Assignment Code: MMPC-004/TMA/JULY/2023

Course Code: MMPC-004

Assignment Name: Accounting For Managers

Year: 2023-2024

Verification Status: Verified by Professor

Q1) During the current year AB Ltd. Should a profit of Rs. 1,80,000 on a sale of Rs. 30,00,000. The various expenses were Rs. 21,00,000. You are required to calculate:

1. The break-even sales at present.

2. The break-even sales if variable cost increased by 55.

3. The break-even sales to maintain the profit as at present if the selling price is reduced by 6 per cent.

Ans) To calculate the break-even sales at present and under different scenarios, we can use the following formula:

Here, the denominator becomes zero because the variable costs equal the sales. In this scenario, the company cannot maintain the current profit level if the selling price is reduced by 6%, as it would result in zero sales.

So, in the third scenario, if the selling price is reduced by 6%, the company will not be able to maintain the current profit level as it would result in zero sales.

Q2) XYZ Ltd. Is currently working at 50% capacity and produces 10,000 units. At 60% capacity raw material cost increased by 2% and selling price falls by 2 percent. At 8% capacity raw material cost increased by 5% and selling price falls by 5%. At 50% capacity the product costs Rs. 180 per unit and is sold at Rs. 200 per unit. The unit cost of Rs. 180 comprises the following:

Prepare a marginal cost statement showing the estimated profit of the business when it is operating at 60% and 80% of capacity.

Ans) To analyse the impact of different capacity levels on costs and pricing, we'll calculate the cost per unit at each capacity level, considering the given information.

1) At 50% Capacity:

Production = 10,000 units

Selling Price = Rs. 200 per unit

Cost per Unit = Rs. 180

Given cost details:

Material = Rs. 100

Wages = Rs. 30

Factory Overheads = Rs. 30 (40% fixed)

Administrative Overheads = Rs. 20 (50% fixed)

Calculation:

Variable Cost per Unit = Material + Wages = Rs. 100 + Rs. 30 = Rs. 130

Fixed Cost per Unit (Factory Overheads + Administrative Overheads) = (Rs. 30 + Rs. 20) = Rs. 50

Total Cost per Unit = Variable Cost per Unit + Fixed Cost per Unit = Rs. 130 + Rs. 50 = Rs. 180

Profit per Unit = Selling Price - Total Cost per Unit = Rs. 200 - Rs. 180 = Rs. 20

2) At 60% Capacity:

Production = 10,000 units × 60% = 6,000 units

Selling Price = Rs. 200 per unit (falls by 2%)

Given cost details:

Material = Rs. 100 (increased by 2%)

Wages = Rs. 30

Factory Overheads = Rs. 30 (40% fixed)

Administrative Overheads = Rs. 20 (50% fixed)

Calculation:

Variable Cost per Unit = Material + Wages = Rs. 102 + Rs. 30 = Rs. 132

Fixed Cost per Unit (Factory Overheads + Administrative Overheads) = (Rs. 30 + Rs. 20) = Rs. 50

Total Cost per Unit = Variable Cost per Unit + Fixed Cost per Unit = Rs. 132 + Rs. 50 = Rs. 182

Profit per Unit = Selling Price - Total Cost per Unit = Rs. 200 - Rs. 182 = Rs. 18

3) At 80% Capacity:

Production = 10,000 units × 80% = 8,000 units

Selling Price per unit: Rs. 200

Estimated Sales Revenue = Production × Selling Price per Unit = 8,000 units × Rs. 200 = Rs. 16,00,000

Total Variable Cost at 80% capacity = Marginal Cost per Unit × Production = Rs. 130 × 8,000 units = Rs. 10,40,000

Total Profit at 80% Capacity = Estimated Sales Revenue - Total Variable Cost = Rs. 16,00,000 - Rs. 10,40,000 = Rs. 5,60,000

Material = Rs. 100 (increased by 5%)

Wages = Rs. 30

Factory Overheads = Rs. 30 (40% fixed)

Administrative Overheads = Rs. 20 (50% fixed)

These calculations show how changes in capacity levels, raw material costs, and selling prices affect the cost structure and profitability of the product.

Q3) Explain the following:

Q3. (a) Business Entity Concept

Ans) The business entity concept is a fundamental accounting principle that separates the financial affairs of a business from the personal affairs of its owner(s) or any other entity. According to this concept, a business is treated as a distinct and separate entity, and its financial transactions are recorded and reported separately from the transactions of its owners or any other businesses. This separation is crucial for maintaining transparency and accuracy in financial reporting.

Q3. (b) Accrual Concept

Ans) The accrual concept is an accounting principle that states that revenue and expenses should be recognized when they are earned or incurred, regardless of when the actual cash flow occurs. In other words, transactions are recorded in the accounting books when they occur, and not necessarily when the cash is received or paid. This concept ensures that financial statements reflect the true financial position of a business, as it considers all economic events, not just cash transactions.

Q3. (c) Dual Aspect Concept

Ans) The dual aspect concept, also known as the duality principle, is a fundamental accounting concept that states that every financial transaction has two aspects: a debit and a credit. In double-entry accounting, for every debit entry made to an account, there must be an equal and opposite credit entry in another account. This principle ensures that the accounting equation (Assets = Liabilities + Owner's Equity) remains in balance after each transaction, providing accuracy and consistency in financial record-keeping.

Q3. (d) Cash and Cash equivalents

Ans) Cash and cash equivalents refer to highly liquid assets that a business can readily convert into cash within a short period, typically within three months or less. These assets include actual cash in hand, cash in bank accounts, and short-term investments that are easily convertible to cash, such as treasury bills and money market funds. Cash and cash equivalents are an important component of a company's liquidity and are reported on the balance sheet as they represent the company's immediate access to funds to meet its short-term obligations.

Q4) Explain the various Financial Statements. Which are parts of the Annual Report. How can Notes to the accounts help in better understanding of financial statements?

Ans) Financial statements are essential documents that provide a comprehensive summary of a company's financial performance and financial position. They are typically prepared at the end of an accounting period (usually annually) and are an integral part of a company's annual report.

The key financial statements include:

Income Statement (Profit and Loss Statement)

The income statement presents a company's revenues, expenses, gains, and losses over a specific period, such as a fiscal year. It calculates the net income (profit) or net loss for the period by subtracting total expenses from total revenues. The income statement helps assess the profitability of the company.

Balance Sheet (Statement of Financial Position)

The balance sheet provides a snapshot of a company's financial position at a specific point in time. It consists of three main sections: assets, liabilities, and shareholders' equity. The balance sheet equation (Assets = Liabilities + Equity) must always balance. It helps determine a company's solvency and liquidity.

Cash Flow Statement

The cash flow statement reports the cash inflows and outflows resulting from operating, investing, and financing activities over a period. It categorizes cash flows into three sections: operating, investing, and financing activities. This statement helps assess a company's cash management and its ability to generate and use cash.

Statement of Changes in Equity

This statement details the changes in shareholders' equity during the reporting period. It typically includes information about dividends, share issuances, and any changes in accounting policies that affect equity.

Parts of the Annual Report

The annual report typically consists of several sections, including:

1. Chairman's Message or Letter to Shareholders

2. Management Discussion and Analysis (MD&A)

3. Financial Statements (Income Statement, Balance Sheet, Cash Flow Statement, Statement of changes in Equity)

4. Notes to the Financial Statements

5. Auditor's Report

6. Corporate Governance Report

7. Shareholder Information

Notes to the Accounts

Notes to the accounts are an integral part of the financial statements. They provide additional details, explanations, and disclosures related to the information presented in the financial statements. These notes help in better understanding the financial statements in several ways:

Explanatory Information: Notes provide context and explanations for various line items in the financial statements, helping users understand the significance of specific figures.

1. Accounting Policies: They disclose the accounting policies and methods used in preparing the financial statements, ensuring transparency and consistency.

2. Contingencies: Notes disclose any contingent liabilities or assets that may impact the company's financial position in the future.

3. Segment Reporting: For companies with multiple business segments, notes provide information about each segment's performance.

4. Related Party Transactions: They disclose transactions with related parties that could potentially impact a company's financial position.

5. Fair Value Measurements: If applicable, notes provide information on how fair values were determined for certain assets and liabilities.

6. Significant Events: Notes may include information about significant events that occurred after the balance sheet date but before the financial statements' issuance.

Financial statements are critical for assessing a company's financial health, and the annual report includes various sections that provide a comprehensive view of the company's performance and operations. The notes to the accounts are essential for providing additional context and details that enhance the understanding of the financial statements.

Q5) What is Human Resource Accounting? How it is used as management decision tool.

Ans) Human Resource Accounting (HRA) is a specialized branch of accounting that quantifies and reports the value of human resources (employees) in an organization. It treats employees as assets rather than expenses, recognizing that their skills, knowledge, experience, and potential contribute significantly to an organization's success. HRA is used as a management decision tool by providing valuable insights into the allocation, development, and utilization of human resources. Here's an explanation of HRA and its role as a management decision tool:

Components of Human Resource Accounting

1. Monetary Value: HRA assigns a monetary value to each employee's contribution based on factors like education, experience, training, and performance. This value is reflected on the balance sheet as an intangible asset.

2. Human Capital Development: HRA accounts for investments made in human capital development, such as training programs, education reimbursements, and skill enhancement initiatives.

3. Cost of Recruitment: It considers the cost incurred in recruiting and selecting employees, including advertising, interviewing, and onboarding expenses.

Employee Retention: HRA also accounts for the cost of employee retention strategies, such as benefits, bonuses, and incentives designed to keep talented employees within the organization.

Use of Human Resource Accounting as a Management Decision Tool

1. Resource Allocation: HRA helps management allocate resources more effectively by identifying which areas of the organization have a higher return on investment in terms of human capital. This information guides decisions about where to invest in training, development, and recruitment.

2. Performance Evaluation: HRA allows for the evaluation of individual and departmental performance in financial terms. By comparing the monetary value of employees to their actual performance, management can identify areas for improvement and make informed decisions about promotions, rewards, and transfers.

3. Succession Planning: Human resource accounting helps in succession planning by quantifying the potential value of employees at different levels of the organization. This aids in identifying and nurturing future leaders and ensuring a smooth transition in key roles.

4. Cost-Benefit Analysis: It facilitates cost-benefit analysis of HR initiatives. For example, if a training program costs a certain amount, HRA can help determine whether the increase in the value of human capital justifies the investment.

5. Strategic Decision-Making: HRA aligns human resource management with the overall strategic goals of the organization. It provides insights into whether the organization has the right talent mix to achieve its objectives and helps in making strategic hiring decisions.

6. Merger and Acquisition (M&A): In M&A scenarios, HRA can be crucial. It helps in evaluating the worth of the workforce of the target company, identifying redundancies, and making informed decisions about workforce integration.

7. Risk Assessment: By quantifying the value of human resources, HRA allows management to assess the risk associated with losing key employees. This can lead to the development of retention strategies and succession plans to mitigate such risks.

8. Investor Confidence: Providing HRA information in financial reports enhances transparency and investor confidence. Investors can better understand the organization's human capital strategy and its potential impact on long-term financial performance.

9. Compliance and Reporting: In some cases, regulatory bodies require organizations to disclose human resource-related information in their financial reports. HRA ensures compliance with these reporting requirements.

10. Continuous Improvement: HRA promotes a culture of continuous improvement in human resource management. It encourages organizations to track and measure the impact of HR initiatives over time and adjust as needed.