M.

Com -I Semester-I
Advanced Accountancy - Paper-II
(Management Accounting)

Unit-I Introduction:
Meaning of Management Accounting- Management accounting also is known as
managerial accounting and can be defined as a process of providing financial information and
resources to the managers in decision making. Management accounting is only used by the internal
team of the organization, and this is the only thing which makes it different from financial
accounting. In this process, financial information and reports such as invoice, financial balance
statement is shared by finance administration with the management team of the company. Objective
of management accounting is to use this statistical data and take a better and accurate decision,
controlling the enterprise, business activities, and development.
Scope and Functions Of Management Accounting-

Management Accounting Function

The following is the function of management accounting for a company:
 Tools for Analysing Decision Making
Accounting is used as an analytical tool that can provide quantitative and qualitative data. The data
presented will then be used as a basis for making decisions.
 Information Systems for External Parties
Management accounting is not only designed for internal parties. This field of accounting is also
used for the benefit of external parties, such as shareholders, governments, financial institutions,
and other parties who have interests in the company.
The resulting report can be used as a form of company responsibility towards stakeholders in the
company. The stakeholders can find out the condition of the company based on the management
accounting report.
 Relevant Sources of Financial Data and Information
Management accounting provides information related to company finances and various relevant
data sources. These data are then used as the basis for planning activities or operations within a
company.
 Sources of Information for the Accountability of Each Division
Each division must make reports related to management management. Management accounting can
be used as a source of information in making reports for each division. This report can later be used
as a basis for planning their work program according to company needs.
  Measuring Company Performance
Management accounting presents historical data that can be used as a tool to evaluate work at the
division level and also the interests of the company as a whole. The evaluation process is very
important to do to be able to assess the extent to which the company's performance is in achieving
the predetermined targets. Thus, the company can control which parts need to be increased,
reduced, or maybe eliminated.
 Coordination of Various Company Activities
Management accounting also functions for coordination between divisions. The information
generated by this management enables the divisions to obtain external information needed to carry
out their respective programs. Thus, collisions of interests between divisions can be avoided.
Scope Of Management Accounting
 Finance Manager
Financial managers need this accounting to collect information related to working capital, cost
expenses, returns on investment, returns on capital, and various other types of finance.
 Production manager
Production managers also need accounting management to obtain detailed information related to
production costs, unit product costs, direct labour costs, and overhead costs that directly affect the
production process.
 Marketing Manager
Marketing managers need data from management accounting to determine the selling price of
products, determine the sales system on credit or cash, sales commission expenses, and information
on discount rates for certain products that are made to increase the number of sales of these
products. Thus a discussion of the meaning, function, and scope of management accounting. Soltius
Indonesia is here to provide solutions in the application and development of accounting
software products that can optimize the functions of management accounting in your company.

Role of Management Accountant in Decision Making- Strategic decision-making is the

process of selecting the best course of action to achieve the goals and objectives of a business.
Management accounting plays a crucial role in this process. It provides information on the financial
performance of the business, which is essential for identifying opportunities and threats, evaluating
options, and making decisions. At Concilium we have been providing management accounting
services to businesses since 2013. In our experience, here are some of the ways in which
management accounting supports strategic decision-making:
1. Cost Analysis - Management accounting data is vital to identifying opportunities to reduce costs,
improve efficiency, and increase profitability. By analysing the cost of each business activity,
owners and managers can make informed decisions about how to allocate resources and improve
processes.
2. Budgeting and forecasting- The data produced in a set of management accounts covers the
financial performance of the business. In turn, this is used to prepare budgets and forecasts. These
tools are essential for planning and controlling business operations. Budgets and forecasts help
owners and managers to set goals, allocate resources, and monitor performance. They also enable
businesses to anticipate future trends and adjust their strategies accordingly.
3. Product and service profitability analysis- Determining the profitability of products and
services is critical for any business. A well-prepared set of management accounts provide this
essential data and help in identifying which products and services are generating the most revenue
and which ones are not profitable. By analysing product and service profitability, owners and
managers can make informed decisions about which products and services to focus on and which
ones to discontinue.
4. Investment appraisal- In addition to product or service-specific data, management accounting
can also assess the financial performance of business units. This information is essential for
evaluating investment opportunities across more complex businesses. By analysing the financial
performance of potential investments, owners and managers can make informed decisions about
which investments to pursue and which ones to reject.
5. Performance evaluation- Management accounting can also generate data that contributes
towards evaluating the effectiveness of business strategies and making adjustments as needed. As
opposed to assessing the financial performance of individual business units, management accounts
can also help owners and managers identify areas of weakness and make informed decisions about
how to improve performance.

Management Accounting vs. Financial Accounting-

Financial Accounting Management Accounting

Objectives The main objectives of financial The main objective of managerial

accounting are to disclose the end accounting is to help management by
results of the business, and the financial providing information that is used to plan,
condition of the business on a particular set goals and evaluate these goals.
date.

Audience Financial accounting produces Managerial accounting produces

information that is used by external information that is used within an
parties, such as shareholders and organization, by managers and employees.
lenders.

Optional? It is legally required to prepare financial Managerial accounting reports are not
accounting reports and share them with
 investors. legally required.

Segment Pertains to the entire organization. Pertains to individual departments in

reporting Certain figures may be broken out for addition to the entire organization.
materially significant business units.

Focus Financial accounting focuses on history; Managerial accounting focuses on the

reports on the prior quarter or year. present and forecasts for the future.

Format Financial accounts are reported in a Format is informal and is on a per

specific format, so that different department/company basis as needed.
organizations can be easily compared.

Rules Rules in financial accounting are Managerial accounting reports are only used
prescribed by standards such as GAAP internally within the organization; so they
or IFRS. There are legal requirements are not subject to the legal requirements that
for companies to follow financial financial accounts are.
accounting standards.

Reporting Defined - annually, semi-annually, As needed - daily, weekly, monthly.

frequency and quarterly, yearly.
duration

Information Monetary, verifiable information. Monetary and company goal driven

information.

Management Accounting vs. Cost Accounting-

Cost Accounting Management Accounting

Objectives The primary purpose of the Cost The main objective of managerial accounting
Accounting is cost ascertainment and is to help management by providing
its use in decision-making performance information that is used to plan, set goals and
evaluation. evaluate these goals.
Audience Cost Accounting reports to internal Managerial accounting produces information
parties i.e. Managers, HODs e.t.c. that is used within an organization, by
managers and employees.

Tools and Techniques of Management Accounting-

 The tools and techniques of management accounting are mentioned below:
1. Financial Policy and Accounting
An organization’s Capital structure reflects the sources of raising finance for business conduct.
Depending upon the management policies, the finances may be raised through the ‘Equity Route’
or ‘Debt Route.’ Under the first route, there is an option for the ‘Issue of Share Capital’ or ‘Issue of
Preference Share Capital.’ Similarly, various alternatives are available under the ‘Debt Route,’ like
‘Long Term Debts or Short Term Debts. Then there are options to issue ‘Bonds / ‘Debentures’ or
‘Institutional Borrowings. The choices are innumerable.
2. Analysis of Financial Statements
Financial Statements, viz. “Profit & Loss Accounts & Balance Sheet’ or even “Funds Flow
Statement’ & ‘Cash Flow Statements are rather technical and difficult to comprehend. They are
subjected to rearrangement, proper classification, and analysis (including ratio analysis) by the
Management Accountant’ and presented in such form and manner that they become simple, easily
understandable, and “Ready to Use by the management for ‘Decision Making” and “Policy
Formulation exercises.
3. Historical Cost Accounting
Under the “Historical Cost Accounting system,” the information regarding costing is recorded
either on the actual transaction date or a subsequent date. A comparison between the ‘Actual Cost
and the ‘Standard Cost (predetermined by the management) indicates the organization’s
performance in this area. Historical Cost Accounting, though quite useful, has certain restrictions
concerning its application.
4. Budgetary Control
The “Budgetary control” system helps prepare Budgets for all the Functional Departments of the
organization based on past data and the department’s potential. The actual performance of the
departments and individual employees is monitored on an ongoing basis regarding the targets fixed
under the Budget. The entire process enables the management to control the affairs of different
departments and their employees and prompt it for necessary action (including changes in its
planning and policy).
5. Standard Costing
Under the system of “Standard Costing,” costs involved in each activity are pre-decided based on
study and analysis of the prevailing internal and external circumstances. After determining standard
costs in the above manner, the actual costs incurred later are compared with standard costs. Any
deviation between the two is analyzed to ascertain the causes of such variance and initiate
appropriate measures, ‘Standard Costing acts as an effective tool for
i) Cost Control
ii) Increasing overall organizational efficiency
iii) Management by Exception
6. Marginal Costing
The underlying principle of the ‘Marginal Costing’ system is that the cost also changes with the
changes in the production volume. The cost Element of a product is bifurcated into “Fixed Cost”
and “Marginal Cost.” The Fixed Cost of production remains constant irrespective of the production
level. It means that even if a single product unit is produced, the minimum fixed cost would be
incurred, remaining unchanged at a certain level after that. With the production of every additional
unit, only the variable cost will be added.
7. Decision Accounting
One of the most important functions of the management of any organization is to make decisions.
‘Decision Making’ exercise involves:
i) Availability of data and multiple choices
ii) Pros and cons associated with each of those choices
iii) Deciding the best course of action, keeping in mind the interest and welfare of the organization.
8. Revaluation Accounting / Replacement Accounting
The management of any organization is entrusted with the time-consuming task of ensuring that its
capital remains intact, i.e., there is no erosion of capital under any circumstances. The
‘Management Accountant’ is helpful to the management in performing the task; the computation of
profits is carried out in such a manner that the ‘Capital’ remains unaffected, even when the
inflationary forces are very strong. Replacement of ‘Fixed Assets’ is planned without putting undue
strain on ‘Profitability’ and ‘Capital.’
9. Control Accounting
Various tools and systems are a part of ‘Control Accounting, some of which are as follows:
i) Internal Audit
ii) Statutory Audit
iii) Concurrent Audit
iv) Variance Analysis Reports
v) Management Information Reports
10. Management Information Systems
With the advent of electronic devices and the growth of Information Technology of late, various
steps involved in accounting, viz. recording, classifying data, and analysis, have become easy,
convenient, and fast. Data flow through various management channels occurs very fast (some of
them on ‘Real Time Basis?). “Decision Making Process at top levels of management and flow of
information at lower levels of management in the form of instructions (about the further course of
action) has also improved significantly.
11. Working Capital Management
The system of “Management Accounting uses this tool to efficiently manage ‘Working Capital. It
includes handling of “Short Term Assets’ (cash, sundry debtors, inventories, etc.) and ‘Short Term
Liabilities (sundry creditors, miscellaneous expenses, etc.). Any mismatch between them (Working
Capital Gap) must be filled without losing time. The target is to reduce the time to convert “Raw
Material’ into ‘Sales’ and ‘Sundry Debtors’ into ‘Cash.’

UNIT-II Analysis of Financial Statements: Part I

Meaning and Types of Financial Statements- Financial statements are the statements that
present an actual view of the financial performance of an organisation at the end of a financial year.
It represents a formal record of financial transactions taking place in an organisation. These
statements help the users of the information in determining the financial position, liquidity and
performance of the organisation.
Financial statements reflect the impact of financial effects of the transactions on the organisation.
Preparation of financial statements is done by both profit and non-profit organisations. It forms a
crucial part of the annual report of any organisation.
Financial statements are used by different stakeholders of an organisation which includes
shareholders, staff, customers, investors, suppliers, stock exchanges, government authority and
other related stakeholders.
Types of Financial Statements
There are four (4) types of financial statements that are required to be prepared by an entity. These
statements are :
1. Income statement,
2. Balance Sheet or Statement of financial position,
3. Statement of cash flow,
4. Noted (disclosure) to financial statements.
Let us discuss these statements in detail now
1. Income statement
Income statement of an organisation or business entity is the financial statement which
contains financial information about the three important components, which are revenues, profit or
loss and expenses incurred during the accounting period.
The three components of income statement are explained as follows:
1. Revenues: It refers to the sales of goods and services that the business generates during the
current accounting period. Revenues can be obtained from both cash and credit sales.
2. Profit or Loss: Profit or loss is the net income which is obtained by deducting the expenses
from the revenues. Profit will happen if revenues are more than expenses and loss will
occur if expenses are more than revenue.
3. Expenses: Expenses are the cost of operations that an organisation incurs for running day to
day operations. They can be administrative expenses like salaries, depreciation etc.
2. Balance sheet
A balance sheet is known as a statement of financial position as it shows the position of
assets, liabilities and equity at the end of an accounting period. The net worth of a business can be
determined by deducting the liabilities from the assets.
If the users of financial information are looking for information regarding the financial position of
the company, a balance sheet is the most appropriate statement which will present the necessary
information.
Components of a balance sheet are assets, liabilities and equity. These are described below:
a. Assets: Assets are resources that are owned by the company both legally and economically.
There are two main classes of assets. They are current and non-current assets.
Current assets of a company are those assets that are going to be utilised in the current accounting
period. The examples of current assets are cash, marketable securities, cash equivalent etc.
Non-current assets comprise of those assets that cannot be utilised completely in the current
accounting period and are therefore used across several accounting periods. It consists of tangible
and intangible assets including machinery, building, land, computer equipment, vehicles etc.
Assets are equal to the sum of liabilities and equity of the organisation.
b. Liabilities: Liabilities are obligations of a company which they owe to other businesses or
individuals. It includes interests payable, loans, taxes etc. Liabilities are of two categories current
liabilities and non-current liabilities.
Current liabilities are due within a year that means the organisation has to pay the dues within that
accounting year only. Non-current liabilities, on the other hand, are obligations that have a longer
period of repayment, which is more than twelve months. For example, a long term lease which is
due in more than twelve months.
c. Equity: Equity is defined as the difference between assets and liabilities. The examples of equity
are retained earnings, share capital. Equity can be calculated by subtracting assets from liabilities.
3. Statement of Cash Flow
Cash flow statement reveals the movement of cash in an organisation. It comprises cash
inflows and outflows. Cash flow can be classified into three activities which are operating
activities, investing activities and financing activities.
4. Notes to Accounts
Notes to accounts or notes to financial statements are supporting piece of information that is
provided along with final accounts of a company. Notes are required to be provided as per the law
which can include details regarding reserves, provisions, inventory, depreciation, share capital etc.

Analysis of financial statements: Comparative Statement Analysis-

• The comparative statements are the statements of the financial position and performance of two
or more periods represented in comparative form in adjacent columns in a single report.
• In comparative statement we can compare each element of financial statement very easily and
find increase/decrease in the elements in absolute terms and in terms of percentage.

Common size Statement Analysis- 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.
There are two types of common size statements:
1. Common size income statement
2. Common size balance sheet
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.
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.

Trend Analysis-
• Trend simply means stalking tendency.
• Analysis of these general tendencies is called trend analysis.
• Comparing the past data over a period of time with a base year is called trend analysis.
Objectives of trend analysis
• To find the trend or direction of movement over a period of time .
• To make a comprehensive and comparative study of financial statements
• To have a better understanding of financial and profitability position.
Methods of trend analysis
• Trend percentages
• Trend ratios
• Graphic method
Steps in the computation of trend ratios
• Select a base year .generally ,first year is taken as base year
• Take the figure of base year as 100.
• Calculate trend percentages in relation to base year.
• Each years figure is divided by the base years figure .

UNIT-III Analysis of Financial Statements: Part II

Ratio Analysis- Classification of Ratios- Ratio analysis is a quantitative method of gaining
insight into the financial condition of a company. In finance, ratios are usually two financial
statement items that may be related to one another and may provide important insights.
Types Of Ratio Analysis-
There are four main types of ratios: liquidity, turnover, profitability and debt.
Liquidity ratios indicate a company's ability to meet its maturing short-term obligations. Turnover
ratios indicate how effectively a company manages its resources to generate sales. Profitability
ratios indicate the efficiency with which a company is managed. Debt ratios indicate the extent to
which a company is financed by debt.
importance of ratio analysis-
Ratio analysis is important because it provides a snapshot of a company's financial
condition and allows for comparisons to be made between companies, industries and/or time
periods.

Advantages and Limitations of Accounting ratios-

Advantages of Ratio Analysis are as follows:
 Helps in forecasting and planning by performing trend analysis.
 Helps in estimating budget for the firm by analysing previous trends.
  It helps in determining how efficiently a firm or an organisation is operating.
 It provides significant information to users of accounting information regarding the
performance of the business.
 It helps in comparison of two or more firms.
 It helps in determining both liquidity and long-term solvency of the firm.

Limitations of Ratio Analysis

While ratios are very important tools of financial analysis, they do have some
limitations, such as
 The firm can make some year-end changes to their financial statements, to improve their
ratios. Then the ratios end up being nothing but window dressing.
 Ratios ignore the price level changes due to inflation. Many ratios are calculated using
historical costs, and they overlook the changes in price level between the periods. This does
not reflect the correct financial situation.
 Accounting ratios completely ignore the qualitative aspects of the firm. They only take into
consideration the monetary aspects (quantitative)
 There are no standard definitions of the ratios. So firms may be using different formulas for
the ratios. One such example is Current Ratio, where some firms take into consideration all
current liabilities but others ignore bank overdrafts from current liabilities while calculating
current ratio
 And finally, accounting ratios do not resolve any financial problems of the company. They
are a means to the end, not the actual solution.

Calculation of ratios and Interpretation.

(a) Current Ratio
(b) Quick Ratio or Acid test Ratio
(c) Cash Ratio or Absolute Liquidity Ratio
(d) Basic Defense Interval or Interval Measure Ratios
(e) Net Working Capital Ratio
(a) Current Ratio: The Current Ratio is one of the best known measures of short term
solvency. It is the most common measure of short-term liquidity.
The main question this ratio addresses is: "Does your business have enough current assets to meet
the payment schedule of its current debts with a margin of safety for possible losses in current
assets?"
Where,
Current Assets = Inventories + Sundry Debtors + Cash and Bank
Balances + Receivables/ Accruals + Loans and Advances +
Disposable Investments + Any other current assets.
Current Liabilities = Creditors for goods and services + Short-
term Loans + Bank Overdraft + Cash Credit + Outstanding
Expenses + Provision for Taxation + Proposed Dividend +
 Unclaimed Dividend + Any other current liabilities.
Interpretation-
A generally acceptable current ratio is 2:1. But whether or not a specific ratio is
satisfactory depends on the nature of the business and the characteristics of its current assets and
liabilities.
(a) Quick Ratio: The Quick Ratio is sometimes called the "acid-test" ratio and is one
of the best measures of liquidity.
Quick Assets
Quick Ratio or Acid Test Ratio =
Current Liabilities

Where,
Quick Assets = Current Assets  Inventories  Prepaid expenses
Current Liabilities = As mentioned under Current Ratio.
The Quick Ratio is a much more conservative measure of short-term liquidity than the Current
Ratio. It helps answer the question: "If all sales revenues should disappear, could my business meet
its current obligations with the readily convertible quick funds on hand?"
Quick Assets consist of only cash and near cash assets. Inventories are deducted from current assets
on the belief that these are not ‘near cash assets’ and also because in times of financial difficulty
inventory may be saleable only at liquidation value. But in a seller’s market inventories are also
near cash assets.
Interpretation-
An acid-test of 1:1 is considered satisfactory unless the majority of "quick assets" are in
accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for
paying current liabilities.
C) Cash Ratio/ Absolute Liquidity Ratio: The cash ratio measures the
absolute liquidity of the business. This ratio considers only the absolute
liquidity available with the firm. This ratio is calculated as:

Cash and Bank balances +Marketable Securities

Cash Ratio =
Current Liabilities

Or,

Cash and Bankbalances + Current Investments

Current Liabilities

Interpretation-The Absolute Liquidity Ratio only tests short-term liquidity in terms of cash
and marketable securities/ current investments.
(d) Basic Defense Interval/ Interval Measure:

Cash and Bank balances +Marketable Securities

Basic Defence Interval =
Operating Expenses No. of days (say 360)

Or

Current Assets - Inventories

Interval Measure =
Interpretation-If for some reason all the company’s revenues were to suddenly cease, the Basic
Defense Interval would help determine the number of days for which the company can cover
its cash expenses without the aid of additional financing.

(e) Net Working Capital Ratio: Net working capital is more a

measure of cash flow than a ratio. The result of this calculation must be
a positive
Net Working Capital Ratio = Current Assets-Current Liabilities

(Excluding short-term bank borrowing)

Interpretation- Bankers look at Net Working Capital over time to determine a company's
ability to weather financial crises. Loans are often tied to minimum working capital requirements.

UNIT-IV Working Capital: -

Meaning-

In general sense, the working capital means, the capital which is needed to carry
on the day to day working of the business. Shubin defined the working capital as, ''the funds
necessary to cover the cost of operating the business enterprise." The cost of operating the
enterprise includes purchases of raw materials or finished goods, wages and salaries of staff,
payment of other expenses like rent, insurance, printing, lighting, advertisement etc. The funds need
to cover this cost is called as working capital. Such capital is in the form of different current assets
and they change their form in the ordinary course of business., from cash to inventories, inventories
to receivables and receivables into cash. Hoagland defines it as, “the difference between the book
value of the current assets and the current liabilities. In this view, Gestenberg called it as a
circulating capital. The most widely used concept of working capital is defined as, "the difference
between current assets and current liabilities." This concept is useful to know the liquidity of the
firm.
Significance and Determinants of Working Capital-
I] Significance-
 Helps maintain solvency for a company by managing an uninterrupted process cycle.
 Prompt payment to suppliers helps improve the goodwill and creditworthiness of the
business.
 Suppliers may provide cash discounts for timely payment of bills. It helps reduce costs,
thereby improving profits.
  Helps businesses avail loans based on improved creditworthiness in the market.
 Helps efficiently manage any sudden financial crisis or market volatility.
 Helps divert excess funds to productive ventures to generate more profits for the business.
 Helps manage company expenses and bills like staff salary, taxes, and other expenses.
II] Determinants-
Determinants/Factors affecting on working capital:
Each business firm needs the working capital but the requirement of the working
capital of each firm is different because it depends upon various factors. These
factors are as follows:
i) Size of the firm: The amount of working capital required depends upon the size
of the firm. Big firm require more working capital as compare to the small
firms.
ii) Nature of business: The requirement of working capital also depends on the
nature of the business carried out by the firm. If the firm is a trading firm it
requires more working capital and if the firm is an industrial or public utilities
concern it requires less working capital.
iii) Volume of business: If the volume of business is large it requires more working
capital and if the volume of business is small there is a less need of working
capital.
iv) Length of processing or selling period: If the processing or selling period is
large it requires more working capital and vice versa.
v) Policy of purchase and sale: The requirement of working capital depends upon
the firm's policy of purchase and sale. If a firm has a policy of cash purchases
and credit sales it requires more working capital and if a firm has a policy of
credit purchases and cash sales it requires less working capital.
vi) Large stock of raw materials: Some firms require large stock of raw materials
for some reasons such as seasonal nature, long distance etc. Such firms need
more working capital than others.
vii) Expansion: If a firm wants to make rapid expansion or expansion on large scale
it require more working capital.
viii) Cash requirements: If a firm requires more cash for payment of different
expenses, taxes, charges etc. the requirement of working capital is more and if
cash requirement is less, the need of working capital is also less.
ix) Use of Labour: The firm, who use labour on large scale for business activities,
needs more working capital and if the firm is highly mechanized it needs less
working capital.
x) Management attitude and efficiency : The attitude or policy of management in
respect of payments of dividend, discount, price, expenses etc. is of cash saving
and efficiency of management is more that time requirement of working capital
 Operating Cycle-
The operating cycle, also known as the cash cycle of a company, is an activity ratio
measuring the average period required for turning the company’s inventories into cash. This
process of producing or purchasing inventories, selling finished goods, receiving cash from
customers, and using that cash to purchase/produce inventories again is a never-ending cycle,
as long as the company remains in operation.

The various components of Operating Cycle may be calculated as

shown below:

Raw Material Average stock of raw material

(1)  Average Cost of Raw Material Consumption per
Storage Period
day
Work-in-Progress Average Work - in- progress
(2) = inventory Average Cost of
holding period
Production per day
(3) Finished Goods Average stock of finished goods
= Average Cost of Goods Sold per
storage period
day
Receivables (Debtors)
(4) Average Receivables
collection = Average Credit Sales per
period day
(5) Credit period Average Payables
allowed by suppliers = Average Credit Purchases per day
(Creditors)
Types of Working Capital-
The types of working capital are mainly divided into different parts:
 Gross Working Capital
Gross working capital is the total value of the company’s current assets. Current assets include
cash, receivables, short-term investments, and especially market securities.
The Gross working capital does not showcase the current liabilities. Gross working capital can be
executed by calculating the difference between the existing assets and current liabilities.
The difference remaining is the actual working capital that the company has to meet its obligations.
 Net Working Capital
Networking capital is the difference between the current assets and current liabilities of the
company. If the company’s assets are more than current liabilities, it indicates a positive working
capital, and the company is in a financial position to meet its obligations.
However, if the company’s assets are less than current liabilities, it indicates a negative working
capital, and the company is facing financial distress.
The key difference between gross and net working capital is that gross working capital will always
be a positive value. In contrast, networking capital can either be a negative or positive value.
 Permanent Working Capital
Permanent working capital is the minimum amount of capital required to carry on the operations
without interruption or difficulty.
For example, a company will need minimum cash to keep the operations smooth and running; here,
the minimum amount of money required will act as permanent working capital.
 Regular Working Capital
Regular working capital is the amount of funds businesses require to fund its day-to-day operations.
For example, cash needed for making payment of wages, raw materials, salaries come under regular
working capital.
 Reserve Margin Working Capital
Apart from conducting day-to-day activities, a business may need some amount of capital to face
unforeseen circumstances. Reserve margin working capital is nothing, but the money kept aside
apart from the regular working capital. These funds are held separately against unexpected events
like floods, natural calamities, storms, etc.
 Variable Working Capital
Variable working capital can be defined as the capital invested for a temporary period in the
business. Variable working capital is also called fluctuating working capital.
Such capital differs with respect to changes in the business assets or the size of the business.
Furthermore, variable capital is subdivided into two parts:
1) Seasonable Variable Working Capital
Seasonable variable working capital is the amount of capital kept aside to meet the seasonal
demand if the business is running seasonally.
2) Special Variable Working Capital
Special variable working capital is the temporary rise in the working capital due to any unforeseen
or occurrence of a special event.

Estimation of Working Capital Requirements-

Method I: (Operating cycle approach) (Refer to calculation of operating cycle given in the previous
content) Particulars Rs.
Raw material stock (179,200 ÷ 12) 14,933
Semi-finished stock: [14,933 + (628,800 ÷ 2 ÷ 12) ] 41,133
Finished goods stock (968,000 ÷ 12) 80,667
Debtors (1,448,000 ÷ 12) 120,667
Operating cash (968,000 ÷ 12) 80,667
-----------
Total current assets 338,067*
Less: Current liabilities (179,200 ÷ 12 × 2) 29,867
-----------
Net working capital requirement 308,200
Method II (Current assets holding period approach)*
Working capital requirement
= Total current assets 338,067
Method III (Ratio to Sales Method)
Assume that industry’s average ratio is 30%. Therefore, working capital is 30% of Annual sales,
i.e., Rs. 434,400 (30% ×1,448,000)
Method IV: Ratio of fixed investment method: Assume 15% the average rate of fixed investment.
Hence, the working capital requirement Rs. 240,000 (i.e., 15% ×1,600,000).

All above methods are subject to error if markets are seasonal, and/or estimate is inaccurate.
A number of factors govern the choice of methods of estimating working capital. Therefore, each
factor, for example, seasonal variations, variability in input factors’ prices, production cycle, etc.,
should be given due weightage in Projecting working capital requirements
Shivaji University, Kolhapur
Nature of Question Paper M.Com. I Semester I (NEP)
Advanced Accountancy Paper II
(Management Accounting)
Marks: 80 Duration: 3 hours.
Instructions:
4. Question number 1 and 2 are compulsory
5. Attempt any three questions from question number 3 to 6
6. Use of Calculator is allowed
Q. 1 a. Choose the appropriate alternative (10)
b. True or false (6)
Q.2 Short Notes (any 4 out of 6) (16)
Q.3 Practical Problem (16)
Q.4 practical problem (16)
Q.5 practical problem (16)
Q. 6. a. Short problem (8)
b. Short Problem (8)

(Theory Questions – 40% and Practical Problems – 60%)