Subject : Financial and Cost Accounting

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Name : Mary Jennifer.A                                                                                                                  Marks : 80
Course : Bachelors in Management Studies (BMS)
Subject : Financial and Cost Accounting



Answer the following question.

Question. 1. What one the limitations of financial accounting? How do you overcome item in cost accounting? (10 marks)

Answer: The limitations of financial statements are those factors that a user should be aware of before relying on them to an excessive extent. Knowledge of these factors could result in a reduction of invested funds in a business, or actions taken to investigate further.

The following are all limitations of financial statements:

·       Dependence on historical costs. Transactions are


Question. 2. Define costing. How does it differ from financial accounting? Explain its importance under present circumstances. (10 marks)

Answer: In accounting terms, costing refers to a system of calculating the amount of money it takes to produce goods or operate a business. Generally, costs include variables like cost of labor, cost of materials, cost of distribution and selling, taxes and administrative costs.

It is important that managers figure out the manufacturing cost of a product before it goes into the production stage, according to Ohio State University. Establishing product costs helps in determining the selling price and break-even point of goods. This system of determining costs also helps companies set the profit margin percentage on goods



Question. 3. Define costing critically evaluate the arguments for the installation of costing system in an industry. (10 marks)

Answer: Full costing is a managerial accounting method that describes when all fixed and variable costs, including manufacturing costs, are used to compute the total cost per unit. Full costing includes these costs when computing the amount of money it takes to produce and distribute one unit of output.

How a firm expenses its production and distribution costs will impact the structure of internal income statements. Because all costs incurred to sell a product are included with cost of goods sold, the firm's gross margin will be lower under the full costing method than the absorption costing method.

Activity-based costing (ABC) is a




Question. 4. Define cost accounting. How does a good system of cost accounting serve the management. (10 marks)

Answer: Cost accounting is a process of collecting, recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action & control of costs. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other



Question. 5. What do you mean by installation of costing system? Explain the practical difficulties involved in installing such a system in a manufacturing concern. (10 marks)

Answer: The installation of a costing system requires careful consideration of the following two interrelated aspects:

·       Overcoming the practical difficulties while introducing a system
·       Main considerations that should govern the installation of such a system

Practical Difficulties: The important difficulties in the installation of a costing system and the suggestions to overcome them are as follows:

a. Lack of Support from Top Management: Often, the costing system is introduced at the behest of the managing director or some other director without taking into confidence other members of the top management team. This results in opposition from various managers as they consider it interference as well as an uncalled check of their activities. They,



Question. 6. Explain the advantages of cost accounting. (10 marks)

Answer: The advantages of cost accounting are:

Disclosure of profitable and unprofitable activities: Since cost accounting minutely calculates the cost, selling price and profitability of product, segregation of profitable or unprofitable items or activities becomes easy.

Guidance for future production policies: On the basis of data provided by costing department about the cost of various processes and activities as well as profit on it, it helps to plan the future.

Periodical determination of profit and losses: Cost accounting helps us to determine the periodical profit and loss of a product.



Question. 7. What are the advantages of cost audit? (10 marks)

Answer: The important advantages of cost audit are briefly discussed as follows:

A. Advantages Of Cost Audit To The Management

1. Cost audit provides reliable cost data for managerial decisions.
2. Cost audit helps management to regulate production.
3. Cost audit acts as an effective managerial tool for the detection of errors, frauds and irregularities so that reliable and smooth functioning of the system is continued.




Question. 8. Which ratios will help in determining the long term solvency of a business and how? (10 marks)

Answer: Solvency and liquidity are both terms that refer to an enterprise’s state of financial health, but with some notable differences. Solvency refers to an enterprise's capacity to meet its long-term financial commitments. Liquidity refers to an enterprise’s ability to pay short-term obligations; the term also refers to its capability to sell assets quickly to raise cash. A solvent company is one that owns more than it owes; in other words, it has a positive net worth and a manageable debt load. On the other hand, a company with adequate liquidity may

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