ure, here are the answers based on the provided PDF:

Preliminary Steps for Establishing a Standard Costing System

1. Establishment of Cost Centres: Define cost centres with clear areas of responsibility.

2. Classification of Accounts: Classify accounts to identify each expense and revenue by

function and assign responsibility.

3. Types of Standards: Set standards according to the situation and their achievability. Common
types include:

o Basic Standard: Established for long-term use and remains constant.

o Current Standard: Established for short-term and current conditions.

o Ideal Standard: Based on the best possible operating conditions.

o Normal Standard: Achievable under normal operating conditions.

o Expected/Practical Standard: Based on expected performance with allowances for

unavoidable losses.

Differences Between Budgetary Control and Standard Costing

Budgetary Control Standard Costing

Budgets are forecasts of financial accounts. Standard costing is an estimate of cost accounts.

Includes statements of both income and

Not used for forecasting.
expenses.

Budgets are estimated costs ("what the cost will

Standard costs are norms ("what cost should be").
be").

Applied to any industry engaged in mass Applicable to concerns engaged in construction

production. work.

Part of the accounting system; variances are Not part of the accounting system; based on
recorded in the books. statistical facts and figures.

Advantages of Standard Costing

1. Guides Management: Helps evaluate production performance.

2. Fixing Standards: Assists in setting standards.

3. Production Planning and Pricing: Useful in formulating production plans and price policies.

4. Variance Measurement: Acts as a measuring rod for determining variances.

5. Eliminating Inefficiencies: Facilitates corrective measures to eliminate inefficiencies.

Disadvantages of Standard Costing

1. Expensive: Costly to implement, especially for small concerns.

2. Technical Difficulties: Challenging to establish standards without technical expertise.

 3. Non-Standardized Products: Not applicable where non-standardized products are produced.

4. Responsibility Fixation: Difficult to fix responsibility for uncontrollable variances.

5. Frequent Revisions: Requires frequent updates, which can be challenging with insufficient
staff.

Characteristics of Preparing Good Budgeting

1. Involvement of Personnel: A good budgeting system should involve individuals at various

levels during the preparation of budgets. This ensures that subordinates do not feel that the
budget is being imposed on them.

2. Authority and Responsibility: Proper fixation of authority and responsibility is crucial.

Delegation of authority should be done appropriately.

3. Realistic Targets: The targets set in the budgets should be realistic. If the targets are too
difficult to achieve, they will not motivate the concerned individuals.

4. Effective Accounting System: A good system of accounting is essential to make budgeting

successful.

5. Support from Top Management: The budgeting system should have the wholehearted
support of top management.

6. Budgeting Education: Employees should be educated about budgeting. Meetings and

discussions should be held to explain the targets to the concerned employees.

7. Reporting System: A proper reporting system should be introduced. Actual results should be
promptly reported to facilitate performance appraisal.

Differences Between a Fixed and Flexible Budget

1. Rigidity: A fixed budget remains unchanged irrespective of the situation, while a flexible
budget is adjusted to suit changed circumstances.

2. Conditions: A fixed budget assumes constant conditions, whereas a flexible budget is

adjusted if the level of activity varies.

3. Cost Classification: In fixed budgets, costs are not classified according to their nature. In
flexible budgets, costs are studied as fixed, variable, or semi-variable.

4. Changes in Volume: Fixed budgets do not allow for comparison between budgeted and
actual results if the level of activity changes. Flexible budgets are redrafted as per the
changed volume, allowing for accurate comparison.

5. Forecasting: Accurate forecasting is difficult with fixed budgets. Flexible budgets clearly show
the impact of expenses on operations, aiding in accurate forecasts.

6. Cost Ascertainment: Under changed circumstances, costs cannot be ascertained with fixed
budgets. Flexible budgets allow for easy cost ascertainment under different levels of activity.

Expected Objectives of Budgetary Control

1. Future Planning: Ensuring planning for the future by setting up various budgets.

2. Coordination: Coordinating the activities of different departments.

 3. Efficiency and Economy: Operating various cost centers and departments with efficiency and
economy.

4. Elimination of Wastes: Eliminating wastes and increasing profitability.

5. Capital Expenditure Anticipation: Anticipating capital expenditures for the future.

6. Centralized Control: Centralizing the control system.

7. Deviation Correction: Correcting deviations from established standards.

8. Responsibility Fixation: Fixing the responsibility of various individuals in the organization.

Types of Budgets

1. Classification According to Time:

o Long-term Budgets: Prepared for long-term planning, typically spanning five to ten
years. Useful for industries with long gestation periods.

o Short-term Budgets: Generally for one or two years, often used in consumer goods
industries.

o Current Budgets: Covering months or weeks, relating to current activities of the

business.

2. Classification on the Basis of Functions:

o Functional Budgets: Relate to different functions within the business, such as sales,
production, purchase, cash, and finance budgets.

o Master Budget: An integration of various functional budgets, prepared by the

budget officer and used to coordinate activities of various departments.

3. Classification on the Basis of Flexibility:

o Fixed Budget: Prepared for a given level of activity before the financial year begins. It
remains unchanged despite changes in expenditure.

o Flexible Budget: Consists of a series of budgets for different levels of activity,

adjusted for unforeseen changes in business conditions.

8. Nature and Scope of Management Accounting

Management accounting is a branch of accounting that focuses on providing financial and non-
financial information to managers to aid in decision-making, planning, and control. It involves the use
of accounting data to help management in formulating policies, planning, and controlling the
operations of the business. The scope of management accounting includes:

• Planning and Forecasting: Management accounting helps in planning by providing relevant

financial and non-financial information. It involves preparing budgets and forecasts to guide
the management in decision-making.

• Decision Making: It provides data and analysis that help managers make informed decisions.
This includes cost-benefit analysis, break-even analysis, and other financial metrics.
 • Control: Management accounting involves setting performance standards, comparing actual
performance with these standards, and taking corrective actions if necessary.

• Financial Analysis and Interpretation: It involves analyzing financial statements to

understand the financial health of the organization and to make strategic decisions.

• Cost Management: Management accounting helps in identifying and controlling costs to

improve efficiency and profitability.

• Performance Measurement: It involves measuring the performance of different

departments, products, or projects to ensure they are meeting the set objectives.

9. Functions of Management Accounting in Detail

The functions of management accounting are diverse and crucial for the effective management of an
organization. Some of the key functions include:

• Forecasting and Planning: Management accounting uses historical data to predict future
trends and helps in planning the business activities. This includes preparing budgets and
forecasts.

• Organizing: It helps in organizing the resources of the company by preparing budgets and
allocating resources to different departments or cost centers.

• Performance Variances: Management accountants analyze the variances between actual

performance and budgeted performance to identify areas of improvement.

• Coordinating: It involves coordinating the activities of different departments by providing

relevant financial information and analysis.

• Communication: Management accounting acts as a communication tool by providing

financial information to different levels of management and external stakeholders.

• Analyzing and Interpreting Data: Management accountants analyze financial data and
present it in a way that is easy to understand for the management. This helps in making
informed decisions.

• Business Asset Protection: It involves managing the funds required for maintaining and
replacing the fixed assets of the organization.

• Tax Policies: Management accounting helps in preparing accurate tax reports and ensuring
timely tax payments to avoid penalties.

• Decision-Making: It provides relevant financial data and analysis to aid in decision-making.

This includes evaluating capital expenditure proposals and their impact on profitability.

• Other Functions: Management accounting also involves providing information for policy
planning, cash flow management, and product launch decisions.

10. Differences Between Management Accounting and Financial Accounting

Management accounting and financial accounting are two distinct branches of accounting with
different objectives and functions. Here are the key differences:

• Purpose: Management accounting is focused on providing information to internal

management for decision-making, planning, and control. Financial accounting, on the other
 hand, is focused on providing financial information to external stakeholders such as
investors, creditors, and regulatory authorities.

• Reporting: Management accounting reports are used internally and are not subject to
external reporting standards. Financial accounting reports are prepared according to
Generally Accepted Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS) and are used for external reporting.

• Time Frame: Management accounting focuses on future-oriented information, such as

budgets and forecasts. Financial accounting focuses on historical information and provides a
record of past financial performance.

• Detail Level: Management accounting provides detailed information about specific

departments, products, or projects. Financial accounting provides a summary of the overall
financial performance of the organization.

• Flexibility: Management accounting is more flexible and can be tailored to meet the specific
needs of the management. Financial accounting is more rigid and must comply with
established accounting standards.

11. Differences Between Marginal Costing and Absorption Costing

Marginal costing and absorption costing are two different methods of costing used in management
accounting. Here are the key differences:

• Costing Method: Marginal costing considers only variable costs (direct materials, direct labor,
and variable overheads) in the cost of production. Fixed costs are treated as period costs and
are charged to the profit and loss account. Absorption costing, on the other hand, includes
both variable and fixed costs in the cost of production.

• Profit Calculation: Under marginal costing, profit is calculated by deducting variable costs
from sales revenue and then subtracting fixed costs. Under absorption costing, profit is
calculated by deducting the total cost of production (including fixed costs) from sales
revenue.

• Inventory Valuation: In marginal costing, inventory is valued at variable cost only. In

absorption costing, inventory is valued at the total cost of production, including both variable
and fixed costs.

• Decision Making: Marginal costing is more useful for short-term decision-making as it

provides a clear picture of the contribution margin. Absorption costing is more useful for
long-term decision-making as it provides a complete picture of the total cost of production.

• Impact on Profit: In marginal costing, profit is affected only by changes in sales volume. In
absorption costing, profit is affected by changes in both sales volume and production
volume.