paper 2b cost and management accounting - … of...3. methods of costing ! unit costing, contract...

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


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


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


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


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


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



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.



(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.


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


(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.


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.


2011 - Dec [5] {C} (b) Write the most appropriate answer from the given options in


(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



(i) Variable cost per unit does not remain _________. (1 mark)

Answer :

(i) Variable.


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.


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.


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)


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.


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)


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.


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)


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.


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.


(i) “Management accounting is not concerned with legal and/or conventional

constraints and the ‘generally accepted principles’ unlike financial accounting.”

Comment. (5 marks)


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)


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.


[Chapter #### 2] Material Cost OOOO 2.337


OBJECTIVE QUESTIONS


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


(iv) Economic lot size is the order size that ________ the total cost of ordering and

storing. (1 mark)

Answer :

(iv) minimizes;


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.



(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


(i) Material losses due to abnormal reasons should be transferred to ______.

(1 mark)

Answer :

(i) Costing Profit and Loss Account.




(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


(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.



(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


Answer :

(ii) (b) No demand for technological change

2011 - June [5] {C} (a) Write the most appropriate answer from the given options in


(iv) Continuous stock taking is a part of -

(a) Annual stock taking

(b) Perpetual inventory

(c) ABC Analysis


Answer :

(iv) (b) Perpetual inventory


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)


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.



(iv) The process of physical verification of stores throughout the year is known as

__________. (1 mark)

Answer :

(iv) Perpetual inventory system


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)


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.


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


(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)



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


(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.


(ii) 'Bin card' and 'store ledger'. (3 marks)

Answer :

Please refer 2009 - June [5] (c) (i) on page no. 341


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


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.


(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


(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


(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)


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—


(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.


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.


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.


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.


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


(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 =


= = 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.


(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)


Answer :

Economic Ordering Quantity

EOQ =

U = Annual consumption


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


S = Annual cost of storage of one unit


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.



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 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.



OBJECTIVE QUESTIONS


correct or incorrect :

(iii) Under differential piece rate of incentive scheme, there is no encouragement to

improve the performance of the workers.


(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



(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


Answer :

(i) (b)



(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.


(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.


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.



(v) Rowan premium plan is an improvement over—

(a) Taylor plan

(b) Gantt bonus plan

(c) Halsey premium plan


Answer:




(i) The rate of change of labour force in an organisation during a specified period

is called —


(b) Labour turnover




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.


true or false:

(i) Job card is used for recording the ‘in’ and ‘out’ time of the workers on the job.

(2 marks)


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


(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.


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.


(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.


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.


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)


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 :

=

=


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 :


`

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


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


(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)


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


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 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.



OBJECTIVE QUESTIONS




(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


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.



(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


Answer :

(v) (b)



(iii) The process of apportionment of factory overheads among production and

service department is called of factory overheads. (1 mark)

Answer :

(iii) Primary distribution



(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



(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


Answer :

(v) (a) Charging of over heads to cost centres

or

(c) Charging of overheads to cost centres or cost units.



(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


(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.



(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. (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,



(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.


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.


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


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)


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


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


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 =


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.


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.


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)


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


(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)


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 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.



OBJECTIVE QUESTIONS


true of false :

(v) Cost reduction is cost control. (2 marks)

Answer :

(v) False;

[Chapter #### 5] Method of Costing OOOO 2.381



(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


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


(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


Answer :

(i) (a)



(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


Answer :

(ii) (c)



(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.


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.



(i) The three categories of inventory for a manufacturer are raw material, work-in-

process and_________. (1 mark)

Answer :


process and finished goods.



(iii) Cost is determined before hand under -

(a) Standard costing

(b) Historical costing

(c) Marginal costing


Answer :

(iii) (a) Standard costing


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)




(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.


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


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.


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


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


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.


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.


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


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)



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.



OBJECTIVE QUESTIONS


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



(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)



(ii) ______determines the priorities of functional budgets. (1 mark)

Answer :

(ii) Budget key factor/ Principal budget factor



(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.


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.



(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)


Answer :

(i) Master budget is a summary budget incorporating the component functional


(v) Excess of budgeted revenues over the break-even revenue is called Margin of

Safety



(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



(v) Zero base budgeting overcomes the weaknesses of ________. (1 mark)

Answer :

(v) Conventional or Traditional budgeting.


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)


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



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.



(iii) Traditional budgeting is accounting oriented whereas zero base budgeting is —

(a) Activity oriented

(b) Decision oriented

(c) Event oriented




(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”.


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.


(i) Superiority of zero base budgeting (ZBB) to traditional budgeting. (3 marks)

Answer :






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:














Packages.








(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.


DISTINGUISH BETWEEN


(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.


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.


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.


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)


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



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.


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


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


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


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


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


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


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.


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.


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.


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.


(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.


(ii) Standard costing and budgetary systems vary in scope despite the similarity in

the basic principles. (4 marks)


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 :






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:














Packages.








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



(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




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


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.



OBJECTIVE QUESTIONS


true or false :


(iii) In absorption costing, the valuation of inventories is higher than in marginal

costing technique. (2 marks)

Answer :

(iii) True;



(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


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.



(iv) Break-even chart is the graphical relationship between ______. (1 mark)

Answer :

(iv) Cost volume and Profit



(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


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.



(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.



(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



(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



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.



(i) At break-even point, the contribution will be equal to __________. (1 mark)

Answer :

(i) Fixed cost


are true or false :

(v) When a factory operates at full capacity, fixed cost also becomes relevant for

make or buy decisions. (2 marks)


(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.


true or false:

(ii) Cost-volume-profit relationship is a more comprehensive term than break-

even analysis. (2 marks)


(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


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)


(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)


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.


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)



(ii) When margin of safety is 20% and P/V ratio is 60%, the profit will be —

(a) 30%

(b)

(c) 12%


(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)



(iii) Contribution earned after reaching break-even point is ___________ of the firm.

(1 mark each)

SHORT NOTES


(ii) Make or buy decisions (3 marks)


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


(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.


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”.


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.


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

___________________________________________________________________


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


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)


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)


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


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


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)


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


(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



(iii) Explain the significance of 'break-even analysis'. (5 marks)


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.


(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.


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


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


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


(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


(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


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)


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)


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


Labour charges 20,000

Fixed overheads 18,000 88,000

Net profit 12,000


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.


(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


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.


[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.443


OBJECTIVE QUESTIONS


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.



(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)



(iii) The ratio of total liquid assets to current liabilities is known as ____. (1 mark)

Answer :

(iii) Liquid ratio/Acid test ratio/ Quick ratio



(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.


are true or false :

(v) Collection of sundry debtors has no impact on current ratio. (2 marks)


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.



(iii) A current ratio of less than one implies that the working capital is ________.

(1 mark)

Answer :

(iii) Negative


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)


(ii) The nature of ratio analysis is —

(a) Quantitative analysis

(b) Qualitative analysis

(c) Both quantitative and qualitative analysis


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.


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.


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 :


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.


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


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


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)


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


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


(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


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 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


(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


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.


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


Summarised Balance Sheet as at 31st March, 2011


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


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


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


(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


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


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


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


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


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.


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


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%


(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


(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.


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.


(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-------


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


(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-------


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


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


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)


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


(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


(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


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.


(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.



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


9 Cash Flow Statement

This Chapter Includes : Introduction; Classification of Cash Flows; Special Items;

Preparation of Cash Flow Statements; Usefulness of Cash Flow Statement.



OBJECTIVE QUESTIONS



(iv) 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 :

(iv) (a) Short range


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.


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-



(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.


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


(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


(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.


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 :


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


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


(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


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


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


(`) (`)

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


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


(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.


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


Plant and Machinery Account


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


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


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


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



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


Provision For Taxation Account



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


31.03.2009 31.03.2010

(`) (`)


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)


Answer :

Cash Flow Statement of Bright Ltd

for the year ended 31.3.2010


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 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


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)


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.


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:



(`̀̀̀) (`̀̀̀)

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


Stock 1,00,000 75,000


Cash 20,000 20,000

8,50,000 11,75,000


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.



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


Add: Adjustment for Depreciation

Less: Profit on Sale of Machinery


Add: Decrease in current assets & increase in

current liabilities:

Decrease in stock


Increase in Bills payable

Less: Increase in current Assets & decrease in

current liabilities

Increase in sundry debtors

Decrease in Outstanding Expenses


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


(40,000)

(3,55,000)

8,000

(3,87,000)

III. Cash Flow from Financing Activities:


Net cash from financing activities

2,00,000

2,00,000


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.


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.


(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


Assets


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


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


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


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.



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


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


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


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


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


500

6,000

(1,90,000)

(2,00,000)

(26,000)

(4,09,500)

III. Cash Flow from Financing Activities :


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.


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


Dr. Machinery & Plant A/c Cr.


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.


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.


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


(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


(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)


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)


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


Provision for taxation 1,50,000 3,00,000

Proposed dividend 45,000 1,00,000

22,50,000 31,20,000


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)


(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


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

(`) (`)


Retained earnings 8,30,000 9,46.000


12% Debentures 6,00,000 5,00,000


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


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.


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

(`) (`)


Outstanding expenses 65,000 60,000


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


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


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)


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)


Answer :

Madhuri Ltd.

Cash Flow Statement of for the year ended 31st March, 2006


(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


(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.


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)



(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


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


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


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



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)


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.


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


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


(iii) Provision for Taxation A/c


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 Compulsory questions from a chapter jjjjj

10 Objective Questions



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;



(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


(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);



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.


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.


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


(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)


(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


(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)



(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)


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



(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 —



(i) The rate of change of labour force in an orgainsation during a specified period

is called—



(b) Labour turnover



(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


(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


(1 mark each)

Answer :

(b) (i) (b)

(ii) (c)

(iii) (d)

(iv) (c)

(v) (b)



(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)


(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.


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.




(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


(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


(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.




process and_________. (5)


(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 :


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)


(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


(1 mark each)


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


(ii) Costs which are pertinent for decision-making are termed as Relevant costs


(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.


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)


(i) Opportunity cost helps in —

(a) Ascertainment of cost


(b) Controlling cost

(c) Making managerial decisions


(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



(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)


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.


(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


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)


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)


(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


(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)


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—


(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



(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%


(v) Rowan premium plan is an improvement over—

(a) Taylor plan

(b) Gantt bonus plan



(1 mark each)


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)


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)


(iv) Marginal costing is different from direct costing. (7)

(v) Management accounting is based on double entry system. (1)

(2 marks each)


following:

(i) The rate of change of labour force in an organisation during a specified period

is called —


(b) Labour turnover



(ii) Differential cost analysis is incorporated in the —

(a) Cost books

(b) Financial books

(c) Statutory books


(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)


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)


(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.


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)


(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)



(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



(a) 30%

(b)

(c) 12%


(iii) Traditional budgeting is accounting oriented whereas zero base budgeting is —



(c) Event oriented


(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 —



(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)



(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)


(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)


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)


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


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.


(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)


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


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)


(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


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


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)


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


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)


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



(a) 30%

(b)

(c) 12%



(iii) Traditional budgeting is accounting oriented whereas zero base budgeting

is —



(c) Event oriented


(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 —



(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


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


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


(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


(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:


`

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


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)

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