus begun from the beginning each time the budget is established.

  2. Traditional budgeting places a premium on the previous expenditure level. Zero-based budgeting, on the other hand, focuses on making a new economic proposal whenever the budget is set.

  3. Budgeting in the traditional sense is accounting-oriented, as it is based on cost accounting principles. The zero-based budgeting method, on the other hand, is decision-oriented.

  4. Justification of the existing project is not necessary in the typical budget formulation. In zero-based budgeting, on the other hand, the current and proposed project must be justified, taking into account the cost and benefit.

  5. Top management makes the choice on why a certain amount is spent on a decision unit in traditional budgeting. Unlike zero-based budgeting, managers decide whether or not to spend a specific amount on a decision unit.

  6. In traditional budgeting, the prior spending level is the key reference point, followed by inflation demand and new programmes. In zero-based budgeting, on the other hand, a decision unit is divided into comprehensive decision packages, which are then prioritised according to their importance, allowing top management to focus on the decision packages that were given priority over others.

  7. Zero-based budgeting outperforms traditional budgeting in terms of clarity and responsiveness.

  8. Traditional budgeting takes a methodical approach, whereas zero-based budgeting takes a more direct approach.

(b) “Responsibility accounting is a responsibility set-up of management accounting”. Comment. (10)

Ans) Responsibility accounting is a type of management accounting in which a company's management, budgeting, and internal accounting are all held accountable. The fundamental goal of this accounting is to assist all of a company's planning, costing, and responsibility centres.

Accounting often entails the creation of monthly and annual budgets for each responsibility centre. It also keeps track of a company's costs and revenues, with reports compiled monthly or annually and sent to the appropriate manager for review. The focus of responsibility accounting is mostly on responsibilities centres.

For example, if Mr. X, a unit manager, plans his department's budget, he is accountable for keeping it under control. Mr. X will have all of the necessary information about his department's costs. If the expenditure exceeds the budgeted amount, Mr. X will look for the problem and take the required actions and procedures to remedy it. Mr. X will be held personally responsible for his unit's performance.

In the management control process, responsibility accounting, which focuses on managerial levels, is a useful tool. It has a wide range of applications and provides numerous advantages. The following are some of them:

  1. Evaluation of Performance: This is likely the most significant advantage. It is conceivable to grade individual managers on a cost basis now that responsibility has been decentralised. When a manager is held accountable for everything he does, he becomes more cautious. The information provided by the responsibility accounting system assists the management in controlling operations and evaluating the performance of subordinates.

  2. Delegation of Power: Without adequate delegation of authority, large corporations will struggle to survive. Responsibility accounting, by its very nature, facilitates this. Its main feature is decentralisation of power, which leads to delegation of authority.

  3. Motivation: The use of accounting data for planning and management is known as responsibility accounting. When managers are aware that they are being assessed, they are motivated to put their all into reaching the goals that have been established for them. It functions as a powerful stimulant. Responsibility accounting, in fact, is built on pushing individual managers to achieve optimal performance. The targets serve to inspire managers to grow revenues or cut expenditures by setting goals for them to attain.

  4. Corrective Measures: If a person's performance isn't up to par, he or she must be held accountable. Corrective action can only be implemented when the erring subordinate has been identified. Corrective action becomes easier under responsibility accounting because areas of authority are clearly defined. To be effective, the control measure must be taken as soon as the problem's causes are identified. The longer control action is postponed, the worse the financial consequences become.

  5. Objective-based Management: Before the time begins, the heads of divisions and departments are given specific objectives. They are held accountable for meeting these objectives. Excessiveness is rewarded while shortfalls are penalised. This type of system aids in the implementation of the management by objectives principle (MBO)

  6. Exceptional Management: Exceptions or variations from the plan are the focus of this performance reporting. The concept pervades the responsibility accounting. It aids managers by allowing them to focus their efforts on the big differences with the greatest opportunity for development. The key to the system's success is focusing managerial attention on exceptional or rare items of deviation rather than on all.

  7. High Morale and Productivity: It functions as a tremendous morale booster once rewards are tied to performance. If an operational foreman is judged on decisions in which he was not involved, he will be disappointed.

Q3. Information regarding Sanjeev Ltd. is as follows: (20)

Sales 6,00,000

Less : Variable costs 4,50,000

Contribution 1,50,000

Less : Fixed costs 90,000

Profit 60,000

You are required to calculate:

(a) Break-even point

(b) P/V Ratio

(c) Profit on sales of` 9,00,000

(d) Sales required to each a profit of 90,000

(e) Margin of safety

Ans) Calculations:

Break-even Point:


= FC / P/V Ratio

= 90,000 / 25%

= 90,000 / 25 x 100

= Rs. 3,60,000

P/v Ratio:

P/V Ratio

= SP – VC / SP x 100

= 6,00,000 – 4,50,000 / 6,00,000 x 100

= 25%

Sales Required to each a Profit of 90,000:

Net Profit for the Sales of Rs. 9,00,000:

Contribution Margin (CM)

= P/V Ratio x Sales

= 25% x 9,00,000

= 25 / 100 x 9,00,000

= Rs. 2,25,000

Net Profit

= CM – FC

= Rs. 2,25,000 – 90,000

=Rs. 1,35,000

Margin of Safety:

Required Sales to Earn a Profit of Rs. 90,000:

Contribution Margin (CM)

= FC + Profit

= Rs. 90,000 + 90,000

= Rs. 1,80,000


= CM / P/V Ratio

= 1,80,000 / 25%

= 1,80,000 / 25 x 100

= Rs. 7,20,000.

Q4. (a) What do you mean by accounting reports? What are the different types of reports for internal use? (10)

Ans) Accounting reports are financial documents that are critical to the success of every organisation, no matter how big or little. Accounting reports enable you to keep track of your financial history, forecast future revenue, and maintain precise records for tax purposes. Many businesses generate accounting reports on a regular basis, and others may generate reports for specific objectives. We define an accounting report, explain why accounting reports are necessary, and outline different types of accounting reports in this article.

A financial report that a company files to show its history and current financial status is known as an accounting report. Businesses and financial experts can better estimate their financial status in the future with this report.

An accounting report may include data from all areas of the company or it may focus on a specific aim, such as finding which department utilises the most cash flow. Many companies that keep tight tabs on their finances submit accounting reports at least once a month. They might even do it more frequently if they are seeking financial goals for the organisation.

A typical accounting report consists of three sorts of reports:

Income Statement

An income statement is a financial statement that shows a company's overall expenses and sales in order to calculate its net profit. A profit-and-loss report is another name for an income statement. Accountants use data from ledgers and accounting journals to create income statements. To reach an exact amount, the statement covers both primary and secondary sources of income. Similarly, the income statement includes both primary and secondary expenses.

Cash Flow Statement

A cash flow statement indicates where money comes from (cash flow sources) and where it goes (cash flow destinations) (cash flow expenditures). This enables a company to assess how successfully it is earning revenue. This report can be used by executives and decision-makers to see where cash is coming from and subsequently where it is going, which could include:

  1. Business operations

  2. Financing

  3. Investments

A cash flow statement is a financial statement that shows how much money has flowed between two dates. An accountant examines the cash flow in each account, which may include equity accounts, liability accounts, expense accounts, revenue accounts, and asset accounts, to generate a cash flow statement.

Balance Sheet

A balance sheet depicts the final balance at a given point in time. It frequently incorporates asset, liabilities, and equity balances. The balance sheet allows the company to assess its financial reserves as well as its liquid assets. It also allows potential investors or lenders to see the company's financial situation. A business usually establishes an accounting cycle, and at the end of each cycle, someone generates a balance sheet. The ledger provides data for a balance sheet, just as it does for an income statement.

A corporation can use these reports to see its financial health throughout time as well as at a single point in time. The Financial Accounting Standards Board has established Generally Accepted Accounting Principles (GAAP) for all accounting reports (FASB). These ensure that accounting reports adhere to a set of principles, such as consistency, sincerity, and good faith, among others.

Consistency refers to a company's accounting methods being consistent from month to month and year to year. Sincerity implies that the person who creates the report (the accountant) is telling it how it is. When people engage in good faith, it indicates that all parties involved in a transaction are truthful.

It's easy to compare one firm to another when they all follow the same principles. This ensures that organisations do not distort their facts in order to deceive investors and others about the company's financial situation.

(b) Explain the significance of Profit-Volume ratio, Margin of Safety and Angle of Incidence? (10)

Ans) The significance of profit-volume ratio, margin of safety and angle of incidence is given below:

Significance of Profit Volume Ratio

The profit volume ratio, also known as the P/V ratio, is the proportion of contribution margin to total sales. This ratio is also known as the variable profit ratio, marginal income ratio, or contribution to sales ratio. The profit volume ratio, which is commonly represented as a percentage, is the rate at which profit rises as volume rises.

A logical extension of marginal costing is the profit volume (or contribution-sales) ratio. It is the study of the interrelationships between cost behaviour patterns, activity levels, and profit generated by each potential combination. The importance of profit volume ratio can be seen in the following examples:

  1. Calculation of profit based on a specific level of sales volume.

  2. Calculation of the break-even point.

  3. Calculation of sales required to achieve a specific profit level.

  4. Estimation of the sales volume required to maintain current profit levels if selling prices are cut by a certain margin.

  5. It's helpful for creating flexible budgets for cost-cutting goals.

  6. Identification of the minimum level of activity that the company must reach in order to avoid losing money.

  7. Data on relevant expenses for pricing, keeping or deleting product lines, accepting or rejecting specific orders, make or buy decisions, sales mix planning, changing plant layout, distribution channel specifications, promotional activities, and other decisions.

Significance of Margin of Safety

The margin of safety is the difference between actual sales earnings and break-even earnings. The margin of safety is the difference between actual or budgeted sales and the break-even volume of sales. It's a financial metric that counts how many sales go over the break-even point. The margin of safety is the amount by which actual or expected sales surpass break-even sales in a break-even analysis. (Actual Sales – Break-even Sales Earnings) is the formula for calculating the margin of safety.

In management accounting, companies utilise the margin of safety to determine the business's strength and potency. The higher the margin of safety, the more stable a corporation is considered. A high margin of safety shows that a firm is sound, i.e., the break-even point is significantly lower than actual sales, thus even if sales fall, a profit will still be made. A narrow margin, on the other hand, denotes a less-than-stable stance. When a low margin of safety is combined with a high fixed cost and a high contribution margin ratio, lowering the fixed cost or boosting sales volume is required. A low margin of safety is concerning, and the following activities can be performed to remedy an inadequate margin of safety:

  1. Raising the selling price

  2. Reducing fixed or variable expenses, or both, is a good idea.

  3. Utilize underutilised production capacity to increase output volume.

  4. Stop making things that aren't profitable and focus solely on the ones that are.

Companies try to set their selling price at this level to cover both fixed and variable costs. It is thus a crucial figure for any organisation because it informs management of the amount of revenue decrease required to reach break-even.

Significance of Angle of Incidence

In the break-even chart, the Angle of Incidence occurs when the entire sales line crosses the cost line from below. Alternatively, it is an angle that is generated as a result of the sale and cost line. The break-even point, which indicates how effectively the organisation is producing a profit, is usually where this angle begins to form. Furthermore, the angle shows that the company's profit rate is increasing.

The higher the angle, the more profit, and vice versa is a typical rule of thumb. A big angle of incidence indicates that the corporation is profiting at a faster rate. A tiny angle, on the other hand, indicates that the profit is earned at a lower rate.

It also provides another important piece of information. If the angle of incidence is small, it indicates that the company has more variable costs. A big angle of incidence with a strong margin of safety is thus beneficial for a firm. It could also signify that the company has a monopolistic status in its industry.

Q5. Following are the summary of cash transactions extracted from the books of AB Ltd.:


Balance on 1-07-2016

Receipts from customers

Issue of shares

Sale of fixed Assets







Payments to suppliers

Payment for fixed assets

Payments for overheads



Dividends paid

Repayment of Bank Loan









Prepare a cash flow statement of the company for the year ended 30th June 2017 in accordance with AS-3 (revised) by direct method.

Ans) Cash Flow Statement of M/s AB Ltd.

Cash Flow from Operating Activities

Cash Received from Customers

Less: Payment to Suppliers

Payment For Overheads



(-) 20,47,000

(-) 1.15,000

(-) 69,000



Cash Generated from Operating

Less: Income Taxed Paid


(-) 2,43,000



Net Cash from Operating Activities


Cash Flow from Operating Activities

Payment for Fixed Assets

Sale of Fixed Assets





Net Cash from Investing Activities


Cash Flow from Operating Activities

Issue of Shares

Repayment of Bank Loan

Dividend Paid

Net Cash Flow from Financing Activities




(-) 30,000





.Net In charge ofs Cash and Cash Equivalent

Cash balance at the beginning of the year





Cash balance at the end of the period




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