Show the relationship among cost, volume and profit by using graphical form.

Top management
delegates decision-making responsibilities to middle or lower subordinates-why?
● Empower Employees: Delegation helps employees feel trusted and motivated.
● Focus on Big Decisions: Top management focuses on long-term goals, while lower levels handle
daily operations.
● Faster Decisions: Middle managers can make decisions quickly, saving time.
● Better Expertise: Lower-level managers often know their area best and can make informed
decisions.
● Develop Leaders: Delegation gives managers experience, preparing them for future leadership
roles.
What is meant by CM ratio? How is it useful in planning business operations? Give an example.
What is the Contribution Margin (CM) Ratio?
The Contribution Margin (CM) Ratio shows the percentage of each sales dollar that contributes to
covering fixed costs and generating profit after covering variable costs. It’s calculated using this formula:

Here is CM Ratio formula

The CM ratio tells you how much money from each sale is available to cover fixed costs and then
contribute to profit.

How is it Useful in Planning Business Operations?

The CM ratio is useful because it helps businesses:

● Understand Profitability: It shows how much of each sale contributes to fixed costs and profit.
● Set Sales Targets: Helps in determining how much sales are needed to break even or achieve a
profit.
● Optimize Costs: By knowing the CM ratio, businesses can make decisions on pricing, production
levels, and cost management.

Example:
Let’s say a company sells a product for $50. The variable cost per unit is $30.

Contribution Margin=$50(sales)- $30 (variable costs) = $20

CM Ratio =( 20/50)×100=40%
This means that 40% of every $1 in sales goes toward covering fixed costs and generating profit. If the
company needs to cover $10,000 in fixed costs, they would need:

Sales to break even

=10000/20=500 units

Thus, the CM ratio helps the company plan how many units need to be sold to cover costs and start
making a profit
To prepare a performance report, what steps are followed in variance analysis? How
flexible budget works?
Steps in Variance Analysis:
● Identify the Actual and Budgeted Figures: Gather actual performance data and compare it to
budgeted or planned figures for the period.
● Calculate Variances: For each line item (e.g., sales, costs), calculate the variance as:
Variance = Actual - Budgeted
● Classify Variances:
● Favorable Variance (F): Actual is better than budgeted (e.g., higher sales or lower costs).
Unfavorable Variance (U): Actual is worse than budgeted (e.g., lower sales or higher costs).
● Analyze the Causes: Investigate the reasons behind the variances to understand if they are due to
internal factors (e.g., inefficiencies) or external factors (e.g., market conditions).
● Take Corrective Action: Based on the analysis, take steps to improve performance where
nnecessary

A flexible budget adjusts to changes in actual activity levels, such as sales or production volume,
unlike a static budget, which remains fixed. Here's how it works in an easy way:

Set the Budget: Start by creating a budget based on expected levels of activity (e.g., sales, production).

Determine Variable and Fixed Costs:

Variable Costs change with activity level (e.g., materials, labor).

Fixed Costs stay the same regardless of activity (e.g., rent, salaries).

Adjust Based on Actual Activity: As actual activity (e.g., sales or production) occurs, adjust the budget
to reflect these changes. For example, if sales are higher than expected, variable costs will increase
accordingly.

Compare to Actual Results: After the period ends, compare the flexible budget (adjusted for actual
activity) to actual results. This helps identify variances and better understand performance.

Example:
If you budgeted for 1,000 units to be sold at $10 each, but actually sold 1,200 units, a flexible budget will
adjust the revenue to reflect the 1,200 units. Similarly, if materials cost $5 per unit, the flexible budget
will show $6,000 in material costs for 1,200 units, instead of $5,000 for 1,000 units.

In short, a flexible budget provides a more accurate picture of performance by adjusting to real activity
levels.

Contrast between variable costing and absorbing costing.

Variable Costing (Direct Costing)
What it includes: Only variable costs (direct materials, direct labor, and variable manufacturing
overhead).
What it excludes: Fixed manufacturing overhead (treated as a period expense).

Income Statement Focus: Focuses on contribution margin (sales - variable costs).

Use: Often used for internal decision-making because it shows how much profit is generated by each unit
sold.

Absorption Costing (Full Costing)

What it includes: All manufacturing costs (direct materials, direct labor, variable and fixed
manufacturing overhead).

What it excludes: Non-manufacturing expenses (like selling and administrative costs).

Income Statement Focus: Focuses on gross profit (sales - cost of goods sold).

Use: Required by Generally Accepted Accounting Principles (GAAP) for external financial reporting.

what is variance analysis. compare Between price variance and quantity variance.
Variance Analysis is a method used in management accounting to compare actual performance
against budgeted or standard expectations. It helps identify the differences (variances) between
what was planned and what actually happened. These variances can indicate whether a company
is spending too much or using resources inefficiently.

Price Variance:
Definition: Measures the difference between the actual cost per unit and the standard cost per
unit.
Formula:
Price Variance=(Actual Price−Standard Price)×Actual Quantity
Example: If a company budgeted $10 per unit but actually paid $12, the price variance would be
unfavorable.

Quantity Variance:
Definition: Measures the difference between the actual quantity used and the standard quantity
expected for the actual production level.
Formula:
Quantity Variance=(Actual Quantity−Standard Quantity)×Standard Price
Example: If a company planned to use 100 units of material but actually used 120, the quantity
variance would be unfavorable.

Budgeting and budgetary control are related but distinct concepts in financial
management:
Budgeting

● Definition: The process of creating a financial plan for future income and expenditures.
● Purpose: To set financial goals and allocate resources efficiently.
● Focus: Forecasting and planning what will be earned and spent.
● Example: Creating an annual budget for a company to estimate costs, sales, and profits.
Budgetary Control
● Definition: The process of monitoring and comparing actual performance against the
budget.
● Purpose: To ensure that spending and revenue stay on track with the budgeted plan.
● Focus: Controlling and managing financial performance by identifying variances.
● Example: Regularly reviewing expenses to ensure they align with the budget and
adjusting as needed.

what is self imposed budget explain advantages of self imposed budget

A self-imposed budget is a financial plan created by an individual or a business to control spending and
manage income, without external pressures. It's based on personal or organizational goals and priorities.
Advantages of a Self-Imposed Budget:
● Better Control Over Finances: It helps you track income and expenses, ensuring you don't
overspend.
● Achieves Financial Goals: By setting limits and allocating funds to important areas (like
savings), you can work towards goals like buying a home or paying off debt
● Increases Awareness: You become more aware of where your money is going, helping you make
smarter decisions.
● Encourages Discipline: It encourages self-control, reducing unnecessary expenses and helping
you live within your means.
● Flexibility: Since it's self-made, you can adjust the budget as needed to adapt to changes in your
life or finances.

How standard cost are related to Management by exception

Standard costs are related to Management by Exception (MBE) because they serve as a
benchmark for performance. In MBE, managers focus on areas where actual performance
significantly deviates from the standard. Here's a simple breakdown:

Setting Standards: Standard costs are predetermined or budgeted costs that represent what
should happen under normal operating conditions.

Comparing Actual Performance: Actual costs are then compared to these standard costs.

Management by Exception: When actual costs differ significantly from standard costs (either
higher or lower), management focuses on investigating and addressing the exceptions.
So, standard costs act as a guide, and MBE helps managers focus their attention on the areas that
need corrective action. It’s an efficient way to manage by only addressing significant
discrepancies.

Narrate the potential problem related to standard costing

Standard costing involves setting predetermined costs for materials, labor, and overhead, then
comparing these to actual costs. While it’s a useful tool for budgeting and performance
measurement, it can lead to problems like:

Inaccuracy in Standards: If the set standards are outdated or not realistic, they can mislead
decision-making and result in poor performance assessments.

Overemphasis on Variance: Focusing too much on variances (the differences between standard
and actual costs) can distract from the overall strategic goals, causing managers to take actions
that are not in the best interest of the company.

Lack of Flexibility: Standard costing may not account for changes in the market, such as price
fluctuations in raw materials or labor rates. This can make it hard to adapt quickly to new
conditions.

Employee Morale: If variances are seen as a failure or if employees are blamed for not meeting
standards, it can negatively affect morale and productivity.

Not Reflecting Real-Time Performance: Standard costing typically relies on historical data,
which may not reflect current operating conditions or the real-time challenges businesses face

Outline the main problems of budgeting and discuss why you think that?Despite this
problem budgeting remains prevalent within organisation?
Main Problems of Budgeting
● Inaccuracy: Budgets are often based on estimates, which can be incorrect. Changes in
the market or unforeseen expenses can make it difficult to stick to a budget.
● Rigidity: Budgets can be too rigid and inflexible, making it hard for organizations to
adapt to changes or unexpected opportunities.
● Time-Consuming: Preparing a detailed budget takes time and resources, which may not
always be available.
● Short-Term Focus: Budgets often focus on short-term goals and may overlook
long-term growth and innovation.
● Overemphasis on Control: Some organizations use budgets primarily as a tool for
control, leading to pressure on managers and employees, which can negatively affect
morale.
Why Budgeting Remains Prevalent
● Financial Planning: Despite its flaws, budgeting helps organizations plan their finances
and allocate resources effectively.
● Performance Monitoring: Budgets are a useful tool for tracking performance,
identifying areas where costs can be reduced, and ensuring financial discipline.
● Accountability: Budgets hold departments and individuals accountable for their
spending, helping ensure that resources are used efficiently.
● Decision-Making: Budgets provide a framework for decision-making and can guide
organizations in setting priorities.
● Predictability: Budgeting allows organizations to have a sense of financial predictability,
even if the figures aren't always perfect.

State the assumptions of cvp analysis

The assumptions of Cost-Volume-Profit (CVP) analysis are:

● Fixed Costs: Fixed costs remain constant regardless of production or sales levels.
● Variable Costs: Variable costs change in direct proportion to the level of production or
sales.
● Sales Price: The selling price per unit remains constant.
● Sales Mix: The product mix remains unchanged if there are multiple products.
● Linear Relationship: The relationship between costs, volume, and profits is linear
within the relevant range.
● No Inventory Changes: All units produced are sold during the period.
● Time Period: The analysis applies to a specific time period, typically short-term
Define Balanced scorecard. State the four dimensions of balanced scorecard with diagram.
07 b) Why the balanced scorecard (Kaplan and Norton 1992, 1996) becomes very popular
as a means of measuring and managing company performance? Also discuss the criticism
of balanced scorecard.
Balanced Scorecard (BSC)
The Balanced Scorecard is a strategic planning and performance management framework that
helps organizations measure and manage their performance across multiple dimensions. It
translates an organization’s mission and vision into a comprehensive set of performance metrics
across four key perspectives.

Four Dimensions of the Balanced Scorecard:

Financial Perspective
Focuses on financial performance measures such as revenue growth, profitability, and cost
management.

Customer Perspective
Measures customer satisfaction, retention, and market share.

Internal Process Perspective

Focuses on the efficiency and effectiveness of internal processes.

Learning and Growth Perspective

Focuses on innovation, employee training, and organizational development.

---------------------------
| Financial |
---------------------------
| Customer |
---------------------------
| Internal Processes |
---------------------------
| Learning and Growth |
---------------------------

Criticisms of the Balanced Scorecard:

Complexity
Implementing and maintaining BSC can be complex and resource-intensive.

Overemphasis on Metrics
BSC may lead to an over-reliance on metrics, potentially ignoring qualitative factors.

Limited Customization
The generic nature of BSC might not fit all organizations, requiring significant adjustments.

Implementation Challenges
Without proper buy-in from leadership or clear communication, BSC may fail in achieving its
intended benefits.

Most of the problems of standard cost emerged from the inappropriate use of standard cost
and the management by exception principle justify the statement
Inappropriate Use of Standard Costs: Standard costs are predetermined estimates of what
costs should be for producing a product. When used correctly, they help in controlling expenses
and setting targets. However, if these standards are set unrealistically high or low, or if they are
not regularly updated to reflect changes in the business environment, they can lead to misleading
cost comparisons and poor decision-making.
Management by Exception: This principle involves focusing on the significant deviations from
the standard. Managers are expected to take action only when actual performance deviates
significantly from the standard cost. However, if standards are set incorrectly, even minor
discrepancies might trigger unnecessary actions, or important issues might be ignored if they fall
within an acceptable range. This can lead to inefficiency or missed opportunities for
improvement.