paper ² - ca study web | 1 jul 2020...sales in units 30,000 20,000 production capacity (units)...

PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Question No. 1 is compulsory.

Attempt any five questions out of the remaining six questions.

In case, any candidate answers extra question(s)/ sub-question(s) over and above the

required number, then only the requisite number of questions first answered in the answer

book shall be valued and subsequent extra question(s) answered shall be ignored.

Working notes should form part of the answer.

Question 1

Answer the following:

(a) ASJ manufacturer produces a product which requires a component costing ` 1,000 per unit.

Other information related to the component are as under:

Usage. of component 1,500 units per month

Ordering cost ` 75 per order

Storage cost rate 2% per annum

Obsolescence rate 1% per annum

Maximum usage 400 units per week

Lead Time 6-8 weeks

The firm has been offered a quantity discount of 5% by the supplier on the purchase of

component, if the order size is 6,000 units at a time.

You are required to compute:

(i) Economic Order Quantity (EOQ)

(ii) Re-order Level and advise whether the discount offer be accepted by the firm or not.

(b) A company planned to produce 2,000 units of a product in a week of 40 hours by employing

65 skilled workers. Other relevant information are as follows:

• Standard wages rate : ` 45 per hour

• Actual production : 1800 units

• Actual number of worker employed: 50 workers in a week of 40 hours

• Actual wages rate : ` 50 per hour

• Abnormal time loss due to machinery breakdown :100 hours.

You are required to calculate:

(i) Labour cost, rate, idle time and efficiency variances.

(ii) Reconcile the variances.

© The Institute of Chartered Accountants of India

2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

(c) S Ltd. has furnished the following information for the year ending 31 st March, 2018:

`

Net profit before taxation 20,78,000

Depreciation charged to P&L Account 8,00,000

Profit on sale of plant & machinery 2,20,000

Increase in debtors 2,40,000

Decrease in stock 6,80,000

Decrease in other current liabilities 1,50,000

Increase in creditors 20,000

Purchases of plant and machinery 23,20,000

Proceeds from issue of share capital 15,00,000

Dividend paid 7,20,000

Income-tax paid 7,28,000

You are required to calculate cash from operating activities in accordance with AS-3.

(d) JC Ltd. is planning an equity issue in current year. It has an earning per share (EPS) of

` 20 and proposes to pay 60% dividend at the current year end. With a PIE ratio 6.25, it

wants to offer the issue at market price. The flotation cost is expected to be 4% of the

issue price.

Required: Determine the required rate of return for equity share (cost of equity) before

the issue and after the issue (4 x 5 = 20 Marks)

Answer

(a) (i) Annual usage of Components (A) = 1500×12 =18,000 Units

Ordering Cost (O) = ` 75 per order

Carrying cost per unit per annum (C) i.e. Storage cost + Obsolescence cost = 2% +

1% = 3%

Calculation of Economic Order Quantity

EOQ =2AO

C =

2×18,000 units × 75

1000×3%

`

= 300 units

(ii) Re- Order level: = (Maximum usage × Maximum lead time)

= 400 units 8weeks

= 3,200 units


PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 3

Evaluation of Profitability of Different Options of Order Quantity

When EOQ is ordered

(`)

Purchase Cost (18,000 × 1,000) 1,80,00,000

Ordering Cost (A

× OQ

) (18000 x 75)

300

4,500

Carrying Cost (Q

× C×i2

) (300

× 302

) 4,500

Total Cost 1,80,09,000

When Quantity Discount is accepted

(`)

Purchase Cost [18,000 - (1,000-5%)] 1,71,00,000

Ordering Cost (A

× OQ

) (18,000

× 756,000

) 225

Carrying Cost (Q

× C×i2

) (6000

× 950 × 3%2

) 85,500

Total Cost 171,85,725

So, Savings in cost = ` 8,23,275 (`1,80,09,000 – ` 1,71,85,725)

Advice – The total cost of inventory is higher if EOQ is adopted. If we accept

quantity discount of 5% offered by the supplier, ‘ASJ’ will save ` 8,23,275/-. Hence,

the company is advised to accept the quantity discount.

(b) (i) Labour cost variance (SH x Std. Rate) – (AH paid x AR)]

40× 65× 1,800 × 45 50× 40× 50

2,000

`

= (` 1,05,300 – ` 1,00,000)

= ` 5,300 (F)

Labour Rate Variance = AH paid (SR-AR)

= ` 2,000 (45-50) = ` 10,000 (A)

Labour efficiency variance = SR (SH – AH worked)

= `45 (` 2,340 – ` 1,900) = ` 19,800(F)

Idle time variance = SR Idle time = ` 45` 100 = ` 4,500(A)



(ii) Reconciliation

Labour Cost Variance = Labour Rate Variance + Labour efficiency variance + Idle

time variance

Or

` 10,000 (A) + ` 19,800 (F) + ` 4,500 (A) = ` 5,300(F)

(c) Statement of Cash Flows for the year ended 31st March 2018 (as per AS-3)

(`)

Cash flow from Operating Activities

Net profit before taxation 20,78,000

Add: Depreciation charged to P & L account 8,00,000

Less: Profit on Sale of Plant & Machinery (2,20,000)

Operating profit before working capital changes 26,58,000

Add: Decrease in Stock 680000

Add: Increase in Creditors 20000

Less: Increase in Debtors (240000)

Less: Decrease in Current Liabilities (150000) 310000

Cash generated from Operating activities 29,68,000

Less: Income tax 7,28,000

Net Cash from Operating activities 22,40,000

(d) Workings

• P0 = EPS × P/E = 20 × 6.25 = 125

• r = Rate of Return on Retained Earnings = 100/6.25 = 16%

• Retention ratio = b = 1 – Dividend Payout Ratio = 1 – 0.60 = 0.40

• Growth rate = g = br = 0.40 ×0.16 = 0.064

• D0 = EPS × Dividend Payout

= 20 × 60%

= 12

• D1 = D0 (1+ g) = 12 (1+0.064) = 12.768

Cost of Equity before issue

ke = 1

0

D 12.768+ g = + 0.064 = 0.1021 + 0.064 = 0.1661 or 16.61%

P 125



Cost of Equity after issue

ke = 1

0

D+ g

P =

12.768 + 0.064 = 0.1064 + 0.064 = 0.1704 or 17.04%

120

Question 2

(a) A company is producing an identical product in two factories. The following are the

details in respect of both factories:

Factory X Factory Y

Selling price per unit (`) 50 50

Variable cost per unit (`) 40 35

Fixed cost (`) 2,00,000 3,00,000

Depreciation included in above fixed cost (`) 40,000 30,000

Sales in units 30,000 20,000

Production capacity (units) 40,000 30,000

You are required to determine:

(i) Break Even Point (BEP) each factory individually.

(ii) Cash break even point for each factory individually.

(iii) BEP for company as a whole, assuming the present product mix is in sales ratio.

(iv) Consequence on profit and BEP if product mix is changed to 2:3 and total demand

remain same. (8 Marks)

(b) G Ltd. has furnished the following information relating to the year ended 31st March, 2017 and

31st March, 2018:

31st March, 2017 31st March, 2018

Share Capital 40,00,000 40,00,000

Reserve and Surplus 20,00,000 25,00,000

Long term loan 30,00,000 30,00,000

• Net profit ratio: 8%

• Gross profit ratio: 20%

• Long-term loan has been used to finance 40% of the fixed assets.

• Stock turnover with respect to cost of goods sold is 4.

• Debtors represent 90 days sales.

• The company holds cash equivalent to 1½ months cost of goods sold.

• Ignore taxation and assume 360 days in a year.



You are required to prepare Balance Sheet as on 31 st March, 2018 in following format:

Liabilities (` ) Assets (`)

Share Capital - Fixed Assets -

Reserve and Surplus - Sundry Debtors -

Long-term loan - Closing Stock -

Sundry Creditors - Cash in hand -

(8 Marks)

Answer

(a)

Factory X Factory Y

(i) Break Even Point:

Fixed Cost

Contribution

2,00,000

50 - 40 = 20,000 units

3,00,000

50 - 35 = 20,000 units

(ii) Cash Break Even Point:

Fixed Cost -Depreciation

Contribution

2,00,000 - 40,000

10 = 16,000 units

3,00,000 - 30,000

15 = 18,000 units

(iii) BEP as a whole = Complete Fixed Cost

Composite Contribution

= 2,00,000 + 3,00,000

3 210 × + 15 ×

5 5

` `

= 5,00,000

6 + 6

` = 41,667 units

(iv) New Sales Mix = 2

50,000 ×5

= 20,000 of X

= 3

50,000 ×5

= 30,000 of Y

Calculation of Composite contribution = 2 3

10 × + 15 ×5 5

= 4+9 = `13



Consequence on profit

Existing Mix New Mix

Contribution 50,000 12 = 6,00,000 50,000 13 = 6,50,000

Less: Fixed Cost 5,00,000 5,00,000

Profit 1,00,000 1,50,000

Increase in profit = ` 1, 50,000 – ` 1, 00,000

= ` 50,000

Consequence on BEP

New BEP as a whole = Complete Fixed Cost

Composite Contribution

5,00,000= = 38,462 units

13

So, BEP Reduced by 3205 units (41,667 – 38,462)

(b) Change in Reserve & Surplus = ` 25, 00,000 – ` 20,00,000 = ` 5,00,000

So, Net profit = ` 5, 00,000

(i) Net Profit Ratio = 8%

Sales = 5,00,000

= 62,50,0008%

`

(ii) Cost of Goods sold

= Sales – Gross profit Margin

= ` 62, 50,000 – 20% of ` 62, 50,000

= ` 50, 00,000

(iii) Fixed Assets = 30,00,000

= 75,00,00040%

``

(iv) Stock = Cost of Goods Sold 50,00,000

= = 12,50,000STR 4

`

(v) Debtors = 62,50,000

× 90 = 15,62,500360

`

(vi) Cash Equivalent = 50,00,000

×1.5 = 6,25,00012

`



Balance Sheet as on 31st March 2018

Liabilities (`) Assets (`)

Share Capital 40,00,000 Fixed Assets 75,00,000

Reserve and Surplus 25,00,000 Sundry Debtors 15,62,500

Long-term loan 30,00,000 Closing Stock 12,50,000

Sundry Creditors

(Balancing Figure)

14,37,500 Cash in hand 6,25,000

1,09,37,500 1,09,37,500

Question 3

(a) A company wants to outsource the operation of its canteen to a contractor. The company

will provide space for cooking, free electricity and furniture in the canteen. The contractor

will have to provide lunch to 300 workers of which 180 are vegetarian (Veg) and the rest

are non-vegetarian (Non-Veg). In the case of non-veg meals, there will be a non-veg

item in addition to the veg items. A contractor who is interested in the contract has

analysed the costs likely to be incurred. His analysis is given below:

Cereals ` 8 per plate

Veg items ` 5 per plate

Non-veg items ` 15 per plate

Spices ` 1 per plate

Cooking oil ` 4 per plate

One cook Salary ` 13,000 per month

Three helpers Salary ` 7,000 per month per head

Fuel Two commercial cylinders per month, price ` 1000 each.

On an average the canteen will remain open for 25 days in a month. The contractor

wants to charge the non-veg meals at 1.50 times of the veg meals.


(i) The price per meal (veg and non-veg separately) that contractor should quote if he

wants a profit of 20% on his takings.

(ii) The price per meal (separately for veg and non-veg) that a worker will be required

to pay if the company provides 60% subsidy for meals out of welfare fund.

(8 Marks)



(b) A company is considering to engage a factor. The following information is available:

• The current average collection period for the company's debtors is 90 days and ½%

of debtors default. The factor has agreed to pay money due after 60 days and will

take the responsibility of any loss on account of bad debts.

• The annual charge for factoring is 2% of turnover. Administration cost saving is

likely to be ` 1,00,000 per annum.

• Annual credit sales are ` 1,20,00,000. Variable cost is 80% of sales price. The

company's cost of borrowing is 15% per annum. Assume 360 days in a year.

Should the company enter into a factoring agreement? (8 Marks)

Answer

(a) Calculation of cost and amount chargeable by the Contractor

Particulars Veg. Non-Veg

No of Meals per Day 180 120

No of Meals per Month 180×25 = 4,500 120×25 = 3,000

Variable Cost: ` `

Cereals 8 per plate -

Veg items 5 per plate -

Cooking Oil 4 per plate -

Spices 1 per plate -

Total Variable Cost 18 × 7500 (4500 + 3000) 1,35,000

Additional variable cost of Non-veg meal 15 × 3000 45,000

Total Variable Cost 1,80,000

Fixed Cost:

Salary of Cook 13,000

Salary of Helpers (7,000 × 3) 21,000

Fuel 2,000 36,000

Total Cost 2,16,000

Profit 20% on his takings or 25% on Cost 54,000

Total amounts chargeable by the Contractor

2,70,000

(i) No. of Non-Veg Meals 3,000

Equivalent No. of Veg Meals = 3,000 × 1.5 = 4,500



No. of Non Veg Meals = 4,500

Total 9,000

Price per Veg Meal = 2,70,000

9,000

= ` 30

Price per Non Veg. Meal = ` 30 × 1.5 = ` 45/-

(ii) Price per meal when a worker will have to pay

Veg meal ` 30 – Subsidy (60% of ` 30)

= ` 30 – ` 27 = ` 12/-

Non-Veg Meal ` 45 – Subsidy (60% of ` 45)

` 45 – ` 27 = ` 18/-

Note: Cost of Veg and non-veg meal calculated separately and then profit of 20% on overall

takings and 25% profit on overall Cost is added to determine the total price to be charged.

(b) Presently, the Debtors of the company pay after 90 days. However, the factor has agreed

to pay after 60 days only. So, the investment in debtors will be reduced by 30 days.

The annual charge in cash flows through entering into a factoring agreement is:

` `

A. Annual Charge (2%1,20,00,000) (2,40,000)

B. Administration Cost Saved 1,00,000

Existing Average Debtors (` 1,20,00,000 ÷ 36090)

days

30,00,000

Average New Debtors (` 1,20,00,000 ÷360 60) days 20,00,000

Reduction in Debtors 10,00,000

Variable Cost thereof 80% 8,00,000

C. Interest Saving @ 15% on ` 8,00,000 1,20,000

D. Bad Debt Saved @ 0.5% of ` 1,20,00,000 60,000

E. Net Annual Benefits of Factoring (B + C + D – A) 40,000

Advice: Therefore, the factoring agreement is worthwhile and should be undertaken.

Question 4

(a) ABC Ltd. produces an item which is completed in three processes - X, Y and Z. The

following information is furnished for process X for the month of March, 2018 :



Opening work-in-progress (5,000 units):

Materials ` 35,000

Labour ` 13,000

Overheads ` 25,000

Units introduced into process X (55,000 units):

Materials ` 20,20,000

Labour ` 8,00,000

Overheads ` 13,30,000

Units scrapped: 5,000 units

Degree of completion:

Materials 100%

Labour & Overheads 60%

Closing work-in-progress (5,000 units):

Degree of completion:

Materials 100%

Labour & Overheads 60%

Units finished and transferred to Process Y: 50,000 units

Normal loss: 5% of total input (including opening works-in progress) Scrapped units fetch

` 20 per unit.

Presuming that average method of inventory is used, prepare

(i) Statement of Equivalent production

(ii) Statement of Cost for each element

(iii) Statement of distribution of cost

(iv) Abnormal loss account (8 Marks)

(b) Following are the selected financial information of A Ltd. and B Ltd. for the year ended

March 31, 2018:

A Ltd. B Ltd.

Variable Cost Ratio 60% 50%

Interest ` 20,000 ` 1,00,000

Operating Leverage 5 2

Financial Leverage 3 2

Tax Rate 30% 30%



You are required to find out

(i) EBIT

(ii) Sales

(iii) Fixed Cost

(iv) Identify the company which is better placed with reasons based on leverages.

(8 Marks)

Answer

(a) (i) Statement of Equivalent Production

Input Units Output Units

Equivalent production

Material Labour & Overheads

(%) Units (%) Units

Opening WIP 5,000 Completed and transferred to Process ‘Y’

50,000 100 50,000 100 50,000

Units introduced

55,000 Normal loss

(5% of 60,000 units)

3,000 -- -- -- --

Abnormal loss 2,000 100 2,000 60 1,200

Closing WIP 5,000 100 5,000 60 3,000

60,000 60,000 57,000 54,200

(ii) Statement of Cost

Details

Cost at the beginning of process

Cost added

Total cost Equivalent Units

Cost per unit

(`) (`) (`) (`) (`)

Material 35,000 20,20,000 20,55,000

Less: Value of normal loss (3,000 units × ` 20)

(60,000)

19,95,000 57,000 35

Labour 13,000 8,00,000 8,13,000 54,200 15

Overheads 25,000 13,30,000 13,55,000 54,200 25

Total 73,000 41,50,000 41,63,000 75



(iii) Statement of Distribution of Cost

(`)

Completed and transferred to Process-Y (50,000 units × ` 75) 37,50,000

Abnormal Loss:

Materials (2,000 units × ` 35) 70,000

Wages (1,200 units × ` 15) 18,000.00

Overheads (1,200 units × ` 25) 30,000.00

1,18,000

Closing WIP:

Materials (5,000 units × ` 35 1,75,000

Wages (3,000 units × ` 15) 45,000

Overheads (3,000 units × ` 25) 75,000

2,95,000

(iv) Abnormal Loss Account

Particulars Units Amount Particulars Units Amount

To Process-X

A/c

2,000 1,18,000 By Cost Ledger Control

A/c.

2,000 40,000

By Costing Profit &

Loss A/c.

- 78,000

2,000 1,18,000 2,000 1,18,000

(b) Company A

(i) Financial Leverage = EBIT

EBT i.e EBIT InterestEBT i.e EBIT Interest

So, 3 = EBIT

EBIT - 20,000

Or, 3 (EBIT – 20,000) = EBIT

Or, 2 EBIT = 60,000

Or, EBIT = 30,000

(ii) Operating Leverage = Contribution

EBIT Or, 5 =

Contribution

30,000`

Or, Contribution = ` 1, 50,000



Sales = Contribution

P / VRatio(1- variable cost ratio) =

1,50,000

40%

` = `3,75,000

(iii) Fixed Cost = Contribution – EBIT

= ` 1, 50,000 – 30,000

or, Fixed cost = ` 1,20,000

Company B


EBT i.e EBIT InterestEBT i.e EBIT Interest

So, 2 = EBIT

EBIT -1,00,000

Or, 2 (EBIT – 1,00,000) = EBIT

Or, 2 EBIT -2,00,000 = EBIT

Or, EBIT = ` 2,00,000


EBIT Or, 2 =

Contribution

2,00,000`

Or, Contribution = ` 4,00,000


P / VRatio(1- variable cost ratio)=

4,00,000

50%

` = ` 8,00,000

(iii) Fixed Cost = Contribution – EBIT

= ` 4, 00,000 – ` 2,00,000

or, Fixed cost = ` 2,00,000

Income Statements of Company A and Company B

Company A (`) Company B (`)

Sales 3,75,000 8,00,000

Less: Variable cost 2,25,000 4,00,000

Contribution 1,50,000 4,00,000

Less: Fixed Cost 1,20,000 2,00,000

Earnings before interest and tax (EBIT) 30,000 2,00,000

Less: Interest 20,000 1,00,000

Earnings before tax (EBT) 10,000 1,00,000

Less: Tax @ 30% 3,000 30,000

Earnings after tax (EAT) 7,000 70,000



Comment based on Leverage

Comment based on leverage – Company B is better than company A of the

following reasons:

• Capacity of Company B to meet interest liability is better than that of

companies A (from EBIT/Interest ratio)

[A = 30,000

20,000 = 1.5, B =

2,00,000

1,00,000 = 2]

• Company B has the least financial risk as the total risk (business and financial)

of company B is lower (combined leverage of Company A – 15 and Company

B- 4)

Question 5

Answer all four:

(a) List important factors which must be taken into consideration for increasing labour

productivity.

(b) What are the essential pre-requisites of integrated accounting system?

(c) Discuss the factors to be taken into consideration while determining the requirement of

working capital.

(d) Differentiate between Business risk and Financial risk. (4 x 4 = 16 Marks)

Answer

(a) Factors for increasing labour productivity: The important factors which must be taken

into consideration for increasing labour productivity are as follows:

1. Employing only those workers who possess the right type of skill.

2. Placing a right type of man on the right job.

3. Training young and old workers by providing them the right types of opportunities.

4. Taking appropriate measures to avoid the situation of excess or shortage of labour

at the shop floor.

5. Carrying out work study for the fixation of wage rate, and for the simplification and

standardisation of work.

(b) Essential pre-requisites of Integrated Accounting System: The essential pre-

requisites of Integrated Accounting System include the following:

1. The management’s decision about the extent of integration of the two sets of books. Some concerns find it useful to integrate upto the stage of primary cost or factory cost

while other prefer full integration of the entire accounting records.



2. A suitable coding system must be made available so as to serve the accounting

purposes of financial and cost accounts.

3. An agreed routine, with regard to the treatment of provision for accruals, prepaid

expenses, other adjustment necessary for preparation of interim accounts.

4. Perfect coordination should exist between the staff responsible for the financial and cost

aspects of the accounts and an efficient processing of accounting documents should be

ensured.

Under this system there is no need for a separate cost ledger. Of course, there will be a

number of subsidiary ledgers; in addition to the useful Customers Ledger and the Bought

Ledger, there will be: (a) Stores Ledger; (b) Finished Stock Ledger and (c) W-I-P Ledger.

(c) Factors to be taken into consideration while determining the requirement of

working capital:

(i) Production Policies (ii) Nature of the business

(iii) Credit policy (iv) Inventory policy

(v) Abnormal factors (vi) Market conditions

(vii) Conditions of supply (viii) Business cycle

(ix) Growth and expansion (x) Level of taxes

(xi) Dividend policy (xii) Price level changes

(xiii) Operating efficiency. (xiv) Receivables

(xv) Technology and Manufacturing policies (xvi) Short term financing options

(d) Difference between Business risk and Financial risk.

Business risk refers to the risk associated with the firm’s operations. It is an unavoidable

risk because of the environment in which the firm has to operate and the business risk is

represented by the variability of earnings before interest and tax (EBIT). The variability in

turn is influenced by revenues and expenses. Revenues and expenses are affected by

demand of firm’s products, variations in prices and proportion of fixed cost in total cost .

Whereas, Financial risk refers to the additional risk placed on firm’s shareholders as a result of debt use in financing. Companies that issue more debt instruments would have

higher financial risk than companies financed mostly by equity. Financial risk can be

measured by ratios such as firm’s financial leverage multiplier, total debt to assets ratio etc.

Question 6

(a) Delta Ltd. is a manufacturing concern having two production departments P I and P2 and

two service departments S1 and S2. After making a primary distribution of factory

overheads, the total overheads of all departments are as under:



(in `)

P1 4,02,000

P2 2,93,000

S1 3,52,000

S2 33,000

Overheads of service departments are reapportioned as below :

P1 P2 S1 S2

S1 40% 50% - 10%

S2 50% 40% 10% -

A product 'Z' passes through all the two production departments – P1 and P2 and each

unit of product remain there in process for 2 and 3 hours respectively. The material and

labour cost of one unit of product ‘Z’ is ` 500 and ` 350 respectively.

The company run for all the 365 days of the year and 16 hours per day.

You are required:

(i) To make secondary distribution of overheads of service departments by applying

Simultaneous Equation method and

(ii) Determine the total cost of one unit of product Z. (8 Marks)

(b) A proposal to invest in a project, which has a useful life of 5 years and no salvage value

at the end of useful life, is under consideration of a firm. It is anticipated that the project

will generate a steady cash inflow of ` 70,000 per annum. After analyzing other facts of

the project, following information were revealed:

Internal rate of return - 13%

Desirability factor - 1.07762

You are required to find out:

(i) Cost of project

(ii) Cost of capital

(iii) Payback period

(iv) Net present value

Present value factors at different rates are given as under:

Year 10% 11% 12% 13%

1 0.909 0.901 0.893 0.885

2 0.826 0.812 0.797 0.783



3 0.751 0.731 0.712 0.693

4 0.683 0.659 0.636 0.613

5 0.621 0.593 0.567 0.543

Total 3.790 3.696 3.605 3.517

Note: Use only above present values to solve this question. (8 Marks)

Answer

(a) (i) Overheads of service cost centres Let S1 be the overhead of service cost centre S1

and S2 be the overhead of service cost centre S2.

S1 = 3,52,000 + 0.10 S2

S2 = 33,000 + 0.10 S1

Substituting the value of S2 in S1 we get

S1 = 3,52,000 + 0.10 (33,000 + 0.10 S1)

S1 = 3,52,000 + 3,300 + 0.01 S1

0.99 S1 = 3,55,300

S1 = ` 3,58,889

S2 = 33,000 + 0.10 3,58,889

= `68,889

Secondary Distribution Summary

Particulars Total (`) P1 (`) P2 (`)

Allocated and Apportioned over-

heads as per primary distribution

6,95,000 4,02,000 2,93,000

S1 3,58,889 1,43,556 1,79,445

S2 68,889 34,445 27,556

5,80,001 5,00,001

(ii) Working for Overhead rate per hour

P1 P2

Total overheads cost (`) 5,80,001 5,00,001

Production hours worked 5,840 5,840

Rate per hour (`) 99.32 85.62



Calculation of per unit Total Cost of Product Z

(`)

Direct material 500.00

Direct labour 350.00

Prime cost 850.00

Production on overheads

P1 2 hours ` 99.32 = 198.64

P2 3 hours ` 85.62 = 256.86 455.50

Total cost 1,305.50

(b) (i) Cost of Project

Annual cash inflows = ` 70,000

Useful life = 5 years

Desirability factor = 1.07762

At 13% internal rate of return (IRR), the sum of total cash inflows = cost of the

project i.e. initial cash outlay

Considering the discount factor table @ 13%, cumulative present value of cash

inflows for 5 years is 3.517

Hence, Total Cash inflows for 5 years for the Project is

` 70,000 × 3.517 = ` 2,46,190

Hence, Cost of the Project = ` 2,46,190

(ii) Cost of Capital

Profitability index = Sum of Discounted Cash inflows

Cost of the Project

Sum of Discounted Cash inflows

1.07762 2,46,190

`

Sum of Discounted Cash inflows = ` 2,65,300

Since, Annual Cash Inflows = ` 70,000

Hence, cumulative discount factor for 5 years = Rs. 2,65,300

= 3.79Rs. 70,000

From the discount factor table @ 10%, cumulative present value of cash inflows for

5 years is 3.79



Hence, Cost of Capital = 10%

(iii) Payback Period

Payback period =Cost of the Project

Annual Cash Inflows =

2,46,190

70,000

`

` = 3.517 years

(iv) Net Present Value (NPV)

NPV = Sum of Present Values of Cash inflows – Cost of the Project

= ` 2,65,300 – ` 2,46,190 = ` 19,110

Net Present Value = ` 19,110

Question 7

Answer any four of the following:

(a) Discuss cost classification based on variability and controllability.

(b) Describe the salient features of budget manual.

(c) State the different types of packing credit.

(d) (i) State distinct groups of variances that arise in standard costing.

(ii) Explain 'Sale and Lease Back.

(e) Why money in the future is worth-less than similar money today? Give reasons and

explain. (4 x 4 = 16 Marks)

Answer

(a) Cost classification based on variability

(a) Fixed Costs – These are the costs which are incurred for a period, and which,

within certain output and turnover limits, tend to be unaffected by fluctuations in the

levels of activity (output or turnover). They do not tend to increase or decrease with

the changes in output. For example, rent, insurance of factory building etc., remain

the same for different levels of production.

(b) Variable Costs – These costs tend to vary with the volume of activity. Any

increase in the activity results in an increase in the variable cost and vice-versa.

For example, cost of direct labour, etc.

(c) Semi-variable Costs – These costs contain both fixed and variable components

and are thus partly affected by fluctuations in the level of activity. Examples of semi

variable costs are telephone bills, gas and electricity etc .

Cost classification based on controllability

(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or

investment centre manager is called controllable cost. Controllable costs incurred in



a particular responsibility centre can be influenced by the action of the executive

heading that responsibility centre. For example, direct costs comprising direct

labour, direct material, direct expenses and some of the overheads are generally

controllable by the shop level management.

(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a

specified member of an undertaking are known as uncontrollable costs. For

example, expenditure incurred by, say, the tool room is controllable by the foreman

in-charge of that section but the share of the tool-room expenditure which is

apportioned to a machine shop is not to be controlled by the machine shop foreman.

(b) Salient features of Budget Manual

• Budget manual contains many information which are required for effective

budgetary planning.

• A budget manual is a collection of documents that contains key information for

those involved in the planning process.

• An introductory explanation of the budgetary planning and control process, including

a statement of the budgetary objective and desired results is included in Budget

Manual

• Budget Manual contains a form of organization chart to show who is responsible for

the preparation of each functional budget and the way in which the budgets are

interrelated.

• In contains a timetable for the preparation of each budget.

• Copies of all forms to be completed by those responsible for preparing budgets,

with explanations concerning their completion is included in Budget Manual.

• A list of the organization’s account codes, with full explanations of how to use them. • Information concerning key assumptions to be made by managers in their budgets,

e.g. rate of inflation etc.

(c) Different Types of Packing Credit

Packing credit may be of the following types:

(i) Clean Packing credit: This is an advance made available to an exporter only on

production of a firm export order or a letter of credit without exercising any charge

or control over raw material or finished goods. It is a clean type of export advance.

Each proposal is weighted according to particular requirements of the trade and

credit worthiness of the exporter. A suitable margin has to be maintained. Also,

Export Credit Guarantee Corporation (ECGC) cover should be obtained by the

bank.



(ii) Packing credit against hypothecation of goods : Export finance is made available

on certain terms and conditions where the exporter has pledgeable interest and the

goods are hypothecated to the bank as security with stipulated margin. At the time

of utilising the advance, the exporter is required to submit alongwith the firm export

order or letter of credit, relative stock statements and thereafter continue submitting

them every fortnight and whenever there is any movement in stocks.

(iii) Packing credit against pledge of goods: Export finance is made available on

certain terms and conditions where the exportable finished goods are pledged to the

banks with approved clearing agents who will ship the same from time to time as

required by the exporter. The possession of the goods so pledged lies with the bank

and is kept under its lock and key.

(iv) E.C.G.C. guarantee: Any loan given to an exporter for the manufacture,

processing, purchasing, or packing of goods meant for export against a firm order

qualifies for the packing credit guarantee issued by Export Credit Guarantee

Corporation.

(v) Forward exchange contract: Another requirement of packing credit facility is that if

the export bill is to be drawn in a foreign currency, the exporter should enter into a

forward exchange contact with the bank, thereby avoiding risk involved in a possible

change in the rate of exchange.

(d) (i) Distinct groups of variances in standard costing:

The three distinct groups of variances that arise in standard costing are:

(i) Variances of efficiency. These are the variance, which arise due to efficiency or inefficiency in use of material, labour etc.

(ii) Variances of prices and rates: These are the variances, which arise due to changes in procurement price and standard price.

(iii) Variances due to volume: These represent the effect of difference between actual activity and standard level of activity.

(ii) Sale and Lease Back

It is arrangement under which an entity sells the asset to another party and

simultaneously takes it back from the other party under a lease arrangement.

The important features of sale and lease back arrangement are:

(a) The lessee gets a lumpsum amount as sale consideration of the asset.

(b) The lessee continues to use the asset.

(e) Time Preference of money

Time value of money means that worth of a rupee received today is different from the

worth of a rupee to be received in future. The preference of money now as compared to

future money is known as time preference for money.



A rupee today is more valuable than rupee after a year due to several reasons:

➢ Risk there is uncertainty about the receipt of money in future.

➢ Preference for present consumption Most of the persons and companies in

general, prefer current consumption over future consumption.

➢ Inflation In an inflationary period a rupee today represents a greater real

purchasing power than a rupee a year hence.

➢ Investment opportunities Most of the persons and companies have a preference

for present money because of availabilities of opportunities of investment for

earning additional cash flow.

Many financial problems involve cash flow accruing at different points of time for

evaluating such cash flow an explicit consideration of time value of money is required .









Question 1


(a) A skilled worker is paid a guaranteed wage rate of ` 150.00 per hour. The standard time

allowed for a job is 50 hours. He gets an effective hourly rate of wages of `180.00 under

Rowan Incentive Plan due to saving in time. For the same saving in time, calculate the

hourly rate of wages he will get, if he is placed under Halsey Premium Scheme (50%).

(b) Premier Construction Company undertook a contract for ` 5,00,000 on 1st August, 2016.

On 31st March, 2017 when the accounts were closed, the following information was

available:

Cost of work uncertified ` 1,20,000

Cash received ` 2,50,000 (80 of work certified)

Profit transferred to costing Profit and Loss account at the end of the year on Incomplete contract

` 80,000

Calculate:

(i) The value of work in progress certified

(ii) Degree of completion of contract

(iii) Notional Profit and

(iv) Cost of contract as on 31-03-2017

(c) Mr. B will require ` 30 lakhs after 10 years from now. He wants to ascertain an amount to

be invested in a fund which pays interest @ 10% per annum.

Following options are available to him:

(i) to make annual payment into the fund at the end of each year.

(ii) to invest a lumpsum amount in the fund at the end of the year.

(iii) to make annual payment into the fund in the beginning of each year.

Find out the amount to be invested under each of the options given above.



Factors are as under:

FVIF/CVF (10%, 10) = 2.594

FVIFA/CVFA (10%,10) = 15.937

PVIF/PVF (l0%, 10) = 0.386

PVIFA/PVFA (10%,10) = 6.145

(d) The X Ltd. is willing to raise funds for its new project which requires an investment of

` 84 lakhs. The company has two options:

Option 1: To issue Equity Shares (` 10 each) only

Option II: To avail term loan at an interest rate of 12%. But in this case, as insisted

by the financing agencies, the company will have to maintain a debt

equity proportion of 2:1.

The corporate tax rate is 30%.

Find out the point of indifference for the project. (4 x 5 = 20 Marks)

Answer

(a) Increase in hourly rate of wages under Rowan Plan is ` 30 i.e. (`180 – ` 150)

TimeSaved

150Time Allowed

= `30 (Please refer Working Note)

Or, TimeSaved

15050hours

= ` 30

Or, Time saved = 1,500

150= 10 hours

Therefore, Time Taken is 40 hours i.e. (50 hours – 10 hours)

Effective Hourly Rate under Halsey System:

Time saved = 10 hours

Bonus @ 50% = 10 hours × 50% × ` 150 = ` 750

Total Wages = (`150 × 40 hours + ` 750) = ` 6,750

Effective Hourly Rate = ` 6,750 ÷ 40 hours = ` 168.75

Working Note:

Effective hourly rate =

Time Taken(Time Taken Rate per hour) Time Saved Rate per hour

Time Allowed

Time Taken


52 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Or, ` 180 =

Time Taken×Time Saved×Rate per hour

Time Taken×Rate per hour Time Allowed+

Time Taken Time Taken

Or, ` 180 - Time Taken×Rateper hour

Time Taken =

Time Taken 1TimeSaved Rateper hour

Time Allowed Time Taken

Or, ` 180 – ` 150 = TimeSaved

× 150Time Allowed

(b) (i) Value of work in progress certified:

Since, Cash Received of ` 2,50,000 is 80% of work certified

Therefore, Value of work in progress certified = 2,50,000

80%

` = ` 3,12,500

(ii) Degree of completion of contract:

= Valueof workcertified

100Valueof contract

= 3,12,500

1005,00,000

`

` = 62.5%

(iii) Notional Profit:

Profit transferred to Costing Profit & Loss A/c = 2 Cash Received

×Notional Profit × 3 Valueof workcertified

(Since contract completion is 62.5% i.e. more than 50%)

Or, ` 80,000 = 2 2,50,000

× Notional Profit× 3 3,12,500

`

`

Notional Profit = ` 1,50,000

(iv) Cost of contract as on 31-03-2017:

= Value of Work certified + Cost of work uncertified – Notional profit

= ` 3,12,500 + `1,20,000 – ` 1,50,000

= ` 2,82,500

(c) Future Value = ` 30,00,000

Interest (i) = 10% p.a.

Period (n) = 10 years

(i) To make annual payment into the fund at the end of each year:

Future Value = Annual Payment × (FVIFA n, i) or Annual Payment × n(1 i) 1

i



` 30,00,000 = A (FVIFA 10%, 10)

Or, A = Rs.30,00,000

15.937 = ` 1,88,241.2

(ii) To invest a lumpsum amount in the fund at the end of the year:

Future Value = Amount × (FVIF10%, 10) or Amount × (1+ 0.1)10

Or, A = 30,00,000

2.594

= ` 11,56,515

(iii) To make annual payment into the fund at the beginning of each year:

Future Value = Annual Payment × (FVIFA n, i) × (1+i)

` 30,00,000 = A (FVIFA 10%, 10) × (1+ 0.1)

Or, A =

30,00,000

15.937 1.1

=

30,00,000

17.531

= ` 1,71,125 (approx.)

(d) Workings Notes

1. Capital Structure

Option-I: 100% equity capital i.e. ` 84,00,000

8,40,000 equity shares @ ` 10 each

Option-II: Equity capital = ` 84,00,000/3 × 1 = ` 28,00,000

2,80,000 equity shares @ ` 10 each

12% Term Loan = ` 84,00,000/3 × 2 = ` 56,00,000

2. Interest on Term loan

` 56,00,000 × 12% = ` 6,72,000

Computation of indifference point between Option-I & Option-II

EPSOption-I = EPSOption-II

Or, EBIT(1 t)

No.of equity shares

=

(EBIT Interest)(1 t)

No.of equity shares

Or, EBIT(1 0.3)

8,40,000shares

=

(EBIT 6,72,000)(1 0.3)

2,80,000shares

Or, 0.7EBIT

3=

0.7EBIT 4,70,400

1

`

Or, 2.1 EBIT – 14,11,200 = 0.7 EBIT



Or, 1.4 EBIT = 14,11,200

1.4

Or, EBIT = ` 10,08,000

So, Point of Indifference for the project is Rs 10,08,000/-

Question 2

(a) A Ltd. produces 'M' as a main product and gets two by products - 'P' and 'Q' in the course

of processing.

Following information are available for the month of October, 2017:

M P Q

Cost after separation - ` 60,000 ` 30,000

No. of units produced 4500 2500 1500

Selling price (per unit) ` 170 ` 80 ` 50

Estimated Net profit to sales - 30% 25%

The joint cost of manufacture upto separation point amounts to ` 2,50,000.

Selling expenses amounting to ` 85,000 are to be apportioned to the three products in

the ratio of sales units.

There is no opening and closing stock.

Prepare the statement showing:

(i) Allocation of joint cost.

(ii) Product wise over all profitability and

(iii) Advise the company regarding results if the by product ' P' is not further processed

and is sold at the point of separation at ` 60 per unit without incurring selling

expenses. (8 Marks)

(b) A firm can make investment in either of the following two projects. The firm anticipates its

cost of capital to be 10. The pre-tax cash flows of the projects for five years are as

follows:

Year 0 1 2 3 4 5

Project A (`) (2,00,000) 35,000 80,000 90,000 75,000 20,000

Project 8 (`) (2,00,000) 21,8000 10,000 10,000 4000 3000

Ignore Taxation.

An amount of `35000 will be spent on account of sales promotion in year 3 in case of

Project A. This has not been taken into account in calculation of pre -tax cash flows.



The discount factors are as under:

Year 0 1 2 3 4 5

PVF (10%) 1 0.91 0.83 0.75 0.68 0.62

You are required to calculate for each project:

(i) The payback period

(ii) The discounted payback period

(iii) Desirability factor

(iv) Net Present Value (8 Marks)

Answer

(a) (i) Statement showing allocation of Joint Cost

Particulars P Q

No. of units Produced 2,500 1,500

Selling Price Per unit (`) 80 50

Sales Value (`) 2,00,000 75,000

Less:Estimated Profit (P-30% & Q -25%) (60,000) (18,750)

Cost of Sales 1,40,000 56,250

Less: Selling Expenses (Refer Working note-1) (25,000) (15,000)

Cost of Production 1,15,000 41,250

Less:Cost after separation (60,000) (30,000)

Joint Cost allocated 55,000 11,250

(ii) Statement of Profitability

Particulars M (`) P (`) Q (`)

Sales Value (A) 7,65,000 2,00,000 75,000

(4,500 × `170)

Less: Joint Cost 1,83,750 55,000 11,250

(2,50,000-55,000- 11,250)

- Cost after separation - 60,000 30,000

- Selling Expenses

(Refer Working note-1)

45,000 25,000 15,000

(B) 2,28,750 1,40,000 56,250



Profit (A –B) 5,36,250 60,000 18,750

Overall Profit = ` 5,36,250 + ` 60,000 + ` 18,750 = ` 6,15,000

(iii) If the by-product P is not further processed and is sold at the point of

separation:

Amount (`)

Sales value at the point of separation

(2,500 units × ` 60)

1,50,000

Less: Joint cost 55,000

Profit 95,000

Profit after further processing 60,000

Incremental Profit 35,000

If the by-product P is sold at the point of separation, it will give an additional profit of

` 35,000 to the company, hence, the company should sell by-product P without

further processing.

Working Note:

1. Apportionment of Selling expenses among M, P and Q

Product M- 85,000

917

= ` 45,000

By-product P- 85,000

517

= ` 25,000

By-product Q- 85,000

317

= ` 15,000

(b) Calculation of Present Value of cash flows

Year PV factor

@ 10%

Project A Project B

Cash flows (`) Discounted

Cash flows

Cash flows

(`)

Discounted

Cash flows

0 1.00 (2,00,000) (2,00,000) (2,00,000) (2,00,000)

1 0.91 35,000 31,850 2,18,000 1,98,380

2 0.83 80,000 66,400 10,000 8,300

3 0.75 55,000(90,000-35,000) 41,250 10,000 7,500

4 0.68 75,000 51,000 4,000 2,720



5 0.62 20,000 12,400 3,000 1,860

Net Present

Value

2,900 18,760

(i) The Payback period of the projects:

Project-A: The cumulative cash inflows upto year 3 is `1,70,000 and remaining

amount required to equate the cash outflow is ` 30,000 i.e. (` 2,00,000 –

` 1,70,000) which will be recovered from year-4 cash inflow. Hence, Payback period

will be calculated as below:

3 years + 30,000

75,000

`= 3.4 years Or 3 years 4.8 months Or 3 years 4 months and 24

days

Project-B: The cash inflow in year-1 is `2,18,000 and the amount required to

equate the cash outflow is ` 2,00,000, which can be recovered in a period less than

a year. Hence, Payback period will be calculated as below:

2,00,000

2,18,000

`

` = 0.917 years Or 11 months

(ii) Discounted Payback period for the projects:

Project-A: The cumulative discounted cash inflows upto year 4 is `1,90,500 and

remaining amount required to equate the cash outflow is ` 9,500 i.e. (` 2,00,000 –

` 1,90,500) which will be recovered from year-5 cash inflow. Hence, Payback period

will be calculated as below:

4 years + 9,500

12,400

`

` = 4.766 years Or 4 years 9.19 months Or 4 years 9 months and 6

days

Project-B: The cash inflow in year-1 is `1,98,380 and remaining amount required to

equate the cash outflow is ` 1,620 i.e. (` 2,00,000 – ` 1,98,380) which will be

recovered from year-2 cash inflow. Hence, Payback period will be calculated as

below:

1 year + 1,620

8,300

`

` = 1.195 years Or 1 Year 2.34 months Or 1 Year 2 months and 10

days.

(iii) Desirability factor of the projects

Desirability Factor (Profitability Index) = Discountedvalue of Cash Inflows

Discountedvalueof Cash Outflows



Project A = 2,02,900

2,00,000

`

` = 1.01

Project B = 2,18,760

2,00,000

` = 1.09

(iv) Net Present Value (NPV) of the projects:

Please refer the above table.

Project A- ` 2,900

Project B- ` 18,760

Question 3

(a) XYZ Limited produces an article and uses a mixture of material X and Y. The standard

quantity and price of materials for one unit of output is as under:

Material Quantity Price (`)

X 2000 KG 1.00 per kg.

Y 800 KG 1.50 per kg.

During a period, 1500 units were produced. The actual consumption of materials and

prices are given below:

Material Quantity Price (`)

X 31,00,000 kg 1.10 per kg.

Y 12,50,000 kg 1.60 per kg.

Calculate:

(i) Standard cost for actual output

(ii) Material cost variance

(iii) Material Price variance

(iv) Material usage variance (8 Marks)

(b) The current credit sales of a firm is ` 15 lakhs and the firm still has an unutilized

capacity. In order to boost its sales, the firm is willing to relax its credit policy.

The firm proposes a new credit policy of 2/10 net 60 days as against the present policy of

1/10 net 45 days. The firm expects an increase in the sales by 12%. However, it is also

expected that bad debts will go upto 2% of sales from 1.5%.

The contribution to sales ratio of the firm is 28%. The firm's tax rate is 30% and firm

requires an after tax return of 15% on its investment.

Should the firm change the credit policy? (8 Marks)



Answer

(a)

(i) Standard cost for Actual output:

Material X = 1,500 units × 2,000 kg. × ` 1 = 30,00,000

Material Y = 1,500 units × 800 kg. × ` 1.50 = 18,00,000 ` 48,00,000

(ii) Material Cost Variance:

= Standard Cost for actual output – Actual Cost

= (SQ × SP) – (AQ × AP)

Material X = {30,00,000 - (31,00,000 kg. × ` 1.10)}

= 30,00,000 – 34,10,000 = 4,10,000 (A)

Material Y = {18,00,000 – (12,50,000 kg. × ` 1.60)}

= 18,00,000 – 20,00,000 = 2,00,000 (A) 6,10,000 (A)

(iii) Material Price Variance:

= AQ (SP – AP)

Material X = 31,00,000 kg. (` 1.00 – ` 1.10) = 3,10,000 (A)

Material Y = 12,50,000 kg. (` 1.50 – ` 1.60) = 1,25,000 (A) 4,35,000 (A)

(iv) Material Usage Variance:

= SP (SQ – AQ)

Material X = ` 1.00 {(1,500 × 2,000) – 31,00,000}

= 30,00,000 – 31,00,000 = 1,00,000 (A)

Material Y = ` 1.50 {(1,500 × 800) – 12,50,000}

= ` 1.50 (12,00,000 – 12,50,000) = 75,000 (A) = 1,75,000 (A)

(b) Evaluation of Credit policies

Particulars Present policy (`) Proposed policy (`)

Credit Sales 15,00,000 16,80,000

(112% of 15,00,000)

Variable Cost (72%) (10,80,000) (12,09,600)

Contribution 4,20,000 4,70,400

Bad debt (22,500)

(15,00,000× 1.5%)

(33,600)

(16,80,000 × 2%)

Profit Before Tax (PBT) 3,97,500 4,36,800



Tax @ 30% (1,19,250) (1,31,040)

Profit After Tax (PAT) 2,78,250 3,05,760

Opportunity Cost (Refer working note) (20,250) (30,240)

Net Profit 2,58,000 2,75,520

In proposed scheme the net profit is more by ` 17,520 i.e. (` 2,75,520 – ` 2,58,000),

hence, company should change the credit policy.

Working Note:

Opportunity Cost on Credit sales:

Present policy = 15 45days

10,80,000100 360days

` = ` 20,250

Proposed policy = 15 60days

12,09,600100 360days

` = ` 30,240

Assumption:

(i) Cash discount is not availed by the debtors.

(ii) Debtors are utilising full credit period for payment.

(iii) No. of days in a year is 360 days.

Question 4

(a) A company, with 90% Capacity utilization, is manufacturing a product and makes a sale

of ` 9,45,000 at ` 30 per unit. The cost data is as under:

Materials - ` 9 .00 per unit

Labour - ` 7,00 per unit

Semi variable cost (including

variable cost of ` 4.25 per unit) - ` 2,10,000.

Fixed cost is ` 94,500 upto 90% level of output (capacity). Beyond this, an additional

amount of ` 15,000 will be incurred.


(i) Level of output at break-even point

(ii) Number of units to be sold to earn a net income of 10% of sales

(iii) Level of output needed to earn a profit of ` 1,41,375 (8 Marks)



(b) The following details of a company for the year ended 31st March, 2017 are given below:

Operating leverage 2:1

Combined leverage 2.5:1

Fixed Cost excluding interest ` 3.4 lakhs

Sales ` 50 lakhs

8% Debentures of ` 100 each ` 30.25 lakhs

Equity Share Capital of ` 10 each 34 lakhs

Income Tax Rate 30%

Required:

(i) Calculate Financial Leverage

(ii) Calculate P/V ratio and Earning per Share (EPS)

(iii) If the company belongs to an industry, whose assets turnover is 1.5, does it have a

high or low assets turnover?

(iv) At what level of sales, the Earning before Tax (EBT) of the company will be equal to

zero? (8 Marks)

Answer

(a) Working Note:

1. Current utilization 90% capacity and Turnover is ` 9,45,000

No. of units = `9,45,000/`30 = 31,500 units

Variable Cost per units:

Material 9.00

Labour cost 7.00

Variable overheads 4.25

Total Variable Cost 20.25

Selling price 30.00

Contribution per unit (Selling price – Variable Cost) 9.75

Calculation of Total Fixed Cost

Particulars (`)

Semi-variable cost 2,10,000

Less: Variable cost (31,500 units × `4.25) 1,33,875

Fixed Cost 76,125



Add: Fixed cost upto 90% level 94,500

Total Fixed Cost 1,70,625

2. Present Profit:

Contribution (31,500 units at ` 9.75) 3,07,125

Less: Fixed cost 1,70,625

Profit 1,36,500

(i) Break-even point = Total Fixed Cost /Contribution per unit

= `1,70,625/ ` 9.75 = 17,500 Units

At 17,500 units, output level is = 17,500

× 90% = 50%31,500

So, at 50% activities level, this company reaches at BEP

(ii) Sales (Units) = Fixed Cost + Profit

Contribution per unit

10% of sales = 10% of ` 30 = ` 3 per unit profit.

Let us assume ‘S’ is the no. of units to be sold, hence profit will be 3S

So, S = 1,70,625 + 3S

9.75

`

Or, 9.75 S = 1,70,625+3S

Or, S = 1,70,625 ÷ 6.75 = 25,278 units.

(iii) Sales (units) = 1,70,625 +1,41,375

9.75

`

= `3,12,000 ÷ ` 9.75 = 32,000 units

32,000 units is beyond 90% activity level. In such case, the fixed cost will be

increased by ` 15,000 to ` 3,27,000.

Then, S = 3,27,000

= 33,538 units 9.75

`

`

i.e. 33,538

× 10035,000

= 95.82% activity level.



(b) (i) Financial leverage

Combined Leverage = Operating Leverage (OL) Financial Leverage (FL)

2.5 = 2 FL Or, FL = 1.25

Financial Leverage = 1.25

(ii) P/V Ratio and Earning per share (EPS)

Operating leverage =Contribution(C)

× 100Contribution - Fixed Cost (FC)

C2 =

C - 3,40,000 Or, C = 2 (C – 3,40,000)

Or, C = 2C – 6,80,000 Or, Contribution = ` 6,80,000

Now, P/V ratio =Contribution (C)

× 100Sales (S)

=6,80,000

× 100 = 13.6%50,00,000

Therefore, P/V Ratio = 13.6%

EBT = Sales – Variable Cost – Fixed Cost – Interest

= `50,00,000 – ` 50,00,000 (1-0.136) – `3,40,000 – (8% × `30,25,000)

= ` 50,00,000 – ` 43,20,000 – ` 3,40,000 – ` 2,42,000

= ` 98,000

PAT = EBT(1-T)

= ` 98,000(1-0.3) = ` 68,600

EPS = sharesequity of No.

tax afterProfit

EPS 68,600

= = 0.2023,40,000shares

`

(iii) Assets turnover

Assets turnover = Sales 50,00,000

= = 0 .78Total Assets * 34,00,000 30,25,000Total Assets * 34,00,000 30,25,000

`

` `

0.78 < 1.5 means lower than industry turnover.

*Total Asset = Equity share capital + 8% Debentures

(iv) EBT zero means 100% reduction in EBT. Since combined leverage is 2.5, sales

have to be dropped by 100/2.5 = 40%. Hence new sales will be



` 50,00,000 (100 – 40) % = ` 30,00,000.

Therefore, at ` 30,00,000 level of sales, the Earnings before Tax (EBT) of the

company will be zero.

Alternatively

Required sales when EBT is zero = Fixed Cost + Interest + desired Profit

P/V Ratio

= 3,40,000 + 2,42,000 + zero

13.60%

` `

= 5,82,000

13.60%

= ` 42,79,412

[Note: The question can also be solved by first calculating EBIT with the help of Financial

Leverage. Accordingly answer to the requirement(ii) and (iv) will also vary]

Question 5

(a) Identify the methods of costing where:

(i) all costs are directly charged to a specific job.

(ii) all costs are directly charged to a group of products.

(iii) the nature of the product is complex and method cannot be ascertained.

(iv) cost is ascertained for a single product.

(b) What are the motivational factors for adopting a reconciliation process? Explain.

(c) What is 'Bill discounting'? How does it differ from 'Factoring'? Explain.

(d) Which method of comparing a number of investment proposals is most suited if each

proposal involves different amount of cash inflows? Explain and state its limitation s.

(4 x 4 = 16 Marks)

Answer

(a) (i) Job Costing

(ii) Batch Costing

(iii) Multiple Costing

(iv) Single or Output Costing

(b) When the cost and financial accounts are kept separately, it is imperative that these

should be reconciled, otherwise the cost accounts would not be reliable. The

reconciliation of two set of accounts can be made, if both the sets contain sufficient detail



as would enable the causes of differences to be located. It is therefore, important that in

the financial accounts, the expenses should be analysed in the same way as in cost

accounts.

Motivation for reconciliation is:

To ensure reliability of cost data

To ensure ascertainment of correct product cost

To ensure correct decision making by the management based on Cost & Financial data.

(c) Bills Discounting:

Advances are allowed by banks against security of bills. When a bill is discounted, the

borrower is paid the present worth.

The differences between Factoring and Bills discounting are as follows:

(i) Factoring is called as ‘Invoice factoring’ whereas bills discounting is known as “Invoice discounting”.

(ii) In factoring the parties are known as client, factor and debtor whereas in bills

discounting they are known as Drawer, Drawee and Payee.

(iii) Factoring is a sort of management of book debts whereas bills discounting is a sort

of borrowing from commercial banks.

(iv) For Factoring there is no specific Act, whereas in the case of bills discounting, the

Negotiable Instrument Act is applicable.

(d) Profitability Index (PI) method is best suited if each investment proposal involves

different amount of cash inflows. PI considers both present value of cash inflows and

present value of cash outflows.

Mathematically, the desirability factor is calculated as below:


Initial Cash outlay or Total Discounted Cash outflow (as the case may be)

PI is known as a superior method of comparing a number of investment proposal than

Net present value method (NPV).

Limitations of PI

Profitability index fails as a guide in resolving capital rationing where projects are

indivisible.

Once a single large project with high NPV is selected, possibility of accepting

several small projects which together may have higher NPV than the single project

is excluded.



Also situations may arise where a project with a lower profitability index selected

may generate cash flows in such a way that another project can be taken up one or

two years later, the total NPV in such case being more than the one with a project

with highest Profitability Index.

Question 6

(a) APP Limited is a manufacturing concern and recovers overheads at a pre-determined

rate of ` 30 per man-day.

The following additional information of a period are also available for you:

Total factory overheads incurred ` 51,00,000

Man-days actually worked 1,50,000

Sales (in units) 50,000

Stock at the end of the period:

Completed units 5,000

incompleted units (50% completed) 10,000

There was no opening stock of finished goods and works in progress.

On analyzing the situation, it was discovered that 60% of the unabsorbed overheads

were due to defective planning and balance were attributable to increase in overhead

costs.

How would you treat unabsorbed overheads in cost accounts? (8 Marks)

(b) XY Ltd. provides the following information for the year ending 31st March, 2017:

Equity Share Capital ` 8,00,000

Closing Stock ` 1,50,000

Stock Turnover Ratio 5 times

Gross profit ratio 20%

Net profit/Sales 16%

Net profit/Capital 25%

Equity Share Capital ` 8,00,000

You are required to prepare:

Trading and Profit & Loss Account for the year ending 31st March, 2017. (8 Marks)



Answer

(a)

Amount (`)

Total factory overheads incurred 51,00,000

Less: Absorbed factory overheads (` 30 × 1,50,000) (45,00,000)

Under-absorption of Overheads 6,00,000

60% of ` 6,00,000 i.e. ` 3,60,000 would be transferred to Costing P/L Account

40% of ` 6,00,000 i.e. ` 2,40,000 would be apportioned over Sales unit and Stock by

using supplementary overheads rate.

Supplementary overheads Rate = 2,40,000

50,000 + 5,000 + 5,000

` = ` 4

On Sales (50,000 units × ` 4) 2,00,000

On Finished Goods (5,000 units × ` 4) 20,000

On Work in Progress (10000 × 50% × ` 4) 20,000

2,40,000

(b) Working Note:

1. Calculation of Net Profit

Net Pr ofit

25%Capital

Or, Net Profit 25

8,00,000 100` Or, Net Profit = ` 2,00,000

2. Calculation of Sales

Net Profit 16

=Sales 100

Or, 2,00,000 16

Sales 100

Or, Sales = ` 12,50,000

3. Calculation of Gross Profit

Gross profit = ` 12,50,000 × 20%

= ` 2,50,000



4. Calculation of Opening Stock

Stock Turnover Ratio = Cost of Sales

Average Stock = 5 times

Or, 12,50,000 (1 0.2)

AverageStock

= 5

Or, Average Stock = 10,00,000

5

= ` 2,00,000

Average Stock = 1,50,000 OpeningStock

2

+ = 2,00,000

Or, Opening Stock = 4,00,000 – 1,50,000 = ` 2,50,000

Trading and Profit & Loss Account

Particulars (`) Particulars (`)

To Opening Stock 2,50,000 By Sales 12,50,000

To Purchases

(Balancing figure)

9,00,000 By Closing Stock 1,50,000

To Gross Profit (Balance c/d) 2,50,000

14,00,000 14,00,000

To Miscellaneous expenses

(Balancing figure)

50,000 By Gross Profit (Balance b/d) 2,50,000

To Net Profit 2,00,000

2,50,000 2,50,000

Question 7


(a) Distinguish between 'Bin Card' and 'Stores Ledger'.

(b) Explain 'Retention Money' and 'Progress payment' in contract.

(c) Explain:

(i) Flexible Budget

(ii) Operating lease

(d) Explain 'Concentration Banking' and 'Lock Box System'.

(e) Explain 'Finance Function'. (4 x 4 = 16 Marks)



Answer

(a) Difference between Bin Card & Stores Ledger

Bin Card Stores Ledger

(i) It is maintained by the storekeeper in the store.

It is maintained in costing department.

(ii) It contains only quantitative details of material received, issued and returned to stores.

It contains information both in quantity and value.

(iii) Entries are made when transactions take place.

It is always posted after the transaction.

(iv) Each transaction is individually posted.

Transactions may be summarized and then posted.

(v) Inter-department transfers do not appear in Bin Card.

Material transfers from one job to another job are recorded for costing purposes.

(b) Retention Money: In a contract, a contractee generally keeps some amount payable to

contractor with himself as security deposit. In a contract, a contractor undertakes to

complete a job work on the basis of pre- determined terms and conditions and work

specifications. To ensure that the work carried out by the contractor is as per the plan

and specifications, it is monitored periodically by the contractee. To have a cushion

against any defect or undesirable work the contractee withhold some money payable to

contractor. This security money withheld by the contractee is known as retention money.

In some contracts the contractor has to deposit some security money before staring of

the contract as a term of contract. This is known as Earnest money. If any deficiency or

defect is noticed in the work, it is to be rectified by the contractor before the release of

the retention money. Retention money provides a safeguard against the risk of loss due

to faulty workmanship.

Mathematically:

Retention Money = Value of work certified – Payment actually made/ cash paid

Progress Payment: A Contractor gets payments for work done on a contract based on

work completion. Since, a contract takes longer period to complete and requires large

investment in working capital to progress the contract work, hence, it is desirable by the

contractor to have periodic payments from the contractee against the work done to avoid

working capital shortage. For this a contactor enters into an agreement with the

contractee and agrees on payment on some reasonable basis, which generally, includes

percentage of work completion as certified by an expert.



Mathematically:

Progress payment = Value of work certified – Retention money – Payment to date

(c) (i) Flexible Budget: According to CIMA, “a flexible budget is defined as a budget which, by recognizing the difference between fixed, semi-variable and variable costs

is designed to change in relation to the level of activity attained.” Unlike static (fixed) budgets, flexible budgets show the expected results of a responsibility center

for different activity levels.

(ii) Operating Lease: A lease is classified as an operating lease if it does not secure

for the lessor the recovery of capital outlay plus a return on the funds invested

during the lease term. Normally, these are callable lease and are cancellable with

proper notice. The term of this type of lease is shorter than the asset’s economic life. The lessee is obliged to make payment until the lease expiration, which

approaches useful life of the asset.

(d) Concentration Banking: In concentration banking the company establishes a number

of strategic collection centres in different regions instead of a single collection centre at

the head office. This system reduces the period between the time a customer mails in

his remittances and the time when they become spendable funds with the company.

Payments received by the different collection centers are deposited with their respective

local banks which in turn transfer all surplus funds to the concentration bank of head

office. The concentration bank with which the company has its major bank account is

generally located at the headquarters. Concentration banking is one important and

popular way of reducing the size of the float.

Lock Box System: Another means to accelerate the flow of funds is a lock box system.

While in concentration banking, remittances are received by a collection centre and

deposited in the bank after processing. The purpose of lock box system is to eliminate

the time between the receipts of remittances by the company and deposited in the bank.

A lock box arrangement usually is on regional basis which a company chooses according

to its billing patterns.

(e) The finance function is most important for all business enterprises. It remains a focus of

all activities. It starts with the setting up of an enterprise. It is concerned with raising of

funds, deciding the cheapest source of finance, utilization of funds raised, making

provision for refund when money is not required in the business, deciding the most

profitable investment, managing the funds raised and paying returns to the providers of

funds in proportion to the risks undertaken by them. Therefore, it aims at acquiring

sufficient funds, utilizing them properly, increasing the profitability of the organization and

maximizing the value of the organization and ultimately the shareholder’s wealth.


PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT


Answer any five questions from the remaining six questions.


Question 1


(a) RST Company Ltd. has computed labour turnover rates for the quarter ended 31st March,

2017 as 20%, 10% and 5% under flux method, replacement method and separation

method respectively. If the number of workers replaced during that quarter is 50, find out

(i) Workers recruited and joined (ii) Workers left and discharged and (iii) Average number

of workers on roll. (5 Marks)

(b) AB Ltd. has furnished the following information:

Budgeted Actual

July 2016

Number of working days 25 27

Production (in units) 20,000 22,000

Fixed Overheads ` 30,000 ` 31,000

Budgeted fixed overhead rate is ` 1.00 per hour. In July 2016, the actual hours worked

were 31,500. In relation to fixed overheads, calculate:

(i) Efficiency Variance

(ii) Capacity Variance

(iii) Calendar Variance

(iv) Volume Variance

(v) Expenditure Variance (5 Marks)

(c) You are given the following information of 5 firms of the same industry:

Name of the Firm Change in

Revenue

Change in Operating Income

Change in Earning per share

M 28% 26% 32%

N 27% 34% 26%

P 25% 38% 23%

Q 23% 43% 27%

R 25% 40% 28%




(i) Degree of operating leverage and

(ii) Degree of combined leverage for all firms. (5 Marks)

(d) VK Co. Ltd. has total cash disbursement amounting ` 22,50,000 in the year 2017 and

maintains a separate account for cash disbursements. Company has an administrative

and transaction cost on transferring cash to disbursement account ` 15 per transfer. The

yield rate on marketable securities is 12% per annum.

You are required to determine optimum cash balance according to William J Baumol

Model. (5 Marks)

Answer

(a) Labour Turnover Rate (Replacement method) = No. of workers replaced

100Average no. of workers

Or, 10

100 =

50

Averageno.of wor ker s

Thus, Average No. of workers = 500

Labour Turnover Rate (Separation method) = No. of workers separated

100Average No. of workers

100

Or, 5

100 =

Number of wor ker s separated

500

Thus, No. of workers separated = 25

Labour Turnover Rate (Flux Method)

=No. of Separations + No. of Accession (Joinings)

100Average no. of workers

100

Or, 20

100 =

25 No. of accessions (Joinings)

500

25 No. of accessions (Joinings)

Or, 100 (25 + No. of Accessions) = 10,000

Or, 25 + No. of Accessions =100

Thus, No. of Accessions = 100 - 25 =75

Accordingly,

(i) Workers recruited and Joined = 75

(ii) Workers left and discharged = 25

(iii) Average number of workers on roll = 500



(b) Workings:

(1) Budgeted Hours = 30,000

1 per hour

= 30,000 hours

(2) Standard Fixed Overhead rate per hour (Standard Rate):

Budgeted fixed overheads=

Budgeted Hours=

30,000

30,000hours

` = ` 1.00

(3) Standard Hour per unit of output = 30,000hours

20,000units= 1.5 hours

(4) Standard hours for Actual Output = 22,000 units × 1.5 hours = 33,000 Hours

(5) Budgeted Overhead per day for budgeted days = 30,000

25days

`= ` 1,200

(6) Budgeted Overhead for actual days worked = ` 1,200 × 27 days = ` 32,400

(7) Budgeted Hours for Actual days worked = 30,000hours

27days25days

27days = 32,400 hours

Computation of Variances in relation to Fixed Overheads:

(i) Efficiency Variance

= Standard Rate × (Standard hours for actual output – Actual hours worked)

= `1.00 (33,000 hours – 31,500 hours) = ` 1,500 (Favourable)

(ii) Capacity Variance

= Standard Rate × (Actual Hours – Budgeted Hours for actual days worked)

= `1.00 (31,500 hours – 32,400 hours) = ` 900 (Adverse)

(iii) Calendar Variance

= Standard Fixed Overhead Rate per day × (Actual Working days – Budgeted

working days)

= `1,200 (27 days – 25 days) = ` 2,400 (Favourable)

(iv) Volume Variance

= Standard Rate × (Standard hours – Budgeted hours)

= `1.00 (33,000 hours – 30,000 hours) = ` 3,000 (Favourable)

(v) Expenditure Variance

= Budgeted Overheads – Actual Overheads

= ` 30,000 – ` 31,000 = ` 1,000 (Adverse)



Note: Overhead Variances may also be calculated based on output.

(c) Calculation of Degree of Operating leverage and Degree of Combined leverage

Firm Degree of Operating Leverage (DOL)

= %changeinOperatingIncome

%changeinRevenue

Degree of Combined Leverage (DCL)

= %changeinEPS

%changeinRevenue

M 26%

28%= 0.929

32%

28%= 1.143

N 34%

27%= 1.259

26%

27%= 0.963

P 38%

25%= 1.520

23%

25%= 0.920

Q 43%

23%= 1.870

27%

23%= 1.174

R 40%

25%= 1.60

28%

25%= 1.120

(d) Determination of Optimum Cash Balance according to William J. Baumol’s Model

C = S

2UP

Where,

C = Optimum cash balance

U = Annual cash disbursement

P = Fixed cost per transaction

S = Opportunity cost of one-rupee p.a.

Therefore, Optimum Cash Balance

= 2 22,50,000 15

0.12

2 22,50,000 15` `= 56,25,00,000

= ` 23,717.08 or ` 23,717

Question 2

(a) KMR Ltd. produces product AY, which passes through three processes ‘XM’, ‘YM’ and ‘ZM’. The output of process ‘XM’ and ‘YM’ is transferred to next process at cost plus 20 percent each on transfer price and the output of process ‘ZM’ is transferred to finished



stock at a profit of 25 percent on transfer price. The following in formation are available in

respect of the year ending 31st March, 2017:

Process-

XM (`)

Process-

YM (`)

Process-

ZM (`)

Finished

Stock

(`)

Opening Stock 30,000 54,000 80,000 90,000

Material 1,60,000 1,30,000 1,00,000 -

Wages 2,50,000 2,16,000 1,84,000 -

Manufacturing Overheads 1,92,000 1,44,000 1,33,000 -

Closing Stock 40,000 64,000 78,000 1,00,000

Inter process profit included in Opening Stock

Nil 8,000 20,000 40,000

Stock in processes is valued at prime cost. The finished stock is valued at the price at

which it is received from process ‘ZM’. Sales of the finished stock during the period was ` 28,00,000.


(i) All process accounts and

(ii) Finished stock account showing profit element at each stage. (8 Marks)

(b) PQ Limited wants to expand its business and has applied for a loan from a commercial

bank for its growing financial requirements.

The records of the company reveals that the company sells goods in the domestic market

at a gross profit of 25% not counting depreciation as part of the cost of goods sold.

The following additional information is also available for you:

`

Sales-Home at one month’s credit 1,20,00,000

Sales-Export at three months’ credit (sales price 10% below home

price)

54,00,000

Material used (supplied extends two months’ credit) 45,00,000

Wages paid ½ month in arrear 36,00,000

Manufacturing Expenses (Cash) paid (one month in arrear) 54,00,000

Adm. Expenses paid one month in arrear 12,00,000

Income tax payable in four installments of which one falls in the next financial year

15,00,000



The company keeps one month’s stock of each of raw materials and finished goods and believes in keeping ` 10,00,000 available to it including the overdraft limit of ` 5,00,000

not yet utilized by the company. Assumes a 15% margin for contingencies. Ignore the

work-in-progress.

You are required to ascertain the requirement of the working capital of the company.

(8 Marks)

Answer

(a) (i) Process ‘XM’ Account Dr. Cr.

Particulars Cost (`) Profit

(`)

Total

(`)

Particulars Cost

(`)

Profit

(`)

Total

(`)

To Opening Stock 30,000 30,000 By Process ‘YM’ A/c (Transfer)

5,92,000 1,48,000 7,40,000

To Material 1,60,000 1,60,000

To Wages 2,50,000 2,50,000

Total 4,40,000 4,40,000

Less: Closing stock 40,000 40,000

Prime Cost 4,00,000 4,00,000

To Manufacturing Overheads

1,92,000 1,92,000

Total cost 5,92,000 5,92,000

To Costing Profit and Loss A/c (20% on transfer Price or 25% on cost)

1,48,000 1,48,000

5,92,000 1,48,000 7,40,000 5,92,000 1,48,000 7,40,000

Process ‘YM’ Account Dr. Cr.

Particulars Cost

(`)

Profit

(`)

Total

(`)

Particulars Cost

(`)

Profit

(`)

Total

(`)

To Opening Stock 46,000 8,000 54,000 By Process ‘ZM’ A/c (Transfer)

10,72,758 4,52,242 15,25,000

To Process ‘XM’ A/c 5,92,000 1,48,000 7,40,000

To Material 1,30,000 -- 1,30,000

To Wages 2,16,000 -- 2,16,000



Total 9,84,000 1,56,000 11,40,000

Less: Closing stock 55,242 8,758 64,000

Prime Cost 9,28,758 1,47,242 10,76,000

To Manufacturing

Overheads

1,44,000

--

1,44,000

Total cost 10,72,758 1,47,242 12,20,000

To Costing Profit and Loss A/c (20% on transfer Price or 25% on cost)

-- 3,05,000 3,05,000

10,72,758 4,52,242 15,25,000 10,72,758 4,52,242 15,25,000

Process ‘ZM’ Account Dr. Cr.

Particulars Cost

(`)

Profit

(`)

Total

(`) Particulars

Cost

(`)

Profit

(`)

Total

(`)

To Opening Stock 60,000 20,000 80,000 By Finished Stock A/c (Transfer)

14,91,258 11,00,742 25,92,000

To Process ‘YM’ A/c 10,72,758 4,52,242 15,25,000

To Material 1,00,000 -- 1,00,000

To Wages 1,84,000

-- 1,84,000

Total 14,16,758 4,72,242 18,89,000

Less: Closing stock 58,500 19,500 78,000

Prime Cost 13,58,258 4,52,742 18,11,000

To Manufacturing Overheads

1,33,000

--

1,33,000

Total cost 14,91,258 4,52,742 19,44,000

To Costing Profit and Loss A/c (25% on transfer Price or 33 1/3% on cost)

-- 6,48,000 6,48,000

14,91,258 11,00,742 25,92,000 14,91,258 11,00,742 25,92,000

(ii) Finished Stock Account

Dr. Cr.

Particulars Cost

(`)

Profit

(`)

Total

(`)

Particulars Cost

(`)

Profit

(`)

Total

(`)

To Opening Stock 50,000 40,000 90,000 By Costing P&L A/c (Transfer)

14,83,725 13,16,275 28,00,000



To Process ‘ZM’ A/c 14,91,258 11,00,742 25,92,000

Total 15,41,258 11,40,742 26,82,000

Less: Closing stock 57,533 42,467 1,00,000

14,83,725 10,98,275 25,82,000

To Costing Profit and Loss A/c (Profit) (Balancing figure)

-- 2,18,000 2,18,000

14,83,725 13,16,275 28,00,000 14,83,725 13,16,275 28,00,000

Calculation of amount of unrealized profit on closing stock:

Process ‘XM’ = Nil

Process ‘YM’ = `

1,56,000 × 64,000 = 8,758.

11,40,000

Process ‘ZM’ = `

` ``

4,72,242 × 78,000 = 19,500.

18,89,000

Finished Stock = 11,00,742

× 1,00,000 = 42,467.25,92,000

`` `

`

Note: Unrealised profit on closing finished stock can also be calculated on the basis of

Average cost.

(b) Statement of Working Capital Requirement for PQ Ltd

(`) (`)

A. Current Assets

(i) Inventories:

Material (1 month)

45,00,0001 month

12months

`

3,75,000

Finished goods (1 months)

1,35,00,0001 month

12months

`

11,25,000 15,00,000

(ii) Receivables (Debtors)

For Domestic Sales

90,00,0001 month

12months

`

7,50,000



For Export Sales

45,00,0003months

12months

`

11,25,000 18,75,000

(iii) Cash in hand & at bank

(` 10,00,000 – ` 5,00,000) 5,00,000

Total Current Assets 38,75,000

B. Current Liabilities:

(i) Payables (Creditors) for materials (2 months)

45,00,0002months

12months

`

7,50,000

(ii) Outstanding wages (0.5 months)

36,00,0000.5month

12months

`

1,50,000

(iii) Outstanding manufacturing expenses

54,00,0001month

12months

`

4,50,000

(iv) Outstanding administrative expenses

12,00,0001 month

12months

`

1,00,000

(v) Income tax payable (` 15,00,000 ÷ 4) 3,75,000

Total Current Liabilities 18,25,000

Net Working Capital (A – B) 20,50,000

Add: 15% contingency margin 3,07,500

Total Working Capital required 23,57,500

Working Note:

1. Calculation of Cost of Goods Sold and Cost of Sales

Domestic (`) Export (`) Total (`)

Sales 1,20,00,000 54,00,000 1,74,00,000

Less: Gross profit @ 25% on domestic sales and 16.67% on export sales (Working note-2) (30,00,000) (9,00,000) (39,00,000)

Cost of Goods Sold/ Cash Cost of Sales 90,00,000 45,00,000 1,35,00,000



2. Calculation of gross profit on Export Sales:

Let domestic selling price is `100. Gross profit is `25, and then cost per unit is `75

Export price is 10% less than the domestic price i.e. `100 – (1- 0.1) = `90

Now gross profit will be `90 - `75 = `15

Therefore, Gross profit at domestic price will be 15

100100

`

` = 15%

Or, gross profit at export price will be 15

10090

`

`= 16.67%

Assumptions

(i) It is assumed that administrative expenses relating to production activities.

(ii) Value of opening and closing stocks are equal.

(iii) Receivables are calculated based on cost of goods sold

Question 3

(a) The following information was obtained from the records of a manufacturing unit:

` `

Sales 80,000 units @ ` 25 20,00,000

Material consumed 8,00,000

Variable Overheads 2,00,000

Labour Charges 4,00,000

Fixed Overheads 3,60,000 17,60,000

Net Profit 2,40,000

Calculate:

(i) The number of units by selling which the company will neither lose nor gain

anything.

(ii) The sales needed to earn a profit of 20% on sales.

(iii) The extra units which should be sold to obtain the present profit if it is proposed to

reduce the selling price by 20% and 25%.

(iv) The selling price to be fixed to bring down its Break-even Point to 10,000 units

under present conditions. (8 Marks)

(b) PNR Limited and PXR Limited are identical in every respect except capital structure.

PNR limited does not employ debts in its capital structure whereas PXR Limited employs



12% Debentures amounting to ` 20,00,000. The following additional information are

given to you:

(i) Income tax rate is 30%

(ii) EBIT is ` 5,00,000

(iii) The equity capitalization rate of PNR Limited is 20% and

(iv) All assumptions of Modigliani - Miller Approach are met.

Calculate:

(i) Value of both the companies,

(ii) Weighted average cost of capital for both the companies. (8 Marks)

Answer

(a) Workings:

(1) Contribution per unit = Selling price per unit – Variable cost per unit

= ` 25 – {` (8,00,000 + 2,00,000 + 4,00,000) ÷ 80,000 units}

= ` 25 – ` 17.50 = ` 7.50

(2) Profit-Volume (P/V) Ratio = Contributionper unit

100Selling priceper unit

= 7.50

10025

`

`= 30%

Calculations:

(i) The number of units to be sold for neither loss nor gain i.e. Break-even units:

= Fixed Overheads

Contribution per unit=

3,60,000

7.50

`

` = 48,000 units

(ii) The sales needed to earn a profit of 20% on sales:

As we know

S = V + F + P

(S = Sales; V = Variable Cost; F = Fixed Cost; P = Profit)

Suppose Sales units are x then

` 25x = ` 17.5 x + ` 3,60,000 + ` 5x

` 25x – ` 22.5x = ` 3,60,000

Or, x = 3,60,000

2.5

`

`= 1,44,000 units

Therefore, Sales needed = 1,44,000 units `25 = `36,00,000 to earn a profit of

20% on sales.



(iii) Calculation of extra units to be sold to earn present profit of ` 2,40,000 under

the following proposed selling price:

When selling price is reduced by

20% 25%

Selling price per unit (`) 20.00

(` 25 × 80%)

18.75

(` 25 × 75%)

Less: Variable Cost per unit (`) 17.50 17.50

Contribution per unit (`) 2.50 1.25

Desired Contribution:

Fixed Overheads (`) 3,60,000 3,60,000

Desired Profit (`) 2,40,000 2,40,000

6,00,000 6,00,000

(a) Sales unit for desired contribution

DesiredContribution

Contributionper unit

6,00,000

2.50

`

`

2,40,000 units

6,00,000

1.25

`

`

4,80,000 units

(b) Units presently sold 80,000 units 80,000 units

(c) Extra units to be sold {(a) – (b)} 1,60,000 units 4,00,000 units

(iv) Sales price to bring down BEP to 10,000 units:

B.E.P (Units) = FixedCost

Contribution per unit

Or, Contribution per unit = 3,60,000

10,000units

`= `36

So, Sales Price (per unit) = Variable Cost + Contribution

= `17.5 + `36 = `53.50

(b) (i) Calculation of Value of Firms PNR Ltd. and PXR Ltd. according to Modigliani-

Miller Approach:

Market Value of Firm PNR (Unlevered)

e

EBIT (1 - t )V =u

K =

5,00,000 (1- 0.30 )

20%

`

3,50,000

= = 17,50,00020%

``



Market Value of Firm PXR (Levered)

Vg = Vu + TB

= `17,50,000 + (`20,00,000 × 0.30)

= ` 17,50,000 + ` 6,00,000 = ` 23,50,000

(ii) Computation of Weighted Average Cost of Capital (WACC):

WACC of ‘PNR Ltd.’ = 20% (i.e. Ke = Ko)

WACC of ‘PXR Ltd.’ PXR Ltd. (`)

EBIT 5,00,000

Interest to Debt holders @12% (2,40,000)

EBT 2,60,000

Taxes @ 30% (78,000)

Income available to Equity Shareholders 1,82,000

Total Value of Firm 23,50,000

Less: Market Value of Debt (20,00,000)

Market Value of Equity 3,50,000

Return on equity (Ke) = 1,82,000 / 3,50,000 0.52

Computation of WACC of PXR Ltd

Component of Capital Amount Weight Cost of Capital WACC

Equity 3,50,000 0.149 0.52 0.0775

Debt 20,00,000 0.851 0.084* 0.0715

Total 23,50,000 0.1490

*Kd= 12% (1- 0.3) = 12% × 0.7 = 8.4%

WACC = 14.90%

Question 4

(a) The following information have been extracted from the cost records of JKL

Manufacturing Company Ltd:

`

Stores:

Opening Balance 90,000

Purchases 4,80,000



Transfer from WIP 2,40,000

Issue to WIP 4,80,000

Issue for repairs 60,000

Deficiency found in stock 18,000

Work-in-Progress:

Opening Balance 1,80,000

Direct wages applied 1,80,000

Overhead charged 7,20,000

Closing Balance 1,20,000

Finished Production:

Entire production is sold at a profit of 10% on cost from work-in-progress

-

Wages Paid 2,10,000

Overhead Incurred 7,50,000

Prepare Stores Ledger Control A/c., Work-in-Progress Control A/c., Overheads Control

A/c. and Costing Profit & Loss A/c. (8 Marks)

(b) Following information relate to a concern:

Debtors Velocity 3 months

Credits Velocity 2 months

Stock Turnover Ratio 1.5

Gross Profit Ratio 25%

Bills Receivables ` 25,000

Bills Payables ` 10,000

Gross Profit ` 4,00,000

Fixed Assets to turnover Ratio 4

Closing stock of the period is ` 10,000 above the opening stock.

Find out:

(i) Sales and cost of goods sold

(ii) Sundry Debtors

(iii) Sundry Creditors

(iv) Closing Stock

(v) Fixed Assets (8 Marks)



Answer

(a) Stores Ledger Control A/c


To Balance b/d 90,000 By Work in Progress Control A/c

4,80,000

To General Ledger

Adjustment A/c

4,80,000

By Overhead Control A/c

60,000

To Work in Progress Control A/c

2,40,000 By Overhead Control A/c (Deficiency)

18,000*

By Balance c/d 2,52,000

8,10,000 8,10,000

*Deficiency assumed as normal (alternatively can be treated as abnormal loss)

Work in Progress Control A/c


To Balance b/d 1,80,000 By Stores Ledger Control A/c

2,40,000

To Stores Ledger Control A/c

4,80,000

By Costing P/L A/c

(Balancing figures being Cost of finished goods)

12,00,000

To Wages Control A/c 1,80,000 By Balance c/d 1,20,000

To Overheads Control A/c 7,20,000

15,60,000 15,60,000

Overheads Control A/c


To Stores Ledger Control A/c 60,000 By Work in Progress Control A/c

7,20,000

To Stores Ledger Control A/c

18,000

By Balance c/d* (Under absorption)

1,38,000

To Wages Control A/c

(` 2,10,000- `1,80,000)

30,000

To Gen. Ledger Adjust. A/c 7,50,000

8,58,000 8,58,000

*Alternatively may be transferred to Costing P& L A/c



Costing Profit & Loss A/c


To Work in progress Control A/c

12,00,000

By Gen. Ledger Adjust. A/c (Sales) (12,00,000+1,20,000)

13,20,000

To Gen. Ledger Adjust. A/c (Profit)

1,20,000

13,20,000 13,20,000

General Ledger Adjustment A/c may also be written as Cost Ledger Control A/c

(b) (i) Determination of Sales and Cost of goods sold:

Gross Profit Ratio = Gross Profit

× 100Sales

Or, 25

100=

4,00,000

Sales

`

Or, Sales = 4,00,00,000

25 = ` 16,00,000

Cost of Goods Sold = Sales – Gross Profit

= ` 16,00,000 - ` 4,00,000 = ` 12,00,000

(ii) Determination of Sundry Debtors:

Debtors velocity is 3 months or Debtors’ collection period is 3 months,

So, Debtors’ turnover ratio = 12months

3months= 4

Debtors’ turnover ratio = Credit Sales

Average AccountsReceivable

=16,00,000

Bills Receivable+ SundryDebtors

= 4

Or, Sundry Debtors + Bills receivable = ` 4,00,000

Sundry Debtors = ` 4,00,000 – ` 25,000 = ` 3,75,000

(iii) Determination of Sundry Creditors:

Creditors velocity of 2 months or credit payment period is 2 months.



So, Creditors’ turnover ratio =12 months

2 months= 6

Creditors turnover ratio = CreditPurchases *

Average AccountsPayables

= 12,10,000

Sundry Creditors+Bills Payables

` = 6

So, Sundry Creditors + Bills Payable = ` 2,01,667

Or, Sundry Creditors + ` 10,000 = ` 2,01,667

Or, Sundry Creditors = ` 2,01,667 – ` 10,000 = ` 1,91,667

(iv) Closing Stock

Stock Turnover Ratio = Cost of Goods Sold

Average Stock=

12,00,000

Average Stock

`=1.5

So, Average Stock = ` 8,00,000

Now Average Stock =Opening Stock+ Closing Stock

2

Or Opening Stock+ (Opening Stock+ 10,000)

2

`= ` 8,00,000

Or, Opening Stock = ` 7,95,000

So, Closing Stock= ` 7,95,000 + ` 10,000 = ` 8,05,000

(v) Calculation of Fixed Assets

Fixed Assets Turnover Ratio = Cost of GoodsSold

FixedAssets= 4

Or, 12,00,000

Fixed Assets

`= 4

Or, Fixed Asset = ` 3,00,000

Workings:

*Calculation of Credit purchases:

Cost of goods sold = Opening stock + Purchases – Closing stock

` 12,00,000 = ` 7,95,000 + Purchases – ` 8,05,000

` 12,00,000 + ` 10,000 = Purchases

` 12,10,000 = Purchases (credit).



Assumption:

(i) All sales are credit sales

(ii) All purchases are credit purchase

(iii) Stock Turnover Ratio and Fixed Asset Turnover Ratio may be calculated either

on Sales or on Cost of Goods Sold.

Question 5

(a) Explain 'Cost Unit' and 'Cost Centre'.

(b) What are the essential factors for installing a cost accounting system? Explain.

(c) Distinguish between 'Funds Flow' and 'Cash Flow'.

(d) Distinguish between 'Profit Maximization' and 'Wealth Maximization' objective of a firm.

(4 × 4 = 16 Marks)

Answer

(a) (i) Cost Units: It is a unit of product, service or time (or combination of these) in

relation to which costs may be ascertained or expressed.

We may for instance determine the cost per tonne of steel, per tonne kilometre of a

transport service or cost per machine hour. Sometime, a single order or a contract

constitutes a cost unit. A batch which consists of a group of identical items and

maintains its identity through one or more stages of production may also be

considered as a cost unit.

Cost units are usually the units of physical measurement like number, weight, area,

volume, length, time and value.

(ii) Cost Centre: It is defined as a location, person or an item of equipment (or group of

these) for which cost may be ascertained and used for the purpose of Cost Control.

Cost Centres are of two types:

Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X,

supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors

etc.

Impersonal Cost Centre: It consists of a location or an item of equipment (or group

of these) e.g. boiler house, cooling tower, weighing machine, canteen, and

generator set etc.

OR

Cost Centres in a manufacturing concern are of two types:



Production Cost Centre: it is a cost centre where raw material is handled for

conversion into finished products. Here both direct and indirect expenses are

incurred. Machine shops, welding shops and assembly shops etc. are examples of

production cost centres.

Service Cost Centre: It is a cost centre which serves as an ancillary unit to

production cost centre. Payroll processing department, HRD, Power house, Gas

production shops, Plant maintenance centres etc. are example of service cost

centres.

(b) Before installation of a system of cost accounting in a manufacturing organisation the

under mentioned factors should be studied:

(i) Objective: The objective of costing system, for example whether it is being

introduced for fixing prices or for insisting a system of cost control.

(ii) Nature of Business or Industry: The Industry in which business is operating.

Every business industry has its own peculiar feature and costing objectives.

According to its cost information requirement cost accounting methods are followed.

For example, Indian Oil Corporation Ltd. has to maintain process wise cost

accounts to find out cost incurred on a particular process say in crude refinement

process etc.

(iii) Organisational Hierarchy: Costing system should fulfill the requirement of different

level of management. Top management is concerned with the corporate strategy,

strategic level management is concerned with marketing strategy, product

diversification, product pricing etc. Operational level management needs the

information on standard quantity to be consumed, report on idle time etc.

(iv) Knowing the product: Nature of product determines the type of costing system to

be implemented. The product which has by-products requires costing system which

account for by-products as well. In case of perishable or short self- life, marginal

costing method is required to know the contribution and minimum price at which it

can be sold.

(v) Knowing the production process: A good costing system can never be

established without the complete knowledge of the production process. Cost

apportionment can be done on the most appropriate and scientific basis if a cost

accountant can identify degree of effort or resources consumed in a particular

process. This also includes some basic technical know-how and process peculiarity.

(vi) Information synchronisation: Establishment of a department or a system requires

substantial amount of organisational resources. While drafting a costing system,

information needs of various other departments should be taken into account. For

example, in a typical business organisation accounts department needs to submit

monthly stock statement to its lender bank, quantity wise stock details at the time

filing returns to tax authorities etc.



(vii) Method of maintenance of cost records: The manner in which Cost and Financial

accounts could be inter-locked into a single integral accounting system and in which

results of separate sets of accounts, cost and financial, could be reconciled by

means of control accounts.

(viii) Statutory compliances and audit: Records are to be maintained to comply with

statutory requirements, standards to be followed (Cost Accounting Standards and

Accounting Standards).

(ix) Information Attributes: Information generated from the Costing system should be

possess all the attributes of an information i.e. complete, accurate, timeliness,

confidentiality etc. This also meets the requirements of management information

system.

(c) The points of distinction between Funds flow and Cash flow are as below:

Funds flow Cash flow

(i) It ascertains the changes in financial position between two accounting periods.

(i) It ascertains the changes in balance of cash in hand and bank.

(ii) It analyses the reasons for change in financial position between two balance sheets

(ii) It analyses the reasons for changes in balance of cash in hand and bank

(iii) It reveals the sources and application of finds.

(iii) It shows the inflows and outflows of cash.

(iv) It helps to test whether working capital has been effectively used or not.

(iv) It is an important tool for short term analysis.

(v) The two significant areas of analysis are cash generating efficiency and free cash flow.

(d) Distinguish between ‘Profit Maximization’ and ‘Wealth Maximization’ : Profit

maximisation is a short-term objective and cannot be the sole objective of a company. It

is at best a limited objective. If profit is given undue importance, a number of problems

can arise like the term profit is vague, profit maximisation has to be attempted with a

realisation of risks involved, it does not take into account the time pattern of returns and

as an objective it is too narrow.

Whereas, on the other hand, wealth maximisation, as an objective, means that the

company is using its resources in a good manner. If the share value is to stay high, t he

company has to reduce its costs and use the resources properly. If the company follows

the goal of wealth maximisation, it means that the company will promote only those

policies that will lead to an efficient allocation of resources.



Question 6

(a) You are given the following data of a manufacturing concern:

`

Variable Expenses (at 50% capacity):

Materials 48,00,000

Labour 51,20,000

Others 7,60,000

Semi variable expenses (at 50% capacity):

Maintenance and Repairs 5,00,000

Indirect Labour 19,80,000

Sales Dept. Salaries 5,80,000

Sundry Administrative Expenses 5,20,000

Fixed Expenses:

Wages & Salaries 16,80,000

Rent, Rates and Taxes 11,20,000

Depreciation 14,00,000

Sundry Administrative Exp. 17,80,000

The fixed expenses remain constant for all levels of production. Semi variable expenses

remain constant between 45% and 65% of capacity whereas it increases by 10%

between 65% and 80% capacity of 20% between 80% and 100 % capacity.

Sales at various levels are as under:

Capacity Sales (`)

75% 2,40,00,000

100% 3,20,00,000

Prepare flexible budget at 75% and 100% capacity. (8 Marks)

(b) X Limited is considering to purchase of new plant worth ` 80,00,000. The expected net

cash flows after taxes and before depreciation are as follows:

Year Net Cash Flows (`)

1 14,00,000

2 14,00,000

3 14,00,000



4 14,00,000

5 14,00,000

6 16,00,000

7 20,00,000

8 30,00,000

9 20,00,000

10 8,00,000

The rate of cost of capital is 10%.


(i) Pay-back period

(ii) Net present value at 10 discount factor

(iii) Profitability index at 10 discount factor

(iv) Internal rate of return with the help of 10% and 15% discount factor

The following present value table is given for you:

Year Present value of ` 1 at

10% discount rate

Present value of ` 1 at

15% discount rate

1 .909 .870

2 .826 .756

3 .751 .658

4 .683 .572

5 .621 .497

6 .564 .432

7 .513 .376

8 .467 .327

9 .424 .284

10 .386 .247 (8 Marks)

Answer

(a) Preparation of Flexible Budget

Particulars Capacity Levels

50% (`) 75% (`) 100% (`)

A Sales Given 2,40,00,000 3,20,00,000

B. Costs:



(i) Variable Expenses:

Materials 48,00,000 72,00,000 96,00,000

Labour 51,20,000 76,80,000 1,02,40,000

Others 7,60,000 11,40,000 15,20,000

1,06,80,000 1,60,20,000 2,13,60,000

(ii) Semi-Variable Expenses:

Maintenance and Repairs 5,00,000 5,50,000 6,00,000

Indirect Labours 19,80,000 21,78,000 23,76,000

Sales Dept. salaries 5,80,000 6,38,000 6,96,000

Sundry Administrative Expenses

5,20,000 5,72,000 6,24,000

35,80,000 39,38,000 42,96,000

(iii) Fixed Expenses:

Wages & Salaries 16,80,000 16,80,000 16,80,000

Rent, Rates and Taxes 11,20,000 11,20,000 11,20,000

Depreciation 14,00,000 14,00,000 14,00,000

Sundry Administrative Expenses

17,80,000 17,80,000 17,80,000

59,80,000 59,80,000 59,80,000

Total Cost {(i) + (ii) + (iii)} 2,02,40,000 2,59,38,000 3,16,36,000

C. Profit/ (Loss) {(A) – (B)} (19,38,000) 3,64,000

At 75% and 100% capacity level, the semi-variable costs increased by 10% and 20%

respectively.

(b) (i) Calculation of Pay-back Period

Cash Outlay of the Project = ` 80,00,000

Total Cash Inflow for the first five years = ` 70,00,000

Balance of cash outlay left to be paid back in the 6 th year ` 10,00,000

Cash inflow for 6th year = 16,00,000

So the payback period is between 5 th and 6th years, i.e.,

10,00,0005 years +

16,00,000

`

`= 5.625 years or 5 years 7.5 months



(ii) Calculation of Net Present Value (NPV) @10% discount rate:

Year

Net Cash Inflow (`) Present Value at Discount Rate of 10%

Present Value (`)

(a) (b) (c) = (a)× (b)

1 14,00,000 0.909 12,72,600

2 14,00,000 0.826 11,56,400

3 14,00,000 0.751 10,51,400

4 14,00,000 0.683 9,56,200

5 14,00,000 0.621 8,69,400

6 16,00,000 0.564 9,02,400

7 20,00,000 0.513 10,26,000

8 30,00,000 0.467 14,01,000

9 20,00,000 0.424 8,48,000

10 8,00,000 0.386 3,08,800

97,92,200

Net Present Value (NPV) = Cash Outflow – Present Value of Cash Inflows

= ` 80,00,000 – ` 97,92,200 = 17,92,200

(iii) Calculation of Profitability Index @ 10% discount rate:

Profitability Index = Present Value of Cash inflows

Cost of the investment

= 97,92,200

80,00,000

`

`= 1.224

(iv) Calculation of Internal Rate of Return:

Net present value @ 10% interest rate factor has already been calculated in (ii)

above, we will calculate Net present value @15% rate factor.

Year

Net Cash Inflow (`) Present Value at Discount Rate of 15%

Present Value (`)

(a) (b) (c) = (a)× (b)

1 14,00,000 0.870 12,18,000

2 14,00,000 0.756 10,58,400

3 14,00,000 0.658 9,21,200



4 14,00,000 0.572 8,00,800

5 14,00,000 0.497 6,95,800

6 16,00,000 0.432 6,91,200

7 20,00,000 0.376 7,52,000

8 30,00,000 0.327 9,81,000

9 20,00,000 0.284 5,68,000

10 8,00,000 0.247 1,97,600

78,84,000

Net Present Value at 15% = ` 78,84,000 – ` 80,00,000 = ` -1,16,000

As the net present value @ 15% discount rate is negative, hence internal rate of

return falls in between 10% and 15%. The correct internal rate of return can be

calculated as follows:

IRR = L

L H

NPVL H L

NPV NPV

=

17,92,20010% 15% 10%

17,92,200 ( 1,16,000)

`

` `

= 17,92,200

10% 5%19,08,200

`

` = 14.7%

Question 7


(a) Discuss briefly the principles to be followed while taking credit for profit on incomplete

contract.

(b) State the difference between Cost Accounting and Management Accounting.

(c) Explain the meaning and advantages of Factoring.

(d) Explain:

(i) Time Value of Money

(ii) A.B.C. Analysis

(e) Explain GDR and ADR. (4 × 4 = 16 Marks)



Answer

(a) Principles to be followed while taking credit for profit on incomplete contracts:

The portion of profit to be credited to costing profit and loss account depends on the

stage of completion of a contract. The stage of completion of the contract refers to

certified work only and uncertified work is not considered.

The transfer of profit to the costing profit and loss account is done as under:

(i) Contract less than 25% complete: If the contract has just started or it is less than

25% complete, no profit is taken into account.

(ii) Contract is 25% or more but less than 50% complete: In this case one third of the

notional profit reduced in the ratio of cash received to work certified, may be

transferred to the profit and loss account. The amount of profit to be transferred to

the profit and loss account may be determined by using the following formula:

3

1× Notional profit ×

certifiedWork

receivedCash

(iii) Contract is 50% or more but less than 90% complete: In this case, two third of the

notional profit, reduced by the portion of cash received to work certified may be

transferred to the profit and loss account. In this case the formula to be used is as

under:

3

2× Notional profit ×

certifiedWork

receivedCash

(iv) Contracts nearing completion, say between 90% and 100% complete: When a

contract is nearing completion or 90% or more work has been done on a contract.

The amount of profit to be credited to costing profit and loss account may be

determined by using any one of the following formula.

(a) Estimated profit × priceContract

certifiedWork

(b) Estimated profit × priceContract

certifiedWork ×

certifiedWork

receivedCash

or Estimated profit × CashReceived

Contract price

(c) Estimated Profit × tcostotalEstimated

datetoworkofCost



(d) Estimated profit ×certifiedWork

receivedCash

costtotalEstimated

datetoworkofCost

(e) Notional profit × priceContract

certifiedWork

(b) Difference between Cost Accounting and Management Accounting

Basis Cost Accounting Management Accounting

(i) Nature

It records the quantitative aspect only

It records both qualitative and quantitative aspect.

(ii) Objective

It records the cost of producing a product and providing a service

It Provides information to management for planning and co-ordination

(iii) Area

It only deals with cost Ascertainment.

It is wider in scope as it includes F.A., budgeting, Tax, Planning.

(iv) Recording of data

It uses both past and present figures.

It is focused with the projection of figures for future.

(v) Development

It’s development is related to industrial revolution.

It develops in accordance to the need of modern business world.

(vi) Rules and Regulation

It follows certain principles and procedures for recording costs of different products

It does not follow any specific rules and regulations.

(c) Meaning of Factoring: Factoring is a specialised service related with receivable

management which involves credit investigation, sales ledger management, purchase

and collection of debts, credit protection as well as provision of finance against

receivables. In factoring, accounts receivables are generally sold to a financial institution,

known as factor, who charges commission and bears the credit risks associated with the

accounts receivables purchased by it.

The factor takes the responsibility of monitoring, follow-up, collection and risk

management related with receivables (debts).

Advantages of Factoring:

(1) The firm can convert accounts receivables into cash without bothering about

repayment.

(2) Factoring ensures a definite pattern of cash inflows.



(3) Continuous factoring virtually eliminates the need for the credit department. That is

why receivables financing through factoring is gaining popularly as useful source of

financing short-term funds requirements of business enterprises because of the

inherent advantage of flexibility it affords to the borrowing firm. The seller firm may

continue to finance its receivables on a more or less automatic basis. If sales

expand or contract it can vary the financing proportionally.

(4) Unlike an unsecured loan, compensating balances are not required in this case.

Another advantage consists of relieving the borrowing firm of substantially credit

and collection costs and to a degree from a considerable part of cash management.

(d) (i) Time Value of Money: It means money has time value. A rupee today is more

valuable than a rupee after a year. Similarly, a rupee received in future is less

valuable than it is today. Time value of money can be of two types, present value of

money and future value of money. Concept of discounting is applicable to present

value of money and compounding is applicable to future value of money. In a

nutshell, time value of money represents monetary value arising out of difference of

time.

(ii) ABC Analysis: It is a system of selective inventory control whereby the measure of

control over an item of inventory varies with its usage value. It exercises

discriminatory control over different items of stores grouped on the basis of the

investment involved. Usually the items of material are grouped into three categories

viz; A, B and C according to their use value during a period. In other words, the high

use value items are controlled more closely than the items of low use value.

(i) 'A' Category of items consists of only a small percentage i.e., about 10 % of

the total items of material handled by the stores but require heavy investment

i.e., about 70% of inventory value, because of their high prices and heavy

requirement.

(ii) 'B' Category of items comprises of about 20% of the total items of material

handled by stores. The percentage of investment required is about 20% of the

total investment in inventories.

(iii) 'C category of items does not require much investment. It may be about 10% of

total inventory value but they are nearly 70% of the total items handled by

stores

(e) Global Depository Receipts (GDRs): It is a negotiable certificate denominated in

US dollars which represents a Non-US company’s publically traded local currency equity shares. GDRs are created when the local currency shares of an Indian

company are delivered to Depository’s local custodian Bank against which the

Depository bank issues depository receipts in US dollars. The GDRs may be traded

freely in the overseas market like any other dollar-expressed security either on a



foreign stock exchange or in the over-the-counter market or among qualified

institutional buyers.

American Depository Receipts (ADRs): American Depository Receipts (ADRs)

are securities offered by non- US companies who want to list on any of the US

exchanges. It is a derivative instrument. It represents a certain number of

company’s shares. These are used by depository bank against a fee income. ADRs

allow US investors to buy shares of these companies without the cost of investing

directly in a foreign stock exchange. ADRs are listed on either NYSE or NASDAQ. It

facilitates integration of global capital markets. The company can use the ADR route

either to get international listing or to raise money in international capital market.









Question 1


(a) The following figures are available from the records of ABC Company as at 31st March.

2015 (` in lakhs) 2016 (` in lakhs)

Sales 200 250

Profit 30 45

Calculate:

(i) The P/V ratio and total fixed expenses.

(ii) The break-even level of sales.

(iii) Sales required to earn a profit of ` 70 lakhs.

(b) Supreme Limited is a manufacturer of energy saving bulbs. To manufacture the finished

product one unit of component ‘LED’ is required. Annual requirement of component ‘LED’

is 72,000 units, the cost being ` 300 per unit. Other relevant details for the year 2015-

2016 are:

Cost of placing an order : ` 2,250

Carrying cost of inventory : 12% per annum

Lead time-

Maximum : 20 days

Minimum : 8 days

Average : 14 days

Emergency purchase : 5 days

Consumption-

Maximum : 400 units per day

Minimum : 200 units per day

Average : 300 units per day




(i) Re-order quantity

(ii) Re-ordering level

(iii) Minimum stock level

(iv) Maximum stock level

(v) Danger level

(c) ABC Company’s equity share is quoted in the market at ` 25 per share currently. The

company pays a dividend of ` 2 per share and the investor’s market expects a growth

rate of 6% per year.

You are required to:

(i) Calculate the company’s cost of equity capital.

(ii) If the anticipated growth rate is 8% per annum, calculate the indicated market price

per share.

(iii) If the company issues 10% debentures of face value of ` 100 each and realises

` 96 per debenture while the debentures are redeemable after 12 years at a

premium of 12%, what will be the cost of debenture?

Assume Tax Rate to be 50%.

(d) The following information is related to YZ Company Ltd. for the year ended 31st March,

2016:

Equity share capital (of ` 10 each) ` 50 lakhs

12% Bonds of ` 1,000 each ` 37 lakhs

Sales ` 84 lakhs

Fixed cost (excluding interest) ` 6.96 lakhs

Financial leverage 1.49

Profit-volume Ratio 27.55%

Income Tax Applicable 40%


(i) Operating Leverage;

(ii) Combined leverage; and

(iii) Earnings per share.

Show calculations upto two decimal points. (5 × 4 = 20 Marks)



Answer

(a) (i) Profit-Volume (P/V) Ratio:

= Change in Pr ofit

100Change inSales

× = Pr ofit in2016 Pr ofit in2015

100Sales in2016 Sales in2015

−×

−

= 45lakhs 30lakhs

100 250lakhs 200lakhs

−×

−` `

` `= 30%

Fixed Expenses:

2015 (` in lakhs) 2016 (` in lakhs)

Contribution 60

(30% of 200)

OR 75

(30% of 250)

Less: Profit 30 45

Fixed Expenses 30 30

(ii) Break-even level of sales:

=Fixed Expenses

P / V ratio=

30lakh

30%

`= ` 100 lakhs

(iii) Sales required to earn a profit of ` 70 lakhs:

= FixedExpenses Desiredprofit

P / V ratio

+

= 30lakhs 70lakhs

30%

+` `= ` 333.33 lakhs

(b) (i) Re- order Quantity (ROQ)

Annual Consumption of raw material (A) = 72,000 units

Cost of placing an order (O) = ` 2,250

Carrying cost per unit per annum (c × i) = ` 300 × 12% = ` 36

Economic Order Quantity (EOQ)/ROQ = 2AO

c × i

= 2 × 72,000 units × 2,250

36

`

`

= 3,000 units



(ii) Re-order level (ROL) = Maximum consumption × Maximum lead time

= 400 units × 20 days = 8,000 units

(iii) Minimum Level = ROL – (Average consumption × Average lead time)

= 8,000 units – (300 units × 14 days)

= 3,800 units

(iv) Maximum Level = ROL + ROQ – (Minimum consumption × Minimum lead time)

= 8,000 units + 3,000 units – (200 units × 8 days)

= 9,400 units

(v) Danger level = Average Consumption × Emergency Delivery Time

= 300 units × 5 days = 1,500 units

Or,

= Minimum consumption × Emergency Delivery Time

= 200 units × 5 days = 1,000 units.

(c) (i) Cost of Equity Capital (Ke):

Ke = 1

0

Expecteddividendper share (D )Growthrate (g)

Market priceper share (P )+

= 2 1.06

0.06 25

×+

`

`= 0.1448 or 14.48%

Note: The cost of equity can be calculated without taking the effect of growth on dividend.

(ii) Indicated market price per share when growth rate is 8% p.a.:

Ke = 1

0

Expecteddividendper share (D )Growthrate (g)

Market priceper share (P )+

Or

P0 = 1

e

Expecteddividendper share (D )

Cost of equity (K ) Growthrate (g)−

P0 = 2 1.08

0.1448 0.08

×−

` Or, P0 =

2.16

0.0648

`= ` 33.33



(iii) Cost of Debenture (Kd):

(Using approximation method)

Kd =

RV NPInterest (1 tax rate)

12years

RV NP

2

−− +

+

Where, Tax rate = 50%

Net Proceeds (NP) = ` 96

Redeemable Value (RV) = ` 100 (1.12) = ` 112

Kd =

112 9610% of 100(1 0.5)

12 years

112 96

2

−− +

+

` ``

` `

Kd = 5 1.33

104

+`

`= 0.0608 or 6.08%

OR

(Using Present Value method or YTM)

Identification of relevant cash flows

Year Cash flows

0 Current market price (P0) = ` 96

1 to 12 Interest net of tax [I(1-t)] = 10% of ` 100 (1 – 0.5) = ` 5

12 Redemption value (RV) = ` 100 (1.12) = ` 112

Calculation of Net Present Values (NPV) at two discount rates

Year Cash flows

Discount factor @

5%(L)

Present Value

Discount factor @ 10% (H)

Present Value

0 96 1.000 (96.00) 1.000 (96.00)

1 to 12 5 8.863 44.32 6.814 34.07

12 112 0.557 62.38 0.319 35.73

NPV +10.7 -26.2



Calculation of IRR

IRR = ( )L

L H

NPVL H L

NPV NPV+ −

−

= ( )10.75% 10% 5%

10.7 ( 26.2)+ −

− −=

53.55%

36.9+ = 6.45%

Therefore, Kd = 6.45%

[Any other low and high rate as discount factor may also be used.]

(d) Computation of Profits after Tax (PAT)

Particulars Amount (`)

Sales 84,00,000

Contribution (Sales × P/V ratio) 23,14,200

Less: Fixed cost (excluding Interest) (6,96,000)

EBIT (Earnings before interest and tax) 16,18,200

Less: Interest on debentures (12% × `37 lakhs) (4,44,000)

Less: Other fixed Interest (balancing figure) (88,160)*

EBT (Earnings before tax) 10,86,040

Less: Tax @ 40% 4,34,416

PAT (Profit after tax) 6,51,624

(i) Operating Leverage:

= Contribution

EBIT=

23,14,200

16,18,200

`

`= 1.43

(ii) Combined Leverage:

= Operating Leverage × Financial Leverage

= 1.43 × 1.49 = 2.13

Or,

Combined Leverage =Contribution EBIT

×EBIT EBT

Contribution 23,14,200

Combined Leverage = = = 2.13EBT 10,86,040

`

`



*Financial Leverage = EBIT

EBT =

16,18,200

EBT

` = 1.49

So, EBT = 16,18,200

1.49

` = `10,86,040

Accordingly, other fixed interest

= ` 16,18,200 - ` 10,86,040 - ` 4,44,000 = ` 88,160

(iii) Earnings per share (EPS):

= PAT

No.of sharesoutstanding=

6,51,624

5,00,000 equity shares

`= ` 1.30

Question 2

(a) A company has introduced a new product and marketed 20,000 units. Variable cost of

the product is ` 20 per units and fixed overheads are ` 3,20,000.


(i) Calculate selling price per unit to earn a profit of 10% on sales value, BEP and

Margin of Safely?

(ii) If the selling price is reduced by the company by 10%, demand is expected to

increase by 5,000 units, then what will be its impact on Profit, BEP and Margin of

Safety?

(iii) Calculate Margin of Safety if profit is ` 64,000. (8 Marks)

(b) The following figures and ratios pertain to ABG Company Limited for the year ending 31st

March, 2016:

Annual Sales (credit) ` 50,00,000


Fixed assets turnover ratio (based on cost of goods sold) 1.5

Stock turnover ratio (based on cost of goods sold) 6

Quick ratio 1 : 1

Current ratio 1.5

Debtors collection period 45 days

Reserves and surplus to Share Capital 0.60 : 1

Capital gearing ratio 0.5

Fixed Assets to net worth 1.2 : 1



You are required to prepare the Balance Sheet as at 31st March, 2016 based on the

above information. Assume 360 days in a year. (8 Marks)

Answer

(a) (i) Let ‘S’ be the selling price per unit, the equation can be written as:

Sales value = Variable Cost + Fixed Cost + Profit

Or, 20,000 units × S = (` 20 × 20,000 units) + `v3,20,000 + (10% of 20,000 units × S)

Or, 20,000S = ` 4,00,000 + ` 3,20,000 + 2,000S

Or, 20,000S – 2,000S = ` 7,20,000

Or, S = ` 40.

Therefore, Selling price per unit = ` 40

Break-even Point (in units):

= FixedOverheads

Contributionper unit=

3,20,000

40 20−`

` `= 16,000 units

Or,

Break-even point (in value):

P/V ratio = Contributionper unit

Selling price per unit=

40 20

40

−` `

`= 50%

Break-even point (in value) = FixedOverheads

P / VRatio=

3,20,000

50%

`= ` 6,40,000

Margin of Safety:

= Total sales value – Break-even sale = ` 40 × 20,000 – ` 6,40,000

= ` 1,60,000 or 4,000 Units (20,000 Units – 16,000 Units)

Or,

Margin of Safety = Pr ofit

P / VRatio=

10%( 40 20,000units)

50%

×` = ` 1,60,000

(ii) Workings:

Profitability Statement

Amount (`)

Sales Value (` 36 × 25,000 units) 9,00,000

Variable Cost (` 20 × 25,000 units) (5,00,000)



Contribution 4,00,000

Fixed overheads (3,20,000)

Profit 80,000

Impact on Profit:

Though there is no impact on the total profit amount but the rate of profit is

decreased from 10% to 8.89% (80,000/ 9,00,000 × 100).

Break-even point (BEP) (in units):

= 3,20,000

36 20−`

` `= 20,000 units

Or,

Break-even point (BEP) (in value):

= Selling price per unit × BEP = ` 36 × 20,000 units = ` 7,20,000

Impact on Break-even point (BEP) :

The Break-even point is increased by 4,000 units (20,000 units – 16,000 units) or by

` 80,000 (` 7,20,000 – ` 6,40,000).

Impact on Margin of Safety:

= Total sales value – Break-even sale

= ` 9,00,000 – ` 7,20,000 = ` 1,80,000

Margin of safety is increased by ` 20,000 (1,80,000 – 160,000) or 1,000 units

(5,000 units – 4,000 units)

(iii) Margin of Safety when, profit is ` 64,000:

= Pr ofit

P / VRatio=

64,000

50%

` = ` 1,28,000 or 3,200 units

(b) Working Notes:

(i) Cost of Goods Sold = Sales – Gross Profit (28% of Sales)

= ` 50,00,000 – ` 14,00,000

= ` 36,00,000

(ii) Closing Stock = Cost of Goods Sold / Stock Turnover

= ` 36,00,000/6 = ` 6,00,000

(iii) Fixed Assets = Cost of Goods Sold / Fixed Assets Turnover

= ` 36,00,000/1.5 = ` 24,00,000



(iv) Current Assets : Current Ratio

= 1.5 and Liquid Ratio = 1

Stock = 1.5 – 1 = 0.5

Current Assets = Amount of Stock × 1.5/0.5

= ` 6,00,000 × 1.5/ 0.5 = ` 18,00,000

(v) Liquid Assets (Debtors and Cash & Cash equivalents)

= Current Assets – Stock

= `18,00,000 – ` 6,00,000

= `12,00,000

(vi) Debtors = Sales × Debtors Collection Period(days) /360 days

= 45

50,00,000 ×360

` = ` 6,25,000

(vii) Cash & Cash equivalents

= Liquid Assets – Debtors

= `12,00,000 – ` 6,25,000 = ` 5,75,000

(viii) Net worth = Fixed Assets / 1.2

= ` 24,00,000/1.2 = ` 20,00,000

(ix) Reserves and Surplus

Reserves & Surplus and Share Capital = 0.6 + 1 = 1.6

Reserves and Surplus = ` 20,00,000 × 0.6/1.6 = ` 7,50,000

(x) Share Capital = Net worth – Reserves and Surplus

= ` 20,00,000 – ` 7,50,000

= `12,50,000

(xi) Current Liabilities = Current Assets / Current Ratio

= `18,00,000/1.5 = `12,00,000

(xii) Long- term Debts

Capital Gearing Ratio = Long-term Debts / Equity Shareholders’ Fund (Net worth)

Or, Long-term Debts = ` 20,00,000 × 0.5 = `10,00,000



Balance Sheet as at 31st March, 2016

Liabilities Amount (`) Assets Amount (`)

Equity Share Capital 12,50,000 Fixed Assets 24,00,000

Reserves and Surplus 7,50,000 Current Assets:

Long-term Debts 10,00,000 Stock 6,00,000

Current Liabilities 12,00,000 Debtors 6,25,000

Cash & Cash eq. 5,75,000 18,00,000

42,00,000 42,00,000

Question 3

(a) The Trading and Profit and Loss Account of a company for the year ended 31-03-2016 is

as under:

Trading and Profit and Loss Account

` `

To Materials 26,80,000 By Sales (50,000 units) 62,00,000

To Wages 17,80,000 By Closing Stock (2,000 units) 1,50,000

To Factory Expenses 9,50,000 By Dividend received 20,000

To Administrative Expenses 4,80,200

To Selling Expenses 2,50,000

To Preliminary Expenses written off

50,000


63,70,000 63,70,000

In the Cost Accounts:

(i) Factory expenses have been allocated to production at 20% of Prime Cost.

(ii) Administrative expenses absorbed at 10% of factory cost.

(iii) Selling expenses charged at ` 10 per unit sold.

Prepare the Costing Profit and Loss Account of the company and reconcile the

Profit/Loss with the profit as shown in the Financial Accounts. (8 Marks)

(b) India Limited requires ` 50,00,000 for a new plant. This Plant is expected to yield

earnings before interest and taxes of ` 10,00,000. While deciding about the financial

plan, the company considers the objective of maximising earnings per share. It has three

alternatives to finance the project- by raising debt of ` 5,00,000 or ` 20,00,000 or

` 30,00,000 and the balance, in each case, by issuing equity shares. The company’s



share is currently selling at ` 150, but is expected to decline to ` 125 in case the funds

are borrowed in excess of ` 20,00,000. The funds can be borrowed at the rate of 9

percent upto ` 5,00,000, at 14 percent over ` 5,00,000 and upto ` 20,00,000 and at 19

percent over ` 20,00,000. The tax rate applicable to the company is 40 percent. Which

form of financing should company choose? Show EPS Amount upto two decimal points.

(8 Marks)

Answer

(a) Workings:

Preparation of Cost Sheet/ Cost Statement


Materials 26,80,000

Wages 17,80,000

Prime Cost 44,60,000

Add: Factory expenses (20% of ` 44,60,000) 8,92,000

Factory Cost 53,52,000

Add: Administrative expenses (10% of ` 53,52,000) 5,35,200

Cost of Production 58,87,200

Less: Closing Stock58,87,200

2,000units52,000units

×

` (2,26,431)

Cost of Goods Sold 56,60,769

Add: Selling expenses (`10 × 50,000 units) 5,00,000

Cost of Sales 61,60,769

Profit (Balancing figure) 39,231

Sales Value 62,00,000

(It has been assumed that administrative expenses are related with production activities)

Costing Profit and Loss Account

Particulars Amount (`) Particulars Amount (`)

To Materials 26,80,000 By Sales 62,00,000

To Wages 17,80,000 By Closing stock 2,26,431

To Factory expenses 8,92,000



To Administrative expenses 5,35,200

To Selling expenses 5,00,000

To Profit (Balancing figure) 39,231

64,26,431 64,26,431

Reconciliation of profit as per Cost Accounts and as per Financial Accounts


Profit as per Cost Accounts 39,231

Additions:

Administrative expenses (Over-absorbed) (` 5,35,200 – `4,80,200) 55,000

Selling expenses (Overcharged) (` 5,00,000 – ` 2,50,000) 2,50,000

Dividend received 20,000

3,64,231

Deductions:

Factory expenses (Under -absorbed) (` 9,50,000 – 8,92,000) 58,000

Closing stock (Over-valued) (`2,26,431 – ` 1,50,000) 76,431

Preliminary expenses written off 50,000

1,84,431

Profit as per Financial Accounts 1,79,800

(Reconciliation statement may also be prepared by taking financial profit as base.)

(b) Calculation of Earnings per share (EPS):

Particulars

Financing Plans

Plan I Plan II Plan III

(`) (`) (`)

Debt 5,00,000 20,00,000 30,00,000

Equity 45,00,000 30,00,000 20,00,000

Expected Earnings before interest and taxes (EBIT) 10,00,000 10,00,000 10,00,000

Less: Interest [WN (i)] (45,000) (2,55,000) (4,45,000)

Earnings before taxes (EBT) 9,55,000 7,45,000 5,55,000

Less: Taxes @ 40% 3,82,000 2,98,000 2,22,000

Earnings after taxes (EAT) 5,73,000 4,47,000 3,33,000



Number of shares [WN (ii)] 30,000 20,000 16,000

Earnings per share (EPS) [ EAT / No of Shares] 19.10 22.35 20.81

Financing Plan II (i.e. Raising debt of ` 20 lakhs and issue of equity share capital of

` 30 lakhs) is the option which maximises the earnings per share.

Working Notes (WN):

(i) Calculation of interest on Debt.

Plan I ` 5,00,000 × 9% ` 45,000

Plan II ` 5,00,000 × 9% ` 45,000

` 15,00,000 × 14% ` 2,10,000 ` 2,55,000

Plan III ` 5,00,000 × 9%

` 15,00,000 × 14%

` 10,00,000 × 19%

` 45,000

` 2,10,000

` 1,90,000

` 4,45,000

Note: Instead of slab, the relevant interest rate can be applied on total amount.

(ii) Number of equity shares to be issued

Plan I:

45,00,000= 30,000

150 (Market price of share)

`

`shares

Plan II: 30,00,000

= 20,000 150 (Market Price of Share)

`

`shares

Plan III:

20,00,000= 16,000 shares

125 (Revised Market Price of Share)

`

`

Question 4

(a) Royal transport company has been given a 50 kilometre long route to run 6 buses. The

cost of each bus is ` 7,50,000. The buses will make 3 round trips per day carrying on an

average 75 percent passengers of their seating capacity. The seating capacity of each

bus is 48 passengers. The buses will run on an average 25 days in a month. The other

information for the year 2016-17 is given below:

Garage Rent ` 6,000 per month

Annual Repairs & Maintenance ` 24,000 each bus

Salaries of 6 drivers ` 4,000 each per month

Wages of 6 conductors ` 1,600 each per month

Wages of 6 cleaners ` 1,000 each per month



Manager’s salary ` 10,000 per month

Road Tax, Permit fee, etc. ` 6,000 for a quarter

Office expenses ` 2,500 per month

Cost of diesel per litre ` 66

Kilometer run per litre for each bus 6 kilometres

Annual Depreciation 20% of cost

Annual Insurance 4% of cost

Engine oils & lubricants (for 1,000 kilometres) ` 2,000

You are required to calculate the bus fare to be charged from each passenger per

kilometer (upto four decimal points), if the company wants to earn profit of 333

1 percent

on taking (total receipts from passengers). (8 Marks)

(b) Following information relates to ABC company for the year 2016:

(i) Projected sales: (` in lakhs)

Month August September October November December

Sale 35 40 40 45 46

(ii) Gross profit margin will be 20% on sale.

(iii) 10% of projected sale will be cash sale. Out of credit sale of each month, 50% will

be collected in the next month and the balance will be collected during the second

month following the month of sale.

(iv) Creditors will be paid in the first month following credit purchase. There will be

credit purchase only.

(v) Wages and salaries will be paid on the first day of the next month. The amount will

be ` 3 lakhs each month.

(vi) Interim dividend of ` 2 lakhs will be paid in December 2016.

(vii) Machinery costing ` 10 lakhs will be purchased in September 2016. Repayment by

instalment of ` 50,000 p.m. will start from October 2016.

(viii) Administrative expenses of ` 1,00,000 per month will be paid in the month of their

incurrence.

(ix) Assume no minimum cash balance is required. Opening cash balance as on 01-10-

2016 is estimated at ` 10 lakhs.

You are required to prepare the monthly cash budget for the 3 month period (October

2016 to December 2016). (8 Marks)



Answer

(a) Working Notes:

1. Total Kilometres to be run during the year 2016-17

= 50 km.× 2 sides × 3 trips × 25 days × 12 months × 6 buses = 5,40,000 Kilometres

2. Total passenger Kilometres

= 5,40,000 km. × 48 passengers × 75% = 1,94,40,000 Passenger- km.

Operating Cost Sheet for the year 2016- 17

Particulars Total Cost (`)

A. Fixed Charges:

Garage rent (` 6,000 × 12 months) 72,000

Salary of drivers (` 4,000 × 6 drivers ×12 months) 2,88,000

Wages of Conductors (` 1,600 × 6 conductors × 12 months) 1,15,200

Wages of Cleaners (` 1,000 × 6 cleaners × 12 months) 72,000

Manager’s salary (`10,000 × 12 months) 1,20,000

Road Tax, Permit fee, etc. (` 6,000 × 4 quarters) 24,000

Office expenses (` 2,500 × 12 months) 30,000

Depreciation (` 7,50,000 × 6 buses × 20%) 9,00,000

Insurance (` 7,50,000 × 6 buses × 4%) 1,80,000

Total (A) 18,01,200

B. Variable Charges:

Repairs and Maintenance (` 24,000 × 6 buses) 1,44,000

Diesel {(5,40,000 km. ÷ 6 km.) × ` 66} 59,40,000

Engine oils & lubricants {(` 2000. ÷ 1000 km.) × 5,40,000 km} 10,80,000

Total (B) 71,64,000

Total Cost (A+B) 89,65,200

Add: 33 1/3 % Profit on takings or 50% on cost 44,82,600

C. Total Takings (Total bus fare collection) 1,34,47,800

D. Total Passenger-km. (Working Note 2) 1,94,40,000

E. Bus fare to be charged from each passenger per km. (C ÷ D) 0.6918

Operating cost sheet can also be calculated for (i) six buses per month, (ii) per bus

per annum and (iii) per bus per month. However, the final answer will remain same.



(b) Cash Budget for the months of October 2016 to December 2016 (Amount in lakhs)

Particulars October (`) November (`) December (`)

(i) Opening cash balance 10.00 14.25 21.25

(ii) Cash Sale 4.00

(10% of 40)

4.50

(10% of 45)

4.60

(10% of 46)

(iii) Cash collection for credit sale:

- For August sale 15.75

(35× 90% × 50%)

- -

- For September sale 18.00

(40× 90% × 50%)

18.00

(40× 90% × 50%)

-

-For October sale - 18.00

(40× 90% × 50%)

18.00

(40× 90% × 50%)

- For November sale - - 20.25

(45× 90% × 50%)

Total cash collection from credit sales (iii)

33.75 36.00 38.25

Total Cash inflow (A) 47.75 54.75 64.10

(iv) Payment to creditors:

- For September purchase 29.00

{(80% of ` 40)- 3}

- -

- For October purchase - 29.00

{(80% of ` 40)- 3}

-

- For November purchase - - 33.00

{(80% of ` 45)- 3}

Total of payment made to creditors (iv)

29 29 33

(v) Payment of wages & salaries

3.00 3.00 3.00

(vi) Interim Dividend - - 2.00

(vii) Instalment for machinery 0.50 0.50 0.50

(viii) Administrative expenses 1.00 1.00 1.00

Total Cash outflow (B) 33.50 33.50 39.50

Closing cash balance (A-B) 14.25 21.25 24.60



Question 5

Answer all four:

(a) Write short notes on:

(i) Sunk Cost

(ii) Opportunity Cost

(b) What is meant by “cost centre”? What are the different type of cost centres?

(c) List the emerging issues (any four) affecting the future role of CFO.

(d) State advantages of Debt. Securitisation. (4 × 4 = 16 Marks)

Answer

(a) (i) Sunk Cost: Historical costs incurred in the past are known as sunk costs. They play

no role in decision making in the current period. For example, in the case of a

decision relating to the replacement of a machine, the written down value of the

existing machine is a sunk cost and therefore, not considered.

(ii) Opportunity Cost: This cost refers to the value of sacrifice made or benefit of

opportunity foregone in accepting an alternative course of action. For example, a

firm financing its expansion plan by withdrawing money from its bank deposits. In

such a case the loss of interest on the bank deposit is the opportunity cost for

carrying out the expansion plan.

(b) It is defined as a location, person or an item of equipment (or group of these) for which

cost may be ascertained and used for the purpose of Cost Control.

Cost Centres are of two types:

Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor,

foreman, accountant, engineer, process staffs, mining staffs, doctors etc.

Impersonal Cost Centre: It consists of a location or an item of equipment (or group of

these) e.g. boiler house, cooling tower, weighing machine, canteen, and generator set

etc.

Cost Centres in a manufacturing concern are of two types:

Production Cost Centre: it is a cost centre where raw material is handled for conversion

into finished products. Here both direct and indirect expenses are incurred. Machine

shops, welding shops and assembly shops etc. are examples of production cost centres.

Service Cost Centre: It is a cost centre which serves as an ancillary unit to production

cost centre. Payroll processing department, HRD, Power house, Gas production shops,

Plant maintenance centres etc. are example of service cost centres.



(c) Emerging Issues/Priorities Affecting the Future Role of Chief Financial Officer

(CFO)

(i) Regulation: Regulation requirements are increasing and CFOs have an

increasingly personal stake in regulatory adherence.

(ii) Globalisation: The challenges of globalisation are creating a need for finance

leaders to develop a finance function that works effectively on the global stage and

that embraces diversity.

(iii) Technology: Technology is evolving very quickly, providing the potential for CFOs

to reconfigure finance processes and drive business insight through ‘big data’ and

analytics.

(iv) Risk: The nature of the risks that organisations face are changing, requiring more

effective risk management approaches and increasingly CFOs have a role to play in

ensuring an appropriate corporate ethos.

(v) Transformation: There will be more pressure on CFOs to transform their finance

functions to drive a better service to the business at zero cost impact.

(vi) Stakeholder Management: Stakeholder management and relationships will

become important as increasingly CFOs become the face of the corporate brand.

(vii) Strategy: There will be a greater role to play in strategy validation and execution,

because the environment is more complex and quick changing, calling on the

analytical skills CFOs can bring.

(viii) Reporting: Reporting requirements will broaden and continue to be burdensome for

CFOs.

(ix) Talent and Capability: A brighter spotlight will shine on talent, capability and

behaviours in the top finance role.

(d) Advantages of Debt Securitisation: Debt securitisation is a method of recycling of

funds and is especially beneficial to financial intermediaries to support lending volumes.

The advantages of debt securitisation are as follows:

(a) To the originator:

(i) The asset is shifted off the Balance Sheet, thus giving the originator recourse

to off balance sheet funding.

(ii) It converts illiquid assets to liquid portfolio.

(iii) It facilitates better balance sheet management; assets are transferred off

balance sheet facilitating satisfaction of capital adequacy norms.

(iv) The originator’s credit rating enhances.

(b) For the investors: Securitisation opens up new investment avenues. Though the

investor bears the credit risk, the securities are tied up to definite assets.



Question 6

(a) The following information is available from the cost records of a Company for the month

of July, 2016:

(1) Material purchased 22,000 pieces ` 90,000

(2) Material consumed 21,000 pieces

(3) Actual wages paid for 5,150 hours ` 25,750

(4) Fixed Factory overhead incurred ` 46,000

(5) Fixed Factory overhead budgeted ` 42,000

(6) Units produced 1,900

(7) Standard rates and prices are:

Direct material ` 4.50 per piece

Standard input 10 pieces per unit

Direct labour rate ` 6 per hour

Standard requirement 2.5 hours per unit

Overheads ` 8 per labour hour

You are required to calculate the following variances:

(i) Material price variance

(ii) Material usage variance

(iii) Labour rate variance

(iv) Labour efficiency variance

(v) Fixed overhead expenditure variance

(vi) Fixed overhead efficiency variance

(vii) Fixed overhead capacity variance. (8 Marks)

(b) Following is the capital structure of RBT Limited as on 31st March 2016:

Particulars Book Value (`) Market Value (`)

Equity Shares of ` 10 each 50,00,000 1,05,00,000

Retained earnings 13,00,000 -

11% Preference shares of ` 100 each 7,00,000 9,00,000

14% debentures of ` 100 each. 30,00,000 36,00,000

Market price of equity shares is ` 40 per share and it is expected that a dividend of ` 4

per share would be declared. The dividend per share is expected to grow at the rate of



8% every year. Income tax rate applicable to the company is 40% and shareholder’s

personal income tax rate is 20%.


(i) Cost of capital for each source of capital,

(ii) Weighted average cost of capital on the basis of book value weights,

(iii) Weighted average cost of capital on the basis of market value weights. (8 Marks)

Answer

(a) (i) Material price variance (on the basis of Single plan):

= Actual QuantityPurchased (Std. Price – Actual Price)

=22,000 pcs 90,000

4.5022,000pcs

−

`` = `9,000* (Favourable)

OR

Material price variance (on the basis of Partial plan):

= Actual Quantityconsumed (Std. Price – Actual Price)

= 21,000 pcs 90,000

4.5022,000pcs

−

`` = `8,591* (Favourable)

(*Figure may slightly differ due to rounding off the actual price per unit)

(ii) Material usage variance:

= Std. price per piece (Std. Quantity – Actual Quantityconsumed)

= `4.50 (1,900 units × 10 – 21,000) = ` 9,000 (Adverse)

(iii) Labour rate variance:

= Actual hours paid (Std. rate – Actual rate)

= 5,150 hours 25,750

65,150hours

−

`` = ` 5,150 (Favourable)

(iv) Labour efficiency variance:

= Std. rate per hour (Std. hours – Actual hoursworked)

= `6 (1,900 units × 2.5 hours – 5,150 hours) = ` 2,400 (Adverse)

(v) Fixed overhead expenditure variance:

= Budgeted Overhead – Actual Overhead

= ` 42,000 – ` 46,000 = ` 4,000 (Adverse)



(vi) Fixed overhead efficiency variance:

= Std. rate (Std. hours - Actual hours worked)

= `8 (1,900 units × 2.5 hours - 5,150 hours) = ` 3,200 (Adverse)

Or,

Fixed overhead efficiency variance on basis of units

= Std. rate per unit (Actual output – Standard output for actual hours)

= `20 (1,900 units - 5,150 / 2.5 hours) = ` 3,200 (Adverse)

(vii) Fixed overhead capacity variance:

= Std. rate (Actual hours worked – Budgeted hours)

= ` 8 42,000

5,150hours8

−

`

`= ` 800 (Adverse)

Or,

Fixed overhead capacity variances on basis of units

= Std. rate per unit (Standard output for actual hours – Budgeted output)

= `20 (2,060 units - 42,000 / 20) = ` 800 (Adverse)

(b) (i) Calculation of Cost of Capital for each source of capital:

(a) Cost of Equity share capital:

Ke = 0

0

D (1 g)g

Market Pr ice per share (P )

++ =

4(1 0.08)0.08

40

++

`

= 4.32

0.0840

+`

` = 0.188 or 18.8%

(b) Cost of Preference share capital (Kp) = 11%

(c) Cost of Debentures (Kd) = r (1 – t) = 14% (1 – 0.4) = 8.4%.

(d) Cost of Retained Earnings (Ks)= Ke (1 – tp) = 18.8 (1 – 0.2) = 15.04%

(ii) Weighted Average Cost of Capital (WACC) on the basis of book value weights

Source Amount (`) Weights After tax Cost of Capital (%)

WACC (%)

(a) (b) (c) = (a) × (b)

Equity share 50,00,000 0.50 18.80 9.40

Retained earnings 13,00,000 0.13 15.04 1.96

11% Preference share 7,00,000 0.07 11.00 0.77



14% Debentures 30,00,000 0.30 8.40 2.52

1,00,00,000 1.00 14.65

(iii) Weighted Average Cost of Capital (WACC) on the basis of market value weights

Source Amount (`) Weights After tax Cost of Capital (%)

WACC (%)

(a) (b) (c) = (a) × (b)

Equity share 1,05,00,000 0.70 18.80 13.16

11% Preference share 9,00,000 0.06 11.00 0.66

14% Debentures 36,00,000 0.24 8.40 2.016

1,50,00,000 1.000 15.836

Note: The cost of equity can be calculated without taking the effect of growth on dividend.

Accordingly WACC can be calculated.

Question 7


(a) What is meant by Job Costing? Give examples of (any four) industries where it is used.

(b) Give the method of costing and the unit of cost against the under noted industries:

(i) Road transport

(ii) Steel

(iii) Bicycles

(iv) Bridge construction

(c) Explain briefly the functions of Treasury Department.

(d) Explain the following:

(i) Bridge finance

(ii) Conversion cost

(e) Explain the relevance of time value of money. (4 × 4 = 16 Marks)

Answer

(a) Job Costing:

Meaning: It is a method of costing which is used when the work is undertaken as per

the customer’s special requirement. When an inquiry is received from the customer,

costs expected to be incurred on the job are estimated and on the basis of this estimate,

a price is quoted to the customer. Actual cost of materials, labour and overheads are

accumulated and on the completion of job, these actual costs are compared with the

quoted price and thus the profit or loss on it is determined.



Example: Job costing is applicable in printing press, ship-building, heavy machinery,

foundry, general engineering works, machine tools, interior decoration, repairs and other

similar work.

(b)

Industry Method of Costing Suggestive Unit of Cost

(i) Road Transport Operating Costing Passenger k.m. or tonne k.m.

(ii) Steel Process Costing/ Single or Unit Costing

Tonne/ Metric Ton (MT)/ per kg/ per bar

(iii) Bicycles Multiple Costing Number/ per piece

(iv) Bridge Construction Contract Costing Project/ Unit

(c) The functions of treasury department management are to ensure proper usage, storage

and risk management of liquid funds so as to ensure that the organisation is able to meet

its obligations, collect its receivables and also maximize the return on its investments.

Towards this end the treasury function may be divided into the following:

(i) Cash Management: The efficient collection and payment of cash both inside the

organisation and to third parties is the function of treasury department. Treasury

normally manages surplus funds in an investment portfolio.

(ii) Currency Management: The treasury department manages the foreign currency risk

exposure of the company. It advises on the currency to be used when invoicing

overseas sales. It also manages any net exchange exposures in accordance with the

company policy.

(iii) Fund Management: Treasury department is responsible for planning and sourcing

the company’s short, medium and long-term cash needs. It also participates in the

decision on capital structure and forecasts future interest and foreign currency

rates.

(iv) Banking: Since short-term finance can come in the form of bank loans or through

the sale of commercial paper in the money market, therefore, treasury department

carries out negotiations with bankers and acts as the initial point of contact with

them.

(v) Corporate Finance: Treasury department is involved with both acquisition and

disinvestment activities within the group. In addition, it is often responsible for investor

relations.

(d) (i) Bridge Finance: Bridge finance refers, normally, to loans taken by the business,

usually from commercial banks for a short period, pending disbursement of term

loans by financial institutions, normally it takes time for the financial institution to

finalise procedures for creation of security, tie-up participation with other institutions

etc. even though a positive appraisal of the project has been made. However, once

the loans are approved in principle, firms in order not to lose further time in starting



their projects arrange for bridge finance. Generally, rate of interest on bridge

finance is higher as compared with that on term loans.

(ii) Conversion cost: It is the cost of transforming basic material into finished goods

Conversion Cost consists of direct wages, direct expenses and manufacturing

overheads. So,

Conversion Cost= Direct labour Cost + Direct Expenses + Manufacturing Overhead

Or

Conversion Cost = Factory Cost – Direct Materials Cost

(e) Time value of money means that worth of a rupee received today is different from the

worth of a rupee to be received in future. The preference of money now as compared to

future money is known as time preference for money.

A rupee today is more valuable than rupee after a year due to several reasons:

♦ Risk − There is uncertainty about the receipt of money in future.

♦ Preference for present consumption − Most of the persons and companies in

general, prefer current consumption over future consumption.

♦ Inflation − In an inflationary period a rupee today represents a greater real

purchasing power than a rupee a year hence.

♦ Investment opportunities − Most of the persons and companies have a preference

for present money because of availabilities of opportunities of investment for

earning additional cash flow.

♦ Many financial problems involve cash flow accruing at different points of time for

evaluating such cash flow an explicit consideration of time value of money is

required.




Attempt any five questions from the remaining six questions.

Working notes should form part of the answers.

Question 1


(a) The following particulars refer to process used in the treatment of material subsequently,

incorporated in a component forming part of an electrical appliance:

(i) The original cost of the machine used (Purchased in June 2008) was ` 10,000. Its

estimated life is 10 years, the estimated scrap value at the end of its life is ` 1,000,

and the estimated working time per year (50 weeks of 44 hours) is 2,200 hours of

which machine maintenance etc., is estimated to take up 200 hours.

No other loss of working time expected, setting up time, estimated at 100 hours, is

regarded as productive time. (Holiday to be ignored).

(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9

paisa per unit. No current is taken during maintenance or setting up.

(iii) The machine required a chemical solution which is replaced at the end of week at a

cost of ` 20 each time.

(iv) The estimated cost of maintenance per year is ` 1,200.

(v) Two attendants control the operation of machine together with five other identical

machines. Their combined weekly wages, insurance and the employer's contribution

to holiday pay amount ` 120.

(vi) Departmental and general works overhead allocated to this machine for the current

year amount to ` 2,000.

You are required to calculate the machine hour rate of operating the machine.

(b) A dairy product company manufacturing baby food with a shelf life of one year furnishes

the following information:

(i) On 1st January, 2016, the company has an opening stock of 20,000 packets whose

variable cost is `180 per packet.

(ii) In 2015, production was 1,20,000 packets and the expected production in 2016 is

1,50,000 packets. Expected sales for 2016 is 1,60,000 packets.



(iii) In 2015, fixed cost per unit was ` 60 and it is expected to increase by 10% in 2016.

The variable cost is expected to increase by 25%. Selling price for 2016 has been

fixed at ` 300 per packet.

You are required to calculate the Break-even volume in units for 2016.

(c) (i) What is a sinking fund and how is it calculated ?

(ii) A company has purchased a plant for ` 10,00,000 with a useful life of 6 years. It

expects that ` 15,00,000 will be required to replace the plant after 6 years. To

ensure that money is available at the time of replacement, the company has created

a sinking fund.

You are required to determine the amount to be deposited annually, if the fund

earns interest at 8% per annum. Given CVFA0.08,6 = 7.336.

(d) A company had the following balance sheet as on 31st March, 2015

Liabilities Amount (`) Assets Amount (`)

Equity share capital of ` 10 each 40,00,000 Fixed Assets (Net) 1,28,00,000

Reserve & Surplus 8,00,000 Current Assets 32,00,000

15% Debentures 80,00,000

Current Liabilities 32,00,000

1,60,00,000 1,60,00,000

The additional information given is as under:

Fixed cost per annum (excluding interest) ` 32,00,000

Variable operating cost ratio 70%

Total assets turnover ratio 2.5

Income tax rate 30%

Calculate the following:

(i) Operating Leverage

(ii) Financial Leverage

(iii) Combined Leverage

(iv) Earning per share (5 × 4 = 20 Marks)

Answer

(a) Working Notes:

(i) Total Productive hours = Estimated Working hours – Machine Maintenance hours

= 2,200 hours – 200 hours = 2,000 hours



(ii) Depreciation per annum = 10,000 - 1,000

10years

` ` = ` 900

(iii) Chemical solution cost per annum = ` 20 × 50 weeks = ` 1,000

(iv) Wages of attendants (per annum) = ×120 50 weeks

6 machines

` = ` 1,000

Calculation of Machine hour rate

Particulars Amount (per annum)

Amount (per hour)

A. Standing Charge

(i) Wages of attendants 1,000

(ii) Departmental and general works overheads 2,000

Total Standing Charge 3,000

Standing Charges per hour 3,000

2,000

1.5

B. Machine Expense

(iii) Depreciation 900 0.45

(iv) Electricity

0.09×16units×1,900hours

2,000hours

`

- 1.37

(v) Chemical solution 1,000 0.50

(vi) Maintenance cost 1,200 0.60

Machine operating cost per hour (A + B) 4.42

(b) Working Notes:

Particulars 2015 (`) 2016 (`)

Fixed Cost 72,00,000

(` 60 × 1,20,000 units)

79,20,000

(110% of ` 72,00,000)

Variable Cost 180 225

(125% of ` 180)

Calculation of Break-even Point (in units):

Since, shelf life of the product is one year only, hence, opening stock is to be sold first.



(`)

Total Contribution required to recover total fixed cost in 2016 and to reach break-even volume.

79,20,000

Less: Contribution from opening stock

{20,000 units × (` 300 – ` 180)}

24,00,000

Balance Contribution to be recovered 55,20,000

Units to be produced to get balance contribution

= 55,20,000

300 225−`

` ` = 73,600 packets.

Break-even volume in units for 2016

Packets

From 2016 production 73,600

Add: Opening stock from 2015 20,000

93,600

(c) (i) It is the fund created for a specified purpose by way of sequence of periodic

payments over a time period at a specified interest rate. Size of the sinking fund is

calculated as follows:

FVA = R[FVIFA (i,n)]

Where, ‘FVA’ is the amount to be saved, ‘R’ is the periodic payment and ‘n’ the

payment period.

Alternatively, the sinking fund amount can be calculated by using following formula.

Maturity value of Sinking Fund = Sinking Fund deposit × n(1 i) 1

i

+ −

(ii) Amount to be deposited annually

= (8%,6years)

Future Value

CVFA=

15,00,000

7.336

` = ` 2,04,471.10

Alternatively, amount to be deposited can be calculated as follows:

Maturity value of Sinking Fund = Sinking Fund deposit × n(1 i) 1

i

+ −

15,00,000 = Sinking fund amount × (1+0.08)6 – 1 / 0.08

Sinking fund amount to be deposited = `2,04,464



(d) Workings:

Total Assets Turnover Ratio i.e. Sales

TotalAssets= 2.5

Since total Assets = ` 1,60,00,000

So, Sales = 2.5 × ` 1,60,00,000 = ` 4,00,00,000

Computation of Profit after tax (PAT/ EAT):


Sales Turnover 4,00,00,000

Less: Variable Cost (70% of ` 4,00,00,000) (2,80,00,000)

Contribution 1,20,00,000

Less: Fixed Costs (32,00,000)

Earnings Before Interest and Tax (EBIT) 88,00,000

Less: Interest on Debenture (15% of ` 80,00,000) (12,00,000)

Earnings Before Tax (EBT) 76,00,000

Less: Income Tax @30% (22,80,000)

Earnings After Tax (EAT or PAT) 53,20,000

(i) Operating Leverage = Contribution

EBIT =

1,20,00,000

88,00,000

`

` = 1.36

(ii) Financial Leverage = EBIT

EBT =

88,00,000

76,00,000

`

` = 1.16

(iii) Combined Leverage = Contribution

EBT =

1,20,00,000

76,00,000

`

` = 1.58

Or

Combined Leverage = Operating Leverage × Financial Leverage

= 1.36 × 1.16 = 1.58

(iv) Earning per share = PAT / EAT

No.of Shares=

53,20,000

4,00,000shares

`= ` 13.30

Question 2

(a) The following information is available from a company's records for March, 2016:



(a) Opening Balance of Creditors Account ` 25,000

(b) Closing Balance of Creditors Account ` 40,000

(c) Payment made to Creditors ` 5,80,000

(d) Opening Balance of Stores Ledger Control Account ` 40,000

(e) Closing Balance of Stores Ledger Control Account ` 65,000

(f) Wages paid (for 8000 hours) 20% relate to indirect workers ` 4,00,000

(g) Various indirect expenses incurred ` 60,000

(h) Opening balance of WIP control account ` 50,000

(i) Inventory of WIP at the end of the month includes material worth ` 35,000 on which 400 labour hours have been booked.

(j) Factory overhead is charged to production at budgeted rate based on direct labour hours.

(k) Budgeted overhead cost is ` 20,80,000 for budgeted direct labour hours 1,04,000.

You are required to prepare Creditors A/c, Stores Ledger Control A/c, WIP Control A/c,

Wages Control A/c and Factory Overhead Control A/c. (8 Marks)

(b) With the following ratios and further information given below prepare a Trading Account,

Profit and Loss Account and Balance Sheet of ABC Company.

Fixed Assets `40,00,000

Closing Stock `4,00,000

Stock turnover ratio 10

Gross profit ratio 25 percent

Net profit ratio 20 percent

Net profit to capital 1/5

Capital to total liabilities 1/2

Fixed assets to capital 5/4

Fixed assets/Total current assets 5/7

(8 Marks)

Answer

(a) Creditors A/c

Dr. Cr.


To Bank A/c 5,80,000 By Balance b/d 25,000



To Balance c/d 40,000 By Stores ledger control A/c

(Materials purchased)(Bal. figure)

5,95,000

6,20,000 6,20,000

Stores Ledger Control A/c

Dr. Cr.


To Balance b/d 40,000 By WIP control A/c

(Balancing figure)

5,70,000

To Creditors A/c

(Materials purchased)

5,95,000 By Balance c/d 65,000

6,35,000 6,35,000

Work-in-Process Control A/c

Dr. Cr.


To Balance b/d 50,000 By Finished goods control A/c

(Balancing figure)

10,05,000

To Stores ledger control A/c 5,70,000 By Balance c/d:

To Wages control A/c

(80% of ` 4,00,000)

3,20,000 - Material 35,000

63,000

- Labour

(` 50* × 400 hours)

20,000

- Factory Oh

(` 20** × 400 hours)

8,000

To Factory Overhead control A/c

1,28,000

10,68,000 10,68,000

* Direct Labour Hour Rate = ` 3,20,000/ 6,400 hours = ` 50

** Factory Overhead Rate = ` 20,80,000/ 1,04,000 = ` 20

Wages Control A/c

Dr. Cr.


To Bank A/c 4,00,000 By WIP control A/c

(80% of ` 4,00,000)

3,20,000



By Factory OH Control A/c

(20% of ` 4,00,000)

80,000

4,00,000 4,00,000

Factory Overhead Control A/c

Dr. Cr.


To Wages control A/c 80,000 By WIP control A/c

(` 20 × 6,400 hours)

1,28,000

To Bank A/c

(Indirect expenses)

60,000 By Balance c/d 12,000

1,40,000 1,40,000

(b) Workings:

(i) Fixed Assets 5

TotalCurrent Assets 7=

Or, Total Current Assets = ×40,00,000 7

5

`= ` 56,00,000

(ii) Fixed Assets 5

Capital 4= Or, Capital =

×40,00,000 4

5

`= ` 32,00,000

(iii) Capital 1

TotalLiabilities * 2= Or, Total liabilities = ` 32,00,000 × 2 = ` 64,00,000

*It is assumed that Total liabilities does not include capital.

(iv) NetPr ofit 1

Capital 5= Or, Net Profit = ` 32,00,000 × 1/5 = ` 6,40,000

(v) NetPr ofit 1

Sales 5= Or, Sales = ` 6,40,000 × 5 = ` 32,00,000

(vi) Gross Profit = 25% of ` 32,00,000 = ` 8,00,000

(vii) Stock Turnover = Cost of GoodsSold(i.e .Sales Grossprofit)

10AverageStock

−=

= −

=32,00,000 8,00,000

10AverageStock

` `



Or, Average Stock = ` 2,40,000 Or, +OpeningStock 4,00,000

2

` = ` 2,40,000

Or, Opening Stock = ` 80,000

Trading Account


To Opening Stock 80,000 By Sales 32,00,000

To Manufacturing exp./ Purchase

(Balancing figure)

27,20,000

To Gross Profit b/d 8,00,000 By Closing Stock 4,00,000

36,00,000 36,00,000

Profit and Loss Account


To Operating Expenses

(Balancing figure)

1,60,000 By Gross Profit c/d 8,00,000


8,00,000 8,00,000

Balance Sheet

Capital and Liabilities (`) Assets (`)

Capital 32,00,000 Fixed Assets 40,00,000

Liabilities 64,00,000 Current Assets:

Closing Stock 4,00,000

Other Current Assets

(Bal. figure)

52,00,000

96,00,000 96,00,000

Question 3

(a) X Associates undertake to prepare income tax returns for individuals for a fee. They use

the weighted average method and actual costs for the financial reporting purposes.

However, for internal reporting, they use a standard costs system. The standards, based

on equivalent performance, have been established as follows:

Labour per return 5 hrs @ ` 40 per hour

Overhead per return 5 hrs @ ` 20 per hour



For March 2015 performance, budgeted overhead is `98,000 for standard labour hours

allowed.

The following additional information pertains to the month of March 2015:

March 1 Return-in-process (25% complete) 200 No.

Return started in March 825 Nos

March 31 Return-in-process (80% complete) 125 Nos

Cost Data:

March 1 Return-in-process labour ` 12,000

- Overheads ` 5,000

March 1 to 31 Labour : 4,000 hours ` 1,78,000

Overheads ` 90,000

You are required to compute:

(a) For each element, equivalent units of performance and the actual cost per

equivalent unit.

(b) Actual cost of return-in-process on March 31.

(c) The standard cost per return.

(d) The labour rate and labour efficiency variance as well as overhead volume and

overhead expenditure variance. (8 Marks)

(b) A trader whose current sales are ` 4,20,000 per annum and an average collection period

of 30 days, wants to pursue a more liberal policy to improve sales. A study made by a

management consultant reveals the following information:

Credit Policy Increase in Collection Period

Increase in Sales Present default anticipated

I 10 days ` 21,000 1.5%

II 30 days `52,500 3%

III 45 days `63,000 4%

The selling price per unit is ` 3. Average cost per unit is `2.25 and variable cost per unit

is ` 2. The current bad-debts loss is 1%. Required return on additional investment is

20%. Assume a 360 days year.

Which of the above policies would you recommend for adoption? (8 Marks)



Answer

(a) (a) Statement Showing Cost Elements Equivalent Units of Performance and the

Actual Cost per Equivalent Unit

Detail of Returns Detail of Input Units

Details Equivalent Units

Output

Units

Labour Overheads

Units % Units %

Returns in Process at Start

200 Returns Completed in March

900 900 100 900 100

Returns Started in March

825 Returns in Process at the end of March

125 100 80 100 80

1,025 1,025 1,000 1,000

Costs: (`) (`)

From previous month 12,000 5,000

During the month 1,78,000 90,000

Total Cost 1,90,000 95,000

Cost per Equivalent Unit 190.00 95.00

(b) Actual cost of returns in process on March 31:

Numbers Stage of Completion

Rate per Return (`)

Total

(`)

Labour 125 returns 0.80 190.00 19,000

Overhead 125 returns 0.80 95.00 9,500

28,500

(c) Standard Cost per Return:

Labour 5 Hrs × ` 40 per hour = ` 200

Overhead 5 Hrs × ` 20 per hour = ` 100

` 300

Budgeted volume for March = ` 98,000 / 1000 = 980 Returns

Actual labour rate = ` 178000 / 4000 = `44.50



(d) Computation of Variances:

Statement Showing Output (March only) Element Wise Labour Overhead

Actual performance in March in terms of equivalent units as Calculated above

1,000

1,000

Less: Returns in process at the beginning of March in terms of equivalent units i.e. 25% of returns (200)

50

50

950 950

Variance Analysis:

Labour Rate Variance

= Actual Time × (Standard Rate – Actual Rate)

= Standard Rate × Actual Time – Actual Rate × Actual Time

= ` 40 × 4,000 hrs. – ` 1,78,000 = ` 18,000(A)

Labour Efficiency Variance

= Standard Rate × (Standard Time – Actual Time)

= Standard Rate × Standard Time – Standard Rate × Actual Time

= ` 40 × (950 units × 5 hrs.) – ` 40 × 4,000 hrs.

= ` 30,000(F)

Overhead Expenditure or Budgeted Variance

= Budgeted Overhead – Actual Overhead

= ` 98,000 – ` 90,000

= ` 8,000(F)

Overhead Volume Variance

= Recovered/Absorbed Overhead – Budgeted Overhead

= 950 Units × 5 hrs. × `20 – ` 98,000 = ` 3,000(A)

(b) A. Statement showing the Evaluation of Debtors Policies (Total Approach)

Particulars Present Policy (30 days)

Proposed Policy I

(40 days)

Proposed Policy II

(60 days)

Proposed Policy III (75 days)

(`) (`) (`) (`)

A. Expected Profit:

(a) Credit Sales 4,20,000 4,41,000 4,72,500 4,83,000

(b) Total Cost (other than



Bad Debts)

(i) Variable Costs

[Sales x ` 2/` 3]

2,80,000 2,94,000 3,15,000 3,22,000

(ii) Fixed Costs (W.N. 1)

35,000 35,000 35,000 35,000

Total Cost (Variable Cost + Fixed Cost)

3,15,000 3,29,000 3,50,000 3,57,000

(c) Bad Debts 4,200

(1% of 4,20,000)

6,615

(1.5% of 4,41,000)

14,175

(3% of 4,72,500)

19,320

(4% of 4,83,000)

(d) Expected Profit [(a) – (b) – (c)]

1,00,800 1,05,385 1,08,325 1,06,680

B. Opportunity Cost of Investments in Receivables *

5,25030 20

(3,15,000x x )360 100

7,31140 20

(3,29,000x x )360 100

11,66760 20

(3,50,000x x )360 100

14,87575 20

(3,57,000x x )360 100

C. Net Benefits (A – B) 95,550 98,074 96,658 91,805

Recommendation: The Proposed Policy I (i.e. increase in collection period by 10 days or

total 40 days) should be adopted since the net benefits under this policy are higher as

compared to other policies.

Working Note- 1:

(i) Calculation of Fixed Cost

= [Average Cost per unit – Variable Cost per unit] × No. of Units sold

= [(2.25 – 2) × (` 4, 20,000/3)] = ` 35,000

*Calculation of Opportunity Cost of Average Investments

Opportunity Cost = Total Cost × Collectionperiod Rate of return

360days 100×

Note 1 : It is assumed that all sales are credit sales only.

Note 2 : This question can also be solved based on incremental approach as well as by

computing Expected Rate of Return.

Question 4

(a) A factory producing article A also produces a by-product B which is further processed

into finished product. The joint cost of manufacture is given below:



Material ` 5,000

Labour ` 3,000

Overhead ` 2,000

` 10,000

Subsequent cost in ` are given below:

A B

Material 3,000 1,500

Labour 1,400 1,000

Overhead 600 500

5,000 3,000

Selling prices are A ` 16,000

B ` 8,000

Estimated profit on selling prices is 25% for A and 20% for B.

Assume that selling and distribution expenses are in proportion of sales prices. Show

how you would apportion joint costs of manufacture and prepare a statement showing

cost of production of A and B. (8 Marks)

(b) Given below are the data on a capital project 'C':

Cost of the project ` 2,28,400

Useful life 4 years

Profitability index 1.0417

Internal rate of return 15%

Salvage value 0


(i) Annual cash flow

(ii) Cost of capital

(iii) Net present value (NPV)

(iv) Discounted payback period

Given the following table of discount factors:

Discount Factor 15% 14% 13% 12%

1 years 0.869 0.877 0.885 0.893



2 years 0.756 0.769 0.783 0.797

3 years 0.658 0.675 0.693 0.712

4 years 0.572 0.592 0.613 0.636

(8 Marks)

Answer

(a) Apportionment of Joint Costs

Particulars A (`) B (`)

Selling Price 16,000 8,000

Less: Estimated profit 4,000

(25% of `16,000)

1,600

(20% of ` 8,000)

Cost of sales 12,000 6,400

Less: Selling & Distribution exp.

(Refer working note)

267

(` 400 × 2/3)

133

(` 400 × 1/3)

Less: Subsequent cost 5,000 3,000

Share of Joint cost 6,733 3,267

So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267

Statement showing Cost of Production of A and B

Elements of cost Joint Cost Subsequent Cost Total Cost

A B A B A B

Material 3,367 1,633 3,000 1,500 6,367 3,133

Labour 2,020 980 1,400 1,000 3,420 1,980

Overheads 1,346 654 600 500 1,946 1,154

Cost of production 11,733 6,267

Working Note:

Calculation of Selling and Distribution Expenses

Particulars (`)

Total Sales Revenue (` 16,000 + ` 8,000) 24,000

Less: Estimated Profit (` 4,000 + ` 1,600) (5,600)

Cost of Sales 18,400

Less: Cost of production:

- Joint Costs (10,000)

- Subsequent costs (` 5,000 + ` 3,000) (8,000)

Selling and Distribution expenses (Balancing figure) 400



(b) (i) Annual Cash Flow:

At 15% internal rate of return (IRR), the sum of total cash inflows = cost of the

project i.e. initial cash outlay

Cost of the Project = ` 2,28,400 and Useful life = 4 years

Considering the discount factor table @ 15%, cumulative present value of cash

inflows for 4 years is 2.855 (0.869 + 0.756 + 0.658 + 0.572)

So, Annual cash flow × 2.855 = ` 2,28,400

Hence, Annual Cash flow = 2,28,4002.855

` = ` 80,000

(ii) Cost of Capital:

Profitability index = Project the ofCost

inflows Cash Discounted of Sum


1.0417 = 2,28,400`

Sum of Discounted Cash inflows = ` 2,28,400 × 1.0417 = ` 2,37,924.28

Since, Annual Cash Inflows = ` 80,000

Hence, cumulative discount factor for 4 years = 2,37,924.28

80,000`

= 2.974

From the discount factor table, at discount rate of 13%, the cumulative discount

factor for 4 years is 2.974 (0.885 + 0.783 + 0.693 + 0.613 )

Hence, Cost of Capital = 13%

(iii) Net Present Value (NPV):

NPV = Sum of Present Values of Cash inflows – Cost of the Project

= ` 2,37,924.28 – ` 2,28,400 = ` 9,524.28

Net Present Value = ` 9,524.28

Alternative

NPV = Cost of Project × (Profitability Index – 1)

= 2,28,400 × (1.0417 – 1) or 2,28,400 × 0.0417 = 9,524.28

(iv) Discounted Payback Period :

Year Annual Cash flow

PV of Re.1 @ 13%

PV of Cash flow

Cumulative PV of Cash inflow

1 80,000 0.885 70,800 70,800



2 80,000 0.783 62,640 1,33,440

3 80,000 0.693 55,440 1,88,880

4 80,000 0.613 49,040 2,37,920

Discounted Payback Period = 39,520

3+ = 3.8059 years49,040

Or = 3 years, 9 Months and 21 days

Question 5

(a) State the difference between cost control and cost reduction.

(b) Write treatment of items associated with purchase of material:

(i) Cash discount

(ii) Subsidy/Grant/Incentives

(iii) VAT or State Sales Tax

(iv) Commission/ brokerage paid

(c) Distinguish between operating lease and finance lease.

(d) Describe the three principles relating to selection of marketable securities. (4 × 4 = 16 Marks)

Answer

(a) Difference between Cost Control and Cost Reduction

Cost Control Cost Reduction

1. Cost control aims at maintaining the costs in accordance with the established standards.

1. Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuously.

2. Cost control seeks to attain lowest possible cost under existing conditions.

2. Cost reduction recognises no condition as permanent, since a change will result in lower cost.

3. In case of Cost Control, emphasis is on past and present.

3. In case of cost reduction it is on present and future.

4. Cost Control is a preventive function.

4. Cost reduction is a corrective function. It operates even when an efficient cost control system exists.

5. Cost control ends when targets are achieved.

5. Cost reduction has no visible end.



(b) Treatment of items associated with purchase of material

Sl. No. Items Treatment

(i) Cash discount Cash discount is not deducted from the purchase price.

(ii) Subsidy/Grant/Incentives Any subsidy/ grant/ incentive received from the Government or from other sources deducted from the cost of purchase.

(iii) VAT or State Sales Tax State Sales Tax/VAT is paid on intra-state sale and collected from the buyers. It is excluded from the cost of purchase if credit for the same is available. Unless mentioned specifically it should not form part of cost of purchase.

(iv) Commission or brokerage paid

Commission or brokerage paid is added with the cost of purchase.

(c) Distinguish between Operating Lease and Financial Lease

Point Operating Lease Finance Lease

Ownership The lessee is only provided the use of the asset for a certain time. Risk incident to ownership belongs only to the lessor.

The risk and reward incidental to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.

Bearing risk

The lessor bears the risk of obsolescence.

The lessee bears the risk of obsolescence.

Purchase option

The lessee does not have any option to buy the asset during the lease period.

It allows the lessee to have a purchase option during the lease period.

Expenses borne

Usually, the lessor bears the cost of repairs, maintenance or operations.

The lessor does not bear the cost of repairs, maintenance or operations.

Treatment Lease payment is treated like operating expenses like rent.

Finance lease is generally treated like a loan.

(d) Three principles relating to selection of marketable securities are as follows

Safety: Return and risks go hand in hand. As the objective in this investment is

ensuring liquidity, minimum risk is the criterion of selection.

Maturity: Matching of maturity and forecasted cash needs is essential. Prices of long term

securities fluctuate more with changes in interest rates and are therefore, more risky.



Marketability: It refers to the convenience, speed and cost at which a security can be

converted into cash. If the security can be sold quickly without loss of time and price it is

highly liquid or marketable.

Question 6

(a) (i) The M-Tech Manufacturing Company is presently evaluating two possible

processes for the manufacture of a toy. The following information is available:

Particulars Process A (`) Process B (`)

Variable cost per unit 12 14

Sales price per unit 20 20

Total fixed costs per year 30,00,000 21,00,000

Capacity (in units) 4,30,000 5,00,000

Anticipated sales (Next year, in units) 4,00,000 4,00,000

Suggest:

1. Which process should be chosen?

2. Would you change your answer as given above, if you were informed that the

capacities of the two processes are as follows:

A - 6,00,000 units; B - 5,00,000 units? Why? (4 Marks)

(ii) State the difference between Fixed Budget and Flexible Budget. (4 Marks)

(b) The X Company has following capital structure at 31st March, 2015 which is considered

to be optimum.

`

14% Debentures 3,00,000

11% Preference Shares 1,00,000

Equity (1,00,000 shares) 16,00,000

20,00,000

The company’s share has a current market price of `23.60 per share. The expected

dividend per share next year is 50% of 2015 EPS. The following are the earning per

share figure for the company during proceeding ten years. The past trends are expected

to continue.

Year EPS (`) Year EPS (`)

2006 1.00 2011 1.61

2007 1.10 2012 1.82



2008 1.21 2013 1.95

2009 1.33 2014 2.15

2010 1.46 2015 2.36

The company issued new debentures carrying 16% rate of interest and the current

market price of debenture is ` 96.

Preference shares ` 9.20 (with dividend of ` 1.1 per share) were also issued. The

company is in 50% tax bracket.

(i) Calculate after tax cost of (a) New debt (b) New Preference share (c) New equity

share (consuming new equity from retained earnings).

(ii) Calculate marginal cost of capital when no new shares was issued.

(iii) How much can be spent for capital investment before new ordinary shares must be

sold? Assuming the retained earning for next year's investment are 50% of 2015.

(iv) What will be the marginal cost of capital when the funds exceeds the amount

calculated in (iii), assuming new equity is issued at ` 20 per share? (8 Marks)

Answer

(a) (i) (1) Comparative Profitability Statements

Particulars Process- A (`) Process- B (`)

Selling Price per unit 20.00 20.00

Less: Variable Cost per unit 12.00 14.00

Contribution per unit 8.00 6.00

Total Contribution 32,00,000

(` 8 × 4,00,000)

24,00,000

(` 6 × 4,00,000)

Less: Total fixed costs 30,00,000 21,00,000

Profit 2,00,000 3,00,000

*Capacity (units) 4,30,000 5,00,000

Total Contribution at full capacity 34,40,000

(` 8 × 4,30,000)

30,00,000

(` 6 × 5,00,000)

Fixed Cost 30,00,000 21,00,000

Profit 4,40,000 9,00,000

Process- B should be chosen as it gives more profit.

(2)

Particulars Process- A (`) Process- B (`)

*Capacity (units) 6,00,000 5,00,000



Total contribution 48,00,000

(` 8 × 6,00,000)

30,00,000

(` 6 × 5,00,000)

Fixed Cost 30,00,000 21,00,000

Profit 18,00,000 9,00,000

Process-A be chosen.

*Note: It is assumed that capacity produced equals sales.

(ii) Difference between Fixed and Flexible Budgets

Fixed Budget Flexible Budget

1. It does not change with actual volume of activity achieved. Thus it is rigid

It can be re-casted on the basis of activity level to be achieved. Thus it is not rigid.

2. It operates on one level of activity and under one set of conditions

It consists of various budgets for different level of activity.

3. If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture.

It facilitates the cost ascertainment and price fixation at different levels of activity.

4. Comparisons of actual and budgeted targets are meaningless particularly when there is difference between two levels.

It provided meaningful basis of comparison of actual and budgeted targets.

(b) (i) Calculation of after tax cost of the followings:

(a) New Debentures (Kd) = I(1- t)

NP=

16 (1-0.5) x 100

96

`

` = 8.33%

New Preference Shares (Kp) = Preference Dividend

Net Proceed

= 1.10

x 100 9.20

`

`= 11.96%

(b) Equity Shares (Consuming New Equity from Retained Earnings) (Ke)

= 1

0

Expecteddividend(D ) + Growthrate (G)

Current market price (P )



= *50% of 2.36100 + 10%

23.60

`

`= 5% + 10% = 15%

* Growth rate (on the basis of EPS) is calculated as below :

EPS in current year - EPS in previous year

EPS in previous year

= 2.36 - 2.15

100 2.15

` `

`= 10%

(Approximate 10% figure is taken because of decimal figures)

[*Alternative calculation of Growth rate:- Growth rate is calculated on basis

average growth of EPS i.e. 10 + 10 + 9.92 + 9.77 + 10.27 + 13.04 + 7.14 + 10.25 +

9.76 = 90.15 / 9 =10.01 or 10%

Or,

The EPS for 2006 is given `1 and whereas for 2015 is given at ` 2.36. This has

resulted in increase of ` 1.36 over a period of 9 years.

The growth rate can be calculated by using formula:

Et = E0 ( 1 + g)t

2.36 = 1 ( 1 + g)9 , using the CVF table, ` 1 becomes ` 2.36 at the end of 9th year at

the compound interest rate of 10%. Therefore, the growth rate is taken at 10%.]

(ii) Calculation of Marginal cost of capital (on the basis of existing capital

structure):

Source of capital

Weight

(a)

After tax Cost of capital (%)

(b)

Weighted Average Cost of Capital [WACC (%)]

(a) × (b)

Debenture 0.15 8.33% 1.25

Preference shares

0.05 11.96% 0.60

Equity shares 0.80 15.00% 12.00

Marginal cost of capital

13.85

(iii) The company can spent for capital investment before issuing new equity

shares and without increasing its marginal cost of capital:

Retained earnings can be available for capital investment

= 50% of 2015 EPS × equity shares outstanding



= 50% of ` 2.36 × 1,00,000 shares = ` 1,18,000

Since, marginal cost of capital is to be maintained at the current level i.e. 13.85%, the

retained earnings should be equal to 80% of total additional capital for investment.

Thus, investment before issuing equity 1,18,000

×10080

`

= ` 1, 47,500

The remaining capital of ` 29,500 i.e. (` 1,47,500 – ` 1,18,000) shall be financed by

issuing New Debenture and New Preference Shares in the ratio of 3 : 1 (3,00,000 :

1,00,000 ) respectively.

(iv) If the company spends more than ` 1, 47,500 as calculated in part (iii) above, it will

have to issue new shares at ` 20 per share.

The cost of new issue of equity shares will be:

Ke= 1

0

Expecteddividend(D ) + Growthrate (g)

Current market price (P ) =

50% of 2.36100 + 10%

20

`

`

= 5.9% + 10% = 15.9%

Calculation of marginal cost of capital (assuming the existing capital structure will

be maintained):

Source of capital

Weight

(a)

Cost (%)

(b)

Weighted Average Cost of

Capital [WACC (%)]

(a) × (b)

Debenture 0.15 8.33 1.25

Preference shares 0.05 11.96 0.60

Equity shares 0.80 15.90 12.72

Marginal cost of capital 14.57

Question 7


(a) What is cost plus contract? What are its advantages?

(b) Narrate the objectives of cost accounting.

(c) State, which of the following would result in inflow/outflow of funds, if the funds were

defined as working capital.

(i) Purchase of a fixed asset on credit of two months.

(ii) Sale of a fixed asset (book value ` 8,000) at a loss of `7,000.



(iii) Payment of final dividend already declared.

(iv) Writing off Bad debts against a provision for doubtful debts.

(d) State the principles that should be followed while designing the capital structure of a

company.

(e) Explain what do you mean by:

(i) Leveraged Lease

(ii) Profit Centres (4×4 =16 Marks)

Answer

(a) Cost plus contract: Under cost plus contract, the contract price is ascertained by adding

a percentage of profit to the total cost of the work. Such types of contracts are entered

into when it is not possible to estimate the contract cost with reasonable accuracy due to

unstable condition of material, labour services etc.

Following are the advantages of cost plus contract:

(i) The contractor is assured of a fixed percentage of profit. There is no risk of

incurring any loss on the contract.

(ii) It is useful specially when the work to be done is not definitely fixed at the time of

making the estimate.

(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to

examine the books and documents of the contractor to ascertain the veracity of the

cost of contract.

(b) The main objectives of introduction of a Cost Accounting System in a manufacturing

organization are as follows:

(i) Ascertainment of cost: The main objective of a Cost Accounting system is to

ascertain cost for cost objects. Costing may be post completion or continuous but

the aim is to arrive at a complete and accurate cost figure to assist the users to

compare, control and make various decisions.

(ii) Determination of selling price: Cost Accounting System in a manufacturing

organisation enables to determine desired selling price after adding expected profit

margin with the cost of the goods manufactured.

(iii) Cost control and Cost reduction: Cost Accounting System equips the cost

controller to adhere and control the cost estimate or cost budget and assist them to

identify the areas of cost reduction.

(iv) Ascertainment of profit of each activity: Cost Accounting System helps to

classify cost on the basis of activity to ascertain activity wise profitability.



(v) Assisting in managerial decision making: Cost Accounting System provides

relevant cost information and assists managers to make various decisions.

(c)

Sl. No. Result in inflow/ outflow of funds

(i) outflow, Total current liabilities are increased but total current assets remain unchanged.

(ii) Inflow, current assets are increased but total current liabilities remain unchanged.

(iii) No effect, Both the total current assets and current liabilities remain unchanged.

OR

If examinees assumed that proposed dividend as Non- current liability then payment of final dividend is considered as out flow of fund.

(iv) No effect, Neither the total current assets nor the total current liabilities are affected.

(d) The fundamental principles are:

(i) Cost Principle: According to this principle, an ideal pattern or capital structure is

one that minimises cost of capital structure and maximises earnings per share

(EPS).

(ii) Risk Principle: According to this principle, reliance is placed more on common

equity for financing capital requirements than excessive use of debt. Use of more

and more debt means higher commitment in form of interest payout. This would

lead to erosion of shareholders value in unfavourable business situation.

(iii) Control Principle: While designing a capital structure, the finance manager may

also keep in mind that existing management control and ownership remains

undisturbed.

(iv) Flexibility Principle: It means that the management chooses such a combination

of sources of financing which it finds easier to adjust according to changes in need

of funds in future too.

(v) Other Considerations: Besides above principles, other factors such as nature of

industry, timing of issue and competition in the industry should also be considered.

(e) (i) Leveraged Lease: Under this lease, a third party is involved beside lessor and

lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from

the third party i.e., lender and asset so purchased is held as security against the



loan. The lender is paid off from the lease rentals directly by the lessee and the

surplus after meeting the claims of the lender goes to the lessor. The lessor is

entitled to claim depreciation allowance.

(ii) Profit Centres are the part of a business which is accountable for both cost and

revenue. These are responsible for generating and maximizing profits. Performance

of these centres is measured with the volume of profit it earns.





Working notes should form part of the answer

Question 1

(a) Human Resources Department of A Ltd. computed labour turnover by replacement

method at 3% for the quarter ended June 2015. During the quarter, fresh recruitment of

40 workers was made. The number of workers at the beginning and end of the quarter

was 990 and 1,010 respectively.

You are required to calculate the labour turnover rate by Separation Method and Flux

Method.

(b) A company gives the following information:

Margin of Safety ` 3,75,000

Total Cost ` 3,87,500

Margin of Safety (Qty.) 15,000 units

Break Even Sales in Units 5,000 units


(i) Selling price per unit

(ii) Profit

(iii) Profit/ Volume Ratio

(iv) Break Even Sales (in Rupees)

(v) Fixed Cost

(c) From the following details of X Ltd., prepare the Income Statement for the year ended

31st December, 2014:

Financial Leverage 2

Interest ` 2,000

Operating Leverage 3

Variable cost as a percentage of sales 75%

Income tax rate 30%

(d) A company issues 25,000, 14% debentures of ` 1,000 each. The debentures are

redeemable after the expiry period of 5 years. Tax rate applicable to the company is 35%

(including surcharge and education cess).


PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 47

Calculate the cost of debt after tax if debentures are issued at 5% discount with 2%

flotation cost. (4 × 5 = 20 Marks)

Answer

(a) Labour Turnover by Replacement Method = No. of workers replaced during the quarter

Average no. of workers onrollduring the quarter

Or, 0.03 = No. of workers replaced during the quarter

(990 1,010) 2+ ÷

Or, No. of workers replaced during the quarter = 0.03 × 1,000 = 30 workers

(i) Labour Turnover by Separation Method

= No. of workers separated during the quarter

Average no. of workers onrollduring the quarter× 100

= Worker at begining + Fresh recruitment + Replacements – Work

Average no. of workers onrolldurin

ers at

g the q

c

u

losing

arter× 100

= 990 40 30 1,010

(990 1,010) 2

+ + −+ ÷

× 100 = 50 wor ker s

1,000 wor ker s× 100 = 5%

(ii) Labour Turnover by Flux Method

= No. of workers (Separated+ Replaced+ Fresh Re cruitment) during the quarter

Average no. of workers onrollduring the quarter× 100

= 50 30 40

(990 1,010) 2

+ ++ ÷

× 100 = 120 wor ker s

1,000 wor ker s× 100 = 12%

(b) (i) Selling Price per unit = Marginof Safety inRupee value

Marginof Safety inQuantity

=`3,75,000

15,000units= ` 25

(ii) Profit = Sales Value – Total Cost

= Selling price per unit × (BEP units + MoS units) – Total Cost

= ` 25 × (5,000 + 15,000) units – ` 3,87,500

= ` 5,00,000 – ` 3,87,500 = ` 1,12,500



(iii) Profit/ Volume (P/V) Ratio = Pr ofit

Marginof Safety inRupee value× 100

= `

`

1,12,500

3,75,000× 100 = 30%

(iv) Break Even Sales (in Rupees) = BEP units × Selling Price per unit

= 5,000 units × ` 25 = ` 1,25,000

(v) Fixed Cost = Contribution – Profit

= Sales Value × P/V Ratio – Profit

= (` 5,00,000 × 30%) – ` 1,12,500

= ` 1,50,000 – ` 1,12,500 = ` 37,500

(c) Workings:


EBIT Interest− Or, 2 =

EBIT

EBIT 2,000−`

Or, EBIT = ` 4,000


EBIT Or, 3 =

`

Contribution

4,000

Or, Contribution = ` 12,000

(iii) Sales = Contribution

P / VRatio =

` 12,000

25% = ` 48,000

(iv) Fixed Cost = Contribution – Fixed cost = EBIT

= `12,000 – Fixed cost = `4,000 Or, Fixed cost = ` 8,000

Income Statement for the year ended 31st December 2014


Sales 48,000

Less: Variable Cost (75% of ` 48,000) (36,000)

Contribution 12,000

Less: Fixed Cost (Contribution - EBIT) (8,000)

Earnings Before Interest and Tax (EBIT) 4,000

Less: Interest (2,000)

Earnings Before Tax (EBT) 2,000



Less: Income Tax @ 30% (600)

Earnings After Tax (EAT or PAT) 1,400

(d) Calculation of Cost of Debt after Tax:

Cost of Debt (Kd) =

RV NPI(1 t)

n

RV NP

2

− − + +

Where, I = Interest payment i.e. 14% of ` 1,000 = ` 140

t = Tax rate applicable to the company i.e. 35%

RV = Redeemable value of debentures i.e. ` 1,000

NP = Net proceeds per debentures

= ` 1,000 × {1 – (0.05 + 0.02)}

= ` 1,000 × 0.93 = ` 930

n = Redemption period of debentures i.e 5 years

Therefore, Kd =

− +

×

` ``

` + `

1,000 – 930140(1 0.35)

5years100

1,000 930

2

= +

×` `

`

91 14100

965 = 10.88 %

The Cost of Debt can also be calculated using the formula, where first Cost of Debt before tax

is calculated and then tax adjustment is made. Accordingly:

Cost of Debt (Kd) =

RV NPI

n(1 t) 100

RV NP

2

− + × − ×+

= +

− ×`

`

140 14(1 0.35) 100

965= 10.37%

Question 2

(a) M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for

the year 2014 are given below:

(`)

(i) Opening Stock of Material 1,50,000

(ii) Closing Stock of Material 2,00,000



(iii) Purchase of Material 18,50,000

(iv) Direct Labour 9,50,000

(v) Factory Overhead 3,80,000

(vi) Administrative Overhead 2,50,400

During 2015, the company has received an order from a car manufacturer where it

estimates that the cost of material and labour will be ` 8,00,000 and ` 4,50,000

respectively. M.L. Auto Ltd. charges factory overhead as a percentage of direct labour

and administrative overhead as a percentage of factory cost based on previous year's

cost.

Cost of delivery of the components at customer's premises is estimated at ` 45,000.


(i) Calculate the overhead recovery rates based on actual costs for 2014.

(ii) Prepare a detailed cost statement for the order received in 2015 and the price to be

quoted if the company wants to earn a profit of 10% on sales. (8 Marks)

(b) VRA Limited has provided the following information for the year ending 31st March, 2015.

Debt Equity Ratio 2: 1

14% long term debt ` 50,00,000


Return on equity 50%

Income Tax Rate 35%

Capital Turnover Ratio 1.2 times

Opening Stock ` 4,50,000

Closing Stock 8% of sales

You are required to prepare Trading and Profit and Loss Account for the year ending 31st

March, 2015. (8 Marks)

Answer

(a) (i) Calculation of Overhead Recovery Rate:

Factory Overhead Recovery Rate = Factory Overheadin 2014

100DirectLabour Costs in2014

×

= ×3,80,000

1009,50,000

`

` = 40% of Direct labour



Administrative Overhead Recovery Rate

= Administrative Overheadin 2014

100Factory Costs in2014(W.N.)

×

= ×2,50,400

10031,30,000

`

` = 8% of Factory Cost

Working Note: Calculation of Factory Cost in 2014


Opening Stock of Material 1,50,000

Add: Purchase of Material 18,50,000

Less: Closing Stock of Material (2,00,000)

Material Consumed 18,00,000

Direct Labour 9,50,000

Prime Cost 27,50,000

Factory Overhead 3,80,000


(ii) Detailed Cost Statement for the Order received from M.L. Auto Ltd. during 2015


Material 8,00,000

Labour 4,50,000

Factory Overhead (40% of ` 4,50,000) 1,80,000


Administrative Overhead (8% of ` 14,30,000) 1,14,400

Cost of delivery 45,000

Total Cost 15,89,400

Add: Profit @ 10% of Sales or 11.11% of cost or 1/9 of 15,89,400 1,76,600

Sales value (Price to be quoted for the order) (` 15,89,400 /0.9) 17,66,000

Hence the price to be quoted is `17,66,000 if the company wants to earn a profit of 10% on

sales.



(b) Debt Equity Ratio = 2 :1; Debt 2

= Equity 1

Equity = 50,00,000

= 25,00,0002

``

Return on Equity = Net Profit after tax (PAT)

= 50%Equity

Or, Net Profit after tax (PAT) = ` 25,00,000 × 50% = ` 12,50,000

Net Profit before tax = `100

12,50,000× = 19,23,07765

`

Tax = ` 19,23,077 – `12,50,000 = ` 6,73,077

Capital Turnover Ratio = Sales Sales

= 1.2 Or, = 1.2Capital ( 25,00,000 + 50,00,000) ` `

So, Sales = ` 75,00,000 × 1.2 = ` 90,00,000

Closing Stock = ` 90,00,000 × 8% = ` 7,20,000

Gross Profit = ` 90,00,000 × 30% = ` 27,00,000

Trading A/c for the year ending 31st March, 2015

Dr. Cr.

Amount (`) Amount (`)


To Purchases (Balancing figure) 65,70,000 By Closing Stock 7,20,000

To Gross Profit c/f to P&L A/c 27,00,000

97,20,000 97,20,000

Profit & Loss A/c for the year ending 31st March, 2015


To Interest on long term debt @14% 7,00,000

By Gross Profit b/f

from Trading A/c

27,00,000

To Miscellaneous Exp. (balancing figure)

76,923

To Income Tax 6,73,077


27,00,000 27,00,000



Question 3

(a) XY Co. Ltd manufactures two products viz., X and Y and sells them through two

divisions, East and West. For the purpose of Sales Budget to the Budget Committee,

following information has been made available for the year 2014-15:

Product Budgeted Sales Actual Sales

East Division West Division East Division West Division

X 400 units at ` 9 600 units at ` 9 500 units at ` 9 700 units at ` 9

Y 300 units at` 21 500 units at ` 21 200 units at ` 21 400 units at ` 21

Adequate market studies reveal that product X is popular but under priced. It is expected

that if the price of X is increased by ` 1, it will, find a ready market. On the other hand, Y

is overpriced and if the price of Y is reduced by ` 1 it will have more demand in the

market. The company management has agreed for the aforesaid price changes. On the

basis of these price changes and the reports of salesmen, following estimates have been

prepared by the Divisional Managers:

Percentage increase in sales over budgeted sales

Product East Division West Division

X + 10% + 5%

Y + 20% + 10%

With the help of intensive advertisement campaign, following additional sales (over and

above the above mentioned estimated sales by Divisional Mangers) are possible:

Product East Division West Division

X 60 units 70 units

Y 40 units 50 units

You are required to prepare Sales Budget for 2015-16 after incorporating above

estimates and also show the Budgeted Sales and Actual Sales of 2014-15. (8 Marks)

(b) Balance Sheets of KAS Limited as on 31st March, 2014 and 31st March, 2015 are

furnished below:

(Amount in Rupees)

Liabilities As at 31st March, 2014

As at 31st March, 2015

Equity Share Capital 75,00,000 1,02,50,000

General Reserve 42,50,000 50,00,000

Profit & Loss Account 15,00,000 18,75,000



13 % Debentures of face value ` 100 each

58,00,000 43,50,000

Current Liabilities 30,00,000 32,50,000

Proposed Dividend 7,50,000 9,10,000

Provision for Income tax 22,50,000 24,75,000

Total 2,50,50,000 2,81,10,000

(Amount in Rupees)

Assets As at 31st

March, 2014

As at 31st

March, 2015

Goodwill 10,00,000 7,75,000

Land & Building 68,00,000 61,20,000

Plant & Machinery 75,12,000 1,07,95,000

Investment 25,00,000 21,25,000

Stock 33,00,000 27,50,000

Debtors 24,45,000 36,20,000

Cash and Bank 14,93,000 19,25,000

Total 2,50,50,000 2,81,10,000

Following additional information is available:

(i) During the financial year 2014-15 the company issued equity shares at par.

(ii) Debentures were redeemed on 1st April, 2014 at a premium of 10%.

(iii) Some investments were sold at a profit of ` 75,000 and the profit was credited to

General Reserve Account.

(iv) During the year an old machine costing ` 23,50,000 was sold for ` 6,25,000. Its

written down value was ` 8,00,000.

(v) Depreciation is to be provided on plant and machinery at 20% on the opening

balance.

(vi) There was no purchase or sale of land and building.

(vii) Provision for tax made during the year was ` 4,50,000.

You are required to prepare a Cash Flow Statement for the year ended 31st March, 2015.

(8 Marks)



Answer

(a) Statement Showing Sales Budget for 2015-16

Division

Product X Product Y Total

Qty. Rate (`) Amt. (`) Qty. Rate (`) Amt. (`) Amt. (`)

East 5001 10 5,000 4003 20 8,000 13,000

West 7002 10 7,000 6004 20 12,000 19,000

Total 1,200 12,000 1,000 20,000 32,000

Workings

1. 400 × 110% + 60 = 500 units

2. 600 × 105% + 70 = 700 units

3. 300 × 120% + 40 = 400 units

4. 500 × 110% + 50 = 600 units

Statement Showing Sales Budget for 2014-15

Division

Product X Product Y Total


East 400 9 3,600 300 21 6,300 9,900

West 600 9 5,400 500 21 10,500 15,900

Total 1,000 9,000 800 16,800 25,800

Statement Showing Actual Sales for 2014-15

Division Product X Product Y Total


East 500 9 4,500 200 21 4,200 8,700

West 700 9 6,300 400 21 8,400 14,700

Total 1,200 10,800 600 12,600 23,400

(b) Cash Flow Statement

As on 31st Mach, 2015


A. Cash flow from Operating Activities

Profit and Loss A/c (Closing) 18,75,000

Less: Profit and Loss A/c (Opening) 15,00,000

3,75,000



Add: Transfer to General Reserve 6,75,000

Provision for Tax 4,50,000


Profit before Tax 24,10,000

Adjustment for Depreciation:

Land and Building (on building) 6,80,000

Plant and Machinery 15,02,400 21,82,400

Loss on Sale of Plant and Machinery 1,75,000

Goodwill written off 2,25,000

Interest on 13% Debentures 5,65,500

Premium on Redemption 1,45,000

Operating Profit before Working Capital Changes 57,02,900

Adjustment for Working Capital Changes:

Decrease in Stock 5,50,000

Increase in Debtors (11,75,000)

Increase in Current Liabilities 2,50,000 (3,75,000)

Cash generated from Operations 53,27,900

Income tax paid (225,000)

Net Cash Inflow from Operating Activities (a) 51,02,900

B. Cash flow from Investing Activities

Sale of Investment 4,50,000

Sale of Plant and Machinery 6,25,000

Purchase of Plant and Machinery (55,85,400)

Net Cash Outflow from Investing Activities (b) (45,10,400)

C. Cash Flow from Financing Activities

Issue of Equity Shares 27,50,000

Redemption of Debentures (14,50,000)

Redemption of Debentures at premium (1,45,000)

Dividend paid (7,50,000)

Interest paid to Debenture holders (5,65,500)

Net Cash Outflow from Financing Activities (c) (1,60,500)

Net increase in Cash and Cash Equivalents during the year 4,32,000



(a + b + c)

Cash and Cash Equivalents at the beginning of the year 14,93,000

Cash and Cash Equivalents at the end of the year 19,25,000

Working Notes:

1. Provision for the Tax Account

` `

To Bank (paid) 2,25,000 By Balance b/d 22,50,000

To Balance c/d 24,75,000 By Profit and Loss A/c

(Provision)

4,50,000

27,00,000 27,00,000

2. Investment Account

` `

To Balance b/d 25,00,000 By Bank A/c (bal. figure- Sale)

4,50,000

To General Reserve A/c

(Profit on Sale)

75,000 By Balance c/d 21,25,000

25,75,000 25,75,000

3. Plant and Machinery Account

` `

To Balance b/d 75,12,000 By Bank (Sale) 6,25,000

To Bank A/c

(Purchase- Bal. figure)

55,85,400 By Profit and Loss A/c

(Loss on sale)

1,75,000

By Profit and Loss A/c

(Depreciation)

15,02,400

By Balance c/d 1,07,95,000

1,30,97,400 1,30,97,400

4. Proposed Dividend Account

` `


To Balance c/d 9,10,000 By Profit and Loss A/c 9,10,000

16,60,000 16,60,000



5. General Reserve Account

` `

By Balance b/d 42,50,000

By Profit & Loss

(transfer from)

6,75,000

To Balance c/d 50,00,000 By Investment (Gain on Sale) 75,000

50,00,000 50,00,000

Question 4

(a) The following information is furnished by ABC Company for Process - II of its

manufacturing activity for the month of April 2015:

(i) Opening Work-in-Progress - Nil

(ii) Units transferred from Process I – 55,000 units at ` 3,27,800

(iii) Expenditure debited to Process – II:

Consumables ` 1,57,200

Labour ` 1,04,000

Overhead ` 52,000

(iv) Units transferred to Process III – 51,000 units

(v) Closing WIP – 2,000 units (Degree of completion):

Consumables 80%

Labour 60%

Overhead 60%

(vi) Units scrapped - 2,000 units, scrapped units were sold at ` 5 per unit

(vii) Normal loss – 4% of units introduced


(i) Prepare a Statement of Equivalent Production.

(ii) Determine the cost per unit

(iii) Determine the value of Work-in-Process and units transferred to Process – III

(8 Marks)

(b) RST Ltd. is expecting an EBIT of ` 4 lakhs for F.Y. 2015-16. Presently the company is

financed entirely by equity share capital of ` 20 lakhs with equity capitalization rate of

16%. The company is contemplating to redeem part of the capital by introducing debt

financing. The company has two options to raise debt to the extent of 30% or 50% of the

total fund.



It is expected that for debt financing upto 30%, the rate of interest will be 10% and equity

capitalization rate will increase to 17%. If the company opts for 50% debt, then the

interest rate will be 12% and equity capitalization rate will be 20%.

You are required to compute value of the company; its overall cost of capital under

different options and also state which is the best option. (8 Marks)

Answer

(a) (i) Statement of Equivalent Production

Input Details

Units Output

Particulars Units

Equivalent Production

Material- A* Consumables Labour & Overheads

% Units % Units % Units

Units transferred from Process-I

55,000 Units transferred to Process-III

51,000 100 51,000 100 51,000 100 51,000

Normal loss (4% of 55,000)

2,200 - - - - - -

Closing W-I-P

2,000 100 2,000 80 1,600 60 1,200

Abnormal Gain

(200) 100 (200) 100 (200) 100 (200)

55,000 55,000 52,800 52,400 52,000

*Material A represent transferred-in units from process-I

(ii) Determination of Cost per Unit

Particulars Amount (`) Units Per Unit (`)

(i) Direct Material (Consumables) :

Value of units transferred from Process-I 3,27,800

Less: Value of normal loss (2,200 units × ` 5)

(11,000)

3,16,800 52,800 6.00

(ii) Consumables added in Process-II 1,57,200 52,400 3.00

(iii) Labour 1,04,000 52,000 2.00

(iii) Overhead 52,000 52,000 1.00

Total Cost per equivalent unit 12.00



(iii) Determination of value of Work-in-Process and units transferred to Process-III

Particulars Units Rate (`) Amount (`)

Value of Closing W-I-P:

Material from Process-I 2,000 6.00 12,000

Consumables 1,600 3.00 4,800

Labour 1,200 2.00 2,400

Overhead 1,200 1.00 1,200

20,400

Value of units transferred to Process-III 51,000 12.00 6,12,000

(b) EBIT = ` 4,00,000

Equity Share Capital = ` 20,00,000

Equity Capitalization rate = 16%

At Present Value of the Company = ` 100

4,00,000× 16

= ` 25,00,000

Computation of Value of the Company and Overall Cost of Capital under the two options:

Particulars Option I Option II

Debt 30% 50%

Equity (existing) ` 20,00,000 ` 20,00,000

Debt ` 6,00,000 ` 10,00,000

Equity capitalization rate 17% 20%

Interest on Debt 10% 12%

EBIT ` 4,00,000 ` 4,00,000

Less: Interest on Debt ` 60,000 ` 1,20,000

Earnings to equity share holders ` 3,40,000 ` 2,80,000

Market Value of equity ` 20,00,000

(` 3,40,000 100

× 17

)

` 14,00,000

(` 100

2,80,000×20

)

Value of Debt ` 6,00,000 ` 10,00,000

Value of the Company (Equity +Debt)

` 26,00,000 ` 24,00,000

Overall Cost of Capital 15.38% 16.67%



(4,00,000

×100 26,00,000

`

`) (

4,00,000×100

24,00,000

`

`)

Since in Option I value of the Company is more and overall cost of Capital is less compared

to Option II, hence Option I is better.

Question 5

(a) State the method of costing and also the unit of cost for the following industries:

(i) Hotel

(ii) Toy-making

(iii) Steel

(iv) Ship Building

(b) How would you account for idle capacity cost in Cost Accounting?

(c) Distinguish between Net Present Value (NPV) and Internal Rate of Return (IRR) methods

for evaluating projects.

(d) What is meant by venture capital financing? State its various methods.

(4 × 4 = 16 Marks)

Answer

(a)

Industry Method of Costing Unit of Cost

(i) Hotel Operating Costing Room day/ per bed

(ii) Toy Making Batch Costing Units/ Batch

(iii) Steel Process Costing/ Single Costing Per Tonne/ Per MT

(iv) Ship Building Contract Costing Project/ Unit

(b) Idle capacity costs are treated in the following ways in Cost Accounts:

(i) If the idle capacity cost is due to unavoidable reasons: A supplementary

overhead rate may be used to recover the idle capacity cost. In this case, the costs

are charged to the production capacity utilised.

(ii) If the idle capacity cost is due to avoidable reasons: Such as faulty planning,

etc. the cost should be charged to Costing Profit and Loss Account.

(iii) If the idle capacity cost is due to trade depression, etc.,: Being abnormal in

nature the cost should also be charged to the Costing Profit and Loss Account.



(iv) If the idle capacity cost is due to seasonal factors, then the cost should be

charged to cost of production by inflating overhead rate.

(c) Distinguish between Net Present Value (NPV) and Internal Rate of Return (IRR)

NPV and IRR methods differ in the sense that the results regarding the choice of an

asset under certain circumstances are mutually contradictory under two methods. In case

of mutually exclusive investment projects, in certain situations, they may give

contradictory results such that if the NPV method finds one proposal acceptable, IRR

favours another. The different rankings given by the NPV and IRR methods could be due

to size disparity problem, time disparity problem and unequal expected lives.

The net present value is expressed in financial values whereas internal rate of return

(IRR) is expressed in percentage terms.

In the net present value cash flows are assumed to be re-invested at cost of capital rate.

In IRR reinvestment is assumed to be made at IRR rates.

(d) Meaning of Venture Capital: The venture capital financing refers to financing and

funding of the small scale enterprises, high technology and risky ventures.

Methods of Venture Capital financing: Some common methods of venture capital

financing are as follows:

(i) Equity financing: The venture capital undertakings generally requires funds for a

longer period but may not be able to provide returns to the investors during the

initial stages. Therefore, the venture capital finance is generally provided by way of

equity share capital..

(ii) Conditional Loan: A conditional loan is repayable in the form of a royalty after the

venture is able to generate sales. No interest is paid on such loans. In India Venture

Capital Financers charge royalty ranging between 2 to 15 per cent; actual rate

depends on other factors of the venture such as gestation period, cash flow

patterns, riskiness and other factors of the enterprise.

(iii) Income Note: It is a hybrid security which combines the features of both

conventional loan and conditional loan. The entrepreneur has to pay both interest

and royalty on sales but at substantially low rates

(iv) Participating Debenture: Such security carries charges in three phases- in the start-

up phase, no interest is charged, next stage a low rate of interest is charged upto a

particular level of operations, after that, a high rate of interest is required to be paid.

Question 6

(a) PVK Constructions commenced a contract on 1st April, 2014. Total contract value was

` 100 lakhs. The contract is expected to be completed by 31st December, 2016. Actual



expenditure during the period 1st April, 2014 to 31st March, 2015 and estimated

expenditure for the period 1st April, 2015 to 31st December, 2016 are as follows:

Actual (`) Estimated (`)

1st April, 2014 to 31st March, 2015

1st April, 2015 to 31st Dec. 2016

Material issued 15,30,000 21,00,000

Direct Wages paid 10,12,500 12,25,000

Direct Wages outstanding 80,000 1,15,000

Plant purchased 7,50,000 -

Expenses paid 3,25,000 5,40,000

Prepaid Expenses 68,000 -

Site office expenses 3,00,000 -

Part of the material procured for the contract was unsuitable and was sold for ` 2,40,000

(cost being ` 2,55,000) and a part of plant was scrapped and disposed of for ` 80,000.

The value of plant at site on 31st March, 2015 was ` 2,50,000 and the value of material at

site was ` 73,000. Cash received on account to date was ` 36,00,000, representing 80%

of the work certified. The cost of work uncertified was valued at ` 5,40,000.

Estimated further expenditure for completion of contract is as follows:

• An additional amount of ` 4,62,500 would have to be spent on the plant and the

residual value of the plant on the completion of the contract would be` 67,500.

• Site office expenses would be the same amount per month as charged in the

previous year.

• An amount of ` 1,57,500 would have to be incurred towards consultancy charges.

Required:

Prepare Contract Account and calculate estimated total profit on this contract. (8 Marks)

(b) A firm has a total sales of ` 200 lakhs of which 80% is on credit. It is offering credit terms

of 2/40, net 120. Of the total, 50% of customers avail of discount and the balance pay in

120 days. Past experience indicates that bad debt losses are around 1% of credit sales.

The firm spends about ` 2,40,000 per annum to administer its credit sales. These are

avoidable as a factor is prepared to buy the firm's receivables. He will charge 2%

commission. He will pay advance against receivables to the firm at an interest rate of

18% after withholding 10% as reserve.

(i) What is the effective cost of factoring? Consider year as 360 days.

(ii) If bank finance for working capital is available at 14% interest, should the firm avail

of factoring service? (8 Marks)



Answer

(a) PVK Constructions

Contract Account for the year 2014-15


To Materials issued 15,30,000 By Material sold 2,40,000

To Direct wages 10,12,500 By Costing P & L Account

(loss on sale of material)

15,000

Add: Outstanding 80,000 10,92,500 By Plant sold 80,000

To Plant purchased 7,50,000 By Plant at site 2,50,000

To Expenses 3,25,000 By Material at site 73,000

Less: Prepaid (68,000) 2,57,000 By Work-in-progress:

To Site office expenses 3,00,000 -Work certified 45,00,000

To Notional profit c/d 17,68,500 - Work uncertified 5,40,000 50,40,000

56,98,000 56,98,000

To Costing P&L A/c (transfer)

(Refer Working note)

4,11,967* By Notional profit b/d 17,68,500

To Work-in-progress (reserve) 13,56,533#

17,68,500 17,68,500

Calculation of Estimated Profit (April 2014 to December 2016)

Particulars Amount (`) Amount (`) Amount (`)

Total Value of the Contract (A) 1,00,00,000

(i) Materials Costs:

Materials Consumed in 2014-2015:

- Materials issued in 2014-15 15,30,000

- Less: Closing Materials at site (73,000)

- Less: Unsuitable Materials sold (2,55,000) 12,02,000

Add: Materials to be Consumed

- Materials to be issued 21,00,000

- Add: Opening materials at site 73,000 21,73,000 33,75,000

(ii) Direct Wages Cost:

Direct wages for 2014-15:

- Wages paid 10,12,500



- Add: Outstanding at closing 80,000 10,92,500

Direct wages to be incurred:

- Wages to be paid 12,25,000

- Less: Outstanding at opening (80,000)

- Add: Outstanding at closing 1,15,000 12,60,000 23,52,500

(iii) Plant Cost

Plant used during 2014-15:

- Plant purchased 7,50,000

- Less: Plant disposed off (80,000)

- Less: Closing plant at site (2,50,000) 4,20,000

Plant to be used

- Additional amount to be spent 4,62,500

- Add: Opening plant at site 2,50,000

- Less: Residual value of plant (67,500) 6,45,000 10,65,000

(iv) Expenses

Expenses incurred during 2014-15:

- Expenses paid 3,25,000

- Less: Prepaid at closing (68,000) 2,57,000

Expenses to be incurred

- Expenses to be paid 5,40,000

- Add: Prepaid at opening 68,000 6,08,000 8,65,000

(v) Site office expenses paid in 2014-15 3,00,000

- Add: To be paid {(3,00,000÷12) × 21 months}

5,25,000 8,25,000

(vi) Consultancy charges to be paid 1,57,500

Total Estimated Cost of the Contract 86,40,000

Estimated Profit (A – B) 13,60,000

* The profit to be transferred can be calculated using various formulae given in the

working note, however, in this solution following the conservative approach, the lowest

amount has been taken.

# Profit transferred to the reserve will vary depending upon the formula of profit

calculation adopted.



Workings:

Profit to be transferred to Costing Profit and Loss Account

= Estimated Profit × priceContract

certifiedWork ×

certifiedWork

receivedCash

= × ×45,00,000 36,00,000

13,60,0001,00,00,000 45,00,000

` ` `

` `= ` 4,89,600

Or

= Estimated Profit ×certifiedWork

receivedCash

costtotalEstimated

datetoworkofCost×

= × ×32,71,500 * 36,00,000

13,60,00086,40,000 45,00,000

` ``

` ` = ` 4,11,967

Or

= Estimated Profit × tcostotalEstimated

datetoworkofCost = ×

32,71,500 *13,60,000

86,40,000

``

` = ` 5,14,958.33

Or

= Value of WorkCertified

EstimatedPr ofitValue of Contract

× = ×45,00,000

13,60,0001,00,00,000

` `

`= ` 6,12,000

*[ Material Consumed + Direct Wages + Plant used + Expenses + Site office expenses]

[` 12,02,000 + ` 10,92,500 + ` 4,20,000 + ` 2,57,000 + ` 3,00,000 = ` 32,71,500]

Since, in the question estimated cost information is given, hence, the profit to be

transferred in the Costing Profit & Loss account for the year 2014-15, will be on the basis

of estimated profit calculated as above.

Profit to be transferred in Costing Profit & Loss account for the year 2014-15 on percentage of completion method as below:

1 CashRe ceived

NotionalPr ofit3 Value of WorkCertified

× × = × ×1 36,00,000

17,68,5003 45,00,000

``

`= ` 4,71,600

The detailed calculations have been shown for better understanding of the students.

(b) Total Sales = ` 200 lakhs

Credit Sales (80%) =` 160 lakhs

Receivables for 40 days = ` 80 lakhs



Receivables for 120 days = ` 80 lakhs

Average collection period [(40 x 0.5) + (120 × 0.5)] = 80 days

Average level of Receivables (` 1,60,00,000 × 80/360) = ` 35,55,556

Factoring Commission (` 35,55,556 × 2/100) = ` 71,111

Factoring Reserve (` 35,55,556 × 10/100) = ` 3,55,556

Amount available for advance {` 35,55,556 - (3,55,556 + 71,111)} = ` 31,28,889

Factor will deduct his interest @ 18% :

Interest = × ×

×31,28,889 18 80

100 360

` = ` 1,25,156

Advance to be paid (` 31,28,889 – ` 1,25,156) = ` 30,03,733

(i) Calculation of Effective Cost of Factoring

Annual Cost of Factoring to the Firm: `

Factoring commission (` 71,111 × 360/80) 3,20,000

Interest charges (` 1,25,156 × 360/80) 5,63,200

Total (A) 8,83,200

Firm’s Savings on taking Factoring Service: `

Cost of credit administration saved 2,40,000

Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000

Total (B) 4,00,000

Net Cost to the firm (A – B) (` 8,83,200 – ` 4,00,000) 4,83,200

Effective cost of factoring = ×4,83,200

10030,03,733

`

` = 16.09* %

* If cost of factoring is calculated on the basis of total amount available for advance,

then, it will be

= ×4,83,200

10031,28,889

`

` = 15.44%

(ii) If Bank finance for working capital is available at 14%, firm will not avail factoring

service as 14 % is less than 16.08% (or 15.44%)

Question 7


(a) Explain the treatment of over and under absorption of overheads in cost accounting.



(b) Describe the various steps involved in adopting standard costing system in an

organization.

(c) Evaluate the role of cash budget in effective cash management system.

(d) Discuss the risk-return considerations in financing current assets.

(e) Distinguish between the following:

(i) 'Scraps' and 'Defectives' in costing

(ii) Preference Shares and Debentures. (4 × 4 = 16 Marks)

Answer

(a) Treatment of over and under absorption of overheads are:-

(i) Writing off to costing P&L A/c:– Small difference between the actual and

absorbed amount should simply be transferred to costing P&L A/c, if difference is

large then investigate the causes and after that abnormal loss shall be transferred

to costing P&L A/c.

(ii) Use of supplementary Rate: Under this method the balance of under and over

absorbed overheads may be charged to cost of W.I.P., finished stock and cost of

sales proportionately with the help of supplementary rate of overhead.

(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the

expectation that next year the position will be automatically corrected. This would

really mean that costing data of two years would be wrong.

(b) The Steps of standard costing is as below:

(i) Setting of Standards: The first step is to set standards which are to be achieved.

(ii) Ascertainment of actual costs: Actual cost for each component of cost is

ascertained. Actual costs are ascertained from books of account, material invoices,

wage sheet, charge slip etc.

(iii) Comparison of actual cost and standard cost: Actual costs are compared with

the standards costs and variances are determined.

(iv) Investigation of variances: Variances arises are investigated for further action.

Based on this performance is evaluated and appropriate actions are taken.

(v) Disposition of variances: Variances arise are disposed off by transferring it the

relevant accounts (costing profit and loss account) as per the accounting method

(plan) adopted.

(c) Cash Budget is the most significant device to plan for and control cash receipts and

payments. It plays a very significant role in effective Cash Management System. This

represents cash requirements of business during the budget period.

The various role of cash budgets in Cash Management System are:-



(i) Coordinate the timings of cash needs. It identifies the period(s) when there might

either be a shortage of cash or an abnormally large cash requirement;

(ii) It also helps to pinpoint period(s) when there is likely to be excess cash;

(iii) It enables firm which has sufficient cash to take advantage like cash discounts on its

accounts payable; and

(iv) Lastly it helps to plan/arrange adequately needed funds (avoiding excess/shortage

of cash) on favorable terms.

(d) The financing of current assets involves a trade off between risk and return. A firm can

choose from short or long term sources of finance. Short term financing is less expensive

than long term financing but at the same time, short term financing involves greater risk

than long term financing.

Depending on the mix of short term and long term financing, the approach followed by a

company may be referred as matching approach, conservative approach and aggressive

approach.

In matching approach, long-term finance is used to finance fixed assets and permanent

current assets and short term financing to finance temporary or variable current assets.

Under the conservative plan, the firm finances its permanent assets and also a part of

temporary current assets with long term financing and hence less risk of facing the

problem of shortage of funds.

An aggressive policy is said to be followed by the firm when it uses more short term

financing than warranted by the matching plan and finances a part of its permanent

current assets with short term financing.

(e) (i) Difference between Scrap and Defectives

Scrap Defectives

1. It is loss connected with output 1. This type of loss connected with the output but it can be in the input as well.

2. Scraps are not intended but cannot be eliminated due to nature of material or process itself.

2. Defectives also are not intended but can be eliminated through proper control.

3. Generally scraps are not used or rectified.

3. Defectives can be used after rectification.

4. Scraps have insignificant recoverable value.

4. Defectives are sold at lower value from that of good one.



(ii) Difference between Preference Shares and Debentures

Basis of difference Preference shares Debentures

Ownership Preference Share Capital is a special kind of share

Debenture is a type of loan which can be raised from the public

Payment of Dividend/ Interest

its holders enjoy priority both as regard to the payment of a fixed amount of dividend and also towards repayment of capital in case of winding up of a company

It carries fixed percentage of interest.

Nature Preference shares are a hybrid form of financing with some characteristic of equity shares and some attributes of Debt Capital.

Debentures are instrument for raising long term capital with a period of maturity.


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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory.

Attempt any five questions from the remaining six questions. Working notes should form part of the answers.

Question 1 (a) ABC Limited started its operations in the year 2013 with a total production capacity of

2,00,000 units. The following information, for two years, are made available to you: Year Year 2013 2014 Sales (units) 80,000 1,20,000 Total Cost (`) 34,40,000 45,60,000 There has been no change in the cost structure and selling price and it is anticipated that

it will remain unchanged in the year 2015 also. Selling price is ` 40 per unit. Calculate :

(i) Variable cost per unit.

(ii) Profit Volume Ratio.

(iii) Break-Even Point (in units)

(iv) Profit if the firm operates at 75% of the capacity.

(b) X Y Z Limited is drawing a production plan for its two products - Product 'xml' and 'Product 'yml' for the year 2015-16. The company's policy is to maintain closing stock of finished goods at 25% of the anticipated volume of sales of the succeeding month.

The following are the estimated data for the two products:

xml yml Budgeted Production (in units) 2,00,000 1,50,000 Direct Material (per unit) ` 220 ` 280 Direct Labour (per unit) ` 130 ` 120 Direct Manufacturing Expenses ` 4,00,000 ` 5,00,000 The estimated units to be sold in the first four months of the year 2015-16 are as under:



April May June July xmI 8,000 10,000 12,000 16,000 yml 6,000 8,000 9,000 14,000

Prepare: (i) Production Budget (Month wise) (ii) Production cost Budget (for first quarter of the year) (c) A new customer has approached a firm to establish new business connection. The

customer require 1.5 month of credit. If the proposal is accepted, the sales of the firm will go up by ` 2,40,000 per annum. The new customer is being considered as a member of 10% risk of non-payment group.

The cost of sales amounts to 80% of sales. The tax rate is 30% and the desired rate of return is 40% (after tax).

Should the firm accept the offer? Give your opinion on the basis of calculations. (d) Following information are related to four firms of the same industry :

FIRM Change in Revenue Change in Operating Income

Change in Earning per Share

P 27% 25% 30% Q 25% 32% 24% R 23% 36% 21% S 21% 40% 23%

Find out:

(i) degree of operating leverage, and

(ii) degree of combined leverage for all the firms. (4 × 5 = 20 Marks)

Answer

(a) (i) Variable Cost per unit = Change intotalcostChange insales volume

= 45,60,000 34,40,0001,20,000units 80,000units

` `

= 11,20,00040,000units` = ` 28



(ii) Profit Volume Ratio = Contributionper unit 100Sellingpriceper unit

= 40 28 10040

` `

` = 30%

(iii) Break-Even Point (in units) = Fixedcos tContributionper unit

Fixed Cost = Total Cost in 2013 – Total Variable Cost in 2013

= ` 34,40,000 – (` 28 × 80,000 units)

= ` 34,40,000 – ` 22,40,000

= ` 12,00,000

Therefore, Break-Even Point = 12,00,00012

`

`= 1,00,000 units

(iv) Profit if the firm operates at 75% of the capacity:

Number of units to be produced and sold = 2,00,000 units × 75% = 1,50,000 units

Profit = Total contribution – Fixed Cost

Or, = ` 12 × 1,50,000 units – ` 12,00,000

Or, = ` 18,00,000 – ` 12,00,000

Or, Profit = ` 6,00,000 (b) (i) Production Budget of Product ‘xml’ and ‘yml’ (monthwise in units)

April May June Total xml yml xml yml xml yml xml yml

Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000 Add: Closing Stock (25% of next month’s sale)

2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750

Less: Opening Stock 2,000* 1,500* 2,500 2,000 3,000 2,250 7,500 5,750 Production units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000

* Opening stock of April is the closing stock of March, which is as per company’s policy 25% of next month’s sale.



(ii) Production Cost Budget (for first quarter of the year)

Element of cost

Rate (`) Amount (`) xml

(32,000 units)

yml (25,000 units)

xml yml

Direct Material 220 280 70,40,000 70,00,000 Direct Labour 130 120 41,60,000 30,00,000 Manufacturing Overhead (` 4,00,000 ÷ 2,00,000 × 32,000) 64,000 (` 5,00,000 ÷ 1,50,000 × 25,000) 83,333 1,12,64,000 1,00,83,333

(c) Evaluation of Credit proposal to new business connection Amount (`) A. Calculation of profit on additional sales: Increase in Sales 2,40,000 Less: Cost of Sales (1,92,000) 48,000 Less: Risk of non-payment (10% of ` 2,40,000) 24,000 Profit Before Tax 24,000 Tax (30% of ` 24,000) 7,200 Profit After Tax 16,800 B. Opportunity cost of Investment on Receivable

1,92,000 40%

8 *`

9,600

C. Net Benefit (A – B) 7,200

* Receivable Turnover = 12months1.5months

= 8 times

Since estimated PAT on additional sales (i.e. ` 16,800) is more than the opportunity cost of investment on receivable (i.e. ` 9,600), the firm should accept the offer.



(d) Calculation of Degree of Operating leverage and Degree of Combined leverage Firm Degree of Operating Leverage (DOL)

= % change inOperatingIncome% change inRevenue

Degree of Combined Leverage (DCL)

= % changeinEPS%change inRevenue

P 25%27%

= 0.926 30%27%

= 1.111

Q 32%25%

= 1.280 24%25%

= 0.960

R 36%23%

= 1.565 21%23%

= 0.913

S 40%21%

= 1.905 23%21%

= 1.095

Question 2 (a) QS Limited has furnished the following information:

Standard overhead absorption rate per unit ` 20

Standard rate per hour ` 4

Budgeted production 12000 units

Actual production 15560 units

Actual working hours 74000

Actual overheads amounted to ` 2,95,000, out of which ` 62,500 are fixed. Overheads are based on the following flexible budget:

Production (units) Total Overheads (`) 8,000 1,80,000 10,000 2,10,000 14,000 2,70,000

Calculate following overhead variances on the basis of hours :

(i) Variable overhead efficiency variance. (ii) Variable overhead expenditure variance.

(ill) Fixed overhead efficiency variance.

(iv) Fixed overhead capacity variance.



(b) SSR Ltd. has furnished the following ratios and information relating to the year ended 31st March, 2015.

Sales ` 60 Lacs

Return on Net worth 25%

Rate of Income tax 50%

Share Capital to reserves 7:3

Current Ratio 2

Net-Profit to Sales (after tax) 6.25%

Inventory Turnover 12

(Based on cost of goods sold and closing stock)

Cost of goods sold ` 18 Lacs

Interest on Debentures (@ 15%) ` 60,000

Sundry Debtors ` 2 Lacs

Sundry Creditors ` 2 Lacs

You are required to :

(i) Calculate the operating expenses for the year ended 31st March, 2015.

(ii) Prepare a Balance Sheet as on 31st March, 2015. (8 Marks)

Answer (a) Workings:

(a) Variable Overhead rate per unit

= Difference of Overheadat two levelDifference inPr oductionunits

= 2,10,000 1,80,000 1510,000units 8,000units

` `

`

(b) Fixed Overhead = `1,80,000 (8,000 units ` 15) = ` 60,000

(c) Standard hours per unit of production = Std.Overhead AbsorptionRateStd.Rateper hour

= 20 5hours4

`

`



(d) Standard Variable Overhead Rate per hour = VariableOverheadper unitStd.hour per unit

= 15 35hours

`

`

(e) Standard Fixed Overhead Rate per hour = ` 4 - ` 3 = ` 1

(f) Actual Variable Overhead = ` 2,95,000 – ` 62,500= ` 2,32,500

(g) Actual Variable Overhead Rate per Hour= 2,32,500 3.141974,000hours

`

`

(h) Budgeted hours = 12,000 units 5 hours = 60,000 hours

(i) Standard Hours for Actual Production= 15,560 units 5 hours = 77,800 hours (i) Variable Overhead Efficiency Variance: = Std. Rate per hour (Std. Hours – Actual Hours) = ` 3 (77,800 hours 74,000 hours) = ` 11,400 (F) (ii) Variable Overhead Expenditure Variance: = Actual Hours (Std. Rate - Actual Rate) = 74,000 hours (` 3 - ` 3.1419) = ` 10,500 (A) (iii) Fixed Overhead Efficiency Variance: = Std. Rate per Hour (Std. Hours-Actual Hours) = ` 1(77,800 hours -74,000 hours) = ` 3,800 (F) (iv) Fixed Overhead Capacity Variance: = Std. Rate per Hour (Actual Hours - Budgeted Hours) = ` 1(74,000 hours – 60,000 hours) = ` 74,000 ` 60,000 = ` 14,000 (F)

(b) Workings: 1. Net Profit = 6.25% of ` 60,00,000 = ` 3,75,000

2. Net worth = ` 3,75,000 × 10025

= ` 15,00,000



Share Capital = ` 15,00,000 × 710

= ` 10,50,000

Reserve = ` 15,00,000 × 310

= ` 4,50,000

Debentures = ` 60,000 × 10015

= ` 4,00,000

3. Sundry Creditors = ` 2,00,000

Current Ratio = Current AssetsCurrentLiabilities

= 2

Current Assets = 2 Current Liabilities = 2 × ` 2,00,000 (assumed creditors is the only current liabilities) = ` 4,00,000

4. Inventory Turnover = Cost of GoodsSoldClo singStock

= 12

Hence, Closing Stock = 18,00,00012

` = ` 1,50,000

Calculation of Earnings Before Interest and Tax (EBIT) Particulars Amount (`) Net Profit 3,75,000 Tax @50% 3,75,000 Profit Before Tax 7,50,000 Add: Interest on Debentures 60,000 Earnings Before Interest and Tax (EBIT) 8,10,000

(i) Calculation of Operating Expenses for the year ended 31st March 2015 Particulars Amount (`) Amount (`) Sales 60,00,000 Less: Cost of Goods Sold 18,00,000

EBIT 8,10,000 26,10,000 Operating Expenses 33,90,000



(ii) Balance Sheet as on 31st March, 2015 Liabilities Amount

(`) Amount

(`) Assets Amount

(`) Amount

(`) Share capital 10,50,000 Fixed Assets

(balancing figure)

17,00,000

Reserve 4,50,000 Current Assets: Debentures 15% 4,00,000 Closing stock 1,50,000 Sundry Creditors 2,00,000 Debtors 2,00,000 Cash 50,000 4,00,000 21,00,000 21,00,000

Question 3 (a) A mini-bus, having a capacity of 32 passengers, operates between two places - 'A' and

'B'. The distance between the place 'A' and place 'B' is 30 km. The bus makes 10 round trips in a day for 25 days in a month. On an average, the occupancy ratio is 70% and is expected throughout the year.

The details of other expenses are as under:

Amount (`) Insurance 15,600 Per annum

Garage Rent 2,400 Per quarter

Road Tax 5,000 Per annum

Repairs 4,800 Per quarter

Salary of operating staff 7,200 Per month

Tyres and Tubes 3,600 Per quarter

Diesel: (one litre is consumed for every 5 km) 13 Per litre

Oil and Sundries 22 Per 100 km run

Depreciation 68,000 Per annum

Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit of 25% on total taking.

Prepare operating cost statement on the annual basis and find out the cost per passenger kilometer and one way fare per passenger. (8 Marks)



(b) Given below are the data on a capital project 'M'.

Annual cash inflows ` 60,000 Useful life 4 years Internal rate of return 15% Profitability index 1.064 Salvage value 0

You are required to calculate for this project M :

(i) Cost of project

(ii) Payback period

(iii) Cost of capital

(iv) Net present value

PV factors at different rates are given below:

Discount factor 15% 14% 13% 12% 1 year 0.869 0.877 0.885 0.893 2 year 0.756 0.769 0.783 0.797 3 year 0.658 0.675 0.693 0.712 4 year 0.572 0.592 0.613 0.636

(8 Marks) Answer (a) Operating Cost Statement

Particulars Total Cost Per annum (`)

A. Fixed Charges: Insurance 15,600 Garage rent (` 2,400 × 4 quarters) 9,600 Road Tax 5,000 Salary of operating staff (` 7,200 × 12 months) 86,400 Depreciation 68,000 Total (A) 1,84,600 B. Variable Charges: Repairs (` 4,800 × 4 quarters) 19,200



Tyres and Tubes (` 3,600 × 4 quarters) 14,400 Diesel {(1,80,000 km. ÷ 5 km.) × `13} 4,68,000 Oil and Sundries {(1,80,000 km. ÷ 100 km.) × `22} 39,600 Total (B) 5,41,200 Total Operating Cost (A+B) 7,25,800 Add: Passenger tax (Refer to WN-1) 3,01,275 Add: Profit (Refer to WN-1) 3,42,359 Total takings 13,69,434

Calculation of Cost per passenger kilometre and one way fare per passenger:

Cost per Passenger-Km. = TotalOperatingCostTotalPassenger Km.

= 7,25,80040,32,000Passenger Km.

` = ` 0.18

One way fare per passenger = TotalTakings 30Km.TotalPassenger Km.

= 13,69,434 30km40,32,000Passenger Km.

` = ` 10.20

Working Notes: 1. Let total taking be X then Passenger tax and profit will be as follows:

X = ` 7,25,800 + 0.22 X + 0.25X

X – 0.47 X = ` 7,25,800

X = 7,25,8000.53

` = ` 13,69,434

Passenger tax = ` 13,69,434 × 0.22 = ` 3,01,275 Profit = ` 13,69,434 × 0.25 = ` 3,42,359

2. Total Kilometres to be run during the year = 30 km.× 2 sides × 10 trips × 25 days × 12 months = 1,80,000 Kilometres 3. Total passenger Kilometres

= 1,80,000 km. × 32 passengers × 70% = 40,32,000 Passenger- km.



(b) (i) Cost of Project ‘M’ At 15% internal rate of return (IRR), the sum of total cash inflows = cost of the project i.e initial cash outlay

Annual cash inflows = ` 60,000

Useful life = 4 years

Considering the discount factor table @ 15%, cumulative present value of cash inflows for 4 years is 2.855 (0.869 + 0.756 + 0.658 + 0.572)

Hence, Total Cash inflows for 4 years for Project M is

` 60,000 × 2.855 = ` 1,71,300

Hence, Cost of the Project = ` 1,71,300 (ii) Payback Period

Payback period = Cost of the ProjectAnnual Cash Inflows

= 1,71,30060,000

`

` = 2.855 years

(iii) Cost of Capital

Profitability index = Project the ofCost

inflows Cash Discounted of Sum

Sum of Discounted Cash inflows1.064 1,71,300

`

Sum of Discounted Cash inflows = ` 1,82,263.20 Since, Annual Cash Inflows = ` 60,000

Hence, cumulative discount factor for 4 years = 1,82,263.2060,000

`

`

From the discount factor table, at discount rate of 12%, the cumulative discount factor for 4 years is 3.038 (0.893 + 0.797 + 0.712 + 0.636) Hence, Cost of Capital = 12%

(iv) Net Present Value (NPV) NPV = Sum of Present Values of Cash inflows – Cost of the Project

= ` 1,82,263.20 – ` 1,71,300 = ` 10,963.20 Net Present Value = `10,963.20



Question 4 (a) A company manufactures one main product (M1) and two by-products B1 and B2. For the

month of January 2015, following details are available: Total cost upto separation point ` 2,12,400.

M1 B1 B2 Cost after separation - ` 35,000 ` 24,000 No. of Units produced 4,000 1,800 3,000 Selling Price per unit ` 100 ` 40 ` 30 Estimated net profit as percentage to Sales Value

-

20%

30%

Estimated selling expenses as 20% 15% 15% percentage to Sales Value

There are no opening or closing inventories. Prepare statement showing:

(i) Allocation of Joint Cost; and (ii) Product-wise and overall profitability of the company for January, 2015. (8 Marks)

(b) A Ltd. wishes to raise additional finance of ` 30 lakhs for meeting its investment plans. The company has ` 6,00,000 in the form of retained earnings available for investment purposes.

The following are the further details: Debt equity ratio - 30 : 70 Cost of debt - at the rate of 11 % (before tax) upto ` 3,00,000 and 14% (before tax)

beyond that. Earnings per share - ` 15. Dividend payout - 70% of earnings. Expected growth rate in dividend - 10%. Current market price per share - ` 90. Company's tax rate is 30% and shareholder's Personal tax rate is 20%. You are required to :

(i) Calculate the post tax average cost of additional debt.

(ii) Calculate the cost of retained earnings and cost of equity.

(iii) Calculate the overall weighted average (after tax) cost of additional finance.

(8 Marks)



Answer (a) (i) Statement showing allocation of Joint Cost

Particulars B1 B2 No. of units Produced 1,800 3,000 Selling Price Per unit (`) 40 30 Sales Value (`) 72,000 90,000 Less:Estimated Profit (B1 -20% & B2 -30%) (14,400) (27,000) Cost of Sales 57,600 63,000 Less: Estimated Selling Expenses (B1 -15% & B2 -15%) (10,800) (13,500) Cost of Production 46,800 49,500 Less:Cost after separation (35,000) (24,000) Joint Cost allocated 11,800 25,500


Particulars M1 (`) B1 (`) B2 (`) Sales Value (A) 4,00,000

(4,000 × `100) 72,000 90,000

Less:- Joint Cost 1,75,100 11,800 25,500 (2,12,400 -11,800

- 25,500)

- Cost after separation - 35,000 24,000 - Selling Expenses

(M1- 20%, B1-15% & B2-15%) 80,000 10,800 13,500

(B) 2,55,100 57,600 63,000 Profit (A –B) 1,44,900 14,400 27,000 Overall Profit = `1,44,900 + `14,400 + ` 27,000 = ` 1, 86,300

(b)

Pattern of raising capital = 0.30 30,00,000 Debt = 9,00,000 Equity = 21,00,000 Equity fund (` 21,00,000) Retained earnings = ` 6,00,000



Equity (additional) = `15,00,000 Total = ` 21,00,000 Debt fund (` 9,00,000) 11% debt = ` 3,00,000 14% debt = ` 6,00,000 Total = ` 9,00,000

(i) Kd = TotalInterest (1 t) 100 9,00,000

`

= ( 33,000 84,000)(1 0.3) 100 9,00,000

` `

`

or = 81,900 1009,00,000

`

` = 9.10%

(ii) Ke* = (EPS Payout)(1 g) 100 gMp

= ( 15 0.7) 1.1 100 10%

90

`

`

= 11.55 100 10% 90

`

` = 22.83%

Kr = Ke (1 – tp) = 22.83%(1 0.2) = 18.26% (iii) Weighted average cost of capital

Sources of Capital Amount (`) Weight After tax Cost Weighted Cost (in percentage)

Equity Capital 15,00,000 0.5 22.83% 11.415 Retained earning 6,00,000 0.2 18.26% 3.652 Debt 9,00,000 0.3 9.10% 2.730 Total 30,00,000 1.00 17.797

* Ke is calculated based on dividend growth model Kd = Cost of capital; Ke = Cost of equity; Kr = Cost of retained earnings; Mp = Market price; g = growth; tp = Shareholder’s personal tax; Ko = Cost of overall capital

Note: Cost of retained earnings(Kr ) and Cost of equity (Ke) can also be calculated in the same way without considering shareholder’s personal tax. In that case Ke and Kr will be same and accordingly Ko can be calculated.



Question 5 (a) Explain 'Sunk Cost' and 'Opportunity Cost'. (b) Write notes on 'Escalation Clause'. (c) Explain 'Sales and Lease Back'. (d) Explain 'Miller-Orr Cash Management model'. (4 x 4 = 16 Marks)

Answer (a) Sunk cost: Historical costs or the costs incurred in the past are known as sunk cost.

They play no role in the current decision making process and are termed as irrelevant costs. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost, and therefore, not considered.

Opportunity cost: It refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan.

(b) Escalation Clause: This clause is usually provided in the contracts as a safeguard against any likely changes in the price or utilization of material and labour. If during the period of execution of a contract, the prices of materials or labour rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an 'escalation clause'.

An escalation clause usually relates to change in price of inputs, it may also be extended to increased consumption or utilization of quantities of materials, labour etc (where it is beyond the control of the contractor). In such a situation the contractor has to satisfy the contractee that the increased utilization is not due to his inefficiency.

(c) Sales and Lease Back: Under this type of lease, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of a lease rentals. Under this arrangement, the asset is not physically exchanged but it all happen in records only. The main advantage of this method is that the lessee can satisfy himself completely regarding the quality of an asset and after possession of the asset convert the sale into a lease agreement.

(d) Miller – Orr Cash Management Model: According to this model the net cash flow is completely stochastic. When changes in cash balance occur randomly, the application of control theory serves a useful purpose. The Miller – Orr model is one of such control limit models. This model is designed to determine the time and size of transfers between an investment account and cash account. In this model control limits are set for cash balances. These limits may consist of ‘h’ as upper limit, ‘z’ as the return point and zero as the lower limit.



h

Z

0

Upper Control Limit

Cash

Bal

ance

(Rs.

)

Return Point

Time Lower Control Limit

MILLER-ORR CASH MANAGEMENT MODEL

When the cash balance reaches the upper limit, the transfer of cash equal to ‘h – z’ is invested in marketable securities account. When it touches the lower limit, a transfer from marketable securities account to cash account is made. During the period when cash balance stays between (h, z) and (z, 0) i.e. high and low limits, no transactions between cash and marketable securities account is made. The high and low limits of cash balance are set up on the basis of fixed cost associated with the securities transaction, the opportunities cost of holding cash and degree of likely fluctuations in cash balances. These limits satisfy the demands for cash at the lowest possible total costs.

Question 6 (a) A machine shop cost centre contains three machines of equal capacities. Three

operators are employed on each machine, payable ` 20 per hour each. The factory works for 48 hours in a week which includes 4 hours set up time. The work is jointly done by operators. The operators are paid fully for the 48 hours. In addition, they are also paid a bonus of 10% of productive time. Costs are reported for this company on the basis of thirteen, four-weekly period.

The company, for the purpose of computing machine hour rate includes the direct wages of the operator and also recoups the factory overheads allocated to the machines. The following details of factory overheads applicable to the cost centres are available:

Original Cost of each machine - ` 52,000

Depreciation on the original cost of the machine -` 10% p.a.

Maintenance & Repair per week per machine - ` 60

Consumable Stores per week per machine - ` 75

Power: 20 units per hour per machine - 80 paise per unit



Apportionment to the cost centre:

Rent per annum ` 5,400

Heat and Light per annum ` 9,720

Foreman's Salary per annum ` 12,960

Calculate:

(i) the cost of running one machine for a four week period.

(ii) machine hour rate. (8 Marks)

(b) The following information is provided by the DVP Ltd. for the year ending 31st March, 2015.

Raw Material storage period 50 days

Work in progress conversion period 18 days Finished Goods storage period 22 days Debt Collection period 45 days Creditors' payment period 55 days Annual Operating Cost ` 21 Lacs (Including depreciation of ` 2,10,000) (1 year = 360 days) You are required to calculate:

(i) Operating Cycle period.

(ii) Number of Operating Cycles in a year.

(iii) Amount of working capital required for the company on a cash cost basis.

(iv) The company is a market leader in its product, there is virtually no competitor in the market. Based on a market research, it is planning to discontinue sales on credit and deliver products based on pre-payments. Thereby, it can reduce its working capital requirement substantially. What would be the reduction in working capital requirement due to such decision? (8 Marks)

Answer (a) Effective Machine hour for four-week period = Total working hours – unproductive set-up time = {(48 hours × 4 weeks) – {(4 hours × 4 weeks)} = (192 – 16) hours ) =176 hours.



(i) Computation of cost of running one machine for a four week period

(`) (`)

(A) Standing charges (per annum) Rent 5,400.00 Heat and light 9,720.00 Forman’s salary 12,960.00 Standing charges (per annum) 28,080.00 720.00 Total expenses for one machine for four week

period

28,080 3machines 13 four week period

`

Wages (48 hours × 4 weeks × ` 20 × 3 operators) ÷ 3 machines)

3,840.00

Bonus (176 hours × ` 20 × 3 operators) ÷ 3 machines) 10%

352.00

Total standing charges 4,912.00 (B) Machine Expenses

Depreciation

=

152,000 × 10% ×

13 four - weekperiod

400.00

Repairs and maintenance (`60 4 weeks) 240.00 Consumable stores (` 75 4 weeks) 300.00 Power (176 hours 20 units ` 0 .80) 2,816.00 Total machine expenses 3,756.00

(C) Total expenses (A) + (B) 8,668.00

(ii) Machine hour rate = 8,668 49.25176hours

`

`

If we assume that there are three different operators for three machines i.e. 9 operators, in that case Wages will be `11,520 (48 hours × 4 weeks × ` 20 × 3 operators), Bonus will be `1,056 (176 hours × ` 20 × 3 operators 10%) and

accordingly the Machine hour rate will be 17,052 176hours` = ` 96.89



(b) (i) Calculation of Operating Cycle Period Operating Cycle Period = R + W + F + D – C

= 50 + 18 + 22 + 45 – 55 = 80 days

(ii) Number of Operating Cycle in a Year

= 360Operating Cycle Period

= 36080

= 4.5

(iii) Amount of Working Capital Required

= Annual Operating CostNumber of Operating Cycle

= ( 21,00,000 2,10,000)4.5` `

= 18,90,0004.5

= 4,20,000

(iv) Reduction in Working Capital

Operating Cycle Period = R + W + F – C

= 50 + 18 + 22 – 55= 35 days

Amount of Working Capital Required = 18,90,000 × 35360

= 1,83,750

Reduction in Working Capital = 4,20,000 – 1,83,750 = 2,36,250 Question 7 Answer any four of the following: (a) Define 'Cost Centre' and state its types. (b) State benefits of Integrated Accounting. (c) Differentiate between 'Factoring' and 'Bill discounting'. (d) Discuss the conflicts in Profit versus Wealth maximization principle of the firm. (e) Define 'Present Value' and 'Perpetuity'. (4 x 4 = 16 Marks)

Answer (a) It is defined as a location, person or an item of equipment (or group of these) for which

cost may be ascertained and used for the purpose of Cost Control.



Cost Centres are of two types, Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X,

supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.

Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g. Ludhiana branch, boiler house, cooling tower, weighing machine, canteen, and generator set etc.

In a manufacturing concern there are two types of cost centres viz., Production and Service cost centres.

(b) The main advantages of Integrated Accounting are as follows: No need for Reconcilation: The question of reconciling costing profit and financial

profit does not arise, as there is only one figure of profit. Less efforts: Due to use of one set of books, there is significant saving in efforts

made. Less time consuming: No delay is caused in obtaining information provided in

books of original entry. Economical Process: It is economical also as it is based on the concept of

‘Centralization of Accounting Function’ (c) Differentiation between Factoring and Bills Discounting The differences between Factoring and Bills discounting are:

(a) Factoring is called as “Invoice Factoring’ whereas Bills discounting is known as ‘Invoice discounting.”

(b) In Factoring, the parties are known as the client, factor and debtor whereas in Bills discounting, they are known as drawer, drawee and payee.

(c) Factoring is a sort of management of book debts whereas bills discounting is a sort of borrowing from commercial banks.

(d) For factoring there is no specific Act, whereas in the case of bills discounting, the Negotiable Instruments Act is applicable.

(d) Conflict in Profit versus Wealth Maximization Principle of the Firm: Profit maximisation is a short-term objective and cannot be the sole objective of a company. It is at best a limited objective. If profit is given undue importance, a number of problems can arise like the term profit is vague, profit maximisation has to be attempted with a realisation of risks involved, it does not take into account the time pattern of returns and as an objective it is too narrow.

Whereas, on the other hand, wealth maximisation, as an objective, means that the company is using its resources in a good manner. If the share value is to stay high, the



company has to reduce its costs and use the resources properly. If the company follows the goal of wealth maximisation, it means that the company will promote only those policies that will lead to an efficient allocation of resources.

(e) Present Value: Present Value” is the current value of a “Future Amount”. It can also be defined as the amount to be invested today (Present Value) at a given rate over specified period to equal the “Future Amount”.

Perpetuity: Perpetuity is an annuity in which the periodic payments or receipts begin on a fixed date and continue indefinitely or perpetually. Fixed coupon payments on permanently invested (irredeemable) sums of money are prime examples of perpetuities.


DISCLAIMER












Question 1


(a) Following details are related to a manufacturing concern:

Re-order Level 1,60,000 units

Economic Order Quantity 90,000 units

Minimum Stock Level 1,00,000 units

Maximum Stock Level 1,90,000 units

Average Lead Time 6 days

Difference between minimum lead time and Maximum lead time 4 days

Calculate:

(i) Maximum consumption per day

(ii) Minimum consumption per day

(b) Zed Limited sells its product at ` 30 per unit. During the quarter ending on 31st March,

2014, it produced and sold 16,000 units and suffered a loss of ` 10 per unit. If the

volume of sales is raised to 40,000 units, it can earn a profit of ` 8 per unit.


(i) Break Even Point in Rupees.

(ii) Profit if the sale volume is 50,000 units.

(iii) Minimum level of production where the company needs not to close the production if

unavoidable fixed cost is ` 1,50,000.

(c) Alpha Limited requires funds amounting to ` 80 lakhs for its new project. To raise the

funds, the company has following two alternatives:

(i) to issue Equity Shares (at par) amounting to ` 60 lakhs and borrow the balance

amount at the interest of 12% p.a.; or

(ii) to issue Equity Shares (at par) and 12% Debentures in equal proportion.

The Income-tax rate is 30%.

Find out the point of indifference between the available two modes of financing and state

which option will be beneficial in different situations.


(d) 'A' Ltd. and 'B' Ltd. are identical in every respect except capital structure. 'A' Ltd. does

not employ debts in its capital structure whereas 'B' Ltd. employs 12% Debentures

amounting to ` 10 lakhs. Assuming that :

(i) All assumptions of M-M model are met;

(ii) Income-tax rate is 30%;

(iii) EBIT is ` 2,50,000 and

(iv) The Equity capitalization rate of ‘A' Ltd. is 20%.

Calculate the value of both the companies and also find out the Weighted Average Cost

of Capital for both the companies. (4 x 5 = 20 Marks)

Answer

(a) Difference between Minimum lead time Maximum lead time = 4 days

Max. lead time – Min. lead time = 4 days Or, Max. lead time = Min. lead time + 4 days.............................................(i) Average lead time is given as 6 days i.e. Max.lead time Min.lead time

2+ = 6 days.......................................................(ii)

Putting the value of (i) in (ii), Min. lead time 4 days Min.lead time

2+ + = 6 days

Or, Min. lead time + 4 days + Min. lead time = 12 days Or, 2 Min. lead time = 8 days

Or, Minimum lead time = 8days2

= 4 days

Putting this Minimum lead time value in (i), we get Maximum lead time = 4 days + 4 days = 8 days (i) Maximum consumption per day:

Re-order level = Max. Re-order period × Maximum Consumption per day 1,60,000 units = 8 days × Maximum Consumption per day

Or, Maximum Consumption per day = 1,60,000units8days

= 20,000 units

(ii) Minimum Consumption per day:

Maximum Stock Level =


Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day) Or, 1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day) Or, 4 days × Min. Consumption per day = 2,50,000 units – 1,90,000 units

Or, Minimum Consumption per day = 60,000 units4 days

= 15,000 units

(b) Units sold Sales value (`) Profit/ (loss) (`)

16,000 units 4,80,000 (` 30 × 16,000 units)

(1,60,000) (` 10 × 16,000 units)

40,000 units 12,00,000 (` 30 × 40,000 units)

3,20,000 (` 8 × 40,000 units)

P/V Ratio = Change inprofit 100Change insales value

× = 3,20,000 ( 1,60,000) 10012,00,000 4,80,000

− −×

−` `

` `

4,80,000 100 7,20,000

= ×`

`= 66.67%

Total Contribution in case of 40,000 units = Sales Value × P/V Ratio

= ` 12,00,000 × 66.67%

= ` 8,00,000

So, Fixed cost = Contribution – Profit

= ` 8,00,000 – ` 3,20,000

= ` 4,80,000

(i) Break-even Point in Rupees = FixedCostP / VRatio

= 4,80,00066.67%

` = ` 7,20,000

(ii) If sales volume is 50,000 units, then profit = Sales Value × P/V Ratio – Fixed Cost

= (50,000 units× ` 30×66.67% - ` 4,80,000)

= ` 5,20,000

(iii) Minimum level of production where the company needs not to close the production, if unavoidable fixed cost is ` 1,50,000:


= Avoidable fixedcos tContributionper unit

= Total fixedcos t Unavoidable fixedcos tContributionper unit

−

= 4,80,000 1,50,000 30 66.67%

−×

` `

`

= 3,30,000 20

`

`= 16,500 units.

At production level of ≥ 16,500 units, company needs not to close the production. (c) (i) (Note: The par value of equity share is assumed to be `100)

Amount = ` 80 Lakhs

Plan I = Equity of ` 60 lakhs + Debt of ` 20 lakhs

Plan II = Equity of ` 40 lakhs + Debentures of ` 40 Lakhs.

Plan I: Interest Payable on Loan

= 0.12 x 20,00,000 = 2,40,000

Plan II: Interest Payable on Debentures

= 0.12 x 40,00,000 = 4,80,000

Computation of Point of Indifference

( ) ( )

1

EBIT - I I - t =

E( ) ( )

2

2

EBIT - I I - t

E

( ) ( )EBIT - 2,40,000 1- 0.3 =

60,000( ) ( )EBIT - 4,80,000 I - 0.3

40,000

2 (EBIT – 2,40,000) = 3(EBIT – 4,80,000)

2 EBIT – 4,80,000 = 3 EBIT – 14,40,000

2 EBIT – 3 EBIT = -14,40,000 + 4,80,000

EBIT = 9,60,000


(ii) Earnings per share (EPS) under Two Situations for both the Plans

Situation A (EBIT is assumed to be ` 9,50,000)

Particulars Plan I Plan II

EBIT 9,50,000 9,50,000 Less: Interest @ 12% 2,40,000 4,80,000 EBT 7,10,000 4,70,000 Less: Taxes @ 30% 2,13,000 1,41,000 EAT 4,97,000 3,29,000 No. of Equity Shares 60,000 40,000 EPS 8.28 8.23

Comment: In Situation A, when expected EBIT is less than the EBIT at indifference point then, Plan I is more viable as it has higher EPS. The advantage of EPS would be available from the use of equity capital and not debt capital.

Situation B (EBIT is assumed to be ` 9,70,000)

Particulars Plan I Plan II

EBIT 9,70,000 9,70,000 Less: Interest @ 12% 2,40,000 4,80,000 EBT 7,30,000 4,90,000 Less: Taxes @ 30% 2,19,000 1,47,000 EAT 5,11,000 3,43,000 No. of Equity Shares 60,000 40,000 EPS 8.52 8.58

Comment: In Situation B, when expected EBIT is more than the EBIT at indifference point then, Plan II is more viable as it has higher EPS. The use of fixed-cost source of funds would be beneficial from the EPS viewpoint. In this case, financial leverage would be favourable.

(Note: The problem can also be worked out assuming any other figure of EBIT which is more than 9,60,000 and any other figure less than 9,60,000. Alternatively, the answer may also be based on the factors/governing the capital structure like the cost, risk, control, etc. Principles).

(d) (i) Calculation of Value of Firms ‘A Ltd.’ and ‘B Ltd’ according to MM Hypothesis

Market Value of ‘A Ltd’ (Unlevered)

Vu = ( )EBIT 1 - t

Ke


= ( )2,50,000 1 - 0.30

20%

= 1,75,000 8,75,00020%

= `

Market Value of ‘B Ltd.’ (Levered)

V E = Vu + DT = 8,75,000 + (10,00,000 x 0.30) = 8,75,000 + 3,00,000 = ` 11,75,000 (ii) Computation of Weighted Average Cost of Capital (WACC)

WACC of ‘A Ltd.’ = 20% (Ke =Ko) WACC of ‘B Ltd.’

B Ltd.

EBIT 2,50,000 Interest to Debt holders (1,20,000) EBT 1,30,000 Taxes @ 30% (39,000) Income available to Equity Shareholders 91,000 Total Value of Firm 11,75,000 Less: Market Value of Debt (10,00,000) Market Value of Equity 1,75,000 Ke = 91,000 / 1,75,000 0.52

For Computation of WACC B. Ltd

Component of Costs Amount Weight Cost of Capital WACC

Equity 1,75,000 0.149 0.52 0.0775 Debt 10,00,000 0.851 0.084* 0.0715 11,75,000 WACC 0.1490

Kd= 12% (1- 0.3) = 12% x 0.7 = 8.4% WACC = 14.90%

Question 2

(a) Z Limited obtained a contract No. 999 for ` 50 lacs. The following details are available in

respect of this contract for the year ended March 31, 2014:


`

Materials purchased 1,60,000

Materials issued from stores 5,00,000

Wages and salaries paid 7,00,000

Drawing and maps 60,000

Sundry expenses 15,000

Electricity charges 25,000

Plant hire expenses 60,000

Sub-contract cost 20,000

Materials returned to stores 30,000

Materials returned to suppliers 20,000

The following balances relating to the contract No. 999 for the year ended on March 31,

2013 and March 31, 2014 are available:

as on 31st March, 2013 as on 31st March, 2014

Work certified 12,00,000 35,00,000

Work uncertified 20,000 40,000

Materials at site 15,000 30,000

Wages outstanding 10,000 20,000

The contractor receives 75% of work certified in cash.

Prepare Contract Account and Contractee's Account. (8 Marks)

(b) Balance Sheets of Star Ltd. are as under:

Balance Sheet (in lakh `)

Liabilities 31/03/13 `

31/03/14 `

Assets 31/03/13

`

31/03/14

`

Share Capital 24.00 30.00 Plant & Machinery 15.00 21.00

Reserve 4.50 6.00 Buildings 12.00 18.00

Profit & Loss A/c 1.80 3.00 Investments - 3.00

Debentures - 6.00 Sundry Debtors 21.00 15.00

Provision for Taxation 2.10 3.00 Stock 6.00 12.00

Proposed Dividend 3.00 6.00 Cash in hand/Bank 6.00 6.00

Sundry Creditors 24.60 21.00

Total 60.00 75.00 60.00 75.00


With the help of following additional information, prepare Cash Flow Statement:

(i) Depreciation on plant and machinery was charged @ 25% on its opening balance

and on building @ 10% on its opening balance.

(ii) During the year an old machine costing ` 1,50,000 (written down value ` 60,000)

was sold for ` 1,05,000.

(iii) ` 1,50,000 was paid towards Income-tax, during the year. (8 Marks)

Answer

(a) Contract No. 999 Account for the year ended 31st March, 2014

Dr. Cr. Particulars Amount (`) Particulars Amount (`)

To Work in progress b/d: By Material returned to store 30,000 - Work certified 12,00,000 By Material returned to

suppliers 20,000

- Work uncertified 20,000 By Stock (Material) c/d 30,000 To Stock (Materials) b/d 15,000 By Work in progress c/d: To Material purchased 1,60,000 - Work certified 35,00,000 To Material issued 5,00,000 - Work uncertified 40,000 To Wages paid 7,00,000 Less: Opening O/s (10,000) Add: Closing O/s 20,000 7,10,000 To Drawing and maps* 60,000 To Sundry expenses 15,000 To Electricity charges 25,000 To Plant hire expenses 60,000 To Sub- contract cost 20,000 To Notional profit c/d (balancing figure)

8,35,000

36,20,000 36,20,000 To Costing P& L A/c (W.N.-1) 4,17,500 By Notional profit b/d 8,35,000 To WIP Reserve (balancing figure) 4,17,500 8,35,000 8,35,000

*Assumed that expenses incurred for drawing and maps are used exclusively for this contract only.


Dr. Contractee’s Account Cr. Particulars Amount (`) Particulars Amount (`)

To Balance c/d (` 35,00,000 × 75%)

26,25,000 By Balance b/d (75% of ` 12,00,000)

9,00,000

By Bank A/c 17,25,000 26,25,000 26,25,000

Working Note:

1. Profit to be Transferred to Costing Profit & Loss account:

(a) Percentage of completion = Work certfied x100Value of contract

= 35,00,000 x10050,00,000

`

` = 70%

(b) Profit to be transferred to Costing Profit & Loss Account

= 32 × Notional profit ×

certifiedWorkreceivedCash

= 32 × ` 8,35,000 × 75

100 = ` 4,17,500

(b) Cash Flow Statement for the year ending on March 31, 2014

` in lakhs ` in lakhs

I. Cash flows from Operating Activities Net profit made during the year (W.N.1) 8.70 Provision for taxation made during the year 2.40 Profit on sale of machinery (0.60) Adjustment for depreciation on Machinery (W.N.2) 3.75 Adjustment for depreciation on Land & Building 1.20 Operating profit before change in Working Capital 15.45 Increase in inventory (6.00) Decrease in Debtors 6.00 Decrease in Creditors (3.60) Cash generated from operations 11.85 Income-tax paid (1.50) Net cash from operating activities 10.35


II. Cash flows from Investing Activities

Purchase of Machinery (10.20) Sale of Machinery 1.05 Purchase of Building (7.20) Purchase of investments (3.00) (19.35) III. Cash flows from Financing Activities Issue of shares 6.00 Issue of debentures 6.00 Dividend paid (3.00) 9.00 Net increase in cash and cash equivalent Nil Cash and cash equivalents at the beginning of the period 6.00 Cash and cash equivalents at the end of the period 6.00

Working Notes:

(i) Net Profit made during the year ended 31.3.2014

` in lakhs

Increase in P & L (Cr.) Balance 1.20 Add: Transfer to general reserve 1.50 Add: Provided for proposed dividend during the year 6.00 8.70

(ii) Plant & Machinery Account


To Balance b/d 15.00 By Depreciation (Bal. Fig.) [25% of 15 ]

3.75

To P& L A/c [1.05 less 0.45 (0.60 less depreciation 0.15)]

0.60 By Cash/Bank A/c 1.05

To Cash/Bank (balancing fig.)

10.20

By Balance c/d 21.00

25.80 25.80


(iii) Provision for Taxation Account


To Cash/Bank (Bal. Fig.) 1.50 By Balance b/d 2.10 To Balance c/d 3.00 By P & L A/c 2.40 4.50 4.50

(iv) Proposed Dividend Account


To Bank 3.00* By Balance b/d 3.00 To Balance c/d 6.00 By P & L A/c (Bal. Fig.) 6.00

9.00 9.00 * last year proposed dividend assumed to be paid this year.

(v) Building Account


To Balance b/d 12.00 By Depreciation 1.20 To Bank A/c (Purchase) 7.20 By Balance c/d 18.00 19.20 19.20

Question 3

(a) RST Limited is presently operating at 50% capacity and producing 30,000 units. The

entire output is sold at a price of ` 200 per unit. The cost structure at the 50% level of

activity is as under:

`

Direct Material 75 per unit

Direct Wages 25 per unit

Variable Overheads 25 per unit

Direct Expenses 15 per unit

Factory Expenses (25% fixed) 20 per unit

Selling and Distribution Exp. (80% variable) 10 per unit

Office and Administrative Exp. (100% fixed) 5 per unit

The company anticipates that the variable costs will go up by 10% and fixed costs will go

up by 15%.


You are required to prepare an Expense budget, on the basis of marginal cost for the

company at 50% and 60% level of activity and find out the profits at respective levels.

(8 Marks)

(b) From the following information, prepare Balance Sheet of a firm:

Stock Turnover Ratio (based on cost of goods sold) - 7 times

Rate of Gross Profit to Sales - 25%

Sales to Fixed Assets - 2 times

Average debt collection period - 1.5 months

Current Ratio - 2

Liquidity Ratio - 1.25

Net Working Capital - ` 8,00,000

Net Worth to Fixed Assets - 0.9 times

Reserve and Surplus to Capital - 0.25 times

Long Term Debts - Nil

All Sales are on credit basis. (8 Marks)

Answer

(a) Expense Budget of RST Ltd. for the period

Per unit (`)

30,000 units 36,000 units


Sales (A) 200.00 60,00,000 72,00,000 Less: Variable Costs:

- Direct Material 82.50 24,75,000 29,70,000 - Direct Wages 27.50 8,25,000 9,90,000

- Variable Overheads 27.50 8,25,000 9,90,000 - Direct Expenses 16.50 4,95,000 5,94,000 - Variable factory expenses

(75% of ` 20 p.u.) 16.50 4,95,000 5,94,000

- Variable Selling & Dist. exp. (80% of ` 10 p.u.)

8.80 2,64,000 3,16,800

Total Variable Cost (B) 179.30 53,79,000 64,54,800 Contribution (C) = (A – B) 20.70 6,21,000 7,45,200


Less: Fixed Costs: - Office and Admin. exp. (100%) -- 1,72,500 1,72,500 - Fixed factory exp. (25%) -- 1,72,500 1,72,500 - Fixed Selling & Dist. exp. (20%) -- 69,000 69,000

Total Fixed Costs (D) -- 4,14,000 4,14,000

Profit (C – D) -- 2,07,000 3,31,200

(b) Working Notes;

1. Net Working Capital = Current Assets – Current Liabilities = 2 - 1 = 1

Current Assets = Net Working Capital × 2

1

= 8,00,000 × 21

Current Assets =16,00,000 Current Liabilities = 16,00,000 – 8,00,000 = 8,00,000

2. Liquid Ratio = Liquid Assets

Current Liabilities

1.25 = Current Assets - StockCurrent Liabilities

1.25 = 16,00,000 - Stock8,00,000

1.25 x 8,00,000 = 16,00,000 – Stock 10,00,000 = 16,00,000 – Stock Stock = 6,00,000 Liquid Assets = 1.25 x 8,00,000 = 10,00,000

3. Stock Turnover Ratio = COGSStock

7 = COGS6,00,000

COGS = 42,00,000


4. Sales – Gross Profit = COGS

Gross Profit = 25%Sales

Gross Profit = 25% Sales Sales – 25% Sales = COGS

Sales = 42,00,000 = 56,00,0000.75

5. Debtors turnover Ratio = 12 = 81.5

Debtors = Credit SalesDebtors Turnover

= 56,00,000 = 7,00,0008

6. Sales = 2Fixed Assets

Fixed Assets = 56,00,000 = 28,00,0002

7. Net worth = Fixed Assets + Current Assets – Long-term Debt – Current Liabilities = 28,00,000 + 16,00,000 – 0 – 8,00,000

= 36,00,000

8. Reserves & Surplus = 0.25Capital

Net worth = Reserves and Surplus + Capital

Capital = 36,00,000 = 28,80,000

1.25

Reserves and Surplus = 0.25 x 28,80,000 = 7,20,000

9. Cash = Liquid Assets – Debtors

= 10,00,000 – 7,00,000 = 3,00,000 10. Long Term Debts = Nil


Draft Balance Sheet

Liabilities ` Assets ` Share Capital 28,80,000 Fixed Assets 28,00,000 Reserves and Surplus 7,20,000 Current Assets: Long Term Debts - Stock 6,00,000 Current Liabilities 8,00,000 Debtors 7,00,000 - Cash 3,00,000 44,00,000 44,00,000

(Note: The above solution has been worked out by ignoring the Net worth to Fixed assets ratio given in the question in order to match the total of assets and liabilities in the Balance Sheet).

Question 4

(a) Following information have been extracted from the cost records of XYZ Pvt. Ltd:

`

Stores:

Opening balance 54,000

Purchases 2,88,000

Transfer from WIP 1,44,000

Issue to WIP 2,88,000

Issue for repairs 36,000

Deficiency found in stock 10,800

Work-in-progress: `

Opening balance 1,08,000

Direct wages applied 1,08,000

Overheads charged 4,32,000

Closing balance 72,000

Finished Production: `

Entire production is sold at a profit of 15% on cost at WIP

Wages paid 1,26,000

Overheads incurred 4,50,000

Draw the Stores Ledger Control Account, Work-in-Progress Control Account, Overheads

Control Account and Costing Profit and Loss Account. (8 Marks)


(b) The Capital structure of RST Ltd. is as follows:

`

Equity Share of ` 10 each 8,00,000

10% Preference Share of ` 100 each 5,00,000

12% Debentures of ` 100 each 7,00,000

20,00,000

Additional Information:

- Profit after tax (Tax Rate 30%) are ` 2,80,000

- Operating Expenses (including Depreciation ` 96,800) are 1.5 times of EBIT

- Equity Dividend paid is 15%

- Market price of Equity Share is ` 23

Calculate:

(i) Operating and Financial Leverage

(ii) Cover for preference and equity dividend

(iii) The Earning Yield Ratio and Price Earning Ratio

(iv) The Net Fund Flow

Note: All operating expenses (excluding depreciation) are variable. (8 Marks)

Answer

(a) Stores Ledger Control A/c


To Balance b/d To General Ledger Adjustment A/c To Work in Process A/c

54,000 2,88,000

1,44,000

By Work in Process A/c By Overhead Control A/c By Overhead Control A/c (Deficiency) By Balance c/d

2,88,000 36,000

10,800*

1,51,200 4,86,000 4,86,000

*Deficiency assumed as normal (alternatively can be treated as abnormal loss)


Work in Progress Control A/c


To Balance b/d To Stores Ledger Control A/c To Wages Control A/c To Overheads Control a/c

1,08,000 2,88,000 1,08,000 4,32,000

By Stores Ledger Control a/c By Costing P/L A/c (Balancing figures being Cost of finished goods) By Balance c/d

1,44,000 7,20,000

72,000

9,36,000 9,36,000

Overheads Control A/c


To Stores Ledger Control A/c To Stores Ledger Control A/c To Wages Control A/c

(`1,26,000- `1,08,000) To Gen. Ledger Adjust. A/c

36,000 10,800 18,000

4,50,000

By Work in Process A/c By Balance c/d

(Under absorption)

4,32,000 82,800

5,14,800 5,14,800

Costing Profit & Loss A/c


To Work in progress To Gen. Ledger Adjust. A/c (Profit)

7,20,000 1,08,000

By Gen. Ledger Adjust. A/c (Sales) (` 7,20,000 × 115%)

8,28,000

8,28,000 8,28,000

(b) Working Notes:

` Net Profit after Tax 2,80,000 Tax @ 30% 1,20,000 EBT 4,00,000 Interest on Debentures 84,000 EBIT 4,84,000 Operating Expenses (1.5 times of EBIT) 7,26,000 Sales 12,10,000


(i) Operating Leverage

= ContributionEBIT

(12,10,000 - 6,29,200)=4,84,000

5,80,800 = 1.2 times4,84,000

=

Financial Leverage EBITEBT

=

4,84,000=4,00,000

= 1.21 times OR

Financial Leverage EBIT=Preference DividendEBT -

1- t

4,84,000=50,0004,00,000 - 1- 0.30

4,84,000=4,00,000 - 71,428.57

4,84,000 = 1.47 times3,28,571

=

(ii) Cover for Preference Dividend

PAT= Preference Share Dividend

2,80,000 = 5.6 times50,000

=


Cover for Equity Dividend

(PAT - Preference Dividend)Equity Share Dividend

=

(2,80,000 - 50,000) 1,20,000

=

2,30,000= = 1.92 times1,20,000

(iii) Earning Yield Ratio

EPS × 100Market Price

=

= 2,30,000 × 10080,000

23

2.875= × 100 = 12.5%23

Price – Earnings Ratio (PE Ratio)

Market Price 23= = EPS 2.875

= 8 times (iv) Net Funds Flow

= Net PAT + Depreciation-Total Dividend

= 2,80,000 + 96,800 – (50,000 + 1,20,000)

= 3,76,800 – 1,70,000

Net Funds Flow = 2,06,800

Question 5

(a) Identify the methods of costing for the following:

(i) Where all costs are directly charged to a specific job.

(ii) Where all costs are directly charged to a group of products.


(iii) Where cost is ascertained for a single product.

(iv) Where the nature of the product is complex and method can not be ascertained.

(b) Explain the treatment of over and under absorption of overheads in cost accounts.

(c) Explain four kinds of float with reference to management of cash.

(d) Distinguish between ‘Operating Lease’ and ‘Financial Lease’. (4 x 4 = 16 Marks)

Answer

(a)

Sl. No. Method of Costing

(i) Job Costing (ii) Batch Costing (iii) Unit Costing or Single or Output Costing (iv) Multiple Costing

(b) Treatment of over and under absorption of overheads are:- (i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed

amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss/ gain shall be transferred to costing P&L A/c.

(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead.

(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected.

(c) Four Kinds of Float with reference to Management of Cash

The four kinds of float are: (i) Billing Float: The time between the sale and the mailing of the invoice is the billing

float. (ii) Mail Float: This is the time when a cheque is being processed by post office,

messenger service or other means of delivery. (iii) Cheque processing float: This is the time required for the seller to sort, record and

deposit the cheque after it has been received by the company. (iv) Bank processing float: This is the time from the deposit of the cheque to the

crediting of funds in the seller’s account.


(d) Difference between Financial Lease and Operating Lease

S.No. Finance Lease Operating Lease

1. The risk and reward incident to ownership are passed on the lessee. The lessor only remains the legal owner of the asset.

The lessee is only provided the use of the asset for a certain time. Risk incident to ownership belongs only to the lessor.

2. The lessee bears the risk of obsolescence.

The lessor bears the risk of obsolescence.

3. The lease is non-cancellable by either party under it.

The lease is kept cancellable by the lessor.

4. The lessor does not bear the cost of repairs, maintenance or operations.

Usually, the lessor bears the cost of repairs, maintenance or operations.

5. The lease is usually full payout. The lease is usually non-payout. (Note: Students may answer any four of the above differences)

Question 6

(a) PQR Ltd. having an annual sales of ` 30 lakhs, is re-considering its present collection

policy. At present, the average collection period is 50 days and the bad debt losses are

5% of sales. The company is incurring an expenditure of ` 30,000 on account of

collection of receivables.

The alternative policies are as under:

Alternative I Alternative II

Average Collection Period 40 days 30 days

Bad Debt Losses 4% of sales 3% of sales

Collection Expenses ` 60,000 ` 95,000

Evaluate the alternatives on the basis of incremental approach and state which

alternative is more beneficial. (8 Marks)

(b) The following information relate to Process A:

(i) Opening Work-in-Progress 8,000 units at ` 75,000

Degree of Completion:

Material 100%

Labour and Overhead 60%

(ii) Input 1,82,000 units at ` 7,37,500

(iii) Wages paid ` 3,40,600

(iv) Overheads paid ` 1,70,300


(v) Units scrapped 14,000


Material 100 %

Wages and Overheads 80%

(vi) Closing Work - in- Progress 18,000 units


Material 100%

Wages and Overheads 70%

(vii) Units completed and transferred 1,58,000 to next process

(viii) Normal loss 5% of total input including opening WIP

(ix) Scrap value is ` 5 per unit to be adjusted out of direct material cost

You are required to compute on the basis of FIFO basis:

(i) Equivalent Production

(ii) Cost Per Unit

(iii) Value of Units transferred to next process. (8 Marks)

Answer

(a) Evaluation of Alternative Collection Programmes

Present Policy Alternative I Alternative II

` ` `

Sales Revenues 30,00,000 30,00,000 30,00,000 Average Collection Period (ACP) (days) 50 40 30 Receivables

(`) ACPSales × 360

4,16,667 3,33,333 2,50,000

Reduction in Receivables from Present Level (`)

−

83,334

1,66,667

Savings in Interest @ 10% p.a. (A) − ` 8,333 ` 16,667 % of Bad Debt Loss 5% 4% 3% Amount (`) 1,50,000 1,20,000 90,000 Reduction in Bad Debts from Present Level (B)

−

30,000

60,000


Incremental Benefits from Present Level (C) = (A) + (B)

−

38,333

76,667

Collection Expenses (`) 30,000 60,000 95,000 Incremental Collection Expenses from Present Level (D)

−

30,000

65,000

Incremental Net Benefit (C – D) − ` 8,333 ` 11,667

Conclusion: From the analysis it is apparent that Alternative I has a benefit of ` 8,333 and Alternative II has a benefit of ` 11,667 over present level. Alternative II has a benefit of ` 3,334 more than Alternative I. Hence Alternative II is more viable. (Note: In absence of Cost of Sales, sales has been taken for purpose of calculating

investment in receivables. Cost of Funds has been assumed to be 10%. 1 year = 360 days.)

(b) (i) Statement of Equivalent Production

(FIFO Method)

Input Output Equivalent Production

Particulars Units Particulars Units Material Labour & Overheads

(%) Units (%) Units

Opening WIP 8,000 Transfer to next Process : Introduced 1,82,000 Opening WIP completed 8,000 -- -- 40 3,200 Introduced & completed 1,50,000 100 1,50,000 100 1,50,000 Normal loss

5% (8,000 + 182,000) 9,500 -- -- -- --

Abnormal loss 4,500 100 4,500 80 3,600 Closing WIP 18,000 100 18,000 70 12,600 1,90,000 1,90,000 1,72,500 1,69,400

(ii) Computation of Cost per unit

Particulars Materials

(`)

Labour

(`)

Overhead

(`)

Input of Materials 7,37,500 -- -- Expenses -- 3,40,600 1,70,300 Total 7,37,500 3,40,600 1,70,300 Less : Sale of Scrap (9,500 units x ` 5 ) (47,500) -- -- Net cost 6,90,000 3,40,600 1,70,300 Equivalent Units 1,72,500 1,69,400 1,69,400 Cost Per Unit 4.0000 2.0106 1.0053

Total cost per unit = ` (4.0000 + 2.0106 + 1.0053) = ` 7.0159


(iii) Value of units transferred to next process:


Opening W-I-P 75,000 Add: Labour (3,200 units × ` 2.0106) 6,434 Overhead (3,200 units × ` 1.0053) 3,217 84,651 New introduced (1,50,000 units × ` 7.0159) 10,52,385 11,37,036

Question 7


(a) Why money in the future is worth less than similar money today? Give the reasons and

explain.

(b) Distinguish between 'Business Risk' and 'Financial Risk'.

(c) What is 'Internal Rate of Return'? Explain.

(d) State the different types of Packing Credit.

(e) Define ‘Labour Turnover’. How is it measured? Explain. (4 x 4 = 16 Marks)

Answer

(a) Money in the Future is worth less than the Similar Money Today due to several reasons: Risk − There is uncertainty about the receipt of money in future. Preference For Present Consumption − Most of the persons and companies in

general, prefer current consumption over future consumption. Inflation − In an inflationary period a rupee today represents a greater real

purchasing power than a rupee a year hence. Investment Opportunities − Most of the persons and companies have a

preference for present money because of availabilities of opportunities of investment for earning additional cash flow.

(b) Business Risk and Financial Risk: Business risk refers to the risk associated with the firm’s operations. It is an unavoidable risk because of the environment in which the firm has to operate and the business risk is represented by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by revenues and expenses. Revenues and expenses are affected by demand of firm’s products, variations in prices and proportion of fixed cost in total cost. Whereas, Financial risk refers to the additional risk placed on firm’s shareholders as a result of debt use in financing. Companies that issue more debt instruments would have


higher financial risk than companies financed mostly by equity. Financial risk can be measured by ratios such as firm’s financial leverage multiplier, total debt to assets ratio etc.

(c) Internal Rate of Return: It is that rate at which discounted cash inflows are equal to the discounted cash outflows. It can be stated in the form of a ratio as follows:

Cash inflows 1Cash Outflows

=

This rate is to be found by trial and error method. This rate is used in the evaluation of investment proposals. In this method, the discount rate is not known but the cash outflows and cash inflows are known. In evaluating investment proposals, internal rate of return is compared with a required rate of return, known as cut-off rate. If it is more than cut-off rate the project is treated as acceptable; otherwise project is rejected.

(d) Different Types of Packing Credit

Packing credit may be of the following types: (i) Clean Packing credit: This is an advance made available to an exporter only on

production of a firm export order or a letter of credit without exercising any charge or control over raw material or finished goods. It is a clean type of export advance. Each proposal is weighted according to particular requirements of the trade and credit worthiness of the exporter. A suitable margin has to be maintained. Also, Export Credit Guarantee Corporation (ECGC) cover should be obtained by the bank.

(ii) Packing credit against hypothecation of goods: Export finance is made available on certain terms and conditions where the exporter has pledgeable interest and the goods are hypothecated to the bank as security with stipulated margin. At the time of utilising the advance, the exporter is required to submit alongwith the firm export order or letter of credit, relative stock statements and thereafter continue submitting them every fortnight and whenever there is any movement in stocks.

(iii) Packing credit against pledge of goods: Export finance is made available on certain terms and conditions where the exportable finished goods are pledged to the banks with approved clearing agents who will ship the same from time to time as required by the exporter. The possession of the goods so pledged lies with the bank and is kept under its lock and key.

(iv) E.C.G.C. guarantee: Any loan given to an exporter for the manufacture, processing, purchasing, or packing of goods meant for export against a firm order qualifies for the packing credit guarantee issued by Export Credit Guarantee Corporation.


(v) Forward exchange contract: Another requirement of packing credit facility is that if the export bill is to be drawn in a foreign currency, the exporter should enter into a forward exchange contact with the bank, thereby avoiding risk involved in a possible change in the rate of exchange.

(Note: Students may answer any four of the above packing credits). (e) Labour turnover in an organisation is the rate of change in the composition of labour

force during a specified period measured against a suitable index. The standard of usual labour turnover in the industry or labour turnover rate for a past period may be taken as the index or norm against which actual turnover rate should be compared.

The methods for measuring labour turnover are: Replacement method: This method takes into consideration actual replacement of

labour irrespective of no. of workers leaving.

Replacement method = yeartheduringrollonemployeesofnumberAverage

yeartheduringreplacedemployeesofNumber × 100

Separation method: In this method labour turnover is measured by dividing the total no. of separations during the period by average no. of workers on payroll during the same period.

Separation method = yeartheduringrollonemployeesofnumberAverage

yeartheduringseparatedemployeesofNumber × 100

Flux method: This method takes into account both the replacements as well as no. of separations during the period.

Flux method =

No.of employeesreplaced No.of employees separatedduringthe year duringthe year

Average number of employees on roll during the year

+

× 100






Question 1

(a) SHA Limited provides the following trading results:

Year Sale Profit

2012-13 ` 25,00,000 10% of Sale

2013-14 ` 20,00,000 8% of Sale


(i) Fixed Cost

(ii) Break Even Point

(iii) Amount of profit, if sale is ` 30,00,000

(iv) Sale, when desired profit is ` 4,75,000

(v) Margin of Safety at a profit of ` 2,70,000

(b) A manufacturing company has disclosed net loss of ` 48,700 as per their cost accounting

records for the year ended 31st March, 2014. However their financial accounting records

disclosed net profit of ` 35,400 for the same period. A scrutiny of data of both the sets of

books of accounts revealed the following informations:

`

(i) Factory overheads under absorbed 30,500

(ii) Administrative overheads over absorbed 65,000

(iii) Depreciation charged in financial accounts 2,25,000

(iv) Depreciation charged in cost accounts 2,70,000

(v) Income-tax provision 52,400

(vi) Transfer fee (credited in financial accounts) 10,200

(vii) Obsolescence loss charged in financial accounts 20,700

(viii) Notional rent of own premises charged in cost accounts 54,000

(ix) Value of opening stock:

(a) in cost accounts 1,38,000

(b) in financial accounts 1,15,000



(x) Value of closing stock:

(a) in cost accounts 1,22,000

(b) in financial accounts 1,12,500

Prepare a Memorandum Reconciliation Account by taking costing loss as base.

(c) NOOR Limited provides the following information for the year ending 31st March, 2014:

Equity Share Capital `25,00,000

Closing Stock `6,00,000

Stock Turnover Ratio 5 times


Net Profit / Sale 20%

Net Profit / Capital

4

1


Trading and Profit & Loss Account for the year ending 31st March, 2014.

(d) The following details are provided by the GPS Limited :

`

Equity Share Capital 65,00,000

12% Preference Share Capital 12,00,000

15% Redeemable Debentures 20,00,000

10% Convertible Debentures 8,00,000

The cost of equity capital for the company is 16.30% and Income Tax rate for the

company is 30%.

You are required to calculate the Weighted Average Cost of Capital (WACC) of the

company. (4 × 5 = 20 Marks)

Answer

(a) Workings:

Profit in year 2012-13 = ` 25,00,000 × 10% = ` 2,50,000

Profit in year 2013-14 = ` 20,00,000 × 8% = ` 1,60,000

So, P/V Ratio = Change inPr ofit

100Change inSales

×



= 2,50,000 1,60,000

10025,00,000 20,00,000

−×

−` `

` `

= 90,000

1005,00,000

×`

` = 18%

(i) Fixed Cost = Contribution (in year 2012-13) – Profit (in year 2012-13)

= (Sales × P/V Ratio) – ` 2,50,000

= (` 25,00,000 × 18%) – ` 2,50,000

= ` 4,50,000 – ` 2,50,000

= ` 2,00,000

(ii) Break-even Point (in Sales) = FixedCost

P / VRatio

= 2,00,000

18%

`= ` 11,11,111 (Approx)

(iii) Calculation of profit, if sale is ` 30,00,000

Profit = Contribution – Fixed Cost

= (Sales × P/V Ratio) – Fixed Cost

= (` 30,00,000 × 18%) - ` 2,00,000

= ` 5,40,000 – ` 2,00,000 = ` 3,40,000

So profit is ` 3,40,000, if Sale is ` 30,00,000.

(iv) Calculation of Sale, when desired Profit is ` 4,75,000

Contribution Required = Desired Profit + Fixed Cost

= ` 4,75,000 + ` 2,00,000 = ` 6,75,000


P / VRatio =

6,75,000

18%

`= ` 37,50,000

Sales is ` 37,50,000 when desired profit is ` 4,75,000.

(v) Margin of Safety = Pr ofit

P / VRatio

= 2,70,000

18%

`= ` 15,00,000

So Margin of Safety is ` 15,00,000 at a profit of ` 2,70,000



(b) Memorandum Reconciliation Accounts

Dr. Cr.

Particulars Amount

(`)

Particulars Amount

(`)

To Net Loss as per Cost

Accounts

48,700 By Administration overheads over

recovered in Cost Accounts

65,000

To Factory overheads under

absorbed in Cost Accounts

30,500 By Depreciation overcharged in

Cost Accounts

(` 2,70,000 – ` 2,25,000)

45,000

To Provision for Income tax 52,400 By Transfer fees in Financial

Accounts

10,200

To Obsolescence loss 20,700 By Notional Rent of own premises 54,000

To Overvaluation of closing

stock in Cost Accounts**

9,500 By Overvaluation of Opening stock

in Cost Accounts*

23,000

To Net Profit (as per Financial

Accounts)

35,400

1,97,200 1,97,200

* Overvaluation of Opening Stock as per Cost Accounts

= Value in Cost Accounts – Value in Financial Accounts

= ` 1,38,000 – ` 1,15,000 = ` 23,000.

** Overvaluation of Closing Stock as per Cost Accounts

= Value in Cost Accounts – Value in Financial Accounts

= ` 1,22,000 – ` 1,12,500 = ` 9,500.

(c) Working Notes:

(i) Net Profit

Capital =

4

1

Net Profit

25,00,000 =

4

1

Net Profit = 6,25,000

(ii) Net Profit

Sale = 20%

Sale = 6,25,000

0.20 = 31,25,000



(iii) Gross Profit Ratio = Gross Profit

× 100Sales

25 = Gross Profit

× 10031,25,000

Gross Profit = 31,25,000 × 25

100

= 7,81,250

(iv) Stock Turnover = COGS

Average Stock

5 = ⎛ ⎞⎜ ⎟⎝ ⎠

31,25,000 - 7,81,250

Average Stock

Average Stock = 23,43,750

5

= 4,68,750

(v) Average Stock = Closing Stock + Opening Stock

2

4,68,750 = 6,00,000 + Opening Stock

2

Opening Stock = 9,37,500 – 6,00,000 = 3,37,500

Trading A/c for the year ending 31st March, 2014

` `


To Purchases (Balancing figure) 26,06,250 By Closing Stock 6,00,000

To Gross Profit c/f to P&L A/c 7,81,250 -

37,25,000 37,25,000

Profit & Loss A/c for the year ending 31st March, 2014

` `

To Miscellaneous Expenses (balancing figure)

1,56,250 By Gross Profit b/f from Trading A/c

7,81,250

To Net Profit 6,25,000 -

7,81,250 7,81,250



(d) Calculation of Weighted Average Cost of Capital (WACC)

Source Amount (`) Weight Cost of Capital after tax

WACC

Equity Capital 65,00,000 0.619 0.163 0.1009

12% Preference Capital 12,00,000 0.114 0.120 0.0137

15% Redeemable Debentures 20,00,000 0.190 0.105* 0.020

10% Convertible Debentures 8,00,000 0.076 0.07** 0.0053

Total 1,05,00,000 1.0000 0.1399

* Cost of Debentures (after tax) = 15 (1 – 0.30) = 10.5% = 0.105

** Cost of Debentures (after tax) = 10 (1 – 0.30) = 7% = 0.07

Weighted Average Cost of Capital = 0.1399 = 13.99%

(Note: In the above solution, the Cost of Debentures has been computed in the above

manner without considering the impact of special features i.e. redeemability and

convertibility in absence of requisite information.)

Question 2

(a) A company manufactures a product from a raw material, which is purchased at ` 80 per

kg. The company incurs a handling cost of ` 370 plus freight of ` 380 per order. The

incremental carrying cost of inventory of raw material is ` 0.25 per kg per month. In

addition, the cost of working capital finance on the investment in inventory of raw

material is ` 12 per kg per annum. The annual production of the product is 1,00,000 units

and 2.5 units are obtained from one kg. of raw material.

Required:

(i) Calculate the economic order quantity of raw materials.

(ii) Advise, how frequently company should order for procurement be placed.

(iii) If the company proposes to rationalize placement of orders on quarterly basis, what

percentage of discount in the price of raw materials should be negotiated?

Assume 360 days in a year. (8 Marks)

(b) A company had the following Balance Sheet as on 31st March, 2014:

Liabilities ` (In crores) Assets (` In crores)

Equity Share Capital (50 lakhs shares of ` 10 each)

5

Reserves and Surplus 1 Fixed Assets (Net) 12.5

15% Debentures 10 Current Assets 7.5

Current Liabilities 4

20 20



The additional information given is as under:

Fixed cost per annum (excluding interest) ` 4 crores

Variable operating cost ratio 65%

Total assets turnover ratio 2.5

Income Tax rate 30%

Required:

Calculate the following and comment:

(i) Earnings Per Share

(ii) Operating Leverage

(iii) Financial Leverage

(iv) Combined Leverage (8 Marks)

Answer

(a) (i) Calculation of Economic Order Quantity (E.O.Q)

Annual requirement (usage) of raw material in kg. (A) = 1,00,000units

=40,000kg.2.5unitsper kg.

Ordering Cost (Handling & freight cost) (O) = ` 370 + ` 380 = ` 750

Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital cost

= (`0.25 × 12 months) + ` 12

= `15 per kg.

E.O.Q. = 2 A O

C =

2 40,000kg. 750

15

× × `

`= 2,000 kg.

(ii) Frequency of placing orders for procurement:

Annual consumption (A) = 40,000 kg.

Quantity per order (E.O.Q) = 2,000 kg.

No. of orders per annum (A

E.O.Q) =

40,000kg.

2,000kg. = 20 orders

Frequency of placing orders (in days) = 360days

20orders = 18 days



(iii) Percentage of discount in the price of raw materials to be negotiated:

Particulars On Quarterly Basis On E.O.Q Basis

1. Annual Usage (in Kg.) 40,000 kg. 40,000 kg.

2. Size of the order 10,000 kg. 2,000 kg.

3. No. of orders (1 ÷ 2) 4 20

4. Cost of placing orders or Ordering cost

(No. of orders × Cost per order)

` 3,000 (4 order × ` 750)

` 15,000 (20 orders × ` 750)

5. Inventory carrying cost (Average inventory × Carrying cost per unit)

` 75,000 (10,000 kg. × ½ × `

15)

` 15,000 (2,000 kg. × ½ × `

15)

6. Total Cost (4 + 5) ` 78,000 ` 30,000

When order is placed on quarterly basis the ordering cost and carrying cost increased by

` 48,000 (`78,000 - `30,000).

So, discount required = ` 48,000

Total annual purchase = 40,000 kg. × ` 80 = ` 32,00,000

So, Percentage of discount to be negotiated = ×48,000

10032,00,000

`

` = 1.5%

(b) Total Assets = ` 20 crores

Total Asset Turnover Ratio = 2.5

Hence, Total Sales = 20 × 2.5 = ` 50 crores

Computation of Profit after Tax (PAT)

(` in crores)

Sales 50.00

Less: Variable Operating Cost @ 65% 32.50

Contribution 17.50

Less: Fixed Cost (other than Interest) 4.00

EBIT 13.50

Less: Interest on Debentures (15% × 10) 1.50

PBT 12.00

Less: Tax @ 30% 3.60

PAT 8.40



(i) Earnings per Share

EPS = 8.40 crores

Number of Equity Shares

= 8.40 crores

50,00,000 = ` 16.80

It indicates the amount the company earns per share. Investors use this as a guide

while valuing the share and making investment decisions. It is also a indicator used

in comparing firms within an industry or industry segment.

(ii) Operating Leverage

Operating Leverage = Contribution

EBIT

= 17.50

13.50

= 1.296

It indicates the choice of technology and fixed cost in cost structure. It is level

specific. When firm operates beyond operating break-even level, then operating

leverage is low. It indicates sensitivity of earnings before interest and tax (EBIT) to

change in sales at a particular level.

(iii) Financial Leverage

Financial Leverage = EBIT

PBT

= 13.50

12.00 = 1.125

The financial leverage is very comfortable since the debt service obligation is small

vis-à-vis EBIT.

(iv) Combined Leverage

Combined Leverage = Contribution

EBIT

EBIT×

PBT

Or, = Operating Leverage × Financial Leverage

= 1.296 × 1.125 = 1.458

The combined leverage studies the choice of fixed cost in cost structure and choice

of debt in capital structure. It studies how sensitive the change in EPS is vis-à-vis



change in sales. The leverages − operating, financial and combined are measures

of risk.

Question 3

(a) M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz.

Process-A and Process-B. The details for the year ending 31st March, 2014 are as follows:

Process A Process - B

40,000 Units introduced at a cost of ` 3,60,000 -

Material Consumed ` 2,42,000 2,25,000

Direct Wages ` 2,58,000 1,90,000

Manufacturing Expenses ` 1,96,000 1,23,720

Output in Units 37,000 27,000

Normal Wastage of Input 5% 10%

Scrap Value (per unit) ` 15 20

Selling Price (per unit) ` 37 61


(a) 80% of the output of Process-A, was passed on to the next process and the balance

was sold. The entire output of Process- B was sold.

(b) Indirect expenses for the year was ` 4,48,080.

(c) It is assumed that Process-A and Process-B are not responsibility centre.

Required:

(i) Prepare Process-A and Process-B Account.

(ii) Prepare Profit & Loss Account showing the net profit I net loss for the year.

(8 Marks)

(b) FH Hospital is considering to purchase a CT-Scan machine. Presently the hospital is

outsourcing the CT -Scan Machine and is earning commission of `15,000 per month (net

of tax). The following details are given regarding the machine:

`

Cost of CT -Scan machine 15,00,000

Operating cost per annum (excluding Depreciation) 2,25,000

Expected revenue per annum 7,90,000

Salvage value of the machine (after 5 years) 3,00,000

Expected life of the machine 5 years



Assuming tax rate @ 30%, whether it would be profitable for the hospital to purchase the

machine?

Give your recommendation under:

(i) Net Present Value Method, and

(ii) Profitability Index Method.

PV factors at 12% are given below:

Year 1 2 3 4 5

PV factor 0.893 0.797 0.712 0.636 0.567

(8 Marks)

Answer

(a) (i) Process- A Account

Particulars Units Amount

(`)


(`)

To Input 40,000 3,60,000 By Normal wastage (2,000 units × ` 15)

2,000 30,000

To Material --- 2,42,000 By Abnormal loss A/c (1,000 units × ` 27)

1,000 27,000

To Direct wages --- 2,58,000 By Process- B (29,600 units × ` 27)

29,600 7,99,200

To Manufacturing Exp. --- 1,96,000 By Profit & Loss A/c (7,400 units × ` 27)

7,400 1,99,800

40,000 10,56,000 40,000 10,56,000

Cost per unit = 10,56,000 30,000

40,000units 2,000units

−−

` `= ` 27 per unit

Normal wastage = 40,000 units × 5% = 2,000 units

Abnormal loss = 40,000 units – (37,000 units + 2,000 units) = 1,000 units

Transfer to Process- B = 37,000 units × 80% = 29,600 units

Sale = 37,000 units × 20% = 7,400 units

Process- B Account


(`)


(`)

To Process- A A/c 29,600 7,99,200 By Normal wastage

(2,960 units × ` 20)

2,960 59,200



To Material --- 2,25,000 By Profit & Loss A/c (27,000 units × ` 48)

27,000 12,96,000

To Direct Wages --- 1,90,000

To Manufacturing Exp. --- 1,23,720

To Abnormal Gain A/c (360 units × ` 48)

360 17,280

29,960 13,55,200 29,960 13,55,200

Cost per unit = −−

13,37,920 59,200

29,600units 2,960units

` `= ` 48 per unit

Normal wastage = 29,600 units × 10% = 2,960 units

Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units

(ii) Profit & Loss Account

Particulars Amount

(`)

Particulars Amount

(`)

To Process- A A/c 1,99,800 By Sales:

To Process- B A/c 12,96,000 - Process-A (7,400 units × ` 37)

2,73,800

To Abnormal loss A/c 12,000 - Process- B (27,000 units × ` 61)

16,47,000

To Indirect Expenses 4,48,080 By Abnormal gain 10,080

By Net loss 25,000

19,55,880 19,55,880

Working Notes:

Normal wastage (Loss) Account

Particulars Units Amount (`) Particulars Units Amount (`)

To Process- A A/c

2,000 30,000 By Abnormal Gain A/c (360 units × ` 20)

360 7,200

To Process- B A/c

2,960 59,200 By Bank (Sales) 4,600 82,000

4,960 89,200 4,960 89,200

Abnormal Loss Account


(`)


(`)

To Process- A A/c

1,000 27,000 By Bank A/c (1,000 units × ` 15)

1,000 15,000



By Profit & Loss A/c --- 12,000

1,000 27,000 1,000 27,000

Abnormal Gain Account


(`)


(`)

To Normal loss A/c

(360 units × ` 20)

360 7,200 By Process- B A/c 360 17,280

To Profit & Loss A/c 10,080

360 17,280 360 17,280

(b) Advise to the Hospital Management

Determination of Cash inflows `

Sales Revenue 7,90,000

Less: Operating Cost 2,25,000

5,65,000

Less: Depreciation (15,00,000 – 3,00,000)/5 2,40,000

Net Income 3,25,000

Tax @ 30% 97,500

Earnings after Tax (EAT) 2,27,500

Add: Depreciation 2,40,000

Cash inflow after tax per annum 4,67,500

Less: Loss of Commission Income 1,80,000

Net Cash inflow after tax per annum 2,87,500

In 5th Year :

New Cash inflow after tax 2,87,500

Add: Salvage Value of Machine 3,00,000

Net Cash inflow in year 5 5,87,500

Calculation of Net Present Value (NPV)

Year CFAT PV Factor @10% Present Value of Cash inflows

1 to 4 2,87,500 3.038 8,73,425.00

5 5,87,500 0.567 3,33,112.50

12,06,537.50

Less: Cash Outflows 15,00,000.00

NPV (2,93,462.50)



Sum of discounted cash inflows 12,06,537.50Profitability Index = = = 0.804

Present value of cash outflows 15,00,000

Advise: Since the net present value is negative and profitability index is also less than

1, therefore, the hospital should not purchase the CT-Scan machine.

Question 4

(a) XYZ Co. Ltd. provides the following information:

Standard Actual

Production 4,000 Units 3,800 Units

Working Days 20 21

Fixed Overhead ` 40,000 ` 39,000

Variable Overhead ` 12,000 ` 12,000

You are required to calculate following overhead variances:

(a) Variable Overhead Variance

(b) Fixed Overhead Variances

(i) Expenditure Variance

(ii) Volume Variance (8 Marks)

(b) The Balance Sheets of Z Ltd. as on 31st March, 2013 and 31st March, 2014 are as under:

Liabilities 2013 2014 Assets 2013 2014

` ` ` `

Equity share capital 15,00,000 20,00,000 Goodwill 5,75,000 4,50,000

12% Redeemable pref. share cap.

7,50,000 5,00,000 Land & Building

10,00,000 8,50,000

General Reserve 2,00,000 3,50,000 Plant 4,00,000 10,00,000

Profit & Loss A/c 1,50,000 2,40,000 Debtors 8,00,000 12,60,000

Creditors 2,75,000 4,15,000 Stock 4,85,000 4,35,000

Outstanding Expenses

1,00,000 80,000 Marketable Securities

75,000 50,000

Provision for Tax 2,00,000 2,50,000 Cash and Bank

50,000 40,000


33,85,000 40,85,000 33,85,000 40,85,000


(i) Depreciation charged on Plant and Land & Buildings during the year was ` 50,000

and ` 1,00,000 respectively.



(ii) Income-Tax ` 1,75,000 was paid during the year 2013-14.

(iii) An Interim Dividend of ` 1,00,000 has been paid in 2013-14.

Prepare Cash Flow Statement. (8 Marks)

Answer

(a) Workings:

Standard Variable Overhead rate per unit = 12,000

4,000units

` = ` 3

Standard Fixed Overhead rate per unit = 40,000

4,000units

` = ` 10

(a) Variable Overhead Variance = Recovered Variable Overhead - Actual Variable overhead

= 3,800 units × ` 3 – ` 12,000

= ` 11,400 – `12,000 = ` 600 (Adverse)

(b) (i) Fixed Overhead Expenditure Variance = Budgeted Overhead – Actual Overhead

= ` 40,000 – ` 39,000

= ` 1,000 (Favourable)

(ii) Fixed Overhead Volume Variance = Recovered Overhead – Budgeted Overhead

= 3,800 units × ` 10 – ` 40,000

= ` 38,000 – ` 40,000

= ` 2,000 (Adverse)

(b) Cash Flow Statement for the year ending 31st March, 2014

` `

A. Cash flow from Operating Activities

Profit and Loss A/c as on 31.3.2014 2,40,000

Less: Profit and Loss A/c as on 31.3.2013 (1,50,000)

90,000

Add: Transfer to General Reserve 1,50,000

Provision for Tax 2,25,000

Interim Dividend paid during the year 1,00,000


Profit before Tax 8,15,000

Adjustment for Depreciation:

Land and Building 1,00,000



Plant and Machinery 50,000 1,50,000

Goodwill written off 1,25,000

Operating Profit before Working Capital Changes 10,90,000

Adjustment for Working Capital Changes:

Decrease in Outstanding Expenses (20,000)

Decrease in Stock 50,000

Increase in Debtors (4,60,000)

Increase in Creditors 1,40,000 (2,90,000)

Cash generated from Operations 8,00,000

Income tax paid (1,75,000)

Net Cash Inflow from Operating Activities (a) 6,25,000

B. Cash flow from Investing Activities

Proceeds from Sale of Building 50,000

Purchase of Plant and Machinery (6,50,000)

Net Cash Outflow from Investing Activities (b) (6,00,000)

C. Cash Flow from Financing Activities

Proceeds from Issuance of Share Capital 5,00,000

Redemption of Preference Shares (2,50,000)

Interim Dividend Paid (1,00,000)

Final Dividend Paid (2,10,000)

Net Cash Outflow from Financing Activities (c) (60,000)

Net increase in Cash and Cash Equivalents during the year (a+b+c) (35,000)

Cash and Cash Equivalents at the beginning of the year

(Cash and Bank and Marketable Securities)

1,25,000

Cash and Cash Equivalents at the end of the year 90,000

Working Notes:

1. Provision for the Tax Account

` `


To Balance c/d 2,50,000 By Profit and Loss a/c 2,25,000

4,25,000 4,25,000

2. Plant and Machinery Account

` `

To Balance b/d 4,00,000 By Depreciation 50,000



To Bank a/c (Purchases)

(Balancing figure)

6,50,000 By Balance c/d 10,00,000

10,50,000 10,50,000

3. Land and Building Account

` `

To Balance b/d 10,00,000 By Depreciation 1,00,000

By Bank a/c (Sales)

(Balancing figure)

50,000

By Balance c/d 8,50,000

10,00,000 10,00,000

(Note: In the above solution it has been assumed that marketable securities have

insignificant risk of changes in value.)

Question 5

(a) Distinguish between cost control and cost reduction.

(b) Explain the following:

(i) Explicit costs

(ii) Engineered costs

(c) Discuss emerging issues affecting the future role of Chief Financial Officer (CFO).

(d) State the main features of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). (4 × 4 = 16 Marks)

Answer

(a) Difference between Cost Control and Cost Reduction

Cost Control Cost Reduction

1. Cost control aims at maintaining the costs in accordance with the established standards.

1. Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuously

2. Cost control seeks to attain lowest possible cost under existing conditions.

2. Cost reduction recognises no condition as permanent, since a change will result in lower cost.

3. In case of Cost Control, emphasis is on past and present

3. In case of cost reduction it is on present and future.



4. Cost Control is a preventive function

4. Cost reduction is a corrective function. It operates even when an efficient cost control system exists.

5. Cost control ends when targets are achieved

5. Cost reduction has no visible end.

(b) (i) Explicit Costs - These costs are also known as out of pocket costs and refer to costs involving immediate payment of cash. Salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment.

(ii) Engineered Costs - These are costs that result specifically from a clear cause and effect relationship between inputs and outputs. The relationship is usually personally observable. Examples of inputs are direct material costs, direct labour costs etc.

(c) Emerging Issues/Priorities Affecting the Future Role of Chief Financial Officer (CFO)

(i) Regulation: Regulation requirements are increasing and CFOs have an increasingly personal stake in regulatory adherence.

(ii) Globalisation: The challenges of globalisation are creating a need for finance leaders to develop a finance function that works effectively on the global stage and that embraces diversity.

(iii) Technology: Technology is evolving very quickly, providing the potential for CFOs to reconfigure finance processes and drive business insight through ‘big data’ and analytics.

(iv) Risk: The nature of the risks that organisations face is changing, requiring more effective risk management approaches and increasingly CFOs have a role to play in ensuring an appropriate corporate ethos.

(v) Transformation: There will be more pressure on CFOs to transform their finance functions to drive a better service to the business at zero cost impact.

(vi) Stakeholder Management: Stakeholder management and relationships will become important as increasingly CFOs become the face of the corporate brand.

(vii) Strategy: There will be a greater role to play in strategy validation and execution, because the environment is more complex and quick changing, calling on the analytical skills CFOs can bring.

(viii) Reporting: Reporting requirements will broaden and continue to be burdensome for CFOs.

(ix) Talent and Capability: A brighter spotlight will shine on talent, capability and behaviours in the top finance role.

(Note: Students may answer any four of the above issues)



(d) Global Depository Receipts and American Depository Receipts

Global Depository Receipts (GDRs) are basically negotiable certificates denominated

in US dollars that represent a non-US company’s publicly traded local currency equity

shares. These are created when the local currency shares of Indian company are

delivered to the depository’s local custodian bank, against which the depository bank

issues Depository Receipts in US dollars.

American Depository Receipts (ADRs) are securities offered by non-US companies

who want to list on any of the US exchange. Each ADR represents a certain number of a

company's regular shares. ADRs allow US investors to buy shares of these companies

without the costs of investing directly in a foreign stock exchange. ADRs are issued by an

approved New York bank or trust company against the deposit of the original shares.

These are deposited in a custodial account in the US. Such receipts have to be issued in

accordance with the provisions stipulated by the SEC USA which are very stringent.

Question 6

(a) M/s ABID Constructions undertook a contract at a price of ` 171.00 lacs. The relevant

data for the year ended 31st March, 2014 are as under:

(`’000)

Material issued at site 7700

Direct Wages paid 3300

Site office cost 550

Material return to store 175

Work certified 12650

Work uncertified 225

Progress Payment Received 10120

Prepaid site office cost as on 31-03-2014 50

Direct wages outstanding as on 31-03-2014 100

Material at site as on 31-03-2014 110


(a) A plant was purchased for the contract at ` 8,00,000 on 01-12-2013.

(b) Depreciation @ 15% per annum is to be charged.

(c) Material which cost ` 1,30,000 was destroyed by fire.

Prepare:

(i) Contract Account for the year ended 31st March, 2014 and compute the profit to be taken to the Profit & Loss Account.

(ii) Account of Contractee.

(iii) Profit & Loss Account showing the relevant items.



(iv) Balance Sheet showing the relevant items. (8 Marks)

(b) Black Limited has furnished the following cost sheet:

` / Per Unit

Raw Material 98

Direct Labour 53

Factory Overhead (Includes depreciation of ` 15 per unit at budgeted level of activity)

88

Total Cost 239

Profit 43

Selling Price 282


(i) Average raw material in stock 3 weeks

(ii) Average work-in-progress (% of completion with respect to Material- 75% Labour & Overhead - 70%)

2 weeks

(iii) Finished goods in stock 4 weeks

(iv) Credit allowed to debtors 2½ weeks

(v) Credit allowed by creditors 3½ weeks

(vi) Time lag in payments of labour 2 weeks

(vii) Time lag in payments of factory overheads 1½ weeks

(viii) Company sells, 25% of the output against cash

(ix) Cash in hand and bank is desired to be maintained ` 2,25,000

(x) Provision for contingencies is required @ 4% of working capital requirement including that provision.

You may assume that production is carried on evenly throughout the year and labour and

factory overheads accrue similarly.

You are required to prepare a statement showing estimate of working capital needed to

finance a budgeted activity level of 1,04,000 units of production. Finished stock, debtors

and overhead are taken at cash cost. (8 Marks)

Answer

(a) (i) M/s ABID Constructions

Contract Account

Particulars Amount

(` in ‘000)

Particulars Amount

(` in ‘000)

To Material issued 7,700 By Material returned 175



To Direct wages 3,300 By Profit & Loss A/c

(Material Destroyed by fire)

130

Add: Outstanding 100 3,400 By W-I-P:

To Site Office Cost 550 - Work uncertified 225

Less: Prepaid 50 500 - Work certified 12,650 12,875

To Depreciation* 40 By Material at site 110

To Notional Profit 1,650

13,290 13,290

To Profit & Loss A/c

(Working Note -2)

880 By Notional Profit 1,650

To W-I-P (Reserve) 770

1,650 1,650

* Depreciation on plant = ` 8,00,000 × 15% × 4 months

12 months = ` 40,000

(ii) Contractee’s Account

Particulars Amount

(` in ‘000)

Particulars Amount

(` in ‘000)

To Balance c/d 10,120 By Bank A/c 10,120

10,120 10,120

(iii) Relevant items of Profit & Loss Account

Particulars Amount

(` in ‘000)

Particulars Amount

(` in ‘000)

To Contract A/c

(loss of material due to fire)

130 By Contract A/c

(Profit on contract)

880

To Net Profit 750

880 880

(iv) Balance Sheet (Extracts) as on 31st March, 2014

(Amount in ‘000)

Liabilities Amount

(`)

Amount

(`)

Assets Amount

(`)

Amount

(`)

Plant at cost 800

Add: Profit 750 Less: Dep. 40 760

Contract W-I-P:



Outstanding Wages 100 -Uncertified 225

-Certified 12,650

-Reserve (770)

Less: Advances (10,120) 1,985

Materials at site 110

Prepaid exp. 50

Working Notes:

1. Percentage of Completion = WorkCertified

100Value of ontract

×

= ×1,26,50,000

1001,71,00,000

`

`

= 73.98%

2. Profit from the incomplete contract

= Notional Profit × 2 CashRe ceived

3 WorkCertified×

= ` 16,50,000 × ×2 1,01,20,000

3 1,26,50,000

`

`

= ` 8,80,000

(Note: The above figures calculated on traditional prudent basis followed in Contract

costing.)

(b) Statement of Estimation of Working Capital Needs

Current Assets `

I Investment in Inventory

(i) Raw material Inventory = ×

31,04,000 × 98

52`

5,88,000

(ii) Work-in-Process Inventory

Material =

21,04,000 × × 0.75 × 98

52= 2,94,000

Labour and Overheads Cost (other than depreciation)

=2

1,04,000 × × 0.70 × 12652

= 3,52,800

6,46,800



(iii) Finished Goods Inventory (Cash Cost)

1 =4

,04,000 × × 22452

17,92 ,000

II Investment in Debtors (Cash Cost)

=2.5

1,04,000 × × 0.75 × 22452

8,40,000

III Cash Balance 2,25 ,000

Investment in Current Assets 40,91,800

Current Liabilities and Deferred Payment `

(i) Creditors =

3.51,04,000 × × 98

52

6,86,000

(ii) Wages outstanding =

21,04,000 × × 53

52

2,12,000

(iii) Overheads outstanding (cash cost) =

1.51,04,000 × × 73

52

2,19,000

Total Deferred Payments 11,17,000

Net Working Capital (Current assets – Non-interest bearing current liabilities) = 40,91,800 – 11,17,000

29,74,800

Add: Provision for Contingencies @ 4 percent (` 29,74,800 × 1/24) 1,23 ,950

Working Capital Requirement including Provision 30,98,750

(Note: For calculation purpose, 4 weeks maybe taken as equivalent to a month and 52

weeks in a year.)

Question 7


(a) Distinguish between allocation and apportionment of cost.

(b) Describe the salient features of budget manual.

(c) Explain the following:

(i) Concentration Banking

(ii) Lock Box System

(d) Comment on the Debt Service Coverage Ratio.



(e) (i) Name any four financial instruments, which are related to international financial

market.

(ii) State the unit of cost for the followings:

(1) Transport

(2) Power

(3) Hotel

(4) Hospital (4 x 4 = 16 Marks)

Answer

(a) Distinguish between allocation and apportionment of cost.

Cost allocation: The term ‘allocation’ refers to assignment or allotment of an entire item

of cost to a particular cost centre or cost unit. It implies relating overheads directly to the

various departments. The estimated amount of various items of manufacturing overheads

should be allocated to various cost centres or departments. For example- if a separate

power meter has been installed for a department, the entire power cost ascertained from

the meter is allocated to that department.

Cost apportionment: There are some items of estimated overheads (like the salary of

the works manager) which cannot be directly allocated to the various departments and

cost centres. Such unallocable expenses are to be spread over the various departments

or cost centres on an appropriate basis. This is called apportionment.

(b) Salient features of Budget Manual

• Budget manual contains many information which are required for effective

budgetary planning.

• A budget manual is a collection of documents that contains key information for

those involved in the planning process.

• An introductory explanation of the budgetary planning and control process,

including a statement of the budgetary objective and desired results is included in

Budget Manual

• Budget Manual contains a form of organisation chart to show who is responsible for

the preparation of each functional budget and the way in which the budgets are

interrelated.

• In contains a timetable for the preparation of each budget.

• Copies of all forms to be completed by those responsible for preparing budgets,

with explanations concerning their completion is included in Budget Manual.



(c) (i) Concentration Banking: In concentration banking the company establishes a

number of strategic collection centres in different regions instead of a single

collection centre at the head office. This system reduces the period between the

time a customer mails in his remittances and the time when they become spendable

funds with the company. Payments received by the different collection centers are

deposited with their respective local banks which in turn transfer all surplus funds to

the concentration bank of head office.

(ii) Lock Box System: Another means to accelerate the flow of funds is a lock box

system. The purpose of lock box system is to eliminate the time between the

receipts of remittances by the company and deposited in the bank. A lock box

arrangement usually is on regional basis which a company chooses according to its

billing patterns.

(d) Comment on Debt Service Coverage Ratio (DSCR)

Debt service coverage ratio indicates the capacity of a firm to service a particular level of

debt i.e. repayment of principal and interest. High credit rating firms target DSCR to be

greater than 2 in its entire loan life. High DSCR facilitates the firm to borrow at the most

competitive rates. Lenders are interested in this ratio to judge the firm’s ability to pay off

current interest and installments.

The debt service coverage ratio can be calculated as under:

tsInstallmenInterest

servicedebt for available EarningsRatio Coverage ServiceDebt

+=

Or, Debt Service Coverage Ratio =

cT1

Due Repayment PrincipalInterest

EBITDA

−+

(e) (i) Financial Instruments in the International Market

Some of the various financial instruments dealt with in the international market are:

(a) Euro Bonds

(b) Foreign Bonds

(c) Fully Hedged Bonds

(d) Medium Term Notes

(e) Floating Rate Notes

(f) External Commercial Borrowings

(g) Foreign Currency Futures



(h) Foreign Currency Option

(i) Euro Commercial Papers.

(Note: Students may answer any four of the above financial instruments)

(ii)

Industry Unit of Cost

1. Transport Per passenger k.m. or per tonne k.m.

2. Power Per Kilo – watt (kw) hour

3. Hotel Per room day / or per meal

4. Hospital Per Patient – day / or per bed/day


DISCLAIMER












Question 1


(a) Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex'

costing ` 10 per unit. Other relevant information are:

Cost of placing an order : ` 800 per order

Carrying cost : 15% per annum of average inventory

Re-order period : 10 days

Safety stock : 600 units

The company operates 300 days in a year.

You are required to calculated:

(i) Economic Order Quantity for material 'Rex'.

(ii) Re-order Level

(ill) Maximum Stock Level

(iv) Average Stock Level

(b) Journalise the following transactions assuming cost and financial accounts are

integrated :

`

(i) Materials issued :

Direct 3,25,000

Indirect 1,15,000

(ii) Allocation of wages (25% indirect) 6,50,000

(iii) Under/Over absorbed overheads:

Factory (Over) 2,50,000

Administration (Under) 1,75,000

(iv) Payment to Sundry Creditors 1,50,000

(v) Collection from Sundry Debtors 2,00,000



(c) Calculate the degree of operating leverage, degree of financial leverage and the degree

of combined leverage for the following firms :

N S D

Production (in units) 17,500 6,700 31,800

Fixed costs ` 4,00,000 3,50,000 2,50,000

Interest on loan ` 1,25,000 75,000 Nil

Selling price per unit ` 85 130 37

Variable cost per unit ` 38.00 42.50 12.00

(d) X Ltd. is considering the following two alternative financing plans:

Plan - I Plan - II

` `

Equity shares of ` 10 each 4,00,000 4,00,000

12% Debentures 2,00,000 -

Preference Shares of ` 100 each - 2,00,000

` 6,00,000 6,00,000

The indifference point between the plans is ` 2,40,000. Corporate tax rate is 30%.

Calculate the rate of dividend on preference shares. (4 x 5 = 20 Marks)

Answer

(a) (i) Economic Order Quantity (E.O.Q)

= 2×Annual requirement of 'Rex' × Ordering cost per order

Annual carrying cost per unit per annum

= × ×

×

2 60,000units 800

10 15%

`

` =

9,60,00,000

1.5`

= 8,000 units

(ii) Re-order Level = Safety Stock + (Normal daily Usage × Re-order period)

= 600 + (60,000units

300days × 10 days)

= 600 + 2,000

= 2,600 units



(iii) Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock

= 8,000 units + 600 units

= 8,600 units

(iv) Average Stock Level = Minimum Stock level + 1

2 Re-order Quantity

= 600* + 1

2 8,000 units

= 4,600 units

OR

Average Stock Level = MaximumStock level + MinimumStock level

2

= 8,600units + 600units

2

= 4,600 units

* Minimum Stock Level = Re-order level – (Normal daily usage × Re-order period)

= 2,600 – (60,000units

300days × 10 days)

= 2,600 – 2,000

= 600 units

OR

Minimum Stock Level = Safety Stock level = 600 units

Note: Various levels can be calculated in different other ways. However answers will be the same.

(b) Journal Entries under Integrated system of accounting

Particulars ` `

(i) Work-in-Progress Ledger Control A/c Dr. 3,25,000

Factory Overhead Control A/c Dr. 1,15,000

To Stores Ledger Control A/c 4,40,000

(Being issue of Direct and Indirect materials)



(ii) Work-in Progress Ledger Control A/c Dr. 4,87,500

Factory Overhead control A/c Dr. 1,62,500

To Wages Control A/c 6,50,000

(Being allocation of Direct and Indirect wages)

(iii) Factory Overhead Control A/c Dr. 2,50,000

To Costing Profit & Loss A/c 2,50,000

(Being transfer of over absorption of Factory overhead)

Costing Profit & Loss A/c Dr. 1,75,000

To Administration Overhead Control A/c 1,75,000

(Being transfer of under absorption of Administration overhead)

(iv) Sundry Creditors A/c Dr. 1,50,000

To Cash/ Bank A/c 1,50,000

(Being payment made to creditors)

(v) Cash/ Bank A/c Dr. 2,00,000

To Sundry Debtors A/c 2,00,000

(Being payment received from debtors)

(c) Computation of Degree of Operating Leverage (DOL), Degree of Financial Leverage

(DFL) and Degree of Combined Leverage (DCL)

Firm N Firm S Firm D

Output (Units) 17,500 6,700 31,800

Selling Price/Unit 85 130 37

Sales Revenue (A) 14,87,500 8,71,000 11,76,600

Variable Cost/Unit 38.00 42.50 12.00

Less: Variable Cost (B) 6,65,000 2,84,750 3,81,600

Contribution (A-B) 8,22,500 5,86,250 7,95,000

Less: Fixed Cost 4,00,000 3,50,000 2,50,000

EBIT 4,22,500 2,36,250 5,45,000

Less: Interest on Loan 1,25,000 75,000 -

PBT 2,97,500 1,61,250 5,45,000



DOL = EBIT

C

4,22,500

8,22,500

2,36,250

5,86,250

5,45,000

7,95,000

= 1.95 = 2.48 = 1.46

DFL= PBT

EBIT

2,97,500

4,22,500

1,61,250

2,36,250

5,45,000

5,45,000

= 1.42 = 1.47 = 1.00

DCL = OL x FL 1.95 x 1.42 2.48 x 1.47 1.46 x 1

OR

ContributionDCL

PBT=

= 2.77

8,22,500= 2.76

2,97,500

= 3.65

5,86,250= 3.64

1,61,250

= 1.46

7,95,000= 1.46

5,45,000

(d) Computation of Rate of Preference Dividend

EBIT = 2,40,000

Tax rate = 30%

1 2

(EBIT Interest) (1 Tax rate) EBIT (1 Tax rate) Preference Dividend

No. of Equity Shares (N ) No. of Equity Shares (N )

− − − −=

(2,40,000 - 24,000) (1- 0.30) 2,40,000 (1- 0.30) - Preference Dividend=

40,000 40,000

2,16,000 (1- 0.30) 1,68,000 - Preference Dividend=

40,000 40,000

1,51,200 = 1,68,000 – Preference Dividend

Preference Dividend = 1,68,000 – 1,51,200

Preference Dividend = 16,800

Rate of Dividend = Preference Dividend

x 100Preference Share Capital

=16,800

2,00,000x 100 = 8.4%

Question 2

(a) The following information relates to a bus operator:

Cost of the bus ` 18,00,000

Insurance charges 3% p.a.

Manager-cum accountant's salary ` 8,000 p.m.



Annual Tax ` 50,000

Garage Rent ` 2,500 p.m.

Annual repair & maintenance ` 1,50,000

Expected life of the bus 15 years

Scrap value at the end of 15 years ` 1,20,000

Driver's salary ` 15,000 p.m.

Conductor's salary ` 12,000 p.m.

Stationery ` 500 p.m.

Engine oil, lubricants (for 1200 kms.) ` 2,500

Diesel and oil (for 10 kms.) ` 52

Commission to driver and conductor (shared equally) 10% of

collections

Route distance 20 km long

The bus will make 3 round trips for carrying on the average 40 passengers in each trip.

Assume 15% profit on collections. The bus will work on the average 25 days in a month.

Calculate fare for passenger-km. (8 Marks)

(b) The assets of SONA Ltd. consist of fixed assets and current assets, while its current

liabilities comprise bank credit in the ratio of 2 : 1. You are required to prepare the

Balance Sheet of the company as on 31st March 2013 with the help of following

information:

Share Capital ` 5,75,000

Working Capital (CA-CL) ` 1,50,000

Gross Margin 25%

Inventory Turnover 5 times

Average Collection Period 1.5 months

Current Ratio 1.5:1

Quick Ratio 0.8: 1

Reserves & Surplus to Bank & Cash 4 times (8 Marks)



Answer

(a) Working Notes:

(i) Calculation of Depreciation of Bus (Per month)

Cost of thebus Scrap value at the endof the15years

=Expectedlife of thebus

−

−18,00,000 1,20,000=

15years

` `

= ` 1,12,000 p.a.

Depreciation per month = =1,12,000

9,333.3312months

``

(ii) Calculation of total distance travelled and Passenger-km. per month

Total distance = 3 trips × 2 × 20 k.m. × 25 days = 3,000 k.m.

Total Passenger-km. = 3 trips × 2 × 20 k.m. × 25 days × 40 passengers

= 1,20,000 Passenger-k.m.

(iii) Cost of Engine oil, Lubricants and Diesel & oil (Per month)

Engine oil & lubricants Totaldistance travelled

= × 2,5001,200 K.m.

`

3,000K.m.

= × 2,5001,200 K.m.

`

= ` 6,250

Diesel and Oil Totaldistance travelled

= × 5210 K.m.

`

3,000K.m.

= × 5210 K.m.

` = ` 15,600

Statement showing the Operating Cost per Passenger-km.

` `

(i) Standing Charges:

Depreciation {Working Note- (i)} 9,333.33



Insurance Charge

18,00,000× 3%

12

`

4,500

Manager-cum-accountant’s salary 8,000

Annual Tax (p.m.)

50,000

12

`

4,166.67

Garage Rent 2,500 28,500

(ii) Maintenance Charges:

Repair & Maintenance per month

1,50,000

12

`

12,500

(iii) Running Cost:

Driver’s Salary 15,000

Conductor’s Salary 12,000

Stationery 500

Engine oil & Lubricants {Working Note- (iii)} 6,250

Diesel and oil {Working Note- (iii)} 15,600

Total running cost before deducting commission to driver and conductor

49,350 49,350

Total cost excluding commission to driver and conductor

90,350

Driver’s commission on collection* 6,023.34

Conductor’s commission on collection* 6,023.33

Total Cost (i) +(ii) + (iii) 1,02,396.67

Add: Profit** 18,070

Total Collection 1,20,466.67

Working note:

Total costs before commission on collection and net profit is ` 90,350.

Commission on collection to driver and conductor is 10% of collection and Profit is

15% of collection means

100% - (10% + 15%) i.e. 75% = ` 90,350

So, Total collection = 90,350

×100 = 1,20,466.6775

``

*Total Commission on collection = 10% × ` 1,20,466.67 = ` 12,046.67



Driver’s share = 50% × ` 12,046.67 = 6,023.34

Conductor’s share = 50% × ` 12,046.67 = 6,023.33

** Profit on collection = ` 1,20,466.67 × 15% = ` 18,070

Fare per Passenger-km. Total Collection

=Total Passenger - km. {Working Note (ii)}

1,20,466.67

=1,20,000

`

= ` 1.004 (appx.)

(b) Working Notes:

(1) Computation of Current Assets (CA) and Current Liabilities (CL)

Current Assets= Current Ratio

Current Liabilities

1

1.5

CL

CA=

1.5CL CA =∴

CA - CL = 1,50,000

1.5 CL- CL = 1,50,000

0.5 CL = 1,50,000

CL = 1,50,000

= 3,00,000 0.5

CA = 1.5 x 3,00,000 = 4,50,000

2. Computation of Bank Credit (BC) and Other Current Liabilities (OCL)

1

2

CL Other

Credit Bank=

BC = 2 OCL

BC + OCL = CL

2 OCL + OCL = 3,00,000

3 OCL = 3,00,000

OCL = 1,00,000

Bank Credit = 2 × 1,00,000 = 2,00,000



3. Computation of Inventory

Quick Ratio = Quick Assets

Current Liabilities

Current Assets - Inventories

Current Liabilities =

0.8 = 4,50,000 - Inventories

3,00,000

0.8 × 3,00,000 = 4,50,000 – Inventories

Inventories = 4,50,000 – 2,40,000 = 2,10,000

4. Computation of Debtors

Inventory Turnover = 5 times

Average Inventory = COGS

Inventory Turnover

COGS = 2,10,000 × 5 = 10,50,000

Average Collection Period (ACP) = 1.5 months = 45 days

Debtors Turnover = 845

360

ACP

360==

Sales - COGS×100 = 25%

Sales

25×SalesSales - COGS =

100

Sales – 0.25 Sales = COGS

0.75 Sales = 10,50,000

Sales = 10,50,000

0.75= 14,00,000

Debtors = Sales

Debtors Turnover

14,00,000= = 1,75,000

8

5. Computation of Bank and Cash

Bank & Cash = CA - (Debtors + Inventory)

= 4,50,000 – (1,75,000 + 2,10,000)= 4,50,000 – 3,85,000 = 65,000



6. Computation of Reserves & Surplus

4= Cash& Bank

Surplus& Reserves

Reserves & Surplus = 4 × 65,000 = 2,60,000

Balance Sheet of SONA Ltd. as on March 31, 2013

Liabilities ` Assets `

Share Capital 5,75,000 Fixed Assets 6,85,000

Reserves & Surplus 2,60,000 Current Assets:

Current Liabilities: Inventories 2,10,000

Bank Credit 2,00,000 Debtors 1,75,000

Other Current Liabilities 1,00,000 Bank & Cash 65,000

11,35,000 11,35,000

Question 3

(a) The rate of change of labour force in a company during the year ending 31st March, 2013

was calculated as 13%,8% and 5% respectively under 'Flux Method', 'Replacement

method' and 'Separation method'. The number of workers separated during the year is

40.


(i) Average number of workers on roll.

(ii) Number of workers replaced during the year.

(iii) Number of new accessions i.e. new recruitment.

(iv) Number of workers at the beginning of the year. (8 Marks)

(b) APZ Limited is considering to select a machine between two machines 'A' and 'B'. The

two machines have identical capacity, do exactly the same job, but designed differently.

Machine 'A' costs ` 8,00,000, having useful life of three years. It costs ` 1,30,000 per

year to run.

Machine 'B' is an economy model costing ` 6,00,000, having useful life of two years. It

costs ` 2,50,000 per year to run.

The cash flows of machine 'A' and 'B' are real cash flows. The costs are forecasted in

rupees of constant purchasing power. Ignore taxes.

The opportunity cost of capital is 10%.



The present value factors at 10% are :

Year t1 t2 t3

PVIF0.10,t 0.9091 0.8264 0.7513

PVIFA0.10,2 = 1.7355

PVIFA0.10,3 = 2.4868

Which machine would you recommend the company to buy? (8 Marks)

Answer

(a) (i) Labour Turnover Rate (Separation method)

= No. of workers separated

Average no. of workersonroll

Or, 5

100 =

40

Average no. of workerson roll

Or, Average no. of workers on roll = 800

(ii) Labour Turnover Rate (Replacement method)

= No. of workers replaced

Average no. of workerson roll

Or, 8

100 =

No. of workers replaced

800

Or, No. of workers replaced = 64

(iii) Labour Turnover Rate (Flux Method)

= No. of Separations + No. of accession (newrecruitments)

Average No. of workerson roll

Or, 13

100 =

40 + No. of accessions (New recruitments)

800

Or, 100 (40 + No. of Accessions) = 10,400

Or, No. of new accessions = 64

(iv) No. of workers at the beginning of the year

Let workers at the beginning of the year were ‘X’

Average no. of workers on roll = Wor ker sat thebegining Wor ker sat the end

2

+



800 = X ( X New accessions Separations)

2

+ + −

800 = X ( X 64 40)

2

+ + −

800 = X ( X 24)

2

+ +

2 X = 1,600 – 24

X = 788 workers

(b) Statement Showing Evaluation of Two Machines

Particulars Machine A Machine B

Purchase Cost (`) : (i) 8,00,000 6,00,000

Life of Machines (in years) 3 2

Running Cost of Machine per year (`) : (ii) 1,30,000 2,50,000

Cumulative PVF for 1-3 years @ 10% : (iii) 2.4868 -

Cumulative PVF for 1-2 years @ 10% : (iv) - 1.7355

Present Value of Running Cost of Machines (`):

(v) = [(ii) x (iii)]

3,23,284

4,33,875

Cash Outflow of Machines (`) : (vi) = (i) + (v) 11,23,284 10,33,875

Equivalent Present Value of Annual Cash Outflow

[(vi) ÷ (iii)]

4,51,698.57

Or 4,51,699

5,95,721.69

Or 5,95,722

Recommendation: APZ Limited should consider buying Machine A since its equivalent

Cash outflow is less than Machine B.

Question 4

(a) SP Limited produces a product 'Tempex' which is sold in a 10 Kg. packet. The standard

cost card per packet of 'Tempex' are as follows:

`

Direct materials 10 kg @ ` 45 per kg 450

Direct labour 8 hours @ ` 50 per hour 400

Variable Overhead 8 hours @ ` 10 per hour 80

Fixed Overhead 200

1,130

Budgeted output for the third quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.



Actual cost for this quarter are as follows :

`

Direct Materials 8,900 Kg @ ` 46 per Kg. 4,09,400

Direct Labour 7,000 hours @ ` 52 per hour 3,64,000

Variable Overhead incurred 72,500

Fixed Overhead incurred 1,92,000

You are required to calculate :

(i) Material Usage Variance

(ii) Material Price Variance

(iii) Material Cost Variance

(iv) Labour Efficiency Variance

(v) Labour Rate Variance

(vi) Labour Cost Variance

(vii) Variable Overhead Cost Variance

(viii) Fixed Overhead Cost Variance (8 Marks)

(b) The following are the summarized Balance Sheet of Flexon Limited as on 31st March

2012 and 2013 :

Liabilities 31.3.12 31.3.13 Assets 31.3.12 31.3.13

` ` ` `

Share Capital 8,00,000 8,00,000 Goodwill 15,000 15,000

General Reserve 1,40,000 1,80,000 Building 4,00,000 3,60,000

Profit & Loss A/c. 1,60,000 2,70,000 Plant 3,70,000 5,20,000

Sundry Creditors 1,71,000 1,67,000 Investment

(Long-term)

1,20,000 1,50,000

Bills Payable 20,000 30,000 Stock 3,00,000 2,30,000

Provision for Tax 1,60,000 1,80,000 Debtors 1,80,000 2,00,000

Cash & Bank 66,000 1,52,000

14,51,000 16,27,000 14,51,000 16,27,000


(1) Depreciation charged during the year 2012-13:



On Plant - ` 40,000

On Building - ` 40,000

(2) Provision for tax of ` 1,90,000 was made during the year 2012-13.

(3) Interim dividend paid during the year 2012-13:

Interim Dividend - ` 80,000

Corporate Dividend Tax - ` 13,596

Prepare:

(i) Statement of changes in working capital

(ii) Funds flow statement for the year ended 31st March, 2013. (8 Marks)

Answer

(a) (i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)

= ` 45 (9,000 kgs. – 8,900 kgs.)


(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)

= 8,900 kgs. (` 45 – ` 46)

= ` 8,900 (Adverse)

(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost

= (SQ × SP) – (AQ × AP)

= (9,000 kgs. × ` 45) – (8,900 kgs. × ` 46)

= ` 4,05,000 – ` 4,09,400

= `4,400 (Adverse)

(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)

= ` 50 (9,000

8hours10

× – 7,000 hrs.)

= ` 50 (7,200 hrs. – 7,000 hrs.)


(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)

= 7,000 hrs. (` 50 – `52)

= ` 14,000 (Adverse)

(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost

= (SH × SR) – (AH × AR)



= (7,200 hrs. × ` 50) – (7,000 hrs. × ` 52)

= ` 3,60,000 – ` 3,64,000

= `4,000 (Adverse)

(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost

= (7,200 hrs. × ` 10) – ` 72,500

= ` 500 (Adverse)

(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead

= 200

9,000kgs. 1,92,00010 kgs.

× −`

`

= ` 1,80,000 – ` 1,92,000

= ` 12,000 (Adverse)

(b) (i) Schedule of Changes in Working Capital

Particulars 31st March Working Capital

2012

(`)

2013

(`)

Increase

(`)

Decrease

(`)

(A) Current Assets

Stock 3,00,000 2,30,000 - 70,000

Debtors 1,80,000 2,00,000 20,000 -

Cash & Bank 66,000 1,52,000 86,000 -

Total (A) 5,46,000 5,82,000

(B) Current Liabilities

Sundry Creditors 1,71,000 1,67,000 4,000 -

Bills Payable 20,000 30,000 - 10,000

Total (B) 1,91,000 1,97,000

Working Capital (A-B) 3,55,000 3,85,000 1,10,000 80,000

Increase in Working Capital 30,000 - - 30,000

Total 3,85,000 3,85,000 1,10,000 1,10,000

Funds Flow Statement as on 31st March, 2013

Sources of Fund ` Application of Fund `

Funds from Operation 5,13,596 Increase in Working Capital 30,000

Interim Dividend 80,000



Purchase of Investment 30,000

Corporate Dividend Tax 13,596

Purchase of Plant 1,90,000

Payment of Income Tax 1,70,000

5,13,596 5,13,596

Working Notes:

Adjusted Profit and Loss A/c

Particulars ` Particulars `

To General Reserve 40,000 By Net Profit for 2012 1,60,000

To Depreciation:

Plant 40,000 By Funds from Operations 5,13,596

Building 40,000 80,000

To Goodwill -

To Interim Dividend 80,000

To Corporate Dividend

Tax

13,596

To Provision for Tax

To Net Profit for 2013

1,90,000

2,70,000

6,73,596 6,73,596

Provision for Tax A/c


To Bank A/c (Tax Paid) 1,70,000 By Bal. b/d 1,60,000

To Balance b/d 1,80,000 By P&L A/c 1,90,000

3,50,000 3,50,000

Plant & Machinery A/c


To Bal. b/d 3,70,000 By Depreciation 40,000

To Bank 1,90,000 By Bal. c/d 5,20,000

5,60,000 5,60,000

(Note: Schedule of changes in the working capital maybe computed alternatively by

taking provision for tax as current liability and working out the problem accordingly.)



Question 5

(a) Explain the following terms in relation to process costing:

(i) Equivalent Production

(ii) Inter-process profit

(b) Elaborate the practical application of Marginal Costing.

(c) What is Virtual Banking? State its advantages.

(d) What is Over capitalisation? State its causes and consequences. (4 x 4 = 16 Marks)

Answer

(a) (i) Equivalent Production: When opening and closing stocks of work-in-process exist,

unit costs cannot be computed by simply dividing the total cost by total number of

units still in process. We can convert the work-in-process units into finished units

called equivalent production units so that the unit cost of these uncompleted (W-I-P)

units can be obtained. Equivalent Production units = Actual number of units in

production × Percentage of work completed. It consists of balance of work done on

opening work-in-process, current production done fully and part of work done on

closing WIP with regard to different elements of costs viz., material, labour and

overhead.

(ii) Inter-Process Profit: In some process industries the output of one process is trans-

ferred to the next process not at cost but at market value or cost plus a percentage

of profit. The difference between cost and the transfer price is known as inter-

process profits.

(b) Practical applications of Marginal costing:

(i) Pricing Policy: Since marginal cost per unit is constant from period to period, firm

decisions on pricing policy can be taken particularly in short term.

(ii) Decision Making: Marginal costing helps the management in taking a number of

business decisions like make or buy, discontinuance of a particular product,

replacement of machines, etc

(iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of

finished goods and work-in-progress are carried on marginal cost basis and the

fixed expenses are written off to profit and loss account as period cost. This shows

the true profit of the period.

(iv) Determination of production level: Marginal costing helps in the preparation of

break-even analysis which shows the effect of increasing or decreasing production

activity on the profitability of the company.



(c) Virtual Banking and its Advantages

Virtual banking refers to the provision of banking and related services through the use of

information technology without direct recourse to the bank by the customer.

The advantages of virtual banking services are as follows:

Lower cost of handling a transaction.

The increased speed of response to customer requirements.

The lower cost of operating branch network along with reduced staff costs leads to

cost efficiency.

Virtual banking allows the possibility of improved and a range of services being

made available to the customer rapidly, accurately and at his convenience.

(Note: Students may answer any two of the above advantages)

(d) Overcapitalization and its Causes and Consequences

It is a situation where a firm has more capital than it needs or in other words assets are

worth less than its issued share capital, and earnings are insufficient to pay dividend and

interest.

Causes of Over Capitalization

Over-capitalisation arises due to following reasons:

(i) Raising more money through issue of shares or debentures than company can

employ profitably.

(ii) Borrowing huge amount at higher rate than rate at which company can earn.

(iii) Excessive payment for the acquisition of fictitious assets such as goodwill etc.

(iv) Improper provision for depreciation, replacement of assets and distribution of

dividends at a higher rate.

(v) Wrong estimation of earnings and capitalization.

(Note: Students may answer any two of the above reasons)

Consequences of Over-Capitalisation

Over-capitalisation results in the following consequences:

(i) Considerable reduction in the rate of dividend and interest payments.

(ii) Reduction in the market price of shares.

(iii) Resorting to “window dressing”.



(iv) Some companies may opt for reorganization. However, sometimes the matter gets

worse and the company may go into liquidation.

(Note: Students may answer any two of the above consequences)

Question 6

(a) Calculate Machine Hour Rate from the following particulars:

Cost of Machine - ` 25,00,000

Salvage Value - ` 1,25,000

Estimated life of the machine - 25,000 Hours

Working Hours (per annum) - 3,000 Hours

Hours required for maintenance - 400 Hours

Setting-up time required - 8% of actual working hours


(i) Power 25 units @ ` 5 per unit per hour.

(ii) Cost of repairs and maintenance ` 26,000 per annum.

(iii) Chemicals required for operating the machine ` 2,600 per month.

(iv) Overheads chargeable to the machine ` 18,000 per month.

(v) Insurance Premium (per annum) 2% of the cost of machine

(vi) No. of operators - 02 (looking after three other machines also)

(vii) Salary per operator per month ` 18,500 (8 Marks)

(b) PTX Limited is considering a change in its present credit policy. Currently it is evaluating

two policies. The company is required to give a return of 20% on the investment in new

accounts receivables. The company's variable costs are 70% of the selling price.

Information regarding present and proposed policies is as follows:

Present Policy Policy

Policy Option 1 Option 2

Annual Credit Sales (`) 30,00,000 42,00,000 45,00,000

Debtors turnover ratio 4 times 3 times 2.4 times

Loss due to bad debts 3% of sales 5% of sales 6% of sales

Note: Return on investment in new accounts receivable is based on cost of investment in

debtors.

Which option would you recommend? (8 Marks)



Answer

(a) Computation of Machine Hour Rate

Particulars

Setting-up time is

‘Unproductive’ (Machine hour-

2,407*)

Setting-up time is

‘Productive’ (Machine

hour- 2,600)

` `

Fixed Charges (Standing Charges):

Overhead Chargeable ` 18,000 × 12 = ` 2,16,000

2,16,000

2,407 hours

Rs

;

2,16,000

2,600 hours

Rs

89.74

83.08

Operator’s Salary:

× ×

=18,500 12 2 Operators

1,11,0004 machines

R `

1,11,000

2,407 hours

R

;

1,11,000

2,600 hours

R

46.12 42.69

Insurance: 2% of `25,00,000 = `50,000 20.77 19.23

156.63 145.00

Variable Expenses (Machine Expenses) per hour

Depreciation : 25,00,000 1,25,000

25,000 hours

− ` `

95.00 95.00

Power: ( 25 units × ` 5) 125.00 125.00

Repairs and Maintenance : 10.80 10.00

26,000

2,407 hours

`

;

26,000

2,600 hours

`

Chemical : 2,600 12

2,407 hours

×

Rs

;

2,600 12

2,600 hours

×

Rs

12.96 12.00

Machine Hour Rate 400.39 387.00



* (Hours)

Working Hours 3,000

Less: Maintenance hours 400

2,600

Less: Setting-up hours 193

Actual working hours 2,600hours

( ×100)108

2,407

Assumptions:

1. Working hours (i.e. 3,000 hours) are inclusive of maintenance and setting-up time.

2. It is assumed that no power is consumed by the machine during unproductive hours i.e. during maintenance and unproductive setting-up hours.

3. Depreciation is calculated on the basis of estimated life of the machine hours. Hence per unit machine hour rate of depreciation will be same.

Note: As this numerical problem does not specifically mention about the nature of setting-

up time; means whether setting-up time is unproductive or productive is not clear. The

problem can be solved assuming setting-up time either as productive or as unproductive.

The question may be solved based on logical assumption regarding the nature of setting-

up time (i.e. unproductive or productive) and for furnishing any one or both the situation.

(b) Statement of Evaluation of Credit Policies of PTX Limited (based on Total Cost

Approach)

Present

Policy

Policy Option I

Policy Option II

Sales Revenue 30,00,000 42,00,000 4,50,0000

Less: Variable Cost @70% 21,00,000 29,40,000 31,50,000

Contribution 9,00,000 12,60,000 13,50,000

Less: Other Relevant Costs

Bad Debt Losses (90,000) (2,10,000) (2,70,000)

Investment Cost

(VC ÷ DTR) × 20%

(1,05,000) (1,96,000) (2,62,500)

Profit 7,05,000 8,54,000 8,17,500

Recommendation: PTX Limited is advised to adopt Policy Option I.

(Note: In the above solution, investment in accounts receivable is based on total cost of

goods sold on credit. Since fixed costs are not given in the problem, therefore, it is assumed



that there are no fixed costs and investment in receivables is determined with reference to

variable costs only. The above solution may alternatively be worked out on the basis of

incremental approach. However, the recommendation would remain the same.)

Question 7


(a) What is the meaning of Margin of Safety (MOS)? State the relationship between

Operating Leverage and Margin of Safety Ratio.

(b) Describe the steps involved in the budgetary control technique.

(c) 'Management of marketable securities is an integral part of investment of cash.'

Comment.

(d) What do you mean by capital structure? State its significance in financing decision.

(e) (i) State the main elements of leveraged lease.

(ii) State the escalation clause in contract costing. (4 x 4 = 16 Marks)

Answer

(a) Margin of Safety (MoS) is the excess of total sales over the Break even sales. MoS defines

the amount upto which level sales can decline before occurring loss. Therefore MoS = Total

Sales – Break even sales and MoS ratio = Sales - Break even sales

Sales Break even sales

(BE sales) will depend on contribution margin (BE sales = Fixed Cost ÷ Contribution margin).

Contribution margin is related to operating leverage also. Operating leverage is calculated as

Contribution ÷ Operating profit and contribution margin plays an important role in it. If sales

are expected to increase, higher operating leverage will result in higher profit. When sales

are expected to decrease, lower operating leverage will result in higher profit. Higher variable

cost and lower fixed cost will result into higher MoS and risk will be lower and vice versa.

So like Operating leverage, MoS is a measure of risk as to what extent an organisation is

exposed to change in sales volume.

(b) There are certain steps involved in the budgetary control technique. They are as follows:

(i) Definition of objectives: A budget being a plan for the achievement of certain

operational objectives, it is desirable that the same are defined precisely. The

objectives should be written out; the areas of control demarcated; and items of reve-

nue and expenditure to be covered by the budget stated.

(ii) Location of the key (or budget) factor: There is usually one factor (sometimes

there may be more than one) which sets a limit to the total activity. Such a factor is

known as key factor. For proper budgeting, it must be located and estimated

properly.



(iii) Appointment of controller: Formulation of a budget usually required whole time

services of a senior executive known as budget controller; he must be assisted in

this work by a Budget Committee, consisting of all the heads of department along

with the Managing Director as the Chairman.

(iv) Budget Manual: Effective budgetary planning relies on the provision of adequate

information which are contained in the budget manual. A budget manual is a

collection of documents that contains key information for those involved in the

planning process.

(v) Budget period: The period covered by a budget is known as budget period. The

Budget Committee determines the length of the budget period suitable for the

business. It may be months or quarters or such periods as coincide with period of

trading activity.

(vi) Standard of activity or output: For preparing budgets for the future, past statistics

cannot be completely relied upon, for the past usually represents a combination of

good and bad factors. Therefore, though results of the past should be studied but

these should only be applied when there is a likelihood of similar conditions

repeating in the future.

(c) “Management of Marketable Securities is an Integral Part of Investment of Cash”

Management of marketable securities is an integral part of investment of cash as it

serves both the purposes of liquidity and cash, provided choice of investment is made

correctly. As the working capital needs are fluctuating, it is possible to invest excess

funds in some short term securities, which can be liquidated when need for cash is felt.

The selection of securities should be guided by three principles namely safety, maturity

and marketability.

(d) Concept of Capital Structure and its Significance in Financing Decision

Capital structure refers to the mix of a firm’s capitalisation i.e. mix of long-term sources of

funds such as debentures, preference share capital, equity share capital and retained

earnings for meeting its total capital requirement.

Significance in Financing Decision

The capital structure decisions are very important in financial management as they

influence debt – equity mix which ultimately affects shareholders return and risk. These

decisions help in deciding the forms of financing (which sources to be tapped), their

actual requirements (amount to be funded) and their relative proportions (mix) in total

capitalisation. Therefore, such a pattern of capital structure must be chosen which

minimises cost of capital and maximises the owners’ return.



(e) (i) Main Elements of Leveraged Lease

Under this lease, a third party is involved beside lessor and lessee. The lessor borrows

a part of the purchase cost (say 80%) of the asset from the third party i.e., lender. The

asset so purchased is held as security against the loan. The lender is paid off from the

lease rentals directly by the lessee and the surplus after meeting the claims of the

lender goes to the lessor. The lessor is entitled to claim depreciation allowance.

(ii) Escalation Clause - If during the period of execution of a contract, the prices of

materials, or labour etc., rise beyond a certain limit, the contract price will be

increased by an agreed amount. Inclusion of such a clause in a contract deed is

called an “Escalation Clause”


DISCLAIMER











“Working Notes should form part of the answer”.

Question 1


(a) Following are the details of the product Phomex for the month of April 2013:

Standard quantity of material required per unit 5 kg

Actual output 1000 units

Actual cost of materials used ` 7,14,000

Material price variance ` 51,000 (Fav)

Actual price per kg of material is found to be less than standard price per kg of material

by ` 10.


(i) Actual quantity and Actual price of materials used.

(ii) Material Usage Variance

(iii) Material Cost Variance

(b) MFN Limited started its operation in 2011 with the total production capacity of 2,00,000

units. The following data for two years is made available to you:

2011 2012

Sales units 80,000 1,20,000

Total cost (`) 34,40,000 45,60,000

There has been no change in the cost structure and selling price and it is expected to

continue in 2013 as well. Selling price is ` 40 per unit.


(i) Break-Even Point (in units)

(ii) Profit at 75% of the total capacity in 2013

(c) A company issued 40,000, 12% Redeemable Preference Share of ` 100 each at a

premium of ` 5 each, redeemable after 10 years at a premium of ` 10 each. The

floatation cost of each share is ` 2.

You are required to calculate cost of preference share capital ignoring dividend tax.

(d) The following information relates to Beta Ltd. for the year ended 31st March 2013:



Net Working Capital ` 12,00,000

Fixed Assets to Proprietor’s Fund Ratio 0.75

Working Capital Turnover Ratio 5 Times

Return on Equity (ROE) 15%

There is no debt capital.


(i) Proprietor’s Fund

(ii) Fixed Assets

(iii) Net Profit Ratio. (4 x 5 = 20 Marks)

Answer

1. (a) (i) Actual Quantity and Actual Price of material used

Material Price Variance = Actual Quantity (Std. Price – Actual Price) = `51,000

Or, AQ (SP – AP) = ` 51,000

Or, 10 AQ = ` 51,000

Or, AQ = 5,100 kgs

Actual cost of material used is given i.e. AQ x AP = ` 7,14,000

or, 5,100 AP = ` 7,14,000

AP = ` 140

Actual price is less by ` 10

So, Standard Price = ` 140 + ` 10 = ` 150 per kg

Actual Quantity = 5,100 kgs

Actual Price = ` 140/kg

(ii) Material Usage Variance

Std. Price (Std. Quantity – Actual Quantity)

Or, SP (SQ – AQ)

= ` 150 (1,000 units x 5 kg – 5,100 kg)

= ` 15,000 (A)

(iii) Material Cost Variance = Std. Cost – Actual Cost

= (SP x SQ) – (AP x AQ)

= ` 150 x 5,000 – ` 140 x 5,100



= ` 7,50,000 – ` 7,14,000

= ` 36,000 (F)

OR

Material Price Variance + Material Usage Variance

` 51,000 (F) + ` 15,000 (A)

= ` 36,000 (F)

(b)

2011 2012 Difference

Sales Units 80,000 1,20,000 40,000

Sale Value @ ` 40 32,00,000 48,00,000 16,00,000

Total Cost ` 34,40,000 45,60,000 11,20,000

Variable Cost per unit

(change in total

cost/change in sales

volume)

11,20,000/40,000

= ` 28

Total Fixed Cost (`) 45,60,000 –

1,20,000 x 28 =

` 12,00,000

Or

34,40,000 –

80,000 x 28 =

` 12,00,000

Break-even point in

units

Fixed Cost/Contribution per unit = ` 12,00,000/ ` (40-28)

= 12,00,000/12 = 1,00,000 units

Capacity at 75% 1,50,000 units (2,00,000 x 75%)

Contribution per unit ` 12

Contribution (`) 1,50,000 x ` 12 = ` 18,00,000

Fixed Cost ` 12,00,000

Profit Contribution – Fixed Cost = ` 18,00,000 – 12,00,000

= ` 6,00,000

(c) Calculation of Cost of Preference Shares (Kp)

Preference Dividend (PD) = 0.12 x 40,000 x 100

= 4,80,000

Floatation Cost = 40,000 x 2 = ` 80,000

Net Proceeds (NP) = 42,00,000 – 80,000 = 41,20,000



Redemption Value (RV) = 40,000 x 110 = 44,00,000

Cost of Redeemable Preference Shares =

2

NP RV

N / NP) -(RV PD

++

Kp =

2

41,20,00044,00,000

/1041,20,000)-(44,00,0004,80,000

++

=285,20,000/

/10(2,80,000)4,80,000 +

= 42,60,000

28,0004,80,000 +=

42,60,000

5,08,000

= 0.1192

Kp = 11.92%

(Note: Kp may be computed alternatively by taking the RV and NP for one unit of

preference shares. Final figure would remain unchanged).

(d) (i) Calculation of Proprietor’s Fund

Since Ratio of Fixed Assets to Proprietor’s Fund = 0.75

Therefore, Fixed Assets = 0.75 Proprietor’s Fund

Net Working Capital = 0.25 Proprietor’s Fund

12,00,000 = 0.25 Proprietor’s Fund

Therefore, Proprietors Fund = 0.25

12,00,000

= 48,00,000

(ii) Calculation of Fixed Assets

Fixed Assets = 0.75 Proprietor’s Fund

= 0.75 x 48,00,000

= 36,00,000

(iii) Calculation of Net Profit Ratio

Net Working Capital = 0.25 x 48,00,000

= 12,00,000



Working Capital Turnover Ratio = Capital Working

Sales

∴ Sales = 60,00,000

ROE = Equity

PAT

0.15 = 48,00,000

PAT

PAT = 7,20,000

Net Profit Ratio = Sales

Profit Net x100

= 60,00,000

7,20,000x 100

Net Profit Ratio = 12%

[Note: Fixed Assets may be computed alternatively by (Net Working Capital × Fixed Assets

to Proprietor’s Fund Ratio) and Proprietor’s Fund by (Fixed Assets + Net Working Capital)].

Question 2

(a) The summarized Balances Sheets of MPS Limited as on 31-3-2012 and 31-3-2013 are as

under:

Liabilities 31-3-2012 31-3-2013 Assets 31-3-2012 31-3-2013

` ` `

Equity share capital

40.00 50.00 Land & Building

27.00 25.00

Securities Premium Account

- 1.00 Plant & Machinery

25.00 34.00

General Reserve

8.00 11.00 Investments (Long Term)

3.00 8.00

Profit & Loss Account

10.30 12.70 Stock 7.50 9.80

10% Debentures 5.00 3.00 Debtors 9.25 11.15

Sundry Creditors 4.90 6.20 Bills Receivable

1.77 1.65

Provision for Tax 5.00 7.00 Cash & Bank 4.50 7.70



Balance

Proposed Dividend

4.80 6.00 Preliminary Expenses

0.80 0.62

Corporate Dividend Tax

0.82 1.02

78.82 97.92 78.82 97.92


(i) On 1.4.2012, the company redeemed debentures of ` 2,00,000 at par.

(ii) During 2012-13 the company has issued equity shares for cash at a premium of

10%.

(iii) Provision for tax made during the year 2012-13 for ` 6,80,000.

(iv) Dividend received on investment ` 50,000 in July 2012.

(v) A machine costing ` 8,00,000 (WDV ` 1,20,000) was sold for ` 50,000 during the

year 2012-13.

(vi) Depreciation for 2012-13 charged on plant & machinery ` 3,30,000 and ` 2,00,000

on land and building.

(vii) Proposed Dividend and Corporate Dividend Tax of 2011-12 paid during the year

2012-13.

Prepare a Cash Flow Statement as per Accounting Standard (AS)-3. (10 Marks)

(b) A skilled worker is paid a guaranteed wage rate of ` 120 per hour. The standard time

allowed for a job is 6 hour. He took 5 hours to complete the job. He is paid wages under

Rowan Incentive Plan.

(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.

(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to

maintain the same effective hourly rate of earnings, calculate the time in which he

should complete the job. (6 Marks)

Answer

(a) Cash Flow Statement

(` in

lakhs)

(` in

lakhs)

(A) Cash Flow from Operating Activities

Profit and Loss A/c (12.70 – 10.30) 2.40

Add: General Reserves (11.00 – 8.00) 3.00

5.40



Add: Provision for tax 6.8

12.20

Add: Proposed dividend 6.00

Corporate dividend tax 1.02

Profit before tax 19.22

Add: Interest on debentures 0.30

Loss on Sale of Machinery 0.70

Depreciation on Plant & Machinery 3.30

Depreciation on Land & Building 2.00

Preliminary Expenses written off 0.18

25.70

Less: Dividend received on Investment (0.50)

Cash flow before W/C adjustments 25.20

Less:Increase in Current Assets

Stock (2.30)

Debtors (1.90)

21.00

Add: Decrease in Current Assets

Bills receivables 0.12

Add: Increase in Current Liabilities

Sundry Creditors 1.30

Cash Generated from Operations 22.42

Less:Income tax paid

[(5.00+6.80) – 7.00] (4.80)

Cash Flow from Operating Activities 17.62

(B) Cash Flow from Investing Activities

Sale of Plant & Machinery 0.50

Purchase of Plant & Machinery (13.50)

Purchase of Investment (5.00)

Dividend Received on Investment 0.50

Cash Flow from Investing Activities (17.50)

(C) Cash Flow from Financing Activities



Issue of Share Capital 10.00

Securities Premium 1.00

Redemption of Debentures (2.00)

Interest on debentures (0.30)

Proposed Dividend (4.80)

Corporate dividend tax (0.82)

Cash flow from Financing Activities 3.08

Net increase in Cash and Cash Equivalent (A+B+C) 3.20

Cash and Cash equivalent at beginning of year 4.50

Cash and Cash Equivalent at end of year 7.70

Working Notes:

Provision for Tax A/c


To Cash b/f 4.80 By Bal. b/d 5.00

To Balance c/d 7.00 By P/L 6.80

11.80 11.80

Land & Building A/c


To Bal. b/d 27.00 By Depreciation 2.00


27.00 27.00

Plant & Machinery A/c


To Balance b/d 25.00 By Bank 0.50

To Bank b/f 13.50 By P/L 0.70

By Depreciation 3.30


38.50 38.50



(b) (i) Effective hourly rate of earnings under Rowan Incentive Plan

Earnings under Rowan Incentive plan =

(Actual time taken × wage rate) + Time Saved

Time Allowed× Time taken × Wage rate

= (5 hours × `120) + 1 hour

5 hours 1206 hours

× ×

`

= ` 600 + `100 = `700

Effective hourly rate = `700/5 hours = ` 140 /hour

(ii) Let time taken = X

∴ Effective hourly rate = Earnings under Halsay Scheme

Time Taken

Or, Effective hourly rate under Rowan Incentive plan =

(Time taken Rate) 50% Rate (Time allowed Time taken)

TimeTaken

× + × −

Or, `140 = (X 120) 50% 120 (6 X)

X

× + × −` `

Or, 140X = 120X + 360 – 60X

Or, 80X = 360

Or, X = 360

80= 4.5 hours

Therefore, to earn effective hourly rate of `140 under Halsey Incentive Scheme

worker has to complete the work in 4.5 hours

Question 3

(a) ABX Company Ltd. provides the following information relating to Process-B:

(i) Opening Work-in-progress - NIL

(ii) Units Introduced - 45,000 units @ ` 10 per unit

(iii) Expenses debited to the process:

Direct material - ` 65,500

Labour - ` 90,800

Overhead - ` 1,80,700

(iv) Normal loss in the process - 2% of Input



(v) Work-in progress - 1800 units

Degree of completion

Materials - 100%

Labour - 50%

Overhead - 40%

(vi) Finished output - 42,000 units

(vii) Degree of completion of abnormal loss:

Materials - 100%

Labour - 80%

Overhead - 60%

(viii) Units scrapped as normal loss were sold at ` 5 per unit.

(ix) All the units of abnormal loss were sold at ` 2 per unit.


(a) Statement of equivalent production.

(b) Statement showing the cost of finished goods, abnormal loss and closing balance of

work-in-progress.

(c) Process-B account and abnormal loss account. (10 Marks)

(b) The following information related to XL Company Ltd. for the year ended 31st March,

2013 are available to you:

Equity share capital of ` 10 each ` 25 lakh

11% Bonds of ` 1000 each ` 18.5 lakh

Sales ` 42 lakh

Fixed cost (Excluding Interest) ` 3.48 lakh

Financial leverage 1.39

Profit-Volume Ratio 25.55%

Income Tax Rate Applicable 35%


(i) Operating Leverage;

(ii) Combined Leverage; and

(iii) Earning per Share. (6 Marks)



Answer

(a) Statement of Equivalent Production

Input

Details Units

Output

Particulars Units

Equivalent Production

Material Labour Overhead

% Units % Units % Units

Unit

Introduced

45,000 Finished

output

42,000 100 42,000 100 42,000 100 42,000

Normal

loss (2%

of 45,000)

900 - - - - - -

Abnormal

loss

300 100 300 80 240 60 180

Closing

W-I-P

1,800 100 1,800 50 900 40 720

45,000 45,000 44,100 43,140 42,900

(b) Statement of Cost

Particulars Units Rate (`) Amount

(`)

Amount (`)

(i) Finished goods 42,000 17.9042 7,51,976.40

(ii) Abnormal Loss

Material 300 11.5873 3,476.19

Labour 240 2.1048 505.15

Overhead 180 4.2121 758.18 4,739.52

(iii) Closing W-I-P:

Material 1,800 11.5873 20,857.14

Labour 900 2.1048 1,894.32

Overhead 720 4.2121 3,032.71 25,784.17

Cost per Unit

Particulars Amount (`) Units Per Unit (`)

(i) Direct Material :

Unit Introduced 4,50,000

Add: Material 65,500



5,15,500

Less: Value of normal loss

(900 units × `5)

(4,500)

5,11,000 44,100 11.5873

(ii) Labour 90,800 43,140 2.1048

(iii) Overhead 1,80,700 42,900 4.2121

17.9042

(c) Process – B A/c


(`) Particulars Units Amount

(`)

To Input 45,000 4,50,000 By Normal loss 900 4,500

To Direct Material - 65,500 By Abnormal loss 300 4,740

To Labour - 90,800 By Finished goods 42,000 7,51,976

To Overhead 1,80,700 By Closing W-I-P 1,800 25,784

45,000 7,87,000 45,000 7,87,000

Abnormal Loss A/c


(`) Particulars Units Amount

(`)

To Process-B A/c 300 4,740 By Cost ledger control A/c

or Bank A/c

300 600

By Costing Profit & loss A/c - 4,140

300 4,740 300 4,740

(b) Profit – Volume Ratio = Sales

onContributi

25.55 = 42,00,000

onContributix 100

Contribution = 10,73,100

(i) Operating Leverage = Cost Fixed - onContributi

onContributi

= 3,48,000 - 10,73,100

10,73,100

= 25,100 7,

10,73,100



= 1.48

(ii) Combined Leverage = Operating Leverage x Financial Leverage

= 1.48 x 1.39 = 2.06

(iii) Earnings per Share (EPS)

Number of Equity Shares = 2,50,000

Earnings before Tax (EBT) = Sales – Variable Cost – Fixed Cost – Interest

= 42,00,000 – 31,26,900 – 3,48,000 – 2,03,500

EBT = 5,21,600

Profit after Tax (PAT) = EBT – Tax

= 5,21,600 – 1,82,560

= 3,39,040

EPS = 2,50,000

3,39,040= 1.3561

EPS = 1.36

Question 4

(a) A company manufactures one main product (M1) and two by-products B1 and B2. For the

month of January 2013, following details are available:

Total Cost upto separation Point ` 2,12,400

M1 B1 B2

Cost after separation - ` 35,000 ` 24,000

No. of units produced 4,000 1,800 3,000

Selling price per unit ` 100 ` 40 ` 30

Estimated net profit as percentage to sales value

- 20% 30%

Estimated selling expenses as percentage to sales value

20% 15% 15%

There are no beginning or closing inventories.

Prepare statement showing:

(i) Allocation of joint cost; and

(ii) Product-wise and overall profitability of the company for January 2013. (8 Marks)

(b) The following information is provided by the DPS Limited for the year ending 31st March,

2013.



Raw material storage period 55 days

Work-in-progress conversion period 18 days

Finished Goods storage period 22 days

Debt collection period 45 days

Creditors’ payment period 60 days

Annual Operating cost ` 21,00,000

(Including depreciation of ` 2,10,000)

[1 year = 360 days]


(i) Operating Cycle period.

(ii) Number of Operating Cycle in a year.

(iii) Amount of working capital required for the company on a cash cost basis.

(iv) The company is a market leader in its product, there is virtually no competitor in the

market. Based on a market research it is planning to discontinue sales on credit

and deliver products based on pre-payments. Thereby, it can reduce its working

capital requirement substantially.

What would be the reduction in working capital requirement due to such decision?

(8 Marks)

Answer

(a) (i) Statement showing allocation of Joint Cost

Particulars B1 B2

No. of units Produced 1,800 3,000

Selling Price Per unit (`) 40 30

Sales Value (`) 72,000 90,000

Less:Estimated Profit (B1 -20% & B2 -30%) (14,400) (27,000)

Cost of Sales 57,600 63,000

Less: Estimated Selling Expenses (B1 -15% & B2 -

15%)

(10,800) (13,500)

Cost of Production 46,800 49,500

Less:Cost after separation (35,000) (24,000)

Joint Cost allocated 11,800 25,500




Particulars M1 (`) B1 (`) B2 (`)

Sales Value (A) 4,00,000 72,000 90,000

(4,000x `100)

Less:- Joint Cost 1,75,100 11,800 25,500

(2,12,400 -11,800 -

25,500)

- Cost after separation - 35,000 24,000

- Selling Expenses

(M1- 20%, B1-15% & B2-15%)

80,000 10,800 13,500

(B) 2,55,100 57,600 63,000

Profit (A –B) 1,44,900 14,400 27,000

Overall Profit = 1,44,900 + 14,400 + 27,000 = ` 1,86,300

(b) (i) Calculation of Operating Cycle Period

Operating Cycle Period = R + W + F + D – C

= 55 + 18 + 22 + 45 – 60

= 80 days

(ii) Number of Operating Cycle in a Year

= Period Cycle Operating

360

= 80

360= 4.5

(iii) Amount of Working Capital Required

= Cycle Operating of Number

Cost Operating Annual

= 4.5

18,90,000= 4,20,000

(iv) Reduction in Working Capital

Operating Cycle Period = R + W + F – C

= 55 + 18 + 22 – 60

= 35



Amount of Working Capital Required = 18,90,000

35360

×

= 1,83,750

Reduction in Working Capital = 4,20,000 – 1,83,750

= 2,36,250

Question 5

(a) Cost of a product or service is required to be expressed in suitable cost unit. State the

cost units for the following industries:

(i) Steel

(ii) Automobile

(iii) Transport

(iv) Power

(b) Distinguish between cost allocation and cost absorption.

(c) What is debt securitization? And also state its advantages.

(d) Distinguish between factoring and bill-discounting. (4x4=16 Marks)

Answer

(a)

Industry Cost Unit

(i) Steel Tonne

(ii) Automobile Numbers

(iii) Transport Passenger Kilo-meter/ Tonne Kilo-meter

(iv) Power Kilo-watt hour (Kwh)

(b) Distinguish between Cost allocation and Cost absorption:

Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In

other words, it is the process of identifying, assigning or allowing cost to a cost centre or

a cost unit.

Cost absorption is the process of absorbing all indirect costs or overhead costs allocated

or apportioned over particular cost centre or production department by the units

produced.



(c) Debt Securitisation and its Advantages

Debt securitisation is a method of recycling of funds and is especially beneficial to

financial intermediaries to support lending volumes. Under debt securitisation a group of

illiquid assets say a mortgage or any asset that yields stable and regular cash flows like

bank loans, consumer finance, and credit card payment are pooled together and sold to

intermediary. The intermediary then issues debt securities.

The advantages of debt securitisation to the originator are the following:

(i) The asset is shifted off the Balance Sheet, thus giving the originator recourse to off

balance sheet funding.

(ii) It converts illiquid assets to liquid portfolio.

(iii) It facilitates better balance sheet management; assets are transferred off balance

sheet facilitating satisfaction of capital adequacy norms.

(iv) The originator’s credit rating enhances.

(Note: Students may answer any two of the above advantages)

(d) Differentiation between Factoring and Bills Discounting

The differences between Factoring and Bills discounting are:

(i) Factoring is called as “Invoice Factoring’ whereas Bills discounting is known as

‘Invoice discounting.”

(ii) In Factoring, the parties are known as the client, factor and debtor whereas in Bills

discounting, they are known as drawer, drawee and payee.

(iii) Factoring is a sort of management of book debts whereas bills discounting is a sort

of borrowing from commercial banks.

(iv) For factoring there is no specific Act, whereas in the case of bills discounting, the

Negotiable Instruments Act is applicable.

Question 6

(a) Pentax Limited has prepared its expense budget for 20,000 units in its factory for the

year 2013 as detailed below:

` per unit

Direct Materials 50

Direct Labour 20

Variable Overhead 15

Direct Expenses 6

Selling Expenses (20% fixed) 15



Factory Expenses (100% fixed) 7

Administration expenses (100% fixed) 4

Distribution expenses (85% variable) 12

Total ` 129

Prepare an expense budget for the production of 15,000 units and 18,000 units.

(7 Marks)

(b) PQR Company Ltd. Is considering to select a machine out of two mutually exclusive

machines. The company’s cost of capital is 12 per cent and corporate tax rate is 30 per

cent. Other information relating to both machines is as follows:

Machine – I Machine – II

Cost of Machine ` 15,00,000 ` 20,00,000

Expected Life 5 Yrs. 5 Yrs.

Annual Income (Before Tax and Depreciation) ` 6,25,000 ` 8,75,000

Depreciation is to be charged on straight line basis:


(i) Discounted Pay Back Period

(ii) Net Present Value

(iii) Profitability Index

The present value factors of ` 1 @ 12% are as follows:

Year 01 02 03 04 05

PV factor @ 12% 0.893 0.797 0.712 0.636 0.567 (9 Marks)

Answer

(a) Expense Budget of M/s Pentax Ltd.

Particulars 20,000 Units (`) 15,000 Units (`) 18,000 Units (`)

Direct Material 10,00,000 7,50,000 9,00,000

(20,000 x 50) (15,000 x 50) (18,000 x 50)

Direct Labour 4,00,000 3,00,000 3,60,000

(20,000 x 20) (15,000 x 20) (18,000 x 20)

Variable Overhead 3,00,000 2,25,000 2,70,000

(20,000 x 15) (15,000 x 15) 18,000 x 15)

Direct Expenses 1,20,000 90,000 1,08,000

(20,000 x 6) (15,000 x 6) 18,000 x 6)



Selling Expenses (Variable)* 2,40,000 1,80,000 2,16,000

(20,000 x 12) (15,000 x 12) (18,000 x 12)

Selling Expenses (Fixed)* 60,000 60,000 60,000

(3 x 20,000)

Factory Expenses (Fixed) 1,40,000 1,40,000 1,40,000

(7 x 20,000)

Administration Expenses (Fixed) 80,000 80,000 80,000

(4 x 20,000)

Distribution Expenses (Variable)** 2,04,000 1,53,000 1,83,600

(10.20 x 20,000) (10.20 x 15,000) (10.20 x 18,000)

Distribution Expenses (Fixed)** 36,000 36,000 36,000

(1.80 x 20,000)

25,80,000 20,14,000 23,53,600

*Selling Expenses: Fixed cost per unit = `15 x 20% = `3

Fixed Cost = `3 x 20,000 units = `60,000

Variable Cost Per unit = `15 – `3 = `12

**Distribution Expenses: Fixed cost per unit = `12 x 15% = `1.80

Fixed Cost = `1.80 x 20,000 units = `36,000

Variable cost per unit = `12 – `1.80 = `10.20

(b) Working Notes:

Depreciation on Machine – I = 5

15,00,000= ` 3,00,000

Depreciation on Machine – II =5

20,00,000= ` 4,00,000

Particulars Machine-I (`) Machine – II (`)

Annual Income (before Tax and Depreciation) 6,25,000 8,75,000

Less: Depreciation 3,00,000 4,00,000

Annual Income (before Tax) 3,25,000 4,75,000

Less: Tax @ 30% 97,500 1,42,500

Annual Income (after Tax) 2,27,500 3,32,500

Add: Depreciation 3,00,000 4,00,000

Annual Cash Inflows 5,27,500 7,32,500



Machine – I Machine - II

Year PV of Re 1 @ 12%

Cash flow

PV Cumulative PV

Cash flow

PV Cumulative PV

1 0.893 5,27,500 4,71,058 4,71,058 7,32,500 6,54,123 6,54,123

2 0.797 5,27,500 4,20,418 8,91,476 7,32,500 5,83,803 12,37,926

3 0.712 5,27,500 3,75,580 12,67,056 7,32,500 5,21,540 17,59,466

4 0.636 5,27,500 3,35,490 16,02,546 7,32,500 4,65,870 22,25,336

5 0.567 5,27,500 2,99,093 19,01,639 7,32,500 4,15,328 26,40,664

(i) Discounted Payback Period

Machine – I

Discounted Payback Period = 3 + 3,35,490

12,67,056)(15,00,000−

= 3 + 3,35,490

2,32,944

= 3 + 0.6943

= 3.69 years or 3 years 8.28 months

Machine – II

Discounted Payback Period = 3 + 4,65,870

17,59,466)(20,00,000−

= 3 + 4,65,870

2,40,534

= 3 + 0.5163

= 3.52 years or 3 years 6.24 months

(ii) Net Present Value (NPV)

Machine – I

NPV = 19,01,639 -15,00,000 = ` 4,01,639

Machine – II

NPV = 26,40,664 – 20,00,000 = ` 6,40,664



(iii) Profitability Index

Machine – I

Profitability Index = 15,00,000

19,01,639= 1.268

Machine – II

Profitability Index = 20,00,000

26,40,664= 1.320

Conclusion:

Method Machine - I Machine - II Rank

Discounted Payback Period 3.69 years 3.52 years II

Net Present Value `4,01,639 `6,40,664 II

Profitability Index 1.268 1.320 II

Question 7

Answer any four of the following: (4x4=16 Marks)

(a) “Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of

the system depends on continuous stock taking.” Comment.

(b) “Is reconciliation of cost accounts and financial accounts necessary in case of integrated

accounting system?”

(c) “Operating risk is associated with cost structure, whereas financial risk is associated with

capital structure of a business concern.” Critically examine this statement.

(d) What is venture capital financing? State the factors which are to be considered in

financing any risky project.

(e) State the advantage of Electronic Cash Management System.

Answer

(a) Perpetual Inventory system represents a system of records maintained by the stores

department. Records comprise of (i) Bin Cards and (ii) Stores Ledger. Bin Card

maintains a quantitative record of receipts, issues and closing balances of each item of

stores. Like a bin card, the Stores Ledger is maintained to record all receipt and issue

transactions in respect of materials. It is filled up with the help of goods received note

and material requisitions. But a perpetual inventory system’s efficacy depends on the

system of continuous stock taking. Continuous stock taking means the physical checking

of the records i.e. Bin cards and store ledger with actual physical stock. Perpetual

inventory is essentially necessary for material control. It incidentally helps continuous

stock taking.



The main advantages of continuous stock taking are as follows:

(1) Physical stocks can be counted and book balances adjusted as and when desired

without waiting for the entire stock-taking to be done.

(2) Quick compilation of Profit and Loss Accounts (for interim period) due to prompt

availability of stock figures.

(3) Discrepancies are easily located and thus corrective action can be promptly taken

to avoid their recurrence.

(4) A systematic review of the perpetual inventory reveals the existence of surplus,

dormant, obsolete and slow-moving materials, so that remedial measures may be

taken in time.

(5) Fixation of the various levels and check of actual balances in hand with these levels

assist the Storekeeper in maintaining stocks within limits and in initiating purchase

requisitions for correct quantity at the proper time.

(b) In integrated accounting system cost and financial accounts are kept in the same set of

books. Such a system will have to afford full information required for Costing as well as

for Financial Accounts. In other words, information and data should be recorded in such

a way so as to enable the firm to ascertain the cost (together with the necessary

analysis) of each product, job, process, operation or any other identifiable activity. It also

ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In

fact all information that management requires from a system of Costing for doing its work

properly is made available. The integrated accounts give full information in such a

manner so that the profit and loss account and the balance sheet can be prepared

according to the requirements of law and the management maintains full control over the

liabilities and assets of its business.

Since, only one set of books are kept for both cost accounting and financial accounting

purpose so there is no necessity of reconciliation of cost and financial accounts.

(c) “Operating risk is associated with cost structure whereas financial risk is

associated with capital structure of a business concern”.

Operating risk refers to the risk associated with the firm’s operations. It is represented

by the variability of earnings before interest and tax (EBIT). The variability in turn is

influenced by revenues and expenses, which are affected by demand of firm’s products,

variations in prices and proportion of fixed cost in total cost. If there is no fixed cost,

there would be no operating risk. Whereas financial risk refers to the additional risk

placed on firm’s shareholders as a result of debt and preference shares used in the

capital structure of the concern. Companies that issue more debt instruments would

have higher financial risk than companies financed mostly by equity.



(d) Venture Capital Financing and Factors to be considered in financing any Risky

Project

Under venture capital financing, venture capitalist makes investment to purchase debt or

equity from inexperienced entrepreneurs who undertake highly risky ventures with

potential of success. The factors to be considered in financing any risky project are:

(i) Quality of the management team is a very important factor to be considered. They

are required to show a high level of commitment to the project.

(ii) The technical ability of the team is also vital. They should be able to develop and

produce a new product / service.

(iii) Technical feasibility of the new product / service should be considered.

(iv) Since the risk involved in investing in the company is quite high, venture capitalists

should ensure that the prospects for future profits compensate for the risk.

(v) A research must be carried out to ensure that there is a market for the new product.

(vi) The venture capitalist himself should have the capacity to bear risk or loss, if the

project fails.

(vii) The venture capitalist should try to establish a number of exit routes.

(viii) In case of companies, venture capitalist can seek for a place on the Board of

Directors to have a say on all significant matters affecting the business.

(Note: Students may answer any two of the above factors)

(e) Advantages of Electronic Cash Management System

(i) Significant saving in time.

(ii) Decrease in interest costs.

(iii) Less paper work.

(iv) Greater accounting accuracy.

(v) More control over time and funds.

(vi) Supports electronic payments.

(vii) Faster transfer of funds from one location to another, where required.

(viii) Speedy conversion of various instruments into cash.

(ix) Making available funds wherever required, whenever required.

(x) Reduction in the amount of ‘idle float’ to the maximum possible extent.



(xi) Ensures no idle funds are placed at any place in the organization.

(xii) It makes inter-bank balancing of funds much easier.

(xiii) It is a true form of centralised ‘Cash Management’.

(xiv) Produces faster electronic reconciliation.

(xv) Allows for detection of book-keeping errors.

(xvi) Reduces the number of cheques issued.

(xvii) Earns interest income or reduce interest expense.

(Note: Students may answer any four of the above advantages).


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