5.Advantages of Fund flow Statement
Advantages of Funds Flow Statement :
Preparation of 'Funds Flow Statement' is beneficial in the following manner
1) Helps in the Analysis of Financial Operations :
The net effect of different business transactions on the Operational' as well
as "Financial' status of an organisation are disclosed through the 'Financial
Statements' ('Balance Sheet and Profit and Loss Account') prepared for an
accounting period. The 'Balance Sheet' reveals the position regarding
various resources of funds of a business enterprise and the applications
thereof as on a specific date.
However, it does not bring to the forefront the reasons behind the changes
in the assets and liabilities of an organisation between two different points
of time. The analysis of 'Funds Flow Statement' not only explains the
reasons for those changes, it also brings out the impact of such changes on
the liquidity status of the organisation.
2) Helps in the Formation of a Reasonable Dividend Policy :
There may be a situation, where a company may have enough available
profits for dividend distribution, still it is not advisable to distribute
dividend due to liquidity constraints. Analysis of 'Funds Flow Statement'
facilitates formulation of a reasonable dividend policy in such situations.
3) Helps in the Proper Distribution of Resources :
Generally, the resources of any organisation are constrained and it is the
endeavour of the organisation to use those resources in an optimal and
prudent manner. The 'Funds Flow Statement' is helpful to the management
in taking appropriate decisions with regard to the deployment or allocation
of limited resources.
4) Helps in Improving the Use of Working Capital :
A Funds Flow Statement' reveals the efficiency of the management in
utilising the available 'Working Capital'. It also advices the steps to be taken
for improving the Working Capital Management of the company.
5) Helps Knowing the Overall Creditworthiness of a Firm :
Funds Flow Statement for a number of years is one of the most important
documents required by the financial institutions and banks (e.g. State
Financial Institutions (SFIs), State Industrial Development Corporations
(SIDCs), Industrial Finance Corporation of India (IFC), and all the
commercial banks), before granting loans.
It helps them in ascertaining the creditworthiness or repaying capacity of
the business enterprise. Thus, it is mandatory for these financial
institutions to prepare funds flow statement.
6.CASH FLOW STATEMENT
7.Examples of Fund flow Statement
8.Margin of safety
10Cost volume profit analysis
11.Marginal costing concept
13.zero based budget
16.Characteristic of Budget
17.Types of costs
19.Uses of Cost accounting
20.Advantages and disadvantage of management
21.Management accounting is nothing more than the use of financial statement.
22.Ratio and uses
23.Fund Flow Statement
24.Steps involved in preparing fund flow statement
25.Margin of Safety
26.Marginal Costing Vs Absorption Costing
27.Different Methods of Costing
28. Cost heads
5.i) Cost Variance = Standard Cost – Actual Cost
5,100 – `4,950 = `150 (F)
(a) Calculation of Actual Cost:
85 workers for 50 hours @ 1 per hour =
10 workers for 50 hours @ 80 p. per hour =
5 workers for 50 hours @ `1.20 per hour =
Total actual cost
(b) Calculation of Standard Rate:
Standard cost per (gang hour) = 100 × 50 × `1 = `5000
Standard production (per gang hour)
= 100 × 200 × 50 = 10000 unit
Standard rate per unit = `5000
= 50 p. per unit.
(c) Calculation of Standard Cost:
Actual production × Standard rate 10,200 units × 50 p. per unit = `5,100
(ii) Rate Variance:
As the actual wage rate has deviated from the standard in respect of
only 15 workers out of a total of 100 workers, wages rate variance would
be calculated only in respect of these 15 workers.
Actual Hours (Standard Rate – Actual Rate)
Therefore, 500 Hours (`1 – 80 p.) = `100 (F)
250 Hours (`1 – `1.20) = `50 (A)
Thus, the total rate variance is `50 (F).
(iii) Efficiency Variance: Efficiency variance is indicated by the fact that,
as compared with standard production of 10,000 units (200 units × 50
hours), the actual production is 10,200 units
Standard Rate (Standards Hours – Actual Hours) `1 (5,100 - 5,000) = `100
favourable. Calculation of Standard Hours= 5000 10200 = 5,100 hours.
Standard labour cost per unit of output (SY – AY)
0.50 (10,000 – 10,200) = `100 (F)
Verification: Cost Variance = Rate Variance + Efficiency Variance
150 (F) = 50 (F) + `100 (F)
b) Calculation of present profit `
Selling price per unit A 20.00
Material cost per unit 8.00
Conversion cost per unit 6.00
Dealer‘s margin per unit 2.00
Variable cost per unit B 16.00
Contribution per unit A – B 4.00
Total contribution (` 4 x 90,000 units) 3,60,000
Less : fixed cost 2,50,000
The present profit can be maintained by keeping total contribution at
present level of ` 3,60,000
(i) Reducing sales price by 5%
Reducing sales price by 5% New selling price per unit = 20 – 1 = ` 19.00
New dealer‘s margin per unit = 19 x 10/100 = ` 1.90
New variable cost per unit = 8 + 6 +1.90 = ` 15.90
New contribution per unit = 19.00 – 15.90 = ` 3.10
Desired sales (units) to maintain the present level of profit : = Desired
contribution/ New contribution per unit = 3,60,000/3.10 = 116129
(ii) Increasing dealer‘s margin by 25%
New dealer‘s margin per unit = 2 + 25% of 2 = ` 2.50
New variable cost per unit = 8 + 6 + 2.50 = ` 16.50
New contribution per unit = 20.00 – 16.50 = ` 3.50
Desired sales (units) required to maintain the present level of profit =
Desired contribution/ New contribution per unit = 3,60,000/ 3.50=102875
PART C .
How cost Accounting helps the firm in determining the Selling Price?
• Ans : Cost accounting provides detailed and
selling price of products or services.
• In fixing selling prices. However, regard must
be had to the cost structure, condition of the
market, the type of consumer, the area of
supplied, the demand for the product and supply
• A cost accountant should not only accurately
ascertain the total cost but also analyze such
total cost under variable and fixed cost so
that management may quote prices even below
total cost but above variable or marginal costs
maximization of profit.
Que 2: According to you, by adopting Cost Accounting
method, Can a firm prepare a Financial Statement?
Ans: In order to prepare financial statements
it is required to determine the stock-values
at the end of the period over which such
financial statements are to be prepared.
Physical stock-taking is a lengthy procedure
and the business has to be closed down for
Where cost accounts are kept, the ascertainment
materials, work-in-progress and finished goods
become easy and as such financial statements
can be prepared monthly or even weekly.
Que 3: Which kind of operating policy decision
can we take by using Cost Accounting Method?
Ans: These policies may be-
Whether to shut down or operate at a loss;
Whether to make or buy from outside
Whether to continue with the existing
plant and machinery or to replace them by
improved and economic ones.
Que 4 : (4) From the case, what are the benefits/
Advantages enjoyed by a firm, by adopting Cost Accounting?
Ans: They are as follows ---
Establishment of more accurate unit costs, a
knowledge of which results in establishment of
fair selling prices and in the elimination of
unprofitable lines of product.
Elimination of inefficiencies in plant
operation. These inefficiencies are costly and
arc caused by material wastage, use of obsolete
machinery, poor planning, or assignment of men
to work for which they are not qualified.
Presentation of more frequent and more accurate
financial accounts with the help of perpetual
inventory system of stock control.
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