Ans 1.

standard costing must be accompanied with standard costing system which can help in finding
the variances between actual and budgeted costs where it will help the management in the
planning process es through management by exception and controlling the reasons of the variances to
the extent which it can be eliminated or reduced to the minimum

Ans 2. What is Common Size Statement

Common size statement is a form of analysis and interpretation of the financial statement. It is also known as
vertical analysis. This method analyses financial statements by taking into consideration each of the line
items as a percentage of the base amount for that particular accounting period.

Common size statements are not any kind of financial ratios but are a rather easy way to express financial
statements, which makes it easier to analyse those statements.

Common size statements are always expressed in the form of percentages. Therefore, such statements are
also called 100 per cent statements or component percentage statements as all the individual items are
taken as a percentage of 100.

Types of Common Size Statements

There are two types of common size statements:

Common size income statement

Common size balance statement

1. Common Size Income Statement

This is one type of common size statement where the sales is taken as the base for all calculations. Therefore,
the calculation of each line item will take into account the sales as a base, and each item will be expressed as
a percentage of the sales.

Use of Common Size Statement

It helps the business owner in understanding the following points

Whether profits are showing an increase or decrease in relation to the sales obtained.

Percentage change in cost of goods that were sold during the accounting period.

Variation that might have occurred in expense

If the increase in retained earnings is in proportion to the increase in profit of the business.

Helps to compare income statements of two or more periods

Recognises the changes happening in the financial statements of the organisation, which will help investors in
making decisions about investing in the business.

2. Common-Size Balance Sheet:

A common size balance sheet is a statement in which balance sheet items are being calculated as the ratio of
each asset in relation to the total assets. For the liabilities, each liability is being calculated as a ratio of the
total liabilities.
Common-size balance sheets can be used for comparing companies that differ in size. The comparison of
such figures for the different periods is not found to be that useful because the total figures seem to be
affected by a number of factors.

Standard values for various assets cannot be established by this method as the trends of the figures cannot
be studied and may not give proper results.

Common Size Statement Format

The common size statement format is as follows:

Preparing Common Size Statements

(1) Take the total of assets or liabilities as 100

(2) Each individual asset is expressed as a percentage of the total assets, i.e., 100 and different liabilities are
also calculated as per total liabilities. For example, suppose total assets are around Rs 4 lakhs, and inventory
value is Rs 1 lakh. In that case, it will be counted as 25% of the total assets.

Limitations of Common Size Statement

Following are the limitations discussed

It is not helpful in the decision-making process as it does not have any approved benchmark.

For a business that is impacted by fluctuations due to seasonality, it can be misleading.

Ans 3. The Basics of Zero-Based Budgeting (ZBB)

ZBB allows top-level strategic goals to be implemented into the budgeting process
by tying them to specific functional areas of the organization, where costs can be first
grouped and then measured against previous results and current expectations.
Because of its detail-oriented nature, zero-based budgeting may be a rolling process
done over several years, with a few functional areas reviewed at a time by managers or
group leaders. Zero-based budgeting can help lower costs by avoiding blanket increases
or decreases to a prior period's budget. It is, however, a time-consuming process that
takes much longer than traditional, cost-based budgeting. The practice also favors areas
that achieve direct revenues or production, as their contributions are more easily
justifiable than in departments such as client service and research and development.
Zero-Based Budgeting vs. Traditional Budgeting

Traditional budgeting calls for incremental increases over previous budgets, such as a
2% increase in spending, as opposed to a justification of both old and new expenses, as
called for with zero-based budgeting. Traditional budgeting analyzes only new
expenditures, while ZBB starts from zero and calls for a justification of old, recurring
expenses in addition to new expenditures. Zero-based budgeting aims to put the onus
on managers to justify expenses, and aims to drive value for an organization
by optimizing costs and not just revenue.
Example of Zero-Based Budgeting

Suppose a company making construction equipment implements a zero-based

budgeting process calling for closer scrutiny of manufacturing department expenses.
The company notices that the cost of certain parts used in its final products and
outsourced to another manufacturer increases by 5% every year. The company has the
capability to make those parts in-house using its own workers. After weighing the
positives and negatives of in-house manufacturing, the company finds it can make the
parts more cheaply than the outside supplier.
Ans 4. Cost application. Only the variable cost is applied to inventory under marginal costing,
while fixed overhead costs are also applied under absorption costing.

Profitability. The profitability of each individual sale will appear to be higher under marginal
costing, while profitability will appear to be lower under absorption costing.
Measurement. The measurement of profits under marginal costing uses the contribution
margin (which excludes applied overhead ), while the gross margin (which includes applied
overhead) is used under absorption costing.

Overhead costs are charged to expense in the period under marginal costing, whereas they are
applied to products under the absorption costing method (which may defer expense
recognition to a later period).

An additional difference is that absorption costing is required by the applicable accounting

frameworks for financial reporting purposes, so that factory overhead will be included in the
inventory asset. Marginal costing is not allowed for financial reporting purposes, so its use is
restricted to internal management reports.

Ans 5. A cash flow statement is a financial statement that provides aggregate data

regarding all cash inflows a company receives from its ongoing operations and external
investment sources. It also includes all cash outflows that pay for business activities and
investments during a given period. 
A company's financial statements offer investors and analysts a portrait of all the
transactions that go through the business, where every transaction contributes to its
success. The cash flow statement is believed to be the most intuitive of all the financial
statements because it follows the cash made by the business in three main ways—
through operations, investment, and financing. The sum of these three segments is
called net cash flow.
These three different sections of the cash flow statement can help investors determine
the value of a company's stock or the company as a whole.
KEY TAKEAWAYS

A cash flow statement provides data regarding all cash inflows a company receives from
its ongoing operations and external investment sources.
The cash flow statement includes cash made by the business through operations,
investment, and financing—the sum of which is called net cash flow.
The first section of the cash flow statement is cash flow from operations, which
includes transactions from all operational business activities. 
Cash flow from investment is the second section of the cash flow statement, and is the
result of investment gains and losses. 
Cash flow from financing is the final section, which provides an overview of cash used
from debt and equity.
Ans 6. Margin of safety is a principle of investing in which an investor only purchases
securities when their market price is significantly below their intrinsic value. In other
words, when the market price of a security is significantly below your estimation of its
intrinsic value, the difference is the margin of safety. Because investors may set a
margin of safety in accordance with their own risk preferences, buying securities when
this difference is present allows an investment to be made with minimal downside risk.
Alternatively, in accounting, the margin of safety, or safety margin, refers to the
difference between actual sales and break-even sales. Managers can utilize the margin
of safety to know how much sales can decrease before the company or a project
becomes unprofitable.
Ans 7. The DuPont analysis (also known as the DuPont identity or DuPont model) is a framework for
analyzing fundamental performance popularized by the DuPont Corporation. DuPont analysis is a useful
technique used to decompose the different drivers of return on equity (ROE). The decomposition of ROE
allows investors to focus on the key metrics of financial performance individually to identify strengths
and weaknesses.

There are three major financial metrics that drive return on equity (ROE): operating efficiency, asset use
efficiency and financial leverage. Operating efficiency is represented by net profit margin or net income
divided by total sales or revenue. Asset use efficiency is measured by the asset turnover ratio. Leverage is
measured by the equity multiplier, which is equal to average assets divided by average equity.

KEY TAKEAWAYS

The DuPont analysis is a framework for analyzing fundamental performance originally popularized by
the DuPont Corporation.

DuPont analysis is a useful technique used to decompose the different drivers of return on equity (ROE). 

An investor can use analysis like this to compare the operational efficiency of two similar firms.
Managers can use DuPont analysis to identify strengths or weaknesses that should be addressed.

Ans 8. A make-or-buy decision refers to an act of using cost-benefit to make a

strategic choice between manufacturing a product in-house or purchasing from an
external supplier. It arises when a producing company faces a diminishing capacity,
experiences problems with the current suppliers, or sees changing demand.

Ans 9. In marginal costing, stocks of work-in-progress and finished goods are

valued at marginal cost only.
In absorption costing, stocks are valued at total cost which includes both
fixed and variable costs. Thus stock values in marginal costs are lower than
that of absorption costing.
3. Under/Over-Absorption of Overheads:
In marginal costing, since fixed costs are excluded from product costs, the
problem of apportionment of fixed overhead does not arise. There is thus no
question of under/over-absorption of overheads.
In absorption costing, as fixed costs are included in product costs, these are
apportioned to various products, processes or operations which is really on
an arbitrary basis. This leads to under/over-absorption of overheads.
Ans 10. In accounting, the break-even point formula is determined by dividing the total
fixed costs associated with production by the revenue per individual unit minus the
variable costs per unit. In this case, fixed costs refer to those which do not change
depending upon the number of units sold. Put differently, the breakeven point is the
production level at which total revenues for a product equal total expenses.
The term is also used in investing. The breakeven point formula for a stock
or futures trade is determined by comparing the market price of an asset to the original
cost; the break even point is reached when the two prices are equal. For options
trading, the breakeven point is the market price that an underlying asset must reach for
an option buyer to avoid a loss if they exercise the option. For a call buyer, the
breakeven point is reached when the underlying is equal to the strike price plus
the premium paid, while the BEP for a put position is reached when the underlying is
equal to the strike price minus the premium paid. The breakeven point doesn't typically
factor in commission costs, although these fees could be included if desired.