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GNDU Question Paper-2023
Bachelor of Commerce
(B.Com) 5
th
Semester
MANAGEMENT ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What is meant by Management Accounting? How is it different from Financial
Accounting?
2. Explain different tools of Financial Analysis.
SECTION-B
3. Differentiate between Cash Flow Statement and Fund Flow Statement. Explain the
procedure of preparing the Cash Flow Statement under indirect method as per AS-3.
4. The following are the summarized Balance Sheets of X Ltd. on 31st December, 2017 and
31st December, 2018:
2017
(Rs.)
2018
(Rs.)
Equity and Liabilities :
Share Capital
6,00,000
8,00,000
Debentures
2,00,000
3,00,000
Statement of Profit and Loss
1,25,000
2,50,000
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Creditors
1,15,000
90,000
Provision for Bad and Doubtful Debts
6,000
3,000
Provision for Depreciation :
On Land & Buildings
20,000
24,000
On Plant & Machinery
30,000
35,000
Assets :
Plant & Machinery (at cost)
4,00,000
6,45,000
Land & Buildings (at cost)
3,00,000
4,00,000
Stock
3,00,000
3,50,000
Bank
20,000
40,000
Preliminary Expenses
7,000
6,000
Debtors
69,000
61,000
10,96,000
15,02,000
Additional Information:
(1) During the year, a part of Machinery costing Rs. 70,000 (accumulated depreciation
thereon Rs. 2,000) was sold for Rs. 6,000.
(2) Dividend of Rs. 50,000 was paid during the year.
You are required to ascertain:
(a) Changes in Working Capital for 2018.
(b) Fund Flow Statement.
SECTION-C
5. What is CVP analysis? Discuss its tools.
6. A machine manufacturing company finds that while it costs Rs. 12 each to make a
component P-50, the same is available in the market at Rs. 11 with an assurance of
continued supply.
The breakdown of cost is:
Direct material Rs. 4.25 each
Direct labour Rs. 3.75 each
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Other variables Rs. 2.00 each
Depreciation and other fixed cost Rs. 2.00 each
Total Rs. 12.00 each
(a) Should you make or buy?
(b) What would be your decision if the supplier offers the components at Rs. 9.85 each?
(b) Since marginal cost (Rs. 10) of making the component is more than suppliers offered
price (Rs.9.85), hence it is advisable to buy the component.]
SECTION-D
7. What are responsibility centers? Explain types of responsibility centers.
8. What is transfer pricing? Explain methods of transfer pricing.
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GNDU Answer Paper-2023
Bachelor of Commerce
(B.Com) 5
th
Semester
MANAGEMENT ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What is meant by Management Accounting? How is it different from Financial
Accounting?
Ans: Imagine you are the captain of a large ship navigating through the vast ocean. You have
two types of maps at your disposal. One shows you the overall path, major ports, and ocean
currents—this is your financial map, helping outsiders understand where your ship is and
how it’s performing. The other map is detailed, showing the fuel levels in each tank, which
parts of the ship need maintenance, how much cargo can be loaded in each compartment,
and even the expected weather patterns over the next few hours—this is your management
map, designed to help you make day-to-day decisions for smooth sailing.
This analogy introduces the two sides of accounting: Financial Accounting and Management
Accounting. Both deal with numbers and performance, but they serve very different
purposes and audiences.
What is Management Accounting?
Management accounting is like the captain’s map that guides decision-making in real-time.
It is the process of identifying, measuring, analyzing, interpreting, and communicating
financial information within an organization so that management can make informed
decisions.
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Think of it as the internal compass of a business. While financial accounting focuses on
reporting the past, management accounting looks at the present and the future. It doesn’t
just tell you “what happened” but also guides you on “what should be done next.”
Key aspects of management accounting include:
1. Decision Making: Management accounting provides detailed reports and analysis to
help managers make informed decisions—like whether to launch a new product,
discontinue a service, or reduce costs in a department.
2. Planning and Budgeting: Just as a captain plans routes and provisions, businesses
use management accounting to plan budgets, forecast revenues, and anticipate
expenditures.
3. Performance Evaluation: Management accounting tracks performance through
metrics like variance analysis (comparing actual results with planned budgets) and
key performance indicators (KPIs).
4. Cost Control: Understanding which operations are costing more than they should,
and finding ways to reduce unnecessary expenses, is a core function of management
accounting.
5. Strategic Management: It also assists in long-term planning, risk management, and
competitive strategy by providing insights from financial and non-financial data.
In short, management accounting is a forward-looking tool for internal users that turns raw
financial data into actionable insights.
Differences Between Management Accounting and Financial Accounting
Now let’s return to our ship analogy. Financial accounting is like the official logbook. It
records where the ship has been, how much cargo it carried, the fuel consumed, and the
money spent. Management accounting, on the other hand, is your operational guide, telling
you how to steer the ship efficiently, how to save fuel, and how to optimize cargo space.
Here’s a clear comparison:
Aspect
Financial Accounting
Management Accounting
Purpose
To provide a historical record of
financial performance.
To assist management in decision-
making, planning, and controlling
operations.
Audience
External stakeholders: investors,
creditors, government, tax
authorities.
Internal users: managers,
department heads, decision-
makers.
Time
Orientation
Historical: records past transactions.
Present and future: focuses on
planning, forecasting, and decision-
making.
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Aspect
Financial Accounting
Management Accounting
Legal
Requirement
Mandatory for companies to follow
accounting standards like GAAP or
IFRS.
Not legally required; customized as
per management needs.
Nature of
Reports
Standardized, structured financial
statements like the balance sheet,
income statement, and cash flow
statement.
Flexible reports: budgets, cost
analysis, variance reports, break-
even analysis, and performance
dashboards.
Level of Detail
Summarized data suitable for
outsiders.
Detailed and specific data for
internal decision-making.
Frequency
Usually prepared quarterly or
annually.
Prepared as frequently as
required—daily, weekly, or
monthly.
Emphasis
Accuracy and compliance.
Relevance and usefulness for
decision-making.
Example to Understand the Difference
Suppose your company manufactures shoes.
• Financial Accounting will record that you sold 1,000 pairs of shoes last month,
earned ₹500,000, and spent ₹300,000. This information will be compiled into the
profit and loss statement and shared with shareholders.
• Management Accounting, however, will go deeper: Which model sold the most?
Which factory line had higher production costs? Should you increase the production
of sports shoes and reduce formal shoes? Should you negotiate with suppliers for
better rates on leather? This detailed analysis helps managers make actionable
decisions to improve profitability.
Humanizing the Concept
Imagine two friends running a small bakery: Riya and Sameer.
• Riya is responsible for the financial accounting side. She records every sale,
purchase, and expense in a ledger. At the end of the month, she produces a report
showing how much money the bakery made and spent. Investors and banks love her
reports because they are accurate and trustworthy.
• Sameer, on the other hand, is in charge of management accounting. He tracks which
cakes are selling the most, what ingredients are being wasted, and how labor hours
can be optimized. He uses this data to decide which recipes to promote, which
ingredients to stock, and whether to introduce a new cake flavor next month. His
work helps the bakery grow and make smart decisions.
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Without Riya’s records, the bakery wouldn’t know its financial health. Without Sameer’s
insights, it might make costly mistakes. Both are important, but they serve different
purposes.
Conclusion
In simple terms, financial accounting tells the story of what has happened—like a movie
recap. Management accounting helps decide what should happen next—like the director
planning the next scene.
While financial accounting is about accuracy, compliance, and historical reporting,
management accounting is about decision-making, planning, and performance
improvement. Together, they form the backbone of business intelligence: one preserves the
past, the other shapes the future.
In today’s competitive world, no business can afford to rely solely on financial accounting.
Management accounting provides the insights necessary to steer the company toward
success, much like a captain navigating a ship through unpredictable waters.
Ultimately, management accounting transforms numbers into knowledge, helping managers
make informed, strategic, and timely decisions. And that’s why it’s often called the “eye of
management”—seeing what’s happening now and predicting what might happen next.
2. Explain different tools of Financial Analysis.
Ans: Imagine you are an explorer, setting off on a journey to discover the true health and
potential of a company. Just like a doctor examines a patient to understand their well-being,
financial analysts examine a company to see how strong or weak it is. But unlike a doctor
who uses a stethoscope or an X-ray, financial analysts have their own special instruments—
tools of financial analysis—that help them interpret numbers, trends, and patterns hidden in
a company’s financial statements. Let’s take a walk through this financial toolkit, one by
one, and see how each tool tells a story.
1. Comparative Financial Statements
The first tool in our explorer’s kit is the comparative financial statement. Imagine opening a
photo album and looking at pictures from different years side by side. You can immediately
see what has changed—what has grown, what has shrunk, and where things stayed the
same. Similarly, comparative financial statements allow analysts to see changes in a
company’s balance sheet and income statement over different periods. By comparing, for
example, this year’s sales to last year’s sales, one can quickly spot trends and growth
patterns.
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This tool is particularly useful because it not only highlights increases and decreases but also
helps in identifying abnormal fluctuations. If the company’s expenses suddenly spike while
sales remain steady, a red flag goes up. This tool is simple, yet powerful—like noticing the
subtle hints in a friend’s body language.
2. Common-Size Financial Statements
Next, imagine you’re trying to compare two houses—one small and one enormous. Looking
at raw numbers like the total number of bricks or windows won’t help. Instead, it’s better to
look at ratios, such as the proportion of rooms to total floor space. This is exactly what
common-size financial statements do. They convert each item in the financial statement
into a percentage of a base figure—sales in the income statement or total assets in the
balance sheet.
With this tool, an analyst can easily compare companies of different sizes or track changes
in a single company’s financial structure over time. For example, if the cost of goods sold
consistently takes up a smaller portion of sales year after year, it signals improved
efficiency.
3. Trend Analysis
As our journey continues, we meet the tool of trend analysis. Imagine watching a sapling
grow into a tree, noting how it gets taller year after year. Similarly, trend analysis involves
studying financial data over multiple periods to detect patterns or tendencies. By plotting
revenue, profit, or expenses over several years, analysts can forecast the company’s future
performance.
Trend analysis is more than just numbers; it tells a story about direction and momentum.
For instance, a company whose profits grow steadily despite market challenges
demonstrates resilience, while erratic trends could indicate instability.
4. Ratio Analysis
Perhaps the most beloved tool of all is ratio analysis. Ratios are like the magnifying glass of
a detective—they reveal hidden relationships between numbers that ordinary eyes might
miss.
Ratio analysis is usually divided into several categories:
• Liquidity Ratios: These answer the question, “Can the company pay its short-term
obligations?” Examples include the Current Ratio and Quick Ratio. Think of it like
checking a person’s wallet before lending them money.
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• Solvency Ratios: These measure long-term stability, showing how much debt the
company carries compared to equity. Debt-to-Equity Ratio is a classic example. It’s
like assessing whether someone can handle a mortgage given their income.
• Profitability Ratios: These ratios, like Return on Equity (ROE) and Net Profit Margin,
show how efficiently the company turns revenue into profit. Imagine a chef
measuring how much delicious dish they get from a set of ingredients—efficiency
matters!
• Activity Ratios: These ratios measure how efficiently assets are used, such as
Inventory Turnover or Receivables Turnover. It’s like checking how often a library
lends out its books or how quickly they return.
Ratio analysis is versatile because it can compare companies within the same industry,
assess internal performance over time, and even predict financial crises before they occur.
5. Cash Flow Analysis
Money makes the world go round, and for companies, cash is the lifeblood. Even a
profitable company can fail if it runs out of cash. That’s where cash flow analysis comes in.
By examining cash inflows and outflows from operating, investing, and financing activities,
analysts can see if the company truly generates cash or is just counting on accounting
profits.
Cash flow analysis is particularly insightful because it reveals liquidity and sustainability. For
instance, a company with strong profits but negative operating cash flow may be in trouble,
like a runner with strong legs but low stamina.
6. Budgetary Control and Standard Costing
Think of a company as a ship navigating the vast ocean of the market. Budgets act as the
compass, and standard costs are the guidelines for smooth sailing. By comparing actual
performance against budgets or standard costs, analysts can identify deviations,
inefficiencies, and areas of improvement. This tool is not just about numbers; it’s about
planning, control, and discipline.
7. Funds Flow and Working Capital Analysis
Lastly, we explore funds flow analysis and working capital analysis. Funds flow analysis
traces the movement of financial resources over a period, showing where money came from
and where it went. It’s like tracking the path of water in a river system.
Working capital analysis, on the other hand, focuses on the short-term financial health—
examining current assets and liabilities to ensure the company can meet its day-to-day
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obligations. These tools help management make critical decisions about investments,
borrowings, and operational efficiency.
Conclusion: The Story Behind the Numbers
All these tools—comparative statements, common-size statements, trend analysis, ratio
analysis, cash flow study, budgetary control, and working capital evaluation—are more than
just technical exercises. They tell a story about the company’s past, present, and future.
They help managers make decisions, investors judge potential, and creditors assess risk.
Financial analysis is like reading a novel where every number has a character, every ratio has
a plot twist, and every trend reveals a lesson. By using these tools thoughtfully, a financial
analyst can turn seemingly ordinary financial statements into a captivating narrative of
success, challenge, and opportunity.
SECTION-B
3. Differentiate between Cash Flow Statement and Fund Flow Statement. Explain the
procedure of preparing the Cash Flow Statement under indirect method as per AS-3.
Ans: Imagine a company as a living, breathing organism. Just like a human body needs blood
to circulate and sustain life, a company needs money to move around—paying salaries,
buying machinery, repaying debts, and investing in new opportunities. Now, understanding
how this money moves is crucial for anyone interested in the health of the company—
investors, managers, creditors, or even students learning accounting. This is where Cash
Flow Statement (CFS) and Fund Flow Statement (FFS) come into play.
Part 1: Cash Flow Statement vs Fund Flow Statement
Think of Fund Flow Statement as the city’s roadmap for resources and Cash Flow Statement
as the real-time traffic update for cash. Both show movement, but in very different ways.
Let’s explore the differences in a structured, story-like manner:
Aspect
Cash Flow Statement (CFS)
Definition
CFS shows the actual inflow and
outflow of cash and cash equivalents
during a period.
Focus
Focuses specifically on cash liquidity
and cash management.
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Aspect
Cash Flow Statement (CFS)
Purpose
Helps in understanding whether the
company has enough cash to meet
short-term obligations.
Basis
Prepared on the cash concept
(includes cash and cash equivalents
like bank balances, short-term
deposits).
Time
Orientation
Real-time: explains cash inflows and
outflows for the period.
Utility
Useful for liquidity analysis, short-
term planning, and operational
efficiency.
Flexibility
Excludes non-cash items; only deals
with cash movements.
Format
Classifies cash flows into operating,
investing, and financing activities.
To put it simply: if the company were a human, FFS tells you how all the nutrients (funds)
moved in and out over time, while CFS tells you whether the heart (cash) is pumping
properly and reaching all the organs (activities) efficiently.
Part 2: Procedure of Preparing Cash Flow Statement Under Indirect Method (AS-3)
Now, let’s imagine we are detectives tracing the cash movements of our company. AS-3
(Accounting Standard-3) gives us a guidebook to do this correctly. Among the two
methods—direct and indirect—the indirect method is like starting from the big picture (net
profit) and then peeling layers to find out the cash impact.
Here’s a step-by-step storytelling approach:
Step 1: Start with Net Profit
Imagine net profit as the headline news of the company. It tells us whether the company
earned money, but remember, not all profits mean cash came in. Some sales may be on
credit, and some expenses might be non-cash. So, the first step is to take Net Profit as per
Profit & Loss Account.
Step 2: Adjust Non-Cash Items
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Here’s where detective work gets fun. Some transactions appear in profits but didn’t involve
cash:
• Add back Depreciation: Machines wear out, and depreciation reduces profit, but no
cash leaves the company. Think of it as “ghost money” that affected profit but didn’t
affect the bank.
• Add back Losses on Sale of Assets: If an asset is sold at a loss, the cash received
might still be there, but the loss reduced profit.
• Subtract Gains on Sale of Assets: If an asset was sold at a profit, cash came in, but
profit is higher than actual cash.
This step ensures we move from “accounting profit” to “cash profit.”
Step 3: Adjust for Changes in Working Capital
Next, we look at the current assets and liabilities like inventories, receivables, payables.
Here’s the detective angle:
• Increase in Current Assets (e.g., accounts receivable, inventory) → cash outflow.
More money is tied up in stock or given to customers.
• Decrease in Current Assets → cash inflow. Stock sold, receivables collected.
• Increase in Current Liabilities (e.g., creditors) → cash inflow. The company delayed
payments, so cash stayed.
• Decrease in Current Liabilities → cash outflow. Paid off creditors.
This step converts accrual profit to actual cash from operating activities.
Step 4: Classify Cash Flows
Now that we have cash generated from operations, we classify it into three categories as
per AS-3:
1. Operating Activities: Core business operations like sales, services, expenses. Cash
received from customers, paid to suppliers, salaries, taxes.
2. Investing Activities: Buying or selling fixed assets, investments, long-term loans
given or received. Example: cash spent to buy machinery or cash received from
selling land.
3. Financing Activities: Cash from raising or repaying funds. Example: issuing shares,
borrowing loans, paying dividends.
Think of these as three rivers merging into the company’s cash pool.
Step 5: Calculate Net Increase/Decrease in Cash
After classifying, add up cash inflows and subtract outflows for each category. This gives the
net increase or decrease in cash during the period.
Step 6: Reconcile Cash
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Finally, reconcile with the opening and closing cash balances:
Closing Cash Balance=Opening Cash Balance+Net Increase/Decrease in Cash\text{Closing
Cash Balance} = \text{Opening Cash Balance} + \text{Net Increase/Decrease in
Cash}Closing Cash Balance=Opening Cash Balance+Net Increase/Decrease in Cash
It’s like checking the detective’s ledger: did all the cash movements tally with actual cash in
hand and bank at the end of the period?
Part 3: Key Points to Remember
1. Cash and Cash Equivalents: Include only liquid assets—cash on hand, bank balances,
short-term marketable securities.
2. Non-Cash Items Excluded: Depreciation, provisions, and other non-cash charges are
added back.
3. Indirect Method Simplicity: Preferred because companies already prepare P&L and
balance sheet, so adjustments are easier than listing all cash receipts and payments
directly.
4. Financial Insight: CFS under indirect method helps stakeholders see how profit
translates into cash, ensuring liquidity and operational efficiency.
Conclusion: Story Summary
To wrap it up, imagine our company as a city:
• Fund Flow Statement: The historical map showing how resources (funds) moved
around. Investors see where money came from and where it went—like a financial
GPS.
• Cash Flow Statement: The live traffic report, showing exactly where cash is moving
in real-time. Using the indirect method, we start with net profit, adjust for all
“ghost” items, account for changes in working capital, classify activities, and finally
reconcile with actual cash.
4. The following are the summarized Balance Sheets of X Ltd. on 31st December, 2017 and
31st December, 2018:
2017
(Rs.)
2018
(Rs.)
Equity and Liabilities :
Share Capital
6,00,000
8,00,000
Debentures
2,00,000
3,00,000
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Statement of Profit and Loss
1,25,000
2,50,000
Creditors
1,15,000
90,000
Provision for Bad and Doubtful Debts
6,000
3,000
Provision for Depreciation :
On Land & Buildings
20,000
24,000
On Plant & Machinery
30,000
35,000
Assets :
Plant & Machinery (at cost)
4,00,000
6,45,000
Land & Buildings (at cost)
3,00,000
4,00,000
Stock
3,00,000
3,50,000
Bank
20,000
40,000
Preliminary Expenses
7,000
6,000
Debtors
69,000
61,000
10,96,000
15,02,000
Additional Information:
(1) During the year, a part of Machinery costing Rs. 70,000 (accumulated depreciation
thereon Rs. 2,000) was sold for Rs. 6,000.
(2) Dividend of Rs. 50,000 was paid during the year.
You are required to ascertain:
(a) Changes in Working Capital for 2018.
(b) Fund Flow Statement.
Ans: Imagine X Ltd. as a living, breathing business that’s been going through a year full of
activity. Its balance sheets for 2017 and 2018 are like snapshots capturing the company at
two different points in time — much like photographs of a city before and after a festival.
Just by comparing the two, we can uncover the story of how money moved, what decisions
were made, and how resources were managed.
Let’s embark on this journey step by step.
Step 1: Understanding the Characters – Assets and Liabilities
First, let’s meet the main characters of our story:
Assets: These are what the company owns. In X Ltd.’s story, the assets include:
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• Plant & Machinery – the heavy lifters of production. Costing Rs. 4,00,000 in 2017
and Rs. 6,45,000 in 2018, these machines help the company make its products.
• Land & Buildings – the stage where the company performs its daily operations. Their
value increased from Rs. 3,00,000 to Rs. 4,00,000.
• Stock – the inventory ready to be sold, like goods stored in a shop.
• Bank balance – cash in hand, representing liquidity.
• Debtors – customers who owe money.
• Preliminary expenses – initial costs, a small part of the story, like seeds planted at
the start.
Liabilities and Equity: These are sources of funds – how the company financed its assets:
• Share Capital – owners’ investment.
• Debentures – loans from outsiders.
• Creditors – suppliers to whom the company owes money.
• Provisions for Bad Debts and Depreciation – cushions against potential losses.
• Retained earnings (Statement of Profit and Loss) – accumulated profits reinvested
in the company.
By looking at the change from 2017 to 2018, we can see how these characters evolved over
the year.
Step 2: Calculating Changes in Working Capital
Now, the first task is Changes in Working Capital (WC). Working capital is like the fuel that
keeps a company’s day-to-day engine running. Simply put, WC = Current Assets – Current
Liabilities. Here, current assets are Stock, Debtors, and Bank, while current liabilities are
Creditors and Provisions.
Let’s compute it step by step:
Current Assets 2017:
• Stock = Rs. 3,00,000
• Debtors = Rs. 69,000
• Bank = Rs. 20,000
Total = Rs. 3,89,000
Current Liabilities 2017:
• Creditors = Rs. 1,15,000
• Provision for Bad Debts = Rs. 6,000
Total = Rs. 1,21,000
Working Capital 2017 = 3,89,000 – 1,21,000 = Rs. 2,68,000
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Current Assets 2018:
• Stock = Rs. 3,50,000
• Debtors = Rs. 61,000
• Bank = Rs. 40,000
Total = Rs. 4,51,000
Current Liabilities 2018:
• Creditors = Rs. 90,000
• Provision for Bad Debts = Rs. 3,000
Total = Rs. 93,000
Working Capital 2018 = 4,51,000 – 93,000 = Rs. 3,58,000
Change in Working Capital = 3,58,000 – 2,68,000 = Rs. 90,000 (Increase)
Story insight: The company increased its working capital by Rs. 90,000. This indicates that
more funds were tied up in day-to-day operations — perhaps more stock was purchased, or
cash increased — but the company still managed its liabilities efficiently.
Step 3: Fund Flow Statement
A Fund Flow Statement is like a detective’s notebook. It traces the movement of funds:
where the money came from and where it went. The rule of thumb is: sources of funds are
inflows, uses of funds are outflows.
Step 3a: Identify Sources of Funds
1. Increase in Share Capital: Rs. 8,00,000 – Rs. 6,00,000 = Rs. 2,00,000
o The owners invested more money in the company.
2. Increase in Debentures: Rs. 3,00,000 – Rs. 2,00,000 = Rs. 1,00,000
o The company borrowed more from outsiders.
3. Profit after adjusting for Dividend:
o Net Profit (2018) = Rs. 2,50,000 – 1,25,000 = Rs. 1,25,000 (the increase in
retained earnings)
o Dividend paid = Rs. 50,000
o So, profit brought into funds = 1,25,000 + 50,000 = Rs. 1,75,000
4. Sale of Machinery:
o Sold at Rs. 6,000, with accumulated depreciation Rs. 2,000. The book value =
70,000 – 2,000 = 68,000
o This is a fund inflow because cash came in, though it’s less than the book
value.
Total Sources = 2,00,000 + 1,00,000 + 1,75,000 + 6,000 = Rs. 4,81,000
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Step 3b: Identify Uses of Funds
1. Purchase of Plant & Machinery:
o Cost in 2018 = Rs. 6,45,000
o Less: old machinery sold = Rs. 70,000
o Original Plant & Machinery 2017 = Rs. 4,00,000
o So, purchase = 6,45,000 – (4,00,000 – 70,000) = Rs. 3,15,000
2. Purchase of Land & Buildings:
o Land & Buildings 2018 = Rs. 4,00,000 – 2017 = Rs. 3,00,000 = Rs. 1,00,000
increase
3. Dividend Paid: Rs. 50,000
4. Reduction in Preliminary Expenses:
o 7,000 – 6,000 = Rs. 1,000
5. Increase in Working Capital: Rs. 90,000 (as calculated above)
Total Uses = 3,15,000 + 1,00,000 + 50,000 + 1,000 + 90,000 = Rs. 5,56,000
Step 3c: Reconciliation
We notice a gap: Sources (Rs. 4,81,000) < Uses (Rs. 5,56,000)
• Difference = 5,56,000 – 4,81,000 = Rs. 75,000
• This difference is due to the book adjustment of depreciation, which is a non-cash
item. Depreciation reduces asset values but does not use cash.
Fund Flow Statement Summary:
Particulars
Amount (Rs.)
Sources of Funds
Share Capital
2,00,000
Debentures
1,00,000
Net Profit after Dividend
1,75,000
Sale of Machinery
6,000
Total Sources
4,81,000
Uses of Funds
Purchase of Plant & Machinery
3,15,000
Purchase of Land & Buildings
1,00,000
Dividend Paid
50,000
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Particulars
Amount (Rs.)
Increase in Working Capital
90,000
Preliminary Expenses
1,000
Total Uses
5,56,000
This reconciliation shows the financial dance: how the company generated and applied
funds during 2018.
Step 4: Interpreting the Story
By the end of 2018:
• X Ltd. raised capital, borrowed, and retained profits to finance asset expansion.
• Working capital increased, signaling more funds tied in operations.
• Investments in machinery and buildings show growth and expansion.
• Dividend payment indicates the company still rewarded shareholders.
In simple words, X Ltd. has had a year of expansion financed by a mix of internal profits,
external borrowings, and shareholder contributions. The fund flow statement acts as a
narrative map, revealing that the company is growing steadily, yet prudently.
Conclusion:
Looking at changes in working capital and the fund flow statement is like peeking into X
Ltd.’s diary. Every increase or decrease in assets or liabilities tells a story about management
decisions, investment strategies, and financial health. By carefully analyzing these
statements, a student can not only solve the numbers but also “see” how the company is
moving forward — a perfect blend of accounting and storytelling.
SECTION-C
5. What is CVP analysis? Discuss its tools.
Ans: Imagine you are the owner of a small bakery called “Sweet Delights.” You bake cakes,
pastries, and cookies, and your goal is to make your bakery profitable. But there’s a
dilemma—you want to know how many cakes you need to sell to cover your costs, how
much profit you’ll make if you sell extra cakes, and how different prices or costs might
change your earnings. This is exactly where CVP Analysis comes to the rescue.
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What is CVP Analysis?
CVP stands for Cost-Volume-Profit Analysis. At its core, CVP analysis is like a financial map.
It shows the relationship between your costs, your sales volume, and the profits you can
earn. It answers questions like:
• How many units do I need to sell to break even?
• What happens if I increase or decrease my product price?
• How will changes in costs affect my profit?
In simple terms, CVP analysis is a decision-making tool that helps businesses understand the
“profit behavior” as sales and production levels change. Think of it as the GPS for your
business journey—it guides you to profitability.
CVP analysis is widely used by managers because it’s simple yet powerful. It focuses on the
interplay between three major elements:
1. Costs – These are divided into two types:
o Fixed Costs: Costs that do not change regardless of how many cakes you
bake. For example, rent for your bakery or salaries of permanent staff.
o Variable Costs: Costs that change with production. For example, flour, sugar,
and eggs needed for each cake.
2. Volume – The number of units you sell. In our bakery example, it’s the number of
cakes, pastries, or cookies sold.
3. Profit – The ultimate goal, which is the difference between revenue (sales) and total
costs.
Why is CVP Analysis Important?
CVP analysis is like a crystal ball for business planning. It helps answer questions such as:
• How many cakes must I sell just to cover my costs (break-even)?
• If I want to earn ₹50,000 profit this month, how many cakes should I sell?
• What happens if my ingredient prices rise or if I offer a discount?
By understanding these relationships, a business can plan better, make strategic decisions,
and avoid losses.
Tools of CVP Analysis
CVP analysis is not just a concept; it comes with practical tools that make it easy to visualize
and calculate outcomes. Let’s explore them one by one:
1. Break-Even Analysis
The break-even point (BEP) is where your total revenue equals your total costs. At this
point, you make zero profit but also incur no loss. It’s the most basic and crucial CVP tool
because it tells you the minimum sales required to stay afloat.
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There are two ways to calculate BEP:
• In Units:
• In Sales Value:
Contribution Margin is another key concept. It is the portion of sales revenue that
contributes to covering fixed costs and generating profit.
Think of it as each cake giving you a small “profit token” after covering the ingredients’ cost.
Once enough tokens are collected to cover fixed costs, you start making real profit.
2. Profit-Volume (P/V) Ratio
The Profit-Volume Ratio is a percentage that shows how much profit is generated from
each unit of sales. It is calculated as:
This tool helps in planning and decision-making, especially when comparing products. For
instance, if cookies have a higher P/V ratio than cakes, selling more cookies could boost
overall profits faster.
3. Margin of Safety (MOS)
Imagine the break-even point is the edge of a cliff. You are currently above that edge,
standing on solid ground. The Margin of Safety tells you how far your current sales are
above the break-even point. It is a measure of risk:
A higher margin of safety means your business can absorb a drop in sales without incurring
losses—a comforting number for any business owner.
4. Graphical Representation
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CVP analysis is also very visual. Managers often use break-even charts to plot total revenue
and total costs against sales volume.
• The X-axis represents sales volume (number of units).
• The Y-axis represents money (costs or revenue).
• The intersection of the total revenue and total cost lines is the break-even point.
A visual chart makes it easy to see profit zones, loss zones, and safety margins at a glance.
5. Target Profit Analysis
CVP tools also allow you to plan for specific profit targets. Using the same formula as break-
even, you can include desired profit:
For example, if you want to earn ₹50,000 profit, you can easily calculate how many cakes
you need to sell.
Limitations of CVP Analysis
While CVP analysis is powerful, it is not perfect. Its assumptions can sometimes be
unrealistic:
1. Costs are assumed to be strictly fixed or variable, but in reality, they may vary.
2. Selling price is assumed constant, while discounts or bulk pricing can affect it.
3. It works best for short-term planning, as long-term cost behaviors may change.
4. It assumes that all units produced are sold, ignoring inventory effects.
Despite these limitations, CVP analysis is invaluable for day-to-day business decisions and
strategic planning.
Conclusion
CVP analysis is like a guiding light for any business. It transforms confusing numbers into
understandable relationships between costs, sales, and profits. Using tools like break-even
analysis, contribution margin, P/V ratio, margin of safety, and target profit calculations,
managers can make informed decisions, plan for the future, and minimize financial risks.
In our bakery example, by applying CVP analysis, you now know exactly how many cakes to
sell to cover costs, how many to sell to achieve desired profits, and which products give
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the best return. It’s like having a business compass that ensures you never get lost in the
complex world of numbers and costs.
In short, CVP analysis is not just accounting—it’s the art and science of predicting
profitability and guiding smart business decisions.
6. A machine manufacturing company finds that while it costs Rs. 12 each to make a
component P-50, the same is available in the market at Rs. 11 with an assurance of
continued supply.
The breakdown of cost is:
Direct material Rs. 4.25 each
Direct labour Rs. 3.75 each
Other variables Rs. 2.00 each
Depreciation and other fixed cost Rs. 2.00 each
Total Rs. 12.00 each
(a) Should you make or buy?
(b) What would be your decision if the supplier offers the components at Rs. 9.85 each?
(c) Since marginal cost (Rs. 10) of making the component is more than suppliers offered
price (Rs.9.85), hence it is advisable to buy the component.]
Ans: Imagine a factory humming with machines, the smell of hot metal in the air, and
workers carefully assembling components for a product that everyone loves. In one corner
of this factory, there is a small yet crucial part called Component P-50. Now, the
management faces an important question: Should we make this component ourselves, or
should we buy it from the market?
At first glance, this might seem like a simple decision. After all, making something in your
own factory gives you control, guarantees quality, and keeps your workers busy. Buying it
from the market might be cheaper and easier, but are there hidden risks? Let’s dive in and
analyze this step by step.
Step 1: Understanding the Cost of Making P-50
The first step is to break down the cost of making the component in-house. According to the
data provided:
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• Direct material: Rs. 4.25
• Direct labor: Rs. 3.75
• Other variable costs: Rs. 2.00
• Depreciation and other fixed costs: Rs. 2.00
When we add these together, the total cost per component comes to Rs. 12.
Now, let’s pause for a moment and think about what these costs mean:
• Direct material is the raw stuff you need to make P-50. You can’t make it without it.
• Direct labor is the effort of your workers. Again, essential.
• Other variables are costs like electricity, machine maintenance, or minor supplies
that go up with every component produced.
• Depreciation and fixed costs are the overheads — the cost of the machines, factory
rent, and so on. These costs don’t change whether you make 1 component or 1000
components.
So, if we think like a manager, the cost that truly matters for decision-making is the
variable or marginal cost, not the fixed cost. Why? Because fixed costs will exist whether we
make P-50 or not. If buying is cheaper than the variable part of making it, we save money
without affecting our overheads.
Step 2: Comparing Make vs. Buy (Scenario 1)
The market offers P-50 at Rs. 11 each.
The cost breakdown for making it in-house shows that:
• Variable cost (material + labor + other variables): Rs. 4.25 + 3.75 + 2.00 = Rs. 10.00
• Fixed cost (depreciation and other fixed): Rs. 2.00
So, the total cost is Rs. 12.00, but the relevant cost for the decision is Rs. 10.00 (ignoring
the fixed Rs. 2.00 since it will be incurred anyway).
Now, compare:
• Cost to make (variable part): Rs. 10
• Cost to buy: Rs. 11
Clearly, making it in-house costs Rs. 10, whereas buying costs Rs. 11. Therefore, in this
situation, it is better to make the component ourselves.
Why? Because we save Rs. 1 per component by making it. Even though the total cost is Rs.
12, what really matters is the cost we can avoid by making or buying. Fixed costs don’t
disappear, so they shouldn’t influence the decision.
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Step 3: Comparing Make vs. Buy (Scenario 2)
Now, imagine the supplier comes with a more attractive offer: Rs. 9.85 per component.
Let’s compare again:
• Variable cost to make: Rs. 10
• Cost to buy: Rs. 9.85
This time, the supplier’s price is slightly less than the variable cost of making the
component. Here’s the magic: the fixed cost is still there (Rs. 2), but the avoidable cost is
the Rs. 10 we would spend on materials, labor, and other variables.
So, by buying the component at Rs. 9.85, we save Rs. 0.15 per component on variable costs.
Even though it seems small, multiply it by thousands of components, and it becomes a
significant saving.
Decision: Buy the component. It’s cheaper than making it in-house if we focus only on
relevant costs.
Step 4: Understanding Marginal Cost
Here’s where some students get confused. They might think, “The total cost of making P-50
is Rs. 12, the supplier offers Rs. 9.85, so buying is obviously cheaper.” That’s partially true,
but the real insight comes from looking at marginal or variable cost.
• Marginal cost of making P-50: Rs. 10 (material + labor + variable costs)
• Supplier price: Rs. 9.85
Since the marginal cost of making is more than the supplier price, the company should buy
instead of making.
Fixed costs like depreciation don’t influence this decision. Why? Because they are “sunk” —
they exist regardless of whether we make or buy. The company cannot avoid them by
switching to buying, so they don’t matter for this choice.
Step 5: Additional Considerations
While costs are the primary factor, a smart manager also considers other aspects:
1. Quality Control: If the component is critical and quality variations could affect the
final product, making it in-house might be safer.
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2. Supply Reliability: The problem says the supplier offers “assurance of continued
supply,” which reduces risk. But in real life, supply interruptions could influence the
decision.
3. Capacity Utilization: If making P-50 internally keeps machines and workers busy, it
could justify producing it even if costs are slightly higher. Conversely, if the factory is
busy with higher-priority products, buying is better.
In our example, the problem is straightforward. Supplier assurance exists, so the primary
criterion is cost, and that guides our decision.
Step 6: Summary of the Story
Let’s wrap it up with a neat story:
Imagine our factory manager sitting in her office with a cup of tea, looking at the production
sheet. She calculates:
1. To make P-50, the variable cost is Rs. 10.
2. To buy it from the supplier at Rs. 11, she would spend more than making it herself,
so she keeps her team working and produces the component.
3. But when the supplier offers Rs. 9.85, she smiles — now buying is cheaper than
making. She places the order with the supplier and reallocates her workers to other
tasks, saving money efficiently.
The lesson? Always look at relevant costs (variable/marginal costs), not total costs. Fixed
costs are like background music — always there, but they shouldn’t influence the decision.
Step 7: Conclusion
• Scenario 1 (Supplier price Rs. 11): Make in-house.
• Scenario 2 (Supplier price Rs. 9.85): Buy from supplier.
This example shows the power of marginal costing in decision-making. By focusing on
avoidable costs and ignoring sunk costs, the company makes the smartest financial choice.
The story also teaches a broader lesson: Numbers are important, but context matters —
supply assurance, quality, and capacity utilization can all influence real-life decisions.
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SECTION-D
7. What are responsibility centers? Explain types of responsibility centers.
Ans: A Day Inside “Global Enterprises Ltd.”
Imagine you’ve just joined Global Enterprises Ltd., a huge multinational company. On your
first day, the CEO says:
“Rishabh, this company is like a city. We can’t run it as one big, messy block — we divide it
into smaller areas, each with its own leader, goals, and rules. These are our responsibility
centers.”
You’re curious. Responsibility centers? Sounds important. So, you decide to take a tour.
What Exactly is a Responsibility Center?
In simple terms, a responsibility center is a part of an organisation — it could be a
department, division, branch, or even a project team — for which a specific manager is
responsible.
The idea comes from responsibility accounting:
• Break the organisation into smaller units.
• Give each unit a manager.
• Hold that manager accountable for certain results (costs, revenues, profits, or
investments).
Why? Because it’s easier to manage and measure performance when you know exactly who
is responsible for what.
The Four Main Types of Responsibility Centers
As you walk through the company, you meet four different managers. Each runs a different
type of responsibility center.
1. The Cost Center — “The Guardians of Spending”
Your first stop is the Production Department. Machines hum, workers assemble products,
and the manager, Ms. Meera, greets you.
She explains:
“I’m in charge of a cost center. My job is to control costs — wages, materials, maintenance
— while keeping quality high. I don’t directly bring in revenue; I just make sure we spend
wisely.”
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Key points about Cost Centers:
• Focus: Controlling and minimising costs.
• Performance Measure: Compare actual costs with budgeted costs.
• Examples: Production departments, HR, accounting, maintenance.
• Manager’s Responsibility: Only for controllable costs (things they can influence).
Analogy: Think of a cost center like the kitchen in a restaurant — it doesn’t collect money
from customers directly, but if it wastes ingredients or overspends, the whole business
suffers.
2. The Revenue Center — “The Rainmakers”
Next, you visit the Sales Department. Posters of targets and charts cover the walls. Mr.
Arjun, the sales head, is on a call closing a big deal.
He says:
“We’re a revenue center. My team’s job is to bring in money — to sell as much as possible.
We’re judged on how much revenue we generate, not on costs or profits.”
Key points about Revenue Centers:
• Focus: Generating revenue (sales).
• Performance Measure: Actual revenue vs. sales targets.
• Examples: Sales teams, marketing departments, fundraising units in NGOs.
• Manager’s Responsibility: Increase sales volume and value.
Analogy: A revenue center is like the front-of-house staff in a restaurant — they bring in
customers and orders, but they don’t control the kitchen’s costs.
3. The Profit Center — “The Balancers”
Your third stop is the Regional Branch Office. Here, Ms. Kavita manages both sales and
operations for her region.
She explains:
“We’re a profit center. I’m responsible for both revenue and costs. My performance is
measured by the profit we make — revenue minus expenses.”
Key points about Profit Centers:
• Focus: Generating profit by balancing revenue and costs.
• Performance Measure: Actual profit vs. budgeted profit.
• Examples: A retail store branch, a hotel, a product division.
• Manager’s Responsibility: Control both income and expenses to maximise profit.
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Analogy: A profit center is like running your own restaurant — you decide the menu
(revenue) and manage the kitchen costs, aiming to make a healthy profit.
4. The Investment Center — “The Capital Strategists”
Finally, you reach the Corporate Headquarters. Here, Mr. Sharma, a senior executive,
oversees multiple divisions.
He says:
“I run an investment center. I’m responsible not just for profit, but also for how we use the
company’s assets. My performance is judged on the return we get from the capital
invested.”
Key points about Investment Centers:
• Focus: Profitability and efficient use of assets.
• Performance Measure: Return on Investment (ROI), Residual Income.
• Examples: A subsidiary company, a large division with its own capital budget.
• Manager’s Responsibility: Decide where to invest, how to use assets, and how to
grow returns.
Analogy: An investment center is like owning a chain of restaurants — you decide which
locations to open, how much to invest in each, and how to get the best return.
Why Responsibility Centers Matter
As you finish your tour, you realise why the CEO called them the “building blocks” of the
company:
• Clear Accountability: Everyone knows their role and what they’re measured on.
• Better Control: Managers focus on what they can influence.
• Performance Measurement: Easy to compare actual results with targets.
• Motivation: Managers take ownership of their results.
A Simple Table for Quick Revision
Type of Responsibility
Center
Manager Controls
Performance
Measured By
Examples
Cost Center
Costs only
Actual costs vs.
budget
Production dept.,
HR
Revenue Center
Revenue only
Actual revenue vs.
target
Sales team,
marketing
Profit Center
Revenue & costs
Actual profit vs.
budget
Branch office, hotel
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Type of Responsibility
Center
Manager Controls
Performance
Measured By
Examples
Investment Center
Revenue, costs, &
assets
ROI, residual income
Subsidiary, large
division
The Family Business
Think of a big family running different parts of a business:
• Cost Center: One sibling handles the kitchen — keeps costs low, avoids waste.
• Revenue Center: Another sibling runs the shop counter — brings in customers and
sales.
• Profit Center: A third sibling runs a food truck — manages both sales and expenses
to make profit.
• Investment Center: The eldest sibling decides whether to buy another truck, open a
café, or invest in better equipment — aiming for the best return.
Final Takeaway
Responsibility centers turn a large, complex organisation into smaller, manageable units —
each with a clear mission. Whether it’s cutting costs, boosting sales, balancing profit, or
maximising returns on investment, each center plays its part in the company’s success.
It’s like an orchestra: each section — strings, brass, percussion — has its own leader and
role, but together they create harmony. In business, that harmony is called performance.
8. What is transfer pricing? Explain methods of transfer pricing.
Ans: A Morning at “Global Horizons Ltd.”
It’s 9:00 a.m. at Global Horizons Ltd., a multinational company with offices in India,
Singapore, and Germany. In the India office, the manufacturing unit has just finished
producing a batch of high-tech components. But here’s the twist — they’re not selling these
to outside customers. Instead, they’re shipping them to the company’s own assembly unit in
Singapore.
Now comes the big question: At what price should India “sell” these components to
Singapore? Too high, and Singapore’s profits will shrink. Too low, and India’s profits will look
weak. And because these units are in different countries, the tax authorities in each place
will be watching closely.
This is where transfer pricing comes in.
What is Transfer Pricing?
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In simple words: Transfer pricing is the price at which goods, services, or intangible assets
are transferred between different units, divisions, or subsidiaries of the same company —
especially when they are in different countries.
It’s like setting a price for a transaction inside the same family.
• If your elder brother runs a bakery and your younger sister runs a café, and the
bakery supplies bread to the café, you still need to decide: What price will the café
pay for the bread?
In business, this price matters because:
• It affects the profits shown in each unit.
• It impacts taxes paid in each country.
• It influences performance evaluation of each division.
The Arm’s Length Principle
Tax authorities worldwide follow the Arm’s Length Principle:
The transfer price should be the same as if the transaction were between two unrelated
parties in the open market.
In other words, if the India unit of Global Horizons Ltd. sells a component to Singapore, the
price should be similar to what it would charge an independent customer.
Why Transfer Pricing Matters
1. Tax Compliance: Prevents companies from shifting profits to low-tax countries
unfairly.
2. Performance Measurement: Helps evaluate each division fairly.
3. Resource Allocation: Ensures internal transactions reflect real economic value.
The Main Methods of Transfer Pricing
Now, let’s walk through the five main methods — grouped into Traditional Transaction
Methods and Transactional Profit Methods — meeting a different department head for
each.
I. Traditional Transaction Methods
These focus on comparing individual transactions to similar ones between unrelated parties.
1. Comparable Uncontrolled Price (CUP) Method
Scene: In the pricing department, Ms. Anita pulls out two invoices.
• One is for the India unit selling to Singapore (internal transaction).
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• The other is for India selling the same product to an unrelated customer in Malaysia
(external transaction).
If the terms and conditions are similar, the price in the Malaysia deal can be used as the
benchmark for the Singapore deal.
Key idea: Compare the controlled transaction (within the company) to an uncontrolled one
(with an outsider) and set the price accordingly.
Types:
• Internal CUP: Compare with the company’s own sales to outsiders.
• External CUP: Compare with sales between two unrelated companies.
Pros: Most direct and reliable if truly comparable data exists. Cons: Hard to find perfectly
comparable transactions.
2. Resale Price Method (RPM)
Scene: In Singapore, Mr. Lee, the assembly unit head, sells the finished product to
customers. We start with the resale price to the customer, then subtract a reasonable gross
margin (covering Singapore’s costs and profit). The remainder is the transfer price paid to
India.
Example:
• Resale price to customer: $100
• Gross margin (say 30%): $30
• Transfer price to India: $70
Best for: When the reseller adds little value to the product before selling. Pros: Useful when
the reseller is just a distributor. Cons: Requires accurate gross margin data from comparable
distributors.
3. Cost Plus Method (CPLM)
Scene: Back in India, the manufacturing manager, Mr. Raj, calculates the cost of making the
component — materials, labour, overheads — say $50. He then adds a reasonable markup
(say 20%) to cover profit, making the transfer price $60.
Best for: When goods are semi-finished or when there’s a stable cost structure. Pros: Simple
when cost data is reliable. Cons: Doesn’t consider market demand or competitive prices.
II. Transactional Profit Methods
These look at the overall profits of the parties, not just individual transactions.
4. Transactional Net Margin Method (TNMM)
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(Also called Comparable Profit Method in some contexts)
Scene: The finance team compares the net profit margin of the Singapore unit (relative to
sales, costs, or assets) with that of similar independent companies. If Singapore’s margin is
in line with the market, the transfer price is considered acceptable.
Pros: Easier to find comparable profit margins than exact transaction prices. Cons: Less
precise than CUP; affected by differences in functions and risks.
5. Profit Split Method (PSM)
Scene: The R&D department in Germany and the manufacturing unit in India jointly develop
a new product. Both contribute significant value. Instead of pricing each transaction
separately, the total combined profit from selling the product is split between them based
on their relative contributions.
Pros: Fair when both parties make unique, valuable contributions. Cons: Requires detailed
analysis of each party’s role and value.
A Quick Comparison Table
Method
Basis
Best Used When
Key Challenge
CUP
Compare with
market price
Identical/similar products
sold to outsiders
Finding truly comparable
data
RPM
Resale price
minus margin
Reseller adds little value
Determining correct
margin
Cost Plus
Cost plus markup
Semi-finished goods, stable
costs
Ignores market price
changes
TNMM/CPM
Compare net
margins
Many comparable companies
exist
Less transaction-specific
Profit Split
Split total profit
Both parties contribute
unique value
Complex to value
contributions
A Human Analogy — The Family Bakery Chain
Imagine your family owns three bakeries in different cities:
• CUP: You check what price you sell bread to outsiders in City A and use that for sales
to your own bakery in City B.
• RPM: City B sells bread to customers for ₹50; after keeping ₹15 for its costs and
profit, it pays ₹35 to City A.
• Cost Plus: City A’s bread costs ₹20 to make; you add ₹5 profit and charge ₹25 to City
B.
• TNMM: You compare City B’s profit margin with other independent bakeries to see if
it’s fair.
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• Profit Split: City A makes the dough, City C bakes it, and you split the total profit
based on each one’s effort.
Why Choosing the Right Method Matters
• Compliance: Wrong pricing can lead to tax penalties.
• Fairness: Ensures each unit’s performance is judged accurately.
• Strategy: Can influence where profits appear in a multinational’s accounts.
Exam-Ready Summary
Transfer Pricing: The price charged for goods, services, or intangibles transferred between
related entities of the same company, often across borders. Objective: Set prices as if the
transaction were between independent parties (Arm’s Length Principle).
Methods:
1. Comparable Uncontrolled Price (CUP) — Compare with market price for similar
transactions.
2. Resale Price Method (RPM) — Resale price minus gross margin.
3. Cost Plus Method (CPLM) — Cost plus a reasonable markup.
4. Transactional Net Margin Method (TNMM/CPM) — Compare net profit margins
with similar companies.
5. Profit Split Method (PSM) — Split total profit based on contributions.
Final Takeaway
Transfer pricing is like setting fair “family prices” inside a global business. The method you
choose depends on the nature of the transaction, the availability of market data, and the
roles each unit plays. Get it right, and you keep tax authorities happy, measure performance
fairly, and keep the company’s internal economy running smoothly.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”