2.313
Paper 2B Cost and Management Accounting
Syllabus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.314
Bird's-Eye View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.315
Line Chart Showing Relative Importance Chapters . . . . . . . . . . . . . . 2.317
Table Showing Importance of Chapter on the Basis of Marks . . . . . . 2.318
Table Showing Importance of Chapter on the Basis of Marks
of Compulsory Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.319
Legends for the Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.320
Study Material Based Contents
1 (Study VIII) Introduction to Cost and Management Accounting . . 2.321
2 (Study IX) Material Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.336
3 (Study X) Labour Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.355
4 (Study XI) Direct Expenses and Overheads . . . . . . . . . . . . . . . . 2.367
5 (Study XII) Method of Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.380
6 (Study XIII) Budgetary Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.392
7 (Study XIV) Marginal Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.415
8 (Study XV) Analysis & Interpretation of Financial Statements . . . 2.442
9 (Study XVI) Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . 2.477
10 Objective Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 2.518
Question Paper of June, 2012 . . . . . . . . . . . . . . . . . . 2.540
Question Paper of December, 2012 . . . . . . . . . . . . . 2.543
Question Paper of June, 2013 . . . . . . . . . . . . . . . . . . 2.546
Question Paper of December, 2013 . . . . . . . . . . . . . 2.550
2.314
Syllabus
Paper 2 Company Accounts, (100 marks)
Cost and Management Accounting
Part B (50 marks)
Level of knowledge: Working knowledge.
Objective: (ii) To acquaint the students with cost and management accounting
techniques and practices.
Detailed Contents
1. Cost Accounting!objectives of costing system; cost concepts and cost
classification; management accounting ! nature and scope; role of management
accountant, tools and techniques of management accounting; distinction between
financial accounting, cost accounting and management accounting.
2. Elements of cost:
(i) Material cost ! purchase procedures, store keeping and inventory control,
fixing of minimum, maximum and re-order levels, ABC analysis, pricing of
receipts and issue of material and accounting thereof; accounting and control
of wastage, spoilage and defectives.
(ii) Labour cost ! classification of labour costs, payroll procedures, monetary and
non-monetary incentive schemes; labour turnover and remedial measures;
treatment of idle time and overtime.
(iii) Direct expenses ! nature, collection and classification, of direct expenses
and its treatment.
(iv) Overheads ! nature, classification, collection, allocation, apportionment,
absorption and control of overheads.
3. Methods of costing ! unit costing, contract costing.
4. Budgetary control ! preparation of various types of budgets, advantages and
limitations; budgetary control reports to management.
5. Marginal costing ! application of marginal costing; cost-volume-profit relationship;
break-even analysis, preparation of break-even charts; profit ! volume graph;
practical application of profit volume ratio.
6. Analysis and interpretation of financial statements ! nature, objectives; latest
trends in presenting financial data; importance and limitations; accounting ratios -
classification, advantages and limitations.
7. Cash flow statements ! classification of cash flows, preparation and usefulness.
2.315
Bird's-Eye View
Paper 2B
Cost and Management Accounting
Question Paper Based Contents of Last Five Examination
Years Q. No. Chapter Page
No.No. Name
2011
Dec.
5.
6. (a)
(b)
(c)
7. (a)
(b)
(c)
8. (a)
(b)
10
9
2
5
3
6
6
8
7
Objective Questions
Cash Flow Statement
Material Cost
Method of Costing
Labour Cost
Budgetary Control
" "
Analysis & Interpretation of Financial Statements
Marginal Costing
529
490
346
385
363
405
398
454
426
2012
June
5.
6. (a)
(b)
(c)
7. (a)
(b)
8. (a)
(b)
(c)
10
2
5
3
9
7
8
6
6
Objective Questions
Material Cost
Method of Costing
Labour Cost
Cash Flow Statement
Marginal Costing
Analysis & Interpretation of Financial Statements
Budgetary Control
" "
531
346
389
361
492
428
456
399
399
2012
Dec.
5.
6. (a)
(b)
7. (a)
(b)
8. (a)
(b)
(c)
10
8
6
5
2
9
7
1
Objective Questions
Analysis & Interpretation of Financial Statements
Budgetary Control
Method of Costing
Material Cost
Cash Flow Statement
Marginal Costing
Introduction to Cost and Management Accounting
533
458
400
390
347
493
429
330
2013
June
5.
6. (a)
(b)
10
8
7
Objective Questions
Analysis & Interpretation of Financial Statements
Marginal Costing
535
461
422
2.316
7. (a)
(b)
8. (a)
(b)
9
5
6
7
Cash Flow Statement
Method of Costing
Budgetary Control
Marginal Costing
496
385
407
430
2013
Dec.
5.
6. (a)
(b)
(c)
7. (a)
(b)
(c)
8. (a)
(b)
10
5
6
7
4
8
3
9
7
Objective Questions
Method of Costing
Budgetary Control
Marginal Costing
Direct Expenses and Overheads
Analysis & Interpretation of Financial Statements
Labour Cost
Cash Flow Statement
Marginal Costing
537
391
400
422
375
445
363
499
431
2.317
Line Chart Page
2.318
Table Showing Importance of Chapter on the Basis of Marks
Chap.
No.
Years
Chapter Name
09
June
09
Dec.
10
June
10
Dec.
11
June
11
Dec.
12
June
12
Dec.
13
June
13
Dec.Total Ave.
1 Introduction to Cost and... 3 3 5 6 3 20 2.0
2 Material Cost 9 6 6 5 8 3 6 6 49 4.9
3 Labour Cost 6 6 7 6 3 6 34 3.4
4 Direct Expenses and Overheads 6 9 3 6 5 29 2.9
5 Method of Costing 6 6 3 4 6 9 3 7 44 4.4
6 Budgetary Control 9 3 3 6 3 9 6 5 9 4 57 5.7
7 Marginal Costing 3 9 9 5 3 6 6 3 9 9 62 6.2
8 Analysis & Interpretation of... 15 6 15 6 9 9 10 12 4 86 8.6
9 Cash Flow Statement 6 6 3 15 9 8 9 9 12 10 87 8.7
10 Objective Questions 14 20 20 20 20 20 20 20 20 20 194 19.4
2.319
Table Showing Importance of Chapter on the Basis of Marks of Compulsory Questions
Chap.
No.
Years
Chapter Name
09
June
09
Dec.
10
June
10
Dec.
11
June
11
Dec.
12
June
12
Dec.
13
June
13
Dec.Total Ave.
1 Introduction to Cost and...
2 Material Cost 3 3 0.3
3 Labour Cost 3 3 0.3
4 Direct Expenses and Overheads
5 Method of Costing
6 Budgetary Control
7 Marginal Costing 3 3 0.3
8 Analysis & Interpretation of...
9 Cash Flow Statement
10 Objective Questions 14 20 20 20 20 20 20 20 20 20 194 19.4
2.320
Legends for the GraphsS
ho
rt N
ote
s
Dis
tin
gu
ish
Be
twe
en
De
sc
rip
tiv
e
Pra
cti
ca
l
2.321
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter j
On the basis of Compulsory questions from a chapter jjjj
1 Introduction to Cost and
Management Accounting
This Chapter Includes : Meaning of cost; Costing; Cost accounting and cost
accountancy; Classification of costs; Cost centre & cost unit; Types & methods of
costing Management accounting - nature; Tools and techniques.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
2.322 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true of false :
(i) Cost accounting is a branch of financial accounting. (2 marks)
Answer :
(i) False;
2008 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iii) The type of process loss that should not affect the cost of inventories is —
(a) Abnormal loss
(b) Normal loss
(c) Seasonal loss
(d) Standard loss. (1 mark)
Answer :
(iii) (a) Abnormal loss
2008 - Dec [5] {C} (c) Re ! write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(i) Cost is a fact whereas price is a __________ .
(ii) Imputed costs are relevant for __________ .
(iii) A _______ is the cost that has already been incurred and cannot be avoided by
decisions taken in the future.
(v) A profit centre is a division or organisational unit concerned with controlling both
______ and costs. (1 mark each)
Answer :
(i) policy;
(ii) decision making;
(iii) sunk cost;
(v) sales / (revenue);
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(ii) Fixed cost per unit remains fixed.
(iv) Rent on owned building is included in cost accounts. (2 marks each)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.323
Answer :(a)(ii) False : It is the total fixed cost which remains fixed inspective of the level of
output. But, the fixed cost per unit will be different at different level of output. Aslevel of output increases the fixed cost per unit will decrease and the level ofoutput decreases the fixed cost per unit will increases.
(iv) True: Rent on owned building is included in cost accounts, it is done to calculatethe real cost after taking into account the national rent which would have beenpaid, had the building been taken on rent.
2009 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figures(s) :
(ii) Abnormal wastage_________ part of cost of production.(iv) Direct material + direct labour + factory overheads = _____. (1 mark each)
Answer :(ii) is not(iv) Factory cost/Works cost.
2009 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements arecorrect or incorrect :
(i) All long-term costs are controllable.(ii) Rent on own building is not included in cost accounts. (2 marks each)
Answer :(i) Correct : Normally, in short run all variable cost are controllable and all fixed
cost are not controllable whereas in long run/terms all cost whether variable orfixed cost are controllable.
(ii) Incorrect : For decision making, point of view rent on own building is veryimportant. Whether it is not recorded in the book and also important in comparingalternatives. This cost is treated as imputed or national costs and do not enterinto traditional accounting systems.
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options inrespect of the following :(iii) Non-controllable cost is the cost which –
(a) Is not subject to control at any level of managerial supervision(b) Cannot be controllable during a particular financial year(c) Cannot be controllable at any cost(d) None of the above. (1 mark)
Answer :(iii) (a)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s) :
(v) ______is the allotment of proportion of items of cost to cost centre/cost units. (1 mark)
Answer :
(v) Apportionment
2.324 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(iv) A profit centre whose performance is measured by its return on investment (ROI)
is known as investment centre. (2 marks)
Answer :
(iv) This statement is Correct : Reason :- In investment centre, it is the responsibility
of the manager to earn a satisfactory return on the assets employed in his
responsibilities centre which is govern by ROI.
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(iv) Fixed costs remain fixed—
(a) Over a short period
(b) Over a long period and within relevant range
(c) Over a short period and within a relevant range
(d) Over a long period. (1 mark)
Answer :
(iv) (c)
2010 - June [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(i) expenses are excluded from cost. (1 mark)
Answer :
(i) Notional
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(iv) Opportunity cost is recorded in the books of account. (2 marks)
Answer :
(iv) False: Opportunity cost is not recorded in the books of account, even though it
is considered for decision making. Opportunity cost is the benefit foregone which
would have been received had it been used for second best use.
2010 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(v) The management accounting is an extension of !
(a) Financial accounting
(b) Responsibility accounting
(c) Cost accounting
(d) All of the above. (1 mark)
Answer :
(v) (d) All of the above.
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.325
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iv) ________costs are not useful for decision making as all past costs are
irrelevant. (1 mark)
Answer :
(iv) Sunk costs are not useful for decision making as all past costs are irrelevant.
2011 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) A responsibility centre in which a manager is accountable for costs only is
called_________. (1 mark)
Answer :
(iii) A responsibility centre in which a manager is accountable for cost only is called
cost centre.
2011 - June [5] {C} (c) State, with reasons in brief, whether the following statements
are true or false :
(i) Direct costs and variable costs are not necessarily the same. (2 marks)
Answer :
(i) True : Direct costs are not necessarily the same as variable cost. Direct costs
comprises of direct material cost, direct labour cost and direct expenses.
Variable cost is made up of direct material, direct wages, direct expenses and
variable overheads.
2011 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iii) Sunk costs are not relevant for decision-making.
(iv) ‘Costing’ and ‘cost accounting’ are the same. (2 marks each)
Answer :
(iii) The statement is true:- A sunk cost cannot be avoided it has already been
incurred in the future as it refers to past cost it is called as avoidable cost. This
cost is not so important for decision making. Therefore, past cost are irrelevant.
(iv) The statement is false:- Cost accounting and costing are two different terms.
Costing provides only the basis and information for ascertainment of cost.
Whereas the cost accounting is classifying, recording and allocating expenditure
for determination of cost of product or services and for the preparation of data for
the purpose of control and guidance of management.
2.326 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2011 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) Opportunity cost helps in —
(a) Ascertainment of cost
(b) Controlling cost
(c) Making managerial decisions
(d) None of the above.
(ii) Fixed cost per unit-increases when —
(a) Production volume decreases
(b) Production volume increases
(c) Variable cost per unit decreases
(d) Variable cost per unit increases.
(v) The type of spoilage that does not affect the cost of inventories is —
(a) Normal spoilage
(b) Standard spoilage
(c) Abnormal spoilage
(d) Seasonal spoilage. (1 mark each)
Answer :
(i) (c) Making management decisions
(ii) (a) Production volume decreases
(v) (a) Normal spoilage
2012 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) Variable cost per unit does not remain _________. (1 mark)
Answer :
(i) Variable.
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(v) Management accounting is based on double entry system. (2 marks)
(b) Write the most appropriate answer from the given options in respect of the following:
(ii) Differential cost analysis is incorporated in the —
(a) Cost books
(b) Financial books
(c) Statutory books
(d) None of the above. (1 mark)
Answer :
(a) (v) This statement is false : Management Account is not based on double entry
system.
(b) (ii) (a) Cost books.
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.327
SHORT NOTES
2010 - June [7] (a) Write short notes on the following:
(ii) Activity based costing (3 marks)
Answer :
Activity Based Costing —
According to this techniques the overhead costs of the organisations are identified with
each activity which is acting as the cost driver. Such cost drivers may be purchase :-
(a) order issued;
(b) quality inspections;
(c) maintenance request;
(d) material receipt;
(e) inventory movement;
(f) power consumed and
(g) machine time.
Hence, ABC technique- is a technique which involves identification of cost with each
cost driving activity and making it as the basis for apportionment of costs over different
products or Jobs.
DISTINGUISH BETWEEN
2011 - June [6] (a) Distinguish between the following :
(i) 'Cost accounting' and 'management accounting'. (3 marks)
Answer :
Cost Accounting Management Accounting
1. It deals with ascertainment
allocation, apportionment and
accounting aspect of costs.
It deals with the effect and impact of costs
on the business.
2. It provides a base for management
accounting.
It is derived from both cost accounting and
financial accounting.
3. The status of cost accountant
comes after the management
accountant.
Management accountant is senior in
position to cost accountant.
4. It has a narrow approach. He has to
refer to economic and statistical
data for analysing cost effects.
It reports the effect of cost on the business
alongwith cost analysis.
2.328 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
5. It does not include financial
accounting, tax planning and tax
accounting.
It includes financial and cost accounting,
tax planning and tax accounting.
6. It can be installed without
management accounting.
It needs financial and cost accounting as
its base for its installation.
DESCRIPTIVE QUESTIONS
2008 - Dec [7] (Or) “Although including interest in the normal cost is practically difficult
but excluding interest altogether may lead to wrong managerial decisions.” Comment.
(6 marks)
Answer :
Arguments in favour of and against the inclusion of interest on capital in cost:
There is controversy amongst the cost expert about the inclusion of interest of capital
in cost. In some businesses the introduction of capital is from own Private Sources while
in other it is taken on loan.
Cost experts agree that interest on both types of capitals should be included in cost
records.
Any how following points are in favour and against the inclusion of interest on
capital in cost.
(a) Points in favour of inclusion of interest on capital in cost:
(i) Interest is reward of capital, as wages are the reward of labour hence, like
wage interest should be included in costs.
(ii) Real profit cannot be ascertained without taking account of interest.
(iii) It is necessary to include notional interest if intelligent comparisons are to be
made between operations, processes, etc.
(b) Points against the inclusion of interest on capital in cost:
(i) The argument of interest as reward of capital holds goods in economics and
not in costing.
(ii) Interest being an anticipation of profit cannot be a part of cost.
Hence, it is true that there are practical difficulties in including interest as part of the
normal cost. However, excluding it altogether may lead to wrong managerial decisions
which are not desirable.
Therefore, it is suggested that while interest may be excluded from the regular cost
sheet, cost calculations for other purposes for decision making should include a proper
amount of notional interest where the interest will be material.
2009 - Dec [6] (c) What are the limitations of ‘management accounting’? (3 marks)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.329
Answer :Limitations of Management Accounting:The management accountant has the responsibility of producing and providingdependable accounting and other relevant data for the use of management. Thefollowing are the limitations of management accounting:1. Different meaning of the same term: In accounting different terms carry different
meanings under different set of circumstances and conditions. The most commonsource of confusion is the word ‘cost’. There are historical costs, full costs, directcosts, variable costs, standard costs, original costs, residual costs, net costs,differential costs, opportunity costs, estimated cost and incremental costs. etc.
2. Approximations: Management accounting data cannot be completely accurate inall respects. A good deal of approximation is involved in the compilation andpreparation of such data.
3. Incompleteness of the data: Data will not disclose the extent to which the qualityand utility of a product is affected by the changes in materials or methods ofproduction. The management should guard itself against the belief that problemscould be completely solved by numerical analysis.
4. Importance of proper management action: A management accountant may provideinformation and figures in most appropriate form to the management. But figuresthemselves are nothing more than marks on pieces of paper, and by themselvesthey accomplish nothing. Anything that the business accomplishes is the result ofaction of the people.
2010 - Dec [7] (a) Explain briefly the role of a management accountant in a businessenterprise. (5 marks)Answer :For efficient and effective management of an enterprise management needs financialinformation in understandable form. The management accountant being principal officerin charge of accounts of the company plays a significant role in providing relevantfinancial information needed for day to day as well as strategic decisions. The role ofmanagement accountant in this direction includes :
(i) Management accountant establishes, coordinates and administers plans tofacilitate the forecasting of sales, preparation of budgets and development ofcost standards that facilitates profit planning, capital budgeting and financing.
(ii) He formulates accounting policy and procedures to facilitate analysis andinterpretation of financial data for the use of management.
(iii) He also assists in tax planning and implementing control schemes for enhancingprofit for owners of the business.
(iv) He keeps up to date information on economic and social matters which mayaffect the interest of his employer.
(v) He prepares reports for the use of managers at different layers of managementfor their rational decision making.
2.330 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2011 - June [7] (c) Explain the significance of decision-making costs. Briefly explain the
various type of costs used by the management in decision-making. (3 marks)
Answer :
There are certain costs which are specially used for decision making by the
management such decision making costs may, be relevant costs or irrelevant costs.
Various types of costs used by management in decision making are briefly described
below :-
1. Opportunity Costs : Opportunity cost is the cost of selecting one course of action
and the losing of other opportunities to carry out that course of action. It is the
amount that can be received if the asset is utilized in its next best alternative.
2. Differential cost : Differential cost has been defined as "the difference in total cost
between alternatives, calculated to against decision making." It helps management
to know the additional profit that would be earned if idle capacity is used or when
additional investments are made.
3. Imputed costs : Some costs are not incurred and are useful while taking decision
pertaining to a particular situation. Examples : Interest on internally generated
funds, salaries of owners of proprietorship or partnership, notional rent. etc.
4. Out-of-Pocket Costs : This costs signify such outlay required for an activity. The
management would like to know that the income from a particular project will at
least cover the expenditure for the project, Acceptance of a special order requires
to be considered as additional costs need not be incurred if the special order is not
accepted.
5. Marginal Costs : It is the aggregate of variable Costs, i.e. prime cost plus variable
overheads. Thus, costs are classified as fixed and variable.
6. Replacement Costs : This is the cost of replacing an asset at current market
values example when the cost of replacing an asset is considered it means the
cost of purchasing the asset at the prevailing market price is important and not the
cost at which it was purchased.
2012 - Dec [8] (c) “Management accounting is a decision making system.” Comment.
(3 marks)
Answer:
Please refer 2005 - June [7 ] (a) on page no. 332
CS Inter Gr. I
DISTINGUISH BETWEEN
2004 - June [7] (a) Distinguish between 'costing' and 'cost accounting'. (2 marks)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.331
Answer :
Difference Between 'Costing' And 'Cost Accounting'
Costing Cost Accounting
1. It is broader in its scope.
2. It is concerned with ascertainment of
cost.
3. It begins where cost accountancy
ends.
It is narrow in scope.
It is concerned with recording of cost.
It begins where costing ends.
2007 - Dec [5] {C} (c) Distinguish between the following:
(ii) ‘Explicit costs’ and ‘implicit costs’. (3 marks)
Answer :
(ii) Explicit Costs: There are those which are paid by the employer to owners of the
factor units, which do not belong to the employer himself.
Implicit Costs: These are imputed Value of the entrepreneurs own resources
and services.
2008 - June [8] (a) Distinguish between ‘imputed costs’ and ‘common costs’.
(5 marks)
Answer :
Imputed Costs: These are hypothetical cost which are specially computed for the
purpose of decision-making. Interest on capital is a common-type of imputed cost. As
interest on capital is usually not included in cost, it is considered necessary to take it
into account when deciding about the alternative capital investment projects.
Common Costs: Common costs are costs, which are incurred for more than one
product, job, territory or any other specific costing object. It is the cost of services
employed in the creation of two or more outputs which is not allocated to those outputs
on a clearly justified basis. They are not easily related with individual products and
hence are generally apportioned.
Common costs are not only common to products, but they may be common to
process, functions, responsibilities, customs, sales territories, periods of time and similar
costing units.
DESCRIPTIVE QUESTIONS
2004 - June [5] {C} (d) State, with reasons, whether the following statements are
correct or incorrect:
(i) Notional costs and imputed costs mean the same thing,
(ii) Conversion costs and overheads are interchangeable terms. (4 marks)
2.332 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :
(i) This statement is correct. These are the hypothetical cost which are specially
computed for the purpose of decision making, Interest on capital is a common
type of imputed cost.
(ii) This statement is incorrect. This term is used to denote the sum of direct
labour and overhead costs in the production of a product. It is the total cost of
‘converting’ a raw material into finished product.
2004 - Dec [5] {C} (d) Explain briefly the nature of 'management accounting'.
(4 marks)
Answer :
(i) Management accounting is a decision-making system.
(ii) Management accounting is futuristic.
(iii) Management accounting is a technique of selective nature.
(iv) Management accounting analyses different variables.
(v) Management accounting does not set particular formats for information.
2005 - June [7] (a) "Management accounting is a decision making system." Comment.(2 marks)
Answer :Decision-making is an important and prime function of top management. ManagementAccounting may make the decision-making process more modern and scientific byproviding significant information relating to various alternatives in terms of cost andrevenue. With the help of techniques provided by Management Accounting, datarelating to cost, price profit or saving for each of the available alternatives may becollected and analysed and these provide a base for taking sound decision.Management Accounting deals with a number of techniques which could be usedinjudging the profitability and feasibility of the alternative selected on the basis of costand revenue data.
2005 - June [8] (a) "Opportunity cost is the measure of the benefit of opportunity
foregone."Comment. (3 marks)
Answer :
The terminology of ICMA defines opportunity cost as “the value of benefit sacrificed in
favour of an alternative course of action. ”
It is the value of benefit sacrificed in favour of an alternative course of action. “It is
an important cost for decision making & in comparing various alternatives to choose the
best one.”
For example, if an owned building is proposed to be used for a project, the likely
rent of the building is the opportunity cost which should be taken into account while
evaluating the profitability of the project.
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.333
2005 - Dec [5] {C} Attempt the following :
(i) Explain the complementary role of financial accounting and cost accounting.
(5 marks)
Answer :
Both financial accounting and cost accounting are concerned with systematic recording
and presentation of financial data. The complementary roles of financial accounting and
cost accounting may be summarized as under:
Financial Accounting Cost Accounting
1. It provides information in general way
disclosing the profit or loss to the
owners & outsiders.
2. Financial accounts disclose profit for
the entire business as a whole.
3. It fails to guide the formulation of
pricing policy.
4. All the expenses or costs are reported
in aggregate.
5. Monetary information is used only.
It provides detailed information about cost
and profit and gives information to the
management for planning decision-making
and controlling.
It discloses profit or loss of each job,
product or service.
It provides adequete data for formulating
pricing policy.
Costs are presented on unit basis and in
analytical way.
Non-monetary information like units is also
used.
6. Stock is valued at cost or market
price whichever is lower.
Stock or inventory is valued at cost only.
2006 - June [5] {C} Attempt the following :
(i) Mention the various tools and techniques of ‘management accounting’.
(5 marks)
Answer :
The following are the tools and techniques of management accounting:
(i) Financial planning
(ii) Financial Statement Analysis
(iii) Decision-making
(iv) Control Techniques
(v) Statistical and operational techniques
(vi) Reporting.
2006 - Dec [5] {C} Attempt the following :
(i) “Management accounting is not concerned with legal and/or conventional
constraints and the ‘generally accepted principles’ unlike financial accounting.”
Comment. (5 marks)
2.334 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :Financial accounting has to be governed by “generally accepted principles”. It providesinformation about the business in a general way. It tells about the profit and loss andfinancial position of business to outsiders and other outside parties. It classifies, recordsand analysis the transactions in a subjective manner that is according to the nature ofexpense.
Management accounting is concerned with presentation of accounting informationin the most useful way for managerial decision making. It does not specify any legal andor conventional constraints and the “generally accepted principles”. Managementaccounting collects and communicates significant and required information for variouslevel of management, known as internal parties. In management accounting fixedassets may be stated at appraisal values, overhead cost may be omitted frominventories or revenues may be recorded before realization. The form and content ofmanagement accounting information differs according to the needs and purpose.
2007 - Dec [8] (a) Attempt the following :
(i) What are the essential steps required for installation of an efficient and effective
management accounting system? (4 marks)
Answer :
Management accounting is the collection, analysis, diagnosis and interpretation of
accounting information in such a way as to help the management.
Management accounting is an integral part of management concerned with:
(a) Presenting and interpreting information used for formulating strategy;
(b) Planning and controlling activities;
(c) Decision taking;
(d) Optimizing the use of resources;
(e) Disclosure to shareholders;
(f) Disclosure to employee and
(g) Safeguarding the assets;
Following are the essential steps required for installation of an efficient and effective
management accounting system.
1. An appropriate organizational manual should be prepared and adopted.
2. The requisite staff will have to be recruited, trained and developed.
3. Appropriate forms, return etc. should be designed, prepared and made available.
4. Classification and codification of accounts.
5. Setting up suitable system of budgetary control.
6. Setting up cost budget and profit centers and introduction of operational research
technique.
2008 - June [6] (Or) (a) "Costing is a reality and pricing is a policy." Comment.
(5 marks)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.335
Answer :
Costing is technique and process of ascertaining costs. These techniques consist of
principles and rules which govern the procedure of ascertaining cost of products or
services. The process includes the day to day routine of determining costs by historical
or conventional costing, standard costing or marginal costing. The techniques to be
followed for analysis of expenses and the process by which such an analysis should be
related to the different products or services differ from industry to industry. The main
object of costing is the analysis of financial records, so as to sub-divide expenditure and
to allocate it to selected cost centers, and hence to arrive the total cost for the
departments, process or jobs of the organization.
Pricing of a product is used as a policy parameter by the organization to optimize the
interest in terms of profit and revenue subject to cost structure, competition, customer
expectations, legal concerns and perceived value to customers. Price of a product is
based on total cost i.e. production, administration and selling overheads, fixed as well
as variable plus normal profit. In the normal course, price fixed should cover all the
costs plus a desired level of profit. But in some situations the selling price may vary
depending on the desired profit even below total cost to tide over the situations.
Hence the management may fix the price of a product based on the situations
prevailing in the market and considering the objectives of the business.
Hence costing is considered as a reality and pricing is a policy.
Repeatedly Asked Questions
No. Question Frequency
1 “Management accounting is a decision making system.”
Comment. 05 - June [7] (a), 12 - Dec [8] (c) 2 Times
2.336
Star Rating
On the basis of Maximum marks from a chapter jj
On the basis of Questions included every year from a chapter jj
On the basis of Compulsory questions from a chapter jjj
2 Material Cost
This Chapter Includes : Introduction; Methods of Purchasing; Purchase Procedure;
Store Keeping; Classification and Codification of Materials; Inventory Control,
Techniques of Inventory Control; Bill of Materials; Pricing; Material Losses; Control
of Losses.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
[Chapter #### 2] Material Cost OOOO 2.337
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(ii) Bin card shows the value of a material at any moment of time. (2 marks)
Answer :
(ii) False;
2008 - Dec [5] {C} (c) Re!write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(iv) Economic lot size is the order size that ________ the total cost of ordering and
storing. (1 mark)
Answer :
(iv) minimizes;
2009 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figures(s) :
(i) Inflated price method of valuing material issue is suited when_____. (1 mark)
Answer :
(i) is unavoidable wastage of material.
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iv) Re-ordering level is equal to –
(a) Maximum consumption x minimum re-order period
(b) Maximum consumption x maximum re-order period
(c) Minimum consumption x minimum re-order period
(d) Normal usage x normal delivery period. (1 mark)
Answer :
(iv) (b)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) Material losses due to abnormal reasons should be transferred to ______.
(1 mark)
Answer :
(i) Costing Profit and Loss Account.
2.338 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(iii) When prices fluctuate widely, the method that will avoid the effect of fluctuations
is—
(a) FIFO
(b) LIFO
(c) Simple average
(d) Weighted average. (1 mark)
Answer :
(iii) (d)
2010 - June [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(v) A system that keeps a running and continuous record that tracks inventories and
cost of goods sold on day-to-day basis is called . (1 mark)
Answer :
(v) Perpetual inventory system.
2010 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(ii) Obsolete stocks are those having !
(a) Low turnover rate
(b) No demand for technological change
(c) No present demand, but may be in future
(d) None of the above. (1 mark)
Answer :
(ii) (b) No demand for technological change
2011 - June [5] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(iv) Continuous stock taking is a part of -
(a) Annual stock taking
(b) Perpetual inventory
(c) ABC Analysis
(d) None of the above. (1 mark)
Answer :
(iv) (b) Perpetual inventory
2011 - June [5] {C} (c) State, with reasons in brief, whether the following statements
are true or false :
(iv) Assuming inflation, if a company wants to maximise net income, it would select
FIFO as the method of pricing raw materials. (2 marks)
[Chapter #### 2] Material Cost OOOO 2.339
Answer :
(iv) False : In case of rising prices, i.e. inflation, the real profits of the concern
becomes low because they may be inadequate to meet the concern's demand
to purchase raw materials at the ruling price. Therefore, net income cannot be
maximized in inflation.
2011 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iv) The process of physical verification of stores throughout the year is known as
__________. (1 mark)
Answer :
(iv) Perpetual inventory system
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(iii) ABC analysis is based on the principle of management by exception.
(2 marks)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(ii) Quantitative records of receipts, issue and balance items of material in stores are
entered in _________. (1 mark)
(iii) Abnormal losses on account of idle time should be written off by being directly
debited to__________. (1 mark)
(iv) Two important opposing factors in fixing the economic order quantity are
________ and carrying cost. (1 mark)
(c) Write the most appropriate answer from the given options in respect of the following:
(i) The annual demand is 1,000 units. The unit price is ` 10 per unit. The carrying
cost of inventory is 10% and the ordering cost is ` 5 per order. The economic
order lot to be ordered is —
(a) 100 units
(b) 800 units
(c) 200 units
(d) 400 units. (1 mark)
(iii) When prices fluctuate widely, the method that will smooth out the effect of
fluctuations is —
(a) FIFO
(b) LIFO
(c) Simple average
(d) Weighted average. (1 mark)
2.340 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :
(a) (iii) The statement is True: Since the management time is saved since attention
need be paid only to some of the items rather than all the items as would be
the case if the ABC (always better control) system was not in operation
because it is based on the principal of management by exception.
(b) (ii) Bin-card.
(iii) Costing Profit & Loss A/c.
(iv) Ordering cost.
(c) (i) (a) 100 units.
(iii) (d) Weighted average.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iv) Direct cost and variable cost are not the same.
(v) ABC analysis is used to manage the spare parts, etc. (2 marks each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(v) __________method of valuation of inventory is useful when prices are rising.
(1 mark)
Answer:
(a) (iv) This Statement is True:
Direct costs are not necessarily the same as variable cost. Direct costs
comprises of direct material cost ,direct labour and direct expenses, variable
cost is made up of direct materials, direct wages, direct expenses and variable
overheads.
(v) This Statement is False:
The ABC analysis is a selective inventory control which aims at concentrating
control mainly on cost basis.
(c) (v) LIFO
2013 - June [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iv) When prices of materials have a rising trend, then the suitable method for
issuing the materials will be —
(a) FIFO
(b) LIFO
(c) HIFO
(d) Standard cost price. (1 mark)
[Chapter #### 2] Material Cost OOOO 2.341
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(ii) Economic order quantity depends on _______ and _______ costs.
(v) Bin card shows _______ at any moment of time. (1 mark each)
Answer :
(b) (iv) (c) HIFO.
(c) (ii) Ordering and storage.
(v) The quantity of raw materials.
2013 - Dec[5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(b) (ii) Material losses due to abnormal reasons should be transferred to _________ .
(c) (v) _________ are that portion of the process loss which can be converted into a
finished product by incurring more material and labour expenses.
(1 mark each)
DISTINGUISH BETWEEN
2009 - June [5] {C} (c) Distinguish between the following :
(i) 'Bin card' and 'stores ledger'. (3 marks)
Answer :
A bin card differs from a store ledger card in the following respects:
Bin Card Store Ledger Account
1. Bin card is a record of quantity only.
2. Bin card is maintained by storekeeper.
3. Entries are posted individually.
4. Entries are posted before the
transactions takes place.
5. Inter-departmental transactions do not
appear in a bin card.
Whereas store ledger records both
quantity and money value.
Whereas ledger is kept in the cost office.
Entries are posted periodically
While in stores ledger, it is posted after
the transaction.
Inter-departmental transfer of materials
are recorded in the Store Ledger Card.
2011 - June [6] (a) Distinguish between the following :
(ii) 'Bin card' and 'store ledger'. (3 marks)
Answer :
Please refer 2009 - June [5] (c) (i) on page no. 341
2.342 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
PRACTICAL QUESTIONS
2009 - June [7] (a) Material -A is used as follows :
Minimum usage ! 500 units per week
Maximum usage ! 1,500 units per week
Normal usage ! 1,000 units per week
Ordering quantities ! 1,600 units
Delivery period ! 4-6 weeks
Calculate !
(i) Maximum level. (2 marks)
(ii) Minimum level. (2 marks)
(iii) Ordering level. (2 marks)
Answer :
(i) Ordering level = Maximum usage x Maximum delivery period
= 1,500 x 6 = 9,000 units
(ii) Minimum level = Ordering level - (Normal usage x Normal delivery period)
= 9,000 - (1,000 x 5)
= 9,000 - 5,000 = 4,000 units
(iii) Maximum level = (Ordering level + Ordering Quantity) - (Minimum
usage x Minimum delivery period)
= (9,000 + 1,600) ! (500 x 4)
= 10,600 - 2,000 = 8,600 units
2009 - Dec [7] (b) A chemical manufacturing unit uses Material-A as the basic material.
The cost of Material-A is ` 20 per kg. and the input-output ratio is 120%. Due to a
sudden shortage in the market, Material-A becomes non-available and the
manufacturing unit is considering the use of one of the following substitutes available :
Material Material Input-Output Ratio ` Per Kg.
B1 135% 26
B2 115% 30
You are required to recommend which of the above substitutes is to be used. Also
indicate additional cost required to be incurred. (6 marks)
Answer :
Cost of Material in Final Product=(Input/Output) × Rate per unit.
Cost of Material A=(120/100) × 20=`24.00 per kg in the final product.
Cost of Material B1=(135/100) × 26=`35.10 per kg in the final product
Cost of Material B2=(115/100) × 30=`34.50 per kg in the final product
[Chapter #### 2] Material Cost OOOO 2.343
It is evident from the above that Material B2 is cheaper in the final product as its
productivity is more inspite of higher price.
Additional cost required to be incurred as compared to original material is ` 10.50 per
kg. of final product (i.e. ` 34.50 less `24.00).
2010 - June [8] (a) A company manufactures 5,000 units of a product per month. The
cost of placing an order is ` 100. The purchase price of the raw material is ` 10 per kg.
The re-order period is 4 to 8 weeks. The consumption of raw materials varies from 100
kgs. to 450 kgs. per week, the average consumption being 275 kgs. The carrying cost
of inventory is 20% per annum. You are required to calculate—
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level
Assume 52 weeks in a year. (6 marks)
Answer :
(i) Re-order Quantity
= 1,196 Kgs.
Where -
U = Annual Requirement = 275 kgs. per week for 52 weeks = 14,300
P = Ordering Cost = ` 100 per order
S = Carrying Cost per unit per annum = 20% of ` 10 = ` 2
(ii) Re-order Level = Maximum Consumption × Maximum Re-order Period
= 450 Kgs. × 8 (weeks) = 3,600 Kgs.
(iii) Maximum Stock Level
= Re-order Level + Re-order Quantity ! (Minimum Consumption × Minimum
Re-order Period)
= 3,600 Kgs. + 1,196 Kgs. ! (100 Kgs. × 4 weeks)
= 3,600 Kgs. + 1,196 Kgs. ! 400 Kgs.
= 4,396. Kgs.
(iv) Minimum Stock Level
= Re-order level ! (Normal Consumption × Normal Re-order Period)
= 3,600 Kgs. ! (275 Kgs. × 6 weeks)
= 3,600 Kgs. ! 1,650 Kgs.
= 1,950 Kgs.
2.344 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(v) Average Stock Level = Minimum Level + of Re-order Quantity
= 1,950 Kgs. + × 1,196 Kgs.
= 1,950 Kgs. + 598 Kgs.
= 2,548 Kgs.
OR
= 4,396 Kgs. + 1950 Kgs. = 3173 Kgs.
2010 - Dec [7] (b) Pooja Pipes Ltd. uses about 75,000 valves per year and the usageis fairly constant at 6,250 valves per month. The valve costs ` 1.50 per unit whenbought in large quantities; and the carrying cost is estimated to be 20% of averageinventory investment on an annual basis. The cost to place an order and process thedelivery is ` 18. It takes 45 days to receive delivery from the date of an order and asafety stock of 3,250 valves is desired.
You are required to determine (i) The most economical order quantity andfrequency of orders; (ii) the re-order point; and (iii) the most economical order quantityif the valves cost ` 4.50 each instead of `1.50 each. (5 marks)Answer :
(i) Economic Order Quantity (EOQ)
Where!
U = Annual Requirement = 75,000 units
P = Ordering Cost = ` 18 per order
S = Carrying Cost per unit per annum = 20% of average inventory
= 3,000 units
Working note :
Total carrying cost = ` 22,500
Carrying cost per unit = ` 22,500/75,000 = ` 0.30
Frequency of orders :
Number of order per year = 75,000/3000 = 25 orders
Or Orders may be placed in every 14.6 days, i.e. 365/25 = 14.6 days
[Chapter #### 2] Material Cost OOOO 2.345
(i) Re order point = (Lead time × Normal usage) + 3,250 units = 12,625 units
= (1.5 months × 6,250 units per month) + 3,250 units = 12,625 units
(ii) EOQ when the cost per value is ` 4.50
Total carrying cost = ` 67,500
Carrying cost per unit = ` 67,500/75,000 = ` 0.90
2011 - June [8] (c) Following information is given :
Cost of placing a purchase order ` 20
No. of units to be purchased during the year 5,000 Nos.
Purchase price per unit inclusive of transport cost ` 50
Annual storage cost per unit ` 5
Details of lead time :
- Average 10 days
- Maximum 15 days
- Minimum 6 days
- For emergency purchase 4 days
Rate of consumption per day :
- Average 15 units
- Maximum 20 units
Calculate - (i) re-ordering level; (ii) re-order quantity; (iii) maximum level; (iv) minimum
level; and (v) danger level. ( 5 marks)
Answer :
(i) Re-ordering level (ROL)= Maximum usage × Maximum Reorder Period
= 20 units per day × 15 days
= 300 units
(ii) Reorder Quantity (ROQ)= =
= 200 units
A = Annual Demand
O = Ordering Cost
C = Carrying Cost
(iii) Maximum Level = ROL + ROQ - (Minimum rate of Consumption X Minimum
Reorder Period)
= 300 units + 200 units - (10 units per day × 6 days)
= 440 units
2.346 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iv) Minimum Level = ROL - (Average Rate of consumption × Average Reorder
Period)
= 300 units - (15 units per day × 10 days)
= 300 - 150 units
= 150 units
(v) Danger Level = Average consumption × Lead time for emergency purchases
= 15 units per day × 4 days
= 60 units
2011 - Dec [6] (b) From the following information, calculate economic order quantity
(EOQ) and the number of orders to be placed in one quarter of the year:
(i) Quarterly consumption of material : 2,000 kg.
(ii) Cost of placing one order : ` 50
(iii) Cost per unit : ` 40
(iv) Storage and carrying cost : 8% on average inventory. (3 marks)
Answer :
Economic Order Quantity (EOQ) = =
= 500 kgs
Number of orders per Quarter =
=
= 4 orders
Working Notes:A = Annual Demand = 2,000 × 4 = 8,000 kgsO = Ordering Cost = ` 50 per orderC = Carrying Cost = Cost per unit × Cost of Storage = 40 × 8% = ` 3.2
2012 - June [6] (a) A company manufacturers 5,000 units of a product per month. Thecost of placing an order is ` 100. The purchase price of the raw material is ` 10 per kg.The re-order period is 4 to 8 weeks. The consumption of raw materials varies from 100kg. to 450 kg. per week. The average weekly consumption being 275 kg. The carryingcost of inventory is 20% per annum. Assuming 52 weeks in a year, you are required tocalculate —
(i) Re-order quantity;(ii) Maximum level;(iii) Minimum level; and (iv) Average level. (6 marks)
[Chapter #### 2] Material Cost OOOO 2.347
Answer :
(i) Reorder Quantity (ROQ) =
Annual Req = Weekly Req × 52 = 275*52 = 14,300Ordering Cost = 100 Carrying Cost = 20%
= 20% × 100= 2
ROQ =
= 1,196
(ii) Reorder Level (ROL) = Maximum Usage × Max reorder PeriodReorder Period: 4 to 8 WeeksMaximum Reorder Period = 8 WeeksConsumption = 100 Kg to 450 KgMaximum Consumption = 450 KgReorder Level = 450 × 8 = 3,600 KgMaximum Level = ROL + ROQ - (Minimum usage × Minimum Reorder Period)
= 3,600 + 1,196 - (100 × 4)= 4,796 - 400= 4,396 Kg
(iii) Minimum level = ROL - (Normal Usage × Normal Reorder period)
Normal Usage = (Max Usage + Minimum Usage)/2
= (450 + 100)/2
= 275
Normal Reorder Period = (Max Period + Minimum Period)/2
= (4 + 8)/2
= 6
Minimum Level = 3,600 - (275 × 6)
= 1,950 Kg
(iv) Average level = (Maximum level + Minimum level)/2
= (4,396 + 1,950)/2
= 3,173 Kg
Or = Minimum Stock Level + ½ of 1,196 = 2,548 kg.
2012 - Dec [7] (b) X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd.
on regular basis. It is estimated that it costs 10 paise as inventory holding cost per
bearing per month and that the set-up cost per run of bearing manufacture is ` 324.
Required—
2.348 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(i) What would be the optimum run size for manufacture of bearings?
(ii) Assuming that company has a policy of manufacturing 6,000 bearings per run, how
much extra cost the company would be incurring as compared to the optimum run
suggested in (i) above.
(iii) What is the minimum inventory holding cost? (6 marks)
Answer:
(b)(i) Optimum bearing batch size=
Annual Production = 24,000 bearings
Cost per Production per set up = ` 324
Inventory holding cost per unit per annum = 10 × 12 = ` 1.20 per unit p.a.
Optimum run size =
= 3600 unit
(ii) Calculation of inventory set up cost and holding cost at two different run size
Run Size 6000 units
Amount in `
3600 units
Amount in `
Annual set up costs 1296
Annual set up costs 2160
Annual inventory holding cost 3600
Annual inventory holding cost 2160
4896 4320
Extra cost incurred by company on using run size of 6000 per bearing
= ` 4896 - 4320
= ` 576
(iii) Minimum Inventory Holding Cost: ` 2,160 i.e., carrying cost of EOQ.
[Chapter #### 2] Material Cost OOOO 2.349
CS Inter Gr. I
SHORT NOTES
2008 - June [7] (a) Write a note on ‘perpetual inventory system’. (5 marks)
Answer :
Perpetual Inventory System : According to ICMA, “Perpetual Inventory System is a
system of records maintained by the controlling departments, which reflects the physical
movement of stock and there current balances”.
Thus Perpetual inventory system is the maintenance of systematic inventory records on
a continuous basis.
Function of Perpetual Inventory : The two main functions of the Perpetual inventory
system are :-
(i) Recording of receipts and issues of materials in such a way that stock in hand
can be known at any time without physical counting of stock.
(ii) Continuous Physical checking of actual stock of materials as a regular practice.
Advantages :
(i) In minimises the time devoted to stock taking.
(ii) It also avoids dislocation in production which arises in the case of periodic stock
- taking at the end of each year.
(iii) Loss of stock due to pilferage or obsolescence etc. is detected at an early stage
and suitable steps can be taken to prevent its recurrence.
(iv) Over stocking and under-stocking can be easily controlled.
(v) A System of internal check remains in operation all the time.
DESCRIPTIVE QUESTIONS
2004 - June [5] {C} (a) "Ordering costs and carrying costs are equal at EOQ level."
Comment. (4 marks)
Answer :
Ordering Costs : These are the costs, which are associated with the purchasing or
ordering of materials. These cost include :
(i) Cost of staff posted for ordering of goods.
(ii) Expenses incurred on transportation of goods purchased.
(iii) Inspection costs of incoming materials.
(iv) Cost of stationery, typing, postage, telephone charge etc.
2.350 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Carrying Costs : These are the costs for holding the inventories. These costs will not
be incurred if inventories are not carried. These costs include :
(i) The cost of capital invested in inventories. “An interest will be paid on the
amount of capital locked up in inventories.
(ii) Costs of storage, which could have been used for other purposes.
(iii) Insurance Costs
(iv) Cost of spoilage in handling of materials.
Ordering costs increases as the number of orders increases carrying cost decreases
as the number of orders increases EOQ is that quantity where the total cost is minimum.
2007 - Dec [8] (a) Attempt the following :
(ii) Discuss the treatment of spoilage and defectives in cost accounting. (4 marks)
Answer :
Accounting treatment of spoilage :
Normal spoilage : It is spoilage which is in the interest in nature and result of the
process and therefore uncontrollable in short run. The cost of such spoilage will be
borne by good units.
Abnormal spoilage : This spoilage is avoidable and controllable even in the short run.
Its cost shall, therefore, be charged to costing profit and loss account.
Accounting Treatment of Defectives :
(a) Charging to Overheads
(b) Charging to specific job
(c) Charging to good units
(d) Charging reconditioned work.
[Chapter #### 2] Material Cost OOOO 2.351
PRACTICAL QUESTIONS
2005 - June [5] {C} Attempt the following :(ii) In a company, the weekly minimum and maximum consumption of Material-A are
25 and 75 units respectively. The re-order quantity as fixed by the company is300 units. Material-A is received within 4 to 6 weeks from the date of issue ofsupply order. Calculate minimum level and maximum level of Material-A.
(5 marks)Answer :Minimum Level
= Re-order Level!(Average rate of consumption×Average re-order period)= 450 units ! (50 units × 5 weeks) = 200 units
Maximum Level= Re-order level % Re-order quantity !(Minimum rate of consumption ×
Minimum reorder period)= 450 units % 300 units !(25 Units × 4 weeks) = 650 units
Working Note :Re-order level = Maximum usage per period × Maximum re-order period= 75 Units × 6 Weeks = 450 units
2006 - June [5] {C} Attempt the following :
(ii) The following details are available from the books of Ruby Engineering Works
Ltd. for the year ended 31st March, 2005 :
Monthly demand (Units) 2,000
Cost of placing an order (`) 200
Annual carrying cost (` Per Unit) 30
Normal usage (Units Per Month) 100
Maximum usage (Units Per Month) 150
Minimum usage (Units Per Month) 50
Re-order period (Weeks) 4 – 6
Based on the above details, calculate —
— Re-order quantity;
— Re-order level;
— Minimum level; and
— Maximum level.
Assume 52 weeks in a year. (5 marks)
Answer :
(i) Re-order Quantity =
2.352 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
= = 126 units (approx.)
Where,
U = annual Consumption = 12 months × 100 = 1,200 units
P = Cost of placing an order
S = Annual Carrying cost per unit
(ii) Re-order Level = (Maximum re-order period or
= Maximum delivery period × Maximum usage)
= 1.38 months × 150 units = 207 units
(iii) Minimum Level = Reorder Level ! (Normal usage × Average delivery period
or Normal re-order period)
= 207 units ! (100 units × 1.15 months)
= 207 units !115 units
= 92 units
(iv) Maximum Level = (Reorder level %Reorder quantity)!(Minimum usage
×Minimum delivery period or minimum reorder period)
= (207 units%126 units) !(50 units ×0.92 months)
= 333 units !46 units = 287 units.
Note : In the question, normal usage, maximum usage and minimum usage
have been given in units per month instead of in weeks as the re-order period
is given in weeks. It is further given that 52 weeks are in a year. Therefore, in
order to make the uniformity in usage of materials and re-order period, the re-
order period given is weeks has been converted into months.
Therefore, maximum re-order period = × 6 = 1.38 months.
minimum re-order period = × 4 = 0.92 months.
Alternatively, the normal usage, maximum usage and minimum usage can be
calculated in units per week, giving the same answers.
2006 - Dec [5] {C} Attempt the following :
(iv) Your factory buys and uses a component for production at ̀ 10 per unit. Annual
requirement is 20,000 units. The carrying cost of inventory is 10% per annum
and ordering cost is ` 40 per order. The purchase manager argues that as the
ordering cost is very high, it is advantageous to place a single order for the entire
annual requirement. He also says that if we order 20,000 units at a time, we can
get a 3% discount from the supplier. You are required to evaluate this proposal
and make your recommendations. (5 marks)
[Chapter #### 2] Material Cost OOOO 2.353
Answer :
Economic Ordering Quantity
EOQ =
U = Annual consumption
P = Cost of placing an order
S = Annual cost of carrying one unit.
= =
EOQ = 1,265 Units
No. of order to be placed =20,000/1265 = 15.8 = say, 16 orders
(i) Total cost in case EOQ `
Ordering Cost = 16 × `40 = 640.00
Carrying Cost = 1,265/2 × 10 × 10/100 = 632.50
Buying Cost = 20,000 × `10 = 2,00,000.00
2,01,264.91
(ii) Total Cost of acquiring 20,000 units in one lot `
Ordering Cost = 40.00
Carrying Cost = 20,000/2 ×10/100 × 9.70 = 9,700.00
Buying Cost = 20,000 × `9.70 = 1,94,000.00
2,03,740.00
By the economical order level, the total cost is less by ` 2475.09 (` 2,03,740
!2,01,264.91) as compared to buy in one lot of 20,000 units. Hence, the view of the
purchase manager is incorrect.
2007 - June [6] (a) A factory requires 1,500 units of an item per month. The cost of
each unit is ` 27. The cost per order is `150 and inventory carrying charges works out
to 20% of the average inventory. Find out the economic order quantity (EOQ) and
ascertain the number of orders to be placed per year. Would you accept a 2% price
discount on a minimum supply of 1,200 units? (5 marks)
Answer :
Annual requirement 1500 units × 12 = 18,000 units
Economic Ordering Quantity = E.O.Q =
U = Annual consumption (units) during the year
P = Cost of placing an order
S = Annual cost of storage of one unit
2.354 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
EOQ
= = =
= = 1,000 units
No. of orders per year = 18,000 ÷ 1,000 = 18 orders
if 2% discount is given (original price !2% discount)
Cost price = ` 27!0.54 = ` 26.46
No. of orders to be placed : placed : 18,000 ÷ 1,200 = 15 orders
Inventory carrying cost : 20% of `26.46 = `5.292
Total cost without discount = ordering cost %carrying cost %Purchase price
= (18×150) % (½ × 1,000 × 5.40) % (18000 × 27)
= (2,700 % 2,700 % 4,86,000)
= ` 4,91,400
Total cost with 2% discount:
= (15 × 150) % (½ × 1,200 × 5.292) % (18,000 × 26.46)
= (2,250 + 3,175.20 + 4,76,280)
= ` 4,81,705.20
Since the total cost is less with 2% discount, the proposal may be accepted.
Repeatedly Asked Questions
No. Question Frequency
1 Distinguish between Question of 'Bin card' and 'stores ledger'
09 - June [5] {C} (c) (i), 11 - June [6] (a) (ii) 2 Times
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Dt. Between 3
Total 3
2.355
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter j
3 Labour Cost
This Chapter Includes : Introduction; Direct labour cost & Indirect labour cost; Time
Recording; Labour Remuneration; Incentive Schemes; Classification; Labour
Productivity; Labour Turnover; Idle Time; Overtime; Preparation of Payrolls.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2009 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(iii) Under differential piece rate of incentive scheme, there is no encouragement to
improve the performance of the workers.
2.356 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iv) By job rotation, labour turnover can be controlled/reduced upto some extent.
(2 marks each)
Answer :(iii) Incorrect : Efficient and inefficient workers are distinguished under the
differential piece-rate of incentive scheme. Efficient workers are those who attainor perform better than the standard are given a higher piece rate and inefficientworkers are given a lower rate. Hence, there is encouragement to improve theperformance of worker.
(iv) Correct : Workers can be satisfied through the job rotation within organizationand they do not try to leave the organization.
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statementsare correct or incorrect:
(i) Under Flux Method, labour turnover is calculated by number of workers leftdivided by average number of workers.
(iii) There is no need to record attendance of piece rate workers since attendanceis not relevant for ascertaining the amount of wages to be paid.(2 marks each)
Answer :(i) This statement is Incorrect :
Reason :- Labour turnover under flux method has been calculated as givenbelow labour turnover is equal to number of workers left plus number of workersjoined, divided by average number of workers.
(iii) This statement is Correct : Reason :- The payment made to the worker under payment by result system is directly associated with output given by a worker
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(i) The rate of change of labour force in an orgainsation during a specified period
is called—
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above. (1 mark)
Answer :
(i) (b)
2010 - June [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iv) The time for which the employer pays remuneration to workers but obtains no
direct benefit is called . (1 mark)
Answer :
(iv) Idle time
[Chapter #### 3] Labour Cost OOOO 2.357
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements aretrue or false :
(i) If a worker saves half of time of the standard time, the incentive under HalseyPlan and Rowan Plan will be the same. (2 marks)
Answer :(i) True : The incentives under Halsey and Rowan plan would be same because
half of standard time is saved due to operational efficiency of labour. Since, timesaved and the time taken being the same, the incentives calculated as per theformula resulted to the same amount.
2010 - Dec [5] {C} (b) Choose the most appropriate answer from the given options inrespect of the following :
(iii) Holiday pay is treated as !(a) Fringe benefits cost (b) Direct labour cost(c) Overheads(d) Abnormal loss charged to profit and loss account.
(iv) Incentive schemes include !(a) Piece rate wage plan(b) Time rate wage plan(c) Differential piece rate wage plan(d) None of the above. (1 mark each)
Answer :(iii) (c) Overheads or (b) Direct labour cost(iv) (c) Differential piece rate wage plan
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s) :
(ii) The time lost by workers who are paid on time basis, is known as __________.(1 mark)
Answer :(ii) The time lost by workers who are paid on time basis, is known as idle time.
2011 - June [5] {C} (c) State, with reasons in brief, whether the following statementsare true or false :
(ii) Idle facility and idle time are the same. (iii) Overtime premium paid to all factory workers is usually considered direct labour.
(2 marks each)Answer :
(ii) False : Idle facility is that part of total facility like that part of a plant, machine orequipment etc. Which cannot be effectively utilized in the business whereas idletime is that time which is paid for, but not utilized for production. Hence, we maysay idle time is part of idle facility.
2.358 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iii) True : Because they are usually directly engaged in production or carrying out
some operation or process. Overtime premium paid to the factory workers is
called direct labour cost and they can be easily identified with and charged to the
product.
2011 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(v) High wages means high cost of production. (2 marks)
Answer :
(v) The statement is false:- The high or low cost of production depends upon the
efficiency and effectiveness of workers.
2012 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(v) Rowan premium plan is an improvement over—
(a) Taylor plan
(b) Gantt bonus plan
(c) Halsey premium plan
(d) None of the above. (1 mark)
Answer:
(c) Halsey premium plan
2013 - June [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) The rate of change of labour force in an organisation during a specified period
is called —
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(iv) Abnormal idle time cost should be charged to _______. (1 mark)
Answer :
(b) (i) (b) Labour turnover.
(c) (iv) Costing profit and loss account.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Job card is used for recording the ‘in’ and ‘out’ time of the workers on the job.
(2 marks)
[Chapter #### 3] Labour Cost OOOO 2.359
SHORT NOTES
2008 - Dec [6] (a) Write short notes on the following :
(iii) Labour turnover. (3 marks)
Answer :
Labour Turnover : It is a normal feature in every business organisation that some
workers leave their jobs and some new workers take their place. This mobility or change
in the labour force is known as labour turnover.
Labour turnover whether it is high labour turnover or low labour turnover will result in
increased cost of production. A high labour turnover results in increased cost of
Production due to the following reasons.
(i) Cost of training of new workers.
(ii) Cost of tool and machine breakage.
(iii) Cost of scrap and defective work
(iv) Increased in cost due to rectification of defective Products.
(v) Production Planning cannot be properly executed and this results in production
loss.
A low labour turnover in the senior grades of factory employment may not be a good
thing because there will be few possibilities of promotion for the young workman who
will be forced to leave the organisation for future advancement. This also results in
increased labour cost per unit of production because of high wages of existing senior
workman.
DISTINGUISH BETWEEN
2009 - June [5] {C} (c) Distinguish between the following :
(ii) 'Fixed cost' and 'variable cost.' (3 marks)
Answer :
(1) Fixed Cost can never be zero:- In the short-term when production is temporarily
stopped, there will be no variable cost. Thus, the variable costs will be zero. But,
the fixed cost can never be zero whether a firm produces or not the fixed costs are
always positive.
(2) Price Determination :- In short, due to fall in demand, the producer is forced to
sell the commodity at low price. In such a situation, the producer will sale the
product so long as it covers the variable costs. He will not bother about the fixed
costs because he has to bear these costs even at zero level of output.
2.360 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2009 - June [7] (c) Differentiate between 'Halsey wage plan' and 'Rowan wage plan.'
(3 marks)
Answer :
Comparison of Halsey and Rowan Plan
Basis Halsey Plan Rowan Plan
(1) Scientific
Method
It is not Scientific method or
technique
This method is completely
scientific
(2) Fixed rate
Premium
Under this plan, the rate of
premium is fixed (30% to 50%)
that is generally 50% of value of
time saved.
The rate of premium is not fixed
under this plan.
(3) Calculation
of Premium
Premium is calculated on a part
of normal wages of the time
saved.
Premium is calculated on the
basis of normal wages and rate
of efficiency.
(4) Relationship
with efficiency
Under this plan. Premium
increases with increase in
efficiency.
Under this plan, the premium
first increases with increase the
efficiency but after a limit it
starts decreasing.
(5) Practice It has gained currency and used
more in practice.
It is not much popular, in
practice.
(6) Easy Computation of Premium is
easier.
Computation of Premium is
relatively not easier.
2011 - June [6] (a) Distinguish between the following :
(iii) 'Time keeping' and 'time booking'. (3 marks)
Answer :
Is concerned with the recording of time of each worker engaged in the factory.
The time - keeping will serve the following purposes : -
1. Preparation of pay rolls in case of time - paid workers
2. Meeting the statutory requirements.
3. Ensuring discipline in attendance.
4. Recording of each worker's time 'in' and 'out' of the factory making distinction
between normal time, over time, late attendance & early leaving.
5. For overhead distribution when overheads are absorbed on the basis of labour
hours.
Time - Booking : is the recording of time spent by the worker on the different jobs or
work orders carried out by him during his period of attendance in the factory.
[Chapter #### 3] Labour Cost OOOO 2.361
The objects of time - booking are :- 1. To ensure that time paid for according to time - keeping is properly utilised on
different jobs or work orders. 2. To ascertain the labour cost of each individual job or work order. 3. To ascertain unproductive time or idle time so as to make efforts to keep it in limit.4. Bonus payable under incentive schemes of wage payment is dependent upon the
time taken for completing a job, so it is necessary to know the time taken tocomplete a particular job.
5. To know the efficiency of workers, it is necessary to make the comparison of actualtime taken with time allowed for completing a particular task.
DESCRIPTIVE QUESTIONS
2012 - June [6] (c) “Normal labour turnover is advantageous and excessive labourturnover is not desirable.” Comment. (3 marks)Answer :
Normal labour turnover is advantageous because it allows injection of Fresh Bloodinto the firm. But excessive labour turnover is not desirable because it shows that labourforce is not contended.The following steps may be taken to reduce the labour turnover:-
(i) A suitable personnel policy should be framed for employing the right person forthe right job.
(ii) Good working condition should be provided to the workers.(iii) No discrimination between the workers.(iv) Efficient workers are motivated to do more work.(v) Maximum not-monetary benefits should be introduced.(vi) Introducing incentive wage system.(vii) An employee suggestion box scheme should be introduced.(viii) It provides very strong incentive to efficient workers.(ix) Fair rates of pay and allowances should be introduced to the workers.(x) Man-management relationship should be improved.
PRACTICAL QUESTIONS
2009 - Dec [7] (a) A worker under the Halsey Plan of remuneration has a wage rate of
` 1,200 per week of 48 hours, plus a cost of living bonus of `10 per hour worked. He is
given an 8-hour task to perform, which he accomplishes in 6 hours. He is allowed 30%
of the time saved as premium bonus. What would be his total hourly rate of earnings,
and what difference would it make if he were paid under the Rowan Plan ? (6 marks)
2.362 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :Standard Time : 8 hoursTime taken : 6 hoursStandard Wages :Day rate = `1200 for 48 hours = ` 25per hourCost of living bonus = `10 per hourPremium bonus = 30% of time savedUnder Halsey Method:Wages for 6 hours @`25 per hour ` 150Cost of living bonus for 6 hours @`10 per hour ` 60Bonus:(Time saved × Rate × 30%) = 2 × ` 25 × 30% ` 15Earnings for 6 hours ` 225Hourly rate = `225/6 = `37.5Under Rowan Method:Wages for 6 hours @ ` 25 per hour `150.00Cost of living bonus for 6 hours @`10per hour ` 60.00Bonus: (Time saved/Standard Time) × Time taken ` 37.50x Hourly Rate = (2/8) × 6 × 25 = Earnings for 6 hours `247.50Hourly rate = ` 247.5/6=`41.25Under Rowan plan the worker would get ` 3.75 more per hour.
2011 - June [8] (a) From the following data provided to you, find out the labour turnoverrate by applying (i) replacement method; and (ii) separation method : Number of workers on the payroll : - At the beginning of the month : 500 - At the end of the month : 600. During the month, 5 workers left, 20 workers were discharged and 75 workers wererecruited. Of these, 10 workers were recruited in the vacancies of those leaving andwhile the rest were engaged for an expansion scheme. (4 marks)Answer :
(i) Replacement Method
= = 1.82%
(ii) Separation Method
= = 4.55%
Average no. of workers is calculated as under :
=
=
[Chapter #### 3] Labour Cost OOOO 2.363
2011 - Dec [7] (a) The cost accountant of Raman Ltd. has computed labour turnover
rates for the quarter ended 31st March, 2011 as 10%, 5% and 3% under flux method,
replacement method and separation method respectively.
If the number of workers replaced during the quarter is 30, find out the number of —
(i) Workers recruited and joined; and
(ii) Workers left and discharged. (6 marks)
Answer :
(i) Replacement Method
Labour Turnover Rate =
Or, 5 =
Or, average no. of workers on roll = 3,000/5
= 600
(ii) Separation Method
Labour Turnover Rate =
Or, 3 =
Or, no. of workers left and discharged = 18
(iii) Flux Method
Labour Turnover Rate
=
Or, 10 =
Or, no. of workers recruited and joined = 60 - 18 = 42
2013 - Dec [7] (c) The management of Sunshine Ltd. wants to have an idea of the
profit lost/foregone as a result of labour turnover last year. Last year sales accounted
to ` 66,00,000 and the P/V ratio was 20%. The total number of actual hours worked by
the direct labour force was 3.45 lakh. As a result of the delays by the personnel
department in filling up vacancies due to labour turnover, 75,000 potentially productive
hours were lost. The actual direct labour hours included 30,000 hours attributable to
training new recruits, cut of which half of the hours were unproductive. The cost incurred
consequent upon labour turnover revealed the following analysis :
2.364 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
`
Settlement cost due to leaving 27,420Recruitment cost 18,725Selection cost 12,750Training cost 16,105
Assuming that the potential production loss due to labour turnover could have been soldat prevailing prices, ascertain the profit forgone/lost last year on account of labourturnover. (6 marks)
CS Inter Gr. I
PRACTICAL QUESTIONS
2005 - June [5] {C} Attempt the following :(iii) A worker produced 200 units in a week's time. The guaranteed weekly wage
payment for 45 hours is ` 1,350. The expected time to produce one unit is 15minutes which is raised further by 20% under the incentive scheme. What will bethe earnings per hour of that worker under Halsey (50% sharing) and Rowanbonus schemes? (5 marks)
Answer :Earnings per hour under Halsey (50% sharing) Bonus Scheme
Earnings = (Hours worked × Rate per hour) + ½ (Time saved) × Rate per hour45 hours × ` 30 + (½ × 15 hours × ` 30)= ` 1,350 + `225= ` 1,575Earning per hour = ` 1,575 ÷ 45 = ` 35Earning per hour under rowan Bonus SchemeEarnings = Hours worked × Rate per Hour %
× Rate per hour
= 45 hrs × ` 30 % × ` 30
= ` 1,350 % ` 337.5 = ` 1,687.50Earning per hour = ` 1,687.50 ÷ 45 = ` 37.5
Working Notes :
(i) Total Allowed for actual weekly production = = 60 hours
(ii) Time saved = Time allowed = Actual time taken= 60 hours ! 45 hours= 15 hours
[Chapter #### 3] Labour Cost OOOO 2.365
2005 - Dec [5] {C} Attempt the following:(v) Following are the labour turnover rates computed under different methods for the
quarter ended on 31st March, 2005:Flux method 20%Replacement method 10%Separation method 6%
The total number of workers replaced during the quarter is 80.You are required to find the number of —(i) workers left and discharged; and(ii) workers recruited and joined including replacements. (5 marks)
Answer :Average number of workers on roll:Labour Turnover Rate
(Replacement method) =
Or =
Or Average number of workers on roll = 800 Workers left and discharged:
Labour Turnover Rate
(Separation method) = × or S = 48
Workers left and discharged = 48Labour Turnover Rate (Flux method)
=
=
N = = 112
No. of workers recruited and joined(including replacement) = 112
2006 - Dec [5] {C} Attempt the following :
(v) The labour turnover rates of a manufacturing organisation for the quarter ended
31st March, 2006 are 10%, 5% and 3% under ‘flux method’, ‘replacement
method’ and ‘separation method’ respectively. The number of workers replaced
during the quarter is 120. Work out the number of workers (i) left and discharged;
and (ii) recruited and joined including replacements. (5 marks)
2.366 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :
Working Notes:
Average Number of Workers on Roll:
Labour Turnover rate (under replacement method)
=
or 5/100 = 120/average Number of Workers on Roll.
or Average Number of Workers on Roll = 120 × = 2400
(i) Workers left and discharged
Labour Turnover Rate (Separation method)
=
or 3/100 = No. of Separation/2400
or No. of Separation = × 2400 = 72
Therefore, the number of workers left and discharged = 72
(ii) Workers recruited and joined including replacements
Labour Turnover Rate (Flux method)
=
or = 72 %
or No. of Accessions = !72 = 168
Therefore, the number of workers recruited and joined including replacement = 168
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Dt. Between 3
Total 3
2.367
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter jj
On the basis of Compulsory questions from a chapter jj
4 Direct Expenses and Overheads
This Chapter Includes : Direct Expenses; Indirect Expenses; Overheads,
Classification of overheads; Treatment of Factory Overheads; Collection; Allocation
and Apportionment; Absorption of Overheads; Treatment of Administrative
Overheads; Control of Overheads.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
2.368 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(i) Administration overheads are recovered as a percentage of —
(a) Direct materials
(b) Direct wages
(c) Prime cost
(d) Works cost. (1 mark)
Answer :
(i) (d) Works cost
2009 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(v) Administration overheads are incurred due to management policy and they are
easily controllable. (2 marks)
Answer :
(v) Incorrect : Administration overhead are fixed in nature and are incurred due to
management policy. Therefore it is very difficult to control administration
overhead.
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(v) When the under or over absorbed overheads amount is significant, it should be
disposed off by—
(a) Transferring to costing profit and loss account
(b) Using a supplementary rate
(c) Carry over to next year
(d) None of the above. (1 mark)
Answer :
(v) (b)
2010 - June [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iii) The process of apportionment of factory overheads among production and
service department is called of factory overheads. (1 mark)
Answer :
(iii) Primary distribution
2010 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) In element-wise classification of overheads, which one of the following is not
included-
(a) Fixed overheads
(b) Indirect labour
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.369
(c) Indirect materials
(d) Indirect expenditure. (1 mark)
Answer :
(i) (a) Fixed overheads
2011 - June [5] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(v) Absorption means -
(a) Charging of overheads to cost centres
(b) Charging of overheads to cost units
(c) Charging of overheads to cost centres or cost units
(d) None of the above. (1 mark)
Answer :
(v) (a) Charging of over heads to cost centres
or
(c) Charging of overheads to cost centres or cost units.
2011 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iii) The costing method in which fixed factory overheads are added to inventory is—
(a) Direct costing
(b) Marginal costing
(c) Absorption costing
(d) Activity based costing. (1 mark)
Answer :
(iii) (c) Absorption costing
2012 - June [5] {C} (c) Write the most appropriate answer from the given options in
respect of the following :
(iv) When the amount of overheads absorbed is less than the amount of overheads
incurred, it is called —
(a) Under-absorption of overheads
(b) Over-absorption of overheads
(c) Proper absorption of overheads
(d) Normal absorption of overheads. (1 mark)
Answer :
(a) Under-absorption of overheads.
2012 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) Over-absorption of factory overheads due to inefficiency of management should
be disposed by—
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(a) Use of supplementary rate(b) Transfer to costing profit and loss account(c) Carry forward to next year(d) Transfer to production account. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):(i) All indirect costs are collectively called__________. (1 mark)
Answer:(b) (i) (b) Transfer to costing profit and loss account,(c) (i) Overheads,
2013 - June [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iii) In case the amount of overheads recovered from production is more than the
actual overheads, there is said to be _______ of overheads. (1 mark)
Answer :
(iii) Over absorption.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(ii) Simultaneous equation method is not an algebraic method. (2 marks)
SHORT NOTES
2008 - Dec [6] (a) Write short notes on the following :(i) Bases of apportionment. (3 marks)
Answer :Bases of Apportionment : It is also known as primary distribution of overheads. Thereare several bases, which are adopted in practice to apportion the items of overheadcosts to production and service department. However, the basis of apportionmentadopted should be proper and just which can be suitably explained some of thecommon bases of apportionment of different items of overhead are illustrated in thefollowing table.
Bases of apportionment Overhead
1.
2.
3.
4.
Floor area occupied
No. of light points
No. of employee
Direct wages
Rent and other building expenses, lighting
and heating, fire precaution services.
Lighting
Canteen expenses, welfare exp, time
keeping, personal office.
Compensation to workers, ESI and P.F
Contribution, holiday par etc.
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.371
5.
6.
7.
Cubic content
Sales or total cost
Weight, volume, tonmiles
Building maintenance
Audit fees
Delivery charges
2010 - Dec [8] (a) Write a short note on ‘pre-determined overheads rate’. (3 marks)
Answer :
Pre-determined overhead rate
Pre-determined overhead rate is determined in advance of the actual production and
is computed by dividing the budgeted overhead expenses for the accounting period by
the budgeted base for the period i.e.
Pre-determined overhead rate =
The computation of a pre-determined overhead rate has the following advantages :
(i) Pre-determined overhead rate facilitates products cost determination
immediately after production is completed.
(ii) In those concerns where the budgetary control system is in operation, all the
data for the purpose of calculation of pre-determined overhead rate is available
without any extra clerical cost.
(iii) It is useful when cost plus contracts are undertaken.
(iv) Cost estimating and competitive pricing, offer ideal situations for use of pre-
determined overhead rates.
PRACTICAL QUESTIONS
2009 - Dec [6](b) The total overhead expenses of a factory are ` 4,46,380. Taking into
account the normal working of the factory, overheads were recovered from production
at ̀ 1.25 per hour. The actual hours worked were 2,93,104. How would you proceed to
close the books of account, assuming that besides 7,800 units produced of which 7,000
were sold ? There were 200 equivalent units in work-in-progress.
On investigation, it was found that 50% of the unabsorbed overheads were on
account of increase in the cost of indirect material and indirect labour and the other 50%
was due to factory’s inefficiency. (6 marks)
Answer :
Unabsorbed overheads: (`)
Overhead recovered from production = (2,93,104hrs × `1.25) = 3,66,380
Actual Overheads = 4,46,380
Unabsorbed Overheads 80,000
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Out of the total unabsorbed overheads of ̀ 80,000, 50% was due to increase in the
cost of indirect material and labour. The amount of ` 40,000 (50% of ` 80,000) should
therefore, be charged to units produced by means of supplementary rate.
Unabsorbed overhead = ` 40,000
Units produced = 8,000
Supplementary Rate = ` = ` 5/-per unit
Apportionment of Overheads:
The amount of overheads of ` 40,000 will be apportioned between cost of sales,
finished goods and work in progress as follows:
(`)
Cost of Sales Account = 7,000 × `5 = 35,000
Finished goods Account = 800 × `5 = 4,000
Work in progress Account = 200 × `5 = 1,000
` 40,000
The balance of ̀ 40,000(50% of 80,000) which represents unabsorbed overheads
on account of factory`s inefficiency (an abnormal factor) should be transferred to
Costing Profit and Loss Account.
2010 - June [8] (b) Following information is available for a factory for the year 2008:
`
Direct material .......... 3,00,000
Direct wages .......... 2,50,000
Factory overheads .......... 1,50,000
Administrative overheads .......... 1,68,000
Selling overheads .......... 1,12,000
Distribution overheads .......... 70,000
Profit .......... 2,10,000
A work order has been executed in the year 2009 and the expenses incurred
were—materials ` 4,000; and wages ` 2,500.
Assuming that in the year 2009 the rate of factory overheads has increased by
20%, distribution overheads have gone down by 10% and selling and administration
overheads have each gone up by 12.5%, at what price should the product be sold so
as to earn the same rate of profit on the selling price as in the year 2008? Factory
overheads are based on direct wages while other overheads are based on factory cost.
(9 marks)
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.373
Answer :
(b) Statement of Cost and Profit for the year 2008
Particulars `̀̀̀
Materials
Direct Wages
Prime Cost
Factory Overheads
Factory Cost
Administration Overheads
Cost of Productions
Selling Overheads
Distribution Overheads
Cost of Sales
Profit
Sales
3,00,000
2,50,000
5,50,000
1,50,000
7,00,000
1,68,000
8,68,000
1,12,000
70,000
10,50,000
2,10,000
12,60,000
(a) Percentage of Factory overheads on direct wages
= 1,50,000/2,50,000 × 100 = 60%
(b) Percentage of Administration overheads on factory cost
= 1,68,000/7,00,000 ×100 = 24%
(c) Percentage of Selling overheads to factory cost
= 1,12,000/7,00,000 × 100 = 16%
(d) Percentage of Distribution overheads to factory cost
= 70,000/7,00,000 × 100 = 10%
(e) Percentage of Profit on cost of sales
= 2,10,000/10,50,000 × 100 = 20%
Estimate for the work order
Particulars `̀̀̀
Materials
Wages
Prime Cost
Factory Overheads (60% of wages + 20% thereof) i.e. 72% of wages
Factory Cost
Administration Overheads (24% of factory cost + 12.5% thereof) i.e.
27% of factory cost
Cost of Production
Selling Overheads (16% of factory cost + 12.3% thereof) i.e. 18% of
factory cost
4,000
2,500
6,500
1,800
8,300
2,241
10,541
1,494
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Distribution Overheads (10% of works cost-10% thereof) i.e. 9% of
factory cost
Cost of Sales
Profit (20% on cost)
Selling Price
747
12,782
2,556
15,338
2011 - June [8] (b) Following information is made available from the costing records of
a factory :
(i) The original cost of the machine : ` 1,00,000
Estimated life : 10 years
Residual value : ` 5,000
Factory operates for 48 hours per week : 52 weeks in a year.
Allow 15% towards machine maintenance down time.
5% (of productive time assuming unproductive) may be allowed as setting-up
time.
(ii) Electricity used by the machine is 10 units per hour at a cost of 50 paise per unit.
(iii) Repair and maintenance cost is ` 500 per month.
(iv) Two operators attend the machine during operations alongwith two other
machines. Their total wages including fringe benefits, amounting to ` 5,000 per
month is paid.
(v) Other overheads attributable to the machine are ` 10,431 per year.
Using above data. calculate machine hour rate. (6 marks)
Answer :
Computation of machine Hour Rate :
Particulars Per Year
`̀̀̀
Per Hour
`̀̀̀
Standing Charges
Wages for operator (` 5,000 × 12)/3
Other Overheads
Total
Standing charges Per hour (30,431/2,015)
Machine Expenses
Depreciation
[(1,00,000 ! 5,000) / 10]/2,015
Repair and Maintenance (500×12/2015)
Electricity (10 units @ 50 Paise)
Machine Hour Rate
20,000
10,431
30,431
15.10
4.71
2.98
5.00
27.79
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.375
Working Note:
Calculation of effective machine hours:
Total working hours per year (48 × 52) 2,496
Less: 15% maintenance time 375
2,121
Less: 5% for setting up time 106
Effective time 2,015
2013 - Dec [7] (a) From the information given below, calculate machine hour rate for
the Machine No. 30 :
Cost of machine `12,00,000
Estimated scrap value `50,000
Estimated working life 16,000 hours
Time required for maintenance 250 hours
Productive working hours 2,200 hours per year
Setting-up time 5%
Cost of repair `1,60,000 per year
No. of operators after 2 machines 2 persons
Wages of operator ` 20,000 per month
Chemicals required ` 12,500 per month
Overheads chargeable to this machine ` 22,500 per month
Insurance premium 1% per year
Power 20 units per hour @ ` 5.00 per unit.
(5 marks)
CS Inter Gr. I
DISTINGUISH BETWEEN
2007 - Dec [5] {C} (c) Distinguish between the following :
(iii) ‘Single overhead rate’ and ‘multiple overhead rate’. (3 marks)
Answer :
Difference between `Single Overhead Rate & `Multiple Overhead Rate'
Single Overhead Rate : A blanket overhead rate is single overhead rate for the entire
factory. It is computed as follows :
Blanket Rate =
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Blanket overhead rate Should not be used except when output is uniform. Other wise
it will result in over-costing and under-costing of certain cost units. Moreover, when a
blanket rate is used, performance of individual departments or cost centres can not be
properly assessed and exercise of control becomes difficult.
Multiple Overhead Rate : Multiple rates means a number of separate rates for each
cost centre or department. For instance, separate rates are calculated for each
production department, product line and for fixed and variable overheads. The following
formula is used to calculate multiple rates :
Overheads Rate =
Multiple rates are of more practical utility and should always be preferred over blanket
rates for accuracy and control.
DESCRIPTIVE QUESTIONS
2004 - Dec [5] {C} (c) Are the high overhead costs an indication of inefficiency?Explain. (4 marks)Answer :Overheads constitute an Important element of costs and without appropriate charge ofoverheads Product or service cost is not complete. In modern times dominated byincreasing automation necessitated by the demands of high productivity and speed inexecution, heavy investments are being made on sophisticated machineries andequipments with light technological inputs.The test of efficiency lies in increasing the utility of overhead costs and the resultantincrease in productivity. The benefits of productivity are reflected in the overallimprovement in production and consequent reduction in unit cost.
On the contrary, high amount of overheads may be sign of efficiency in a givensituation. With the progressive automation, direct labour cost often inversely moves withthe overhead costs and when compared with different manufacturing units, the oneusing more sophisticated technology than the other shows satisfactory results withlower cost of production through improved productivity.
2007 - Dec [6] (a) Comment on the following :
(i) Controlling of selling and distribution overheads is a difficult task. (4 marks)
Answer :
Control of selling and Distribution overhead : The control of selling and distribution
overhead is comparatively difficult because of certain special feature of such costs
which require a more detailed and exacting analysis. It is not easy to identify or link
selling and distribution costs with the units of production because these costs are
normally incurred after production has been completed.
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.377
The incidence of such overhead is dependent upon various factors such as :
(a) distance of market;
(b) terms of sale;
(c) extent and nature of competition etc.
Which are beyond the control of management.
The main problem which are in the control of selling and distribution overhead costs are
as under:
(a) No Control over customers or competitors is possible.
(b) Capacity of sales organisation cannot be properly defined.
(c) It is difficult to obtain the market operation data.
(d) Price fluctuations are determined by many factors besides cost factors.
(e) The difference of making or not making is not clear.
In spite of the above difficulties the following methods may be used for controlling.
(i) Comparison with post results;
(ii) Budgetary control;
(iii) Standard costing.
PRACTICAL QUESTIONS
2004 - June [5] {C} (b) A factory is currently working at 50% of its working capacity and
produces 10,000 units. At 60% working capacity, the raw materials cost increases by
2% and selling price falls by 2%.
At 80% working capacity, raw material cost increases by 5% and selling price falls
by 5%.
At 50% working capacity, the product costs ` 180 per unit and sold at ` 200 per
unit. The cost of ` 180 is made up as follows : `
Materials 100
Labour 30
Factory overhead (40% fixed) 30
Administration overhead (50% fixed) 20
180
You are required to estimate the profits of the factory when it works at 60% and
80% of its working capacity. (4 marks)
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Answer :
Flexible Budget
Existing Proposed
Level of Activity
No. of units
variable Costs:
Material
Labour
Factory Overhead
Administration Overhead
Total Variable Costs.....(i)
Fixed Costs:
Factory overhead
50%
10,000
10,00,000
3,00,000
1,80,000
1,00,000
15,80,000
1,20,000
60%
12,000
12,24,000
3,60,000
2,16,000
1,20,000
19,20,000
1,20,000
80%
16,000
16,80,000
4,80,000
2,88,000
1,60,000
26,08,000
1,20,000Administration Overhead
Total Fixed Costs........(ii)
Total Costs (i) %(ii)
Sales value
Profit
1,00,000
2,20,000
18,00,000
20,00,000
2,00,000
1,00,000
2,20,000
21,40,000
23,52,000
2,12,000
1,00,000
2,20,000
28,28,000
30,40,000
2,12,000
2005 - Dec [5] {C} Attempt the following :
(ii) A manufacturing company has three production departments and two service
departments. The summary of departmental expenses are distributed as under :
` `
Production Deptt.
P1 32,000
P2 26,000
P3 28,000 86,000
Service Deptt.
S1 9,360
S2 12,000 21,360
The service department expenses are charged on the following percentage
basis:
Production Deptt. Service Deptt.
Service Deptt. P1 P2 P3 S1 S2
S1 20% 25% 35% — 20%
S2 25% 25% 40% 10% —
Prepare a statement showing the apportionment of expenses of two
service departments in production departments by simultaneous equation
method. (5 marks)
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.379
Answer :
Statement showing Secondary Distribution by simultaneous Equation Method:
Production Departments P1
(`)
P2
(`)
P3
(`)
Total
(`)
As per Primary distribution
Service Department S1 [80% of 10,776]
Service Department S2 [90% of 14,155]
32,000
2,155
3,539
26,000
2,694
3,539
28,000
3,771
5,662
86,000
8,620
12,740
37,694 32,233 37,433 1,07,360
Working Note :
Let X = Total overheads of Department of S1
Y = total overheads of Department of S2
X = 9,360 % 0.1Y ................ (1)
Y = 12,000 % 0.2 X ................ (2)
Solving (1) and (2) above
X = 9,360 % 0.1 [12,000 % 0.2X]
X = 9,360 % 1200 % 0.02 X
0.98 X = 10560
X = 10560/0.98 = 10,776
Substituting the value of X in (2) above
Y = 12000 % 0.2 × 10776
Y = 12000 % 2155 = 14,155
2.380
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter Nil
5 Method of Costing
This Chapter Includes : Marginal Costing; Single/Output/Unit Costing; Cost Sheet;
Production Account; Contract Costing, its Aspects, Profit on Incomplete Contracts
(Based on AS!7!Revised); Advantages & Limitation of Break-even Charts.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true of false :
(v) Cost reduction is cost control. (2 marks)
Answer :
(v) False;
[Chapter #### 5] Method of Costing OOOO 2.381
2008 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(ii) For contracts which are very near to completion, the profit is ascertained by the
formula —
(a) Estimated profit × Work certified / Contract price
(b) Estimated profit × Work certified / Contract price × Cash received / Work
certified
(c) Estimated profit × Work certified / Contract price × Cost of work / Total cost
to date
(d) Any of the above in the absence of specific instruction.
(v) For shoe manufacturers, the most suitable cost system is —
(a) Job costing
(b) Batch costing
(c) Contract costing
(d) None of the above. (1 mark each)
Answer :
(ii) (a) Estimated profit × Work certified / Contract price
(v) (b) Batch costing
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(v) Job costing can be used in industries using standard costing. (2 marks)
Answer :
(v) True : Standard costing is a technique which can be used with any methods of
costing including Job Costing.
2009 - Dec [5] {C}(b) Choose the most appropriate answer from the given options in
respect of the following :
(i) The most suitable cost system where the products differ in type of materials and
work performed is –
(a) Job costing
(b) Process costing
(c) Operating costing
(d) None of the above. (1 mark)
Answer :
(i) (a)
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(ii) When a contract is not complete at the end of the year, profit on incomplete
contract—
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(a) Is not considered
(b) Is considered for inclusion in the profit for the year
(c) Is considered for the inclusion of a part of the year
(d) None of the above. (1 mark)
Answer :
(ii) (c)
2010 - June [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(ii) An account giving details of cost of production, cost of sales and profit made
during a particular period is called . (1 mark)
Answer :
(ii) Production account.
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(ii) The method of costing used in a refinery is operating costing. (2 marks)
Answer :
(ii) False : The suitable method of costing to be used for a refinery is process
costing because refining is done in different consecutive processes.
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) The three categories of inventory for a manufacturer are raw material, work-in-
process and_________. (1 mark)
Answer :
(i) The three categories of inventory for a manufacturer are raw material, work-in-
process and finished goods.
2011 - June [5] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(iii) Cost is determined before hand under -
(a) Standard costing
(b) Historical costing
(c) Marginal costing
(d) None of the above. (1 mark)
Answer :
(iii) (a) Standard costing
[Chapter #### 5] Method of Costing OOOO 2.383
2011 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s) :
(iv) Contract in which reimbursement is based on actual allowable cost plus a fixedfee is called__________. (1 mark)
Answer :(iv) Contract in which reimbursement is based on actual allowable cost plus a fixed
fee is called Cost plus contract
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statementsare true or false :
(ii) In cost plus contracts, the contractor runs a risk of incurring loss. (2 marks)Answer :The statement is False :- Since the contractor is assured of a fixed percentage of profitthere is no risk of incurring any loss on the Contract.
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statement istrue or false:
(i) Cost sheet is the same as statement of cost and profit. (2 marks)(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):
(i) A document which provides for assembly of different costs in respect of a costcentre or a cost unit is called _______. (1 mark)
Answer :(a) (i) This statement is false : Cost sheet is a document which provide the detailed
cost of the cost centre. The selling and distribution expenses are not included inthe cost sheet when in statement of cost and profit.(a) the first part gives the cost of production.(b) the second part gives the cost of goods sold.(c) the third part gives the cost of sale and profits for the period.
(c)(i) Cost sheet.2013 - Dec [5] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(i) Batch costing method is applicable where !(a) Similar articles are produced in batches (b) Articles are produced in mass scale(c) Mass production is undertaken in batches (d) None of the above.
(iv) Which of the following is variable cost or variable expense —(a) Depreciation on machinery(b) Interest on capital(c) Direct materials(d) Rent, rates and taxes. (1 mark each)
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2013 - Dec[5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) If the work certified is 50% or more of contract price, the formula for ascertaining
the profit to be transferred to profit and loss account is _____________ .
(1 mark)
SHORT NOTES
2008 - Dec [6] (a) Write short notes on the following :
(ii) Cost plus contracts (3 marks)
Answer :
Cost- Plus Contract : In this category the contract is not based on fixed value but
depends on the cost and a set percentage of indirect expenses and profits, therefore
this contract is not pre-determined in terms of value but depends on the cost plus
expenses and the profit.
Some times, the circumstances are such that the contractor is not in a position to
calculate the contract price. During war or economic turmoil, the estimate assessment
becomes impossible in respect of the labour or materials cost. So the contractors hardly
agree to carry on the commitment on a pre-determined price. In such condition, the
contractee agree to pay something more to the contractor. By this management the
element of uncertainty is considerably removed, which in due course helps the
contractor.
In this system, the contractor had no charm to carry on the work-economically. The
contractors inflates the expenditures, only in times of war this way is adopted so as to
get the work expedited.
2011 - June [7] (a) Write short notes on the following :
(iii) Cost-plus contracts. (3 marks)
Answer :
Cost Plus Contracts : is a pricing method under which contractee agrees to reimburse
the actual cost plus the agreed percentage of profit. This method is usually adopted
when the works to be carried out are urgent and the value of the contract is heavy.
For e.g : in the works of construction during war time, urgent works, defence, public
utility works, ship building etc. Government and semi Government organization usually
adopt the cost plus contracts to assign works. In cost plus contracts, it is possible to
know the cost of contract, cost per each element and the amount of profit to the
contractor.
[Chapter #### 5] Method of Costing OOOO 2.385
DISTINGUISH BETWEEN
2008 - Dec [8] (a) Distinguish between the following :
(iii) 'Cost sheet' and 'production account' (3 marks)
Answer :
Difference between Cost Sheet and Production Account:
Cost Sheet Production Account
1. It is prepared as statement and is not
based on double entry system.
It is prepared as an account and is
based on double entry system.
2. It is a statement in which cost of
goods manufactured during a given
period is shown.
It makes clear, in the form of separate
account, cost of any service, job are
contract.
3. A detailed and analytical cost of
production or service is shown in a
systematic and scientific manner.
In it, the cost is not shown in detail.
4. It is not possible to compare the
results shown by it and financial
accounts.
Results from financial accounts and
production are easily comparable.
5. With its help, a comparative study of
two periods is possible.
Through it, no such comparison
is possible
2013 - June [7] (b) Distinguish between ‘production account’ and ‘cost sheet’.
(3 marks)
Answer :
Please refer 2008 - Dec [8] (a) (iii) on page no. 385
DESCRIPTIVE QUESTIONS
2011 - Dec [6] (c) What are the components of total cost shown in the cost sheet? Give
the uses of the cost sheet. (4 marks)
Answer :
Components of the total cost shown in the cost sheet are as follows:-
Prime cost = Direct materials + Direct labour + Direct (or chargeable) Expenses
Factory / works cost = Prime cost + factory overheads
Cost of production = factory / work cost + Administrative overheads
Total cost or cost = Cost of production + Selling of sales and Distribution overheads.
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Uses of Cost Sheet:
1. It reveals the total cost and cost per unit of production.
2. It discloses the break-up of the total cost is different elements of cost.
3. It facilitates comparison with previous years
4. It helps in the fixation of selling price.
PRACTICAL QUESTIONS
2009 - June [7] (b) On 1st July, 2007, Delux Ltd. undertook a contract for ` 5,00,000.
On 30th June, 2008 when the accounts were closed, the following details about the
contract were gathered :
`
Material purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
Materials on hand (30.6.2007) 25,000
Wages accrued (30.6.2008) 5,000
Work certified 2,00,000
Cash received 1,50,000
Work uncertified 15,000
Depreciation of plant 5,000
The above contract has an escalation clause which reads as follows :
"In the event of prices of materials and rates of wages increase by more than 5%,
the contract price would be increased accordingly by 25% of the rise in the cost of
materials and wages beyond 5% in each case."
It was found that since the date of signing the agreements, the prices of materials
and wage rates increased by 25%. The value of the work certified does not take into
account the effect of the above clause.
Prepare the contract account. (6 marks)
Answer :
Contract Account
For the year ending 30th June, 2009
Dr. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Materials
To Wages (` 45,000 + `5,000)
To General Expenses
1,00,000
50,000
10,000
By Work-in-Progress:
Work certified
Work uncertified
2,00,000
15,000
[Chapter #### 5] Method of Costing OOOO 2.387
To Depreciation of Plant
To National Profit c/d
To Profit and Loss A/c
To Work-in-Progress A/c (Reserve)
5,000
80,000
2,45,000
20,000
60,000
By Materials on hand
By Contract Escalation(1)
By Notional Profit b/d
25,000
5,000
2,45,000
80,000
80,000 80,000
Working Note (1)
Particulars Total
Increase `̀̀̀
Upto
5% `̀̀̀
Beyond
5% `̀̀̀
Materials
(` 1,00,000-` 25,000) x
[ in the ratio of 5:20]
Wages ` 50,000 x
15,000
10,000
3,000
2,000
12,000
8,000
Total Increase 25,000 5,000 20,000
Increase in contract price = 25% of increase in material and wages beyond 5%.
= × ` 20,000 = ` 5,000
2010 - Dec [8] (b) The cost of sale of Product-A is made up as follows :`
Materials used in manufacturing 5,500Materials used in packing 1,000Materials used in selling the product 150Materials used in the factory 75Materials used in the office 125Labour required in production 1,000Labour required for supervision of the management for factory 200Direct expenses ! factory 500Indirect expenses ! factory 100Office expenses 125Depreciation ! office building and equipment 75
2.388 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Depreciation ! factory 175Selling expenses 350Freight on materials 500Advertising 125Assuming that all products manufactured are sold. what should be the selling priceto obtain a profit of 25% on selling price ? (6 marks)
Answer :Cost Sheet
Particulars ` `
Direct Material : Materials used in manufacturing
Materials used in packing materials
Freight on materials
Direct Labour : Labour required on production
Direct Expenses : Direct Factory Expenses
Prime Cost
Add : Factory Overheads :
Indirect Material : Material used in factory
Indirect Labour : Labour required for supervision of
the management for factory
Indirect Expenses : Indirect factory expenses 100
Depreciation!factory 175
Factory Cost or Work Cost
Add : Office and administrative overheads :
Indirect Material : Material used in office
Indirect Expenses : Office expenses 125
Depreciation 75
Total Cost of Production
5,500
1,000
500
75
200
275
125
200
7,000
1,000
500
8,500
550
9,050
325
9,375
Particulars ` `
Add : Selling and distribution overheads :
Indirect Material : Material used in selling the product
Indirect Expenses : Selling 350
Advertising 125
Cost of Sales
Profit [33 1/2% on cost (25% on sale)
Sales
150
475 625
10,000
3,333
13,333
Treated as primary packing material. Otherwise may be treated as selling expenses.
[Chapter #### 5] Method of Costing OOOO 2.389
2012 - June [6] (b) The following are the particulars relating to a contract which hasbegun on 1st April, 2010 :
`̀̀̀
Contract price 5,00,000Machinery 30,000Material 1,70,600Wages 1,48,750Direct expenses 6,330Outstanding wages 5,380
`̀̀̀
Uncertified work 9,000Overheads 8,240Material returned 1,600Machinery as on 31st March, 2011 22,000Material in hand on 31st March, 2011 3,700Value of work certified 3,90,000Cash received 3,51,000
Prepare the contract account for the financial year 2010-11 showing the amountof profit that may be taken to the credit of profit and loss account for the year.
(6 marks)Answer:
Contract A/c
Particulars Amt `̀̀̀ Particulars Amt `̀̀̀
To Materials
To Wages 1,48,750
Add: Outstanding 5,380
To Direct Expenses
To Overheads
To Depreciation on machinery
To Balance c/d
To Profit & Loss A/c*
To Reserve Work in Progress A/c
1,70,600
1,54,130
6,330
8,240
8,000
57,000
4,04,300
34,200
22,800
By Materials returned
By Materials on hand
By Work in Progress A/c:
Certified 3,90,000
Uncertified 9,000
By Balance b/d
1,600
3,700
3,99,000
4,04,300
57,000
57,000 57,000
Contract Value = 5,00,000
Work Certified = 3,90,000
Completion% = 78% i.e.
2.390 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
As work complete is 78%, so 2/3 profit will be transferred to P&L Account
Profit to be transferred to P&L A/c =
=
= 34,200
2012 - Dec [7] (a) SV Constructions Ltd. have obtained a contract for construction of
a bridge. The value of the contract is ̀ 12 lakh and the work commenced on 1st October,
2011. The following details are shown in their books for the year ended 30th September,
2012:
`
Plant purchased 60,000
Wages paid 3,40,000
Wages accrued as on 30.9.2012 2,800
Material issued to site 3,36,000
Material at site as on 30.9.2012 4,000
Direct expenses 8,000
Direct expenses accrued as on 30.9.2012 1,200
General overheads apportioned 32,000
Work not yet certified at cost 14,000
Cash received being 80% of work certified 6,00,000
Life of plant purchased is 5 years and scrap value is nil.
You are required to—
(i) Prepare the contract account for the year ended 30th September, 2012.
(ii) Show the amount of profit which you consider might be fairly taken on the
contract and how you have calculated it. (9 marks)
Answer:
(i) S V Construction Ltd.
Contract Account
For the year ended 30th September, 2012
Particulars ` Particulars `
To Material 3,36,000 By work in Progress
To Wages paid: 3,40,000 Work Certified 7,50,000
Add: Accrued 2,800 3,42,800 Work Uncertified 14,000 7,64,000
To Direct Expenses paid 8,000 By Plant at site 48,000
Add: Accrued 1,200 9,200 By Materials at site 4,000
To Plant Purchased 60,000
To General Materials 32,000
[Chapter #### 5] Method of Costing OOOO 2.391
To P&L Account 19,200
To Work in Progress (Reserve) 16,800
8,16,000 8,16,000
Working Notes:Calculation of work certified
Cash received is ` 6,00,000 representing 80% of the work certified, hence the
value of the work certified would be ` 7,50,000 (6,00,000 × )
Calculation of Plant at site as on 30-09-2012Value of Plant Purchased ` 60,000Annual Depreciation ` 12,000 (Scrap value is given nil and working life
5 yrs)Value as on 30-09-2012 ` 48,000
(ii) Total profit made as on 30-09-2012 is ` 36,000. Since the contract value is ` 12lakh and value of work certified is ` 7.5 lakhs which is more than ½ of the contractprice. So 2/3rd of profit made to date as reduced on cash basis shall been takento the P&L Account.Profit to be taken to Profit and Loss Account
= × Profit made upto date ×
= ` 19,2002013 - Dec [6] (a) What is the profit to be recognised as per AS-7 in the current periodhaving regards to the following data :Contract price ` 99,00,000Cumulative figures :
To end of previous period-profit recognised `2,25,000To end of current period-total costs `49,50,000Cost of work certified `36,00,000
Estimated future costs to completion `27,00,000Estimated rectification cost 10% of contract price. (7 marks)
Repeatedly Asked Questions
No. Question Frequency
1 Write short notes on Cost-plus contracts.
08 - Dec [6] (a) (ii), 11 - June [7] (a) (iii) 2 Times
2 Distinguish between ‘production account’ and ‘cost sheet’.
08 Dec [8] (a) (iii), 13 June [7] (b)
2 Times
2.392
Star Rating
On the basis of Maximum marks from a chapter j
On the basis of Questions included every year from a chapter jjj
On the basis of Compulsory questions from a chapter j
6 Budgetary Control
This Chapter Includes : Budget; budgetary Control; Forecast and Budget;
Objectives; Advantages; Limitations; preliminaries for the Adoption of a System of
Budgetary Control; Installation of Budgetary Control System; Classification of
Budgets; Control Ratios; Zero Base Budgeting; Performance Budgeting.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true of false :
(iv) A budget manual is a summary of all the financial budgets. (2 marks)
Answer :
(iv) False;
[Chapter #### 6] Budgetary Control OOOO 2.393
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(v) A budget designed to remain unchanged irrespective of the level of activity
actually attained is called –
(a) Master budget
(b) Fixed budget
(c) Current budget
(d) Flexible budget. (1 mark)
Answer :
(v) (b)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(ii) ______determines the priorities of functional budgets. (1 mark)
Answer :
(ii) Budget key factor/ Principal budget factor
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(ii) In cost plus contracts, the contractor runs a risk of incurring a loss. (2 marks)
Answer :
(ii) This statement is Incorrect : Reason :- Under cost plus contract the contractor
is assured of a fixed percentage of profit over the total cost and there is no risk
incurring any loss on the contract.
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(iii) Fixed budgets are budgets of fixed assets. (2 marks)
Answer :
(iii) False : Fixed budgets are used for estimating costs of a product or a service
over a period of time in which the budget is designed to remain unchanged
irrespective of the level of activity attained. Hence it is not the budget of fixed
assets.
2011 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) _________budget is a summary budget incorporating the component functional
budgets and which is finally approved, adopted and employed.
(v) Excess of budgeted revenues over the break-even revenue is called_________.
(1 mark each)
2.394 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :
(i) Master budget is a summary budget incorporating the component functional
budgets and which is finally approved, adopted and employed.
(v) Excess of budgeted revenues over the break-even revenue is called Margin of
Safety
2011 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(ii) __________ is a budget designed to furnish budgeted costs for any level of
activity actually attained.
(v) In contract costing, the cost unit is a _____________. (1 mark each)
Answer :
(ii) Flexible budget
(v) Contract
2012 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(v) Zero base budgeting overcomes the weaknesses of ________. (1 mark)
Answer :
(v) Conventional or Traditional budgeting.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iii) For control purposes, long-term budgets should be prepared. (2 marks)
(b) Write the most appropriate answer from the given options in respect of the
following:
(ii) A flexible budget is a budget which is designed to change in relation to the
level of activity—
(a) Budgeted
(b) Attained
(c) Not budgeted
(d) Forecasted. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(iii) Zero base budgeting overcomes the weaknesses of__________. (1 mark)
Answer:
(a) (iii) This Statement is False:
Long term budgets are the budgets which are prepared for periods longer than
a year. They are prepared for those activities, the trend in which is difficult to
foresee over longer periods.
(b) (ii) (b) Attained,
(c) (iii) Conventional Budgeting
[Chapter #### 6] Budgetary Control OOOO 2.395
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(ii) Zero base budgeting is based on incremental approach. (2 marks)
Answer :
(ii) This statement is false : Zero based budgeting is not based on incremental
approach, because it promote operational efficiency. Hence, it require manager
to review and justify their activities or the fund. ZBB is particularly useful for
service department and government.
2013 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iii) Traditional budgeting is accounting oriented whereas zero base budgeting is —
(a) Activity oriented
(b) Decision oriented
(c) Event oriented
(d) None of the above. (1 mark)
2013 - Dec[5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iv) Flexible budget recognises the difference between fixed, variable and _______
costs. (1 mark)
SHORT NOTES
2009 - Dec [7] (c) Write a note on ‘zero base budgeting’ (ZBB). (3 marks)
Answer :
Zero Base Budgeting : Zero based budgeting is a new technique of budgeting
introduced first in USA in the year 1969. This is system of budgeting was developed by
Peter Pyhrr of Taxes Instrument of USA. This technique of budgeting is more useful in
government budgeting but can also be used in factories for non-manufacturing activities.
Such as administration and selling activities.
According to Peter Pyhrr, it is a “Planning and budgeting Process which requires
each manager to justify his entire budget request in detail from Scratch (hence Zero
base) and shifts the burden of proof to each manner to justify why he should spend
money at all. The approach requires that all activities be analysed in Decision Packages
which are evaluated by systematic analysis and ranked in order of importance.
I CMA London, has defined it “as a method of budgeting whereby all activities
are re-evaluated each time a budget is set. Discrete levels of each activity are valued
and combination chosen to match funds available”.
2.396 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Advantages of ZBB:
Following are the main advantages of ZBB:
1. Under ZBB, all the budget proposals compete equally.
2. Zero-base budgeting is most appropriate for the Staff and support areas (that is
non manufacturing overheads) of an organisation because the inputs of these
areas are not directly related to the final output of the organisation.
3. There is a lesser Paper work in case of ZBB as compared to traditional budgeting.
4. It focuses management process on analysis and decision making because it
requires managers to review their activity when a budget is developed.
5. Increased Participation in ZBB creates a motivational impact.
6. It help in finding out the impact of any expenditure on a project duly identified.
7. ZBB is particularly useful for Service departments and Governments.
Criticism against Zero base budgeting:
(a) The paper work will increase periodically due to large number of decision
Packages.
(b) Zero base budgeting requires a lot of training for managers.
(c) Ranging of Packages is very often subjective and may give risk to conflicts.
(d) It may lay more emphasis on short-term benefits to the determinant of long term
objectives of the organisation.
(e) Where objectives are very difficult to qualify as in research and Development, Zero
base budgeting does not offer any significant control advantage.
2010 - June [7] (a) Write short notes on the following:
(i) Superiority of zero base budgeting (ZBB) to traditional budgeting. (3 marks)
Answer :
Zero Base Budgeting : Zero based budgeting is a new technique of budgeting
introduced first in USA in the year 1969. This is system of budgeting was developed by
Peter Pyhrr of Taxes Instrument of USA. This technique of budgeting is more useful in
government budgeting but can also be used in factories for non-manufacturing activities.
Such as administration and selling activities.
According to Peter Pyhrr, it is a “Planning and budgeting Process which requires
each manager to justify his entire budget request in detail from Scratch (hence Zero
base) and shifts the burden of proof to each manner to justify why he should spend
money at all. The approach requires that all activities be analysed in Decision Packages
which are evaluated by systematic analysis and ranked in order of importance.
I CMA London, has defined it “as a method of budgeting whereby all activities
are re-evaluated each time a budget is set. Discrete levels of each activity are valued
and combination chosen to match funds available”.
[Chapter #### 6] Budgetary Control OOOO 2.397
Advantages of ZBB:
Following are the main advantages of ZBB:
1. Under ZBB, all the budget proposals compete equally.
2. Zero-base budgeting is most appropriate for the Staff and support areas (that is
non manufacturing overheads) of an organisation because the inputs of these
areas are not directly related to the final output of the organisation.
3. There is a lesser Paper work in case of ZBB as compared to traditional budgeting.
4. It focuses management process on analysis and decision making because it
requires managers to review their activity when a budget is developed.
5. Increased Participation in ZBB creates a motivational impact.
6. It help in finding out the impact of any expenditure on a project duly identified.
7. ZBB is particularly useful for Service departments and Governments.
Criticism against Zero base budgeting:
(a) The paper work will increase periodically due to large number of decision
Packages.
(b) Zero base budgeting requires a lot of training for managers.
(c) Ranging of Packages is very often subjective and may give risk to conflicts.
(d) It may lay more emphasis on short-term benefits to the determinant of long term
objectives of the organisation.
(e) Where objectives are very difficult to qualify as in research and Development, Zero
base budgeting does not offer any significant control advantage.
2011 - June [7] (a) Write short notes on the following :
(i) Essentials of an effective budgetary control system (3 marks)
Answer :
Essentials of an Effective Budgetary Control System
Some of the pre - requisites for the successful implementation of an effective budgetary
control system are given below.
1. It is a plan expressed in monetary terms but it can also contain physical units
2. It is prepared prior to a defined period of time during which it will operate.
3. It is related to a definite future period
4. It is approved by the management for implementation
5. it usually shows the planned income to be generated and expenditure to be
incurred.
6. It also shows capital to be employed during the period.
7. It is prepared for the purpose of implementing the policy formulated by the
management and the objectives to be achieved during the period.
8. The budget should be comprehensive, complete, continuous and realistic to attain.
9. There should be an assurance from the top management executives for co-
operation and acceptance of the budgetary control system.
2.398 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
DISTINGUISH BETWEEN
2008 - Dec [8] (a) Distinguish between the following :
(i) 'Budget period' and 'control period'. (3 marks)
Answer :
Budget Period and Control Period: A budget period should be distinguished from
control period.
The budget period will depend upon the following two factors:
(a) The type of business; and
(b) The control aspect.
For example, in case of seasonal industries (that is food or clothing), the budget
period should be a short one and should cover one season. But in case of industries
with heavy capital expenditure such as heavy engineering works, the budget period
should be long enough to meet the requirements of the business. From control point of
view, the budget period should be a short one so that the actual results may be
compared with the budget each week end or month end and discussed with the Budget
Committee.
A budget period should be distinguished from 'control period'. The latter indicates
the periodicity with which reports are sent to the various levels of management. It need
not be the same as the budget period. Reports are sent usually at shorter intervals so
that corrective action may be taken within budget period.
DESCRIPTIVE QUESTIONS
2011 - Dec [7] (c) Briefly point out the process of budgetary control. (3 marks)
Answer :
Process of Budgetary Control:
The installation of a budgetary control requires the following steps to be taken:-
1. Establishment of Budget Centres: A budget centre is a section of the
organization of a business for the purpose of budgetary control. The entire
organization is divided into budget centers or departments and a budget is
prepared for each centre.
2. Introduction of an Adequate Accounting System: The accounting system
should be so devised as to be able to record and analyze the information required
for each budget centre.
3. Preparation of Organisation Chart: An organization chart is prepared which
defines the functions and responsibilities of each member of the organization.
[Chapter #### 6] Budgetary Control OOOO 2.399
4. Establishment of Budget Committee: A budget committee consists of the several
members of the top management group like general manager and departmental
heads.
5. Preparation of a Budget Manual: A budget manual lays down the details of the
organization setup, the routine procedure and programme to be followed for
developing budgets.
6. Length of the Budget Period: A budget period is the length of time for which a
budget is prepared and employed. The budget period depends upon many factors
like type of budget, general economic situation, length of the trade cycle,
production cycle etc.
7. Determination of Key Factor: It serves as the starting point for the preparation of
budgets. Budget for the key factor is prepared first and it is followed by other
budgets.
2012 - June [8] (b) Flexible budgets are more realistic and useful than fixed budgets.
Do you agree ? Explain. (3 marks)
(c) “Budget is an aid to management and not a substitute for management”. Comment.
(3 marks)
Answer:
(b) Fixed budget: When a budget is prepared by assuming fixed percentage of
capacity utilization, it is called a fixed budget. Fixed budget is prepared on the
assumption that output and sales can be accurately estimated.
Flexible budget: This budget is designed to change in accordance with the level
of activity actually attained. It is prepared in such a manner that budget cost for any
level of activity can be determined. There the costs are classified into fixed variable
and semi-variable so that cost figures can be modified according to the actual
performance.
The difference between fixed budget and flexible budget are as follows:-
Fixed budget Flexible budget
1. Fixed budget is prepared
keeping in mind one level of
output.
Flexible budget is prepared for various
level of output and it is adaptable to
actual performance.
2. Costs are not classified
according to their variability that
is fixed, variable and semi -
variable.
Costs are classified according to the
nature or their variability.
2.400 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
3. It is difficult to forecast
accurately the result in it.
It, clearly show, the impact of various
expenses on the operational aspect of
the business.
4. This budget has limited
application and is not effective
as a tool for cost control.
This budget has more application and
can be used as a tool for effective cost
control.
5. It is not possible to ascertain
costs currently if there is change
in circumstances.
Costs can be easily ascertained at
different levels of activity under this type
of budget.
(c) Budgetary Control helps the management, as an important tool of control, in proper
execution of the plan. This is done by comparing the actual results with the pre-
determined budgets and finding out deviations.
(1) It is an important tool of management control.
(2) It requires formulation of proper budgets which provides data for future
comparison.
(3) It may result in elimination of waste and assist in cost reduction.
(4) It helps in establishing divisional and departmental responsibility.
(5) Effective control in achieving the target easily.
(6) It helps in co-ordinating the various divisions of a business such as-
(a) Production
(b) Marketing
(c) Financial and
(d) Administrative divisions.
(7) It promotes proper co-operation and co-ordination among the various
executive of the concern.
(8) The budgetary control helps the management in proper and continuous
evaluation of the performance of the employee and remind them about the
target and goals to be achieved.
Thus, it can easily said that the budget does not take the place of management
rather it is a tool of management. The budget should be regarded not as a master
but as a servant, it is an aid to management is not a substitute for management.
2012 - Dec [6] (b) Briefly point out the process of budgetary control. (5 marks)
Answer:
Please refer 2011 - Dec.[7] (c) on page no. 398
2013 - Dec [6] (b) Flexible budget is more useful, elastic and practical. Explain.
(4 marks)
[Chapter #### 6] Budgetary Control OOOO 2.401
PRACTICAL QUESTIONS
2008 - Dec [6] (b) A factory is currently working at 50% capacity and produces 1,000units. From the following information, you are required to estimate profits of the factorywhen it works at 60% and 80% working capacity respectively and offer your criticalcomments :
At 60% working capacity, raw material cost increases by 2% and selling price fallsby 2%. At 80% working capacity, raw materials cost increases by 5% and selling price
falls by 5%. At 50% capacity working, the product costs ` 180 per unit and is sold at
` 200 per unit. The unit cost of ` 180 is made up as follows :
` Raw material 100Labour 30Factory overheads 30 (40% fixed)Administration overheads 20 (50% fixed) (9 marks)
Answer :
Costclas-sific-ation
50% capacity1,000 units
60% capacity1,200 units
80% capacity1,600 units
Per unit
`
Total `(000's)
Per unit
`
Total `(000's)
Per unit
`
Total `(000's)
Raw MaterialsLabourFactoryOverheads (60%)Adm.Overheads (50%)Total VariableCost (V)Sales (S ! V)ContributionFactory OverheadsAdmn. OverheadsTotal Fixed CostsTotal Cost (V + F)Profit (Sales-TotalCost)
VV
V
V
FFF
10030
18
10
158200 4212
10 22180
20
100.030.0
18.0
10.0
158.0200.0 42.012.0 10.0 22.0
180.020.0
10230
18
10
160196 3610
8.3318.33
178.3317.67
122.436.0
21.6
12.0
192.0235.2 43.212.010.022.0
214.021.2
10530
18
10
163190 27
7.50 6.2513.75
176.75 13.25
168.048.0
28.8
16.0
260.8304.0 43.212.010.022.0
282.821.2
The profit at 60% and 80% capacities is the same and as such it is not advisable toincrease the production to 80%. However increase to 60% capacity is advisable.
2.402 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2009 - June [6] (b) Lookahead Ltd. produces and sells a single product. Sales budget
for the calender year 2009 for each quarter is as under :
Quarter No. of Units to be Sold
I 12,000
II 15,000
III 16,500
IV 18,000
The year 2009 is expected to open with an inventory of 4,000 units of finished
product and close with an inventory of 6,500 units.
Production is customarily scheduled to provide for two-thirds of the current quarter's
demand plus one-third of the following quarter's demand. Thus production anticipates
sales volume by about one month. The standard cost details for one unit of the product
is as follows :
— Direct materials 10 Kgs. @ 50 paise per kg.
— Direct labour 1 hour 30 minutes @ ` 4 per hour.
— Variable overheads 1 hour 30 minutes @ ` 1 per hour.
— Fixed overheads 1 hour 30 minutes @ ` 2 per hour based on a budgeted
production volume of 90,000 direct labour hours for the year.
Answer the following :
(i) Prepare a production budget for the year 2009 by quarters, showing the
number of units to be produced. (3 marks)
(ii) If the budgeted selling price per unit is ` 17, what would be the budgeted profit
for the year as a whole ? (3 marks)
(iii) In which quarter of the year the company is expected to break-even?(3 marks)
Answer :
( i ) Number of units to be sold during the year 2009
Quarter I 12,000 units
Quarter II 15,000 units
Quarter III 16,500 units
Quarter IV 18,000 units
Sales during the year 61,500 units
Production Budget (for the year 2009 by quarters)
Quarter I
Units
Quarter II
Units
Quarter III
Units
Quarter IV
Units
Total
Units
Units to be produced in
each quarter :
2/3rd of the current
quarter’s sales demand
8,000 10,000 11,000 12,000 41,000
[Chapter #### 6] Budgetary Control OOOO 2.403
Add: 1/3 of the following
quarter’s sales demand in
first 3 quarters and closing
inventory in the 4th quarter
(2/3x12,000)
5,000
(1/3x15,000)
(2/3x15,000)
5,500
(1/3x16,500)
(2/3x16,500)
6,000
(1/3x18,000)
(2/3x18,000)
6,500
23,000
Total 13,000 15,500 17,000 18,500 64,000
(1) Variable Cost per unit ` `
Direct Material: 10kgs.@ 50 paise per kg.
Direct labour : 1-1/2 hours @ ` 4 per hour
Variable overheads : 1-1/2 hours @ ` 1 per hour
(2) Fixed overhead per annum : 90,000 hrs. @ `2 = ` 1,80,000
5.00
6.00
1.50 12.50
(ii) Statement of Budgeted Profit for the year (as a whole)
`
Total Sales : 61,500 units @ ` 17 per unit 10,45,000
Less: Total Variable Cost:61,500 units @ 12.50 per unit 7,68,750
Contribution 2,76,750
Less: Fixed cost for the year 1,80,000
Profit for the year 2009 as a whole 96,750
(iii) Calculation of Break-even point/sales
Break Even Point =
= = 40,000 units
Total sales (in units) by the end of and quarter will be 43,500 (i.e. 12,000 + 15,000
+ 16,500)
Therefore, the company will break-even in the later part of the 3rd quarter.
2010 - Dec [8] (c) The Finance Manager of Jay Electrical Ltd. is preparing a flexible
budget for the accounting year commencing from 1st April, 2011. The company
produces Component-K of a product. Direct material costs ` 7 per unit. Direct labour
averages ̀ 2.50 per hour and requires 1.60 hours to produce one unit of Component-K
Salesmen are paid a commission of Re. 1 per unit sold. Fixed selling and administration
expenses amount to ` 85,000 per year. Manufacturing overheads has been estimated
in the following amounts under specified conditions of volume :
Volume of production (in units) 1,20,000 1,50,000
` `
Expenses :
Indirect material 2,64,000 3,30,000
2.404 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Indirect labour 1,50,000 1,87,500
Inspection 90,000 1,12,500
Maintenance 84,000 1,02,000
Supervision 1,98,000 2,34,000
Depreciation ! Plant and equipment 90,000 90,000
Engineering services 94,000 94,000
Total manufacturing overheads 9,70,000 11,50,000
Normal capacity of production of company is 1,25,000 units.
Prepare a budget of total cost at 1,40,000 units of output. (6 marks)
Answer :
Jay Electricals Ltd.
Budget for the year commencing from 1st April, 2011
Output 1,40,000 units
Particulars Rate per unit (`) (`)
Variable Costs :
Direct Material
Direct Labour
Salesman Commission
Indirect Material
Indirect Labour
Inspection
Total Variable Costs (1)
Semi-Variable Cost
Maintenances (WN:1)
! Fixed
! Variable
Supervision (WN : 2)
! Fixed
! Variable
7.00
4.00
1.00
2.20
1.25
0.75
0.60
1.20
9,80,000
5,60,000
1,40,000
3,08,000
1,75,000
1,05,000
22,68,000
12,000
84,000
54,000
1,68,000
Total Semi-Variable Costs (2)
Fixed Costs
Selling and Administration
Expenses
Depreciation : Plant and Equipment
Engineering Services
Total Fixed Costs (3)
Total Costs=(1)+(2)+(3)
3,18,000
85,000
90,000
94,000
2,69,000
28,55,000
[Chapter #### 6] Budgetary Control OOOO 2.405
Working Notes :
1. Maintenance Cost - Variable cost per unit = Change in Cost/Change in
Output
= 18,000/30,000
= ` 0.60 per unit
Total Variable Cost for 1,20,000 units = 1,20,000 × 0.60 = ` 72,000
Total Fixed Costs = 84,000!72,000 = ` 12,000
2. Supervision Cost
Variable Cost per unit = Change in Cost/Change in
Output
= 36,000/30,000 = ` 1.20 per unit
Total Variable Cost for 1,20,000 units = 1,20,000 × 1.20 = ` 1,44,000
Total Fixed Costs = 1,98,000 - 1,44,000 = ` 54,000
2011 - Dec [7] (b) The monthly budgets for the manufacturing overheads of a concernfor two levels of activity were as follows:Capacity 60% 100%Budgeted production (Units) 600 1,000
`̀̀̀ `̀̀̀
Wages 1,200 2,000Consumable stores 900 1,500Maintenance 1,100 1,500Power and fuel 1,600 2,000Depreciation 4,000 4,000Insurance 1,000 1,000
9,800 12,000
You are required to —
(i) Indicate which of the items are fixed, variable and semi-variable;
(ii) Prepare a budget for 80% capacity; and
(iii) Find total cost, both fixed and variable costs per unit of output at 60%, 80% and
100% capacity. (6 marks)
Answer :
(i) Fixed Costs: Depreciation and Insurance
Variable Costs: Wages (` 2 per unit)
Consumable Stores (` 1.5 per unit)
Semi-Variable Costs:
Maintenance
Variable = `
= ` 1 per unit
2.406 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Fixed = ` 1,100 - ` 600 = ` 500
Power and Fuel
Variable = `
= ` 1 per unit
Fixed = ` 1,600 - ` 600 = ` 1,000
(ii) Budget for 80% capacity (800 units)
`̀̀̀
Wages (` 2 per unit) 1,600
Consumable Stores (` 1.5 per unit) 1,200
Maintenance (` 1 per unit + 500) 1,300
Power and Fuel (` 1 per unit + 1,000) 1,800
Depreciation 4,000
Insurance 1,000
Total Cost 10,900
(iii) Flexible budget
Capacity
Units
60%
600
80%
800
100%
1,000
Total
Cost `
Per unit Total
Cost `
Per unit Total
Cost `
Per unit
Fixed Costs
Depreciation
Insurance
Maintenance
Power and Fuel
(A) Total
Variable Costs
Wages (` 2 per unit)
Consumable Stores
(` 1.5 per unit)
Maintenance (` 1 per unit)
Power and Fuel (` 1 per unit)
(B) Total
Total Cost (A + B)
4,000
1,000
500
1,000
6,500
1,200
900
600
600
3,300
9,800
10.83
5.5
16.33
4,000
1,000
500
1,000
6,500
1,600
1,200
800
800
4,400
10,900
8.125
5.5
13.625
4,000
1,000
500
1,000
6,500
2,000
1,500
1,000
1,000
5,500
12,000
6.5
5.5
12
[Chapter #### 6] Budgetary Control OOOO 2.407
2013 - June [8] (a) The following data are available in a manufacturing company for a
year period :
(` in lakhs)
Fixed expenses :
Wages and salaries 9.50
Rent, rates and taxes 6.60
Depreciation 7.40
Sundry administrative expenses 6.50
Semi-variable expenses (at 50% capacity):
Maintenance and repairs 3.50
Indirect labour 7.90
Sales department salaries, etc. 3.80
Sundry administrative expenses 2.80
Variable expenses (at 50% of capacity)
Materials 21.70
Labour 20.40
Other expenses 7.90
98.00
Assume that fixed expenses remain constant for all levels of production, semi-variable
expenses remain constant between 45% and 65% of capacity and increasing by 10%
between 65% and 80% capacity and by 20% between 80% and 100% capacity.
Sales at various levels are ! at 50% capacity : ̀ 100 lakh; at 60% capacity : ̀ 120 Lakh;
at 75% capacity : ̀ 150 lakh; at 90% capacity : ̀ 180 lakh; and at 100% capacity : ̀ 200
Lakh.
Prepare a flexible budget for the year and forecast the profits at 60%, 75%, 90% and
100% of capacity. (9 marks)
Answer :
Flexible budget (` Lakhs)
Particulars 50% 60% 75% 90% 100%
Variable Expenses
Material
Labour
Other Expenses
Semi Variable Expenses
Maintenance and repairs
Indirect labour
Sales department salaries
Fixed Expenses
Wages and salaries
21.7020.40
7.903.57.93.82.8
9.5
26.0424.48
9.483.57.93.82.8
9.5
32.5530.6011.85
3.858.694.183.08
9.5
39.0636.7214.22
4.29.484.563.36
9.5
43.4040.8015.80
4.29.484.563.36
9.5
2.408 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Rent rates and taxes 6.6 6.6 6.6 6.6 6.6
DepreciationSundry administrative expenses
7.46.5
7.46.5
7.46.5
7.46.5
7.46.5
Total Estimated costs 98.00 108.00 124.80 141.60 151.60
Sales 100 120 150 180 200
Estimated profit (Sales ! Costs) 2.00 12.00 25.20 38.40 48.40
CS Inter Gr. I
DISTINGUISH BETWEEN
2005 - June [5] {C} Attempt the following :(i) Distinguish between 'fixed budget' and 'flexible budget'. (5 marks)
Answer :
The following are the points of distinction between fixed budget and flexible
budget.
Fixed budget Flexible budget
1. Fixed budget is prepared keeping inmind one level of output.
While flexible budget is prepared forvarious level of output and it is adaptableto actual performance.
2. Costs are not classified according totheir variability that is fixed, variableand Semi-variable.
Costs are classified according to thenature or their variability.
3. It is Difficult to forecast accurately theresults in it.
It clearly show, the impact of variousexpenses on the operational aspect of thebusiness.
4. This budget has limited applicationand is not effective as a tool for costcontrol.
This budget has more application and canbe used as a tool for effective cost control.
5. It is not possible to ascertain costscorrectly if there is change incircumstances.
Costs can be easily ascertained atdifferent levels of activity under this type ofbudget.
6. Comparison of actual and budgetperformance can not be compared incase of volume varying.
Comparison are realistic as the changedplan figures are placed against actualones.
[Chapter #### 6] Budgetary Control OOOO 2.409
2006 - June [8] (a) Distinguish between ‘standard costing’ and ‘budgetary control’.(5 marks)
Answer :
The following are the Points of Distinction between Standard costing and
budgetary control.
Standard Costing Budgeting Control
1. Standard costing is related withthe control of expenses and hence itis more intensive.
Budgetary Control is concerned with theoperation of the business as whole andhence it is more extensive.
2. It is projection of cost accounts. It is projection of financial accounts
3. It does not necessarily involvestandardization of Product.
It requires Standardization of products
4. It is more engineering oriented It is more management oriented.
5. It is based on “Unit Concept” asstandard costs are fixes per unit.
It is based on ‘Total concept’ as it isexpressed in total
6. It is not possible in certain industries. It can be implemented in all indus-tries.
7. It is not possible to operate thissystem in parts.
Budgetary control can be adopted in partalso.
DESCRIPTIVE QUESTIONS
2004 - Dec [7] (a) Explain the inter-relationship between 'standard costing' and
'budgetary control'. (5 marks)
Answer :
Similarities between Standard Costing and Budgetary Control: Standard costing
and budgetary control are similar in following ways:
1. Both the techniques lay emphasis upon controlling cost by establishing pre-
determined targets.
2. Both of them are the techniques of Cost Accounting.
3. In both the cases, the actual performance has to be compared with the pre-
determined targets to attain the given objectives. In both the cases, the deviations
are found out and corrective actions have to be taken.
4. Both the techniques are used as the tools of managerial control to attain the targets
and objectives.
2.410 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Differences between Budgetary Control and Standard Costing
Budgetary Control Standard Costing
1. It is more extensive as it covers all the
operations of the business.
2. It is a projection of financial accounts.
3. It can be operated without standards.
4. It is more management oriented.
It is more intensive technique of controlling
cost.
It is a projection of cost accounts.
It cannot exist without budget.
It is more engineering oriented.
2005 - Dec [7] (a) Define 'budget key factor'. List four principal budget factors whichmay influence the targets. (5 marks)Answer :Budgeting key factor or Principal Budget or limiting or Governing factor is defined by theCIMA London terminology as “a factor which will limit the activities of an under takingand which is taking into account in preparing budgets.Key factors influencing the targets:(a) Customer Demand(b) Plant Capacity(c) Availability of raw material, skilled labour & Capital. (d) Availability of accommodation for plant, raw materials & finished goods.(e) Government restrictions.
2006 - Dec [5] {C} Attempt the following :
(iii) Explain the meaning and importance of ‘flexible budgeting’ as a tool of control.
(5 marks)
Answer :
Importance of Flexible Budgeting:
1. It presents details regarding output, costs, sales and profit for varying levels of
business operations which makes the marginal analysis more practicable and
feasible.
2. It makes possible the comparison of actual performance and budgeted one for
actual level of operation in a very easy and understanding way.
3. Fixed Budget fails to achieve the objective of cost control and hence flexible budget
becomes an indispensable tool for achieving the objective of cost reduction and
cost control.
4. Keeping into account the uncertainty and external influences, no exact and precise
forecasts for varying levels of operation. This is possible only by adopting the
flexible budgetary system.
2007 - Dec [6] (a) Comment on the following :
(ii) Standard costing and budgetary systems vary in scope despite the similarity in
the basic principles. (4 marks)
[Chapter #### 6] Budgetary Control OOOO 2.411
Answer :
Please refer 2004 - Dec [7] (a) on page no. 409
2008 - June [6] (a) What do you mean by ‘zero base budgeting’ (ZBB). Explain in brief.
(5 marks)
Answer :
Zero Base Budgeting : Zero based budgeting is a new technique of budgeting
introduced first in USA in the year 1969. This is system of budgeting was developed by
Peter Pyhrr of Taxes Instrument of USA. This technique of budgeting is more useful in
government budgeting but can also be used in factories for non-manufacturing activities.
Such as administration and selling activities.
According to Peter Pyhrr, it is a “Planning and budgeting Process which requires each
manager to justify his entire budget request in detail from Scratch (hence Zero base)
and shifts the burden of proof to each manner to justify why he should spend money at
all. The approach requires that all activities be analysed in Decision Packages which
are evaluated by systematic analysis and ranked in order of importance.
I CMA London, has defined it “as a method of budgeting whereby all activities are re-
evaluated each time a budget is set. Discrete levels of each activity are valued and
combination chosen to match funds available”.
Advantages of ZBB:
Following are the main advantages of ZBB:
1. Under ZBB, all the budget proposals compete equally.
2. Zero-base budgeting is most appropriate for the Staff and support areas (that is
non manufacturing overheads) of an organisation because the inputs of these
areas are not directly related to the final output of the organisation.
3. There is a lesser Paper work in case of ZBB as compared to traditional budgeting.
4. It focuses management process on analysis and decision making because it
requires managers to review their activity when a budget is developed.
5. Increased Participation in ZBB creates a motivational impact.
6. It help in finding out the impact of any expenditure on a project duly identified.
7. ZBB is particularly useful for Service departments and Governments.
Criticism against Zero base budgeting:
(a) The paper work will increase periodically due to large number of decision
Packages.
(b) Zero base budgeting requires a lot of training for managers.
(c) Ranging of Packages is very often subjective and may give risk to conflicts.
(d) It may lay more emphasis on short-term benefits to the determinant of long term
objectives of the organisation.
(e) Where objectives are very difficult to qualify as in research and Development, Zero
base budgeting does not offer any significant control advantage.
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PRACTICAL QUESTIONS
2004 - Dec [5] {C} (b) The following information is obtained from the records of amanufacturing company for a budgeted production of 10,000 units per annum :
`
Particulars (Per Unit)Direct material 120.00Direct labour 60.00Variable overheads 50.00Fixed overheads (` 3,00,000) 30.00Variable expenses (direct) 10.00Selling expenses (10% fixed) 30.00Administrative expenses (` 1,00,000-rigid
for all levels of production) 10.00Distribution expenses (20% fixed) 10.00Total cost of sales (per unit) 320.00
You are required to prepare a budget for production levels of 6,000, 7,000 and8,000 units respectively, showing distinctly marginal cost and total cost. (4 marks)Answer :
Statement showing the cost at budgeted leval production
of 6000, 7,000 and 8,000 units
Particulars Costper unit
Natureof Exp.
6,000units
7,000units
8,000units
I.
II.
VARIABLE COSTSDirect materialsDirect labourVariable OverheadsVariable Expenses (Direct)Selling Direct) ExpensesDistribution Exp. (80%)Total variable Costs.......IFIXED COSTSFixed OverheadsSelling Expenses (10%)Administrative ExpensesDistribution Expenses (20%)Total Fixed Costs......IITOTAL Costs (I% II)Cost Per Unit
1206050102708
VariableVariableVariableVariableVariableVariable
(I)
FixedFixedFixedFixed
`
7,20,0003,60,0003,00,000
60,0001,62,000
48,00016,50,000
3,00,00030,000
1,00,000 20,000 4,50,000
21,00,000 350
`
8,40,0004,20,0003,50,000
70,0001,89,000
56,00019,25,000
3,00,00030,000
1,00,00020,000
4,50,00023,75,000 339.28
`
9,60,0004,80,0004,00,000
80,0002,16,000
64,00022,00,000
3,00,00030,000
1,00,000 20,000 4,50,00026,50,000 331.25
[Chapter #### 6] Budgetary Control OOOO 2.413
2006 - June [5] {C} Attempt the following :
(iii) The cost of a product at capacity level of 5,000 units is given under ‘A’ below.
For a variation in capacity above or below this level, the individual expenses vary
as indicated under ‘B’ below :
Particulars ‘A’ ‘B’
(`)
Material costs 2,50,000 100% varying
Labour costs 1,50,000 100% varying
Power 12,500 80% varying
Repairs and maintenance 20,000 75% varying
Stores 10,000 100% varying
Inspection 5,000 20% varying
Depreciation 1,00,000 100% fixed
Administrative overheads 50,000 25% varying
Selling overheads 30,000 50% varying
Find out the unit cost of product under each individual expenses at
budgeted production levels of 4,000 units and 6,000 units. (5 marks)
Answer :
Units Nature 4,000 units 6,000 units
Total Variable CostsMaterial CostLabour CostPowerRepairs and maintenanceStoresInspectionAdministration overheadsSelling overheads
Total Variable CostsTotal Fixed Costs
PowerRepairs and maintenanceInspectionDepreciationAdministration overheadsSelling overheadsTotal Fixed Costs
Total Costs(i) %(ii)Cost Per Unit
100% (V)100% (V)
80% (V)75% (V)
100% (V)20% (V)25% (V)50% (V)
20% (F)25% (F)80% (F)
100% (F)75% (F)50% (F)
2,00,0001,20,000
8,00012,000
8,000800
10,000 12,0003,70,800
2,5005,0004,000
1,00,00037,500
15,0001,64,0005,34,800 133.70
3,00,0001,80,000
12,00018,00012,000
1,20015,000
18,000 5,56,200
2,5005,0004,000
1,00,00037,500
15,0001,64,0007,20,200 120,03
2.414 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Repeatedly Asked Questions
No. Question Frequency
1 Briefly point out the process of budgetary control.
11 - Dec [7] (c), 12 - Dec [6] (b)
2 Times
2.415
Star Rating
On the basis of Maximum marks from a chapter jjj
On the basis of Questions included every year from a chapter jjjj
On the basis of Compulsory questions from a chapter Nil
7 Marginal Costing
This Chapter Includes : Difference between Absorption Costing and Marginal
Costing; Advantages, Limitation and Application of Marginal Costing; CVP Analysis;
Objective; PV Ratio; Break-even Analysis; Margin of Safety; Practical Applications
of PV Ratio; Advantages & Limitation of Break-Even Charts.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
2.416 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iii) In absorption costing, the valuation of inventories is higher than in marginal
costing technique. (2 marks)
Answer :
(iii) True;
2008 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iv) Cost! Volume !Profit analysis is most important for the determination of the —
(a) Volume of operations necessary to break!even
(b) Variable revenues necessary to equal fixed costs
(c) Relationship between revenues and costs at various levels of operation
(d) Sales volume necessary to equal fixed costs. (1 mark)
Answer :
(iv) (c) Relationship between revenues and costs at various levels of operation
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(i) At break-even point, the company earns only marginal profit. (2 marks)
Answer :
(i) False : Break-even Point is a level of that output of sales at which contribution
is equal to sales. At this point of sales, the producer neither has profit or nor loss.
In other words, at this point of total sales revenue are equal to total cost.
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iv) Break-even chart is the graphical relationship between ______. (1 mark)
Answer :
(iv) Cost volume and Profit
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(v) Contribution is not only the criterion for deciding profitability. (2 marks)
Answer :
(v) Correct. Although to maximize profit, resources should be mobilized towards
that product which gives the maximum contribution. But in real life, there may be
several factors such as, demand for the product, production capacity, availability
of material, labour, capital, etc., which may put a limit on the number of units to
be produced even if the products give a high contribution.
[Chapter #### 7] Marginal Costing OOOO 2.417
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(v) Margin of safety is the difference of actual sale and standard sale. (2 marks)
Answer :
(v) False: Margin of safety is the total sales less break-even sales, i.e. the excess
of actual sales over break-even sales.
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(v) When there is no__________,the profit figures revealed under marginal and
absorption costing are identical. (1 mark)
Answer :
(v) When there is no inventories, profit figures revealed under marginal and
absorption costing are identical.
2011 - June [5] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(i) When the sales increase from ` 40,000 to ` 60,000 and profit increases by
` 5,000, the P/V ratio is -
(a) 20%
(b) 30%
(c) 25%
(d) 40%.
(ii) A company which has a margin of safety of ` 4,00,000 makes a profit of
` 80,000. Its fixed cost is ` 5,00,000, its break-even sales will be -
(a) ` 20 lakh
(b) ` 30 lakh
(c) ` 25 lakh
(d) ` 40 lakh.
Answer :
(i) (c) 25%
(ii) (c) ` 25 lakhs
2011 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(ii) Costs which are pertinent for decision-making are termed as __________.
(1 mark)
Answer :
(ii) Costs which are pertinent for decision-making are termed as Relevant costs
2.418 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2011 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Semi-variable costs are ignored in marginal costing.
(ii) ‘Cost volume profit relationship’ is a more comprehensive term than ‘break-even
analysis’. (2 marks each)
Answer :
(i) The statement is false:
Semi - Variable cost should not be ignored in the marginal costing.
Semi – Variable cost are classified into fixed cost and variable cost keeping in
view the variable proportion by the appropriation method.
(ii) The statement is true:- Cost volume profit relationship is more comprehensive
term because its determination includes marginal cost approach, break even
analysis, profit volume ratio etc.
2011 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(i) At break-even point, the contribution will be equal to __________. (1 mark)
Answer :
(i) Fixed cost
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(v) When a factory operates at full capacity, fixed cost also becomes relevant for
make or buy decisions. (2 marks)
(c) Write the most appropriate answer from the given options in respect of the following:
(v) Product cost under marginal costing include —
(a) Prime cost only
(b) Prime cost and fixed overheads
(c) Prime cost and variable overheads
(d) Material cost and variable overheads. (1 mark)
Answer :
(a) (v) The statement is True:- A factory operates at full capacity, the decision to make
further is very likely to call expansion in installed capacity at such fixed cost
become relevant cost for arriving at make or buy-decisions.
(c) (v) Prime Cost and Variable Overheads.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(ii) Cost-volume-profit relationship is a more comprehensive term than break-
even analysis. (2 marks)
[Chapter #### 7] Marginal Costing OOOO 2.419
(b) Write the most appropriate answer from the given options in respect of thefollowing:(iii) The costing method in which fixed factory overheads are added to the
inventory is—(a) Direct costing(b) Marginal costing(c) Absorption costing(d) Standard costing.
(iv) When margin of safety is 20% and P/V ratio is 60%, the profit will be—(a) 30%
(b)
(c) 12%(d) None of the above. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):(ii) Marginal costing is a__________of costing.(iv) The break-even point__________when selling price is increased.
(1 mark each)Answer:(a)(ii) This Statement is True.
For the determination of cost volume-profit relationship, marginal cost, breakeven point analysis, profit volume ratio and key factor are considered. Hencecost volume profit relationship is more comprehensive term.
(b)(iii) Absorption Costing (iv) 12%(c) (ii) Technique (iv) Decreases
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(iii) When a factory operates at full capacity, fixed cost also becomes relevant for
make or buy decisions.
(iv) Marginal costing is different from direct costing. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the following:
(iii) Marginal costing is a very useful technique to management for —
(a) Cost control
(b) Profit planning
(c) Decision making
(d) All of the above. (1 mark)
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Answer :
(a) (iii) This statement is true : When factory works at full capacity, fixed cost also
become relevant for make or buy decision.
(iv) This statement is true : Marginal costing covers only those expenses which
are of variable nature whereas direct costing may also include costs which
besides being fixed in the nature are identified with the cost objective.
(b) (iii) (d) All of the above.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iv) Unchanged fixed costs should not be considered in a make or buy decision.
(v) Cost-volume-profit relationship is a more comprehensive term than break-even
analysis. (2 marks each)
2013 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(ii) When margin of safety is 20% and P/V ratio is 60%, the profit will be —
(a) 30%
(b)
(c) 12%
(d) None of the above.
(v) Cost-volume-profit analysis is based on several assumptions. Which of the
following is not one of those assumptions —
(a) The sales mix of the product is constant
(b) Inventory quantities change during the year
(c) The behavior of both revenue and cost is linear throughout the relevant
range
(d) Factor prices, e.g. material prices and wage rates remain unchanged.
(1 mark each)
2013 - Dec[5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) Contribution earned after reaching break-even point is ___________ of the firm.
(1 mark each)
SHORT NOTES
2011 - June [7] (a) Write short notes on the following :
(ii) Make or buy decisions (3 marks)
[Chapter #### 7] Marginal Costing OOOO 2.421
Answer :
A concern can utilise its idle capacity by making component parts instead of buying
them from market. In such a make or buy decision, the price asked by the outside
suppliers should be compared with the marginal cost of producing the component parts.
If the marginal cost is lower than the price demanded by the outside suppliers the
component parts should be manufactured in the factory itself to utilised unused
capacity. Fixed expenses are not taken in the cost of manufacturing component parts
on the assumption that they have been already incurred, the additional cost involved is
only variable cost.
DISTINGUISH BETWEEN
2009 - June [5] {C} (c) Distinguish between the following :
(iii) 'Absorption costing' and 'marginal costing'. (3 marks)
Answer :
(a) Treatment of cost: Fixed expenses form the part of total cost under absorption
costing but they do not form the part of cost of production under marginal costing.
(b) Recovery of fixed overhead: In case of Absorption Costing, both fixed and
variable overheads are charged to production on the other hand, in marginal
costing only variable overheads are charged to production, while fixed overheads
are fully charged against contribution in profit determination.
(c) Emphasis: Absorption costing lays emphasis on production or output, while
marginal costing stresses on sales and takes significance of production only to the
extent of quantity sold and its variable costs.
DESCRIPTIVE QUESTIONS
2009 - Dec [8] (c) What is ‘margin of safety’ ? How may it be improved ? (3 marks)
Answer : Margin of Safety : The margin of safety is the difference of actual sales and
BEP sales. The higher this margin, the greater the profits of the firm and more secure
the firm would be. On the contrary, if the margin of safety is low then even a small
reduction in sales would lead to losses for the firm.
Charles T. Homgren has said, “The Margin of Safety is the excess of budgeted or
actual sales over the break even sales volume”.
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Margin of Safety (MS)
Ms = Actual Sales ! BEP Sales
=
=
Margin of Safety Ratio = × 100
The Margin of Safety can be improved by taking the following measures:
(a) Increasing the Selling price
(b) Increasing the sales volume by increasing the capacity
(c) By improving the contribution margin through reducing the variable cost.
(d) By lowering BEP through reduction of Fixed cost
(e) By adopting a better profitable product mix.
2013 - June [6] (b) Marginal costing rewards sales whereas absorption costing rewards
production. Comment. (3 marks)
Answer :
In the case of absorption costing, both fixed and variable overheads are charged to
production on the other hand, in marginal costing only variable overheads are charges
to production while fixed overheads, are fully charged against contribution in profit
determination. Absorption costing lays emphasis on production or output, while marginal
costing stresses on sales and takes significance of production only to the extent of
quantity sold and its variable cost.
(i) When output is equal to sales that it is with no opening or closing stock of
profit. Under absorption and marginal costing is equal.
(ii) When output is less than sales that is closing stock is less than opening stock,
the profit under marginal costing is greater than the profit under absorption
costing.
(iii) When output is greater than sales that is closing stock is more than opening
stock, the profit under marginal costing is less than the profit under absorption
costing.
2013 - Dec [6] (c) Explain the relevance of ‘key factor’ in decision making. (4 marks)
PRACTICAL QUESTIONS
2008 - Dec [7] (b) A company has annual fixed cost of ` 1,40,00,000. In the year2007!08, sales amounted to ` 6,00,00,000 as compared with `4,50,00,000 in thepreceding year 2006!07. Profit in 2007!08 is ` 42,00,000 more than that in 2006!07.
[Chapter #### 7] Marginal Costing OOOO 2.423
On the basis of the above information, answer the following :(i) At what level of sales, the company would have break!even?(ii) Determine profit/loss on a forecasted sales volume of ` 8,00,00,000.(iii) If there is a reduction in selling price by 10% in the financial year 2008 !09 and
company desires to earn the same amount of profit as in 2007 !08, what wouldbe the required sales volume ? (9 marks)
Answer : (i) P/V = (Change in Profit / Change in Sales) × 100 or
= ` 42,00,000 / (` 6,00,00,000 ! ` 4,50,00,000) × 100 = 28%Break Even Sales= Fixed Cost / (P/V Ratio)
= ` 1,40,00,000 / 28% = ` 5,00,00,000(ii) Contribution for sales volume of ` 8,00,00,000
= (PV Ratio × S) or 28% × ` 8,00,00,000 = ` 2,24,00,000Therefore, Profit= (Contribution ! Fixed Cost) = ` (2,24,00,000 ! 1,40,00,000) = ` 84,00,000
(iii) Contribution in 2007-08 = 28% × ` 6,00,00,000 = ` 1,68,00,000Sales in 2008-09 after reduction in price by 10%= (` 6,00,00,000 ! 10% of ` 6,00,00,000) = ` 5,40,00,000New PV Ratio = [Changed Contribution / Changed Sale] × 100= (` 1,68,00,000 ! ` 60,00,000) / ` 5,40,00,000 × 100 = 20%The required sales volume for earning contribution of ` 1,68,00,000= (Required Contribution / New PV Ratio)= (` 1,68,00,000 / 20%) = ` 8,40,00,000
2009 - Dec [6] (a) The sales turnover and profit during two periods were as follows.Period-1 — Sales : ` 20 lakh; and Profit : ` 2 lakhPeriod-2 — Sales : ` 30 lakhs; and Profit : ` 4 lakhCalculate :
(i) P/V ratio;(ii) Sales required to earn a profit of ` 5 lakh; and (iii) Profit when sales are ` 10 lakh. (6 marks)
Answer :(i) Calculation of P/V Ratio
___________________________________________________________________
Period 1 Period 2 Increase in period 2 over period 1
___________________________________________________________________
Sales (`) 20,00,000 30,00,000 10,00,000
Profit (`) 2,00,000 4,00,000 2,00,000
Increase in _______
Costs (`) 8,00,000
___________________________________________________________________
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Since fixed costs are constant, the increase in costs is due to increase in variablecost in tune with increase in sales volume. As such variable costs are 80% of sales.
Thus P/V Ratio = 20%
Alternatively P/V Ratio = = × 100 = 20%
(ii) Calculation of sales required to earn a profit of `̀̀̀ 5 lakhs Fixed Expenses = Contribution & Net Profit
= 20% of 30,00,000&4,00,000 =` 2,00,000
Required Sales =
= = ` 35,00,000
(iii) Profit at Sales of `̀̀̀ 10 lakhs= Sales × P/V Ratio & Fixed Expenses= ` 10 lakhs × 20% & ` 2,00,000= ` 2,00,000 & ` 2,00,000 = Nil
2010 - June [7] (b) Two manufacturing companies which have the following operatingdetails decided to merge:
Company!I Company!IICapacity utilisation (%) 90 60Sales (` in lakhs) 540 300Variable costs (` in lakhs) 396 225Fixed costs (` in lakhs) 80 50Assuming that the proposal in implemented, calculate—
(i) Break-even sales of the merged plant and the capacity utilisation at that stage.(ii) Profitability of the merged plant at 80% capacity utilisation.(iii) Sales turnover of the merged plant to earn a profit of ` 75 lakh.(iv) When the merged plant is working at a capacity to earn a profit of ̀ 75 lakh, what
percentage increase in selling price is required to sustain an increase of 5% infixed overheads? (9 marks)
Answer :(i) Position of the Merged Plant at 100% capacity
(` in lakhs)
Company I Company II Total
Sales
Less: Variable
Costs
Contribution
Less: Fixed Costs
Profit
600
440
160
80
80
500
375
125
50
75
1,100
815
285
130
155
[Chapter #### 7] Marginal Costing OOOO 2.425
P/V Ratio of the merged plant = [(Contribution ÷ Sales) × (100)]
= × 100 = 25.909% (` in lakh)
Break even sales of the merged plant = = = ` 501.75 lakhs
Per cent of capacity utilization = x 100 = 45.61%
(ii) Profitability of the merged plant at 80% capacity ` (in lakh)
Sales (at 80% capacity i.e., 80% of ` 1,100 lakh) 880Less: Variable Costs (80% of ` 815 lakh) 652Contribution 228Less: Fixed costs 130Profit 98
ORTotal contribution at 80% capacity = 285 lakh × 80% = 228Less: Fixed Costs 130Profit 98
Profitability = × 100 = 11.14%
(iii) Sales required to earn a profit of ` 75 lakh :
= =
OR
= = ` 791.23 lakh
(iv) Percentage of increase is selling price to sustain 5% increase in fixed overheads:
5% of fixed cost = = ` 6.5 lakh
Percentage increase in selling price = x 100 = 0.8215%
2010 - Dec [7] (c) A factory produces 300 units of a product per month. The selling price
is ` 120 per unit and variable cost is ` 80 per unit. The fixed expenses of the factory
amount to ` 8,000 per month.
Calculate !
(i) The estimated profit in a month wherein 240 units are produced.
(ii) The break-even sales quantity.
(iii) The sales to be made to earn a profit of ` 7,000 per month. (5 marks)
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Answer :
Selling price per unit ` 120
Less : Variable cost per unit ` 80
Contribution per unit ` 40
P/V ratio =
(i) Profit on sale 240 units
Sale of 240 units at ` 120 each ` 28,800
Contribution from above at ` 9,600
Less : Fixed cost of one month
Profit ` 8,000
` 1,600
(ii) Break Even Sales Quantity = Fixed Cost/Contribution per unit
` 8,000/40=200 Units
(iii) Sales required to earn a profit of ` 7,000
Profit required to be earned ` 7,000
Add : Fixed cost per month ` 8,000
Total contribution to be earned ` 15,000
P/V Ratio
i.e. Sales required to earn ` = ` 100
Sales required to earn ` 15,000
= = ` 45,000
2011 - Dec [8] (b) A company has annual fixed cost of ̀ 1,68,00,000. In the year 2010-
11, sales amounted to ` 6,00,00,000 as compared with ` 4,50,00,000 in the preceding
year 2009-10. The profit in the year 2010-11 is ` 42,00,000 more than that in 2009-10.
On the basis of the above information, answer the following:
(i) What is the break-even level of sales of the company?
(ii) Determine profit/loss on the forecast of a sales volume of ` 8,00,00,000.
(iii) If there is a reduction in selling price by 10% in the financial year 2011-12 and
company desires to earn the same amount of profit as in 2010-11, what would
be the required sales volume? (6 marks)
[Chapter #### 7] Marginal Costing OOOO 2.427
Answer :
(i) P/V Ratio =
= = 28%
Break Even Sales =
=
= ` 6,00,00,000
(ii) Contribution for Sales Volume of ` 8,00,00,000 = P/V Ratio × Sales
= 28% × 8,00,00,000
= ` 2,24,00,000
Profits = Contribution - Fixed costs
= ` 2,24,00,000 - ` 1,68,00,000
= ` 56,00,000
(iii) If Selling Price is 100
Variable Cost is (100 - 28) 72
New Selling Price (100 -10%) 90
New Contribution (90 - 72) 18
New P/V Ratio = 20%
Contribution for Sales Volume of ` 6,00,00,000 for the year 2010-11
= P/V Ratio × Sales
= 28% × ` 6,00,00,000
= ` 1,68,00,000
Desired Profits = Contribution - Fixed Costs
= ` 1,68,00,000 - ` 1,68,00,000
= Nil
Required Sales Volume =
= `
= ` 8,40,00,000
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2012 - June [7] (b) Metro Service Ltd. is operating at 70% capacity and presents the
following information :
Break-even point : ` 200 crore
P/V ratio : 40%
Margin of safety : ` 50 crore.
Metro management has decided to increase production to 95% capacity level
with the following modifications —
— Selling price will be reduced by 8%.
— The variable cost will be reduced to 55% on sales.
— The fixed cost will increase by ̀ 27 crore including depreciation on additions,
but excluding interest on additional capital.
— Additional capital of ` 50 crore will be needed for capital expenditure and
working capital.
You are required to calculate —
(i) Sales required to earn ` 7 crore over and above the present profit and also to
meet 20% interest on additional capital;
(ii) Revised break-even point;
(iii) Revised P/V ratio; and
(iv) Revised margin of safety. (6 marks)
Answer :
(b) Total Sales = Break Even Sales + Margin of Safety
= ` 200 Crores + ` 50 Crores
= ` 250 Crores
P/V Ratio = 40% (given) (100 - PV Ratio)
Variable Cost = 60% of Sales
= ` 250 Crores × 60% = ` 150 Crores
Fixed cost = Break Even Sales × P/V Ratio
= ` 200 Crores × 40% = ` 80 Crores
Total Cost = Variable Cost + Fixed Cost
= ` 150 Crore + ` 80 Crores
= ` 230 Crores
Profit = Total Sales - Total Cost
= ` 250 Crores - ` 230 Crores
= ` 20 Crores
(i) Sales Required to earn 7 Crore over and above the present profit and also to meet
20% interest on capital/sales = (Fixed Cost + Desired Profit)/PV ratio
Presuming that the present selling price - ` 100.00
Reduction in Selling price = 8%
Revised Selling Price will be (100-8) = ` 92.00
[Chapter #### 7] Marginal Costing OOOO 2.429
Reduced Variable Cost = 55% of Sales
New Variable cost = 92 × 55% = ` 50.60
Contribution per unit 41.40
New P/V Ratio = (41.40/92) × 100
= 45%
Earlier Fixed Cost = 80 Crore
Increase in Fixed Cost = 27 Crore
Revised Fixed Cost = 107 Crore
Additional Capital Infused = 50 Crore
Interest desired = 20%
= ` 10 Crore
Desired sales to earn 7 Crore profit over and above present profit and fixed cost
and 20% Interest on capital
=
= ` 320 Crore
(ii) Revised BEP (assuming Interest on capital as a part of fixed cost = Fixed Cost/PV
ratio)
= (107 + 10)/45%
= ` 260 Crore
Alternatively BEP may be calculated without considering interest on capital as
an element of fixed cost.
(iii) Revised PV Ratio as calculated above i.e. 45%
(iv) Revised Margin of Safety = Profit/PV Ratio
= (20 + 7)/45%
= ` 60 Crore
2012 - Dec [8] (b) Product-X can be produced either by Machine-A or Machine-B.
Machine-A can produce 100 units of Product-X per hour and Machine-B can produce
150 units per hour. Total machine hours available during the year are 2,500.
Taking into account the following data, determine which machine is to be used for the
manufacture of Product-X.
Costs and price per unit of Product-X:
Machine-A Machine-B
(`) (`)
Marginal cost 5 6
Selling price 9 9
Fixed cost 2 2 (3 marks)
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Answer:
Since in the given question, machine hour’s availability is a limiting factor so the priority
of machine will depend on contribution per hour.
Calculation of contribution per machine hour
Particular Machine A (`) Machine B (`)
Selling price per unit 9 9
Less: Marginal cost 5 6
Contribution per unit 4 3
Output per hour 100 units 150 units
Contribution per hour 400 450
Since per hour contribution is higher in case of machine B so machine B is to be used
for the production of Product-X
2013 - June [8] (b) A company has fixed expenses of ̀ 90,000 with sales of ̀ 3,00,000and a profit of ` 60,000 during the first half year. If in the next half year, the companysuffered a loss of ` 30,000.Calculate !
(i) P/V ratio, break-even point and margin of safety for the first half year.(ii) Expected sales volume for next half year assuming that selling price and fixed
expenses remain unchanged.(iii) The break-even point and margin of safety for the whole year. (6 marks)
Answer :
(i) P/V Ratio =
= `
= 50%
Break Even Point =
= `
= ` 1,80,000Margin of safety = Actual Sales ! Break even sales
= ` 3,00,000 ! ` 1,80,000= ` 1,20,000
[Chapter #### 7] Marginal Costing OOOO 2.431
(ii) Expected Sales Volume =
= `
= ` 1,20,000
(iii) Break even point for the whole year =
=
= ` 3,60,000
Margin of safely = Actual sales ! Break even sales
= ` 4,20,000 ! ` 3,60,000
= ` 60,000
2013 - Dec [8] (b) A company makes 1,500 units of a product for which the profitability
statement is given below :
` `
Sales 1,20,000
Direct material 30,000
Direct labour 36,000
Variable overheads 15,000
Total variable overheads 81,000
Fixed Cost 16,800
Total Cost 97,800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of ̀ 6 per unit
towards overtime labour. The premium so paid has been included in the direct labour
cost of `36,000 given above. You are required to compute the break-even point.
( 5 marks)
CS Inter Gr. I
DESCRIPTIVE QUESTIONS
2005 - Dec [5] {C} Attempt the following :
(iii) Explain the significance of 'break-even analysis'. (5 marks)
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Answer :
Significance of Break-Analysis :
1. Forecasting the effect of Price-changes on profit and break-even-point.
2. Forecasting the effect of changes in wage rates on profit and break-even-point.
3. Forecasting the effect of changes in the sales channels and methods on profit and
break even-point.
4. Controlling the manufacturing expenses.
5. Evaluating the promotional, potentiality of a new undertaking/ project.
6. Comparing the profitability of two or more concerns.
7. Analysis the effect of taxation on profits.
8. Examining the operating and financial leverage.
2007 - Dec [6] (a) Comment on the following :
(iii) The assumptions in break-even analysis limit the accuracy of break-even point
and makes it unrealistic. (4 marks)
Answer :
Break even charts some time bring in fallacious mathematical relationship where the
purpose could as well be served by a suitable tabulation of a data. Further, the charts
do not convey the entire picture and supplementary information is required to explain
the point. A break-even-chart does not take into consideration capital employed which
is very important factor in taking managerial decisions. Therefore, managerial decisions
on the basis of break-even-chart may not be reliable. But the main criticism arises from
the fact that a number of assumptions are made in computing break-even point or
drawing break-even-chart which limit their accuracy and the break-even-point as
determined is only approximate. The assumptions are as follows :
1. All costs can be separated into fixed and variable costs.
2. Fixed costs will remain constant and will not change with the change in level of
output.
3. Selling price will remain constant even though there may be competition or change
in volume of production.
4. The number of units produced and sold will be the same so that there is no
opening or closing stock.
5. There will be no change in operating efficiency.
6. Product specifications and methods of manufacturing and selling will not change.
[Chapter #### 7] Marginal Costing OOOO 2.433
PRACTICAL QUESTIONS
2004 - June [6] (a) An analysis of Matrix Ltd. reveals the following information :
Variable Cost Fixed Cost
(% of Sales) (`)
Direct materials 32.8 —
Direct labour 28.4 —
Factory overheads 12.6 1,89,900
Distribution overheads 4.1 58,400
General administration overheads 1.1 66,700
Budgeted sales are ` 18,50,000
You are required to determine :
(i) Break-even sales value.
(ii) Profit at the budgeted sales value.
(iii) Profit, if actual sales (a) drop by 10%; and (b) increase by 5% from the budgeted
sales. (5 marks)
Answer :
(i) Break Even Sales = = = ` 15,00,000
P/V Ratio = ×100 = ×100 = 21%
OR,
If sales are ` 100, then variable costs will be `79.
Contribution = Sales !Variable Costs = 100 !79 = 21
P/V Ratio = ×100 = ×100 = 21%
(ii) Profit at Budgeted Sales Value :
`
18,50,000
Budgeted Sales
Less: Variable Costs `
Direct Materials (32.8%) 6,06,800
Direct Labour (28.4%) 5,25,400
Factory overheads (12.6%) 2,33,100
Distribution Overheads (4.1%) 75,850
General Administration
Overheads (1.1%) 20,350 14,61,500
Contribution 3,88,500
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Less : Fixed Costs : Factory Overheads 1,89,900 Distribution Overheads 58,400 General Administration Overheads 66,700 3,15,000 Net Profit 73,500Alternatively :Profit at the budgeted sales of ` 18,50,000 :Profit = (Sales × P/V Ratio) !Fixed Costs
= (` 18,50,000 × 21/100)!` 3,15,000= ` 3,88,500 !` 3,15,000= ` 73,500
(iii) (a) Profit if actual sales drop by 10% `
Revised Sales Value 16,65,000Less : Variable Costs @ 79% 13,15,350
3,49,650Less : Fixed Costs 3,15,000Net Profit 34,650
(b) Increase of 5% from budgeted sales :Revised sales value 19,42,500Less : Variable costs @ 79% 15,34,575Contribution 4,07,925Less: Fixed Costs 3,15,000Net Profit 92,925
2004 - June [8] (c) Design Pens Ltd., manufactures only pens where the marginalcost of each pen is ` 3. It has fixed costs of ` 25,000 per annum. Present productionand sales of pens is 50,000 units and selling price per pen is ` 5. Any sale beyond50,000 pens is possible only if the company reduces20% of its current selling price.
However, the reduced price applies only to the additional units. The companywants a target profit of ̀ 1,00,000. How many pens the company must produce and sellif the target profit is to be achieved? (7 marks)Answer :
(i) Present Sales (in units) = 50,000Per Unit (`) Value (`)
Sales 5.00 2,50,000Less : Variable Cost 3.00 1,50,000Contribution 2.00 1,00,000Less : Fixed Costs (apportioned) 0.50 25,000Profit 1.50 75,000
[Chapter #### 7] Marginal Costing OOOO 2.435
Desired (Targeted) Profit = ` 1,00,000
Since Profit on existing 50,000 units is ` 75,000 the profit to be earned from
additional sales is ` 25,000.
(ii) Selling Price obtainable beyond 50,000 unit shall be equivalent to = (` 5 !(` 5× 0.20) = ` 4.
(iii) Revised contribution shall be ` 4 !` 3 = Re. 1(iv) Sales in order to earn additional profits of ̀ 25,000 on revised selling price of ̀ 4
= 25,000/1 = 25,000 units.(v) The Company must produce and sell 75,000 pens in order to make a target profit
of ` 1,00,000.
2004 - Dec [7] (b) The profit volume ratio of Ulysis Manufacturers Ltd, is 40% and themargin of safety is also 40%. Work out the following if the sales volume is ̀ 1.50 crore:
(i) break-even point;(ii) net profit;(iii) fixed cost; and(iv) sales required to earn a profit of ` 30 lakh. (4 marks)
Answer :(i) Margin of safety in the difference between break -even volume of sales and
actual volume of sales.Therefore, Break-even point = Actual Sales !Margin of Safety = ` 150 lakhs !40% of Actual Sales = ` 90 lakhs
(ii) For margin of safety, contribution is equal to profit since all fixed costs arerecovered at break-even point. Net profit is computed below:
(` in lakhs)Actual Sales 150 100%Break-even point 90 60%Margin of Safety 60 40%Profit = Margin of Safety ×P/V ratio 60 lakhs × 40% 24
(iii) Selling Price !Variable Cost = ContributionOr Selling Price ! Contribution = Variable CostTherefore. Variable Cost = 100% !40% = 60%Total Cost = Variable Cost % Fixed CostBEP is the point, at which no profit is made, nor loss is incurred, i.e., variablecost and fixed cost are recovered. Therefore, fixed cost is worked out as under:
(` in lakhs)Break Even Sales 90Variable Cost : 60% of `90 lakhs 54Fixed Cost 36
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(iv) To earn a profit of `30 lakhs, the contribution to be earned is:
(` in lakhs)
Fixed Cost 36
Profit 30
Contribution 66
P/V ratio is 40% and therefore the required sales volume works out as:
= = `165 lakhs
2005 - June [5] {C} Attempt the following :
(iv) A-One Co. produces 4,00,000 components of a machinery annually at 80% of
full capacity. Regular selling price of the component is `33. Budgeted annual
production costs and other expenses for the year are as follows :
Raw material cost per unit ` 4.25
Direct labour cost per unit ` 5.75
Variable factory overhead per unit ` 7.75
Variable selling costs 5% of selling price
Fixed factory and administrative overheads ` 39,50,000
During the year, A-One Co. received a one-time order to sell 25,000
components for which no selling expenses will be incurred. What should be the
minimum price quoted by A-One Co. if it wants to earn minimum of Re. 1 per
component on this order? (5 marks)
Answer :
Variable cost to be incurred
(`)
Raw Material cost per unit 4.25
Direct Labour cost per unit 5.75
Variable Overhead cost per unit 7.75
Total Variable cost per unit 17.75
Total incremental cost for 25,000 units (25,000 × ` 17.75) 4,43,750
Desired profit (25,000 × Re.1.00) 25,000
Total 4,68,750
Unit selling price to be quoted by A-One and Co.
(`4,68,750/25,000) = ` 18.75
2005 - June [6] (b) A newly set up manufacturing company is planning to produce a
product that will sell for ` 10 per unit. The demand of product is estimated at 10,000
units per year. The company has choice of two machines, each of which has a capacity
of producing 10,000 units per year. Machine-A would have fixed costs of ` 30,000 per
year and would yield a profit of ` 30,000 per year on sale of 10,000 units. Machine-B
[Chapter #### 7] Marginal Costing OOOO 2.437
would have fixed costs of ̀ 18,000 per year and would yield a profit of ̀ 22,000 per year
on sale of 10,000 units. Variable cost behave linearly for both machines.
Calculate the volume of sales at which the cost of the two machines will be
indifferent. (5 marks)
Answer :
In the present problem, sales, fixed overhead and profit are given. From this information
variable costs can be arrived at :
Machine A Machine B
` `
Fixed Cost 30,000 18,000
Profit 30,000 22,000
Contribution 60,000 40,000
Sales (`10,000 × `10) 1,00,000 1,00,000
Variable Costs 40,000 60,000
P/V Ratio 60% 40%
Variable Cost per unit 4.00 6.00
Suppose a sale at which cost indifference point occurs is equal to x. Therefore, at this
level total cost will be the same viz.
` 30,000 % 4x = ` 18.000 + 6x
Therefore, 2x = 30,000 ! 18,000 = 12,000
X = 6,000 units
Volume of sales at which the cost of the two machines will be indifferent = 6,000 units
2006 - Dec [7] (b) A company is producing an identical product in two factories. The
following are the details in respect of both the 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 fixed cost (`) 40,000 30,000
Sales (Units) 30,000 20,000
Production capacity (Units) 40,000 30,000
You are required to determine —
(i) break-even point (BEP) for each factory individually.
(ii) which factory is more profitable.
(iii) cash BEP for each factory individually.
(iv) BEP for company as a whole, assuming the present product mix of Factory-X
and Factory-Y is 3 : 2.
(Note : Indicate BEP in units.) (10 marks)
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Answer :
(i) Computation of Break-even Point (BEP) for each factory individually.
Factory X Factory Y
Fixed Cost ` 2,00,000 `3,00,000
Contribution per unit `10 ` 15
Break-even Point (BEP) =
Fixed Cost/Contribution per unit 20,000 units 20,000 units
(ii) Which factor is more profitable will depend on the level of production. If the
production is 20,000 units only at each factory, both are equally 'profitable' since
both have their break-even point at this level. If output is less than 20,000 units,
factory X will give lower loss, @ ` 10 per unit of the shortfall below the break-
even point whereas the loss will be ̀ 15 Per unit in case of factory Y. Production
in excess of 20,000 units will make Factory Y more profitable since each extra
unit produces a profit of ` 15 per unit as compared to ` 10 per unit in case of
Factory X.
However, in case choice is to be made as to whose capacity is to be utilized first,
choice should be for Y since it gives a higher contribution per unit.
(iii) Computation of Cash Break-even Point for each factory individually.
Factory X Factory Y
Cash Fixed Cost ` 1,60,000 ` 2,70,000
Contribution per unit `10 `15
Cash BEP-Fixed Cost/Contribution
per unit 16,000 units 18,000 units
(iv) Computation of Break-even point for the company as a whole (present product
mix is 3 : 2).
Combined Contribution (3/5 x Hs.10) %(2/5 x 15) = `12
Fixed Cost `5,00,000
Combined BEP 5,00,000/12 = 41,667 units.
2007 - June [7] (b) A company produces a single product and sells it at ̀ 200 each. The
variable cost of the product is `120 per unit and the fixed cost for the year is ` 96,000.
Calculate :
(i) P/V ratio.
(ii) Sales at break-even point.
(iii) Sales units required to earn a target net profit of ` 1,20,000.
(iv) Sales units required to earn a target net profit of ` 1,00,000 after income-tax,
assuming income-tax rate to be 50%.
(v) Profit at sales of ` 7,00,000. (10 marks)
[Chapter #### 7] Marginal Costing OOOO 2.439
Answer :
Sales !Variable Cost = Contribution i.e., `200 !120 = ` 80 per unit
(i) P/V Ratio = ×100 = × 100 = 40%
(ii) Sales at Break-even point (BEP)
= ×100 = `2,40,000
(iii) Sales in units for a target profit of ` 1,20,000
Sales (Units) =
= = 2700 units
(iv) Sales in units after tax profit of `1,00,000 (Tax Rate!50%)
=
= =
= = 3,700 units
(v) Profit when sales are ` 7,00,000
Profit = (Sales × P/V Ratio)!Fixed Cost
=
= ` 2,80,000 !` 96,000 = `1,84,000
2007 - Dec [6] (b) The following data is obtained from the records of an industrial unit :
`
Sale of 4,000 units @ ` 25 each 1,00,000
Material consumed 40,000
Variable overheads 10,000
Labour charges 20,000
Fixed overheads 18,000 88,000
Net profit 12,000
2.440 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
You are required to 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%.
(iv) The selling price to be fixed to bring down its break-even point to 500 units under
present conditions. (7 marks)
Answer :
(i) Number of units where there is no-profit no-loss, i.e., break-even point
Break-even point =
= = 2,400 units
'Selling price `25 !Variable Cost `17.50
(ii) Sales to earn a net profit of 20% on sales
Let the units sold be X
Sales = 25X
Profit = 5X
Total Sales = Variable Cost %Fixed Cost %Profit
25X =17.5X % 18,000 % 5X
2.5X = ` 18,000
X = ` 18,000/2.5 = 7,200
Sales = 7,200 X `25 = ` 1,80,000
(iii) Extra units to be sold to maintain present profit if selling price is reduced by 20%Present selling price ` 25.00Less: Reduction 20% ` 5.00New Selling Price `20.00Less: Variable cost `17.50Contribution per unit ` 2.50
Units to be sold =
=
= = 12,000 units.
Extra units to be sold = 12,000 !4,000 units = 8,000 units.
[Chapter #### 7] Marginal Costing OOOO 2.441
(iv) Selling Price for Break-even Point at 500 units
Break-even point =
Let the contribution per unit be 'X'
500 =
500X = `18,000X = 36
Selling price per unit = Variable cost per unit%Contribution per unit= ` 17,50 % ` 36= ` 53,50 per unit
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Dt. Between 3
Total 3
2.442
Star Rating
On the basis of Maximum marks from a chapter jjjjj
On the basis of Questions included every year from a chapter jjjjj
On the basis of Compulsory questions from a chapter jjjjj
8 Analysis & Interpretation
of Financial Statements
This Chapter Includes : Financial Statements; Nature; Attributes of Financial
Statements; Importance; Limitations; Recent Trends in Presenting Financial
Statements; Analysis of Financial Statements; Methods, Objectives and Limitations
of Financial Statements Analysis; Ratio Analysis; Uses, Advantages and Limitations
of Ratio Analysis; Inter-firm Comparison.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.443
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(iii) Liquidity ratios measure long-term solvency of a concern. (2 marks)
Answer :
(iii) False : Liquidity ratio measure the Short term solvency of the concern. These
ratios indicate the relationship between liquid assets/quick assets and the current
liabilities of the concern. Traditionally, a quick ratio of 1:1 is considered to be
satisfactory ratio.
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(ii) Current liabilities are equal to –
(a) Working capital + current assets
(b) Working capital – current assets
(c) Current assets – working capital
(d) Current assets + working capital. (1 mark)
Answer :
(ii) (c)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) The ratio of total liquid assets to current liabilities is known as ____. (1 mark)
Answer :
(iii) Liquid ratio/Acid test ratio/ Quick ratio
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) Quick ratio is the indicator of position of an enterprise. (1 mark)
Answer :
(iii) Quick ratio is the indicator of liquidity position of an enterprise.
2011 - June [5] {C} (c) State, with reasons in brief, whether the following statements
are true or false :
(v) Collection of sundry debtors has no impact on current ratio. (2 marks)
2.444 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Answer :
(v) True : Collection of sundry debtors has no impact on current ratio. Reduction in
sundry debtors would be equal to addition in cash/bank balance. Therefore total
current assets will remain same and hence current ratio will have no impact.
2011 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iii) A current ratio of less than one implies that the working capital is ________.
(1 mark)
Answer :
(iii) Negative
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(iv) A firm with a very high current ratio and very low liquid ratio has very low level
of inventory. (2 marks)
(c) Write the most appropriate answer from the given options in respect of the following:
(ii) The nature of ratio analysis is —
(a) Quantitative analysis
(b) Qualitative analysis
(c) Both quantitative and qualitative analysis
(d) None of the above. (1 mark)
Answer :
(iv) The statement is False:- A firm with a very high current ratio and very low liquid
ratio indicates a high level of investment in such inventories with are mostly un-
salable.
(ii) (a) Quantitative analysis.
DESCRIPTIVE QUESTIONS
2008 - Dec [7] (a) What are the objectives of financial statement analysis? (6 marks)
Answer :
Objectives of financial statement analysis : Financial statements analysis is very
much helpful in assessing the financial position and profitability of a concern.
The main objectives of analysing the financial statements are as follows :
1. Judging the operational efficiency of the business.
2. Measuring short and long term financial position.
3. Indicating the trend of achievements.
4. Assessing the growth potential of the business.
5. Measuring the profitability.
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.445
6. Intra firm and inter firm comparison of the performance.
7. Forecasting, budgeting the deciding future line of action.
8. Simplified, systematic and intelligible presentation of facts.
9. Judging the solvency of the undertaking.
Limitation of financial statement analysis :
1. Suffering from the limitations of financial statements : financial statements
Suffer from variety of weaknesses. Balance sheet is proposed on historical record
of the value of assets. It is just possible that assets may not have the same value.
Financial statements are prepared according to certain conventions at a point of
time, where as the investor is concerned with the present and future of the
company. Certain assets and liabilities are not disclosed. Personal Judgement
plays an important role in determining the figures of the balance sheet.
2. Absence of standard universally accepted terminology Accounting is not an exact
science. It does not have standard, universally accepted terminology. Different
meanings are given to a particular term. There are different methods of providing
depreciation. Interest may be charged on different rates. In this way. there is
sufficient possibility of manipulation and the financial statements have to be suffer.
As a consequence financial analysis also proves to be defective.
3. Ignoring Price level changes : The results shown by financial statements may be
misleading if price level charges have not been accounted for. The ratio may
improve with the increase in price, where as the actual efficiency may not improve.
4. Ignoring qualitative aspect : Financial analysis does not measure the qualitative
aspects of the business. It does not show the skill, technical know - how and the
efficiency of its employees and managers.
5. Misleading results in the absence of absolute data. Results shown by financial
analysis may be misleading in the absence of absolute data, We can not have the
idea of the size of the business.
6. Financial analysis is only a tool, not the final remedy : Analysis of statements
is a tools to measure the profitability, efficiency and financial soundness of the
business. It should be noted that personal judgement of the analyst are more
important in financial analysis.
2013 - Dec [7] (b) The cause and effect relationship is essential while forming and
establishing the accounting ratios. Comment. (4 marks)
PRACTICAL QUESTIONS
2009 - June [8] From the following information, prepare the projected trading and profit
and loss account for the next financial year ending 31st March, 2009 and the projected
balance sheet as on that date :
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Gross profit ratio 25%
Net profit to equity capital 10%
Stock turnover ratio 5 times
Average debt collection period 2 months
Creditors velocity 3 months
Current ratio 2
Proprietary ratio (Fixed assets to capital employed) 80%
Capital gearing ratio (Preference shares and debentures
to total long-term funds) 30%
General reserve and profit and loss to equity shareholders' fund 20%
Preference share capital to debentures 2
Cost of sales consists of 40% for materials and balance for wages and overheads.
Gross profit is ` 6,00,000. (15 marks)
Answer :
Project Trading and Profit & Loss Account
for the year ending March 31, 2009
Dr. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Material used
To Wages and overheads
To Gross profit c/d
To Expenses (Balancing
figure)
To Net profit
7,20,000
10,80,000
6,00,000
24,00,000
4,93,600
1,06,400
By Sales
By Gross profit b/d
24,00,000
24,00,000
6,00,000
6,00,000 6,00,000
Projected Balance Sheet as on March 31,2009
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital :
Equity Share Capital
Preference Share
Capital
Reserves and Surplus:
General Reserve
Profit & Loss Account
10,64,000
3,80,000
1,59,600
1,06,400
Fixed Assets
Current Assets :
Stock
Debtors
15,20,000
3,60,000
4,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.447
Secured Loans :
Debenture
Current Liabilities:
Trade Creditors
Bank Overdraft
1,90,000
1,80,000
2,00,000
22,80,000 22,80,000
Working Notes :(i) Gross Profit ` 6,00,000
Gross Profit being 25% of salesSales = ` 6,00,000 100/25 = ` 24,00,000×
(ii) Cost Sales = Sales - Gross Profit= ` 24,00,000-`6,00,000 = ` 18,00,000
(iii) Material used = 40% of Cost of sales= 40/100 ` 18,00,000 = ` 7,20,000×
(iv) Wages and overheads = ` 18,00,000 - ` 7,20,000 = ` 10,80,000(v) Stock = Cost of sales/ Stock turnover ratio = ` 18,00,000/5= ` 3,60,000(vi) Debtors = Sales for 2 months = ` 24,00,000 2/12 = ` 4,00,000×
(vii) As current ratio is 2, Current liabilities are half of current assets Hence, current liabilities = 1/2 (`3,60,000+` 4,00,000)= ` 3,80,000×
(viii) Trade Creditors = 3 months of material consumed= ` 7,20,000 3/12 = ` 1,80,000×
(ix) Bank overdraft = ` 3,80,000 - 1,80,000 = ` 2,00,000(x) Fixed assets to capital employed = 80%
Hence, working capital to capital employed = 20%Working Capital = Current assets - Current liabilities= (` 3,60,000 + `4,00,000) - ` 3,80,000=` 3,80,000Fixed assets = ` 3,80,000 80/20 = ` 15,20,000×
(xi) Total long term fund = Fixed Assets + Capital= ` 15,20,000 + ` 3,80,000 = ` 19,00,000
(xii) Capital gearing ratio being 30% (Preference share capital plus debentures toTotal Long Term Funds)= 3% of ` 19,00,000 = ` 5,70,000Preference share capital = ` 5,70,000 2/3 = ` 3,80,000×
(xiii) Debentures = ` 5,70,000 1/3 = ` 1,90,000×
(xiv) Equity Shareholders’ Fund = `19,00,000 - ` 5,70,000 = ` 13,30,000General reserved and Profit & Loss Account = 20% of equity shareholders’ fund= 20% of ` 13,30,000 = ` 2,66,000 Equity share capital = ` 13,30,000 ! ` 2,66,000 = ` 10,64,000.
(xv) Net profit = 10% of Equity share capital = ` 1,06,400(xvi) General Reserve = ` 2,66,000 - ` 1,06,400 = ` 1,59,600
2.448 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2009 - Dec [8] (a) From the following information provided by Jolly Ltd., you are
required to prepare the balance sheet :
Current ratio 2.5
Liquidity ratio 1.5
Proprietary ratio 0.75
Working capital ` 6,00,000
Reserves and surplus ` 4,00,000
Bank overdraft ` 1,00,000
There is no long-term loan or fictitious assets. You are also required to show the
necessary working notes. (6 marks)
Answer :
Working Notes:
Current Assets
(1) Current Ratio = Current Liabilities
Current Asset = 2.5 (Current liabilities)
Working Capital = Current assets & Current liabilities
` 6,00,000 = 2.5(Current liabilities) & Current liabilities
` 6,00,000 = 1.5 (Current liabilities)
Current liabilities = ` 4,00,000
Therefore, Current Assets = ` 10,00,000
(2) Proprietary funds +Current liabilities = Current assets + Fixed assets
Proprietary Ratio = = 0.75 (Given)
Fixed assets = 0.75 (Proprietary funds)
Substituting in the equation above
Proprietary funds+`4,00,000 = `10,00,000 + 0.75(Proprietary funds)
0.25 Proprietary funds = ` 6,00,000
Proprietary funds = `24,00,000
Hence,
Fixed assets = 0.75 (24,00,000) = ` 18,00,000
Share capital = Proprietary funds & Reserve and Surplus
= `24,00,000 & `4,00,000 =`20,00,000
(3) Liquid ratio = = 1.50
Liquid assets = `6,00,000 i.e. 1.5 (Current liabilities)
Therefore, stock = `10,00,000 - `6,00,000 = `4,00,000
i.e. Stock = Current assets & Liquid assets)
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.449
Balance Sheet as at.........
Liabilities ` Assets `
Capital 20,00,000 Fixed assets 18,00,000
Reserves and Surplus 4,00,000 Stock 4,00,000
Bank overdraft 1,00,000 Other current assets 6,00,000
Other current liabilities 3,00.000
28,00,000 28,00,000
Note: Alternatively liquid ratio can be interpreted as:
Liquid ratio =
Then the value of stock and other current assets will be changed accordingly.
2010 - June [6] Summarised income statement and balance sheet of Progressive Ltd.
are given below:
Income Statement for the year ended 31st December, 2009
(` ‘000)
Sales 1,600
Less: Cost of goods sold 1,310
Gross margin 290
Less: Selling and administration expenses 40
Net operating income (EBIT) 250
Less: Interest 45
Earnings before tax 205
Less: Tax paid 82
Net income after tax 123
Earnings per share (EPS) is ` 3.075.
Balance Sheet as at 31st December, 2009
Liabilities (` ‘000)
Paid-up capital (40,000) shares of ` 10 each fully paid) 400
Retained earnings 120
Debentures 700
Creditors 180
Bills payable 20
Other current liabilities 80
1,500
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Assets (` ‘000)
Net fixed assets 800
Inventory 400
Debtors 175
Marketable securities 75
Cash 50
1,500
Price per share is ` 15.
Industry’s average ratios are:
Current ratio .......... 2.4
Quick ratio .......... 1.5
Sales to inventory .......... 8.0
Average collection period .......... 36 days
Price per share/book value of share .......... 1.6
Debts to assets .......... 40%
Times interest earned .......... 6
Profit margin .......... 7%
Price to earnings ratio .......... 15
Return to total assets .......... 11%
(i) Progressive Ltd. would like to borrow ` 5,00,000 form a bank for less than a
year. Evaluate the firm’s current financial position by calculating ratios that you
feel would be useful for the bank’s evaluation.
(ii) What problem areas are suggested by your ratio analysis? What are the possible
reasons for them?
(iii) Do you think that the bank should give the loan?
(iv) If Progressive Ltd.’s inventory utilisation ratio (sales to inventory) and average
collection period were reduced to industry average, what amount of funds would
be generated? (15 marks)
Answer :
Progressive Limited
Computation of Ratios for Evaluation
(` in Thousands)
Particulars
Firm’s
Ratio
Industry
Average
(a) Current Ratio = Current Assets/Current Liabilities
Current Assets = ` 400 + 175 + 75 + 50 = ` 700
Current Liabilities = ` 180 + 20 + 80 = ` 280
Current Ratio = 700/280
2.5 2.4
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.451
(b) Quick Ratio = Liquid Assets/Current Liabilities
Liquid Assets = ` 175 + 75 + 50 = ` 300
Quick Ratio = 300/280
1.07 1.5
(c) Sales to Inventory = Sales/Inventory
= 1,600/400 4 8
(d) Average Collection Period =
Debtors/Average Daily Sales
= 175/(1,600/365)
40 days 36 days
(e) Price per Share to Book Value of Share
= Price per share/Book value of share
= 15/(520/40)
Book value of share = (Paid-up capital + Retained
earnings)/No. of shares
1.15 1.6
(f) Debts to Assets = Debts/Assets
= (700/1,500) × 100 46.7% 40%
(g) Times EBIT = Earnings Before Interest and
Tax/Interest
= 250/45
5.56 6
(h) Profit Margin = (Net Profit/Sales) × 100
= (123/1,600) × 100 7.7% 7%
(i) Price to Earning Ratio = Price per Share/Earning
Per Share
= 15/3.075
4.88 15
(j) Return on total assets = Net profit/Total Assets
= (123/1,500) × 100 8.2% 11%
(i) Different relevant ratios have been calculated above. The final decision about
the loan of ` 5,00,000 can be taken only after considering and analyzing
different ratios and firm’s problems.
(ii) Firm’s current ratio is more than industry ratio but quick ratio is less. The
difference in current and quick ratio is due to inventory of ` 4,00,000 out of
current assets of ` 7,00,000. This firm’s collection period is more than the
industry. If it has been increasing in the past, it is a danger signal. Sales to
inventory are low and less than industry. It may be due to damaged goods.
The credit policy should be reviewed to improve firm’s debts collection. Firm’s
debt to assets ratio is higher than the industry. Which implies that the firm has
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taken more loans. Even the interest coverage ratio is little lesser than the
industry. The creditors/lenders may not like to advance loans to the firm at the
current rate. Therefore, firm may have to pay higher interest in future. The
price earning ratio and price per share to book value is quite less than
industry. It may be due to higher loans and low utilization of assets. The
investment in the firm looks to be risky and it may have adverse effect on
firm’s future growth.
(iii) Keeping in mind the above analysis the bank cannot advance loan to the firm.
Even if the bank agrees for the loan, bank will demand higher rate of interest.
(iv) The industry inventory turnover (sales to inventory) ratio is double the firm’s
ratio. If we use industry inventory turnover ratio, the firm should have inventory
of ̀ 2,00,000 but actually its inventory is ̀ 4,00,000. if this ratio can be brought
to industry level, ` 2,00,000 can be generated. Based on industry collection
period, the receivables should be :
Average Daily Sales × Industry collection period
` 4,400 (approx.) × 36 days = ` 1,58,400
Currently, debtors are ` 1,75,000 and therefore a saving of ` 16,600 is
possible. Therefore, ̀ 2,16,600 (2,00,000 + 16,600) may be generated if sales
to inventory and average collection period is brought to industry level.
2011 - June [7] (b) Following are the ratios to the trading activities of National Traders
Ltd. :
Debtors' velocity 3 months
Stock velocity 8 months
Creditors' velocity 2 months
Gross profit ratio 25%
Gross profit for the year ended 31st December, 2009 amounting to ` 4,00,000.
Closing stock of the year is ` 10,000 more than the opening stock.
Bills receivable amount to ` 25,000.
Bills payable amount to ` 10,000.
Find out - (i) sales; (ii) sundry debtors; (iii) closing stock; and (iv) sundry creditors.
(6 marks)
Answer :
(i) Sales
Gross Profit Ratio =
Sales =
= ` 16,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.453
(ii) Sundry Debtors Debtors Velocity : 3 months
Debtors Velocity =
Therefore Debtor Turnover Ratio = 12/3 = 4 Times
Total Debtors =
= = ` 4,00,000
Less : Bills Receivables ` 25,000Sundry Debtors ` 3,75,000
(iii) Closing stock Stock Velocity = 8 months
Stock Velocity =
Therefore, Stock Turnover ratio = 12/8 = 1.5 times Cost of goods sold = Sales - Gross profit
= ` 16,00,000 - ` 4,00,000= ` 12,00,000
Stock Turnover Ratio =
Or, 1.5 =
Or, Average Stock =
= ` 8,00,000Closing Stock = Opening Stock + 10,000
Average Stock =
Or, 8,00,000 =
Or, OS =
Or, OS = ` 7,95,000Closing stock = ` 7,95,000 + ` 10,000 = ` 8,05,000
(iv) Sundry Creditors Creditors Velocity : 2 months
Creditors Velocity =
Creditors Turnover Ratio = 12/2 = 6 times
Purchase = Cost of goods sold + Closing stock - Opening stock
= 12,00,000 + 8,05,000 - 7,95,000
= ` 12,10,000
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Total Creditors =
Total Creditors =
= ` 2,01,667
Less : Bills Payable = ` 10,000
Sundry Creditors = ` 1,91,667
2011 - Dec [8] (a) From the following information pertaining to ABC Ltd., prepare its
trading, profit and loss account for the year ended 31st March, 2011 and summarised
balance sheet as at that date:
Current ratio = 2.5
Quick ratio (quick assets/quick liabilities) = 1.3
Proprietary ratio (fixed assets/proprietary funds) = 0.6
Gross profit to sales ratio = 10%
Debtors velocity = 40 days
Sales = ` 7,30,000
Working capital = ` 1,20,000
Bank overdraft = ` 15,000
Share capital = ` 2,50,000
Closing stock = 10% more than opening stock
Net profit = 10% of proprietary funds. (9 marks)
Answer :
In the books of ABC Ltd.
Dr. Trading and Profit & Loss Account for the year ended 31st March, 2011 Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Opening Stock
To Purchases (Balancing figure)
To Gross Profit c/d
To Opening Expenses
(Balancing figure)
To Net Profit c/d
To Balance c/d
1,05,000
6,67,500
73,000
8,45,500
43,000
30,000
73,000
50,000
50,000
By Sales
By Closing Stock
By Gross Profit b/d
By Balance b/d
By Net Profit
7,30,000
1,15,500
8,45,500
73,000
73,000
20,000
30,000
50,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.455
Summarised Balance Sheet as at 31st March, 2011
Particulars `̀̀̀ Particulars `̀̀̀
Share Capital
Reserves and Surplus :
Profit & Loss A/c
Current Liabilities:
Bank overdraft
Other Current Liabilities
2,50,000
50,000
15,000
65,000
3,80,000
Fixed Assets
Current Assets:
Stock
Debtors
Other Current Assets
1,80,000
1,15,500
80,000
4,500
3,80,000
Working Notes:
(i) Current Liabilities and Current Assets:
Let Current Liabilities be x
Given Current Ratio = 2.5
Current Assets = 2.5x
Working Capital = 2.5x - x = 1.5x
Or, x =
= ` 80,000
So, Current Liabilities = ` 80,000
Current Assets = ` 80,000 × 2.5 = ` 2,00,000
(ii) Closing Stock:
Given Quick Ratio = 1.3
Or, = 1.3
Or, = 1.3
Or, Closing Stock = 2,00,000 - 84,500 = ` 1,15,500
(iii) Opening Stock = ` 1,15,500 x 100/110 = ` 1,05,000
(iv) Debtors = ` 7,30,000 x 40/365 = ` 80,000
(v) Other current assets = Current Assets - Closing Stock - Debtors
= ` 2,00,000 !1,15,500 - 80,000
= ` 4,500
(vi) Gross Profit = ` 7,30,000 x 10/100
= ` 73,000
(vii) Proprietors' Funds
Proprietary Ratio = 0.6
Or, = 0.6
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Or, Working Capital = 0.4
Proprietary Fund = = ` 3,00,000
(viii) Fixed Assets = 3,00,000 x 0.6 = ` 1,80,000
(ix) Net Profit = 10% of proprietary funds = ` 30,000
(x) Opening Balance of Profit and Loss Account:
`̀̀̀ `̀̀̀
Proprietary Fund 3,00,000
Less: Share Capital 2,50,000
Net Profit 30,000 (2,80,000)
20,000
(xi) It is assumed that there was no general reserve or other reserves
2012 - June [8] (a) From the following particulars, prepare the balance sheet of Dhan
Dhanya Ltd. :
Current ratio 2
Working capital ` 4,00,000
Capital block (employed) to current assets 3:2
Fixed assets to turnover 1:3
Cash sales/credit sales 1:2
Debentures/share capital 1:2
Stock velocity 2 months
Creditors velocity 2 months
Debtors velocity 3 months
Gross profit ratio 25% (to sales)
Net profit 10% of turnover
Reserve 2.5% of turnover
(9 marks)
Answer
A Balance Sheet of Dhan Dhanya Ltd.
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital
Reserves
Profit & Loss A/c
Debentures
Sundry Creditors
Other Current Liabilities
6,00,000
60,000
2,40,000
3,00,000
3,00,000
1,00,000
Fixed assets
Current Assets:
Debtors
Stock
Cash
8,00,000
4,00,000
3,00,000
1,00,000
16,00,000 16,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.457
Working Notes(i) Working Capital = Current Assets-Current Liabilities
Current Ratio = Current Assets/Current Liability
Working Capital = ` 4,00,000Current Ratio = 2 : 1Let Current Liability = X
Current Ratio =
2 = CA/XCA = 2XWorking Capital = CA-CL4,00,000 = 2X-X4,00,000 = XSo, Current Assets = 2 × 4,00,000
= 8,00,000(ii) Capital Block to Current assets = 3:2
Current Assets = 8,00,000
or Capital Block = ` 8,00,000 × 3/2 = ` 12,00,000Total Liabilities = CL + Capital Block = 4,00,000 + 12,00,000
= 16,00,000Total Assets = Total Liabilities = 16,00,000Current Assets = 8,00,000Fixed Assets = Total Assets - Current Assets = 16,00,000 - 8,00,000
= 8,00,000Fixed Assets Turnover Ratio = 3Sales/Fixed Assets = 3Sales = 3 × Fixed Assets= 3 × 8,00,000= 24,00,000
Cash Sales (1/3) = ` 8,00,000
Credit Sales (2/3) = ` 16,00,000(iii) Debtors velocity = 3 months
Debtors = ` 16,00,000 × 3/12 = ` 4,00,000
(iv) Gross Profit = 25/100 × Sales i.e. 25% of ` 24,00,000 = ` 6,00,000
Therefore Cost of goods sold = ` 24,00,000 - ` 6,00,000 = ` 18,00,000(v) Stock Turnover = 2 months
Therefore Stock = ` 18,00,000 × 2/12 = ` 3,00,000(vi) Creditors Velocity = 2 months
assumed that cost of goods sold represents that amount of Purchase
Creditors = ` 18,00,000 × 2/12 = ` 3,00,000
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(vii) Cash Balance = Current Assets - (Stock + Debtors)= ` 8,00,000 - ` (3,00,000, + 4,00,000)= ` 1,00,000
(viii) Reserves = 2.5% of Turnover i.e. 2.5% of ` 24,00,000 = ` 60,000(ix) Profit = 10% Turnover i.e. 10% of 24,00,000 = ` 2,40,000(x) Capital Block = ` 12,00,000
Reserves & Profit = ` 3,00,000 (i.e. 60,000 + 2,40,000)Debentures and Share Capital = ` 9,00,000 (i.e. ` 12,00,000 - ` 3,00,000)Therefore Share Capital (2/3) = ` 6,00,000Debentures (1/3) = ` 3,00,000.
2012 - Dec [6] (a) Prepare the balance sheet of Moon Ltd. from the followingparticulars:
Current ratio 2Working capital ` 4,00,000Capital block to current assets 3 : 2Fixed assets to turnover (based on sales) 1 : 3Cash sales / Credit sales 1 : 2Stock velocity 2 monthsCreditors velocity 2 monthsDebtors velocity 3 monthsNet profit 10% of turnoverReserves 2.5% of turnoverDebentures/share capital 1 : 2Gross profit ratio 25% (on sales)
Assume that capital block includes share capital, debentures, profit and reserves.(10 marks)
Answer:1. Working Note No. 1
Current Ratio = 2Working Capital = ` 4,00,000
Since Current Ratio =
2 =
2 Current Liabilities = Current AssetsAs Working Capital = Current Assets - Current Liabilities` 4,00,000 = 2 Current Liabilities - Current Liabilities` 4,00,000 = Current LiabilityCurrent Assets = 2 × Current Liabilities
= 2 × ` 4,00,000= ` 8,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.459
2. Working Note No. 2Capital Block to Current Assets = 3.2Capital Block = Share Capital + Debentures + Net Profit +
Reserves
Capital Block = Current Assets ×
= ` 8,00,000 ×
= ` 12,00,000Total Liabilities = Capital Block + Current Liabilities
= ` 12,00,000 + ` 4,00,000 = ` 16,00,000Total Assets = Total Liabilities = ` 16,00,000Fixed Assets = Total Assets - Current Assets= ` 16,00,000 - ` 8,00,000= ` 8,00,000Fixed Assets to turnover = 1:3Hence, Sales = ` 8,00,000 × 3 = ` 24,00,000
3. Working Note No. 3Stock Velocity = 2 monthsInventory Turnover ratio = 12/2
= 6Gross Profit Ratio = 25% on SalesHence, Gross Profit = ` 24,00,000 × 25% = ` 6,00,000Cost of Goods Sold = Sales - Gross Profit
= ` 18,00,000
Average Stock =
= `
= ` 3,00,0004. Working Note No. 4
Creditors Velocity = 2 months
Creditor Velocity in Months = Creditors ×
2 = Creditors ×
Since, opening stock is not given; cost of goods sold is taken as purchases and itis also assumed that purchases made at credit only
Creditors = `
= ` 3,00,000
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5. Working Note No. 5Ratio of cash sales to credit sales = 1:2Total Sales = ` 24,00,000 (refer working note number 3)
So Credit Sales = ` 24,00,000 ×
= ` 16,00,000Debtors Velocity = 3 months
Debtors Velocity in months = Debtors ×
3 = Debtors ×
Debtor = ` 16,00,000 ×
= ` 4,00,0006. Working Note No. 6
Net profit is 10% of TurnoverSince sales are ` 24,00,000 net profit is ` 24,00,000 × 10% = ` 2,40,000Reserve is 2 ½ % of TurnoverReserve = ` 24,00,000 × 2.5% = ` 60,000
7. Working Note No. 7Capital Block = Share Capital + Debentures + Net Profit + ReservesOr ` 12,00,000 = Share Capital + Debentures + ` 24,0000 + ` 60,000Or Share Capital + Debentures = ` (12,00,000 - 2,40,000 - 60,000)
= ` 9,00,0008. Working Note No. 8
Debentures/Share Capital Ratio = 1:2Hence, Debentures = 9,00,000 × 1/3 = ` 3,00,000Share Capital = 9,00,000 × 2/3 = ` 6,00,000
Balance Sheet of Moon Ltd.I. EQUITIES AND LIABILITIES `̀̀̀
1. Shareholders’ Funds(a) Share Capital 6,00,000(b) Reserves and Surplus:
I. Reserves 60,000II. Profit & Loss Account 2,40,000
2. Non-Current LiabilitiesDebentures 3,00,000
3. Current LiabilitiesCreditors 3,00,000Others Liabilities 1,00,000TOTAL 16,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.461
II. ASSETS `̀̀̀
1. Fixed Assets 8,00,0002. Current Assets
Stock 3,00,000Debtors 4,00,000Cash & Bank Balance 1,00,000(Balancing Figure) TOTAL 16,00,000
2013 - June [6] (a) From the following particulars relating to Genius Ltd., preparebalance sheet as on 31st March, 2013:
Fixed assets/turnover ratio (based on sale) 1 : 2Debt collection period 2 monthsGross profit 25%Consumption of raw materials 40% of cost of goods soldStock of raw materials 4 months consumptionFinished goods 20% of turnover at costFixed assets to current assets 1 : 1Current ratio 2Long-term loan to current liability 1 : 3Capital to reserve 5 : 2Cost of fixed assets ` 10,50,000 (12 marks)
Answer :Balance Sheet of Genius Ltd.
as on 31st March 2013
Particulars Amount (`̀̀̀)
I. EQUITIES AND LIBILITIES(a) Share capital(b) Reserves and Surplus(c) Non Current liabilities
Long Term Loan(d) Current Liabilities
TotalII. Assets
1. Non Current AssetsFixed Assets
2. Current AssetsStock of raw materialsStock of finished goodsDebtorsCash (balancing figure)
Total
10,00,0004,00,000
1,75,000 5,25,00021,00,000
10,50,000
2,10,0003,15,0003,50,000
1,75,00021,00,000
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Working Notes:(i) Fixed Assets turnover ratio = Net Sales / Fixed Assets
Or, Net sales = ` 10,50,000 × 2= ` 21,00,000
(ii) Gross profit = 25% of sales= 25% of ` 21,00,000= ` 5,25,000
Cost of Sales = Sales ! Gross Profit= ` 21,00,000 ! 5,25,000= ` 15, 75,000
(iii) Raw materials consumed = 40% of cost of sales= 40% of ` 15,75,000= ` 6,30,000
Stock of raw materials = 4/12 × ` 6,30,000= ` 2,10,000
(iv) Debtors collection period =
Or, 2 × 21,00,000 = Debtors × 12Or, Debtors = ` 3,50,000
(v) Fixed assets to current assets = 1:1Current assets = ` 10,50,000
(vi) Current liabilities = Current Assets/2= ` 10,50,000/2= ` 5,25,000
(vii) Long term to Current liability = 1:3Long Term liabilities = ` 5,25,000/3
= ` 1,75,000(viii) Total Assets = ` 10,50,000 + 10,50,000
= ` 21,00,000Total Debt = Long term liabilities + Current liabilities
= ` 1,75,000 + 5, 25,000= ` 7,00,000
Shareholders fund = ` 21,00,000 ! 7,00,000= ` 14,00,000
(ix) Capital to reserve ratio = 5:2Reserves = ` 14,00,000 × 2/7 = ` 4,00,000
Capital = ` 14,00,000 × 5/7 = ` 10,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.463
CS Inter Gr. I
DISTINGUISH BETWEEN
2004 - June [5] {C} (c) State any four objectives of financial statement analysis.
(4 marks)
Answer :
Objectives of financial statement analysis : Financial statements analysis is very
much helpful in assessing the financial position and profitability of a concern.
The main objectives of analysing the financial statements are as follows :
1. Judging the operational efficiency of the business.
2. Measuring short and long term financial position.
3. Indicating the trend of achievements.
4. Assessing the growth potential of the business.
5. Measuring the profitability.
6. Intra firm and inter firm comparison of the performance.
7. Forecasting, budgeting the deciding future line of action.
8. Simplified, systematic and intelligible presentation of facts.
9. Judging the solvency of the undertaking.
Limitation of financial statement analysis :
1. Suffering from the limitations of financial statements : financial statements
Suffer from variety of weaknesses. Balance sheet is proposed on historical record
of the value of assets. It is just possible that assets may not have the same value.
Financial statements are prepared according to certain conventions at a point of
time, where as the investor is concerned with the present and future of the
company. Certain assets and liabilities are not disclosed. Personal Judgement
plays an important role in determining the figures of the balance sheet.
2. Absence of standard universally accepted terminology Accounting is not an exact
science. It does not have standard, universally accepted terminology. Different
meanings are given to a particular term. There are different methods of providing
depreciation. Interest may be charged on different rates. In this way. there is
sufficient possibility of manipulation and the financial statements have to be suffer.
As a consequence financial analysis also proves to be defective.
3. Ignoring Price level changes : The results shown by financial statements may be
misleading if price level charges have not been accounted for. The ratio may
improve with the increase in price, where as the actual efficiency may not improve.
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4. Ignoring qualitative aspect : Financial analysis does not measure the qualitative
aspects of the business. It does not show the skill, technical know - how and the
efficiency of its employees and managers.
5. Misleading results in the absence of absolute data. Results shown by financial
analysis may be misleading in the absence of absolute data, We can not have the
idea of the size of the business.
6. Financial analysis is only a tool, not the final remedy : Analysis of statements
is a tools to measure the profitability, efficiency and financial soundness of the
business. It should be noted that personal judgement of the analyst are more
important in financial analysis.
2004 - Dec [5] {C} (a) Enumerate the limitations of inter-firm comparison in the context
of management decision. (4 marks)
Answer :
Limitation of Inter firm comparison :
Inter firm comparison is very useful but its practical operation suffers from certain
limitations, which are as follows :
1. Business firms may be afraid that disclosure of information may help competitors,
and thus be reluctant to part with facts which are detrimental to their interest.
2. Some managements are not conceived about the utility of inter firm comparison.
3. In such comparisons, time factor is totally ignored.
4. There may be no cost accounting system properly executed in the concern.
5. Establishment of a central organization is also difficult.
PRACTICAL QUESTIONS
2004 - June [6] (b) Following is the profit and loss account of Tradeways Ltd. for the
year ended 31st March, 2003:
Particulars (` in '000) Particulars (` in '000)
To Opening stock 10,000 By Sales 1,00,000
To Purchases 55,000 By Closing stock 15,000
To Gross profits c/d 50,000
1,15,000 1,15,000
To Office and By Gross profit b/d 50,000
admn, expenses 18,000
To Selling expenses 12,000
To Net profit 20,000
50,000 50,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.465
Balance Sheet as on 31st March, 2003
Liabilities (` in '000) Assets (` in '000)
Share capital of Land and buildings 50,000
` 10 each 1,00,000 Plant and machinery 30,000
Profit and loss a/c 20,000 Stock 15,000
Creditors 25,000 Sundry debtors 15,000
Bills payable 15,000 Bills receivable 12,500
Cash and bank balances 37,500
1,60,000 1,60,000
You are required to calculate the following:
(i) Stock turnover ratio;
(ii) Current ratio;
(iii) Liquid ratio;
(iv) Operating ratio; and
(v) Proprietary ratio. (5 marks)
Answer :
Trade Ways Limited
Computation of Ratios :
(i) Stock Turnover Ratio
= = = 4 times
Cost of goods sold = ` 10,000 % ` 55,000 !` 15,000 = ` 50,000
Average Inventory = = ` 12,500
(ii) Current Ratio
= = = 2:1
(iii) Liquid Ratio
= = = 1.625:1
(iv) Operating Ratio
= × 100
= × 100 = 80%
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(v) Proprietary Ratio
= = = 0.75:1
Shareholders' Funds = Share Capital% Profit & Loss A/c = `1,20,000
2005 - June [8] (c) Jerry Holding Ltd.'s financial statements contain the followinginformation:
31.3.2003 31.3.2004(`) (`)
Equity share capital 30,00,000 30,00,000Retained earnings 7,02,000 12,18,00010% Debentures 24,00,000 24,00,000Current liabilities 9,60,000 12,00,000Cash 3,00,000 2,40,000Sundry debtors 4,80,000 6,00,000Temporary investments 3,00,000 4,80,000Stock 27,60,000 32,40,000Prepaid expenses 42,000 18,000Total current assets 38,82,000 45,78,000Total assets 84,00,000 96,00,000
Statement of profit for the year ended 31st March, 2004 :`
Sales 60,00,000Less: Cost of goods sold 42,00,000
Interest 2,40,000 44,40,000Net profit 15,60,000Less: Taxes @ 50% 7,80,000Profit after taxes 7,80,000Dividends declared on equity shares 3,30,000
From the above, appraise the financial position of the company from the point of viewof —
(i) Liquidity;(ii) Solvency; and(iii) Profitability. (9 marks)
Answer :(a) Liquidity Ratio
2003 2004(i) Current Ratio =
= 4.04 = 3.81
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.467
(ii) Acid-test Ratio/Liquid Ratio =
= 1.125 = 1.10(b) Solvency Ratio
(iii) Debt Equity Ratio =
= 0.907 = 0.853OR
= 0.648 = 0.568(iv) Interest Coverage Ratio =
= 7.5 times(c) Profitability Ratios (For 2004)
(v) Gross Profit Ratio = ×100 = ×100 = 30%
(vi) Net Profit Ratio = ×100 = ×100 = 13%
(vii) Return on Total Assets = ×100
= ×100 = 8.125%
(viii) Return on Capital Employed =
×100
= × 100 !27.19%
(ix) Return on Equity Funds = ×100
×100 = 18.49%
The company's position is quite sound from the point of view of liquidity, solvency and
profitability.
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2005 - Dec [8] (a) You are given the following figures worked out from the profit and
loss account and balance sheet of Steadfast Ltd. relating to the year 2004-05. Prepare
a balance sheet :
Fixed assets (net, after writing off 30%) (`) 10,50,000
Fixed assets turnover ratio
(cost of sales basis) 2
Finished goods turnover ratio 6
Rate of gross profit to sales 25%
Net profit (before interest) to sales 16%
Fixed charges cover (debenture interest 14%) 8
Debt collection period 1½ months
Materials consumed to sales 30%
Stock of raw materials (in terms of number of months'
consumption) 3
Current ratio 2.4
Quick ratio 1.0
Reserves to capital 0.21 (9 marks)
Answer :
Balance Sheet of Steadfast Ltd. as on 31st March, 2005
Liabilities ` Assets ` `
Share Capital
General Reserve
14% Debentures
Current Liabilities
10,00,000
2,10,000
4,00,000
4,00,000
20,10,000
Fixed Assets at cost
Less: Depreciation
Current Assets:
Stock of Raw
Materials
Stock of Finished
Goods
Book Debts
Cash
15,00,000
4,50,000
2,10,000
3,50,000
10,50,000
5,60,000
3,50,000
50,000
20,10,000
Working Notes :(i) Cost of Sales = Fixed Assets (net)×2 = `21,00,000(ii) Finished Goods Stock = (Cost of sales/6) = `3,50,000.(iii) Total Sales = ` 21,00,000×100/75 = `28,00,000(iv) Book Debts = 28,00,000/12 × 1.5 = `3,50,000.(v) Material Consumed = 30% of ` 28,00,000 or `8,40,000.(vi) Stock of raw materials = 3 months' consumption = 8,40,000/ 12×3 or
` 2,10,000.
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.469
(vii) Ratio of stock to current liabilities is 1,4,i.e. 2,4 !1.0; Stock of finished goods andof raw materials total ` 5,60,000. Hence current liabilities are `5,60,000/1.4 =4,00,000. Quick assets ratio being 1, quick assets (book debts and cash) areequal to the current liabilities i.e., ` 4,00,000. Book Debts are ` 3,50,000;therefore cash in hand ` 50,000.
(viii) Net Profit on sales is 16%; total profit is ` 4,48,000; this covers the debentureinterest B times, hence debenture interest is ` 56,000 At 14%. the debenturesmust be ` 4,00,000.
(ix) Capital and Reserves are the balancing figures in total; capital and reserves arein the ratio of 100:21.
(x) Fixed assets are after writing of 30% depreciation; the total cost is `10,50,000×100/70 = ` 15,00,000.
2006 - June [7] (b) A firm having owner’s equity of ` 1 lakh provides the following
ratios :
Short term debt to total debt = 0.40
Total debt to owner’s equity = 0.60
Fixed assets to owner’s equity = 0.60
Total assets turnover = 2 times
Inventory turnover = 8 times
From the above information, draw a balance sheet of the firm. (10 marks)
Answer :
Balance Sheet as at-------
Liabilities ` Assets `
Owner's equity
Long-term debts
Short-term debts
1,00,000
36,000
24,000
1,60,000
Fixed assets
Inventory
Cash
60,000
40,000
60,000
1,60,000
Working Notes:
(i) Owner's equity = ` 1,00,000
Total debts = ` 1,00,000 × 0.60 = `60,000
Fixed assets = ` 1,00,000 × 0.60 = `60,000
(ii) Total capital and liabilities = Total debts%Owner's equity
= `60,000%`1,00,000
= ` 1,60,000
(iii) Total assets = Total capital and liabilities
= `1,60,000
(iv) Current assets = Total assets !Fixed assets
(v) Sales are twice as much as total assets, i.e.
= ` 1,60,000 × 2 = ` 3,20,000
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(vi) inventory is 1/8 of sales, i.e.= ` 3,20,000/8 = ` 40,000
(vii) Cash = Current assets !Inventories
(viii) If total debts = ` 1,00,000 !` 40,000 = ` 60,000
Thus, short term debt = ` 60,000
(ix) Long term debts = Total debts !Short term debts
= ` 60,000 !` 24,000 = ` 36,000
2006 - Dec [6] (b) Soma Ltd. has provided the following information :
Current ratio ..... 2.5
Liquidity ratio ..... 1.5
Net working capital ..... ` 30 lakh
Stock turnover ratio ..... 6
Ratio of gross profit to sales ..... 20%
Ratio of turnover to fixed assets
(Cost of sales/net fixed assets) ..... 2
Average debt collection period ..... 2 months
Fixed assets to net worth ..... 0.80
Reserves and surplus to capital ..... 0.50
Draw up the balance sheet of Soma Ltd. (10 marks)
Answer :
Soma Ltd.
Balance Sheet as on-------
Liabilities ` Assets `
Share Capital
Reserves & Surplus
Long-term Loans
(balancing figure)
Current Liabilities
50,00,000
25,00,000
15,00,000
20,00,000
1,10,00,000
Net Fixed Assets
Current Assets:
Stock
Bock Debts
Cash
60,00,000
20,00,000
25,00,000
5,00,000
1,10,00,000
Working Notes:
1. Current Assets are 2.5 times of the Current liabilities
If Current liabilities are '1' Current Assets are '2.5'
The difference (Net Working Capital) is '1.5'
The net working capital is; ` 30,00,000
Therefore, Total Current Assets are :
` 30,00,000 × 2.5/1.5 or ` 50,00,000
Liquid Assets (1.5) ` 30,00,000
Current Liabilities: ` 30,00,000 × 1/1.5 ` 20,00,000
Stock = Current Assets !Liquid Assets ` 20,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.471
2. Stock turnover Ratio - 6.
Cost of Sales = Stock Turnover Ratio × average Stock
= 6 × ` 20,00,000 ` 1,20,00,000
3. Fixed Assets Turnover Ratio !2
Fixed Assets = Cost of sales/Fixed Assets Turnover Ratio
= ` 1,20,00,000/2 ` 60,00,000
4. Gross Profit = 20% on Sales
Or 25% on Cost of Sales
Hence, Gross Profit = 25% × ` 1,20,00,000 ` 30,00,000
5. Sales = Cost of Sales %Gross Profit
= ` 1,20,00,000 % ` 30,00,000 ` 1,50,00,000
6. Average Debt Collection Period !2 months
Book Debts = 2 months sale
= ` 1,50,00,000 × 2/12 ` 25,00,000
7. Cash = Liquid Assets !Book Debts
= `30,00,000 !` 25,00,000 ` 5,00,000
8. fixed Assets to Net Worth !0.80
Or Fixed Assets = 80% of Net Worth
Net Worth = ` 60,00,000 × 100/80 ` 75,00,000
9. Reserves and Surplus to Capital = 0.50
Or Reserve and Surplus = ½ of Share Capital
Reserve and Surplus%Share Capital = Net Worth
Or Reserve and Surplus = 1/3rd of Net Worth
= 1/3rd of ` 75,00,000 ` 25,00,000
10. Share Capital = Twice of Reserves and Surplus
= 2 × ` 25,00,000 ` 50,00,000
2007 - June [8] (b) From the following information provided by Big Brothers Ltd., draw
up its balance sheet :
Current ratio 2.5
Liquid ratio 1.5
Net working capital ` 60,000
Stock turnover ratio (cost of sales/closing stock) 6 times
Gross profit ratio 20%
Fixed assets turnover ratio (on cost of sales) 2 times
Average collection period 2 months
Fixed assets to shareholders net worth 0.8
Reserve and surplus to capital 0.5
Long term loans ` 30,000 (10 marks)
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Answer :
(i) Current Ratio = = = 2.5
Net Working Capital = 2.5 !1 = 1.5Net Working capital is ` 60,000
Current Assets = × 2.5 = `1,00,000
Current Liabilities = ×1=` 40,000
Liquid Ratio =
Liquid Assets = ` 40,000 × 1.5 = ` 60,000(ii) Stock = Current Assets !Liquid Assets
= ` 1,00,000 !60,000 = ` 40,000
(iii) Stock Turnover Ratio =
6 =
Cost of Sales = ` 2,40,000Sales = Cost of Sales %Gross Profit
= 2,40,000 % = ` 3,00,000
(iv) Fixed Assets Turnover Ratio =
2 = or Fixed Assets = `1,20,000
(v) Debt Collection Period = ×12
2 = ×12
Debtors = = ` 50,000
(vi) Fixed Assets to Shareholders Net worth =
0.8 = =or Net worth = = ` 1,50,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.473
(vii) Reserve and Surplus to Capital = = 0.5
Suppose capital = x; then, reserve and Surplus = 0.5x
Net worth = Capital %Reserve and Surplus1,50,000 = x % 0.5xx = 1,00,000 (Capital)0.5x= 50,000 (Reserve and Surplus)
Big Brothers Ltd.Balance Sheet as on.............
Liabilities ` Assets ` `
Share Capital
Reserves and Surplus
Long Term Loan
Current Liabilities
1,00,000
50,000
30,000
40,000
2,20,000
Fixed Assets
Current Assets:
Stock
Debtors
Cash (balancing figure)
40,000
50,000
10,000
1,20,000
1,00,000
2,20,000
2007 - Dec [8] (b) Following information is available from the books of Manbhavan Ltd.:
Debtors velocity : 3 months
Stock velocity : 6 months
Creditors velocity : 2 months
Gross profit ratio : 20%
Gross profit for the year ended 31st March, 2007 was ̀ 10,00,000. Closing stock for the
same period was ` 40,000 more than what it was at the beginning of the year. Bills
receivable and bills payable were ` 1,20,000 and ` 73,334 respectively.
You are required to calculate —
(i) Sales;
(ii) Sundry debtors;
(iii) Sundry creditors; and
(iv) Closing stock. (7 marks)
Answer :
(i) Sales
Gross profit = `10,00,000
Rate of gross profit = 20%
Sales =
= ` 50,00,000
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(ii) Sundry Debtors
Sales = ` 50,00,000
debtors' velocity = 3 months
Year end sales outstanding `
× 3 12,50,000
Less: Bills Receivable 1,20,000
Sundry debtors 11,30,000
(iii) Sundry Creditors
Purchases = Sales !Gross profit %Increase in stock
Or
Cost of goods sold % Increase in stock
Cost of goods sold `
`50,00,000 !`10,00,000 40,000
Purchases 40,40,000
Creditors velocity = 2 months
Year end outstanding for purchases `
= × 2 6,73,334 (approx.)
Less: Bills payable 73,334
Sundry creditors 6,00,000
(iv) Closing Stock
Cost of goods sold = `40,00,000
Stock velocity = 6 months
Stock turnover= = 2
let opening stock be `X'
ˆ Closing Stock = X % 40,000
Stock turnover = =2
ˆ X = ` 19,80,000Thus opening stock = ` 19,80,000ˆ Closing stock = `19,80,000 % 40,000 = `20,20,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.475
2008 - June [8] (b) Anjali Ltd. has provided the following abridged balance sheet as at31st March, 2008 :
Liabilites `
Share capital 5,00,000Fixed liabilities 2,50,000Current liabilites 2,50,000
10,00,000AssetsFixed assets 6,00,000Liquid assets 3,00,000Stock in trade 1,00,000
10,00,000From the above, you are required to comment upon the following by calculating testratios on :
(i) Long term solvency of the company; and (6 marks)(ii) Short term solvency of the company. (4 marks)
Answer :
(i) Long-term Solvency Ratio
(a) Debt Equity Ratio =
=
= = 0.33 or 1 : 3
The proportion of the long-term debt in total long-term funds is only 33%. Itmeans shareholder's funds are 67% of the total long-term funds. Even ifborowed funds would have been 50%, the financial position of the companywould have been considered as quite good. The company, therefore, has asound financial position from this angle.
(b) Fixed Assets Ratio = =
= 0.80 : 1 or 0.80
Long-term requirements of funds should be met out of long-term funds. Judgedfrom this angle, the company has not only met the long-term financialrequirements (i.e., fixed assets) out of long-term funds but it has also met a partof working capital requirement from long-term funds. The ideal ratio is 0.67.The present ratio is 0.80 and hence it is quite satisfactory.
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(ii) Short-term Solvency Ratio
(a) Current Ratio = = = 1.6:1
The ideal ratio is from 1.5 to 2
The position is, therefore, quite satisfactory.
(b) Liquid Ratio = = = 1.2:1
The ideal ratio is 1:1, The present ratio is 1.2:1. Therefore, it is also satisfactory.
Repeatedly Asked Questions
No. Question Frequency
1 Practical Questions of 06 - Dec [6] (b) and 07 - June [8] (b)
2 Times
2 What are the objectives of financial statement analysis ?
04 - June [5] (c), 08 - Dec [7] (a) 2 Times
2.477
Star Rating
On the basis of Maximum marks from a chapter jjjj
On the basis of Questions included every year from a chapter jjjjj
On the basis of Compulsory questions from a chapter Nil
9 Cash Flow Statement
This Chapter Includes : Introduction; Classification of Cash Flows; Special Items;
Preparation of Cash Flow Statements; Usefulness of Cash Flow Statement.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2011 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iv) Cash flow statement is required for the financial planning of —
(a) Short range
(b) Long range
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(c) Medium range
(d) Very long range. (1 mark)
Answer :
(iv) (a) Short range
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(i) Issue of shares against the purchase of fixed assets is considered under
financing activities in cash flow statement. (2 marks)
Answer :
(i) The statement is False: Since cash flow statement ignores non cash
transactions as it does not take into consideration transactions which do not
affect the cash, issue of shares against the purchase of fixed assets is not
considered in cash flow statement at all.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Cash flow statement ignores the accrual accounting concept. (2 marks)
Answer:
(i) This Statement is True:
A statement of cash flow reports the inflows and outflows of cash and its
equivalents only of an organisation during a particular period. Hence it is prepared
on cash basis and not on accrual accounting concepts-
2013 - June [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(v) Cash flow statement is required for the financial planning of —
(a) Short range
(b) Long range
(c) Medium range
(d) Very long range. (1 mark)
Answer :
(v) (a) Short range.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iii) Cash flow statement shows receipts and payments of cash. (2 marks)
[Chapter #### 9] Cash Flow Statement OOOO 2.479
SHORT NOTES
2010 - June [7] (a) Write short notes on the following:
(iii) Cash, cash equivalents and cash flows. (3 marks)
Answer :
Please refer 2008 - Dec [8] (a) (ii) on page no. 479
Cash flow : are inflows and outflows of cash and cash equivalent it means, movement
of cash into the organisation and movement of cash out of the organisation.
DISTINGUISH BETWEEN
2008 - Dec [8] (a) Distinguish between the following :
(ii) 'Cash' and 'cash equivalents'. (3 marks)
Answer:
Cash and Cash equivalent: Cash comprises cash in hand and demand deposit with
banks. Cash equivalents are short term, highly liquid investments are readily convertible
into known amounts of cash and which are subjects to an insignificant risk of change
in value.
An investment normally qualifies as a cash equivalent only when it has a short maturity
of, say 3 months or less from the date of acquisition.
Examples of cash equivalent are:
(i) treasury bill;
(ii) commercial paper;
(iii) money market funds;
(iv) Investment in preference shares and redeemable within three months can also
be taken as cash equivalent if there is no risk of failure of the company.
DESCRIPTIVE QUESTIONS
2009 - Dec [8] (b) What are the benefits of cash flow statement ? Mention the parties
who are benefitted from preparing cash flow statement. (6 marks)
Answer :
Significance of cash flow statement : Cash flow statement is a historical document
which is generally used in examination of short term financial changes. Though this
statement is not published with financial statements but it is very important document
for the financial analyst of the firm the importance of cash flow statement can be
summarised as under :
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1. Knowledge of cash movement : This statement provides information regarding
increase or decrease in cash.
2. Helpful in financial planning : The main background of financial planning is also
cash. The projected cash flow statement helps the financial manager to plan well
about the sources and application of cash, due to this, financial cost can be
reduced to minimum and solid financial statement can be obtained. This statement
is helpful in formulation of policies regarding Clearence of debts, renewal of assets
and capital budgeting etc.
3. Effective capital : This is an effective device of control for the management. The
difference between estimated and actual results can be known by comparing cash
budget and cash flow statement.
4. Co-ordination in financial policies : This statement also brings Co-ordination in
financial policies. How much cash should a firm arrange from its internal sources
and how much should be procured from outside can be decided upon by the help
of cash flow statement.
5. Other Importance : The other uses of this statement are as follows :
(a) Beneficial for bankers,
(b) Comparative study.
(c) Helpful in forecasting and
(d) Measurement of efficiency of management.
Parties benefited from preparing cash flow statement as follows:
(i) Shareholders
(ii) Centers Lenders
(iii) Employees
(iv) Suppliers
(v) Local bodies, etc.
PRACTICAL QUESTIONS
2008 - Dec [8] (b) From the following information, prepare a cash flow statement
showing net cash flows from operating activities, investing activities and financing
activities as per Accounting Standard !3 (Revised) :
` in Lakhs
Net profit 25,000
Dividend paid (including dividend tax) 8,535
Book value of assets sold 185
Amortisation of capital grant 6
Carrying amounts of investments sold 27,765
Interest expenses 10,000
[Chapter #### 9] Cash Flow Statement OOOO 2.481
Increase in working capital (excluding cash and bank balances) 56,075
Expenditure on construction work !in!progress 34,740
Receipt of grant for capital projects 12
Proceeds from short term borrowings 20,575
Closing cash and bank balances 6,988
Provision for taxation 5,000
Income !tax paid 4,248
Loss on sale of assets 40
Depreciation charged 20,000
Profit on sale of investments 100
Interest on investments 2,506
Interest paid during the year 10,520
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Proceeds from calls!in!arrears 2
Proceeds from long!term borrowings 25,980
Opening cash and bank balances 5,003
(9 marks)
Answer :
Cash Flow Statement (`̀̀̀ in lakhs)
(A) Cash Flows from Operating Activities:
Net Profit before Provision for Taxation
` (25,000 + 5,000) 30,000
Add: Adjustments
Depreciation 20,000
Loss on Sale of Assets 40
Interest Expenses 10,000 30,040
60,040
Less: Amortisation of Capital Grant 6
Profit on Sale of Investments 100
Interest income on Investments 2,506 2,612
Operating Profit before change in Working
Capital 57,428
Less: Increase in Working Capital 56,075
1,353
Less: Income Tax Paid 4,248
Net Cash used in Operating Activities (2,895)
It is prepared for each production
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(B) Cash Flows from Investing Activities:
Sale on Investments (Book Value + Profit
on Sale) 27,865
Sale of Asset (Book Value ! Loss on Sale) 145
Interest on Investments 2,506
30,516
Less: Fixed Assets Purchased 14,560
Investments in Joint Venture 3,850
Expenses on construction W.I.P. 34,740 53,150
Net Cash Used in Investing Activities (22,634)
(C) Cash Flow from Financing Activities:
Calls in Arrears received 2
Grant received for Capital Projects 12
Proceeds from Long Term Borrowings 25,980
Proceeds from Short Term Borrowings 20,575 46,569
Less: Interest Paid 10,520
Dividend Paid (Including Tax) 8,535 19,055
Net Cash Generated from Financing
Activities 27,514
Net increase in Cash and Cash Equivalents
(A + B + C) 1,985
Cash and Cash Equivalents at the beginning 5,003
Cash and Cash Equivalents at the end 6,988
Note: All references to sections mentioned in Part - A of the Question Paper relate to
the Income-tax Act, 1961 and the relevant Assessment Year 2008-09 unless stated
otherwise.
2009 - June [6] (a) A company has provided you the following details :
Liabilities 31.12.2007 31.12.2008
(`) (`)
Share capital 70,000 74,000
Debentures 12,000 6,000
Reserve for doubtful debts 700 800
Trade creditors 10,360 11,840
Profit and loss a/c 10,040 10,560
1,03,100 1,03,200
Assets 31.12.2007 31.12.2008
(`) (`)
Cash 9,000 7,800
Debtors 14,900 17,700
[Chapter #### 9] Cash Flow Statement OOOO 2.483
Stock 49,200 42,700Land 20,000 30,000Goodwill 10,000 5,000
1,03,100 1,03,200Additional information !— Dividend paid ` 3,500; and — Land was purchased for ` 10,000.Prepare a cash flow statement as per Accounting Standard- 3 (Revised). (6 marks)Answer : Cash Flow Statement of ..............
for the year ended 31st December, 2008
Particulars `̀̀̀ `̀̀̀
(A) Cash Flow from Operating Activities :Increase in balance of Profit & Loss A/cAdjustments for non-cash and non-operating items:
Reserve for doubtful debtsDividendGoodwill written off
Operating profits before working capital changesAdjustment for changes in current assets and liabilities :
Increase in trade creditorsIncrease in debtorsDecrease in stock
Cash generated from operationsIncome-tax paidNet cash from operating activities
(B) Cash Flow from Investing Activities :Purchase of LandNet cash used in investing activities
(C) Cash Flow from Financing Activities :Proceeds from issue of share capitalRedemption of DebenturesDividend paidNet cash used in financing activitiesNet decrease in cash and cash equivalents{(A) + (B) + (C)}Cash and cash equivalents at the beginning of theperiodCash and cash equivalents at the end of the period
520
1003,5005,000
9,120
1,480(2,800)
6,50014,300
---
(10,000)
4,000(6,000)(3,500)
14,300
(10,000)
(5,500)(1,200)
9,000 7,800
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2010 - Dec [6] From the following balance sheets and information, prepare a cash flow
statement of Rajat Ltd. for the year ended 31 March, 2010 as per Accounting Standard-
3 (revised):
Balance Sheets
Liabilities As on As on
31st March, 2010 31st March, 2009
(`) (`)
Equity share capital 6,00,000 5,00,000
10% Redeemable preference capital — 2,00,000
Capital redemption reserve 1,00,000 —
Capital reserve 1,00,000 —
General reserve 1,00,000 2,50,000
Profit and loss account 70,000 50,000
9% Debentures 2,00,000 —
Sundry creditors 95,000 80,000
Bills payable 20,000 30,000
Liabilities for expenses 30,000 20,000
Provision for taxation 95,000 60,000
Proposed dividend 90,000 60,000
15,00,000 12,50,000
Assets As on As on
31st March, 2010 31st March, 2009
(`) (`)
Land and building 1,50,000 2,00,000
Plant and machinery 7,65,000 5,00,000
Investments 50,000 80,000
Inventory 95,000 90,000
Bills receivable 65,000 70,000
Sundry debtors 1,75,000 1,30,000
Cash and bank 65,000 90,000
Preliminary expenses 10,000 25,000
Voluntary separation payments 1,25,000 65,000
15,00,000 12,50,000
[Chapter #### 9] Cash Flow Statement OOOO 2.485
Additional information :
(i) A piece of land being sold out for ` 1,50,000 (cost `1,20,000) and the balance
land was revalued. Capital reserve consisted of profit on sale and profit on
revaluation of land and building.
(ii) On 1st April, 2004, a plant was sold for ` 90,000 (original cost ` 70,000 and
written down value ` 50,000) and debentures worth ` 1 lakh were issued at par
as part consideration for plant of ` 4.5 lakh acquired.
(iii) Part of the investments (cost ` 50,000) was sold for ` 70,000.
(iv) Pre-acquisition dividend received ` 5,000 was adjusted against cost of
investment.
(v) Directors have proposed 15% dividend for the current year.
(vi) Voluntary separation cost of ` 50,000 was adjusted against general reserve.
(vii) Income-tax liability for the current year was estimated at `1,35,000.
(viii) Depreciation @ 15% has been written off from plant account, but no depreciation
has been charged on land and building. (15 marks)
Answer :
Cash Flow Statement of Rajat Limited
for the year ended 31st March, 2010
Particulars
(A) Cash Flow from Operating Activities :
Net Profit before taxation
Adjustment for:
Depreciation
Preliminary expenses
Profit on sale of plant
Profit on sale of investments
Interest on debentures
Operating profits before working capital changes
`
2,45,000
1,35,000
15,000
(40,000)
(20,000)
18,000
3,53,000
`
Increase in inventory
Decrease in bills receivable
Increase in debtors
Increase in creditors
increase in bills payable
Increase in accrued liabilities Cash generated from
operations Income-tax paid
Voluntary separation payments Net cash from
operating activities
(5,000)
5,000
(45,000)
15,000
(10,000)
10,000
3,23,000
(1,00,000)
2,23,000
(1,10,000) 1,13,000
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(B) Cash Flow from Investing Activities :
Proceeds from sale of land
Proceeds from sale of plant
Proceeds from sale of investments
Purchase of plant
Purchase of investment
Pre-acquisition dividend received
Net cash used in investing activities
1,50,000
90,000
70,000
(3,50,000)
(25,000)
5,000 (60,000)
(C) Cash Flow from Financing Activities:
Proceeds from issue of equity shares
Proceeds from issue of Debentures
Redemption of preference shares
Dividend paid
Interest paid on debentures
Net cash used in financing activities
Net decrease in cash and cash equivalents
[(A) + (B) + (C)]
Cash and cash equivalents at the beginning of the
year
Cash and cash equivalents at the end of the year
1,00,000
1,00,000
(2,00,000)
(60,000)
(18,000) (78,000)
(25,000)
90,000
65,000
Working Notes :
Net profit before taxation
Retained profit
Less: Balance as on 31.3.2009
Add: Provision for taxation
Proposed dividend
`
70,000
50,000
20,000
1,35,000
90,000
2,45,000
Dr. Land and Building Account Cr.
Particulars ` Particulars `
To Balance b/d
To Capital reserve (profit on sale)
To Capital reserve
(revaluation profit)
2,00,000
30,000
70,000
3,00,000
By Cash (sale)
By Balance c/d
1,50,000
1,50,000
3,00,000
[Chapter #### 9] Cash Flow Statement OOOO 2.487
Plant and Machinery Account
Particulars ` Particulars `
To Balance b/d
To Profit and loss account
To Debentures
To Bank
5,00,000
40,000
1,00,000
3,50,000
By Cash (sale)
By Depreciation
By Balance c/d
90,000
1,35,000
7,65,000
9,90,000 9,90,000
Investment Account
Particulars ` Particulars `
To Balance b/d
To Profit and loss account
To Bank (balancing figure)
80,000
20,000
25,000
By Cash (sale)
By Dividend
(pre-acquistion)
By Balance c/d
70,000
5,000
50,000
1,25,000 1,25,000
Capital Reserve Account
Particulars ` Particulars `
To Balance b/d 1,00,000 By Land A/c (profit on sale)
By Land A/c (profit on
revaluation)
30,000
70,000
1,00,000 1,00,000
General Reserve Account
Particulars ` Particulars `
To Voluntary separation cost
To Capital redemption
reserve
To Balance c/d
50,000
1,00,000
1,00,000
By Balance b/d
2,50,000
2,50,000 2,50,000
Proposed Dividend Account
Particulars ` Particulars `
To Bank (balancing figure)
To Balance c/d
60,000
90,000
By Balance b/d
By Profit and loss
account
60,000
90,000
1,50,000 1,50,000
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Provision For Taxation Account
Particulars ` Particulars `
To Bank (balancing figure)
To Balance c/d
1,00,000
95,000
By Balance b/d
By Profit and Loss
Account
60,000
1,35,000
1,95,000 1,95,000
2011 - June [6] (b) From the following particulars of Bright Ltd., prepare cash flow
statement as per AS - 3 (Revised) :
Balance Sheets
Liabilities As on As on
31.03.2009 31.03.2010
(`) (`)
Equity share capital 3,00,000 3,50,000
18% Preference share capital 2,00,000 1,00,000
14% Debentures 1,00,000 2,00,000
Reserves and surplus 1,10,000 2,70,000
Creditors 70,000 1,45,000
Provision for doubtful debts 10,000 15,000
7,90,000 10,80,000
Assets As on As on
31.03.2009 31.03.2010
(`) (`)
Fixed assets (net) 5,10,000 6,20,000
10% Investments 30,000 80,000
Cash 40,000 75,000
Debtors 1,00,000 2,10,000
Stock 1,00,000 90,000
Discount on debentures 10,000 5,000
7,90,000 10,80,000
You are informed that during the year -
(i) A machine with a book value of ` 40,000 was sold for ` 25,000.
(ii) Depreciation charged during the year was ` 70,000.
(iii) Preference shares were redeemed on 31st March, 2010 at a premium of 5%.
(iv) An interim dividend @ 15% was paid on equity shares on 31st March, 2010.
Preference dividend was also paid on 31st March, 2010.
(v) New shares and debentures were issued on 31st March, 2010. (9 marks)
[Chapter #### 9] Cash Flow Statement OOOO 2.489
Answer :
Cash Flow Statement of Bright Ltd
for the year ended 31.3.2010
Particulars `̀̀̀ `̀̀̀
I.
II.
III.
Cash Flows from Operating Activities:
Closing balance as per Reserves & Surplus
Less : Opening balance as per Reserve & Surplus A/c
Add : Preference Dividend
Add : Interim Dividend
Net profit before taxation and extra ordinary items
Add : Adjustment for
Depreciation
Interest on 14% Debentures
Discount on issue of debenture written off
Loss on sale machine / land & building
Premium payable on redemption of preference shares
Less : Interest on investment
Operating profit before Working Capital Changes
add : Decrease in current assets & increase in
current liabilities :
Decrease in stock
Increase in creditors
Increase in provisions for doubtful debts
Less : Increase in current Assets & decrease in
current liabilities :
Increase in debtors (gross)
Net cash from operating activities
Cash Flow from Investing Activities :
Purchase of fixed assets
Proceeds from sale of Machine
Interest on Investment
Purchase of Investment
Net cash used in investing activities
Cash Flow from Financing Activities :
Proceeds from issue of share capital
Proceeds from 14% Debentures
Redemption of preference shares
Interest paid on long-term borrowings
Interim Dividend paid
2,70,000
1,10,000
36,000
45,000
70,000
14,000
5,000
15,000
5,000
10,000
75,000
5,000
(2,20,000)
25,000
3,000
(50,000)
50,000
1,00,000
(1,05,000)
(14,000)
(45,000)
(36,000)
2,41,000
1,09,000
(3,000)
3,47,000
90,000
1,10,000
3,27,000
(2,42,000)
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IV.
V.
VI.
Preference dividend paid during the year
Net cash used in financing activities
Net increase in cash and cash equivalents
[I + II + III]
Add : Cash and cash equivalents at the beginning of the
period
Cash and cash equivalents at the end of the period
(50,000)
35,000
40,000
(IV + V) 75,000
Working Notes :
Dr. Fixed Assets A/c (at WDV) Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/d
To Bank A/c (Purchases)
(Balancing figure)
5,10,000
2,20,000
7,30,000
By Bank A/c
By Profit & Loss A/c
(Loss on sale)
By Depreciation A/c
By Balance c/d
25,000
15,000
70,000
6,20,000
7,30,000
It has been assumed that new investments have been purchased at the end of current
accounting year.
2011 - Dec [6] (a) The balance sheets of X Ltd. as on 31st March, 2010 and 31st March,
2011 were as follows:
Liabilities As on As on
31st March, 2010 31st March, 2011
(`̀̀̀) (`̀̀̀)
Share capital 5,00,000 7,00,000
General reserve 50,000 70,000
Profit and loss account 1,00,000 1,60,000
Sundry creditors 1,53,000 1,90,000
Bills payable 40,000 50,000
Outstanding expenses 7,000 5,000
8,50,000 11,75,000
Assets
Land and building 80,000 1,20,000
Plant and machinery 5,00,000 8,00,000
Stock 1,00,000 75,000
Sundry debtors 1,50,000 1,60,000
Cash 20,000 20,000
8,50,000 11,75,000
[Chapter #### 9] Cash Flow Statement OOOO 2.491
Additional information:
(i) ` 50,000 depreciation has been charged to plant and machinery during the year
2011.
(ii) A piece of machinery costing ` 12,000 (depreciation provided thereon ` 7,000)
was sold at 60% profit on book value.
You are required to prepare cash flow statement. (8 marks)
Answer :
Cash Flow Statement of X Ltd.
for the year ended 31.3.2011
Particulars `̀̀̀ `̀̀̀
I. Cash Flows from Operating Activities:
Closing balance as per Profit & Loss A/c
Less: Opening balance as per Profit & Loss A/c
Add: Transfer to reserve
Net profit before taxation and extra ordinary items
Add: Adjustment for Depreciation
Less: Profit on Sale of Machinery
Operating profit before Working Capital Changes
Add: Decrease in current assets & increase in
current liabilities:
Decrease in stock
Increase in creditors
Increase in Bills payable
Less: Increase in current Assets & decrease in
current liabilities
Increase in sundry debtors
Decrease in Outstanding Expenses
Net cash from operating activities
1,60,000
(1,00,000)
20,000
50,000
(3,000)
25,000
37,000
10,000
10,000
2,000
1,87,000
80,000
47,000
1,27,000
72,000
(12,000)
II. Cash Flow from Investing Activities:
Purchase of Land and Building
Purchase of Plant & machinery
Proceeds from sale of machine
Net cash used in investing activities
(40,000)
(3,55,000)
8,000
(3,87,000)
III. Cash Flow from Financing Activities:
Proceeds from issue of share capital
Net cash from financing activities
2,00,000
2,00,000
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IV. Net increase in cash and cash equivalents
[I + II + III] NIL
V. Add: Cash and cash equivalents at the beginning of
the period 20,000
VI. Cash and cash equivalents at the end of the period
(IV + V) 20,000
Working Notes:
Dr. Plant & Machinery A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/fd
To Profit & Loss A/c (Profit
on sale)
To Bank (Purchases)
(Balancing figure)
5,00,000
3,000
3,55,000
8,58,000
By Depreciation A/c
By Bank
By Balance c/fd
50,000
8,000
8,00,000
8,58,000
Book Value of machinery sold = Original Cost - depreciation
= ` 12,000 - ` 7,000
= ` 5,000
Profit on sale of machinery = 60% of ` 5,000 = ` 3,000
Sale proceeds of machinery = Book Value + Profits
= ` 5,000 + 3,000
= ` 8,000
2012 - June [7] (a) Surya Ltd. provides you the following information for the year ended
31st March, 2011 :
(i) Sales for the year amounted to ̀ 1,20,00,000, the company sells goods for cash
only.
(ii) Cost of goods sold was 60% of sales. Closing inventory was higher than opening
inventory by ̀ 53,750. Trade creditors on 31st March, 2011 exceeds those on 31st
March, 2010 by ` 28,750.
(iii) Net profit before tax was ` 17,25,000. Tax paid amounted to ` 8,75,000.
Depreciation on fixed assets for the year was ` 3,93,750. Whereas other
expenses totalled ` 26,81,250. Outstanding expenses on 31st March, 2010 and
on 31st March, 2011 totalled to ` 1,02,500 and ` 1,13,750 respectively.
(iv) New machinery and furniture costing ` 12,84,375 in all were purchased.
(v) A rights issue was made of 2,500 equity shares of ` 250 each at a premium of
` 75. The entire money was received with applications.
[Chapter #### 9] Cash Flow Statement OOOO 2.493
(vi) Dividends and dividend distribution tax totaling ` 5,08,750 were paid.(vii) Cash in hand and at bank as on 31st March, 2010 totalled ` 2,67,250.
Prepare cash flow statement as per Accounting Standard - 3 (Revised). (9 marks)Answer :
Cash Flow StatementFor the year ending 31.3.2011
(A) Cash flow from Operating ActivitiesNet Profit before tax 17,25,000Add: Depreciation 3,93,750Operating Profit before working Capital changes 21,18,750Less: Increase in inventory 53,750Add: Increase in Trade Creditors 28,750Add: Increase in outstanding expenses 11,250Cash generated from operations 21,05,000Tax paid 8,75,000Net Cash from operating activities 12,30,000
(B) Cash Flow from Investing ActivitiesPurchase of Fixed Assets (12,84,375)Net cash flow from Investing Activities (12,84,375)
(C) Cash Flow from Financing ActivitiesProceeds from issue of share capital 8,12,500Dividend Corporate Dividend Tax Paid (5,08,750)Net Cash flow from Financing Activities 3,03,750Net Increases in Cash & Cash equivalent(A + B + C) 2,49,375Add: Cash & Cash equivalents as on31.3.2010 (opening balance) 2,67,250Cash & Cash equivalents as on 31.3.2011(Closing balance) 5,16,625
2012 - Dec [8] (a) Following are the balances of accounts of Great Ltd.:Equity and Liabilities As on As on
31.03.2012 31.03.2011(`) (`)
Share capital 10,00,000 8,00,000Reserves 2,00,000 1,50,000Profit and loss (Surplus) 1,00,000 60,000Proposed dividend 2,00,000 1,00,000Debentures 2,00,000 —Provisions for taxation 1,00,000 70,000Trade payables 7,00,000 8,20,000
25,00,000 20,00,000
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Assets
Plant and machinery 7,00,000 5,00,000
Land and building 6,00,000 4,00,000
Investment 1,00,000 —
Trade receivables 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash in hand/bank 2,00,000 2,00,000
25,00,000 20,00,000
Additional information is as follows:
(i) Depreciation @ 25% was charged on the opening value of plant and
machinery.
(ii) During the year, one old machine costing ` 50,000 (written down value
` 20,000) was sold for ` 35,000.
(iii) ` 50,000 was paid towards income-tax during the year.
(iv) Building under construction was not subject to any depreciation.
Prepare cash flow statement as per Accounting Standard-3. (9 marks)
Answer:
Working Note No. 1
Plant and Machinery Account
Particulars Amount
(`)
Particulars Amount
(`)
To Balance B/d
To Profit and Loss A/c Profit on
sale (` 35,000 - ` 20,000)
5,00,000
15,000
By Depreciation (@ 25% on
opening balance)
By Bank (Sale)
1,25,000
35,000
To Bank (Balancing figure)
(Purchase of machinery)
3,45,000 By Balance C/d 7,00,000
8,60,000 8,60,000
Working Note No.2
Provision for Taxation Account
Particulars Amount (`) Particulars Amount (`)
To Bank A/c
(Tax payment during the current
year)
50,000 By Balance B/d
By Profit & Loss A/c
(Balancing figure)
70,000
80,000
To Balance C/d 1,00,000
1,50,000 1,50,000
[Chapter #### 9] Cash Flow Statement OOOO 2.495
Working Note No. 3
Profit and loss A/c
Particulars Amount (`) Particulars Amount (`)
To Depreciation A/c 1,25,000 By Balance B/d 60,000
To Provision for Taxation A/c 80,000 By Plant and Machinery A/c
(Profit on sale of machinery)
15,000
To Balance C/d 1,00,000 By Operating Profit 2,30,000
3,05,000 3,05,000
Cash Flow Statement of Great Limited
for the year ended 31st March, 2012
Particulars ` `
(i) Cash Flow from Operating Activities :
Net Profit before Extraordinary items and
appropriation of profit
2,30,000
adjustment for :
Transfer to General Reserve 50,000
Proposed dividend 2,00,000
Operating profits before working capital changes 4,80,000
Increase in Stock (-) (2,00,000)
Decrease in Debtors (+) 2,00,000
Decrease in creditors (-) (1,20,000)
3,60,000
Income-tax paid (-) 50,000 3,10,000
(ii) Cash Flow from Investing Activities :
Purchase of Fixed Assets (3,45,000)
Expenses on Building (2,00,000)
Increase in investments (1,00,000)
Sale of old machine 35,000 (6,10,000)
(iii) Cash Flow from Financing Activities :
Income in Share Capital (presumed fresh capital) 2,00,000
Issue of Debentures 2,00,000
Dividend paid (1,00,000) 3,00,000
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Particulars (`) (`)
Net Increase in cash or cash equivalent (I+II+III) NIL
Cash and cash equivalents at the beginning of the financial
year
2,00,000
Cash and cash equivalents at the end of the financial year 2,00,000
2013 - June [7] (a) From the information given below prepare cash flow statement for
Smile Ltd.:
Balance Sheets
As on As on
31-03-2012 31-03-2013
( ` in ‘000) (` in ‘000)
Equity and liabilities
Shareholders’ funds:
Share capital 1,800 2,000
Reserves and surplus:
General reserve 50 30
Profit and loss account 140 160
Non-current liabilities:
Loan on mortgage @ 8%
(taken on 1st July, 2012) ! 50
Current liabilities:
Bank overdraft 115 114
Trade payables 22 40
Short-term provisions:
provision for final dividend 90 80
2,217 2,474
Assets
Non-current assets:
Freehold building 1,000 1,160
Machinery and plant 340 490
Furniture and fittings 7 6
Goodwill 150 130
Investment in shares 100 120
Preliminary expenses 15 5
[Chapter #### 9] Cash Flow Statement OOOO 2.497
Current assets:
Inventories 440 422
Trade receivables 160 134
Prepaid expenses 4 5
Cash in hand 1 2
2,217 2,474
Additional information:
(i) Depreciation on freehold building @ 2 ½% on cost ` 12,00,000; on machinery
and plant @ 10% on cost ` 5,00,000; on furniture and fitting @ 5% on cost
`10,000.
(ii) Dividend received ` 6,000 was used in writing down the book value of
investment in shares.
(iii) Goodwill was written off out of general reserve.
(iv) The proposed dividend for the year ended 31st March, 2012 was paid off and
interim dividend of ` 60,000 was paid out of profit and loss account.
(12 marks)
Answer :
Cash Flow Statement of Smile Ltd.
for the year ended 31.3.2013
Particulars `̀̀̀ `̀̀̀
I. Cash Flows from Operating Activities:
Closing balance as per Profit & Loss A/c
Less : Opening balance as per Profit & Loss A/c
Add : Provision for dividend
Add: Interim dividend paid
Net profit before taxation and extra ordinary items
Add: Adjustment for Depreciation on Building
Adjustment for Depreciation on Plant and
Machinery
Adjustment for Depreciation on furniture and
fitting
Preliminary Expenses written off
Interest on loan
Operating profit before Working Capital Changes
Add: Decrease in current assets & increase
in current liabilities:
Decrease in stock
1,60,000
(1,40,000)
20,000
80,000
60,000
30,000
50,000
500
10,000
3,000
18,000
1,60,000
93,500
2,53,500
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Decrease in trade receivables
Increase in trade payables
Less: Increase in Current Assets & Decrease
in current liabilities
Increase in prepaid expenses
Decrease in bank overdraft
Net cash from operating activities
26,000
18,000
1,000
1,000
62,000
3,15,500
2,000
3,13,500
II. Cash Flow from Investing Activities :
Sale of Furniture and fitting
Dividend received
Purchase of building
Purchase of plant and machinery
Purchase of investments
Net cash used in investing activities
500
6,000
(1,90,000)
(2,00,000)
(26,000)
(4,09,500)
III. Cash Flow from Financing Activities :
Proceeds from issue of share capital
Mortgage loan raised
Dividend paid
Interim Dividend Paid
Interest on loan paid
Net cash from financing activities
2,00,000
50,000
(90,000)
(60,000)
(3,000)
97,000
IV. Net increase in cash and cash equivalents
[I + II + III] 1,000
V. Add: Cash and cash equivalents at the beginning of
the period 1,000
VI. Cash and cash equivalents at the end of the period
(IV + V)
2,000
Working Notes:
Dr. Freehold Building A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/fd
To Bank (Purchases)
(Balancing figure)
10,00,000
1,90,000
By Depreciation A/c
(2.5% of ` 12,00,000)
By Balance c/d
30,000
11,60,000
11,90,000 11,90,000
[Chapter #### 9] Cash Flow Statement OOOO 2.499
Dr. Machinery & Plant A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/fd
To Bank (Purchases)
(Balancing figure)
3,40,000
2,00,000
By Depreciation A/c
By Balance c/fd
50,000
4,90,000
5,40,000 5,40,000
Dr. Furniture and fitting A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/fd 7,000 By Depreciation A/c
By Bank (Sale)
(Balancing figure)
By Balance c/fd
500
500
6,000
7,000 7,000
Dr. Investment A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/fd
To Bank (Purchases)
(Balancing figure)
1,00,000
26,000
By Dividend
By Balance c/fd
6,000
1,20,000
1,26,000 1,26,000
2013 - Dec [8] (a) Following are the balance sheets of X Ltd. for two years :
As on As on
31.3.2012 31.3.2011
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital
Equity share capital 6,00,000 4,20,000
(b) Reserves and Surplus
Reserves 2,80,000 2,00,000
Surplus (P&L) 60,000 70,000
(2) Current Liabilities
(a) Short-term borrowingsBank overdraft 75,000 —
(b) Trade payables 8,00,000 5,75,000Trade payables for expenses 13,000 25,000
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(c) Short-term provisionsProvision of taxation 1,00,000 80,000Proposed dividend 72,000 50,000
TOTAL 20,00,000 14,20,000II. ASSETS
(1) Non-current assets(a) Fixed assets
Tangible assets before depreciation 8,10,000 7,00,000Less: Depreciation (2,50,000) (1,80,000)Tangible assets after depreciation 5,60,000 5,20,000Investments 20,000 70,000
(2) Current assets(a) Inventories 8,20,000 5,10,000(b) Trade receivables 5,70,000 2,80,000
Bills receivables 30,000 24,000(c) Bank — 16,000
TOTAL 20,00,000 14,20,000The profit for the year ended 31st March, 2012 as per profit and loss account afterproviding depreciation amounted to ` 2,42,000 which was further adjusted as follows:
`
Surplus (P&L as per last balance sheet) 70,000Add : Profit after depreciation 2,42,000
3,12,000Less :
Loss on investment 5,000Provision for taxation 95,000Transfer to reserve 80,000Proposed dividend 72,000 2,52,000Balance of profit 60,000
You are informed that :(i) The sales and purchases for the year ended 31st March, 2012 amounted to
` 60,00,000 and `45,00,000 respectively.(ii) In arriving at the profit, the cost of sales and administrative and selling
expenses were deducted.Prepare a cash flow statement as per AS-3 (revised). (10 marks)
[Chapter #### 9] Cash Flow Statement OOOO 2.501
CS Inter Gr. I
PRACTICAL QUESTIONS
2004 - June [7] (c) Swastik Oils Ltd. has furnished the following information for the year
ended 31st March, 2003:
(` in Lakhs)
Net profit 37,500.00
Dividend (including interim dividend paid) 12,000.00
Provision for income-tax 7,500.00
Income-tax paid during the year 6,372.00
Loss on sale of assets (net) 60.00
Book value of assets sold 277.50
Depreciation charged to profit and loss account 30,000.00
Profit on sale of investments 150.00
Value of investments sold 41,647.50
Interest income on investments 3,759.00
Interest expenses 15,000.00
Interest paid during the year 15,780.00
Increase in working capital (excluding cash and bank balance) 84,112.50
Purchase of fixed assets 21,840.00
Investments in joint venture 5,775.00
Expenditure on construction work-in-progress 69,480.00
Proceeds from long-term borrowings 38,970.00
Proceeds from short-term borrowings 30,862.50
Opening cash and bank balances 11,032.50
Closing cash and bank balances 2,569.50
You are required to prepare the cash flow statement in accordance with AS-3 for
the year ended 31st March, 2003. (Make assumptions wherever necessary.)
(10 marks)
Answer : SWASTIK OILS LIMITED
Cash flow statement for the year Ended 31st March,2003
(a) Cash flows from Operating Activities (` in Lakhs)
Net profit before taxation (37,500 + 7,500) 45,000.00
Adjustment for :
Depreciation charged to P&L A/c 30,000.00
Loss on sale of assets (net) 60.00
Profit on sale of investments (150.00)
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Interest income on investments (3,759.00)
Interest expenses 15,000.00
Operating profit before working capital changes 86,151.00
Increase (change) in working capital
(excluding cash and bank balance) (84,112.50)
Cash generated from operations 2,038.50
Income tax paid (6,372.00)
Net cash used in operating activities (A) (4,333.50)
(b) Cash Flow from Investing Activities
Sale of Assets (277.50 !60.00) 217.50
Sale of Investments (41,647.50 % 150) 41,797.50
Interest Income on investments (assumed) 3,759.00
Purchase of fixed assets (21,840.00)
Investments in joint Venture (5,775.00)
Expenditure on Construction work-in-progress (69,480.00)
Net cash used in investing activities (B) (51,321.00)
(c) Cash Flow from Financing Activities
Proceeds from long term borrowings 38,970.00
Proceeds from short term borrowings 30,862.50
Interest paid (15,780.00)
Dividends (including interim dividend paid) (12,000.00)
Net cash from financing activities (C) 42,052.50
Net Increase in cash equivalents (A%B%C) (13,602.50)
Cash and cash equivalents at the beginning of the year 11,032.50
Cash and cash equivalents at the end of the year 2,569.50
2004 - Dec [6] (c) From the following balance sheets of Winners Ltd. as on 31st March,
2003 and 31st March, 2004, prepare a cash flow statement:
Liabilities 31.3.2003 31.3.2004
(`) (`)
Equity shares of ` 100 each 9,00,000 12,00,000
Securities premium — 90,000
Profit and loss appropriation account 3,00,000 3,00,000
Profit for the year 50,000 6,00,000
9% Debentures 4,00,000 3,00,000
Sundry creditors 4,05,000 2,30,000
Provision for taxation 1,50,000 3,00,000
Proposed dividend 45,000 1,00,000
22,50,000 31,20,000
[Chapter #### 9] Cash Flow Statement OOOO 2.503
Assets 31.3.2003 31.3.2004(`) (`)
Land 6,00,000 7,50,000Plant and machinery 12,00,000 13,50,000Less: depreciation 4,20,000 7,80,000 4,50,000 9,00,000Loans to subsidiary company 50,000 —Share in subsidiary company 60,000 60,000Stock in trade 3,70,000 4,50,000Debtors 3,00,000 4,00,000Bank 90,000 5,60,000
22,50,000 31,20,000
The following additional information are available:(i) A plant costing ` 1,50,000 was sold during the year for ` 60,000. Accumulated
depreciation on this plant was ̀ 1,00,000 and profit/loss, if any, arising out of thissale was transferred to profit and loss account.
(ii) During the year, the company paid income-tax amounting to ` 1,80,000. (9 marks)
Answer : Winners LimitedCash Flow Statement for the year ended 31.3.2004
(a) Cash Flows from Operating Activities `
Net Profit before tax and extraordinary items 5,50,000Adjustments for:Depreciation 1,30,000Provision for taxation 3,30,000Proposed dividend 1,00,000Profit on sale of plant (10,000)Operating profit before working capital changes 11,00,000Adjustments for :Increase in debtors (1,00,000)Increase in stock-in-trade (80,000)Decrease in creditors (1,75,000)Cash generated from operations 7,45,000Tax paid (1,80,000)Net Cash from Operating Activities 5,65,000
(b) Cash Flows from Investing ActivitiesPurchase of land (1,50,000)Sale of plant 60,000Purchase of plant and machinery (3,00,000)Refund of loans from subsidiary 50,000
Net Cash used in Investing Activities (3,40,000)
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(c) Cash Flows from Financing Activities
Issue of equity Shares at premium 3,90,000
Redemption of debentures (1,00,000)
Dividends paid (45,000)
Net Cash from Financing Activities 2,45,000
Net Increase in Cash and Cash Equivalents
(A+B+C = ` 5,65,000 !` 3,40,000 +2,45,000) 4,70,000
Cash and Cash Equivalents at the beginning of the year 90,000
Cash and Cash Equivalents at the end of the year 5,60,000
Working Notes :
Dr. Land Account Cr.
`̀̀̀ `̀̀̀
To Balance b/d
To Bank (purchases-
(balancing figure)
6,00,000
1,50,000
7,50,000
By Balance c/d 7,50,000
7,50,000
Dr. Plant and Machinery Account Cr.
`̀̀̀ `̀̀̀
To Balance b/d
To Profit on plant sold
To Bank (purchases-
(balancing figure)
12,00,000
10,000
3,00,000
By Bank (Plant sold)
By Accumulated depreciation
(on Plant Sold)
By Balance c/d
60,000
1,00,000
13,50,000
15,10,000 15,10,000
Accumulated Depreciation Account
`̀̀̀ `̀̀̀
To Plant and machinery A/c
(on plant sold)
To Balance c/d
1,00,000
4,50,000
5,50,000
By Balance b/d
By Dep. for the year
(balancing figure)
4,20,000
1,30,000
5,50,000
Loans to Subsidiary Account
`̀̀̀ `̀̀̀
To Balance b/d 50,000
50,000
By Bank (balancing figure) 50,000
50,000
[Chapter #### 9] Cash Flow Statement OOOO 2.505
Equity Share Capital Account
`̀̀̀ `̀̀̀
To Balance c/d 12,00,000
12,00,000
By Balance b/d
By Bank
(balancing figure)
9,00,000
3,00,000
12,00,000
Securities Premium Account
`̀̀̀ `̀̀̀
To Balance c/d 90,000
______
90,000
By Bank (balancing figure) 90,000
______
90,000
9% Debentures Account
`̀̀̀ `̀̀̀
To Bank (balancing fig.)
To Balance c/d
1,00,000
3,00,000
4,00,000
By Balance b/d 4,00,000
4,00,000
Provision for Taxation
`̀̀̀ `̀̀̀
To Bank (tax paid)
To Balance c/d
1,80,000
3,00,000
4,80,000
Balance b/d
By Transfer from P& L A/c
1,50,000
3,30,000
4,80,000
Proposed Dividend
`̀̀̀ `̀̀̀
To Bank (dividend paid)
To Balance c/d
45,000
1,00,000
1,45,000
By Balance b/d
By Transfer from P&L A/c
45,000
1,00,000
1,45,000
2005 - June [7] (c) Astha Ltd. presents the following balance sheets and income
statement :
As at As at
31.3.2003 31.3.2004
(`) (`)
Equity share capital 10,00,000 10,00,000
Retained earnings 8,30,000 9,46.000
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12% Debentures 6,00,000 5,00,000
Sundry creditors 1,24,300 1,49,100
25,54,300 25,95,100
Fixed assets, at cost 24,00,000 26,00,000
Provision for depreciation (-) 8,00,000 (-) 9,80,000
Investments 2,50,000 1,00,000
Inventories 4,13,300 5,07,100
Trade debtors 1,60,000 1,80,000
Provision for bad debts (-) 8,000 (-) 9,000
Cash in hand and at bank 1,39,000 1,97,000
25,54,300 25,95,100
Profit and loss account for the year ended 31st March, 2004 :
`
Sales 36,40,200
Cost of goods sold (-) 27,10,700
Compensation received in law suit 55,000
Interest received on investments 21,000
Profit on sale of investments 7,500
Provision for bad debts (-) 1,000
Provision for depreciation (-) 1,80,000
Net profit before tax 8,32,000
Tax paid for the year 4,16,000
Net profit after tax 4,16,000
Astha Ltd. informs you that the debentures were redeemed at par. Prepare the
cash flow statement in accordance with AS-3 for the year ended 31st March, 2004.
(10 marks)
Answer :
Cash Flow Statement for the Year ended 31st March, 2004
(indirect Method)
` `
Cash Flow from Operating Activities
Net Profit before income tax and extra-ordinary items: 7,77,000
Adjustments for
Depreciation 1,80,000
Provision for Bad debts 1,000
Profit on sale of investments (7,500)
Income from investments (21,000)
Operating profit before working capital changes 9,29,500
[Chapter #### 9] Cash Flow Statement OOOO 2.507
Adjustments for :Increase in Inventory (93,800)Increase in Trade Debtors (20,000)Increase in Trade Creditors 24,800Cash inflow from operations 8,40,500Income Tax Paid (4,16,000)Cash flow before extra ordinary item 4,24,500Cash flow from extra ordinary items:Compensation received in law suit 55,000Net Cash from operating activities 4,79,500Cash flow from Investing ActivitiesPurchase of Fixed Assets (2,00,000)Sale Proceeds of Investments 1,57,500Interest received on Investments 21,000Net cash used in investing activities (21,500)Cash flow from financing activitiesRedemption of Debentures at par (1,00,000)Dividends paid (3,00,000)Net cash used in financing activities (4,00,000)Net increase in Cash and Cash Equivalents 58,000Cash and Cash Equivalents as on 31st March, 2003(closing balance) 1,39,000Cash and Cash Equivalents as on 31st March, 2004(closing balance) 1,97,000Working Notes :
`
(i) Net profit before income tax and extra ordinary item Net profit before income tax 8,32,000Less: Compensation received in law suit 55,000
7,77,000(ii) Sale proceeds of Investments
Cost of Investments sold 1,50,000Add: Profit on sale of investments 7,500
1,57,500(iii) Dividend and corporate dividend tax thereon paid
Retained earnings as on 31.3.2003 8,30,000Net Profit for the year ended 4,16,000
12,46,000Less: Retained earning as on 31.3.2004 9,46,000
3,00,000Note: Alternatively the cash flow statement may also be prepared by using directmethod.
2.508 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2005 - Dec [8] (b) The following information is available from the books of ExclusiveLtd. for the year ended 31st March, 2005:
(i) Cash sales for the year were ` 10,00,000 and sales on account ` 12,00,000.(ii) Payments on accounts payable for inventory totalled ` 7,80,000.(iii) Collection against accounts receivable were ` 7,60,000.(iv) Rent paid in cash ` 2,20,000, outstanding rent being ` 20,000.(v) 4,00,000 Equity shares of ` 10 par value were issued for ` 48,00,000.(vi) Equipment was purchased for cash ` 16,80,000.(vii) Dividend amounting to ` 10,00,000 was declared, but yet to be paid.(viii) ` 4,00,000 of dividends declared in the previous year were paid.(ix) An equipment having a book value of ` 1,60,000 was sold for ` 2,40,000.(x) The cash account was increased by ` 37,20,000.
Prepare a cash flow statement using direct method. (6 marks)Answer : Exclusive Limited
Cash Flow Statement for the year ended 31st March, 2005(Direct Method)
` `
Cash Flows from Operating Activities
Cash receipts from customers
(`10,00,000 + `7,60,000)
Cash paid to suppliers and for rent
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Sale of equipment
Purchase of equipment
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Issue of equity shares (including premium)
Dividends paid
Net Cash Flows from Financing Activities
Net Increase in Cash and Cash Equivalents
17,60,000
(10,00,000)
2,40,000
(16,80,000)
48,00,000
(4,00,000)
7,60,000
(14,40,000)
44,00,000
37,20,000
2006 - June [8] (b) The following are the balance sheets in condensed form of Modern
Ltd. :
Liabilities and Capital As on As on
31.3.2004 31.3.2005
(`) (`)
Sundry creditors 5,15,000 4,80,000
Outstanding expenses 65,000 60,000
[Chapter #### 9] Cash Flow Statement OOOO 2.509
8% Debentures 4,50,000 3,50,000
Depreciation fund 2,00,000 2,20,000
Reserve for contingencies 3,00,000 3,00,000
Profit and loss account 80,000 1,15,000
Equity share capital 11,50,000 11,50,000
27,60,000 26,75,000
Assets As on As on
31.3.2004 31.3.2005
(`) (`)
Cash and bank balances 4,50,000 4,50,000
Sundry debtors 3,35,000 2,15,000
Temporary investments 5,50,000 3,70,000
Prepaid expenses 5,000 10,000
Stock in trade 4,10,000 5,30,000
Machinery 2,60,000 3,50,000
Land and buildings 7,50,000 7,50,000
27,60,000 26,75,000
The following information are also available :
(i) 10% Dividend in cash.
(ii) New machinery for ` 1,50,000 was purchased, but old machinery costing
` 60,000 was sold for ̀ 20,000. Accumulated depreciation thereon was ̀ 30,000.
(iii) ` 1,00,000, 8% debentures were redeemed through open market purchase @` 96 for a debenture of ` 100.
(iv) ` 1,80,000 investments were sold at book value.You are required to prepare a cash flow statement for the year ended 31st March, 2005in accordance with Accounting Standard - 3 (Revised) by direct method. (10 marks)Answer :
Modern Ltd.Cash Flow Statement for the year ended 31.3.2005
Particulars ` ` `
A. Cash Flow from Operating ActivitiesNet profit earned during the year 35,000Add: Adjustment for :
Depreciation 50,000Dividend 1,15,000Loss on sale of machinery 10,000Profit on redemption of debentures (4,000)
2.510 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Operating profit before working capital changes:Decrease in debtorsDecrease in sundry creditors
2,06,0001,20,000(35,000)
Increase in stock
Decrease in outstanding expenses
Increase in pre-paid expenses
Cash Flow from Operating Activities (net) (A)
B. Cash Flow from Investing Activities :
Purchase of new plant and machinery
Sale of old plant and machinery
Sale of temporary investments
Cash Flow from Investment Activities (net) (B)
C. Cash Flow from Financial Activities :
Redemption of debentures
Dividends paid in cash
Cash Flow from Financing Activities (C)
Net increase/decrease in cash and cash
equivalents (A) + (B) + (C)
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
(1,20,000)
(5,0000)
(5,000)
(1,50,000)
(20,000)
1,80,000
(96,000)
(1,15,000)
1,61,000
50,000
(2,11,000)
Nil
4,50,000
4,50,000
Note : Cash Flow Statement has been prepared by indirect method in accordance with
Accounting Standard -3 (Revised) with the given information.
2006 - Dec [8] (b) Madhuri Ltd. gives you the following information for the year ended31st March, 2006 :
(i) Sales for the year totalled ` 96,00,000. The company sells goods for cash only.(ii) Cost of goods sold was 60% of sales.(iii) Closing inventory was higher than opening inventory by ` 43,000.(iv) Trade creditors on 31st March, 2006 exceeded those on 31st March, 2005 by
` 23,000.(v) Tax paid amounted to ` 7,00,000.(vi) Depreciation on fixed assets for the year was ` 3,15,000 whereas other
expenses totalled ` 21,45,000. Outstanding expenses on 31st March, 2005 and31st March, 2006 totalled ` 82,000 and ` 91,000 respectively.
(vii) New machinery and furniture costing ` 10,27,500 in all were purchased.(viii) A rights issue was made of 50,000 equity shares of ` 10 each at a premium of
` 3 per share. The entire money was received with applications.(ix) Dividends totalling ` 4,00,000 were distributed among shareholder.(x) Cash in hand and at bank as at 31st March, 2005 totalled ` 2,13,800.
You are required to prepare a cash flow statement using direct method. (10 marks)
[Chapter #### 9] Cash Flow Statement OOOO 2.511
Answer :
Madhuri Ltd.
Cash Flow Statement of for the year ended 31st March, 2006
Particulars `̀̀̀ `̀̀̀
(a) Cash Flow from Operating Activities
Cash receipts from customers 96,00,000
Cash paid to supplies and employees
Cash inflow from operations
Tax paid
Net cash from Operating Activities
(b) Cash Flow from Investing Activities:
Purchase of Fixed Assets
Net cash used in Investing Activities
(c) Cash Flow from Financing Activities :
Proceeds (from issue of share capital
Dividends paid
Net cash from Financing Activities
Net increase in cash and cash equivalents
(A + B + C)
Cash and Cash equivalents as on 31st
March, 2005
(79,16,000)
16,84,000
(7,00,000)
(10,27,500)
6,50,000
(4,00,000)
9,84,000
(10,27,500)
2,50,000
2,06,500
(Opening balance)
Cash and Cash equivalents as on 31st
March 2006 (Closing Balance)
2,13,800
4,20,300
Working Notes :(i) Calculation of cash paid to supplies and employees: `
Cost of sales, 60% of ` 96,00,000 57,60,000Add: Expenses incurred 21,45,000
Outstanding expenses on 31st March, 2005 82,000Excess of closing inventory 43,000
80,30,000Less: Excess of closing creditors `
over opening creditors 23,000Outstanding expenses on31st March, 2006 91,000 1,14,000
79,16,000(ii) Proceeds from issue of share capital:
Issue price of one share = ` 10 + ` 3 = ` 13Proceeds from issue of 50,000 shares = ` 13 × 50,000 = ` 6,50,000.
2.512 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2007 - June [6] (b) The following are the summary of cash transactions extracted fromthe books of Happy Ltd.
(` in ‘000)Balance as on 1st April, 2006 140Receipts from customers 11,132Issue of shares 1,200Sales of fixed assets 512
12,984Payments to suppliers 8,188Payments for fixed assets 920Payments for overheads 460Wages and salaries 276Taxation 972Dividends 320Repayment of bank loans 1,000
12,136Balance as on 31st March, 2007 848You are required to prepare a cash flow statement of the company for the period
ended 31st March, 2007 in accordance with the Accounting Standard-3 (Revised).(10 marks)
Answer :
In the books of Happy Limited
Cash Flow Statement for the period ending 31st March, 2007
(` in "000s)
(A)
(B)
(C)
Cash Flow from Operating Activities
Receipts from customers
Payment to supplies
Payment of Wages and Salaries
Payment of Overheads
Payment of Taxes
Net Cash from Operating Activities (A)
Cash Flow from Investing Activities
Proceeds on sale of fixed assets
Acquisition of (payment) fixed assets
Net Cash Used in Investing Activities (B)
Cash Flow from Financing Activities
Proceeds on issue of shares
Payments of dividends
Repayments of bank loans
Net Cash Used in Investing Activities (C)
11,132
(8, 188)
(276)
(460)
(972)
512
(920)
1200
(320)
(1,000)
1236
(408)
(120)
[Chapter #### 9] Cash Flow Statement OOOO 2.513
Net increase in cash and cash equivalents
(A) + (B) + (C)
Cash and cash equivalents at the beginning of the
period.
Cash and cash equivalents at the end of the period
Cash and cash equivalents at the end of the period.
708
140
848
2007 - Dec [7] (b) Amex Ltd. gives the following condensed balance sheets relating to
years 2006 and 2007 and the profit and loss appropriation account for the year 2007:
Balance Sheets of Amex Ltd. as on 31st March, 2006 and 2007
2006 2007
Liabilities (`) (`)
Share capital 5,00,000 6,00,000
Reserves 1,50,000 1,80,000
Profit and Loss account 40,000 65,000
Debentures 3,00,000 2,50,000
Creditors for goods 1,70,000 1,60,000
Provision for income-tax 60,000 80,000
12,20,000 13,35,000
Assets
Gross block 10,00,000 11,20,000
Less: Depreciation 3,70,000 4,60,000
Net block 6,30,000 6,60,000
Stock in trade 2,40,000 3,70,000
Book debts 2,50,000 2,30,000
Cash in hand and at bank 80,000 60,000
Misc. expenditure:
Discount on issue of shares 10,000 7,500
Preliminary expenses 10,000 7,500
12,20,000 13,35,000
Profit and Loss Appropriation Account for the
year ended 31st March, 2007
Debit Credit
Particulars ` Particulars `
To Transfer to reserves 30,000 By Balance b/d 40,000
To Interim dividend paid 80,000 By Net profit for
To Balance carried current year 1,35,000
to balance sheet 65,000
1,75,000 1,75,000
2.514 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
You are required to prepare cash flow statement showing the following:
(i) Cash from operating activities. (3 marks)
(ii) Cash from financing activities. (2 marks)
(iii) Cash from investing activities. (1 mark)
(iv) Net increase/decrease in cash. (1 mark)
Answer :
Cash Flow Statement
For the Year ended 31st March, 2007
Particulars (`) (`)
(i) Cash from Operating Activities
Net Profit (given)
Adjustment for :
Depreciation (Gross Block)
Discount on issue of shares written off
Preliminary expenses written off
Provision for tax
Profit before working capital changes
1,35,000
90,000
2,500
2,500
80,000
3,10,000
(ii)
(iii)
Increase in stock
Decrease in book debts
Decrease in book creditors
Cash generated from operation
Income tax paid
Cash from Operating Activities
Cash from Financing, Activities
issue of shares
Redemption of Debentures
Dividend Paid
Net Cash used in Financing Activities
Cash from Investing Activities
Fixed assets purchased
Total cash invested in fixed assets
Cash used in investing Activities
Net Decrease in Cash
Opening balance of cash and cash equivalents
Closing balance of cash and cash equivalents
(1,30,000)
20,000
(10,000)
1,90,000
(60,000
1,00,000
(50,000)
80,000
(1,20,000)
1,30,000
(30,000)
(1,20,000)
(20.000)
80,0000
60,000
[Chapter #### 9] Cash Flow Statement OOOO 2.515
2008 - June [7] (b) The following are the summarised balance sheets of Gamma Ltd.
as at 31st March, 2006 and 31st March, 2007 :
Liabilities 31.03.2006 31.03.2007
(`) (`)
Share Capital 4,50,000 4,50,000
General reserve 3,00,000 3,10,000
Profit and loss account 56,000 68,000
Creditors 1,68,000 1,34,000
Provision for taxation 75,000 10,000
Mortgage loan ) 2,70,000
10,49,000 12,42,000
Assets
Plant and machinery 4,00,000 3,20,000
Investments 50,000 60,000
Inventory 2,40,000 2,10,000
Debtors 2,10,000 4,55,000
Cash at bank 1,49,000 1,97,000
10,49,000 12,42,000
Additional information :
(i) Investments costing ` 8,000 were sold during the year form ` 8,500.
(ii) Provision for taxation made during the year was `9,000.
(iii) During the year, a part of plant and machinery costing ` 10,000 was sold for
`12,000, the profit was included in profit and loss account.
(iv) Dividend paid during the year amounted to ` 44,080.
You are required to prepare cash flow statement in new format as per Accounting
Standard (Revised) by indirect method. (10 marks)
Answer :
Cash flow Statement for the year ending 31.3.07 (Indirect Method)
(as per Accounting Standard-3)
(A) Cash Flow from Operating Activities ` `
Net Profit (` 68,000!` 56,000
+ ` 9,000) 21,000
Adjustment for :
Depreciation 70,000
Transfer to General Reserve 10,000
Dividend paid 44,080
Profit on sale of machinery (2,000)
Profit on sale of investment (500)
2.516 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Operating Profit before Working Capital
Charges 1,42,580
Adjustment for : Inventory 30,000
Debtors (2,45,000)
Creditors (34,000)
Cash generated from operations (1,06,420)
Tax paid (74,000)
Net Cash used in operating activities (1,80,420)
(B) Cash Flow from Investing Activities :
Sale of Plant and Machinery 12,000
Sale of Investment 8,500
Purchase of Investment (18,000)
Net Cash provided by Investing Activities 2,500
(C) Cash Flow from Financing Activities :
Mortgage Loan 2,70,000
Payment of Dividend (44,080)
Net Cash used in Financial Activities 2,25,920
Net increase in Cash and Bank 48,000
Cash at Bank as on 31.3.2006 1,49,000
Cash at Bank as on 31.3.2007 1,97,000
Working Notes :
(i) Dr. Plant and Machinery A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/d
To Profit & Loss A/c
(Profit on Sales)
4,00,000
2,000
By Depreciation
(balancing figure)
By Cash'A/c (Sales)
By Balance c/d
70,000
12,000
3,20,000
4,02,000 4,02,000
(ii) Investment A/c
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/d
To Profit & Loss A/c
(profit on sale)
To Bank (bal. figure)
50,000
500
18,000
By Bank (hhsales)
By Balance c/d
8,500
60,000
68,500 68,500
[Chapter #### 9] Cash Flow Statement OOOO 2.517
(iii) Provision for Taxation A/c
Particulars `̀̀̀ Particulars `̀̀̀
To Balance (bal. figure)
To Balance c/d
74,000
10,000
By Balance b/d
By Profit and Loss A/c
(provision made)
75,000
9,000
84,000 84,000
2.518
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter jjjjj
10 Objective Questions
CS Executive Programme (Module I)
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true of false :
(i) Cost accounting is a branch of financial accounting. (1)
(ii) Bin card shows the value of a material at any moment of time. (2)
(iii) In absorption costing, the valuation of inventories is higher than in marginal
costing technique. (7)
(iv) A budget manual is a summary of all the financial budgets. (6)
(v) Cost reduction is cost control. (5)
(2 marks each)
Answer :
(i) False;
(ii) False;
(iii) True;
(iv) False;
(v) False;
2008 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) Administration overheads are recovered as a percentage of —
(a) Direct materials
(b) Direct wages
(c) Prime cost
(d) Works cost. (4)
(ii) For contracts which are very near to completion, the profit is ascertained by the
formula —
(a) Estimated profit × Work certified / Contract price
(b) Estimated profit × Work certified / Contract price × Cash received / Work
certified
(c) Estimated profit × Work certified / Contract price × Cost of work / Total cost
to date
(d) Any of the above in the absence of specific instruction. (5)
[Chapter #### 10] Objective Questions OOOO 2.519
(iii) The type of process loss that should not affect the cost of inventories is —
(a) Abnormal loss
(b) Normal loss
(c) Seasonal loss
(d) Standard loss. (1)
(iv) Cost! Volume !Profit analysis is most important for the determination of the —
(a) Volume of operations necessary to break!even
(b) Variable revenues necessary to equal fixed costs
(c) Relationship between revenues and costs at various levels of operation
(d) Sales volume necessary to equal fixed costs. (7)
(v) For shoe manufacturers, the most suitable cost system is —
(a) Job costing
(b) Batch costing
(c) Contract costing
(d) None of the above. (5) (1 mark each)
Answer :
(i) (d) Works cost
(ii) (a) Estimated profit × Work certified / Contract price
(iii) (a) Abnormal loss
(iv) (c) Relationship between revenues and costs at various levels of operation
(v) (b) Batch costing
2008 - Dec [5] {C} (c) Re ! write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(i) Cost is a fact whereas price is a __________ . (1)
(ii) Imputed costs are relevant for __________ . (1)
(iii) A _______ is the cost that has already been incurred and cannot be avoided by
decisions taken in the future. (1)
(iv) Economic lot size is the order size that ________ the total cost of ordering and
storing. (2)
(v) A profit centre is a division or organisational unit concerned with controlling both
______ and costs. (1)
(1 mark each)
Answer :
(i) policy;
(ii) decision making;
(iii) sunk cost;
(iv) minimizes;
(v) sales / (revenue);
2.520 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(i) At break-even point, the company earns only marginal profit. (7)
(ii) Fixed cost per unit remains fixed. (1)
(iii) Liquidity ratios measure long-term solvency of a concern. (8)
(iv) Rent on owned building is included in cost accounts. (1)
(v) Job costing can be used in industries using standard costing. (5)
(2 marks each)
Answer :
(i) False : Break-even Point is a level of that output of sales at which contribution
is equal to sales. At this point of sales, the producer neither has profit or nor loss.
In other words, at this point of total sales revenue are equal to total cost.
(ii) False : It is the total fixed cost which remains fixed inspective of the level of
output. But, the fixed cost per unit will be different at different level of output. As
level of output increases the fixed cost per unit will decrease and the level of
output decreases the fixed cost per unit will increases.
(iii) False : Liquidity ratio measure the Short term solvency of the concern. These
ratios indicate the relationship between liquid assets/quick assets and the
current liabilities of the concern. Traditionally, a quick ratio of 1:1 is considered
to be satisfactory ratio.
(iv) True : Rent on owned building is included in cost accounts, it is done to
calculate the real cost after taking into account the notional rent which would
have been paid, has the building been taken on rent.
(v) True : Standard costing is a technique which can be used with any methods of
costing including Job Costing.
2009 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figures(s) :
(i) Inflated price method of valuing material issue is suited when_____. (2)
(ii) Abnormal wastage_________ part of cost of production. (1)
(iii) _________in a contract provides that the contract price would be
suitably enhanced on the happening of a specified contingency. (5)
(iv) Direct material + direct labour + factory overheads = _______. (1)
(1 mark each)
Answer :
(i) is unavoidable wastage of material.
(ii) is not
(iii) Escalation clause
(iv) Factory cost/Works cost.
[Chapter #### 10] Objective Questions OOOO 2.521
2009 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(i) All long-term costs are controllable. (1)
(ii) Rent on own building is not included in cost accounts. (1)
(iii) Under differential piece rate of incentive scheme, there is no encouragement to
improve the performance of the workers. (3)
(iv) By job rotation, labour turnover can be controlled/reduced upto some extent.
(3)
(v) Administration overheads are incurred due to management policy and they are
easily controllable. (4)
(2 marks each)
Answer :
(a) (i) Correct : Normally, in short run all variable cost are controllable and all fixed
cost are not controllable whereas in long run/terms all cost whether variable
or fixed cost are controllable.
(ii) Incorrect : For decision making, point of view rent on own building is very
important. Whether it is not recorded in the book and also important in
comparing alternatives. This cost is treated as imputed or notional cost and
do not enter into traditional accounting systems.
(iii) Incorrect : Efficient and inefficient workers are distinguished under the
differential piece-rate of incentive scheme. Efficient workers are those who
attain or perform better than the standard are given a higher piece rate and
inefficient workers are given a lower rate. Hence, there is encouragement to
improve the performance of worker.
(iv) Correct : Workers can be satisfied through the job rotation within organization
and they do not try to leave the organization.
(v) Incorrect : Administration overhead are fixed in nature and are incurred due
to management policy. Therefore it is very difficult to central administration
overhead.
2009 - Dec [5]{C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) The most suitable cost system where the products differ in type of materials
and work performed is –
(a) Job costing
(b) Process costing
(c) Operating costing
(d) None of the above. (5)
2.522 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(ii) Current liabilities are equal to –
(a) Working capital + current assets
(b) Working capital – current assets
(c) Current assets – working capital
(d) Current assets + working capital. (8)
(iii) Non-controllable cost is the cost which –
(a) Is not subject to control at any level of managerial supervision
(b) Cannot be controllable during a particular financial year
(c) Cannot be controllable at any cost
(d) None of the above. (1)
(iv) Re-ordering level is equal to –
(a) Maximum consumption x minimum re-order period
(b) Maximum consumption x maximum re-order period
(c) Minimum consumption x minimum re-order period
(d) Normal usage x normal delivery period. (2)
(v) A budget designed to remain unchanged irrespective of the level of activity
actually attained is called –
(a) Master budget
(b) Fixed budget
(c) Current budget
(d) Flexible budget. (6)
(1 mark each)
Answer :
(b) (i) (a)
(ii) (c)
(iii) (a)
(iv) (b)
(v) (b)
2009 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) Material losses due to abnormal reasons should be transferred to ______.
(2)
(ii) ______determines the priorities of functional budgets. (6)
(iii) The ratio of total liquid assets to current liabilities is known as ____. (8)
(iv) Break-even chart is the graphical relationship between ______. (7)
(v) ______is the allotment of proportion of items of cost to cost centre/cost
units. (1)
(1 mark each)
[Chapter #### 10] Objective Questions OOOO 2.523
Answer :
(c) (i) Costing Profit and Loss Account.
(ii) Budget key factor/ Principal budget factor
(iii) Liquid ratio/Acid test ratio/ Quick ratio
(iv) Cost volume and Profit
(v) Apportionment
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(i) Under Flux Method, labour turnover is calculated by number of workers left
divided by average number of workers. (3)
(ii) In cost plus contracts, the contractor runs a risk of incurring a loss. (6)
(iii) There is no need to record attendance of piece rate workers since attendance
is not relevant for ascertaining the amount of wages to be paid. (3)
(iv) A profit centre whose performance is measured by its return on investment
(ROI) is known as investment centre. (1)
(v) Contribution is not only the criterion for deciding profitability. (7)
(2 marks each)
Answer :
(a) (i) This statement is Incorrect : Reason :- Labour turnover under flux method has
been calculated as given below labour turnover is equal to number of workers
left plus number of workers joined, divided by average number of workers.
(ii) This statement is Incorrect : Reason :- Under cost plus contract the contractor
is assured of a fixed percentage of profit over the total cost and there is no risk
incurring any loss on the contract.
(iii) This statement is Incorrect : Reason :- The payment made to the worker under
payment by result system is directly associated with output given by a worker
(iv) This statement is Correct : Reason :- In investment centre, it is the responsibility
of the manager to earn a satisfactory return on the assets employed in his
responsibilities centre which is govern by ROI.
(v) This statement is Correct : Reason :- It is very essential to insure that resources
should be mobilized towards that product which is the maximum contribution
wherever profit maximisation is important role. But in reality there may be various
factors such as —
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(i) The rate of change of labour force in an orgainsation during a specified period
is called—
2.524 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above. (3)
(ii) When a contract is not complete at the end of the year, profit on incomplete
contract—
(a) Is not considered
(b) Is considered for inclusion in the profit for the year
(c) Is considered for the inclusion of a part of the year
(d) None of the above. (5)
(iii) When prices fluctuate widely, the method that will avoid the effect of
fluctuations is—
(a) FIFO
(b) LIFO
(c) Simple average
(d) Weighted average. (2)
(iv) Fixed costs remain fixed—
(a) Over a short period
(b) Over a long period and within relevant range
(c) Over a short period and within a relevant range
(d) Over a long period. (1)
(v) When the under or over absorbed overheads amount is significant, it should
be disposed off by—
(a) Transferring to costing profit and loss account
(b) Using a supplementary rate
(c) Carry over to next year
(d) None of the above. (4)
(1 mark each)
Answer :
(b) (i) (b)
(ii) (c)
(iii) (d)
(iv) (c)
(v) (b)
2010 - June [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(i) expenses are excluded from cost. (1)
(ii) An account giving details of cost of production, cost of sales and profit made
during a particular period is called . (5)
[Chapter #### 10] Objective Questions OOOO 2.525
(iii) The process of apportionment of factory overheads among production and
service department is called of factory overheads. (4)
(iv) The time for which the employer pays remuneration to workers but obtains no
direct benefit is called . (3)
(v) A system that keeps a running and continuous record that tracks inventories
and cost of goods sold on day-to-day basis is called .(2)(1 mark each)
Answer :
(c) (i) Notional
(ii) Production account.
(iii) Primary distribution
(iv) Idle time
(v) Perpetual inventory system.
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(i) If a worker saves half of time of the standard time, the incentive under Halsey
Plan and Rowan Plan will be the same. (3)
(ii) The method of costing used in a refinery is operating costing. (5)
(iii) Fixed budgets are budgets of fixed assets. (6)
(iv) Opportunity cost is recorded in the books of account. (1)
(v) Margin of safety is the difference of actual sale and standard sale. (7)
(2 marks each)
Answer :
(i) True : The incentives under Halsey and Rowan plan would be same because
half of standard time is saved due to operational efficiency of labour. Since, time
saved and the time taken being the same, the incentives calculated as per the
formula resulted to the same amount.
(ii) False : The suitable method of costing to be used for a refinery is process
costing because refining is done in different consecutive processes.
(iii) False : Fixed budgets are used for estimating costs of a product or a service
over a period of time in which the budget is designed to remain unchanged
irrespective of the level of activity attained. Hence it is not the budget of fixed
assets..
(iv) False: Opportunity cost is not recorded in the books of account, even though it
is considered for decision making. Opportunity cost is the benefit foregone which
would have been received had it been used for second best use.
(v) False: Margin of safety is the total sales less break-even sales, i.e. the excess
of actual sales over break-even sales.
2.526 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
2010 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) In element-wise classification of overheads, which one of the following is not
included-
(a) Fixed overheads
(b) Indirect labour
(c) Indirect materials
(d) Indirect expenditure. (4)
(ii) Obsolete stocks are those having !
(a) Low turnover rate
(b) No demand for technological change
(c) No present demand, but may be in future
(d) None of the above. (2)
(iii) Holiday pay is treated as !
(a) Fringe benefits cost
(b) Direct labour cost
(c) Overheads
(d) Abnormal loss charged to profit and loss account. (3)
(iv) Incentive schemes include !
(a) Piece rate wage plan
(b) Time rate wage plan
(c) Differential piece rate wage plan
(d) None of the above. (3)
(v) The management accounting is an extension of !
(a) Financial accounting
(b) Responsibility accounting
(c) Cost accounting
(d) All of the above. (1)
(1 mark each)
Answer :
(i) (a) Fixed overheads
(ii) (b) No demand for technological change
(iii) (c) Overheads or (b) Direct labour cost
(iv) (c) Differential piece rate wage plan
(v) (d) All of the above.
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) The three categories of inventory for a manufacturer are raw material, work-in-
process and_________. (5)
[Chapter #### 10] Objective Questions OOOO 2.527
(ii) The time lost by workers who are paid on time basis, is known as ____. (3)
(iii) Quick ratio is the indicator of position of an enterprise. (8)
(iv) ________costs are not useful for decision making as all past costs are
irrelevant. (1)
(v) When there is no__________,the profit figures revealed under marginal and
absorption costing are identical. (7)
(1 mark each)
Answer :
(i) The three categories of inventory for a manufacturer are raw material, work-in-
process and finished goods.
(ii) The time lost by workers who are paid on time basis, is known as idle time .
(iii) Quick ratio is the indicator of liquidity position of an enterprise.
(iv) Sunk costs are not useful for decision making as all past costs are irrelevant.
(v) When there is no inventories, profit figures revealed under marginal and
absorption costing are identical.
2011 - June [5] {C} (a) Write the most appropriate answer from the given options inrespect of the following :
(i) When the sales increase from ` 40,000 to ` 60,000 and profit increases by
` 5,000, the P/V ratio is - (a) 20%(b) 30%(c) 25%(d) 40%. (7)
(ii) A company which has a margin of safety of ` 4,00,000 makes a profit of
` 80,000. Its fixed cost is ` 5,00,000, its break-even sales will be -
(a) ` 20 lakh
(b) ` 30 lakh
(c) ` 25 lakh
(d) ` 40 lakh. (7)(iii) Cost is determined before hand under -
(a) Standard costing (b) Historical costing (c) Marginal costing (d) None of the above. (5)
(iv) Continuous stock taking is a part of - (a) Annual stock taking (b) Perpetual inventory (c) ABC Analysis (d) None of the above. (2)
2.528 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(v) Absorption means -
(a) Charging of overheads to cost centres
(b) Charging of overheads to cost units
(c) Charging of overheads to cost centres or cost units
(d) None of the above. (4)
(1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) _________budget is a summary budget incorporating the component functional
budgets and which is finally approved, adopted and employed. (6)
(ii) Costs which are pertinent for decision-making are termed as ________. (7)
(iii) A responsibility centre in which a manager is accountable for costs only is
called_________. (1)
(iv) Contract in which reimbursement is based on actual allowable cost plus a fixed
fee is called__________. (5)
(v) Excess of budgeted revenues over the break-even revenue is called_________.
(6)
(1 mark each)
(c) State, with reasons in brief, whether the following statements are true or false :
(i) Direct costs and variable costs are not necessarily the same. (1)
(ii) Idle facility and idle time are the same. (3)
(iii) Overtime premium paid to all factory workers is usually considered direct labour.
(3)
(iv) Assuming inflation, if a company wants to maximise net income, it would select
FIFO as the method of pricing raw materials. (2)
(v) Collection of sundry debtors has no impact on current ratio. (8)
(2 marks each)
Answer :
(a) (i) (c) 25%
(ii) (c) ` 25 lakhs
(iii) (a) Standard costing
(iv) (b) Perpetual inventory
(v) (a) Charging of over heads to cost centres
or
(c) Charging of overheads to cost centres or cost units.
(b) (i) Master budget is a summary budget incorporating the component functional
budgets and which is finally approved, adopted and employed.
(ii) Costs which are pertinent for decision-making are termed as Relevant costs
[Chapter #### 10] Objective Questions OOOO 2.529
(iii) A responsibility centre in which a manager is accountable for cost only is
called Cost centre.
(iv) Contract in which reimbursement is based on actual allowable cost plus a
fixed fee is called Cost plus contract
(v) Excess of budgeted revenues over the break-even revenue is called Margin
of Safety
(c) (i) True : Direct costs are not necessarily the same as variable cost. Direct
costs comprises of direct material cost, direct labour cost and direct
expenses. Variable cost is made up of direct material, direct wages, direct
expenses and variable overheads.
(ii) False : Idle facility is that part of total facility like that part of a plant, machine
or equipment etc. Which cannot be effectively utilized in the business
whereas idle time is that time which is paid for, but not utilized for production.
Hence, we may say idle time is part of idle facility.
(iii) True : Because they are usually directly engaged in production or carrying
out some operation or process. Overtime premium paid to the factory
workers is called direct labour cost and they can be easily identified with and
charged to the product.
(iv) False : In case of rising prices, i.e. inflation, the seal profits of the concern
becomes low because they may be inadequate to meet the concern's
demand to purchase raw materials at the ruling price. Therefore, net income
cannot be maximized in inflation.
(v) True : Collection of sundry debtors has no impact on current ratio. Reduction
in sundry debtors would be equal to addition in cash/bank balance.
Therefore total current assets will remain same and hence current ratio will
have no impact.
2011 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Semi-variable costs are ignored in marginal costing. (7)
(ii) ‘Cost volume profit relationship’ is a more comprehensive term than ‘break-even
analysis’. (7)
(iii) Sunk costs are not relevant for decision-making. (1)
(iv) ‘Costing’ and ‘cost accounting’ are the same. (1)
(v) High wages means high cost of production. (3)
(2 marks each)
(b) Write the most appropriate answer from the given options in respect of the following:
(i) Opportunity cost helps in —
(a) Ascertainment of cost
2.530 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(b) Controlling cost
(c) Making managerial decisions
(d) None of the above. (1)
(ii) Fixed cost per unit-increases when —
(a) Production volume decreases
(b) Production volume increases
(c) Variable cost per unit decreases
(d) Variable cost per unit increases. (1)
(iii) The costing method in which fixed factory overheads are added to inventory is—
(a) Direct costing
(b) Marginal costing
(c) Absorption costing
(d) Activity based costing. (4)
(iv) Cash flow statement is required for the financial planning of —
(a) Short range
(b) Long range
(c) Medium range
(d) Very long range. (9)
(v) The type of spoilage that does not affect the cost of inventories is —
(a) Normal spoilage
(b) Standard spoilage
(c) Abnormal spoilage
(d) Seasonal spoilage. (1)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) At break-even point, the contribution will be equal to __________. (7)
(ii) __________ is a budget designed to furnish budgeted costs for any level of
activity actually attained. (6)
(iii) A current ratio of less than one implies that the working capital is _____. (8)
(iv) The process of physical verification of stores throughout the year is known as
__________. (2)
(v) In contract costing, the cost unit is a _____________. (6)
(1 mark each)
Answer :
(a) (i) The statement is false:
Semi – Variable cost should not be ignored in the marginal costing.
Semi – Variable cost are classified into fixed cost and variable cost keeping in
view the variable proportion by the appropriation method.
[Chapter #### 10] Objective Questions OOOO 2.531
(ii) The statement is true:- Cost volume profit relationship is more
comprehensive term because its determination includes marginal cost
approach, break even analysis, profit volume ratio etc.
(iii) The statement is true:- A sunk cost cannot be avoided it has already been
incurred in the future as it refers to past cost it is called as avoidable cost. This
cost is not so important for decision making. Therefore, past cost are irrelevant.
(iv) The statement is false:- Cost accounting and costing are two different terms.
Costing provides only the basis and information for ascertainment of cost.
Whereas the cost accounting is classifying, recording and allocating
expenditure for determination of cost of product or services and for the
preparation of data for the purpose of control and guidance of management.
(v) The statement is false:- The high or low cost of production depends upon the
efficiency and effectiveness of workers.
(b) (i) (c) Making management decisions
(ii) (a) Production volume decreases
(iii) (c) Absorption costing
(iv) (a) Short range
(v) (a) Normal spoilage
(c) (i) Fixed cost
(ii) Flexible budget
(iii) Negative
(iv) Perpetual inventory system
(v) Contract
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(i) Issue of shares against the purchase of fixed assets is considered under
financing activities in cash flow statement. (9)
(ii) In cost plus contracts, the contractor runs a risk of incurring loss. (5)
(iii) ABC analysis is based on the principle of management by exception. (2)
(iv) A firm with a very high current ratio and very low liquid ratio has very low level
of inventory. (8)
(v) When a factory operates at full capacity, fixed cost also becomes relevant for
make or buy decisions. (7)
(2 marks each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) Variable cost per unit does not remain _________. (1)
(ii) Quantitative records of receipts, issue and balance items of material in stores
are entered in _________. (2)
2.532 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iii) Abnormal losses on account of idle time should be written off by being directly
debited to__________. (2)
(iv) Two important opposing factors in fixing the economic order quantity are
________ and carrying cost. (2)
(v) Zero base budgeting overcomes the weaknesses of ________. (6)
(1 mark each)
(c) Write the most appropriate answer from the given options in respect of the
following :
(i) The annual demand is 1,000 units. The unit price is ` 10 per unit. The carrying
cost of inventory is 10% and the ordering cost is ` 5 per order. The economic
order lot to be ordered is —
(a) 100 units
(b) 800 units
(c) 200 units
(d) 400 units. (2)
(ii) The nature of ratio analysis is —
(a) Quantitative analysis
(b) Qualitative analysis
(c) Both quantitative and qualitative analysis
(d) None of the above. (8)
(iii) When prices fluctuate widely, the method that will smooth out the effect of
fluctuations is —
(a) FIFO
(b) LIFO
(c) Simple average
(d) Weighted average. (2)
(iv) When the amount of overheads absorbed is less than the amount of overheads
incurred, it is called —
(a) Under-absorption of overheads
(b) Over-absorption of overheads
(c) Proper absorption of overheads
(d) Normal absorption of overheads. (4)
(v) Product cost under marginal costing include —
(a) Prime cost only
(b) Prime cost and fixed overheads
(c) Prime cost and variable overheads
(d) Material cost and variable overheads. (7)
(1 mark each)
[Chapter #### 10] Objective Questions OOOO 2.533
Answer :(a) (i) The statement is False:- Since cash flow statement ignores non cash
transactions as it does not take into consideration transactions which do notaffect the cash, issue of shares against the purchase of fixed assets is notconsidered in cash flow statement at all.
(ii) The statement is False:- Since the contractor is assured of a fixed percentageof profit there is no risk of incurring any loss on the contract.
(iii) The statement is True:- Since the management time is saved since attentionneed be paid only to some of the items rather than all the items as would be thecase if the ABC (always better control) system was not in operation because itis based on the principal of management by exception.
(iv) The statement is False:- A firm with a very high current ratio and very lowliquid ratio indicates a high level of investment in such inventories with aremostly un-salable.
(v) The statement is True:- A factory operates at full capacity, the decision tomake further is very likely to call expansion in installed capacity at such fixedcost become relevant cost for arriving at make or buy-decisions.
(b) (i) Variable.(ii) Bin-card.(iii) Costing Profit & Loss A/c.(iv) Ordering cost.(v) Conventional or Traditional budgeting.
(c) (i) (a) 100 units.(ii) (a) Quantitative analysis.(iii) (d) Weighted average.(iv) (a) Under-absorption of overheads.(v) (c) Prime Cost and Variable Overheads.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements aretrue or false:
(i) Cash flow statement ignores the accrual accounting concept. (9)(ii) Cost-volume-profit relationship is a more comprehensive term than break-
even analysis. (7)(iii) For control purposes, long-term budgets should be prepared. (6)(iv) Direct cost and variable cost are not the same. (2)(v) ABC analysis is used to manage the spare parts, etc. (2)
(2 marks each)(b) Write the most appropriate answer from the given options in respect of the
following:(i) Over-absorption of factory overheads due to inefficiency of management
should be disposed by—
2.534 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(a) Use of supplementary rate
(b) Transfer to costing profit and loss account
(c) Carry forward to next year
(d) Transfer to production account. (4)
(ii) A flexible budget is a budget which is designed to change in relation to the
level of activity—
(a) Budgeted
(b) Attained
(c) Not budgeted
(d) Forecasted. (6)
(iii) The costing method in which fixed factory overheads are added to the
inventory is—
(a) Direct costing
(b) Marginal costing
(c) Absorption costing
(d) Standard costing. (7)
(iv) When margin of safety is 20% and P/V ratio is 60%, the profit will be—
(a) 30%
(b) %
(c) 12%
(d) None of the above. (7)
(v) Rowan premium plan is an improvement over—
(a) Taylor plan
(b) Gantt bonus plan
(c) Halsey premium plan
(d) None of the above. (3)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) All indirect costs are collectively called__________. (4)
(ii) Marginal costing is a__________of costing. (7)
(iii) Zero base budgeting overcomes the weaknesses of__________. (6)
(iv) The break-even point__________when selling price is increased. (7)
(v) __________method of valuation of inventory is useful when prices are rising.
(2)
(1 mark each)
[Chapter #### 10] Objective Questions OOOO 2.535
Answer (a)
(i) This Statement is True.
A statement of cash flow reports the inflows and outflows of cash and its
equivalents only of an organisation during a particular period. Hence it is
prepared on cash basis and not on accrual accounting concepts-
(ii) This Statement is True.
For the determination of cost volume-profit relationship, marginal cost, break
even point analysis, profit volume ratio and key factor are considered. Hence
cost volume profit relationship is more comprehensive term.
(iii) This Statement is False.
Long term budgets are the budgets which are prepared for periods longer than
a year. They are prepared for those activities, the trend in which is difficult to fore
see over longer periods.
(iv) This Statement is True.
Direct costs are not necessarily the same as variable cost direct costs comprises
of direct material cost ,direct labour and direct expenses, variable cost is made
up of direct materials, direct wages, direct expenses and variable overheads.
(v) This Statement is False.
The ABC analysis is a selective inventory control which aims at concentrating
control mainly on cost basis.
(b) (i) (b) Transfer to costing profit and loss account,
(ii) (b) Attained,
(iii) (c) Absorption costing,
(iv) (c) 12%
(v) (c) Halsey premium plans
(c) Fill in the blanks
(i) Overheads,
(ii) Technique
(iii) Conventional Budgeting
(iv) Decreases
(v) LIFO
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statement are
true or false:
(i) Cost sheet is the same as statement of cost and profit. (5)
(ii) Zero base budgeting is based on incremental approach. (6)
(iii) When a factory operates at full capacity, fixed cost also becomes relevant for
make or buy decisions. (7)
2.536 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iv) Marginal costing is different from direct costing. (7)
(v) Management accounting is based on double entry system. (1)
(2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following:
(i) The rate of change of labour force in an organisation during a specified period
is called —
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above. (3)
(ii) Differential cost analysis is incorporated in the —
(a) Cost books
(b) Financial books
(c) Statutory books
(d) None of the above. (1)
(iii) Marginal costing is a very useful technique to management for —
(a) Cost control
(b) Profit planning
(c) Decision making
(d) All of the above. (7)
(iv) When prices of materials have a rising trend, then the suitable method for
issuing the materials will be —
(a) FIFO
(b) LIFO
(c) HIFO
(d) Standard cost price. (2)
(v) Cash flow statement is required for the financial planning of —
(a) Short range
(b) Long range
(c) Medium range
(d) Very long range. (9)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) A document which provides for assembly of different costs in respect of a cost
centre or a cost unit is called _______. (5)
(ii) Economic order quantity depends on _______ and _______ costs. (2)
[Chapter #### 10] Objective Questions OOOO 2.537
(iii) In case the amount of overheads recovered from production is more than theactual overheads, there is said to be _______ of overheads. (4)
(iv) Abnormal idle time cost should be charged to _______. (3)(v) Bin card shows _______ at any moment of time. (2)
(1 mark each)Answer :(a) (i) This statement is false : Cost sheet is a document which provide the detailed
cost of the cost centre. The selling and distribution expenses are not includedin the cost sheet when in statement of cost and profit.(a) the first part gives the cost of production.(b) the second part gives the cost of goods sold.(c) the third part gives the cost of sale and profits for the period.
(ii) This statement is false : Zero based budgeting is not based on incrementalapproach, because it promote operational efficiency. Hence, it require managerto review and justify their activities or the fund. ZBB is particularly useful forservice department and government.
(iii) This statement is true : When factory works at full capacity, fixed cost alsobecome relevant for make or buy decision.
(iv) This statement is true : Marginal costing covers only those expenses whichare of variable nature whereas direct costing may also include costs whichbesides being fixed in the nature are identified with the cost objective.
(v) This statement is false : Management Account is not based on double entrysystem.
Answer :(b) (i) (b) Labour turnover.
(ii) (a) Cost books.(iii) (d) All of the above.(iv) (c) HIFO.(v) (a) Short range.
Answer :(c) (i) Cost sheet.
(ii) Ordering and storage.(iii) Over absorption.(iv) Costing profit and loss account.(v) The quantity of raw materials.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Job card is used for recording the ‘in’ and ‘out’ time of the workers on the job.(3)
(ii) Simultaneous equation method is not an algebraic method. (4)
(iii) Cash flow statement shows receipts and payments of cash. (9)
2.538 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iv) Unchanged fixed costs should not be considered in a make or buy decision.(7)
(v) Cost-volume-profit relationship is a more comprehensive term than break-even
analysis. (2 marks each) (7)
2013 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) Batch costing method is applicable where !
(a) Similar articles are produced in batches
(b) Articles are produced in mass scale
(c) Mass production is undertaken in batches
(d) None of the above. (5)
(ii) When margin of safety is 20% and P/V ratio is 60%, the profit will be —
(a) 30%
(b)
(c) 12%
(d) None of the above. (7)
(iii) Traditional budgeting is accounting oriented whereas zero base budgeting is —
(a) Activity oriented
(b) Decision oriented
(c) Event oriented
(d) None of the above. (6)
(iv) Which of the following is variable cost or variable expense —
(a) Depreciation on machinery
(b) Interest on capital
(c) Direct materials
(d) Rent, rates and taxes. (5)
(v) Cost-volume-profit analysis is based on several assumptions. Which of the
following is not one of those assumptions —
(a) The sales mix of the product is constant
(b) Inventory quantities change during the year
(c) The behavior of both revenue and cost is linear throughout the relevant
range
(d) Factor prices, e.g. material prices and wage rates remain unchanged.(7)
(1 mark each)
2013 - Dec[5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) If the work certified is 50% or more of contract price, the formula for ascertaining
the profit to be transferred to profit and loss account is _____________ . (5)
[Chapter #### 10] Objective Questions OOOO 2.539
(ii) Material losses due to abnormal reasons should be transferred to _________ .
(2)
(iii) Contribution earned after reaching break-even point is ___________ of the firm.
(7)
(iv) Flexible budget recognises the difference between fixed, variable and _______
costs. (6)
(v) _________ are that portion of the process loss which can be converted into a
finished product by incurring more material and labour expenses. (2)
(1 mark each)
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Objective 14 20 20 20 20 20 20 20 20 20
Total 14 20 20 20 20 20 20 20 20 20
2.540
June - 2012Cost and Management Accounting
PART - B(Answer Question No. 5 which is compulsory and any two of the rest from this part.)
5. (a) State, with reasons in brief, whether the following statements are true or false:(i) Issue of shares against the purchase of fixed assets is considered under
financing activities in cash flow statement. (ii) In cost plus contracts, the contractor runs a risk of incurring loss.(iii) ABC analysis is based on the principle of management by exception.(iv) A firm with a very high current ratio and very low liquid ratio has very low
level of inventory.(v) When a factory operates at full capacity, fixed cost also becomes
relevant for make or buy decisions. (2 marks each)(b) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :(i) Variable cost per unit does not remain _________.(ii) Quantitative records of receipts, issue and balance items of material in
stores are entered in _________.(iii) Abnormal losses on account of idle time should be written off by being
directly debited to__________.(iv) Two important opposing factors in fixing the economic order quantity
are ________ and carrying cost.(v) Zero base budgeting overcomes the weaknesses of ________.
(1 mark each)(c) Write the most appropriate answer from the given options in respect of the
following :(i) The annual demand is 1,000 units. The unit price is ` 10 per unit. The
carrying cost of inventory is 10% and the ordering cost is ` 5 per order.The economic order lot to be ordered is —(a) 100 units(b) 800 units(c) 200 units(d) 400 units.
(ii) The nature of ratio analysis is —(a) Quantitative analysis(b) Qualitative analysis(c) Both quantitative and qualitative analysis(d) None of the above.
(iii) When prices fluctuate widely, the method that will smooth out the effectof fluctuations is —(a) FIFO(b) LIFO(c) Simple average(d) Weighted average.
Question Papers OOOO 2.541
(iv) When the amount of overheads absorbed is less than the amount ofoverheads incurred, it is called —(a) Under-absorption of overheads(b) Over-absorption of overheads(c) Proper absorption of overheads(d) Normal absorption of overheads.
(v) Product cost under marginal costing include —(a) Prime cost only(b) Prime cost and fixed overheads (c) Prime cost and variable overheads(d) Material cost and variable overheads. (1 mark each)
6. (a) A company manufacturers 5,000 units of a product per month. The cost ofplacing an order is ` 100. The purchase price of the raw material is ` 10 perkg. The re-order period is 4 to 8 weeks. The consumption of raw materialsvaries from 100 kg. to 450 kg. per week. The average weekly consumptionbeing 275 kg. The carrying cost of inventory is 20% per annum. Assuming 52weeks in a year, you are required to calculate —
(i) Re-order quantity;(ii) Maximum level;(iii) Minimum level; and (iv) Average level. (6 marks)
(b) The following are the particulars relating to a contract which has begun on1st April, 2010 :
`̀̀̀
Contract price 5,00,000Machinery 30,000Material 1,70,600Wages 1,48,750Direct expenses 6,330Outstanding wages 5,380
`̀̀̀
Uncertified work 9,000Overheads 8,240Material returned 1,600Machinery as on 31st March, 2011 22,000Material in hand on 31st March, 2011 3,700Value of work certified 3,90,000Cash received 3,51,000
Prepare the contract account for the financial year 2010-11 showing theamount of profit that may be taken to the credit of profit and loss account forthe year. (6 marks)
(c) “Normal labour turnover is advantageous and excessive labour turnover isnot desirable.” Comment. (3 marks)
2.542 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
7. (a) Surya Ltd. provides you the following information for the year ended 31st
March, 2011 :(i) Sales for the year amounted to ` 1,20,00,000, the company sells goods
for cash only.(ii) Cost of goods sold was 60% of sales. Closing inventory was higher than
opening inventory by ` 53,750. Trade creditors on 31st March, 2011exceeds those on 31st March, 2010 by ` 28,750.
(iii) Net profit before tax was ̀ 17,25,000. Tax paid amounted to ̀ 8,75,000.Depreciation on fixed assets for the year was ̀ 3,93,750. Whereas otherexpenses totalled ` 26,81,250. Outstanding expenses on 31st March,2010 and on 31st March, 2011 totalled to ` 1,02,500 and ` 1,13,750respectively.
(iv) New machinery and furniture costing ̀ 12,84,375 in all were purchased.(v) A rights issue was made of 2,500 equity shares of ` 250 each at a
premium of ` 75. The entire money was received with applications.(vi) Dividends and dividend distribution tax totaling ` 5,08,750 were paid.(vii) Cash in hand and at bank as on 31st March, 2010 totalled ` 2,67,250.
Prepare cash flow statement as per Accounting Standard - 3 (Revised).(9 marks)
(b) Metro Service Ltd. is operating at 70% capacity and presents the followinginformation :Break-even point : ` 200 croreP/V ratio : 40%Margin of safety : ` 50 crore.Metro management has decided to increase production to 95% capacitylevel with the following modifications —— Selling price will be reduced by 8%.— The variable cost will be reduced to 55% on sales.— The fixed cost will increase by ` 27 crore including depreciation on
additions, but excluding interest on additional capital.— Additional capital of ` 50 crore will be needed for capital expenditure
and working capital.You are required to calculate —
(i) Sales required to earn ̀ 7 crore over and above the present profit andalso to meet 20% interest on additional capital;
(ii) Revised break-even point;(iii) Revised P/V ratio; and(iv) Revised margin of safety. (6 marks)
8. (a) From the following particulars, prepare the balance sheet of Dhan DhanyaLtd.: Current ratio 2Working capital ` 4,00,000Capital block (employed) to current assets 3:2
Question Papers OOOO 2.543
Fixed assets to turnover 1:3Cash sales/credit sales 1:2Debentures/share capital 1:2Stock velocity 2 monthsCreditors velocity 2 monthsDebtors velocity 3 monthsGross profit ratio 25% (to sales)Net profit 10% of turnoverReserve 2.5% of turnover
(9 marks)(b) Flexible budgets are more realistic and useful than fixed budgets. Do you
agree ? Explain. (3 marks)(c) “Budget is an aid to management and not a substitute for management”.
Comment. (3 marks)
December - 2012Cost and Management Accounting
PART—BAnswer Question No. 5 which is compulsory
and any two of the rest from this part.
5. (a) State, with reasons in brief, whether the following statements are true orfalse:(i) Cash flow statement ignores the accrual accounting concept.(ii) Cost-volume-profit relationship is a more comprehensive term than
break-even analysis.(iii) For control purposes, long-term budgets should be prepared.(iv) Direct cost and variable cost are not the same.(v) ABC analysis is used to manage the spare parts, etc. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of thefollowing:(i) Over-absorption of factory overheads due to inefficiency of management
should be disposed by—(a) Use of supplementary rate(b) Transfer to costing profit and loss account(c) Carry forward to next year(d) Transfer to production account.
(ii) A flexible budget is a budget which is designed to change in relation tothe level of activity—(a) Budgeted(b) Attained(c) Not budgeted(d) Forecasted.
2.544 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
(iii) The costing method in which fixed factory overheads are added to theinventory is—(a) Direct costing(b) Marginal costing(c) Absorption costing(d) Standard costing.
(iv) When margin of safety is 20% and P/V ratio is 60%, the profit will be—(a) 30%
(b) %
(c) 12%(d) None of the above.
(v) Rowan premium plan is an improvement over—(a) Taylor plan(b) Gantt bonus plan(c) Halsey premium plan(d) None of the above. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s):(i) All indirect costs are collectively called__________.(ii) Marginal costing is a__________of costing.(iii) Zero base budgeting overcomes the weaknesses of__________.(iv) The break-even point__________when selling price is increased.(v) __________method of valuation of inventory is useful when prices are
rising. (1 mark each)6. (a) Prepare the balance sheet of Moon Ltd. from the following particulars:
Current ratio 2Working capital ` 4,00,000Capital block to current assets 3 : 2Fixed assets to turnover (based on sales) 1 : 3Cash sales / Credit sales 1 : 2Stock velocity 2 monthsCreditors velocity 2 monthsDebtors velocity 3 monthsNet profit 10% of turnoverReserves 2.5% of turnoverDebentures/share capital 1 : 2Gross profit ratio 25% (on sales)Assume that capital block includes share capital, debentures, profit andreserves. (10 marks)
(b) Briefly point out the process of budgetary control. (5 marks)
Question Papers OOOO 2.545
7. (a) SV Constructions Ltd. have obtained a contract for construction of a bridge.The value of the contract is ` 12 lakh and the work commenced on 1st
October, 2011. The following details are shown in their books for the yearended 30th September, 2012:
`
Plant purchased 60,000Wages paid 3,40,000Wages accrued as on 30.9.2012 2,800Material issued to site 3,36,000Material at site as on 30.9.2012 4,000Direct expenses 8,000Direct expenses accrued as on 30.9.2012 1,200General overheads apportioned 32,000Work not yet certified at cost 14,000Cash received being 80% of work certified 6,00,000Life of plant purchased is 5 years and scrap value is nil.You are required to—(i) Prepare the contract account for the year ended 30th September, 2012.(ii) Show the amount of profit which you consider might be fairly taken on the
contract and how you have calculated it. (9 marks)(b) X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on regular
basis. It is estimated that it costs 10 paise as inventory holding cost perbearing per month and that the set-up cost per run of bearing manufacture is` 324.Required—(i) What would be the optimum run size for manufacture of bearings?(ii) Assuming that company has a policy of manufacturing 6,000 bearings per
run, how much extra cost the company would be incurring as comparedto the optimum run suggested in (i) above.
(iii) What is the minimum inventory holding cost? (6 marks)8. (a) Following are the balances of accounts of Great Ltd.:
Equity and Liabilities As on As on31.03.2012 31.03.2011
(`) (`)Share capital 10,00,000 8,00,000Reserves 2,00,000 1,50,000Profit and loss (Surplus) 1,00,000 60,000Proposed dividend 2,00,000 1,00,000Debentures 2,00,000 —Provisions for taxation 1,00,000 70,000Trade payables 7,00,000 8,20,000
25,00,000 20,00,000
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AssetsPlant and machinery 7,00,000 5,00,000Land and building 6,00,000 4,00,000Investment 1,00,000 —Trade receivables 5,00,000 7,00,000Stock 4,00,000 2,00,000Cash in hand/bank 2,00,000 2,00,000
25,00,000 20,00,000Additional information is as follows:(i) Depreciation @ 25% was charged on the opening value of plant and
machinery.(ii) During the year, one old machine costing ` 50,000 (written down value
` 20,000) was sold for ` 35,000.(iii) ` 50,000 was paid towards income-tax during the year.(iv) Building under construction was not subject to any depreciation.Prepare cash flow statement as per Accounting Standard-3. (9 marks)
(b) Product-X can be produced either by Machine-A or Machine-B. Machine-Acan produce 100 units of Product-X per hour and Machine-B can produce 150units per hour. Total machine hours available during the year are 2,500.Taking into account the following data, determine which machine is to be usedfor the manufacture of Product-X.Costs and price per unit of Product-X:
Machine-A Machine-B(`) (`)
Marginal cost 5 6Selling price 9 9Fixed cost 2 2 (3 marks)
(c) “Management accounting is a decision making system.” Comment.(3 marks)
June - 2013Cost and Management Accounting
Part— B(Answer Question No. 5 which is compulsory and any two of the rest from this part.)
5. (a) State, with reasons in brief, whether the following statements are true or false:(i) Cost sheet is the same as statement of cost and profit.(ii) Zero base budgeting is based on incremental approach.(iii) When a factory operates at full capacity, fixed cost also becomes relevant
for make or buy decisions.(iv) Marginal costing is different from direct costing.(v) Management accounting is based on double entry system.
(2 marks each)
Question Papers OOOO 2.547
(b) Write the most appropriate answer from the given options in respect of thefollowing:(i) The rate of change of labour force in an organisation during a specified
period is called —(a) Labour efficiency(b) Labour turnover(c) Labour productivity(d) None of the above.
(ii) Differential cost analysis is incorporated in the —(a) Cost books(b) Financial books(c) Statutory books(d) None of the above.
(iii) Marginal costing is a very useful technique to management for —(a) Cost control(b) Profit planning(c) Decision making(d) All of the above.
(iv) When prices of materials have a rising trend, then the suitable method forissuing the materials will be —(a) FIFO(b) LIFO(c) HIFO(d) Standard cost price.
(v) Cash flow statement is required for the financial planning of —(a) Short range(b) Long range(c) Medium range(d) Very long range. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s):(i) A document which provides for assembly of different costs in respect of
a cost centre or a cost unit is called _______.(ii) Economic order quantity depends on _______ and _______ costs.(iii) In case the amount of overheads recovered from production is more than
the actual overheads, there is said to be _______ of overheads.(iv) Abnormal idle time cost should be charged to _______.(v) Bin card shows _______ at any moment of time. (1 mark each)
6. (a) From the following particulars relating to Genius Ltd., prepare balance sheetas on 31st March, 2013:Fixed assets/turnover ratio (based on sale) 1 : 2Debt collection period 2 months
2.548 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2B
Gross profit 25%Consumption of raw materials 40% of cost of goods soldStock of raw materials 4 months consumptionFinished goods 20% of turnover at costFixed assets to current assets 1 : 1Current ratio 2Long-term loan to current liability 1 : 3Capital to reserve 5 : 2Cost of fixed assets ` 10,50,000 (12 marks)
(b) Marginal costing rewards sales whereas absorption costing rewardsproduction. Comment. (3 marks)
7. (a) From the information given below prepare cash flow statement for Smile Ltd.:Balance Sheets
As on As on31-03-2012 31-03-2013( ` in ‘000) (` in ‘000)
Equity and liabilitiesShareholders’ funds:
Share capital 1,800 2,000Reserves and surplus:
General reserve 50 30Profit and loss account 140 160
Non-current liabilities:Loan on mortgage @ 8%
(taken on 1st July, 2012) ! 50Current liabilities:
Bank overdraft 115 114Trade payables 22 40Short-term provisions:Provision for final dividend 90 80
2,217 2,474AssetsNon-current assets:
Freehold building 1,000 1,160Machinery and plant 340 490Furniture and fittings 7 6Goodwill 150 130Investment in shares 100 120Preliminary expenses 15 5
Question Papers OOOO 2.549
Current assets:Inventories 440 422Trade receivables 160 134Prepaid expenses 4 5Cash in hand 1 2
2,217 2,474Additional information:(i) Depreciation on freehold building @ 2 ½% on cost ̀ 12,00,000; on machinery
and plant @ 10% on cost ` 5,00,000; on furniture and fitting @ 5% on cost`10,000.
(ii) Dividend received ` 6,000 was used in writing down the book value ofinvestment in shares.
(iii) Goodwill was written off out of general reserve.(iv) The proposed dividend for the year ended 31st March, 2012 was paid off and
interim dividend of ` 60,000 was paid out of profit and loss account.(12 marks)
(b) Distinguish between ‘production account’ and ‘cost sheet’. (3 marks)8. (a) The following data are available in a manufacturing company for a year period:
(` in lakhs)Fixed expenses :
Wages and salaries 9.50Rent, rates and taxes 6.60Depreciation 7.40Sundry administrative expenses 6.50
Semi-variable expenses (at 50% capacity):Maintenance and repairs 3.50Indirect labour 7.90Sales department salaries, etc. 3.80Sundry administrative expenses 2.80
Variable expenses (at 50% of capacity):Materials 21.70Labour 20.40Other expenses 7.90
98.00Assume that fixed expenses remain constant for all levels of production, semi-variableexpenses remain constant between 45% and 65% of capacity and increasing by 10%between 65% and 80% capacity and by 20% between 80% and 100% capacity.Sales at various levels are ! at 50% capacity : ̀ 100 lakh; at 60% capacity : ̀ 120 Lakh;at 75% capacity : ̀ 150 lakh; at 90% capacity : ̀ 180 lakh; and at 100% capacity : ̀ 200lakh.Prepare a flexible budget for the year and forecast the profits at 60%, 75%, 90% and
100% of capacity. (9 marks)
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8. (b) A company has fixed expenses of ` 90,000 with sales of ` 3,00,000 and a
profit of ̀ 60,000 during the first half year. If in the next half year, the company
suffered a loss of ` 30,000.
Calculate !
(i) P/V ratio, break-even point and margin of safety for the first half year.
(ii) Expected sales volume for next half year assuming that selling price and
fixed expenses remain unchanged.
(iii) The break-even point and margin of safety for the whole year.
(6 marks)
December - 2013
Cost and Management Accounting
PART—B
Answer Question No. 5 which is compulsory
and any two of the rest from this part.
(Answer Question No.5 which is compulsory and any two of the rest from this part.)
5. (a) State, with reasons in brief, whether the following statements are true or false:
(i) Job card is used for recording the ‘in’ and ‘out’ time of the workers on the
job.
(ii) Simultaneous equation method is not an algebraic method.
(iii) Cash flow statement shows receipts and payments of cash.
(iv) Unchanged fixed costs should not be considered in a make or buy
decision.
(v) Cost-volume-profit relationship is a more comprehensive term than break-
even analysis. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following:
(i) Batch costing method is applicable where !
(a) Similar articles are produced in batches
(b) Articles are produced in mass scale
(c) Mass production is undertaken in batches
(d) None of the above.
(ii) When margin of safety is 20% and P/V ratio is 60%, the profit will be —
(a) 30%
(b)
(c) 12%
(d) None of the above.
Question Papers OOOO 2.551
(iii) Traditional budgeting is accounting oriented whereas zero base budgeting
is —
(a) Activity oriented
(b) Decision oriented
(c) Event oriented
(d) None of the above.
(iv) Which of the following is variable cost or variable expense —
(a) Depreciation on machinery
(b) Interest on capital
(c) Direct materials
(d) Rent, rates and taxes.
(v) Cost-volume-profit analysis is based on several assumptions. Which of
the following is not one of those assumptions —
(a) The sales mix of the product is constant
(b) Inventory quantities change during the year
(c) The behavior of both revenue and cost is linear throughout the
relevant range
(d) Factor prices, e.g. material prices and wage rates remain
unchanged. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :
(i) If the work certified is 50% or more of contract price, the formula for
ascertaining the profit to be transferred to profit and loss account is
_____________ .
(ii) Material losses due to abnormal reasons should be transferred to
_________ .
(iii) Contribution earned after reaching break-even point is ___________ of
the firm.
(iv) Flexible budget recognises the difference between fixed, variable and
_______ costs.
(v) _________ are that portion of the process loss which can be converted
into a finished product by incurring more material and labour expenses.
(1 mark each)
6. (a) What is the profit to be recognised as per AS-7 in the current period having
regards to the following data :
Contract price ` 99,00,000
Cumulative figures :
To end of previous period-profit recognised `2,25,000
To end of current period-total costs `49,50,000
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Cost of work certified `36,00,000
Estimated future costs to completion `27,00,000
Estimated rectification cost 10% of contract price.
(7 marks)
(b) Flexible budget is more useful, elastic and practical. Explain. (4 marks)
(c) Explain the relevance of ‘key factor’ in decision making. (4 marks)
7. (a) From the information given below, calculate machine hour rate for the
Machine No. 30 :
Cost of machine `12,00,000
Estimated scrap value `50,000
Estimated working life 16,000 hours
Time required for maintenance 250 hours
Productive working hours 2,200 hours per year
Setting-up time 5%
Cost of repair `1,60,000 per year
No. of operators after 2 machines 2 persons
Wages of operator ` 20,000 per month
Chemicals required ` 12,500 per month
Overheads chargeable to this machine ` 22,500 per month
Insurance premium 1% per year
Power 20 units per hour @ ` 5.00 per unit.
(5 marks)
(b) The cause and effect relationship is essential while forming and establishing
the accounting ratios. Comment. (4 marks)
(c) The management of Sunshine Ltd. wants to have an idea of the profit
lost/foregone as a result of labour turnover last year. Last year sales
accounted to ` 66,00,000 and the P/V ratio was 20%. The total number of
actual hours worked by the direct labour force was 3.45 lakh. As a result of the
delays by the personnel department in filling up vacancies due to labour
turnover, 75,000 potentially productive hours were lost. The actual direct
labour hours included 30,000 hours attributable to training new recruits, cut of
which half of the hours were unproductive. The cost incurred consequent upon
labour turnover revealed the following analysis :
`
Settlement cost due to leaving 27,420
Recruitment cost 18,725
Selection cost 12,750
Training cost 16,105
Question Papers OOOO 2.553
Assuming that the potential production loss due to labour turnover could
have been sold at prevailing prices, ascertain the profit forgone/lost last year
on account of labour turnover. (6 marks)
8. (a) Following are the balance sheets of X Ltd. for two years :
As on As on
31.3.2012 31.3.2011
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital
Equity share capital 6,00,000 4,20,000
(b) Reserves and Surplus
Reserves 2,80,000 2,00,000
Surplus (P&L) 60,000 70,000
(2) Current Liabilities
(a) Short-term borrowings
Bank overdraft 75,000 —
(b) Trade payables 8,00,000 5,75,000
Trade payables for expenses 13,000 25,000
(c) Short-term provisions
Provision of taxation 1,00,000 80,000
Proposed dividend 72,000 50,000
TOTAL 20,00,000 14,20,000
II. ASSETS
(1) Non-current assets
(a) Fixed assets
Tangible assets before depreciation 8,10,000 7,00,000
Less: Depreciation (2,50,000) (1,80,000)
Tangible assets after depreciation 5,60,000 5,20,000
Investments 20,000 70,000
(2) Current assets
(a) Inventories 8,20,000 5,10,000
(b) Trade receivables 5,70,000 2,80,000
Bills receivables 30,000 24,000
(c) Bank — 16,000
TOTAL 20,00,000 14,20,000
The profit for the year ended 31st March, 2012 as per profit and loss
account after providing depreciation amounted to ̀ 2,42,000 which was further
adjusted as follows:
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`
Surplus (P&L as per last balance sheet) 70,000
Add : Profit after depreciation 2,42,000
3,12,000
Less :
Loss on investment 5,000
Provision for taxation 95,000
Transfer to reserve 80,000
Proposed dividend 72,000 2,52,000
Balance of profit 60,000
You are informed that :
(i) The sales and purchases for the year ended 31st March, 2012 amounted
to ` 60,00,000 and `45,00,000 respectively.
(ii) In arriving at the profit, the cost of sales and administrative and selling
expenses were deducted.
Prepare a cash flow statement as per AS-3 (revised). (10 marks)
(b) A company makes 1,500 units of a product for which the profitability statement
is given below :
` `
Sales 1,20,000
Direct material 30,000
Direct labour 36,000
Variable overheads 15,000
Total variable overheads 81,000
Fixed Cost 16,800
Total Cost 97,800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of
`6 per unit towards overtime labour. The premium so paid has been included in the
direct labour cost of ̀ 36,000 given above. You are required to compute the break-
even point. ( 5 marks)
�
Question Papers OOOO 2.555
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